10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 3, 2008

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file numbers: 333-143444 and 333-134550

 

 

Dollarama Group Holdings L.P.

Dollarama Group L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Quebec, Canada   Not Applicable

(State or other jurisdiction

of incorporation)

 

(IRS Employer

Identification No.)

 

5805 Royalmount Avenue, Montreal   H4P 0A1
(Address of principal executive offices)   (Postal Code)

(514) 737-1006

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

  

Name of Each Exchange on Which Registered

Not applicable

   Not applicable

Securities Registered Pursuant to Section 12(g) of the Act:

 

Title of Each Class

  

Name of Each Exchange on Which Registered

Not applicable

   Not applicable

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant.

Not applicable

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, per Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  ¨     Non-accelerated filer  x

 

 

 

This Form 10-K is a combined annual report being filed separately by two registrants: Dollarama Group Holdings L.P. and Dollarama Group L.P. Unless the context indicates otherwise, any reference in this report to “Holdings” refers to Dollarama Group Holdings L.P. and any reference to “Group L.P.” refers to Dollarama Group L.P., the wholly-owned subsidiary of Holdings. The “Company”, “Partnership”, “we”, “us”, and “our” refer to Dollarama Group Holdings L.P., together with Dollarama Group L.P. and its consolidated subsidiaries.


Table of Contents

DOLLARAMA GROUP HOLDINGS L.P.

DOLLARAMA GROUP L.P.

TABLE OF CONTENTS

 

          Page
     PART I     

Item 1.

   Business    3

Item 1A.

   Risk Factors    5

Item 1B.

   Unresolved Staff Comments    11

Item 2.

   Properties    11

Item 3.

   Legal Proceedings    12

Item 4.

   Submission of Matters to a Vote of Security Holders    12
   PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    12

Item 6.

   Selected Financial Data    12

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    19

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk    33

Item 8.

   Financial Statements and Supplementary Data    35

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    68

Item 9A.

   Controls and Procedures    68

Item 9B.

   Other Information    68
   PART III   

Item 10.

   Directors and Executive Officers of the Registrant    68

Item 11.

   Executive Compensation    70

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    74

Item 13.

   Certain Relationships and Related Transactions    76

Item 14.

   Principal Accounting Fees and Services    78
   PART IV   

Item 15.

   Exhibits and Financial Statement Schedules    79

Signatures

   87

This combined Form 10-K is separately filed by Dollarama Group Holdings L.P. and Dollarama Group L.P. Each Registrant hereto is filing on its own behalf all of the information contained in this annual report that relates to such Registrant. Each Registrant hereto is not filing any information that does not relate to such Registrant, and therefore makes no representation as to any such information.

 

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PART I

 

ITEM 1. BUSINESS

Registrants

This annual report is that of Dollarama Group Holdings L.P. (“Holdings”) and its wholly owned subsidiary Dollarama Group L.P. (“Group L.P.”). Currently, the only assets of Holdings are 100% of the equity of its three direct subsidiaries: (i) Dollarama Group Holdings Corporation, which holds no assets, (ii) Dollarama Holdings GP Inc., which is the general partner of Dollarama Holdings L.P., and (iii) Dollarama Holdings L.P., which holds no assets other than equity in its two direct subsidiaries. Dollarama Holdings L.P., together with its direct subsidiary Dollarama Group GP Inc., owns 100% of the equity of Group L.P. Group L.P., along with its two direct subsidiaries Dollarama GP Inc. and Dollarama Corporation, own 100% of the equity of Dollarama L.P. Together, Dollarama L.P. and Dollarama Corporation operate the Dollarama business. Holdings and Group L.P. are together with its consolidated subsidiaries referred to as the “Company”, the “Partnership”, “we”, “us” or “our”.

Corporate Structure

The chart below summarizes our ownership and corporate structure following the consummation of the 2006 Recapitalization:

 

 

LOGO

The Company

We are the leading operator of dollar discount stores in Canada. Based on our internal review of publicly available information, we believe that we have more than 3.0 times the number of stores as compared to our next largest competitor in Canada. As of February 3, 2008, we operated 521 Dollarama stores, each offering a broad assortment of quality everyday merchandise sold in individual or multiple units primarily at a fixed price of $1.00. All of our stores are company-operated, and nearly all are located in high-traffic areas such as strip malls and shopping centers in various locations, including metropolitan areas, mid-sized cities, and small towns. For the fiscal year ended February 3, 2008, we generated sales of $972.4 million.

We believe that our leadership position in the Canadian dollar store market is attributable to a number of operational advantages that distinguish us from other Canadian dollar store chains. These advantages include:

 

   

the number and concentration of our stores in our key markets, which increase our brand recognition and allows our customers to associate the quality of our merchandise offering to our name;

 

   

our larger store format, which allows us to carry a wide variety of products and a constant supply of staple goods;

 

   

our strong, long-standing supplier network, which gives us the opportunity to offer a constantly evolving product selection and answer our customers’ needs ahead of our competitors;

 

   

the volume of goods we source from low-cost foreign vendors, which enhances our leverage to negotiate better prices and our ability to offer greater value to our customers for one dollar; and

 

   

our in-house product development expertise, which allows us to improve our product offering and quickly adjust to our ever evolving customers’ needs.

Our stores provide exceptional value to a broad range of consumers by offering goods for everyday use, including housewares, groceries, toys, health and beauty aids, giftware and greeting cards, pet supplies, crafts, stationery supplies, and other consumer items, as well as a wide variety of seasonal goods. We offer a mix of both private label and nationally branded merchandise that we believe is associated with good value and contributes to a consistent shopping experience designed to generate consumer loyalty.

In 1910, the Company was established as a single variety store in Québec. In 1992, Mr. Larry Rossy, our chief executive officer and the grandson of our founder, led our management team to introduce a number of initiatives that dramatically altered our strategic focus. These included adopting the “dollar store” concept and aggressively pursuing our store network expansion strategy in Canada to leverage brand awareness, lower our costs and increase our sales. In addition, we implemented a program to directly purchase and import merchandise from low-cost overseas suppliers to diversify our product offering and further lower our costs. As a result of this strategic shift, our store network has grown at a compound annual growth rate, or CAGR, of approximately 17% over the last 17 years, expanding from 44 stores as of January 31, 1992 to 521 stores as of February 3, 2008, and our sales have grown at a CAGR of approximately 25% over the same period.

Our Stores

Site Selection

We carefully manage our real estate portfolio with the goal of maximizing chain-wide store profitability and maintaining a disciplined, cost-sensitive approach to store site selection. We evaluate potential store locations based on a variety of criteria, including (i) the level of retail activity and traffic patterns, (ii) the presence or absence of competitors, (iii) the population and demographics of the area, and (iv) the total rent and occupancy cost per square foot. Our stores are located primarily in high-traffic areas, where our management believes consumers are likely to do their household shopping, in various locations including metropolitan areas, mid-sized cities, and small towns. Historically, our stores have been located in shopping centers, in strip malls, and in stand-alone locations. Our ability to open new stores is dependent upon, among other factors, locating suitable sites and negotiating favorable lease terms.

 

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Of our 521 existing store locations as of February 3, 2008, we leased all stores from third parties, except 17 stores leased directly or indirectly from members of the Rossy family. See Item 13 Certain Relationships and Related Transactions. We expect to continue to lease store locations as we expand. Average base rent has remained under $12 per square foot over the past several years. The average length of our leases is 10.5 years, and the average time to their expiration is 5.7 years. As current leases expire, we believe that we will be able either to obtain lease renewals, if desired, for present store locations, or to obtain leases at market rates for equivalent or better locations in the same general area. To date, we have not experienced difficulty in either renewing leases for existing locations or securing suitable leases for new stores except in Western Canada where there is a more competitive real estate market. We believe that this leasing strategy enhances our flexibility to pursue various expansion and relocation opportunities resulting from changing market conditions.

Store Size and Condition

The range of our store size allows us to target a particular location with the store size that we believe best suits that market. We operate stores primarily ranging from 7,000 to 11,500 square feet. In the future, we intend to concentrate on opening larger stores, generally ranging from 8,000 to 12,000 square feet. Our average store size has increased over the past 11 years from 5,272 square feet in fiscal year 1998 to 9,600 square feet as of February 3, 2008, with new stores opened in the fiscal year ended February 3, 2008 averaging approximately 10,000 square feet.

More than two thirds of our stores have been newly opened, completely renovated or relocated in the last six years. We have spent an average of approximately $2.7 million on store renovations and relocations (including expansions) in each of the past three years. We believe that the current store network is in good condition and does not require material maintenance capital expenditures.

Our Merchandise

Merchandise Mix

We are constantly adjusting our merchandise mix to increase profitability. As a result of the increase in the average size of our stores, we have been able to expand both the number of merchandise categories we offer and the number of products offered in each category. A typical store stocks approximately 5,000 SKUs, a significant increase from just five years ago. We analyze our products in inventory on a monthly basis for sales and profitability. Based on the results, we adjust our merchandise mix with a goal of optimizing profitability. Slower selling items are discontinued and quickly replaced.

We make our merchandise decisions based on our goal of offering the best value to our customers. Our stores offer a varied merchandise mix consisting of both consumables and semi-durables, which are sold primarily in individual or multiple units at a fixed price of $1.00. Despite the low price point, we have been successful at driving increases in average transaction size by modifying our merchandise mix based on consumer preferences and through the use of store layout and displays to encourage impulse purchases. The average customer transaction size at our stores increased approximately 24% from $5.33 in fiscal year 2001 to $6.61 in fiscal year 2008, which we believe is a result of our differentiated store format.

The actual selection of items offered in our stores at any one time varies. We have a core selection of consumable and semi-durable products such as household chemicals, paper and plastics, candy and food, and health and beauty care products that we target to have in stock at our stores continuously. Our larger stores carry a greater variety and quantity of consumable and semi-durable products than our smaller stores, particularly food, household chemicals, and health and beauty care products. In addition, we sell seasonal and impulse items and selected close-out merchandise to add variety and freshness to our core products and create an exciting shopping experience. Examples of seasonal goods include Easter gifts, summer toys, and Halloween and Christmas decorations. Our inventory includes both private label and nationally branded merchandise that we believe is good value and contributes to a consistent shopping experience designed to generate customer loyalty. We believe that despite the large selection of products bearing private label in our stores, there is still room to increase private label penetration.

Although our merchandise mix focuses on quality unbranded products, we offer a small number of close-out branded products to complement our selection, primarily in the candy and grocery category and health and beauty categories. Consistent with the focus of continuity of our product offering, both in national brands and house brands, close-out merchandise typically represent less than 1% of our sales. We believe that the consistency of our merchandise differentiates us from our U.S. counterparts.

Merchandise Sourcing

We purchase most of our merchandise through our centralized merchandising department. We purchase merchandise from wholesalers, manufacturers’ representatives, importers, auctions, professional finders, and other retailers. Our strategy is to source merchandise directly from the lowest cost suppliers that meet our standards for quality. Our sourcing strategy balances directly imported merchandise from overseas and products sourced from North American vendors, which accounted for

 

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approximately 55% and 45%, respectively, of our total volume in fiscal year 2008. Typically, products purchased from Canadian manufacturers are consumables that fall into the categories of cleaning supplies, groceries, confections, and greeting cards. We have been steadily increasing our purchases from overseas suppliers in recent years, including goods sourced directly from China, Hong Kong, India, Indonesia, Italy, Pakistan, Poland, Singapore, Taiwan, Thailand, Turkey and United Kingdom.

We focus on international sourcing for dollar store retail merchandise. We began developing relationships with overseas suppliers in 1993 and sourced more than 50% of our merchandise as a percentage of sales via our import operation directly from our global supplier base in fiscal year 2008. Through these relationships, we also develop the product design, packaging, and labeling concepts for our house brand and work in concert with the supplier partner selected to produce each item to ensure that the final product quality, design and packaging meet our exacting standards.

Our supply base is well diversified, with no single supplier accounting for more than 7% of our total purchases in fiscal year 2008. During fiscal year 2008, we purchased approximately 20% of our merchandise from our top five suppliers, 30% of our merchandise from our top ten suppliers and approximately 45% of our merchandise from our top 25 suppliers. We buy products on an order-by-order basis and have very few long-term purchase contracts or other assurances of continued product supply or guaranteed product cost. However, we have strong and long-standing relationships with our suppliers, including relationships with seven of our top ten suppliers for more than ten years and all of our top ten suppliers for more than seven years. The strength and duration of these relationships as well as our large purchasing volumes have enabled us to exert some influence over merchandise price and quality.

Marketing

We have been able to generate rapid growth without significant expenditures on marketing and promotions. We believe that this is primarily due to our strong brand name and success at selecting locations with high traffic and ease of accessibility. Although we experience immaterial retail markdowns of inventory due to both the nature of our inventory and our business model, in light of the $1.00 price point on all merchandise, there are generally no sales or markdowns to advertise.

Advertising is employed for new store openings. We promote new store openings using a selection of media, which may include radio, local newspapers, circulars, and television. The new store advertising campaign may last from one to two weeks, depending on the store location. We also plan to employ advertising to increase brand awareness and drive sales growth.

Employees

As of February 3, 2008, we had approximately 9,532 retail employees, including full-time, part-time, and temporary employees. We also employed 190 head office employees. In addition, we hire seasonal employees during busy seasons such as Christmas. None of our employees is a party to a collective bargaining agreement or represented by a labor union.

Intellectual Property

We rely on trademark laws to protect certain aspects of our business. We rely on a combination of registered and unregistered trademark rights to protect our position as a branded company with strong name recognition. We use the registered trademark Dollarama®.

Monitoring the unauthorized use of our intellectual property is difficult, and the steps we have taken, including sending letters of demand and taking actions against third parties, may not prevent unauthorized use by others. The failure to adequately build, maintain and enforce our intellectual property portfolio could impair the strength of our brands.

 

ITEM 1A. RISK FACTORS

Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our debt obligations.

We are highly leveraged. As of February 3, 2008, Holdings had long-term debt excluding financing costs of $697.8 million, of which $513.9 million is held by Group L.P. Our high degree of leverage could have important consequences, including the following:

 

   

a substantial portion of our cash flows from operations will be dedicated to the payment of principal and interest on our indebtedness and other financial obligations and will not be available for other purposes, including funding our operations, capital expenditures for projects such as a new warehousing or distribution center, new store openings, and future business opportunities;

 

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the debt service requirements of our other indebtedness and lease expense could make it more difficult for us to make payments on our debt;

 

   

our ability to obtain additional financing for working capital and general corporate or other purposes may be limited;

 

   

certain of our borrowings, including borrowings under our senior secured credit facility, are at variable rates of interest, exposing us to the risk of increased interest rates;

 

   

our debt level may limit our flexibility in planning for, or reacting to, changes in our business and in our industry in general, placing us at a competitive disadvantage compared to our competitors that have less debt; and

 

   

our leverage may make us vulnerable to a downturn in general economic conditions and adverse industry conditions.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under such indebtedness.

Our ability to make scheduled payments on or to refinance our debt obligations and to make distributions to enable us to service our debt obligations depends on the financial and operating performance of Group L.P., which is subject to prevailing economic and competitive conditions and to certain financial, business, and other factors beyond our control, including fluctuations in interest rates, increased operating costs, and trends in our industry. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In such circumstances, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. The senior secured credit facility, the indenture governing the 8.875% senior subordinated notes and the indenture governing the senior floating rate deferred interest notes restrict our ability to dispose of assets and restrict the use of the proceeds from asset dispositions. We may not be able to consummate those dispositions or to obtain the proceeds which could be realized from them and these proceeds may not be adequate to meet any debt service obligations then due.

Despite current indebtedness levels, we may still be able to incur substantially more debt, which could further exacerbate the risks described above.

We may be able to incur substantial additional indebtedness in the future. Although the senior secured credit facility, the indenture governing the 8.875% senior subordinated notes and the indenture governing the senior floating rate notes contain restrictions on the incurrence of additional indebtedness, such restrictions are subject to a number of qualifications and exceptions, and under certain circumstances, indebtedness incurred in compliance with such restrictions could be substantial. The revolving credit facility that is part of the senior secured credit facility provides commitments of up to $75.0 million. In addition, our subsidiaries may, under certain circumstances and subject to receipt of additional commitments from existing lenders or other eligible institutions, request additional term loan tranches or increases to the revolving loan commitments by an aggregate amount of up to $150.0 million (or the U.S. dollar equivalent thereof). If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we now face could intensify.

The indenture governing our senior floating rate deferred interest notes imposes significant operating restrictions, which may prevent us from pursuing certain business opportunities and taking certain actions that may be in our interest.

The indenture governing our senior floating rate deferred interest notes contains various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:

 

   

incur, assume, or guarantee additional debt and issue or sell preferred stock;

 

   

pay dividends on, redeem or repurchase our capital stock;

 

   

make investments;

 

   

create or permit certain liens;

 

   

use the proceeds from sales of assets and subsidiary stock;

 

   

create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us;

 

   

enter into transactions with affiliates;

 

   

conduct certain business activities; and

 

   

consolidate or merge or sell all or substantially all of our assets.

In addition, the senior secured credit facility and the indenture governing the 8.875% senior subordinated notes each contain a number of restrictive covenants and the senior secured credit facility requires us to comply with certain financial covenants, including the maintenance of specified financial ratios. These restrictions may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted.

 

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Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Certain of our indebtedness, including our senior floating rate deferred interest notes and the borrowings under the senior secured credit facility, are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows would decrease.

As a fixed price retailer, we are particularly vulnerable to future increases in operating and merchandise costs.

Our ability to provide quality merchandise at the $1.00 price point is subject to a number of factors that are beyond our control, including cost of products, foreign exchange rate fluctuations, increases in rent and occupancy costs, inflation and increases in labor and fuel costs, all of which may reduce our profitability and have an adverse impact on our cash flows. As a fixed price retailer, we generally do not pass on cost increases to our customers by increasing the price of our merchandise. Instead, we attempt to offset a cost increase in one area of our operations by finding cost savings or operating efficiencies in another. Although we have the ability to re-engineer many of our products, a sustained trend of significantly increased inflationary pressure or other factors beyond our control could require us to abandon our $1.00 price point, which could have a material adverse effect on our business and results of operation.

Foreign exchange rate fluctuations, in particular, have a material impact on our operating and merchandise costs. This is because while most of our sales are in Canadian dollars, we have been increasing our purchases of merchandise from low-cost overseas suppliers, principally in China. In fiscal year 2008, this direct sourcing from overseas suppliers accounted for more than 50% of our purchases. Our results of operations are particularly sensitive to the fluctuation of the Chinese renminbi against the U.S. dollar and the fluctuation of the U.S. dollar against the Canadian dollar because we purchase a majority of our imported merchandise from suppliers in China using U.S. dollars. For example, if the Chinese renminbi were to appreciate against the U.S. dollar, our cost of merchandise purchased in China would increase, which would have a negative impact on our margins, profitability and cash flows. If the U.S. dollar appreciates against the Canadian dollar at the same time, the negative impact would be further exacerbated.

Labor shortages in the trucking industry and fuel cost increases or surcharges could also increase our transportation costs. In addition, inflation and adverse economic developments in Canada, where we both buy and sell merchandise, and in China and other parts of Asia, where we buy a large portion of our imported merchandise, can have a negative impact on our margins, profitability and cash flows. If we are unable to predict and respond promptly to these or other similar events that may increase our operating and merchandise costs, our results of operations and cash flows will be adversely affected.

We may not be able to refresh our merchandise as often as we have done so in the past.

We adjust our merchandise mix periodically based on the results of internal analysis as slow-selling items are discontinued and quickly replaced. Our success, therefore, depends in large part upon our ability to continually find and purchase quality merchandise at attractive prices in order to replace underperforming goods. We have very few continuing or long-term contracts for the purchase or development of merchandise and must continually seek out buying opportunities from both our existing suppliers and new sources, for which we compete with other discount, convenience and variety merchandisers. Although we believe that we have strong and long-standing relationships with our suppliers, we may not be successful in maintaining a continuing and increasing supply of quality merchandise at attractive prices. If we cannot find or purchase the necessary amount of competitively priced merchandise to replace goods that are outdated or unprofitable, our results of operations and cash flows will be adversely affected.

An increase in the cost or a disruption in the flow of our imported goods may significantly decrease our sales and profits and have an adverse impact on our cash flows.

