West 49 Inc. Annual Report 2009

West 49 I nc.

annual report 2009

aren’t we all a kid

atbarreling down the h ill,

action sports lifestyle

T h i s i s OUR space .

With constantly evolving tastes, the youth

can be a difficult space to operate in.

But we L IVE IT and OWN IT .

o u rl i m i t s .testing

One Company . One Dest i na t i on . West 49 I nc .

HEART?

About the lifestyle

Multiple sources of discretionary income

4.3 million tweens and teens

10 to 19 years old

>$4.9B annual purchasing power

Spend about half on clothing, footwear and accessories

Account for 76% of action sports participants

a lucrative target market

Skateboarding. Snowboarding. Surfing. BMX. Motocross. Action sports athletes and enthusiasts often share many similar lifestyle preferences, including tastes in fashion, apparel, footwear and accessories.

Part-time job. Allowance. Birthday money. Holiday money. Back-to-school money. Debit card. Gift card. Pre-paid credit card. Mobile banking machine, also known as a parent.

Our buyers live and breathe the action sports lifestyle. They devote considerable time and effort to identifying emerging trends in apparel, equipment and brands in Southern California, as most of the trends in actions sports have their beginning there.

We understand the lifestyle of our target market. We also spend a lot of time talking to our customers, in our stores and online, to learn which merchandise is in demand. Their opinions are the only ones that matter.

Taking

risk

out of fashion

Southern California

Understanding our customers

1 incredible grassroots marketing engine

20 buyers

Countless hours per year spent online talking to our customers

More than 600 combined days per year in Southern California

How we do retail

Our brand ambassadors

134 stores

200 brands in demand

429 thousand square feet

9 provinces

Our stores, which are primarily mall-based, carry a variety of high-performance, premium brand name and private label products that fulfill the action sports lifestyle needs of Canadian tweens and teens.

Throngs of loyal customers. 171,000 loyalty club members. 1,540,637 unique website visitors. 1,800 passionate store associates. 1 Platinum Club sales incentive program.

focused approach

we w i l l b e t h ere t a i l d e s t i n a t i o n o f c h o i c e f o r C a n a d i a n

seeking to fulfi l l their action sports l ifestyle needs.

vision

growing o u r c o r e b u s i n e s s

tweens and teens

o p e n n e w s t o r e si n n ew a n d e x i s t i n g m a r k e t s

E X P A N D and relocate stores to more optimum locations and sizes

Fellow shareholders:

The past year has been a challenging time for West 49 Inc. and for the apparel retail industry at large. The obstacles to our success were considerable, and included a volatile Canadian currency, cross-border shopping, minimum wage increases and a troubling economy. These poor operating conditions had a clear and direct impact on our financial results. However, their brunt was lessened by a number of strategic actions we took throughout the year to strengthen our business.

Best brands on Earth; lowest prices ever!

To defend against cross-border shopping we worked diligently with our vendors and lowered our prices to be more in line with U.S. retailers – providing our customers with little reason to go south of the border to shop. Our Platinum Club store sales incentive program, launched in March, helped drive higher units per transaction throughout the balance of the year. In Ontario, which seemed particularly affected by cross-border shopping, we ran a no-tax event in our West 49 stores during April and May, reinvigorating their sales performance. After a lot of hard work, we had a new value proposition for our customers – “best brands on Earth; lowest prices ever!” These actions combined to help us preserve market share and grow our comparable store sales during perhaps the most challenging Back-to-School and Holiday selling periods in the history of our Company.

Strengthening our business

Now, I will be the first to admit, that the actions we took to preserve market share and grow our top line were at the expense of our margins, and this will not be sustainable. However, we also took actions to strengthen other elements of our business, which should benefit our margins and bottom line going forward.

We hired a Vice President, GMM in January 2008, who now has a year with us under his belt. He is working hard to ensure that we get the most out of our vendor relationships and we expect this to translate to improved product margins.

Our continued focus on expense management yielded further improvement to our selling, general and administrative expenses as a rate to net sales. During the year, we consolidated our Off The Wall banner’s marketing and merchandising functions into West 49 and we reduced our head office head count in the fourth quarter.