One of our key business strategies is to source quality merchandise directly from the lowest cost supplier. As a result, we rely heavily on imported goods, principally from China. Imported goods are generally less expensive than domestic goods and contribute significantly to our favorable profit margins. Merchandise imported directly from overseas manufacturers and agents accounted for more than 50% of our total purchases fiscal year 2008. We expect direct imports to continue to account for approximately 45% to 55% of our total purchases. Our imported merchandise could become more expensive or unavailable for a number of reasons, including (a) disruptions in the flow of imported goods due to factors such as raw material shortages or increase in prices, work stoppages, inflation, strikes, and political unrest in foreign countries; (b) problems with oceanic shipping, including shipping container shortages; (c) economic crises and international disputes, such as China’s claims to sovereignty over Taiwan; (d) increases in the cost of purchasing or shipping foreign merchandise resulting from a failure of Canada to maintain normal trade relations with China; (e) import duties, import quotas, and other trade sanctions; and (f) increases in shipping rates imposed by the trans-Pacific shipping cartel. The development of one or more of these factors could adversely affect our operations in a material way. If imported

 

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merchandise becomes more expensive or unavailable, we may not be able to transition to alternative sources in time to meet our demands. Products from alternative sources may also be of lesser quality and more expensive than those we currently import. A disruption in the flow of our imported merchandise or an increase in the cost of those goods due to these or other factors would significantly decrease our sales and profits and have an adverse impact on our cash flows.

We are dependent upon the smooth functioning of our distribution network.

We must constantly replenish depleted inventory through deliveries of merchandise to our distribution centers, and from our distribution centers to our stores by various means of transportation, including shipments by sea, train and truck on the roads and highways of Canada. Long-term disruptions to the national and international transportation infrastructure that lead to delays or interruptions of service would adversely affect our business.

Natural disasters, unusual weather, pandemic outbreaks, boycotts and geo-political events or acts of terrorism could adversely affect our operations and financial results.

The occurrence of one or more natural disasters, such as hurricanes and earthquakes, unusually adverse weather, pandemic outbreaks, boycotts and geo-political events, such as civil unrest in countries in which our suppliers are located and acts of terrorism, or similar disruptions could adversely affect our operations and financial results. These events could result in physical damage to one or more of our properties, increases in fuel or other energy prices, the temporary or permanent closure of one or more of our stores or warehouses or distribution centers, delays in opening new stores, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some local and overseas suppliers, the temporary disruption in the transport of goods from overseas, delay in the delivery of goods to our warehouses, distribution centers or stores, the temporary reduction in the availability of products in our stores and disruption to our information systems. These factors could otherwise disrupt and adversely affect our operations and financial results.

We may be unable to obtain additional capacity of our warehouse and distribution centers.

We anticipate that we will need additional warehouse and distribution center capacity in the coming years. Our rapid historical and anticipated future growth places significant pressure on this critical function. We estimate that our recently opened distribution center allows us to serve approximately 600 stores. If we are unable to locate sites for the new warehouses and distribution centers or achieve functionality of the new distribution centers on a timely basis, we may not be able to successfully execute our growth strategy.

Construction and expansion projects relating to our warehouses and distribution centers entail risks which could cause delays and cost overruns, such as shortages of materials; shortages of skilled labor; work stoppages; unforeseen construction scheduling, engineering, environmental, or geological problems; weather interference; fires or other casualty losses; and unanticipated cost increases. Therefore, the completion dates and anticipated costs of these projects may differ significantly from our initial expectations. We cannot guarantee that any project will be completed on time or within established budgets.

Our financial performance is sensitive to changes in overall economic conditions that may impact consumer spending.

A general slowdown in the Canadian economy may adversely affect the spending of our customers, which would likely result in lower sales than expected on a quarterly or annual basis. Future economic conditions affecting disposable consumer income, such as employment levels, business conditions, fuel and energy costs, interest rates, and tax rates, would also adversely affect our business by reducing consumer spending or causing consumers to shift their spending to other products. As a fixed price retailer, we may be particularly sensitive to reductions in consumer spending because we generally do not have the flexibility to reduce our price to maintain or attract additional sales in an economic downturn.

Our sales may be affected by seasonal fluctuations.

Historically, our highest sales results have occurred during the fourth quarter, which includes the holiday selling season. During fiscal year 2008, approximately 28.9% of our sales were generated in the fourth quarter. Accordingly, any adverse trend in sales for the fourth quarter could have a material adverse effect upon our stores’ profitability and adversely affect our results of operations for the entire year.

Competition in the retail industry could limit our growth opportunities and reduce our profitability.

We compete in the discount retail merchandise business, which is highly competitive, and we expect competition to increase in the future. This competitive environment subjects us to the risk of reduced profitability resulting from reduced margins required to maintain our competitive position. Our competitors include variety and discount stores such as Buck or Two, Dollar Giant, Dollar Store With More, Everything For a Dollar, and Great Canadian Dollar Store, mass merchandisers such as Wal-Mart, and, to a lesser extent, other fixed price retailers operating in Canada. In addition, we expect that our expansion plans, as well as the expansion plans of other fixed price retailers, will increasingly bring us into direct competition with them. Competition may also increase because there are no significant economic barriers to other companies becoming fixed price retailers or to U.S. discount retailers such as Dollar General, Dollar Tree and Family Dollar entering the Canadian market. Some of our competitors in the retail industry are much larger and have substantially greater resources than we do, and we remain vulnerable to the marketing power and high level of consumer recognition of major mass merchandisers such as Wal-Mart, and to the risk that these mass merchandisers or others could venture into the “dollar store” industry in a significant way.

 

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Our business is dependent on our ability to obtain competitive pricing and other terms from our suppliers and the timely receipt of inventory.

We believe that we have generally good relations with our suppliers and that we are generally able to obtain competitive pricing and other terms from suppliers. However, we buy products on an order-by-order basis and have very few long-term purchase contracts or other assurances of continued product supply or guaranteed product cost. If we fail to maintain good relations with our suppliers, or if our suppliers’ product costs are increased as a result of prolonged or repeated increases in the prices of certain raw materials, we may not be able to obtain attractive pricing, in which case our profit margins may be reduced and our results of operations may be adversely affected. In addition, if we are unable to receive merchandise from our suppliers on a timely basis because of interruptions in production or other reasons that are beyond our control, our business may be adversely affected.

We may be unable to renew our store leases or find other locations or leases on favorable terms.

As of February 3, 2008, we leased all our stores from unaffiliated third parties, except 17 of our stores leased directly or indirectly from members of the Rossy family. Approximately 11%, 8% and 6% of our store leases with third party lessors will expire in fiscal year 2009, fiscal year 2010, and fiscal year 2011, respectively. Unless the terms of our leases are extended, the properties, together with any improvements that we have made, will revert to the property owners upon expiration of the lease terms. As the terms of our leases expire, we may not be able to renew these leases or find alternative store locations that meet our needs on favorable terms or at all. If we are unable to renew a significant number of our expiring leases or to promptly find alternative store locations that meet our needs, our profitability and cash flows may be materially adversely affected.

If we experience significant disruptions in our information technology systems, our business may be adversely affected.

We depend on our information technology systems for the efficient functioning of our business, including accounting, data storage, purchasing and inventory, and store communications systems. The Partnership has implemented a new enterprise-wide system solution (ERP) during fiscal year ended February 3, 2008 encompassing finance, distribution, store replenishment and supply chain. We expect this enterprise-wide software solution will enable management to better and more efficiently conduct our operations and gather, analyze, and assess information across all business segments and geographic locations. However, difficulties with the new hardware and software platform could disrupt our operations, including our ability to timely ship and track product orders, project inventory requirements, manage our supply chain, and otherwise adequately service our customers, which would have an adverse effect on our business. In the event we experience significant disruptions with our information technology system, we may not be able to fix our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our results of operations and cash flows.

In addition, costs associated with potential interruptions of the newly implemented system could be significant.

We may not be able to successfully execute our growth strategy, particularly outside of our core markets of Ontario and Québec.

We have experienced substantial growth during the past several years, opening an average of 38 stores per year since fiscal year 2000, and we plan to continue to open new stores at a faster rate in the near future. Our ability to successfully execute our growth strategy will depend largely on our ability to successfully open and operate new stores, particularly outside of our traditional core markets of Ontario and Québec, which, in turn, will depend on a number of factors, including whether we can:

 

   

supply an increasing number of stores with the proper mix and volume of merchandise;

 

   

successfully add and operate larger stores, with which we have less experience;

 

   

hire, train, and retain an increasing number of qualified employees at affordable rates of compensation;

 

   

locate, lease, build out, and open stores in suitable locations on a timely basis and on favorable economic terms;

 

   

expand into new geographic markets, where we have limited or no presence;

 

   

expand within our traditional core markets of Ontario and Québec, where new stores may draw sales away from our existing stores;

 

   

successfully compete against local competitors; and

 

   

build, expand and upgrade warehousing and distribution centers and internal store support systems in an efficient, timely and economical manner.

Many of these factors are beyond our control, and any failure by us to achieve these goals could adversely affect our ability to continue to grow.

 

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We may not be able to achieve the anticipated growth in sales and operating income when we open new stores.

If our planned expansion occurs as anticipated, our store base will include a relatively high proportion of stores with relatively short operating histories. Comparable store sales are negatively affected when stores are opened or expanded near existing stores. If our new stores on average fail to achieve results comparable to our existing stores, our planned expansion could produce a decrease in our overall sales per square foot and store-level operating margins.

We are subject to environmental regulations, and compliance with such regulations could require us to make expenditures.

Under various federal, provincial, and local environmental laws and regulations, current or previous owners or occupants of property may become liable for the costs of investigating, removing and monitoring any hazardous substances found on the property. These laws and regulations often impose liability without regard to fault.

Certain of the facilities that we occupy have been in operation for many years and, over such time, we and the prior owners or occupants of such properties may have generated and disposed of materials which are or may be considered hazardous. Accordingly, it is possible that additional environmental liabilities may arise in the future as a result of any generation and disposal of such hazardous materials. Although we have not been notified of, and are not aware of, any current environmental liability, claim, or non-compliance, we could incur costs in the future related to our owned or leased properties in order to comply with, or address any violations under, environmental laws and regulations.

In the ordinary course of our business, we sometimes use, store, handle or dispose of commonplace household products that are classified as hazardous materials under various environmental laws and regulations. We have adopted policies regarding the use, storage, handling and disposal of these products, and we train our employees on how to handle and dispose of them. We cannot assure you that our policies and training will successfully help us avoid potential violations of these environmental laws and regulations in the future.

We cannot predict the environmental laws or regulations that may be enacted in the future or how existing or future laws and regulations will be administered or interpreted. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies or stricter interpretations of existing laws and regulations, may require additional expenditures by us which could vary substantially from those currently anticipated.

If we lose the services of our senior executives who possess specialized market knowledge and technical skills, it could reduce our ability to compete, to manage our operations effectively, or to develop new products and services.

Many of our senior executives have extensive experience in our industry and with our business, products, and customers. Since we are managed by a small group of senior executive officers, the loss of the technical knowledge, management expertise and knowledge of our operations of one or more members of our core management team, including Larry Rossy, our chief executive officer, Neil Rossy, our senior vice president, merchandising, Leonard Assaly, our senior vice president, information technology and logistics, Geoffrey Robillard, the president of our import division, Robert Coallier, our chief financial officer, and Stéphane Gonthier, our chief operating officer, could result in a diversion of management resources, as the remaining members of management would need to cover the duties of any senior executive who leaves us and would need to spend time usually reserved for managing our business to search for, hire and train new members of management. The loss of some or all of our senior executives could negatively affect our ability to develop and pursue our business strategy, which could adversely affect our operating results.

Fluctuations in the value of the Canadian dollar in relation to U.S. dollar may impact our financial condition and results of operations and may affect the comparability of our results between financial periods.

Exchange rate fluctuations could have an adverse effect on our results of operations and ability to service our U.S. dollar-denominated debt. The majority of our debt and over 50% of our purchases are in U.S. dollars while the majority of our sales, and operating expenses are in Canadian dollars. Therefore, a downward fluctuation in the exchange rate of the Canadian dollar versus the U.S. dollar would increase the cash needed to service our U.S. dollar-denominated debt and the related hedge instruments. Although we have recently seen an improvement of the value of the Canadian dollar compared with the U.S. dollar, if the current trend were to reverse and the U.S. dollar were to strengthen against the Canadian dollar, our gross margins would be negatively impacted. In addition, for the purposes of financial reporting, any change in the value of the Canadian dollar against the U.S. dollar during a given financial reporting period would result in a foreign currency loss or gain on the translation of U.S. dollar denominated debt into Canadian dollars under Canadian generally accepted accounting principles (“GAAP”). Consequently, our reported earnings could fluctuate materially as a result of foreign exchange translation gains or losses and may not be comparable from period to period.

 

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We are controlled by funds managed by Bain Capital Partners, LLC, and their interest as equity holders may conflict with the interests of our creditors.

We are controlled by funds managed by Bain Capital Partners, LLC, which have the ability to control our policies and operations. The interests of funds managed by Bain Capital Partners, LLC may not in all cases be aligned with interests of our creditors. In addition, Bain Capital Partners, LLC may have an interest in pursuing acquisitions, divestitures and other transactions that, in the judgment of its management, could enhance its equity investment, even though such transactions might involve risks to our creditors.

We may not be able to protect our trademarks and other proprietary rights.

We believe that our trademarks and other proprietary rights are important to our success and our competitive position. Accordingly, we protect our trademarks and proprietary rights. However, the actions taken by us may be inadequate to prevent imitation of our products and concepts by others or to prevent others from claiming violations of their trademarks and proprietary rights by us. In addition, our intellectual property rights may not have the value that we believe they have. If we are unsuccessful in protecting our intellectual property rights, or if another party prevails in litigation against us relating to our intellectual property rights, we may incur significant costs and may be required to change certain aspects of our operations.

Product recalls may adversely impact our operations and merchandise offerings.

We are subject to regulations by Canadian and international regulatory authorities. One or more of our suppliers might not adhere to product safety requirements or our quality control standards, and we might not identify the deficiency before merchandise ships to our stores. If our suppliers are unable or unwilling to recall products failing to meet our quality standards, we may be required to remove merchandise from our shelves or recall those products at a substantial cost to us.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable

 

ITEM 2. PROPERTIES

Stores

As of February 3, 2008, we operated 521 stores in ten Canadian provinces as detailed below:

 

Alberta

   28    Nova Scotia    21

British Columbia

   11    Ontario    201

Manitoba

   17    Prince Edward Island    3

New Brunswick

   26    Québec    197

Newfoundland and Labrador

   6    Saskatchewan    11

We currently lease our stores and expect to continue to lease new stores as we expand. Our leases typically provide for a base lease term of generally ten years, with options to extend. As current leases expire, we believe that we will be able to obtain lease renewals, if desired, for present store locations, or to obtain leases for equivalent or better locations in the same general area.

Warehousing and Distribution

Our warehousing and distribution facilities consist of four warehouses and a distribution center, all five of which are indirectly owned by certain members of the Rossy family. The five sites are subject to long-term lease agreements. See Item 13 Certain Relationships and Related Transactions. The table below describes our warehousing and distribution facilities.

 

Locations

 

Type

   Size    Lease Expiration

Dorval, Québec

 

Warehouse

   269,950 square feet    November 30, 2019

Lachine, Québec

 

Warehouse

   356,675 square feet    November 30, 2019

Town of Mount Royal, Québec

 

Warehouse

   128,838 square feet    November 30, 2019

Town of Mount Royal, Québec

 

Distribution Center

   292,623 square feet    May 31, 2021

Town of Mount Royal, Québec

 

Warehouse

   325,000 square feet    December 31, 2022

 

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The four warehouses are primarily used for goods directly imported from overseas inventory, while most domestic goods sourced from North American vendors are delivered directly to the distribution center (excluding products delivered directly to the stores). We warehouse approximately 55% of our merchandise in our four warehouses and distribute approximately 85% of our merchandise through the distribution center. The merchandise is then transported to our stores by outside contractors. The remaining 15% of our merchandise is shipped by the suppliers directly to the stores. Examples of items shipped directly to stores by our suppliers include greeting cards and food. Of the suppliers that ship direct, a limited number (such as soft drinks and greeting card suppliers) also work together with the store manager to manage inventory for the store.

In December 2007 we moved into a new 78,000 square foot head-office facility also subject to the same long-term lease as our new 325,000 square foot warehouse.

As a result of our rapid past growth and geographic expansion, we constantly review our warehousing and distributing requirements and we may eventually add to our existing facilities.

Our inventory policy consists of maintaining enough inventory to appropriately replenish our stores and having enough safety stock in the event of a supply disruption from China. Each of our stores has a policy that all customer sales are final.

 

ITEM 3. LEGAL PROCEEDINGS

We are from time to time involved in legal proceedings of a nature considered normal to our business. We believe that none of the litigation in which we are currently involved, individually or in the aggregate, is material to our consolidated financial condition or results of operations.

On July 2, 2003, legal proceedings were instituted against S. Rossy Inc. by Party Favours before the Federal Court for trade-mark and copyright infringement as a result of the importation and sale in Canada of allegedly infringing Party Favour products. This action was amended on May 25, 2005, to include Dollarama L.P. as co-defendant and to this date the plaintiffs are seeking damages, but there is no specific monetary claim.

Of the two other actions against us for alleged personal injuries sustained by customers in our stores, the case Pellegrino v. Dollar A.M.A. Inc. (operating as Dollarama) filed on June 17, 2004 in the Ontario Superior Court of Justice, was settled as of April 2, 2008 with the settlement covered by the insurance company. In the second case (Guiseppa Calvo v. S. Rossy Inc.) filed on May 8, 2006 in the Ontario Superior Court of Justice, the plaintiffs are alleging damages of $1.0 million. We believe that our insurance policies will cover any potential amount to be paid for this claim. While we intend to vigorously defend the claim asserted against us, we cannot predict its outcome.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Not applicable

 

ITEM 6. SELECTED FINANCIAL DATA

The following section presents selected historical combined and consolidated financial data and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto appearing elsewhere in this report. The selected historical financial data for the year ended January 31, 2004 and for the period February 1, 2004 to November 17, 2004 are derived from the audited combined financial statements of our predecessor, which are not included in this report. The historical consolidated financial data for the period from November 18, 2004 to January 31, 2005 are derived from the audited consolidated financial statements which are not included in this report. The historical consolidated financial data for the fiscal years ended January 31, 2006, February 4, 2007 and February 3, 2008 are derived from our audited consolidated financial statements, which are included elsewhere in this report with the exception of the balance sheet as of January 31, 2006.

 

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In the following tables, we include selected financial data of Holdings and Group L.P. The results of operations of Holdings are almost identical to those of Group L.P., with the exception of mainly interest expense, financing costs and foreign exchange gain or loss associated with Holdings’ outstanding balance of senior floating rate deferred interest notes. In fiscal year 2006, the results of Holdings and Group L.P. were identical.

The Acquisition

On November 18, 2004, Dollarama Capital Corporation, an entity formed by funds managed by Bain Capital Partners, LLC caused our wholly-owned subsidiary, Dollarama L.P., to purchase substantially all of the assets of S. Rossy Inc. and Dollar A.M.A. Inc. relating to the Dollarama business, for a total purchase price of $1,032.5 million. We refer to this acquisition and the related transactions as the Acquisition. The total purchase price consisted of approximately $951.5 million of cash and $81.0 million of equity securities of our parent issued to the sellers. The cash portion of the purchase price and the transaction expenses were financed primarily by (i) a cash investment by funds managed by Bain Capital Partners, LLC in our parent, (ii) the borrowing by us of term loans under a new senior secured credit facility, and (iii) the borrowing by us of senior subordinated loans under a new senior subordinated bridge loan facility. The rollover equity investment made by the sellers, and cash investment made by the funds managed by Bain Capital Partners, LLC in our parent were contributed to us as equity in connection with the asset purchase. Our historical financial data discussed herein for the periods following the Acquisition reflect the application of purchase accounting rules which required us to allocate the total cost of the acquisition to the assets acquired and the liabilities assumed on the basis of their estimated fair values as of the closing of the Acquisition.

The 2005 Refinancing

On August 12, 2005, Group L.P. and Dollarama Corporation issued U.S.$200.0 million aggregate principal amount of 8.875% senior subordinated notes due 2012. The notes bear interest at the rate of 8.875% per year. Interest on the notes is payable on February 15 and August 15 of each year with the first payment having been made on February 15, 2006. The notes will mature on August 15, 2012.

The gross proceeds from the sale of the senior subordinated notes was U.S.$200.0 million (approximately $198.8 million based on the exchange rate on February 3, 2008). We used the proceeds from the sale of the senior subordinated notes, together with additional term loan B borrowings of U.S.$45.0 million (approximately $44.7 million based on the exchange rate on February 3, 2008) to (i) repay the outstanding borrowings under our existing senior subordinated loan facility, (ii) make a cash distribution to our parent, and (iii) pay related fees and expenses. We refer to the sales of the senior subordinated notes and the use of proceeds therefrom as the 2005 Refinancing.

We completed the Acquisition as of November 18, 2004. The selected historical financial data presented in the following table for the periods prior to November 18, 2004 represent the combined operations of our predecessor, S. Rossy Inc. and Dollar A.M.A. Inc., prior to the completion of the Acquisition. Our historical financial data presented herein for the periods following the Acquisition reflect the application of purchase accounting rules which required us to allocate the total cost of the Acquisition to the assets acquired and the liabilities assumed on the basis of their estimated fair values as of the closing of the Acquisition. As a result, our predecessor’s combined financial statements and our consolidated financial statements are not comparable.

Our predecessor’s combined financial statements and our consolidated financial statements were prepared in accordance with Canadian GAAP, which differs in certain significant respects from U.S. GAAP. There are no material differences between U.S. GAAP and Canadian GAAP in our consolidated financial statements for the period from November 18, 2004 to January 31, 2005, the fiscal years ended January 31, 2006, February 4, 2007 and February 3, 2008.

 

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Exchange Rate Data

The following table sets forth, for each period indicated, the low and high exchange rates for $1.00 expressed in U.S. dollars, the exchange rate at the end of each period and the average of these exchange rates on the last day of each month within each period, in each case, based upon the noon buying rate in New York City for cable transfers in foreign currencies for customs purposes by the U.S. Federal Reserve Bank of New York. These rates are presented for informational purposes and are not the same as the rates that are used for purposes of translating U.S. dollars into Canadian dollars in the financial statements included in this prospectus.

 

     Year Ended
February 3,
2008
   Year Ended
February 4,
2007
   Year Ended
January 31,
2006
   November 18,
2004 to
January 31,
2005
   February 1,
2004 to
November 17,
2004
   Year Ended
January 31,
2004

Low

   0.84374    0.84474    0.78722    0.80502    0.71582    0.65295

High

   1.09075    0.91000    0.87443    0.84926    0.83900    0.78802

Period end

   1.00614    0.84474    0.87443    0.80671    0.83857    0.75386

Average rate

   0.94803    0.88023    0.82975    0.82229    0.76075    0.72615

 

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Selected Historical Combined and Consolidated Financial Data(1A)

 

    Successor (1)     Predecessor  
    Holdings (1A)     Group L.P. (1A)              

(dollars in thousands)

  Year Ended
February 3,
2008
    Year Ended
February 4,
2007
    Year Ended
February 3,
2008
    Year Ended
February 4,
2007
    Year Ended
January 31,
2006
    November 18,
2004 to
January 31,
2005
    February 1,
2004 to
November 17,
2004
    Year Ended
January 31,
2004
 

Statements of Earnings Data:

                 

Sales

  $ 972,352     $ 887,786     $ 972,352     $ 887,786     $ 743,278     $ 155,309        $ 478,337     $ 584,603  

Cost of sales

    640,885       588,469       640,885       588,469       510,278       138,248       325,570       404,782  
                                                               

Gross profit

    331,467       299,317       331,467       299,317       233,000       17,061       152,767       179,821  

Expenses:

                 

General, administrative and store operating expenses

    186,265       154,462       186,263       154,457       125,347       24,727       82,408       96,511  

Amortization(2)

    18,389       13,528       18,389       13,528       9,782       1,860       7,257       9,280  
                                                               

Total expenses

    204,654       167,990       204,652       167,985       135,129       26,587       89,665       105,791  
                                                               

Operating income (loss)(3)

    126,813       131,327       126,815       131,332       97,871       (9,526 )     63,102       74,030  

Other expenses:

                 

Amortization of financing costs

    6,340       4,354       4,275       4,076       7,527       2,219       —         —    

Write-off of financing costs

    —         —         —         —         6,606       —         —         —    

Interest expense

    65,713       50,498       43,299       47,192       45,547       8,856       3,927       5,404  

Foreign exchange loss (gain) on derivative financial instruments and long-term debt

    (34,411 )     4,275       2,183       (1,972 )     1,508       2,078       7,198       —    
                                                               

Earnings (loss) before income taxes

    89,171       72,200       77,058       82,036       36,683       (22,679 )     51,977       68,626  

Income taxes

    302       365       280       358       1,677       527       18,132       23,807  
                                                               

Net earnings (loss)

  $ 88,869     $ 71,835     $ 76,778     $ 81,678     $ 35,006     $ (23,206 )   $ 33,845     $ 44,819  
                                                               
   

Statements of Cash Flows Data:

                 

Cash flows provided by (used in):

                 

Operating activities

  $ 57,258     $ 94,387     $ 79,109     $ 94,499     $ 46,408     $ 26,987     $ 13,308     $ 42,801  

Investing activities

    (45,562 )     (42,517 )     (45,562 )     (42,517 )     (36,006 )     (926,534 )     (7,371 )     (11,898 )

Financing activities

    (33,185 )     (35,050 )     (55,042 )     (35,170 )     (24,104 )     944,132       24,844       (20,382 )
   

Other Financial Data:

                 

Adjusted EBITDA(4)

  $ 152,073     $ 151,904     $ 152,075     $ 151,909     $ 126,254     $ 31,084     $ 78,662     $ 91,960  

Capital expenditures

  $ 45,994     $ 42,695     $ 45,994     $ 42,695     $ 23,946     $ 2,984     $ 7,371     $ 12,134  

Rent expense(5)

  $ 58,765     $ 50,701     $ 58,765     $ 50,701     $ 41,146     $ 8,045     $ 23,807     $ 28,590  

Gross margin(6)

    34.1 %     33.7 %     34.1 %     33.7 %     31.3 %     11.0 %     31.9 %     30.8 %

Number of stores (at end of period)

    521       463       521       463       398       349       344       331  

Growth of comparable store sales(7)

    (1.5 %)     2.8 %     (1.5 %)     2.8 %     6.1 %     2.4 %     2.1 %     3.0 %

Ratio of earnings to fixed charges(8)

    2.0x       2.0x       2.2x       2.2x       1.5x       —         5.4x       5.7x  
    Successor (1)     Predecessor  
    Holdings (1A)     Group L.P. (1A)              
(dollars in thousands)   As of
February 3,
2008
    As of
February 4,
2007
    As of
February 3,
2008
    As of
February 4,
2007
    As of
January 31,
2006
    As of
January 31,
2005
    As of
November 17,
2004
    As of
January 31,
2004
 

Balance Sheet Data:

                 

Cash and cash equivalents

  $ 26,214     $ 47,703     $ 26,200     $ 47,695     $ 30,883     $ 44,585     $ 49,492     $ 18,711  

Merchandise inventories

    198,500       166,017       198,500       166,017       154,047       129,081       118,210       125,310  

Property and equipment

    111,936       84,665       111,936       84,665       54,571       54,571       36,842       36,015  

Total assets

    1,197,983       1,169,187       1,197,951       1,169,174       1,098,854       1,122,208       238,365       203,707  

Long-term debt

    653,006       806,921       474,553       578,066       581,637       573,732       —         1,510  

Partners’ capital

    331,161       259,231       513,150       491,284       401,820       433,209       67,888       34,043  

 

(1) Immediately prior to the Acquisition, our predecessor acquired the assets of Aris Import Inc., the major importer and distributor used by our predecessor for imports from overseas sources. As a result, the financial data of the successor presented herein include the results of Aris Import Inc.
(1A) Holdings was created in December 2006. For a full discussion on the application of continuity of interest accounting, refer to note 1 to the consolidated financial statements.

 

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(2) Amortization represents amortization of tangible and amortizable intangible assets, including amortization of favorable and unfavorable lease rights.

 

(3) The operating loss in the period from November 18, 2004 to January 31, 2005 was primarily due to $37,042 of amortization of the step-up in fair value of the merchandise inventory as a result of the application of purchase accounting following the Acquisition.

 

(4) EBITDA represents net income (loss) before net interest expense, income taxes, and depreciation and amortization expense. Adjusted EBITDA represents EBITDA as further adjusted to reflect items set forth in the table below, all of which are required in determining our compliance with financial covenants under our senior secured credit facility. We have included EBITDA and Adjusted EBITDA to provide investors with a supplemental measure of our operating performance and information about the calculation of some of the financial covenants that are contained in the senior secured credit facility.

We believe EBITDA is an important supplemental measure of operating performance because it eliminates items that have less bearing on our operating performance and thus highlights trends in our core business that may not otherwise be apparent when relying solely on Canadian GAAP financial measures. We also believe that securities analysts, investors and other interested parties frequently use EBITDA in the evaluation of issuers, many of which present EBITDA when reporting their results. Adjusted EBITDA is a material component of the covenants imposed on us by the senior secured credit facility. Under the senior secured credit facility, we are subject to financial covenant ratios that are calculated by reference to Adjusted EBITDA.

Non-compliance with the financial covenants contained in our senior secured credit facility could result in a default, acceleration in the repayment of amounts outstanding under the senior secured credit facility, and a termination of the lending commitments under the senior secured credit facility. Generally, any default under the senior secured credit facility that results in the acceleration in the repayment of amounts outstanding under the senior secured credit facility would result in a default under the indentures governing the 8.875% senior subordinated notes and the senior floating rate deferred interest notes. While an event of default under the senior secured credit facility or the indentures is continuing, we would be precluded from, among other things, paying dividends on our capital stock or borrowing under the revolving credit facility. Our management also uses EBITDA and Adjusted EBITDA in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets and assess our ability to meet our future debt service, capital expenditure and working capital requirements and our ability to pay dividends on our capital stock.

EBITDA and Adjusted EBITDA are not presentations made in accordance with Canadian GAAP. As discussed above, we believe that the presentation of EBITDA and Adjusted EBITDA in this report is appropriate. However, EBITDA and Adjusted EBITDA have important limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under Canadian GAAP. For example, neither EBITDA nor Adjusted EBITDA reflect (a) our cash expenditures, or future requirements for capital expenditures or contractual commitments; (b) changes in, or cash requirements for, our working capital needs; (c) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and (d) tax payments or distributions to our parent to make payments with respect to taxes attributable to us that represent a reduction in cash available to us. Because of these limitations, we primarily rely on our results as reported in accordance with Canadian GAAP and use EBITDA and Adjusted EBITDA only supplementally. In addition, because other companies may calculate EBITDA and Adjusted EBITDA differently than we do, EBITDA may not be, and Adjusted EBITDA as presented in this report is not, comparable to similarly titled measures reported by other companies.

 

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A reconciliation of net earnings (loss) to EBITDA and to Adjusted EBITDA is included below:

 

     Successor (1)      Predecessor  
     Holdings    Group L.P.               

(dollars in thousands)

   Year Ended
February 3,
2008
    Year Ended
February 4,
2007
   Year Ended
February 3,
2008
   Year Ended
February 4,
2007
    Year Ended
January 31,
2006
   November 18,
2004 to
January 31,
2005
     February 1,
2004 to
November 17,
2004
    Year Ended
January 31,
2004
 

Net earnings

   $ 88,869     $ 71,835    $ 76,778    $ 81,678     $ 35,006    $ (23,206 )    $ 33,845     $ 44,819  

Income taxes

     302       365      280      358       1,677      527        18,132       23,807  

Interest expense

     65,713       50,498      43,299      47,192       45,547      8,856        3,927       5,404  

Amortization of financing costs

     6,340       4,354      4,275      4,076       7,527      2,219        —         —    

Amortization of fixed tangible and intangible assets

     18,389       13,528      18,389      13,528       9,782      1,860        7,257       9,280  
                                                              

EBITDA

     179,613       140,580      143,021      146,832       99,539      (9,744 )      63,161       83,310  

Foreign exchange loss on derivative financial instruments and long-term debt

     (34,411 )     4,275      2,183      (1,972 )     1,508      2,078        7,198       —    

Write-off of financing costs

     —         —        —        —         6,606      —          —         —    

Management fees(a)

     3,247       3,194      3,247      3,194       3,554      298        4,957       6,220  

Seller compensation(b)

     —         —        —        —         —        —          152       47  

Professional fees(c)

     —         —        —        —         —        —          3,214       939  

Deferred lease inducements(d)

     2,312       3,318      2,312      3,318       2,427      431        —         1,125  

Non-cash stock compensation expense(e)

     1,312       537      1,312      537       598      202        —         —    

Transition reserve expenses(f)

     —         —        —        —         2,285      777        —         —    

Amortization of inventory step-up(g)

     —         —        —        —         9,737      37,042        —         —    

Warehouse relocation expenses(h)

     —         —        —        —         —        —          228       650  

Other(i)

     —         —        —        —         —        —          (248 )     (331 )
                                                              

Adjusted EBITDA

   $ 152,073     $ 151,904    $ 152,075    $ 151,909     $ 126,254    $ 31,084      $ 78,662     $ 91,960  
                                                              
 
  (a) Reflects the elimination of historical management fees paid to the sellers in the predecessor periods and the management fees paid to an affiliate of Bain Capital Partners, LLC in the successor periods under our new management agreement.

 

  (b) Reflects a normalization of historical salaries and benefits paid to the sellers to align historical expenses with compensation paid to seller management following the Acquisition. The predecessor periods have been adjusted to reflect the current compensation levels.

 

  (c) Reflects the elimination of professional fees, primarily legal, accounting and advisory fees incurred by the sellers in connection with the Acquisition and subsequent refinancing, which have not been capitalized in purchase accounting.

 

  (d) Represents the elimination of non-cash straight-line rent expense.

 

  (e) Represents the elimination of non-cash stock-based compensation expense.

 

  (f) Represents the elimination of certain transition-related expenses incurred in connection with the Acquisition which have not been capitalized in purchase accounting or as debt issuance costs, primarily relating to non-recurring legal and accounting fees.

 

  (g) Represents the elimination of incremental cost of sales from November 18, 2004 to October 31, 2005 resulting from amortization of the step-up in fair value of the merchandise inventory balance following the application of purchase accounting to the Acquisition.

 

  (h) Represents various expenses incurred in connection with the relocation to our existing warehouse facility in September 2004, including elimination of rent expense for temporary warehouse facilities, transportation costs and dismantling and re-installation expenses.

 

  (i) Represents certain other income and expenses of a non-recurring and/or non-cash nature incurred in the predecessor periods, which are not expected to occur following the Acquisition, including sublease rent income.

 

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A reconciliation of Adjusted EBITDA to cash flows from operating activities is included below:

 

     Successor (1)     Predecessor  
     Holdings     Group L.P.              

(dollars in thousands)

   Year Ended
February 3,
2008
    Year Ended
February 4,
2007
    Year Ended
February 3,
2008
    Year
Ended
February 4,
2007
    Year Ended
January 31,
2006
    November 18,
2004 to
January 31,
2005
    February 1,
2004 to
November 17,
2004
    Year Ended
January 31,
2004
 

Adjusted EBITDA

   $ 152,073     $ 151,904     $ 152,075     $ 151,909     $ 126,254     $ 31,084        $ 78,662     $ 91,960  

Cash income taxes

     (302 )     (365 )     (280 )     (358 )     (1,677 )     (527 )     (20,209 )     (24,369 )

Interest expense

     (65,713 )     (50,498 )     (43,299 )     (47,192 )     (45,547 )     (8,856 )     (3,927 )     (5,404 )

Cash foreign exchange gain (loss) on derivative financial instruments and long-term debt(a)

     (9,618 )     6,089       (9,861 )     6,089       (443 )     (7,501 )     —         —    

Non-cash straight line rent expense(b)

     —         —         —         —         —         —         —         (1,125 )

Loss (gain) on disposal of property and equipment

     197       45       197       45       (4 )     8       5       25  

Amortization of deferred tenant allowances and leasing costs

     (863 )     (429 )     (863 )     (429 )     (220 )     —         —         —    

Deferred tenant allowances and leasing costs

     3,356       3,574       3,356       3,574       2,685       —         —         —    

Management fees(c)

     (3,247 )     (3,194 )     (3,247 )     (3,194 )     (3,554 )     (298 )     (4,957 )     (6,220 )

Seller compensation(c)

     —         —         —         —         —         —         (152 )     (47 )

Professional fees(c)

     —         —         —         —         —         —         (3,214 )     (939 )

Transition reserve expenses(c)

     —         —         —      

 

—  

 

    (2,285 )     (777 )     —         —    

Amortization of inventory step-up(c)

     —         —         —         —         (9,737 )     (37,042 )     —         —    

Warehouse relocation expenses(c)

     —         —         —         —         —         —         (228 )     (650 )

Other(c)

     —         —         —         —         —         —         248       331  
                                                                
     75,883       107,126       98,078       110,444       65,472       (23,909 )     46,228       53,562  

Changes in non-cash operating elements of working capital

     (18,625 )  

 

(12,739

)

    (18,969 )     (15,945 )     (19,064 )     50,896       (32,920 )     (10,761 )
                                                                

Net cash provided by operating activities

   $ 57,258     $ 94,387     $ 79,109     $ 94,499     $ 46,408     $ 26,987     $ 13,308     $ 42,801  
                                                                
 
  (a) Represents the cash gain (loss) portion of the foreign exchange loss on long-term debt and change in fair value of derivative financial instruments.

 

  (b) Predecessor financial statements were not including straight line rent expense as part of the cash provided by operating activities.

 

  (c) Represents adjustments made in order to calculate Adjusted EBITDA. See footnotes to the prior reconciliation table in this note (4).

 

(5) Rent expense represents (i) basic rent expense on a straight-line basis and (ii) contingent rent expense, net of amortization of inducements received from landlords.

 

(6) Gross margin represents gross profit as a percentage of sales.

 

(7) Comparable store sales is a measure of the percentage increase or decrease of the sales of stores open for at least 13 complete months relative to the same period in the prior year. To provide more meaningful results, we measure comparable store sales over periods containing an integral number of weeks beginning on a Monday and ending on a Sunday that best approximate the fiscal period to be analyzed.

 

(8) For purposes of calculating the ratio of earnings to fixed charges, earnings represent the sum of earnings before income taxes, fixed charges and amortization of capitalized interest, less capitalized interest. Fixed charges consist of interest expense, capitalized interest, amortization of financing costs, write-off of financing costs and the portion of operating rental expense which management believes is representative of the interest component of rent expense. For the period from November 18, 2004 to January 31, 2005, our earnings were insufficient to cover our fixed charges by $22.7 million.

 

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The calculation of the ratio of earnings to fixed charges is included below:

 

    Successor (1)     Predecessor
    Holdings   Group L.P.          

(dollars in thousands)

  Year Ended
February 3,
2008
  Year Ended
February 4,
2007
  Year Ended
February 3,
2008
  Year Ended
February 4,
2007
  Year Ended
January 31,
2006
  November 18,
2004 to
January 31,
2005
    February 1,
2004 to
November 17,
2004
  Year Ended
January 31,
2004

Earnings:

               

Earnings before income taxes

  $ 89,171   $ 72,200   $ 77,058   $ 82,036   $ 36,683   $ (22,679 )   $ 51,977   $ 68,626

Plus:

               

Fixed charges

    91,285     71,257     66,806     67,673     73,050     13,685          11,685     14,680

Amortization of capitalized interest

    —       —       —       —       —       —         —       —  

Less: interest capitalized during period

    —       —       —       —       —       —         —       —  
                                                 
  $ 180,456   $ 143,457   $ 143,864   $ 149,709   $ 109,733   $ (8,994 )   $ 63,662   $ 83,306

Fixed charges:

               

Interest (expense or capitalized)

  $ 65,713   $ 50,498   $ 43,299   $ 47,192   $ 45,547   $ 8,856     $ 3,927   $ 5,404

Estimates portion of rent expense representative of interest

    19,232     16,405     19,232     16,405     13,370     2,610       7,758     9,276

Amortization of financing costs

    6,340     4,354     4,275     4,076     7,527     2,219       —       —  

Write-off of financing costs

    —       —       —       —       6,606     —         —       —  
                                                 
  $ 91,285   $ 71,257   $ 66,806   $ 67,673   $ 73,050   $ 13,685     $ 11,685   $ 14,680

Ratio of earnings to fixed charges

    2.0x     2.0x     2.2x     2.2x     1.5x     —         5.4x     5.7x

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and notes thereto appearing in this report.