Difficult but necessary decisions

The success of any retailer is dependent on their ability to ensure that their stores, brands and merchandise remain relevant and sought after by their target market customers. This has always been a priority of ours and something that I believe we have demonstrated a pretty good track record of in the past. While you will always have your misses, the key is to make the difficult decisions when something is not working. By the end of the year we had to make that decision with our Duke’s Northshore concept. We launched Duke’s as a test concept in 2006 to cater to what we saw as an under-serviced area of the market. Unfortunately, the few stores we had opened did not generate the returns we were expecting and the remaining Duke’s locations will be subleased, returned to the landlord or re-branded under one of our other banners.

We will continue to review our portfolio and will take the necessary action with respect to any stores we deem to be underperforming. This survival of the fittest approach will enable us to devote more focus to growing our core business, including our West 49 banner – which importantly, has maintained its market share throughout these tough times, proving that we remain very relevant to our tween and teen target market customers.

9

Our focus

We remain focused on being the retail destination of choice for Canadian tweens and teens seeking to fulfill their action sports lifestyle needs. We believe in the strong growth potential of our core business, especially our West 49 banner. However, in light of the current economic environment, efforts to maximize the value from existing operations will continue to take precedence over other elements of the Company’s growth strategy over the near term. That does not mean that we will not open new stores, but that we will continue to be more selective with respect to potential locations.

Our employees are our strongest asset

Our competitive retailing strategies and prudent management of operations have better positioned us for growth once the economic recovery takes hold. Furthermore, the encouraging results from our Platinum Club sales incentive program helped remind us that our strongest asset does not show on our balance sheet. Rather, our strongest asset is our team of 2,000 employees who continually strive to ensure the ongoing viability and competitiveness of our business from store to store and province to province in challenging and volatile times. I would like to take this opportunity to personally thank each and every one of them.

In closing, I would like to thank our Board of Directors for their ongoing counsel and guidance, and our Senior Management team for their contributions and commitment. Finally, I would like to thank our shareholders for their ongoing support and our loyal customers, whom without we would not exist. I look forward to keeping you apprised of our progress throughout fiscal 2010.

Sincerely,

Salvatore Baio President and Chief Executive Officer

10

MANAGEMENT’S DISCUSSION AND ANALYSIS Of Financial Condition and Results of Operations

Table of Contents Page #

1.0 Introduction 12

1.1 Forward-looking Statements 12

2.0 Company Overview 13

2.1 Store Real Estate Activity 13

2.2 Store Count by Banner and by Province 13

3.0 Company Performance 14

3.1 Seasonality of Results 14

3.2 Key Performance Indicators 14

4.0 Selected Financial Information 15

4.1 Selected Annual Consolidated Results 15

4.2 Selected Quarterly Consolidated Results 17

4.3 Summary of Results of Operations for the Fiscal Year 18

4.4 Summary of Results of Operations for the Fourth Quarter 19

5.0 Liquidity and Cash Flows 19

5.1 Liquidity 20

5.2 Cash Flows 20

5.3 Capital Management 21

5.4 Related Party Transactions 21

6.0 Policies, Controls and Procedures 22

6.1 Significant Accounting Estimates 22

6.2 Impact of New Accounting Pronouncements 23

6.3 Future Changes in Accounting Policies 24

6.4 Disclosure Controls and Procedures 25

6.5 Internal Control Over Financial Reporting 25

7.0 Growth Strategy and Outlook 26

7.1 Growth Strategy 26

7.2 Future Outlook 26

8.0 Risk Management 26

8.1 Economic Conditions 26

8.2 Banking Arrangements 27

8.3 Competition 27

8.4 Merchandise 28

8.5 Information Systems 28

8.6 Human Resources 29

8.7 Relationships with Commercial Landlords 29

8.8 Legal and Policies 29

8.9 Insurance Coverage 30


WEST 49 INC. – FISCAL 2009 MD&A

April 21, 2009

1.0 Introduction

The following Management’s Discussion and Analysis (“MD&A”) provides management’s perspective on the performance of West 49 Inc. (the “Company”) for the 14 week and 53 week periods ended January 31, 2009 (herein referred to as the fourth quarter and fiscal year 2009 respectively) compared to the 13 week and 52 week periods ended January 26, 2008 (herein referred to as the fourth quarter and fiscal year 2008 respectively). This MD&A is supplemental to, and should be read in conjunction with the information contained in the audited annual consolidated financial statements and accompanying notes of the Company for the year ended January 31, 2009. These statements have been prepared in conformity with Canadian generally accepted accounting principles (“GAAP”) and require management to make estimates and assumptions that affect amounts reported and disclosed in such financial statements and related notes. All amounts in this MD&A are expressed in Canadian dollars.

The Board of Directors, on the recommendation of the Audit Committee, approved the contents of this MD&A on April 21, 2009. Disclosure contained in this document is current to this date, unless otherwise stated. Additional information on the Company, including the Annual Information Form (“AIF”), is available on the SEDAR website at www.sedar.com.

1.1 Forward-Looking Statements

Statements contained or incorporated by reference in this document that are not current or historical factual statements may constitute forward-looking information within the meaning of applicable securities laws. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed in or implied by such forward-looking statements. When used in this document, such statements are such words as “may”, “will”, “expect”, “believe”, “plan”, “anticipate”, “intend”, “estimate” and other similar terminology. The following includes some of the factors that could cause actual results, performance or achievements to differ materially from those expressed in or implied by any forward-looking statements made by or on behalf of the Company: competition, changes in demographic trends, changes in consumer preferences and discretionary spending patterns, changes in business and economic conditions, human resource matters, legal proceedings, challenges to intellectual property rights, and changes in laws, regulations, and accounting policies and practices. The foregoing list of factors is not exhaustive. Also see “Risk Management” below. In formulating the forward-looking statements contained herein, management has assumed that business and economic conditions affecting the Company’s operations will continue substantially in the ordinary course, including without limitation with respect to industry conditions, general levels of economic activity, laws, regulations (including regarding employees, facilities, consumers, sales, advertising, competition, manufacturing, safety), taxes, foreign exchange rates, minimum wage rates and interest rates, weather, that there will be no outbreaks of disease or public safety issues, and that there will be no unplanned material changes in its facilities, equipment, supplies, with respect to relations with customers, suppliers, landlords and employees, or with respect to credit availability, among other things. These assumptions, although considered reasonable by management at the time of preparation, may prove to be incorrect. Except as may expressly be required by law, the Company disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements contained herein to reflect any change in expectations, estimates and projections with regard thereto or any changes in events, conditions or circumstances on which any statement is based. In addition to the disclosure contained herein, for more information concerning the Company’s various risks and uncertainties, please refer to the Company’s periodic public filings, including its annual information form, all of which are available under the Company’s profile at www.sedar.com. Forward-looking statements contained in this document reflect management’s current estimates, expectations and projections, which it believes are reasonable as of the current date. Readers are cautioned that forward-looking statements are not guarantees of future performance. Readers should not place undue importance on forward-looking statements and should not rely upon this information as of any other date.

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2.0 Company Overview

The Company is a leading Canadian specialty retailer of fashion and apparel, footwear, accessories and equipment related to the youth action sports lifestyle. The Company’s stores, which are primarily mall-based, carry a variety of high-performance, premium brand name and private label products that fulfill the lifestyle needs of identified target markets, primarily active tweens and teens. At January 31, 2009, the Company operated 134 stores in nine provinces under seven banners, consistent with the prior year. The Company also operated online at www.boardzone.com and www.shop.west49.com.

2.1 Store Real Estate Activity

The following chart outlines the store opening and closing activity by banner for the fiscal year ended January 31, 2009 and the fiscal year ended January 26, 2008:

Banner Opened Closed FY2009 FY2008

West 49 1 - 72 71

Billabong - - 6 6

Off The Wall 1 - 17 16

D-Tox - - 19 19

Amnesia/Arsenic - 1 17 18

Duke's Northshore - 1 3 4

Total 2 2 134 134

During fiscal 2009, the Company opened two new stores and closed two stores (fiscal 2008 – opened 12 new stores and closed three stores). In addition, the Company relocated five stores in the year (fiscal 2008 – nine stores). This has resulted in a 1.5% increase in the total gross square footage of stores in fiscal 2009 (fiscal 2008 – 12.6%). The Company intended to scale back its expansion plans in fiscal 2009 to manage capital and focus on existing operations.