Our functional and reporting currency is the Canadian dollar. Financial data has been prepared in conformity with Canadian GAAP. Certain measures used in this discussion and analysis do not have any standardized meaning under Canadian GAAP. When used, these measures are defined in such terms as to allow the reconciliation to the closest Canadian GAAP measure. It is unlikely that these measures could be compared to similar measures presented by other companies.

Accounting Periods

On February 1, 2007, we changed our fiscal year end from January 31 to February 4, 2007 for fiscal year 2007 and to a floating year ending on the Sunday closest to January 31 for all subsequent fiscal years. We decided to change the year end date of our fiscal year 2007 to February 4, 2007 even though it is not the Sunday closest to January 31 because as is traditional with the retail calendar, every 5 to 6 years, a week is added to the retail calendar. The week ended February 4, 2007 is therefore equivalent to our 53rd week in the retail calendar, leaving the 53rd week year behind us and the rest of our fiscal year end dates to fall on the Sunday closest to January 31. There are five less days of transaction included in fiscal year ended February 3, 2008 when compared with fiscal year ended February 4, 2007. There are an additional four days of transactions included in fiscal year ended February 4, 2007 when compared to fiscal year ended January 31, 2006.

Forward-Looking Statements

Except for historical information contained herein, the statements in this document are forward-looking. Forward-looking statements involve known and unknown risks and uncertainties, including those that are described elsewhere in this report. Such risks and uncertainties may cause actual results in future periods to differ materially from forecasted results. Those risks include, among others, changes in customer demand for products, changes in raw material and equipment costs and availability, seasonal changes in customer demand, pricing actions by competitors and general changes in economic conditions, and are discussed in Item 1A of this report.

 

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Basis of Presentation

Our consolidated financial statements were prepared in accordance with Canadian GAAP, which differs in certain significant respects from U.S. GAAP. There are no material differences between U.S. GAAP and Canadian GAAP in our consolidated financial statements for the fiscal years ended January 31, 2006, February 4, 2007, and February 3, 2008. Holdings was created in December 2006. For a full discussion on the application of continuity of interest accounting, refer to note 1 to the consolidated financial statements.

Overview

We are the leading operator of dollar discount stores in Canada. Based on our internal review of publicly available information, we believe that we have more than 3.0 times the number of stores as compared to our next largest competitor in Canada. Our core markets are Ontario and Québec. As of February 3, 2008, we operated 521 Dollarama stores, including 398 stores located in Ontario and Québec. Our stores offer a varied mix consisting of both consumables and semi-durables, which are sold mainly in individual or multiple units primarily at a price of $1.00. We have a well diversified supply base, sourcing our merchandise from both North American and overseas suppliers. All of our stores are company-operated, and nearly all are located in high-traffic areas such as strip malls and shopping centers in metropolitan areas, mid-sized cities, or small towns.

Our strategy is to grow our sales, net earnings and cash flow by building upon our position as the leading Canadian operator of dollar stores and continuing to offer a compelling value proposition on a wide variety of everyday merchandise to a broad base of shoppers. As a result, we continually strive to maintain and improve the efficiency of our operations.

Key items in Fiscal Year Ended February 3, 2008

 

   

We opened 61 and closed 3 stores during the year.

 

   

324 stores were implemented with debit card technology.

 

   

Our sales increased 9.5% and comparable store sales decreased 1.5% for the fiscal year ended February 3, 2008. The sales growth was driven primarily by the opening of the 61 new stores (offset by the closure of 3 stores) and the incremental full year impact of the 68 stores opened during the fiscal year ended February 4, 2007. The comparable store sales decrease was driven by a 2.8% decrease in store traffic and a 1.3% increase in average transaction size.

 

   

In December 2007, we completed our move and began operations in a newly-constructed head office and warehouse. The warehouse is a 325,000 square foot facility while the office portion is 78,000 square feet. Both facilities are leased.

 

   

Continued to implement a new IT system.

 

   

Strong cash flow from earnings enabled us to prepay a portion of our long-term debt.

Key Items for Fiscal 2009. We have established the following priorities and initiatives aimed at continuing our growth and improving our operating and financial performance while remaining focused on serving our customers:

 

   

We plan to continue to develop our IT system. Since the beginning of March 2007, all of our concerned departments are operating with the new IT system. We will seek to improve our internal processes to adjust to the new system. We believe this new system already offers a variety of benefits, including better information on inventory and improved coordination throughout our organization.

 

   

We will continue the roll-out of our debit card processing system. The roll-out started at the beginning of fiscal 2008 and we currently have more than 350 stores with debit. We plan to implement the debit card technology in the balance of our stores by the end of the second quarter. So far, we can see that the debit card technology contributes to an increase in the average customer ticket size, without significantly impacting our cost structure.

 

   

In order to improve our store execution, we have completed a realignment of our field resources at the beginning of the year.

 

   

The Company intends to continue to study its customers and to be more proactive in improving its store activities, such as maximizing store layouts.

 

   

The Company also plans to increase the use of advertising as a tool to drive sales growth.

Factors Affecting Our Results of Operations

Sales

We recognize sales at the time the customer tenders payment for and take possession of the merchandise. All sales are final. Our sales consist of comparable store sales and new store sales. Comparable store sales is a measure of the percentage increase or decrease

 

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of the sales of stores open for at least 13 complete fiscal months relative to the same period in the prior year. We have revised our method for determining the stores that are included in comparable store sales calculation. Beginning with the fourth quarter of fiscal year 2008, we will now provide comparable store sales calculation for the stores that have been open at least 13 complete fiscal months and remain opened at the end of the period. Previously, comparable store sales calculation included only stores that had been open at least 13 complete fiscal months, that remain open at the end of the period and that were open for the entire previous year comparable period. Our comparable store sales for the 13-week period ended February 3, 2008 decreased 3.4% (decreased 3.5% based on the previous methodology) and for the 52-week period ended February 3, 2008 decreased 1.5% (decreased 1.8% based on the previous methodology).

Before changing our fiscal calendar to a floating year end and in order to provide more meaningful results, we used to measure comparable store sales over periods containing an integral number of weeks beginning on a Monday and ending on a Sunday that best approximate the analyzed fiscal period. We include sales from relocated stores and expanded stores in comparable store sales. The primary drivers of comparable store sales performance are store expansions and relocations, changes in store traffic, and the average number of items purchased by customers per visit. To increase comparable store sales, we focus on expanding our stores and offering a wide selection of merchandise that offer high quality and good value at attractive and well-maintained updated store formats, in convenient locations.

We have historically experienced seasonal fluctuations in our sales and expect this trend to continue. We generated 28.9% of our sales in fiscal year ended February 3, 2008 during the fourth quarter due to the holiday selling season. In anticipation of increased sales activity during the fourth quarter, we typically purchase substantial amounts of inventory and hire a significant number of temporary employees to supplement our permanent store and warehouse staffs.

Our sales are adversely affected by inflation and other adverse economic developments that affect the level of consumer spending in Canada where we sell our merchandise.

Cost of Sales

Our cost of sales consists of merchandise inventories (which are variable and proportional to our sales volume), procurement and warehousing costs (including occupancy and labor costs), store rent and occupancy costs, which are predominantly fixed costs, and shipping and transportation costs. We record vendor rebates consisting of volume purchase rebates, when earned. The rebates are recorded as a reduction of inventory purchases at cost, which has the effect of reducing cost of sales. As a fixed price retailer, increases in operating and merchandise costs could negatively impact our operating results because we generally do not pass on cost increases to our customers. We may be able to redesign some of our direct sourced products to attempt to mitigate the impact of increasing unit costs.

We have historically reduced our cost of sales by shifting more of our sourcing to low-cost foreign suppliers. For the fiscal year ended February 3, 2008, the direct overseas sourcing was 57.5% of our purchases compared to 53.1% for the fiscal year ended February 4, 2007 and 52.6% for the fiscal year ended January 31, 2006. We purchase merchandise from foreign suppliers mainly in China, but also from Hong Kong, India, Indonesia, Italy, Pakistan, Poland, Singapore, Taiwan, Thailand, Turkey and United Kingdom. As a result, our cost of sales is impacted by the fluctuation of foreign currencies against the Canadian dollar. In particular, we purchase a majority of our imported merchandise from suppliers in China using U.S. dollars. Therefore, our cost of sales is impacted by the fluctuation of the Chinese renminbi against the U.S. dollar and the fluctuation of the U.S. dollar against the Canadian dollar. While we enter into forward contracts to hedge part of our exposure to fluctuations in the value of the U.S. dollar against the Canadian dollar, we do not hedge our exposure to fluctuations in the value of the Chinese renminbi against the U.S. dollar.

Our occupancy costs are driven by our base rent expense. We believe that we are generally able to negotiate leases at market, or slightly favorable to market, economic terms due to the increased consumer traffic which our stores usually generate in strip malls and shopping centers. We typically enter into leases with terms of between five and ten years with options to renew for one or more periods of five years each.

Shipping and transportation costs are also a significant component of our cost of sales. When fuel costs increase, shipping and transportation costs increase because the carriers generally pass on such cost increases to the users. Because of the risk of continued increases in fuel costs in fiscal year 2009, we expect increased fuel surcharges from our contract carriers as compared with past quarters. Our cost of sales is also affected by general inflation in costs of merchandise and costs of certain commodities relating to raw materials used in our products. During the last three fiscal years, the negative impact of these cost increases on our product margins has been offset primarily by the favorable foreign currency fluctuations, specifically the relative strengthening of the Canadian dollar to the U.S. dollar.

 

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Table of Contents

General, Administrative and Store Operating Expenses

Our general, administrative and store operating expenses consist of store labor and maintenance costs such as repair costs, which are primarily fixed, and salaries and related benefits of corporate team members, administrative office expenses, professional expenses and other related expenses. Although our average hourly wage rate is higher than the minimum wage, an increase in the mandated minimum wage could significantly increase our payroll costs unless we realize offsetting productivity gains and cost reductions. We expect our administrative costs to increase as we build our infrastructure to effectively meet the needs generated by the growth of the Partnership. Administrative and general expenses also include management fees of up to $3.0 million per year plus expenses to be paid pursuant to a management agreement with Bain Capital Partners, LLC.

Economic or Industry-Wide Factors Affecting the Company

We operate in the Canadian discount retail merchandise business, which is highly competitive with respect to price, store location, merchandise quality, assortment and presentation, in-stock consistency, and customer service. We compete with discount stores and with many other retailers, including mass merchandise, grocery, drug, convenience, variety and other specialty stores. These other retail companies operate stores in many of the areas where we operate and many of them engage in extensive advertising and marketing efforts. Additionally, we compete with a number of companies for prime retail site locations, as well as in attracting and retaining quality employees. We, along with other retail companies, are influenced by a number of factors including, but not limited to: cost of goods, consumer debt levels and buying patterns, economic conditions, interest rates, customer preferences, unemployment, labor costs, inflation, currency exchange fluctuations, fuel prices, weather patterns, catastrophic events, competitive pressures and insurance costs.

Critical Accounting Policies

In preparing our financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the period. We evaluate our estimates on an ongoing basis, based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

Valuation of Merchandise Inventories

The valuation of store merchandise inventories is determined by the retail inventory method valued at the lower of cost (weighted-average) or market. Under the retail inventory method, merchandise inventories are converted to a cost basis by applying an average cost to selling ratio. Merchandise inventories that are at the distribution center or warehouses and inventories that are in-transit from suppliers, are stated at the lower of cost and market, determined on a weighted-average cost basis. Merchandise inventories include items that have been marked down to management’s best estimate of their net realizable value and are included in cost of sales in the period in which the markdown is determined. We estimate our markdown reserve based on the consideration of a variety of factors, including but not limited to quantities of slow-moving or carryover seasonal merchandise on hand, historical markdown statistics and future merchandising plans. The accuracy of our estimates can be affected by many factors, some of which are outside of our control, including changes in economic conditions and consumer buying trends. Historically, we have not experienced significant differences in our estimates of markdowns compared with actual results.

Property and Equipment

Property and equipment are carried at cost. Property and equipment are amortized over the estimated useful lives of the respective assets as follows: (i) on the declining balance method, computer equipment and vehicles at 30%; and (ii) on the straight-line method, store and warehouse equipment at 8 to 10 years, computer software at 5 years and leasehold improvements at the terms of the lease. Property and equipment are reviewed for impairment periodically and whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable.

Goodwill and Trade Name

Goodwill and trade name are not subject to amortization and are tested for impairment annually or more frequently if events or circumstances indicate that the assets might be impaired. Impairment is identified by comparing the fair value of the reporting unit to which it relates to its carrying value. To the extent a reporting unit’s carrying amount exceeds its fair value, we measure the amount of impairment in a manner similar to that of a purchase price allocation, and any excess of carrying amount over the implied fair value of goodwill is charged to earnings in the period in which the impairment is determined. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our business is impaired. Any resulting impairment would be charged to net earnings.

 

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Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors which we consider could trigger an impairment review include, but are not limited to, the following: (i) significant negative industry or economic trends; and (ii) current, historical or projected losses that demonstrate continuing losses. Impairment is assessed by comparing the carrying amount of an asset with the expected future net undiscounted cash flows from its use together with its residual value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. The estimates regarding their fair value include assumptions about future conditions relating to our business, as well as the industry. If actual cash flows differ from those projected by management, additional write-offs may be required.

Operating Leases

We recognize rental expense and inducements received from landlords on a straight-line basis over the term of the leases. Any difference between the calculated expense and the amounts actually paid is reflected as deferred lease inducements on our balance sheet. We recognize contingent rental expense when the achievement of the specified sales targets is considered probable. Our estimates are based on individual store sales trends and are adjusted for actual results.

Financial Instruments

Fair market value of financial instruments

We estimate the fair market value of our financial instruments based on current interest rates, market value and current pricing of financial instruments with similar terms. Unless otherwise disclosed herein, the carrying value of these financial instruments, especially those with current maturities such as cash and cash equivalents, accounts receivable, deposits, accounts payable and accrued expenses, approximates their fair market value.

Derivative financial instruments

We use derivative financial instruments in the management of our foreign currency and interest rate exposures. When hedge accounting is used, we document relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. This process includes linking derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. We also assess whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows of hedged items.

Foreign exchange forward contracts

We have significant cash flows and long-term debt denominated in U.S. dollars. We use foreign exchange forward contracts and foreign currency swap agreements to mitigate risks from fluctuations in exchange rates. All forward contracts and foreign currency swap agreements are used for risk management purposes and are designated as hedges of specific anticipated purchases.

Swaps and interest rate cap

Our interest rate risk is primarily in relation to our fixed rate and floating rate borrowings. We have entered into swap agreements and an interest rate cap to mitigate this risk.

Others

In the event a derivative financial instrument designated as a hedge is terminated or ceases to be effective prior to maturity, related realized and unrealized gains or losses are deferred under current assets or liabilities and recognized in earnings in the period in which the underlying original hedged transaction is recognized. In the event a designated hedged item is sold, extinguished or matures prior to the termination of the related derivative financial instrument, any realized or unrealized gain or loss on such derivative financial instrument is recognized in earnings.

Derivative financial instruments which are not designated as hedges or have ceased to be effective prior to maturity are recorded at their estimated fair values under current assets or liabilities with changes in their estimated fair values recorded in earnings. Estimated fair value is determined using pricing models incorporating current market prices and the contractual prices of the underlying instruments, the time value of money and yield curves.

 

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Monetary assets and liabilities denominated in foreign currencies are translated at year-end exchange rates, while non-monetary assets and liabilities are translated at historic rates. Revenues and expenses are translated at prevailing market rates in the recognition period. The resulting exchange gains or losses are recorded in the statement of earnings, except for gains or losses on foreign exchange contracts used to hedge anticipated purchases in foreign currencies. Gains and losses on these contracts are accounted for as a separate component of partners’ capital in other comprehensive income. Such gains or losses are recorded in income when the inventories are sold.

Results of Operations

The following tables set forth the major components of Holdings and Group L.P.’s consolidated statements of earnings, expressed as a percentage of sales, for the periods indicated:

 

     Holdings     Group L.P.     Holdings and
Group L.P.
 
      Year Ended
February 3,
2008
    Year Ended
February 4,
2007
    Year Ended
February 3,
2008
    Year Ended
February 4,
2007
    Year Ended
January 31,
2006
 

Statements of Earnings Data:

          

Sales

   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Cost of sales

   65.9 %   66.3 %   65.9 %   66.3 %   68.7 %

General, administrative and store operating expenses

   19.2 %   17.4 %   19.2 %   17.4 %   16.9 %

Amortization

   1.9 %   1.5 %   1.9 %   1.5 %   1.3 %

Amortization of financing costs

   0.7 %   0.5 %   0.4 %   0.5 %   1.0 %

Write-off of financing costs

   —   %   —   %   —   %   —   %   0.9 %

Interest expense

   6.8 %   5.7 %   4.5 %   5.3 %   6.1 %

Foreign exchange loss (gain) on derivative financial instruments and long-term debt

   (3.5 %)   0.5 %   0.2 %   (0.2 %)   0.2 %

Income taxes

   0.0 %   0.0 %   0.0 %   0.0 %   0.2 %
                              

Net earnings

   9.1 %   8.1 %   7.9 %   9.2 %   4.7 %
                              

In the following discussion, we address the results of operations of Holdings and Group L.P. The results of operations of Holdings are almost identical to those of Group L.P., with the exception of mainly interest expense, financing costs and foreign exchange gain or loss associated with Holdings’ outstanding balance of senior floating rate deferred interest notes. Therefore, discussion related to sales, cost of sales, general, administrative and store operating expenses and amortization is almost identical for both companies. Beginning with the discussion of amortization of financing costs and continuing through the discussion of net earnings, we discuss Group L.P. and Holdings separately.

Fiscal Year Ended February 3, 2008 Compared to Fiscal Year Ended February 4, 2007

Sales

Our sales increased $84.6 million, or 9.5%, from $887.8 million for the fiscal year ended February 4, 2007 to $972.4 million for the fiscal year ended February 3, 2008. Comparable store sales decreased 1.5% during the fiscal year ended February 3, 2008, representing a decrease of approximately $12.5 million. Comparable store sales include stores that have been open for at least 13 full fiscal months and remain open at the end of the reporting period. Comparable store sales decrease was driven by both a decrease in store traffic of 2.8% and an increase in the average transaction size of 1.3%. The additional five days of transactions in the fiscal year ended February 4, 2007 also negatively impacted our fiscal 2008 sales growth by approximately $10.6 million. The remaining portion of the sales growth, or $107.7 million, was driven primarily by the opening of 61 new stores (offset by the closure of three stores) in the fiscal year ended February 3, 2008 and the incremental full year impact of the 68 stores opened during the fiscal year ended February 4, 2007. Our total store square footage increased 13.6% from 4.4 million at February 4, 2007 to 5.0 million at February 3, 2008.

 

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Cost of Sales

Cost of sales increased by $52.4 million, or 8.9%, from $588.5 million for the fiscal year ended February 4, 2007, to $640.9 million for the fiscal year ended February 3, 2008. Our margin (sales less cost of sales) increased from 33.7% for the fiscal year ended February 4, 2007 to 34.1% for the fiscal year ended February 3, 2008. The improvement in margin was driven by improved sourcing and favorable foreign exchange rates and was offset by higher transportation costs to service our western Canada stores. Since most of our products are distributed from our distribution center located in eastern Canada, our western expansion results in higher transportation costs. In addition, last year we had some positive year-end adjustments related to inventory and systems’ adjustments.

General, Administrative and Store Operating Expenses

General, administrative and store operating expenses increased $31.8 million, or 20.6%, from $154.5 million for the fiscal year ended February 4, 2007, to $186.3 million for the fiscal year ended February 3, 2008. This increase was primarily due to an increase in the number of stores in operation, higher wages resulting from minimum wage increases and an increase in administration costs to support the expansion. As a percentage of sales, our general administrative and store operating expenses increased from 17.4% of sales for the fiscal year ended February 4, 2007 to 19.2% for the fiscal year ended February 3, 2008.

Amortization

Amortization expense increased $4.9 million, from $13.5 million for the fiscal year ended February 4, 2007, to $18.4 million for the fiscal year ended February 3, 2008. This increase was due to the amortization of property and equipment resulting from the new store openings and the amortization of capitalized software costs associated with the upgrade of our information technology systems.

Amortization of Financing Costs

For Group L.P., amortization of financing costs increased from $4.1 million for the fiscal year ended February 4, 2007, to $4.3 million for the fiscal year ended February 3, 2008.

For Holdings, amortization of financing costs increased from $4.4 million for the fiscal year ended February 4, 2007, to $6.3 million for the fiscal year ended February 3, 2008 due to the full year of amortization.

The amortization of financing costs represents the cost of our financings described in “Liquidity and Capital Resources—Debt and Commitments”, which is amortized over the term of the related debt.

Interest Expense

For Group L.P., interest expense decreased $3.9 million from $47.2 million for the fiscal year ended February 4, 2007, to $43.3 million for the fiscal year ended February 3, 2008, which reflects the reduced debt outstanding and favorable foreign exchange rates associated with our U.S. dollar denominated debt.

For Holdings, interest expense increased $15.2 million from $50.5 million for the fiscal year ended February 4, 2007, to $65.7 million for the fiscal year ended February 3, 2008, due mainly to a full year of expense on our senior floating rate notes due 2012. Interest expense increase was offset by the early principal repayment of U.S.$15.0 million of our senior floating rate deferred interest notes.

Foreign Exchange Gain/Loss on Derivative Financial Instruments and Long-Term Debt

For Group L.P., foreign exchange loss on derivative financial instruments and long-term debt increased $4.2 million from a $2.0 million gain for the fiscal year ended February 4, 2007, to a $2.2 million loss for the fiscal year ended February 3, 2008, due mainly to the difference in exchange rate.

For Holdings, foreign exchange gain on derivative financial instruments and long-term debt increased $38.7 million from a $4.3 million loss for the fiscal year ended February 4, 2007, to a $34.4 million gain for the fiscal year ended February 3, 2008, due mainly to the difference in exchange rate.

Income Taxes

For both Group L.P. and Holdings, income tax expense decreased $0.1 million from $0.4 million in fiscal year ended February 4, 2007 to $0.3 million in fiscal year ended February 3, 2008. Net earnings for the fiscal years ended February 4, 2007, and February 3, 2008, constitute income of our partners and are therefore subject to income tax in their hands.

 

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Net Earnings

For Group L.P., despite higher sales and better margins, net earnings decreased $4.9 million, from $81.7 million for the fiscal year ended February 4, 2007 to $76.8 million for the fiscal year ended February 3, 2008. Contributing factors include higher general administration and store expenses and higher amortization of property and equipment – both associated with the growth of our business.

For Holdings, net earnings increased $17.0 million from $71.8 million for the fiscal year ended February 4, 2007 to $88.9 million for the fiscal year ended February 3, 2008 due to the foreign exchange gain on long-term debt on the outstanding senior deferred notes which are unhedged, and offset by the same factors described in Group L.P.’s net earnings.

Fiscal Year Ended February 4, 2007 Compared to Fiscal Year Ended January 31, 2006

Sales

Our sales increased $144.5 million, or 19.4%, from $743.3 million for the fiscal year ended January 31, 2006 to $887.8 million for the fiscal year ended February 4, 2007. The sales growth was driven primarily by the opening of 68 new stores (offset by the closure of three stores) in the fiscal year ended February 4, 2007, which contributed approximately $78.7 million to the sales increase. The additional four days of transactions in the fiscal year ended February 4, 2007 accounted for approximately $10.3 million of the sales increase. The remaining portion of the sales increase came from the comparable store sales increase of 2.8% for the 52 weeks ended January 28, 2007, representing approximately $18.9 million of the total sales increase, and from the incremental full year effect of the 49 stores opened (net of 2 closures) in the fiscal year ended January 31, 2006, accounting for the remaining portion of the total sales increase. Comparable store sales increase was driven by both an increase in store traffic of 2.3% and an increase in the average transaction size of 0.5%. Our total store square footage increased 18.9% from 3.7 million at January 31, 2006 to 4.4 million at February 4, 2007.

Cost of Sales

Cost of sales increased by $78.2 million, or 15.3%, from $510.3 million for the fiscal year ended January 31, 2006, to $588.5 million for the fiscal year ended February 4, 2007. Our margin (sales less cost of sales) increased from 31.3% for the fiscal year ended January 31, 2006 to 33.7% for the fiscal year ended February 4, 2007. The improvement in the margin was driven by improved sourcing and favorable foreign exchange rates and was offset by higher transportation costs to service our western Canada stores. Since most of our products are distributed from our distribution center located in eastern Canada, our western expansion results in higher transportation costs. Cost of sales included $9.7 million of amortization of the purchase accounting inventory step-up during the fiscal year ended January 31, 2006.

General, Administrative and Store Operating Expenses

General, administrative and store operating expenses increased $29.2 million, or 23.3%, from $125.3 million for the fiscal year ended January 31, 2006, to $154.5 million for the fiscal year ended February 4, 2007. This increase was primarily due to an increase in the number of stores in operation, higher wages resulting from minimum wage increases and an increase in administration costs to support the expansion. In addition, the increases in expenses are attributable to costs we incurred to upgrade our controls and procedures offset by reduced expenses relating to the Acquisition. These expenses of $2.3 million for the fiscal year ended January 31, 2006, consist primarily of non recurring legal and accounting fees incurred in connection with the Acquisition. As a percentage of sales, our general administrative and store operating expenses increased from 16.9% of sales for the fiscal year ended January 31, 2006 to 17.4% for the fiscal year ended February 4, 2007.

Amortization

Amortization expense increased $3.7 million, from $9.8 million for the fiscal year ended January 31, 2006, to $13.5 million for the fiscal year ended February 4, 2007. This increase was due to the amortization of property and equipment resulting from the new store openings.

Amortization of Financing Costs

For Group L.P., amortization of financing costs decreased from $7.5 million for the fiscal year ended January 31, 2006, to $4.1 million for the fiscal year ended February 4, 2007.

For Holdings, amortization of financing costs decreased from $7.5 million for the fiscal year ended January 31, 2006, to $4.4 million for the fiscal year ended February 4, 2007.

 

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The amortization of financing costs represents the cost of our financings described in “Liquidity and Capital Resources—Debt and Commitments,” which is amortized over the term of the related debt.

Write-off of Financing Costs

For Group L.P. and Holdings, as a result of the 2005 Refinancing, financing costs related to the financing of the Acquisition of $6.6 million were expensed in the fiscal year ended January 31, 2006.

Interest Expense

For Group L.P., interest expense increased $1.7 million from $45.5 million for the fiscal year ended January 31, 2006, to $47.2 million for the fiscal year ended February 4, 2007, due mainly to higher interest costs on floating rate debt, partially offset by lower interest costs following the 2005 Refinancing.

For Holdings, interest expense increased $5.0 million from $45.5 million for the fiscal year ended January 31, 2006, to $50.5 million for the fiscal year ended February 4, 2007, due mainly to higher interest costs on floating rate debt, issuance of the senior floating rate deferred interest notes in December 2006 and partially offset by lower interest costs following the 2005 Refinancing.

Foreign Exchange Gain/Loss on Derivative Financial Instruments and Long-Term Debt

For Group L.P., foreign exchange gain on derivative financial instruments and long-term debt increased $3.5 million from a $1.5 million loss for the fiscal year ended January 31, 2006, to a $2.0 million gain for the fiscal year ended February 4, 2007, due mainly to the difference in exchange rate.

For Holdings, foreign exchange loss on derivative financial instruments and long-term debt increased $2.8 million from $1.5 million for the fiscal year ended January 31, 2006, to $4.3 million for the fiscal year ended February 4, 2007. During the fiscal year ended February 4, 2007, we realized a foreign exchange loss on long-term debt of approximately $6.2 million relating to the currency translation of the U.S.$ denominated senior floating rate notes. Unlike the remaining portion of our U.S.$ denominated debt, the senior floating rate deferred interest notes have not been hedged for foreign exchange rate variations and therefore, this portion of the foreign exchange loss (gain) on long-term debt is not offset by any derivative financial instruments loss (gain).

Income Taxes

Due to a phase out of large corporation tax, income tax expense, for both Group L.P. and Holdings, decreased $1.3 million from $1.7 million in fiscal year ended January 31, 2006 to $0.4 million in fiscal year ended February 4, 2007. Net earnings for the fiscal years ended January 31, 2006, and February 4, 2007, constitute income of our partners and are therefore subject to income tax in their hands. Income taxes recorded in such periods represent the large corporations’ tax and nominal income taxes of our subsidiary companies.

Net Earnings

For Group L.P., as a result of higher sales, better margins and the absence of a charge of $9.7 million for the amortization of the inventory step-up and a $6.6 million write-off of financing costs which existed in the prior year, net earnings increased $46.7 million, from $35.0 million for the fiscal year ended January 31, 2006 to $81.7 million for the fiscal year ended February 4, 2007.

For Holdings, as a result of higher sales, better margins and the absence of a charge of $9.7 million for the amortization of the inventory step-up and a $6.6 million write-off of financing costs which existed in the prior year, net earnings increased $36.8 million, from $35.0 million for the fiscal year ended January 31, 2006 to $71.8 million for the fiscal year ended February 4, 2007.

 

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Summary of Quarterly Results

(Unaudited)

(in thousands of Canadian Dollars)

Summary of Quarterly Results (Unaudited)

 

     Holdings     Group L.P.     Holdings and
Group L.P.
 
     Year Ended
February 3, 2008
    Year Ended
February 4, 2007
    Year Ended
February 3, 2008
    Year Ended
February 4, 2007
    Year Ended
January 31, 2006
 

(dollars in thousands)

   $    % of Total     $    % of Total     $    % of Total     $    % of Total     $     % of Total  

Sales

                        

Q1

   $ 215,875    22.2 %   $ 184,941    20.8 %   $ 215,875    22.2 %   $ 184,941    20.8 %   $ 154,510     20.8 %

Q2

     233,205    24.0 %     208,142    23.5 %     233,205    24.0 %     208,142    23.5 %     176,444     23.7 %

Q3

     241,905    24.9 %     218,477    24.6 %     241,905    24.9 %     218,477    24.6 %     186,542     25.1 %

Q4

     281,367    28.9 %     276,226    31.1 %     281,367    28.9 %     276,226    31.1 %     225,782     30.4 %
                                                                  

Year

   $ 972,352    100.0 %   $ 887,786    100.0 %   $ 972,352    100.0 %   $ 887,786    100.0 %   $ 743,278     100.0 %
                                                                  

Gross Profit

                        

Q1

   $ 70,579    21.3 %   $ 57,834    19.3 %   $ 70,579    21.3 %   $ 57,834    19.3 %   $ 37,989     16.3 %

Q2

     81,088    24.5 %     69,547    23.3 %     81,088    24.5 %     69,547    23.3 %     57,459     24.7 %

Q3

     81,205    24.5 %     70,976    23.7 %     81,205    24.5 %     70,976    23.7 %     61,658     26.5 %

Q4

     98,595    29.7 %     100,960    33.7 %     98,595    29.7 %     100,960    33.7 %     75,894     32.5 %
                                                                  

Year

   $ 331,467    100.0 %   $ 299,317    100.0 %   $ 331,467    100.0 %   $ 299,317    100.0 %   $ 233,000     100.0 %
                                                                  

Net Earnings

                        

Q1

   $ 18,472    20.8 %   $ 8,897    12.4 %   $ 10,160    13.2 %   $ 8,897    12.4 %   $ (4,855 )   (13.9 %)

Q2

     25,759    29.0 %     16,446    22.9 %     22,275    29.0 %     16,446    22.9 %     8,703     24.9 %

Q3

     33,828    38.0 %     17,412    24.2 %     16,649    21.7 %     17,412    24.2 %     6,355     18.2 %

Q4

     10,810    12.2 %     29,080    40.5 %     27,694    36.1 %     29,080    40.5 %     24,803     70.8 %
                                                                  

Year

   $ 88,869    100.0 %   $ 71,835    100.0 %   $ 76,778    100.0 %   $ 71,835    100.0 %   $ 35,006     100.0 %
                                                                  

Liquidity and Capital Resources

Cash Flows

The following table summarizes the statement of cash flows of Holdings and Group L.P.:

 

     Holdings     Group L.P.     Holdings and
Group
L.P.
 

(dollars in thousands)

   Year Ended
February 3,
2008
    Year Ended
February 4,
2007
    Year Ended
February 3,
2008
    Year Ended
February 4,
2007
    Year Ended
January 31,
2006
 

Net cash provided by operating activities

   $ 57,258     $ 94,387     $ 79,109     $ 94,499     $ 46,408  

Net cash used in investing activities

     (45,562 )     (42,517 )     (45,562 )     (42,517 )     (36,006 )

Net cash used in financing activities

     (33,185 )     (35,050 )     (55,042 )     (35,170 )     (24,104 )
                                        

Net increase (decrease) in cash and cash equivalents

     (21,489 )     16,820       (21,495 )     16,812       (13,702 )

Cash and cash equivalents, beginning of period

     47,703       30,883       47,695       30,883       44,585  
                                        

Cash and cash equivalents, end of period

   $ 26,214     $ 47,703     $ 26,200     $ 47,695     $ 30,883  
                                        

Cash Flows from Operating Activities

Group L.P. generated cash flow from operations of $79.1 million during fiscal year ended February 3, 2008 compared to $94.5 million during fiscal year ended February 4, 2007. The decrease in operating cash flow of $15.4 million was primarily due to a larger increase in non-cash working capital than last year ($3.0 million) and losses on settlements of foreign exchange contracts for which the hedged item is still in the balance sheet ($8.3 million), versus a gain last year, offset by a decrease in interest expense compared to the previous year. Cash flows provided by operating activities during the fiscal year ended February 4, 2007 were $94.4 million, compared with $46.4 million for the fiscal year ended January 31, 2006. During the fiscal year ended February 4, 2007, operating cash flow was driven mainly by earnings growth, resulting mainly from an overall sales

 

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growth of 19.8%, and an inventory increase of $12.0 million compared to an inventory increase of $25.0 million during the fiscal year ended January 31, 2006. Fiscal year 2006 inventory increase was a result of a build up of the store inventory levels and new store openings. During the fiscal year ended January 31, 2006, operating cash flow was driven mainly by earnings growth offset by the previously described inventory increase.

For the years ended February 3, 2008 and February 4, 2007, the operating cash flow of Holdings was less than Group L.P. by $21.7 million and $0.1 million respectively. These differences relate primarily to the interest obligations on the senior floating rate deferred interest notes.

Cash Flows from Investing Activities

During the fiscal year ended February 3, 2008, cash used for investing activities was $45.6 million compared to $42.5 million for the fiscal year ended February 4, 2007. The increase was primarily due to our move to a newly constructed and leased head-office and warehouse. Higher store construction costs in Western Canada and an overall increase in store maintenance capital expenditures explain the remaining portion of the increase.

Cash flows used for investing activities during the fiscal year ended February 4, 2007 were $42.5 million, compared with $36.0 million for the fiscal year ended January 31, 2006. Investing activities for the fiscal year ended February 4, 2007 and for the fiscal year ended January 31, 2006 were mainly impacted by the acquisition of property and equipment related to new stores opened, including the expansion and relocation of existing stores, and to improve information technology systems and distribution capacity in the greater Montreal area.

Cash Flows from Financing Activities

Cash used by Group L.P. for financing activities during fiscal year 2008 increased $19.9 million versus last year. It includes a capital distribution increase of $36.4 million to Holdings. This additional distribution was used by Holdings to make a U.S.$15 million principal repayment and pay scheduled interest expense on the senior floating deferred interest notes. Group L.P. also used $13.1 million for scheduled quarterly principal repayments on the senior secured credit facility, down $15.8 million when compared to fiscal year 2007.

Cash used by Holdings for financing activities during fiscal year 2008 is $33.2 million, down $1.9 million compared to fiscal year 2007. In July 2007 Holdings used $15.6 million to make a U.S.$15.0 million principal repayment on the senior floating rate deferred interest notes. Cash used was offset by a decrease of $15.8 million on the principal repayment of the senior secured credit facility versus the previous year.

Cash flows used by Group L.P. for financing activities during the fiscal year ended February 4, 2007 were $35.2 million ($35.1 million used by Holdings) compared with $24.1 million for the fiscal year ended January 31, 2006. The cash used in financing activities during the fiscal year ended February 4, 2007 was a result of the repayment of long-term debt, capital distributions and financing cost associated with registration of the 8.875% senior subordinated notes. The small difference between Group L.P. and Holdings relates to the issuance of the senior floating rate deferred interest notes in December 2006, which generated proceeds on long-term debt of $228.3 million that were used to pay financing costs of $6.1 million and to make a capital distribution of $222.2 million to our parent. For the fiscal year ended January 31, 2006 the cash used in financing activities was primarily a result of the 2005 Refinancing.

Capital Expenditures

Capital expenditures for the fiscal year ended February 3, 2008 were $46.0 million offset by tenant allowances of $3.8 million as compared with $42.7 million, offset by tenant allowances of $3.9 million for the fiscal year end February 4, 2007. The increased spending in the current fiscal year ended was primarily due to our move to a newly constructed and leased head-office and warehouse and higher store construction costs in Western Canada and an overall increase in store maintenance capital expenditures. Capital expenditures for stores was $34.1 million while $11.9 million was spent on projects to improve our information systems, increase our warehouse capacity and move into our new corporate head-office.

The increase in capital spending for fiscal year ended February 4, 2007 compared to fiscal year ended January 31, 2006 is the result of the opening of new stores at a faster pace: 68 stores and the closure of three stores compared with the opening of 51 stores and the closure of two stores in fiscal year ended January 31, 2006. In addition, during the fiscal year ended February 4, 2007, $9.5 million was spent on projects to improve our information systems and increase our warehouse and distribution capacity in the greater Montreal area.

In fiscal year ended February 3, 2008, the average cost to open a new store was approximately $0.6 million, including $0.4 million for capital expenditures and $0.2 million for inventory.

 

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Contractual Obligations

The following tables summarize our material contractual obligations as of February 3, 2008, including off-balance sheet arrangements and our commitments:

 

Contractual obligations

   Total    Year 1    Year 2    Year 3    Year 4    Year 5    Thereafter
     (dollars in millions)

Lease financing:

                    

Operating lease obligations(1)

   $ 472.2    $ 62.5    $ 58.8    $ 56.2    $ 52.5    $ 47.6    $ 194.6

Long-term borrowings:

                    

Group L.P.

                    

8.875% senior subordinated notes

     198.8      —        —        —        —        198.8      —  

Senior secured credit facility

     315.2      26.4      17.4      40.9      230.5      —        —  

Mandatory interest payments(2)

     145.7      42.0      36.2      28.8      19.3      19.4      —  
                                                

Group L.P.’s total obligations

   $ 1,131.9    $ 130.9    $ 112.4    $ 125.9    $ 302.3    $ 265.8    $ 194.6
                                                

Holdings

                    

Senior floating rate deferred interest notes

     183.9      —        —        —        —        183.9      —  

Mandatory interest payments(3)

     105.7      —        —        —        —        105.7      —  
                                                

Holdings’ total obligations

   $ 1,421.5    $ 130.9    $ 112.4    $ 125.9    $ 302.3    $ 555.4    $ 194.6
                                                

Commitments

   Total    Year 1    Year 2    Year 3    Year 4    Year 5    Thereafter
     (dollars in millions)

Letters of credit and surety bonds

   $ 1.0    $ 1.0    $ —      $ —      $ —      $ —      $ —  
                                                

Total commitments

   $ 1.0    $ 1.0    $ —      $ —      $ —      $ —      $ —  
                                                

Total obligations and commitments

                    

Group L.P.

   $ 1,132.9    $ 131.9    $ 112.4    $ 125.9    $ 302.3    $ 265.8    $ 194.6
                                                

Holdings

   $ 1,422.5    $ 131.9    $ 112.4    $ 125.9    $ 302.3    $ 555.4    $ 194.6
                                                

 

(1) Represent the basic annual rent, exclusive of the contingent rentals, common area maintenance, real estate taxes and other charges paid to landlords, all together representing less than 1/3 of our total lease expenses.

 

(2) Based on the actual interest rate on the 8.875% senior subordinated notes and assumed interest rates on the amounts due under the senior secured credit facility, in each case, applying the current foreign exchange rate where required. Where swap agreements are in place, the mandatory interest payments reflect swap payments.

 

(3) (i) Based on 3.0975% LIBOR rate. (ii) No obligation to pay interest until maturity.

Debt and Commitments

We are and will continue to be significantly leveraged. Our principal sources of liquidity have been cash flow generated from operations and borrowings under our senior secured credit facility. Our principal cash requirements have been for working capital, capital expenditures and debt service. In connection with the Acquisition, we entered into the senior secured credit facility, pursuant to which we incurred $120.0 million of term loan A borrowings and U.S.$201.3 million of term loan B borrowings ($240.0 million based on the exchange rate on the closing date of the Acquisition), and the senior subordinated bridge loan facility, pursuant to which we borrowed an aggregate of $240.0 million.

 

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On August 12, 2005, we issued U.S.$200.0 million senior subordinated notes bearing interest at 8.875% per annum payable semi annually and maturing in August 2012. We used the proceeds from the sale of these 8.875% senior subordinated notes, together with additional term loan B borrowings of U.S.$45.0 million (approximately $44.7 million based on the exchange rate on February 3, 2008) that we incurred pursuant to an amendment to our senior secured credit facility to, (i) repay the outstanding borrowings under the senior subordinated bridge loan facility, (ii) make a cash distribution to our parent and (iii) pay related fees and expenses. At that time, the outstanding borrowings under the senior subordinated bridge loan including the accrued interest were $240.5 million bearing interest at Canadian Banker’s Acceptance rate plus 8.25% per annum and would have otherwise matured in May 2006.

On December 20, 2006, we issued U.S.$200.0 million senior floating rate deferred interest notes bearing interest at 6-month LIBOR plus 5.75% (increasing to 6.25% after two years and 6.75% after three years) per annum, payable semi annually and maturing in August 2012. We used the proceeds from the sale of these notes to make a cash distribution to our parent and to pay related fees and expenses.

As of February 3, 2008, we and our subsidiaries had approximately $315.2 million of senior secured debt outstanding, consisting of debt outstanding under our senior secured credit facility, and U.S.$200.0 million ($198.8 million based on exchange rate on February 3, 2008) of senior subordinated debt outstanding, consisting of the 8.875% senior subordinated notes, and U.S.$185.0 million ($183.9 million based on exchange rate on February 3, 2008) of senior subordinated deferred interest debt outstanding, consisting of the senior floating rate deferred interest notes.

Our and our subsidiaries’ ability to make scheduled payments of principal, or to pay the interest or additional interest, if any, on, or to refinance our indebtedness, or to fund planned capital expenditures will depend on our future performance, which to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, or other factors that are beyond our control. Based upon the current level of our operations, we believe that cash flow from operations, together with borrowings available under our senior secured credit facility, will be adequate to meet our future liquidity needs. Our assumptions with respect to future liquidity needs may not be correct and funds available to us from the sources described above may not be sufficient to enable us to service our indebtedness, or cover any shortfall in funding for any unanticipated expenses.

Senior Secured Credit Facility. Our senior secured credit facility consists of a (i) $77.4 million term loan A facility maturing in May 2010, denominated in Canadian dollars; (ii) U.S.$239.2 million ($237.8 million based on the exchange rate on February 3, 2008) term loan B facility maturing in November 2011, denominated in U.S. dollars; and (iii) $75.0 million revolving credit facility, denominated in Canadian dollars, which includes a $25.0 million letter of credit subfacility and a $10.0 million swingline loan subfacility. In addition, we may, under certain circumstances and subject to receipt of additional commitments from existing lenders or other eligible institutions, request additional term loan tranches or increases to the revolving loan commitments by an aggregate amount of up to $150.0 million (or the U.S. dollar equivalent thereof).

The interest rates per annum applicable to the loans under our senior secured credit facility, other than swingline loans, equal an applicable margin percentage plus, at our option, (1) in the case of U.S. dollar denominated loans, (a) a U.S. base rate equal to the greater of (i) the rate of interest per annum equal to the rate which Royal Bank of Canada establishes at its main office in Toronto from time to time as the reference rate of interest for U.S. dollar loans made in Canada and (ii) the federal funds effective rate (converted to a rate based on a 365 or 366 day period, as the case may be) plus 1.0% per annum or (b) the rate per annum equal to the rate determined by Royal Bank of Canada to be the offered rate that appears on the page of the Telerate screen 3750 that displays an average British Bankers Association Interest Settlement Rate for deposits in U.S. dollars for an interest period chosen by us of one, two, three, or six months (or, if available to all applicable lenders, nine or twelve month periods) and (2) in the case of Canadian dollar denominated loans, a Canadian prime rate equal to the greater of (i) the rate of interest per annum equal to the rate which Royal Bank of Canada establishes at its main office in Toronto from time to time as the reference rate for Canadian dollar loans made in Canada and (ii) the rate per annum determined as being the arithmetic average of the rates quoted for bankers’ acceptance for the appropriate interest period as listed on the applicable Reuters Screen CDOR (Certificate of Deposit Offered Rate) page (plus 0.10% for certain lenders) plus 1.0% per annum.

The applicable margin percentage for Canadian dollar denominated loans is subject to adjustment based upon the level of the total lease-adjusted leverage ratio. Initially, the applicable margins were 1.25% for Canadian prime rate loans and 2.25% for bankers’ acceptances. During the three months ended April 30, 2006, the total lease-adjusted leverage ratio level decreased the applicable margin percentage for Canadian dollar denominated loans by 0.25% to 1.00% for Canadian prime rate loans and 2.00% for bankers’ acceptances, effective May 25, 2006. On the last day of each calendar quarter, we also pay a commitment fee (calculated in arrears) to each revolving credit lender in respect of any unused commitments under the revolving credit facility, subject to adjustment based upon the level of our total lease-adjusted leverage ratio. Previously, the applicable margin percentage was 2.25% for adjusted LIBOR rate loans and 1.25% for U.S. base rate loans. However, on May 25, 2006, the term B loan was amended. As a result, the margin percentage of 2.25% for adjusted LIBOR rate loans and 1.25% for U.S. base rate loans was decreased by 0.25%. A further 0.25% reduction will take effect when we reach a lease-adjusted leverage ratio of less than 4.75:1.

 

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Our senior secured credit facility contains a number of restrictive covenants that, subject to significant exceptions, limit our ability and the ability of our restricted subsidiaries, to, among other things: make investments and loans; make capital expenditures; incur, assume, or permit to exist additional indebtedness, guarantees, or liens; engage in mergers, acquisitions, asset sales or sale-leaseback transactions; declare dividends, make payments on, or redeem or repurchase equity interests; alter the nature of the business we conduct; engage in certain transactions with affiliates; enter into agreements limiting subsidiary distributions; and prepay, redeem, or repurchase certain indebtedness including the notes.

Subject to exceptions, our senior secured credit facility requires mandatory prepayments or offer to prepay (with the failure to do so constituting an event of default) of the loans in the event of certain asset sales or other asset dispositions, issuances of equity securities or debt securities, or if we have annual consolidated excess cash flow. Our senior secured credit facility is guaranteed by all of our existing and future subsidiaries (other than unrestricted subsidiaries as defined in the senior secured credit facility), and is secured by a first priority security interest in substantially all of our existing and future assets, and a first priority pledge of our capital stock and the capital stock of those subsidiaries, subject to certain exceptions agreed upon with our lenders and local law requirements.

8.875% Senior Subordinated Notes Due 2012. The 8.875% senior subordinated notes were issued by Group L.P. and Dollarama Corporation. Interest on the senior subordinated notes accrues at 8.875% per year and is payable on the senior subordinated notes semi-annually on February 15 and August 15 of each year, beginning February 15, 2006.

Beginning August 15, 2009, the senior subordinated notes may be redeemed, in whole or in part, initially at 104.438% of their principal amount, plus accrued and unpaid interest, declining to 100% of their principal amount, plus accrued and unpaid interest, at any time on or after August 15, 2011. Prior to August 15, 2009, the senior subordinated notes may be redeemed, in whole or in part, at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest and a make-whole premium. In addition, prior to August 15, 2008, we may redeem up to 35% of the aggregate principal amount of the senior subordinated notes at a price equal to 108.875% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, using proceeds from the sales of certain kinds of capital stock. Following a change of control, we will be required to offer to purchase all of the senior subordinated notes at a purchase price of 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.

The indenture governing the 8.875% senior subordinated notes contains certain restrictions on us, including restrictions on our ability to incur indebtedness, pay dividends, make investments, grant liens, sell assets and engage in certain other activities.

The senior subordinated notes constitute general unsecured obligations and are subordinated in right of payment to all existing or future senior indebtedness. The 8.875% senior subordinated notes are currently guaranteed by all of our subsidiaries.

Senior Floating Rate Deferred Interest Notes. The senior floating rate deferred interest notes were issued by Holdings and Dollarama Group Holdings Corporation. Interest on the notes accrues and is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on June 15, 2007 at a rate per annum equal to 6-month LIBOR plus 5.75%, increasing to 6.25% after two years and 6.75% after three years. On each interest payment date, we may elect to pay interest in cash or not pay interest in cash, in which case interest accrues on such deferred interest at the same rate and in the same manner applicable to the principal amount of the notes. Interest on the notes is reset semi-annually.

At any time on or after June 15, 2007, we may redeem the notes, in whole or in part, plus accrued and unpaid interest, at the redemption prices specified in the following table:

 

Year

   Redemption Price

June 15, 2007 to December 14, 2008

   100.00

December 15, 2008 to December 14, 2009

   102.00

December 15, 2009 to December 14, 2010

   101.00

December 15, 2010 and thereafter

   100.00

In addition, we may redeem all of the notes at a price equal to 100% of the principal amount plus deferred interest if we become obligated to pay certain tax gross-up amounts. Following a change of control, we will be required to offer to purchase all of the notes at a purchase price of 101% of their principal amount plus deferred interest, plus accrued and unpaid interest (other than deferred interest), if any, to the date of purchase.

 

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The indenture governing the senior floating rate deferred interest notes contains certain restrictions on us, including restrictions on our ability to incur indebtedness, pay dividends, make investments, grant liens, sell assets and engage in certain other activities. The notes constitute general senior unsecured obligations of us. They rank equally in right of payment to all of our future unsecured senior indebtedness, senior in right of payment to any of our future senior subordinated indebtedness and subordinated indebtedness, and are effectively subordinated in right of payment to any of our future secured debt and are structurally subordinated in right of payment to all existing and future liabilities of our subsidiaries. The notes are not guaranteed by any of our subsidiaries.

Off-Balance Sheet Obligations

Other than operating lease obligations and letters of credit, we have no off-balance sheet obligations.

Recent Accounting Pronouncements

On February 5, 2007, the Partnership adopted the new standard of the Canadian Institute of Chartered Accountants (“CICA”) section 1506 “Accounting Changes” which establishes criteria for changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies and estimates, and correction of errors. This new guidance did not have any impact on the current year’s financial situation or income of the Partnership.

Capital disclosures, CICA 1535 requires that an entity disclose information that enables users of its financial statements to evaluate an entity’s objectives, policies and processes for managing capital. This is effective for interim and annual financial statements relating to years beginning on or after October 1, 2007. The Partnership will evaluate the effect of this standard on its consolidated financial statements.

CICA 3031 establishes standards for the measurement and disclosure of inventories and applies to interim and annual financial statements relating to years beginning on or after January 1, 2008. The Partnership will evaluate the effect of this standard on its consolidated financial statements.

CICA 3064 replaces CICA 3062 and establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. The provisions relating to the definition and initial recognition of intangible assets are equivalent to the corresponding provisions of IAS 38, Intangible Assets. CICA 1000 is amended to clarify criteria for recognition of an asset. CICA 3450 is replaced by guidance in CICA 3064. EIC 27 is no longer applicable for entities that have adopted CICA 3064. AcG 11 is amended to delete references to deferred costs and to provide guidance on development costs as intangible assets under CICA 3064. This new standard is effective for interim and annual financial statements for years beginning on or after October 1, 2008. The Partnership will evaluate the effect of this standard on its consolidated financial statements.

These new sections, CICA 3862 (on disclosures) and CICA 3863 (on presentation) replace CICA 3861, revising and enhancing its disclosure requirements and carrying forward unchanged its presentation requirements. The new sections are effective for interim and annual financial statements for years beginning on or after October 1, 2007. The Partnership will evaluate the effect of this standard on its consolidated financial statements.

In September, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 establishes a single definition of fair value and a framework for measuring fair value, sets out a fair value hierarchy to be used to classify the source of information used in fair value measurements, and requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. SFAS No. 157 is effective for all fiscal years beginning after November 15, 2007 and is to be applied prospectively. In February, 2008, the FASB issued Staff Positions No. 157-1 and No. 157-2 which partially defer the effective date of SFAS No. 157 for one year for certain non-financial assets and liabilities and remove certain leasing transactions from its scope. The Partnership will evaluate the effect of this standard on its consolidated financial statements.

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. We will apply this guidance beginning February 4, 2008. We do not expect that the adoption of this statement will have a material impact on our results of operations or financial condition.

In December, 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” (“SFAS 141R”). SFAS 141R. establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in an acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. This statement is effective for annual reporting periods beginning after December 15, 2008. SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The Partnership expects SFAS 141R will have an impact on the Partnership’s accounting for future business combinations once adopted but the effect is dependent upon the acquisitions that are made in the future.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities— an amendment of FASB Statement No. 133, (SFAS No. 161). This statement requires additional disclosures for derivative instruments and hedging activities that include how and why an entity uses derivatives, how these instruments and the related hedged items are accounted for under SFAS No. 133 and related interpretations, and how derivative instruments and related hedged items affect the entity’s financial position, results of operations and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Partnership will evaluate the effect of this standard on its consolidated financial statements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange Risk

While principally all of our sales have been in Canadian dollars, we have been steadily increasing our purchases of merchandise from low-cost overseas suppliers, including suppliers in China, Hong Kong, India, Indonesia, Italy, Pakistan, Poland, Singapore, Taiwan, Thailand, Turkey and United Kingdom. For the fiscal year ended February 3, 2008, this direct sourcing from foreign suppliers accounted for in excess of 50% of our purchases. Accordingly, our results of operations are impacted by the fluctuation of foreign currencies against the Canadian dollar. In particular, we purchase a majority of our imported merchandise from suppliers in China using U.S. dollars. Therefore, our cost of sales is impacted by the fluctuation of the Chinese renminbi against the U.S. dollar and the fluctuation of the U.S. dollar against the Canadian dollar.

We use foreign exchange forward contracts to manage risks from fluctuations in the U.S. dollar relative to the Canadian dollar. All forward contracts are used only for risk management purposes and are designated as hedges of specific anticipated purchases of merchandise. Upon redesignation or amendment of a foreign exchange forward contract, the ineffective portion of such contracts is recognized immediately in earnings. We estimate that in the absence of our currency risk management program, every $0.01 appreciation in the Canadian dollar relative to U.S. dollar exchange rate results in approximately $1.5 million annual increase in operating earnings. The seasonality of our purchases will affect the quarterly impact of this variation. We periodically examine the

 

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derivative financial instruments we use to hedge exposure to foreign currency fluctuation to ensure that these instruments are highly effective at reducing or modifying foreign exchange risk associated with the hedged item.

In addition, a majority of our debt is in U.S. dollars. Therefore, a downward fluctuation in the exchange rate of the Canadian dollar versus the U.S. dollar would reduce our funds available to service our U.S. dollar-denominated debt. As required by the terms of our senior secured credit facility, we have entered into two swap agreements consisting of a foreign currency swap and an interest rate swap that expire on January 31, 2011 to minimize our exposure to exchange rate and interest rate fluctuations in respect of our LIBOR-based U.S. dollar-denominated term loans. We record the fair value of the swap agreements as a reduction of “foreign exchange loss on long-term debt and change in fair value of derivative financial instruments “ in our consolidated statement of operations and in “derivative financial instruments” on the balance sheet.

On August 12, 2005, we entered into two additional swap agreements consisting of foreign currency swaps to minimize our exposure to exchange rate fluctuations in respect of our 8.875% senior subordinated notes. These swap agreements qualify for hedge accounting. The fair value of the swap agreements is deferred in a separate component in our consolidated statement of partners’ capital and other comprehensive income until the underlying hedged transactions are reporting in our consolidated statement of earnings.

Interest Rate Risk

We use variable-rate debt to finance a portion of our operations and capital expenditures. These obligations expose us to variability in interest payments due to changes in interest rates. We have approximately $315.2 million in term loans outstanding under our senior secured credit facility based on the exchange rate on February 3, 2008, bearing interest at variable rates. Each quarter point change in interest rates would result in a $0.8 million change in interest expense on such term loans. We also have a revolving loan facility which provides for borrowings of up to $75.0 million which bears interest at variable rates. Assuming the entire revolver is drawn, each quarter point change in interest rates would result in a $0.2 million change in interest expense on our revolving loan facility.

We also have approximately $183.9 million of senior floating rate deferred interest notes based on the exchange rate on February 3, 2008, bearing interest at variable rates. Each quarter point change in interest rates would result in a $0.5 million change in interest expense on the notes.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Independent Auditors’ Report

To the Partners of

Dollarama Group Holdings L.P.

We have audited the consolidated balance sheets of Dollarama Group Holdings L.P. as at February 3, 2008 and February 4, 2007 and the consolidated statements of earnings, partners’ capital and cash flows for the years then ended. These financial statements are the responsibility of the management of Dollarama Group Holdings ULC, acting in its capacity as General Partner of the partnership. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the partnership as at February 3, 2008 and February 4, 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. We believe that our audit provides a reasonable basis for our opinion.

The consolidated financial statements for the year ended January 31, 2006 were audited by other auditors who expressed an opinion without reservation on those statements in their report dated March 31, 2006 (except for Note 18 to the consolidated financial statements of the Partnership included in the Form 10-K/A filed on December 14, 2007, as to which the date is October 30, 2007).

/s/ PricewaterhouseCoopers LLP

Chartered Accountants

Montréal, Canada

April 30, 2008

 

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Independent Auditors’ Report

To the Partners of

Dollarama Group L.P.

We have audited the consolidated balance sheets of Dollarama Group L.P. as of February 3, 2008 and February 4, 2007 and the consolidated statements of earnings, partners’ capital and cash flows for the years then ended. These financial statements are the responsibility of the management of Dollarama Group GP Inc., acting in its capacity as General Partner of the partnership. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the partnership as of February 3, 2008 and February 4, 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

The consolidated financial statements for the year ended January 31, 2006 were audited by other auditors who expressed an opinion without reservation on those statements in their report dated March 31, 2006 (except for Note 18 to the consolidated financial statements of the Partnership included in the Form 10-K/A filed on December 14, 2007, as to which the date is October 30, 2007).

/s/ PricewaterhouseCoopers LLP

Chartered Accountants

Montréal, Canada

April 30, 2008

 

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Independent Auditors’ Report

To the Partners of

Dollarama Group L.P.

We have audited, before the effects of the restatements described in note 18 of the From 10-K/A filed on December 14, 2007, the consolidated balance sheet of Dollarama Group L.P as at January 31, 2006 and the consolidated statements of earnings, partners’ capital and other comprehensive income and cash flows for the year ended January 31, 2006 (the 2006 financial statements before the restatements discussed in note 18 of the Form 10-K/A filed on December 14, 2007 are not presented herein). These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, except for the restatements described in note 18 of the Form 10-K/A filed on December 14, 2007, these consolidated financial statements present fairly, in all material respects, the financial position of the Partnership as at January 31, 2006 and the results of its operations and its cash flows for the year ended January 31, 2006 in conformity with Canadian generally accepted accounting principles.

We were not engaged to audit, review, or apply any procedures to the restatements described in note 18 to the consolidated financial statements of the Partnership included in Form 10-K/A filed on December 14, 2007 and accordingly, we do not express an opinion or any other form of assurance about whether such restatements are appropriate and have been properly applied. The restatements were audited by PricewaterhouseCoopers LLP.

 

Montreal, Quebec

  /s/ RSM Richter LLP          
March 31, 2006   Chartered Accountants  

(except for Note 18, to the consolidated financial statements of the Partnership included in the Form 10-K/A filed on December 14, 2007 as to which the date is October 30, 2007)

   


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Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Consolidated Balance Sheets

(expressed in thousands of Canadian dollars)

 

     Dollarama Group Holdings L.P.    Dollarama Group L.P.
     As of
February 3,
2008
$
    As of
February 4,
2007
$
   As of
February 3,
2008
$
    As of
February 4,
2007
$

Assets

         

Current assets

         

Cash and cash equivalents

   26,214     47,703    26,200     47,695

Accounts receivable

   3,363     5,760    3,363     5,760

Income taxes recoverable

   1,522     1,059    1,504     1,054

Deposits and prepaid expenses

   11,519     8,598    11,519     8,598

Derivative financial instruments (note 10)

   —       7,224    —       7,224

Merchandise inventories

   198,500     166,017    198,500     166,017
                     
   241,118     236,361    241,086     236,348

Property and equipment (note 4)

   111,936     84,665    111,936     84,665

Goodwill

   727,782     727,782    727,782     727,782

Other intangible assets (note 5)

   117,147     120,379    117,147     120,379
                     
   1,197,983     1,169,187    1,197,951     1,169,174
                     

Liabilities

         

Current liabilities

         

Accounts payable

   23,500     15,780    22,910     15,780

Accrued expenses and other (note 6)

   43,062     35,937    40,084     32,726

Derivative financial instruments (note 10)

   94,239     12,409    94,239     12,409

Current portion of long-term debt (note 7)

   25,734     13,496    25,734     13,496
                     
   186,535     77,622    182,967     74,411

Long-term debt (note 7)

   653,006     806,921    474,553     578,066

Other liabilities (note 8)

   27,281     25,413    27,281     25,413
                     
   866,822     909,956    684,801     677,890
                     

Commitments, contingencies and guarantee (note 9)

         

Partners’ Capital

         

General partner

   374     374    374     374

Limited partner

   163,158     167,103    347,395     389,313

Contributed surplus

   2,649     1,337    2,649     1,337

Retained earnings

   172,504     83,635    170,256     93,478

Accumulated other comprehensive income (loss)

   (7,524 )   6,782    (7,524 )   6,782
                     
   331,161     259,231    513,150     491,284
                     
   1,197,983     1,169,187    1,197,951     1,169,174
                     

The accompanying notes are an integral part of the consolidated financial statements.

 

38


Table of Contents

Dollarama Group Holdings L.P.

Consolidated Statement of Partners’ Capital

(expressed in thousands of Canadian dollars)

 

     General
partner
capital

$
   Limited
partner
capital
$
    Contributed
surplus
$
   Retained
earnings
(deficit)
$
    Accumulated
other
comprehensive
income (loss)
$
    Total
$
 

Balance – January 31, 2005

   374    454,484     202    (23,206 )   1,355     433,209  
                                  

Other comprehensive income

              

Net earnings for the year

   —      —       —      35,006     —       35,006  

Unrealized loss on derivative financial instruments, net of reclassification adjustments

   —      —       —      —       (7,385 )   (7,385 )
                                  

Total comprehensive income

   —      —       —      35,006     (7,385 )   27,621  
                                  

Stock-based compensation (note 12)

   —      —       598    —       —       598  

Capital distributions

   —      (59,608 )   —      —       —       (59,608 )
                                  

Balance – January 31, 2006

   374    394,876     800    11,800     (6,030 )   401,820  
                                  

Other comprehensive income

              

Net earnings for the year

   —      —       —      71,835     —       71,835  

Unrealized gain on derivative financial instruments, net of reclassification adjustments

   —      —       —      —       12,812     12,812  
                                  

Total comprehensive income

   —      —       —      71,835     12,812     84,647  
                                  

Stock-based compensation (note 12)

   —      —       537    —       —       537  

Capital distributions

   —      (227,773 )   —      —       —       (227,773 )
                                  

Balance – February 4, 2007

   374    167,103     1,337    83,635     6,782     259,231  
                                  

Other comprehensive income

              

Net earnings for the year

   —      —       —      88,869     —       88,869  

Unrealized loss on derivative financial instruments, net of reclassification adjustments

   —      —       —      —       (14,306 )   (14,306 )
                                  

Total comprehensive income

   —      —       —      88,869     (14,306 )   74,563  
                                  

Stock-based compensation (note 12)

   —      —       1,312    —       —       1,312  

Capital distributions

   —      (3,945 )   —      —       —       (3,945 )
                                  

Balance – February 3, 2008

   374    163,158     2,649    172,504     (7,524 )   331,161  
                                  

The sum of retained earnings and accumulated other comprehensive income (loss) amounted to $164,980,000 as of February 3, 2008 (2007 – $90,417,000; 2006 – $5,770,000).

The accompanying notes are an integral part of the consolidated financial statements.

 

39


Table of Contents

Dollarama Group L.P.

Consolidated Statement of Partners’ Capital

(expressed in thousands of Canadian dollars)

 

     General
partner
capital

$
   Limited
partner
capital
$
    Contributed
surplus
$
   Retained
earnings
(deficit)
$
    Accumulated
other
comprehensive
income (loss)
$
    Total
$
 

Balance – January 31, 2005

   374    454,484     202    (23,206 )   1,355     433,209  
                                  

Other comprehensive income

              

Net earnings for the year

   —      —       —      35,006     —       35,006  

Unrealized loss on derivative financial instruments, net of reclassification adjustments

   —      —       —      —       (7,385 )   (7,385 )
                                  

Total comprehensive income

   —      —       —      35,006     (7,385 )   27,621  
                                  

Stock-based compensation (note 12)

   —      —       598    —       —       598  

Capital distributions

   —      (59,608 )   —      —       —       (59,608 )
                                  

Balance – January 31, 2006

   374    394,876     800    11,800     (6,030 )   401,820  
                                  

Other comprehensive income

              

Net earnings for the year

   —      —       —      81,678     —       81,678  

Unrealized gain on derivative financial instruments, net of reclassification adjustments

   —      —       —      —       12,812     12,812  
                                  

Total comprehensive income

   —      —       —      81,678     12,812     94,490  
                                  

Stock-based compensation (note 12)

   —      —       537    —       —       537  

Capital distributions

   —      (5,563 )   —      —       —       (5,563 )
                                  

Balance – February 4, 2007

   374    389,313     1,337    93,478     6,782     491,284  
                                  

Other comprehensive income

              

Net earnings for the year

   —      —       —      76,778     —       76,778  

Unrealized loss on derivative financial instruments, net of reclassification adjustments

   —      —       —      —       (14,306 )   (14,306 )
                                  

Total comprehensive income

   —      —       —      76,778     (14,306 )   62,472  
                                  

Stock-based compensation (note 12)

   —      —       1,312    —       —       1,312  

Capital distributions

   —      (41,918 )   —      —       —       (41,918 )
                                  

Balance – February 3, 2008

   374    347,395     2,649    170,256     (7,524 )   513,150  
                                  

The sum of retained earnings and accumulated other comprehensive income (loss) amounted to $162,732,000 as of February 3, 2008 (2007—$100,260,000; 2006—$5,770,000).

 

40


Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Consolidated Statements of Earnings

(expressed in thousands of Canadian dollars)

 

     Dollarama Group Holdings L.P.    Dollarama Group L.P.
     For the
year ended
February 3,
2008
$
    For the
year ended
February 4,
2007
$
   For the
year ended
January 31,
2006
$
   For the
year ended
February 3,
2008
$
   For the
year ended
February 4,
2007
$
    For the
year ended

January 31,
2006
$

Sales

   972,352     887,786    743,278    972,352    887,786     743,278
                               

Cost of sales and expenses

               

Cost of sales

   640,885     588,469    510,278    640,885    588,469     510,278

General, administrative and store operating expenses

   186,265     154,462    125,347    186,263    154,457     125,347

Amortization

   18,389     13,528    9,782    18,389    13,528     9,782
                               
   845,539     756,459    645,407    845,537    756,454     645,407
                               

Operating income

   126,813     131,327    97,871    126,815    131,332     97,871

Amortization of financing costs

   6,340     4,354    7,527    4,275    4,076     7,527

Write-off of financing costs

   —       —      6,606    —      —       6,606

Interest expense

   65,713     50,498    45,547    43,299    47,192     45,547

Foreign exchange loss (gain) on derivative financial instruments and long-term debt

   (34,411 )   4,275    1,508    2,183    (1,972 )   1,508
                               

Earnings before income taxes

   89,171     72,200    36,683    77,058    82,036     36,683

Provision for current income taxes (note 15)

   302     365    1,677    280    358     1,677
                               

Net earnings for the year

   88,869     71,835    35,006    76,778    81,678     35,006
                               

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Consolidated Statements of Cash Flows

(expressed in thousands of Canadian dollars)

 

     Dollarama Group Holdings L.P.     Dollarama Group L.P.  
     For the
year ended
February 3,
2008
$
    For the
year ended
February 4,
2007
$
    For the
year ended
January 31,
2006
$
    For the
year ended
February 3,
2008
$
    For the
year ended
February 4,
2007
$
    For the
year ended
January 31,
2006
$
 

Operating activities

            

Net earnings for the year

   88,869     71,835     35,006     76,778     81,678     35,006  

Adjustments for

            

Amortization of property and equipment

   18,094     12,378     8,525     18,094     12,378     8,525  

Amortization of intangible assets

   3,521     4,606     4,697     3,521     4,606     4,697  

Change in fair value of derivatives

   74,748     (16,534 )   36,588     74,748     (16,534 )   36,588  

Amortization of financing costs

   6,340     4,354     7,527     4,275     4,076     7,527  

Write-off of financing costs

   —       —       6,606     —       —       6,606  

Foreign exchange loss (gain) on long-term debt

   (118,777 )   26,898     (35,523 )   (82,426 )   20,651     (35,523 )

Amortization of unfavourable lease rights

   (3,226 )   (3,456 )   (3,440 )   (3,226 )   (3,456 )   (3,440 )

Deferred lease inducements

   2,312     3,318     2,427     2,312     3,318     2,427  

Deferred leasing costs

   (450 )   (373 )   (976 )   (450 )   (373 )   (976 )

Deferred tenant allowances

   3,806     3,947     3,661     3,806     3,947     3,661  

Amortization of deferred tenant allowances

   (1,024 )   (567 )   (220 )   (1,024 )   (567 )   (220 )

Stock-based compensation

   1,312     537     598     1,312     537     598  

Amortization of deferred leasing costs

   161     138     —       161     138     —    

Other

   197     45     (4 )   197     45     (4 )
                                    
   75,883     107,126     65,472     98,078     110,444     65,472  

Changes in non-cash working capital components (note 13)

   (18,625 )   (12,739 )   (19,064 )   (18,969 )   (15,945 )   (19,064 )
                                    
   57,258     94,387     46,408     79,109     94,499     46,408  
                                    

Investing activities

            

Business acquisitions, net of cash acquired (note 3)

   —       —       (12,382 )   —       —       (12,382 )

Purchase of property and equipment

   (45,994 )   (42,695 )   (23,946 )   (45,994 )   (42,695 )   (23,946 )

Proceeds on disposal of property and equipment

   432     178     322     432     178     322  
                                    
   (45,562 )   (42,517 )   (36,006 )   (45,562 )   (42,517 )   (36,006 )
                                    

Financing activities

            

Financing costs

   (506 )   (6,695 )   (9,951 )   —       (711 )   (9,951 )

Proceeds on long-term debt

   —       228,314     294,133     —       —       294,133  

Repayment of long-term debt

   (28,734 )   (28,896 )   (248,678 )   (13,124 )   (28,896 )   (248,678 )

Capital distributions

   (3,945 )   (227,773 )   (59,608 )   (41,918 )   (5,563 )   (59,608 )
                                    
   (33,185 )   (35,050 )   (24,104 )   (55,042 )   (35,170 )   (24,104 )
                                    

Increase (decrease) in cash and cash equivalents

   (21,489 )   16,820     (13,702 )   (21,495 )   16,812     (13,702 )

Cash and cash equivalents – Beginning of year

   47,703     30,883     44,585     47,695     30,883     44,585  
                                    

Cash and cash equivalents – End of year

   26,214     47,703     30,883     26,200     47,695     30,883  
                                    

The accompanying notes are an integral part of the consolidated financial statements.

 

42


Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

1 Basis of presentation and nature of business

Pursuant to various agreements (the “Agreements”) dated December 8, 2006, all partnership units of Dollarama Holdings L.P. (“Holdings L.P.”) which were held by Dollarama Capital Corporation were ultimately exchanged for partnership units of Dollarama Group Holdings L.P. (“Group Holdings L.P.”). Holdings L.P., together with its direct subsidiary Dollarama Group GP Inc., has no operations and hold no assets other than 100% of the outstanding units of Dollarama Group L.P. (“Group L.P.”). Group Holdings L.P. conducts all of its business through Group L.P. and its subsidiaries.

The consolidated financial statements of Group Holdings L.P. as at February 3, 2008 and February 4, 2007 reflect the financial position of Group Holdings L.P. and its subsidiaries and their results of operations and cash flows for the period from December 8, 2006, the date of creation of Group Holdings L.P., to February 3, 2008. Financial information for the period from February 1, 2006 to December 8, 2006 and for the year ended January 31, 2006 is that of Group L.P. and its subsidiaries. The consolidated financial statements of Group Holdings L.P. have been prepared using the continuity of interest method of accounting. Accordingly, the consolidated financial statements of Group Holdings L.P. on the date of the Agreements were in all material respects the same as those of Group L.P. immediately prior to the Agreements becoming effective.

The consolidated financial statements of Group L.P. reflect the financial position, results of operations and cash flows of the businesses of Dollarama L.P., Dollarama Corporation, Aris Import Inc., Dollarama Group L.P. and Dollarama GP Inc.

Group L.P. was formed on November 11, 2004 for the purpose of acquiring the DOLLARAMA retail stores. It operates discount variety retail stores in Canada that sell substantially all items for $1 or less. As at February 3, 2008, the retail operations are carried on in every Canadian province. The retail operations’ corporate headquarters, distribution centre and warehouses are located in Montréal, Canada. The business is managed on the basis of one reportable segment.

Any reference herein to 2008, 2007 or 2006 relates to as of or for the 364-day period ended February 3, 2008, the 369-day period ended February 4, 2007 and the year ended January 31, 2006. Unless otherwise stated, the information contained herein applies to both Group Holdings L.P. and Group L.P. (collectively referred to as the “Partnership”).

 

2 Summary of significant accounting policies

Accounting pronouncements adopted during the year

Accounting Changes

On February 5, 2007, the Partnership adopted the new standard of the Canadian Institute of Chartered Accountants (“CICA”) Section 1506 “Accounting Changes” establishes criteria for changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies and estimates, and correction of errors. This new guidance did not have any impact on the current year’s financial situation or income of the Partnership.

 

43


Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

Accounting pronouncements not yet adopted

Inventory

CICA 3031 establishes standards for the measurement and disclosure of inventories. Applies to interim and annual financial statements relating to years beginning on/after January 1, 2008. The Partnership will evaluate the effect of this standard on its consolidated financial statements.

Intangible Assets

CICA 3064 replaces CICA 3062 and establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. The provisions relating to the definition and initial recognition of intangible assets are equivalent to the corresponding provisions of IAS 38, Intangible Assets. CICA 1000 is amended to clarify criteria for recognition of an asset. CICA 3450 is replaced by guidance in CICA 3064. EIC 27 is no longer applicable for entities that have adopted CICA 3064. AcG 11 is amended to delete references to deferred costs and to provide guidance on development costs as intangible assets under CICA 3064. This new standard is effective for interim and annual financial statements for years beginning on or after October 1, 2008. The Partnership will evaluate the effect of this standard on its consolidated financial statements.

 

Financial instruments – disclosures and presentation

These new sections, CICA 3862 (on disclosures) and CICA 3863 (on presentation) replace CICA 3861, revising and enhancing its disclosure requirements, and carrying forward unchanged its presentation requirements. Effective for interim and annual financial statements for years beginning on/after October 1, 2007. The Partnership is evaluating the effect of these standards on its consolidated financial statements.

Capital disclosures

Capital disclosures establishes disclosure requirements about capital. It is effective for interim and annual financial statements relating to years beginning on/or after October 1, 2007. The Partnership is evaluating the effect of this standard on its consolidated financial statements.

Use of estimates

The preparation of financial statements in accordance with generally accepted accounting principles in Canada requires the use of estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenue and expense items for the reporting period. On an ongoing basis, management reviews its estimates, including those related to valuation of merchandise inventories, useful lives, impairment of long-lived assets and goodwill, operating leases and financial instruments based on currently available information. Actual results could differ from those estimates.

Cash and cash equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less.

Merchandise inventories

Merchandise inventories at the distribution centre and warehouses are stated at the lower of cost and market value, determined on a weighted average cost basis. Cost includes amounts paid to suppliers, duties and freight into the warehouses and is assigned to store inventories using the retail inventory method, determined on a weighted average cost basis.

 

44


Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

Property and equipment

Property and equipment are carried at cost and amortized over the estimated useful lives of the respective assets as follows:

 

On the declining balance method

  

Computer equipment

   30 %

Vehicles

   30 %

On the straight-line method

  

Store and warehouse equipment

   8-10 years  

Leasehold improvements

   Term of lease  

Computer software

   5 years  

Goodwill

Goodwill is tested for impairment annually or when events or changed circumstances indicate an impairment may have occurred. With the goodwill impairment test, if the carrying value of the Partnership’s reporting unit to which goodwill relates exceeds its estimated fair value, the goodwill related to that reporting unit is tested for impairment. If the carrying value of such goodwill is determined to be in excess of its fair value, an impairment loss is recognized in the amount of the excess of the carrying value over the fair value. The Partnership conducts its annual impairment test as of the date of the balance sheet.

Trade name

The trade name is recorded at cost and is not subject to amortization. It is tested for impairment annually or more frequently if events or circumstances indicate that the asset may be impaired.

Favourable and unfavourable lease rights

Favourable and unfavourable lease rights represent the fair value of lease rights as established on the date of acquisition and are amortized on a straight-line basis over the terms of the related leases.

Covenants not to compete

The covenants not to compete are amortized on a straight-line basis over the terms of the agreements.

Deferred leasing credits

Deferred leasing costs and deferred tenant allowances are recorded on the balance sheet and amortized using the straight-line method over the term of the respective lease.

 

45


Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

Financing costs

Financing costs are amortized using the effective interest method.

Operating leases

The Partnership recognizes rental expense incurred and inducements received from landlords on a straight-line basis over the term of the lease. Any difference between the calculated expense and the amounts actually paid is reflected as deferred lease inducements in the Partnership’s balance sheet. Contingent rental expense is recognized when the achievement of specified sales targets is considered probable.

Impairment of long-lived assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is assessed by comparing the carrying amount of an asset with the expected future net undiscounted cash flows from its use together with its residual value. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value.

Revenue recognition

The Partnership recognizes revenue at the time the customer tenders payment for and takes possession of the merchandise. All sales are final.

Cost of sales

The Partnership includes the cost of merchandise inventories, procurement, warehousing and distribution costs, and certain occupancy costs in cost of sales.

General, administrative and store operating expenses

The Partnership includes store and head office salaries and benefits, repairs and maintenance, professional fees, store supplies and other related expenses in general, administrative and store operating expenses.

Pre-opening costs

Costs associated with the opening of new stores are expensed as incurred.

Vendor rebates

The Partnership records vendor rebates, consisting of volume purchase rebates, when it is probable that they will be received. The rebates are recorded as a reduction of inventory purchases and are reflected as a reduction of cost of sales.

 

46


Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

Advertising costs

The Partnership expenses advertising costs as incurred. It did not incur any material advertising costs for the years ended February 3, 2008, February 4, 2007 or January 31, 2006.

Employee future benefits

The Partnership offers a group defined contribution plan to eligible employees whereby it matches an employee’s contributions up to 3% of the employee’s salary. The pension expense for the year ended February 3, 2008 amounted to approximately $891,669 (2007 – $ 751,230; 2006 – $677,081).

Income taxes

The net earnings, if any, for the year constitute income of the individual partners and are subject to income tax in their hands. Income taxes recorded represent large corporations tax and income taxes of subsidiary companies.

Subsidiaries formed as corporations use the liability method of accounting for income taxes. Future tax assets and liabilities are determined based on temporary differences between the carrying amount and the tax bases of assets and liabilities. Future income tax assets and liabilities are measured using the enacted or substantively enacted tax rates, as appropriate, that will be in effect when these differences are expected to reverse. Future income tax assets, if any, are recognized only to the extent that, in the opinion of management, it is more likely than not that the assets will be realized.

Foreign currencies

Monetary assets and liabilities denominated in foreign currencies are translated at year-end exchange rates while non-monetary assets and liabilities are translated at historic rates. Revenues and expenses are translated at prevailing market rates in the recognition period. The resulting exchange gains or losses are recorded in the consolidated statement of earnings.

 

     Dollarama Group Holdings L.P.     Dollarama Group L.P.  
     For the
year ended
February 3,
2008

$
    For the
year ended
February 4,
2007

$
    For the
year ended
January 31,
2006

$
    For the
year ended
February 3,
2008

$
   For the
year ended
February 4,
2007

$
    For the
year ended
January 31,
2006

$
 

Foreign exchange loss (gain) on derivative financial instruments and long-term debt

   (34,411 )   4,275     1,508     2,183    (1,972 )   1,508  

Foreign exchange loss (gain) included in cost of sales

   9,524     (7,444 )   (127 )   9,524    (7,444 )   (127 )
                                   

Aggregate foreign exchange loss (gain) included in net earnings

   (24,887 )   (3,169 )   1,381     11,707    (9,416 )   1,381  
                                   

 

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Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

Fair market value of financial instruments

The Partnership estimates the fair market value of its financial instruments based on current interest rates, market value and current pricing of financial instruments with similar terms. Unless otherwise disclosed herein, the carrying value of these financial instruments, especially those with current maturities such as cash and cash equivalents, accounts receivable, deposits, accounts payable and accrued expenses, approximates their fair market value.

Derivative financial instruments

The Partnership uses derivative financial instruments in the management of its foreign currency and interest rate exposures.

When hedge accounting is used, the Partnership documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Partnership also assesses whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows of hedged items.

Foreign exchange forward contracts

The Partnership has significant cash flows and long-term debt denominated in U.S. dollars. It uses foreign exchange forward contracts and foreign currency swap agreements to mitigate risks from fluctuations in exchange rates. All forward contracts and swap agreements are used for risk management purposes and are designated as hedges of specific anticipated purchases.

Swaps

The Partnership’s interest rate risk is primarily in relation to its fixed-rate and floating-rate borrowings. The Partnership has entered into swap agreements to mitigate this risk.

Others

In the event a derivative financial instrument designated as a hedge is terminated or ceases to be effective prior to maturity, related realized and unrealized gains or losses are deferred under current assets or liabilities and recognized in earnings in the period in which the underlying original hedged transaction is recognized. In the event a designated hedged item is sold, extinguished or matures prior to the termination of the related derivative financial instrument, any realized or unrealized gain or loss on such derivative financial instrument is recognized in earnings.

Derivative financial instruments which are not designated as hedges or have ceased to be effective prior to maturity are recorded at their estimated fair values under current assets or liabilities with changes in their estimated fair values recorded in earnings. Estimated fair value is determined using pricing models incorporating current market prices and the contractual prices of the underlying instruments, the time value of money and yield curves.

 

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Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

Stock-based compensation

The Partnership recognizes a compensation expense for options granted based on the fair value of the options at the grant date. The options granted by the Partnership vest in tranches (graded vesting) and accordingly, the expense is recognized using the accelerated expense attribution method over the vesting period. When the vesting of an award is contingent upon the attainment of performance conditions, the Partnership recognizes the expense based on management’s best estimate of the outcome of the conditions and consequently the number of options that are expected to vest. When awards are forfeited because service or performance conditions are not met, any expense previously recorded is reversed in the period of forfeiture.

 

3 Business acquisitions

On November 18, 2004, the Partnership acquired substantially all of the operating assets and assumed substantially all of the liabilities of S. Rossy Inc. and Dollar A.M.A. Inc. The aggregate purchase price was approximately $1,032,494,000, of which $939,140,000 was paid in cash, $80,972,000 in partnership units and $12,382,000 in loans from S. Rossy Inc. These loans were repaid in the year ended January 31, 2006.

 

4 Property and equipment

 

     2008
     Cost
$
   Accumulated
amortization
$
   Net
$

Store and warehouse equipment

   82,792    20,540    62,252

Computer software

   11,532    2,676    8,856

Computer equipment

   1,555    577    978

Vehicles

   2,109    683    1,426

Leasehold improvements

   52,730    14,306    38,424
              
   150,718    38,782    111,936
              

 

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Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

     2007
     Cost
$
   Accumulated
amortization
$
   Net
$

Store and warehouse equipment

   61,700    11,456    50,244

Computer software

   5,807    407    5,400

Computer equipment

   881    336    545

Vehicles

   1,862    562    1,300

Leasehold improvements

   35,729    8,553    27,176
              
   105,979    21,314    84,665
              

 

5 Other intangible assets

 

     2008
     Cost
$
   Accumulated
amortization
$
   Net
$

Trade name

   108,200    —      108,200

Favourable lease rights

   20,862    13,632    7,230

Covenants not to compete

   400    183    217

Deferred leasing costs

   1,818    318    1,500
              
   131,280    14,133    117,147
              
     2007
     Cost
$
   Accumulated
amortization
$
   Net
$

Trade name

   108,200    —      108,200

Favourable lease rights

   20,862    10,168    10,694

Covenants not to compete

   400    126    274

Deferred leasing costs

   1,368    157    1,211
              
   130,830    10,451    120,379
              

 

50


Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

The weighted average amortization periods (expressed in number of months) are as follows:

 

Favourable lease rights

   72

Covenants not to compete

   84

Deferred leasing costs

   136

Amortization of intangible assets for the next five years is approximately as follows:

 

     $

2009

   2,454

2010

   1,923

2011

   1,538

2012

   1,256

2013

   770

 

6 Accrued expenses and other

 

     Dollarama Group
Holdings L.P.
   Dollarama Group
L.P.
     2008
$
   2007
$
   2008
$
   2007
$

Compensation and benefits

   11,625    10,944    11,625    10,944

Interest

   11,508    13,343    8,530    10,132

Other

   19,929    11,650    19,929    11,650
                   
   43,062    35,937    40,084    32,726
                   

 

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Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

7 Long-term debt

Long-term debt outstanding consists of the following:

Dollarama Group L.P.

 

     Note     2008
$
   2007
$

Senior subordinated notes (US$200,000,000), maturing in August 2012, bearing interest at 8 7/8%, payable semi-annually

   (a )   198,800    237,100

Term bank loan (2008 – US$239,194,191; 2007 – US$241,628,318), maturing in November 2011, repayable in quarterly capital installments of US$608,637. Advances under the term bank loan bear interest at rates ranging from 0.75% to 1.0% above the bank’s prime rate. However, borrowings under the term bank loan by way of LIBOR loans bear interest at rates ranging from 1.75% to 2.0% per annum above the bank’s LIBOR

   (b )   237,759    286,450

Term bank loan, maturing in May 2010, repayable in quarterly capital installments varying from $1,500,000 to $7,500,000. Advances under the term bank loan bear interest at rates varying from 0.75% to 1.25% per annum above the bank’s prime rate. However, borrowings under the term bank loan by way of bankers’ acceptances bear interest at rates varying from 1.75% to 2.25% per annum above the bankers’ acceptance rate

   (b )   77,390    88,000
           
     513,949    611,550

Less: Current portion

     25,734    13,496
           
     488,215    598,054

Less: Financing costs

     13,662    19,988
           
     474,553    578,066
           

 

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Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

Dollarama Group Holdings L.P.

 

     Note     2008
$
   2007
$

Balance as per Dollarama Group L.P.

     513,949    611,550

Senior subordinated deferred interest notes (2008 - US$185,000,000; 2007 - US$200,000,000), maturing in August 2012, interest accrues semi-annually in arrears commencing in June 2007 at a rate per annum equal to 6-month LIBOR plus 5.75%, increasing to 6.25% in December 2008 and 6.75% in December 2009

   (c )   183,890    237,100
           
     697,839    848,650

Less: Current portion

     25,734    13,496
           
     672,105    835,154

Less: Financing costs and discount

     19,099    28,233
           
     653,006    806,921
           

 

  a) Senior subordinated notes (the “Notes”)

The Notes are senior subordinated unsecured obligations of Group L.P. and Dollarama Corporation (the “Co-issuers”) and will be subordinated in right of payment to all existing and future indebtedness of the Co-issuers. In addition, all the existing and future subsidiaries (other than Dollarama Corporation, co-issuer) guarantee the Notes on a senior subordinated unsecured basis.

Commencing on August 15, 2009, the Co-issuers may redeem some or all of the Notes at the following redemption prices plus accrued and unpaid interest:

 

     Redemption
price

%

Years commencing August 15, 2009

   104.438

2010

   102.219

2011 and thereafter

   100.000

At any time prior to August 15, 2009, the Co-issuers may redeem some or all of the Notes at a redemption price equal to the greater of:

 

  i) 100% of the principal amount of the Notes to be redeemed; and

 

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Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

  ii) the sum of the present value of the redemption price of the Notes on August 15, 2009 and the remaining scheduled payments of interest from the redemption date through August 15, 2009 excluding accrued and unpaid interest, discounted at the redemption date, at the Treasury rate plus 50 basis points. The Treasury rate refers to a United States Treasury security having a maturity closest to the period from the redemption date to 2009 that would be used in pricing new issues of corporate debt securities.

At any time prior to August 15, 2008, the Co-issuers may redeem up to a maximum of 35% of the aggregate principal amount of the Notes with the proceeds of one or more equity offerings at a price equal to 108.875% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, provided at least 65% of the aggregate principal amount of the Notes remains outstanding.

The Notes have been converted into Canadian dollars at foreign exchange rates prevailing at the balance sheet date and the foreign exchange gain of $38,300,000 (2007 – loss of $9,300,000; 2006 – gain of $13,000,000) has been included in the consolidated statement of earnings in “Foreign exchange loss (gain) on derivative financial instruments and long-term debt”.

 

  b) Senior secured credit facility

Group L.P. has a senior secured credit facility amounting to $75,000,000 and consisting of revolving credit loans, banker’s acceptances, swing line loans and a letter of credit facility. The senior secured credit facility also includes term bank loans. Borrowings under swing line loans are limited to $10,000,000 and the letter of credit facility is limited to $25,000,000. As of February 3, 2008, there were no borrowings under this facility with the exception of term bank loans (amounting to $315,149,000 as of February 3, 2008 and $374,450,000 as of February 4, 2007) and letters of credit issued for the purchase of inventories amounting to US$971,000 (2007 – US$1,915,000). The term bank loans require payment of 100% of net cash proceeds on certain sales of assets, 100% of net cash proceeds on issuance of certain new indebtedness, 50% of net proceeds of a public offering or private placement, and 50% of excess cash flow (as defined in the credit agreement).

The term bank loan of US$239,194,191 (2007 – US$241,628,318) has been converted into Canadian dollars at foreign exchange rates prevailing at the balance sheet date and the foreign exchange gain of $45,694,000 (2007 – loss of $11,351,000; 2006 – gain of $22,523,000) has been included in the consolidated statement of earnings in “Foreign exchange loss (gain) on derivative financial instruments and long-term debt”.

The credit facilities are subject to customary terms and conditions for loans of this nature, including limits on incurring additional indebtedness and granting liens or selling assets without the consent of the lenders. The credit facilities are also subject to the maintenance of a maximum lease adjustment leverage ratio test and a minimum interest coverage ratio test. The credit facilities may, in certain circumstances, restrict the Group L.P.’s ability to pay distributions, including limiting distributions, unless sufficient funds are available for the repayments of indebtedness and the payment of interest expenses and taxes.

 

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Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

The failure to comply with the terms of the credit facilities would entitle the lenders to accelerate all amounts outstanding under the credit facilities and upon such acceleration, the lenders would be entitled to begin enforcement procedures against the assets of Group L.P., including accounts receivable, inventory and equipment. The lender would then be repaid from the proceeds of such enforcement proceedings, using all available assets. Only after such repayment, and the payment of any other secured and unsecured creditors, would the holders of units receive any proceeds from the liquidation of the assets of Group L.P. Group L.P. was in compliance with these covenants as of February 3, 2008.

 

  c) Senior subordinated deferred interest notes (the “Deferred Interest Notes”).

The Deferred Interest Notes were issued at 99% of face value and are senior unsecured obligations of Group Holdings L.P. and are structurally subordinated to any creditors and preferred stockholders. On each interest payment date Group Holdings L.P. may elect to pay interest in cash or let the interest accrue with the principal. Group Holdings L.P. may redeem some or all of the Deferred Interest Notes at the following redemption prices plus accrued and unpaid interest:

 

     Redemption
price
%

Years commencing December 15, 2008

   102.00

December 15, 2009

   101.00

December 15, 2010 and thereafter

   100.00

Following a change in control, Group Holdings L.P. will be required to offer to purchase all Deferred Interest Notes at a price of 101% of their principal amount plus any unpaid interest to the date of the purchase.

The Deferred Interest Notes are subject to customary covenants restricting Group Holdings L.P.’s ability to, among other things, incur additional debt, pay dividends and make other restricted payments except in certain circumstances when no default or event of default has occurred or is occurring under the indenture, create liens, consolidate, merge or enter into business combinations, or sell assets.

The Deferred Interest Notes have been translated into Canadian dollars at foreign exchange rates prevailing at the balance sheet date and the foreign exchange gain of $36,351,000 (2007 – loss of $6,247,000) has been included in the consolidated statement of earnings in “Foreign exchange loss (gain) on derivative financial instruments and long-term debt.”

 

  d) As security for the long-term debt, the Partnership has pledged substantially all of its assets.

 

  e) As of February 3, 2008 and February 4, 2007, there was no significant difference between the fair value and the carrying value of the long-term debt.

 

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Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

  f) Principal repayments on long-term debt due in each of the next five years are approximately as follows:

 

     Dollarama
Group
Holdings L.P.

$
   Dollarama
Group L.P.

$

2009

   26,420    26,420

2010

   17,420    17,420

2011

   40,810    40,810

2012

   230,499    230,499

2013

   382,690    198,800

 

  g) As described in note 7(a), (b) and (c), certain restrictions exist regarding the transfer of funds in the form of loans, advances, or cash dividends (defined as “Restricted Payments”) to and from Group Holdings L.P. Virtually all operations of Group Holdings L.P. are conducted through its subsidiary, Group L.P. and consequently, its capacity to make Restricted Payments depends on the capacity of Group L.P. to make Restricted Payments. As of February 3, 2008, the net assets of Group L.P. amounted to $513.2 million of which $422.7 million was restricted from payments. Subject to limitations imposed by the Indenture governing the Deferred Interest Notes, as of February 3, 2008, Group Holdings L.P. net assets amounted to $331.2 million, of which $281.2 million was restricted from payments.

 

8 Other liabilities

 

     2008
$
   2007
$

Unfavourable lease rights, (including accumulated amortization of $10,874,000; 2007 – $7,648,000)

   9,191    12,417

Deferred lease inducements

   8,488    6,176

Deferred tenant allowances (including accumulated amortization of $1,811,000; 2007 – $787,000)

   9,602    6,820
         
   27,281    25,413
         

 

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Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

9 Commitments, contingencies and guarantee

At February 3, 2008, there were contractual obligations for operating leases amounting to approximately $472,259,000. The leases extend over various periods up to the year 2024.

The basic annual rent, exclusive of contingent rentals, for the next five years and thereafter is as follows:

 

     $

2009

   62,493

2010

   58,807

2011

   56,235

2012

   52,501

2013

   47,598

Thereafter

   194,625

The rent and contingent rent expense of operating leases for store, warehouse, distribution centre and corporate headquarters included in the consolidated statement of earnings are as follows:

 

     2008
$
   2007
$
   2006
$

Basic rent

   57,696    49,216    40,110

Contingent rent

   1,069    1,485    1,036
              
   58,765    50,701    41,146
              

A legal proceeding has been instituted against the Partnership for alleged copyright infringement pertaining to the sale of certain products. The Partnership has denied this claim and believes it is without merit. It is not possible at this time to determine the outcome of this matter and accordingly, no provision has been made in the accounts for this claim.

Of the two other actions against the Partnership for alleged personal injuries sustained by customers in our stores, the case Pellegrino v. Dollar A.M.A. Inc. (operating as Dollarama) filed on June 17, 2004 in the Ontario Superior Court of Justice was settled as of April 2, 2008 with the settlement being covered by the insurance company. In the second case (Giuseppa Calvo v. S. Rossy Inc.) filed on May 8, 2006 in the Ontario Superior Court of Justice, the plaintiffs are alleging damages of $1.0 million. The Partnership believes that the potential amount to be paid for this claim would be covered by its insurance policy. It is not possible at this time to determine the outcome of this matter and accordingly, no provision has been made in the account for this claim.

The Partnership believes that these suits are without substantial merit and should not result in judgments which in aggregate would have a material adverse effect on its financial statements.

 

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Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

10 Derivative financial instruments

 

           Fair value     Qualify for
hedge
accounting
   Nature
of hedging
relationship
     Note     2008
$
    2007
$
      

Foreign currency and interest rate swap agreements

   (b )   (50,806 )   (6,011 )   No    —  

Foreign exchange forward contracts

   (c )   (4,507 )   7,224     Yes    Cash flow hedge

Foreign currency swap agreements

   (d )   (38,926 )   (6,398 )   Yes    Cash flow hedge
                   
     (94,239 )   (5,185 )     
                   

Derivative financial instruments – current assets

     —       7,224       

Derivative financial instruments – current liabilities

     (94,239 )   (12,409 )     
                   
     (94,239 )   (5,185 )     
                   

 

     2008  
           Impact on
balance sheet
    Impact on other
comprehensive
income
    Impact on
earnings
    Impact on cash flows  
      Note     Change in fair
value in the
year on debt and
derivatives
$
    Unrealized gain
(loss) on derivative
financial instruments
net of reclassification
adjustments
$
    Foreign
exchange loss (gain)
on derivative
financial instruments
and long-term debt
$
    Change in fair value
of derivatives
$
    Foreign exchange
loss (gain) on
long-term debt
$
 

Foreign currency and interest rate swap agreements

   10 (b)   44,795     —       44,795     44,795     —    

Term B loan

   7 (b)   (45,694 )   —       (45,694 )   —       (45,694 )

Foreign exchange forward contracts, net of reclassification

   10 (c)   11,731     (11,731 )   —       —       —    

Impact of three month lag on foreign exchange forward contracts

   10 (a)   8,347     (8,347 )   —       (8,347 )   —    

Foreign currency swap agreements

   10 (d)   32,528     5,772     38,300     38,300     —    

Senior subordinated loans

   7 (a)   (38,300 )   —       (38,300 )   —       (38,300 )

Other materialized gains and losses on debt repayments

     —       —       3,082     —       1,568  
                            

Total for Dollarama Group L.P.

       (14,306 )   2,183     74,748     (82,426 )
                            

 

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Table of Contents

Dollarama Group Holdings L.P. and

Dollarama Group L.P.

Notes to Consolidated Financial Statements

February 3, 2008 and February 4, 2007

(tabular amounts expressed in thousands of Canadian dollars, unless otherwise noted)

 

 

     2008  
           Impact on
balance sheet
    Impact on other
comprehensive
income
    Impact on
earnings
    Impact on cash flows  
      Note     Change in fair
value in the
year on debt and
derivatives
$
    Unrealized gain
(loss) on derivative
financial instruments
net of reclassification
adjustments
$