2.2 Store Count by Banner and by Province

The following chart outlines the store locations across Canada by province as at January 31, 2009 and January 26, 2008:

Amnesia/ Duke's FY2009 FY2008

Province West 49 Billabong Off The Wall D-Tox Arsenic Northshore Total Total

Alberta 11 2 2 2 - - 17 16 British Columbia 13 1 11 - - 1 26 25

Manitoba 3 1 - - - - 4 4

New Brunswick 3 - - 1 - - 4 4

Newfoundland 1 - - - - - 1 1 Nova Scotia 2 - - 1 - - 3 3

Ontario 37 2 4 6 - 2 51 52

Quebec - - - 9 17 - 26 27 Saskatchewan 2 - - - - - 2 2 Total 72 6 17 19 17 3 134 134

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3.0 Company Performance

The Company’s financial results in the earlier part of fiscal 2009 were impacted by a higher Canadian dollar and the Company’s strategic actions to help mitigate the pronounced threat of cross-border shopping. These strategic actions included lowering the Company’s retail price points on many goods to be competitive with like retailers on both sides of the Canadian-U.S. border. While the lower prices were partly achieved through successfully negotiating lower list prices from the Company’s vendors, the Company also sacrificed margins to preserve market share, drive higher units per transaction and protect comparable store sales.

In the latter part of the year, the Company’s performance was impacted by the current economic downturn, which on a broader scale, resulted in reduced consumer confidence and spending. The Company’s merchandising and pricing strategies focused on offering exceptional brands at competitive prices. This strategy helped the Company defend its market share and was largely responsible for reclaiming comparable store sales during the key Back-to-School and Holiday selling periods.

It should also be noted that the financial results for the fiscal year and fourth quarter ended January 31, 2009 include contributions from one additional week compared to the corresponding periods in fiscal 2008, due to the Company’s floating year end.

3.1 Seasonality of Results

Revenues vary by quarter due to the seasonality of the retail industry. Retail sales are traditionally higher in the third and fourth quarters due to the Back-to-School period and the Holiday season. In addition, fourth quarter earnings are usually reduced by post Holiday season sale promotions. Variable costs can be adjusted to match the revenue pattern, but costs such as occupancy are fixed, leading the Company to report a disproportionate level of earnings in the third and fourth quarters. This business seasonality results in quarterly performance that is not necessarily indicative of the year’s performance.

3.2 Key Performance Indicators

Management evaluates the following items, which it considers to be key performance indicators, in assessing the performance of the Company:

Comparable store sales provide a measure of sales growth for current stores opened for at least one year. A store is included in comparable store sales in the thirteenth month of operation and includes a relocated or expanded store. Management considers comparable store sales to be a good indicator of the Company’s current performance, helping leverage certain costs such as store payroll, store occupancy, general and administrative expenses and other costs that are generally fixed. Positive comparable store sales results could generate improved operating leverage while negative comparable store sales results could negatively impact operating leverage.

Net sales per average gross square foot is a common retail metric used to measure the sales productivity of the retail locations. The net sales per average gross square foot is calculated using net sales for the year, excluding online sales, divided by the simple average of the beginning and ending gross square footage for the year. Management considers net sales per average gross square foot a good indicator of the Company’s performance relative to its competitors.

Gross margin measures whether the Company is appropriately optimizing the price and inventory levels of merchandise. Gross margin is the difference between net sales and cost of sales. Cost of sales includes cost of goods sold, shrink, freight, buying, distribution and occupancy costs. An inability to obtain acceptable levels of initial markups or a significant increase in the use of markdowns could have an adverse effect on the Company’s gross margin and results of operations.

Selling, general and administrative expenses (“SG&A”) include compensation costs associated with store and head office locations, advertising and promotional expenses and other administrative costs. Management views SG&A as a rate to net sales to be a key indicator of success as a multi-banner retailer. The ability to leverage and control operating costs directly impacts the operating results of the Company.

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Earnings before interest, income taxes, dividends, depreciation and amortization (“EBITDA”) is a non-GAAP performance measure used by the Company. EBITDA does not have a standardized meaning prescribed by GAAP and management cautions investors that EBITDA should not replace net income or loss or cash flows from operating, investing and financing activities (as determined in accordance with GAAP), as an indicator of the Company’s performance. The Company’s method of calculating EBITDA may differ from the methods used by other issuers. Therefore, the Company’s EBITDA may not be comparable to similar measures presented by other issuers. Management believes that EBITDA is a useful supplementary measure of operating performance as it is a commonly used metric by investors. The primary drivers of EBITDA are total net sales, gross margin and the Company’s ability to control operating costs.

Cash flow and liquidity are used by management to evaluate cash flow from operations, investing and financing to determine the sufficiency of the Company’s cash position. Management believes that cash flow from operations, along with leveraging the Company’s credit facilities throughout the year, will be sufficient to fund anticipated capital expenditures and working capital requirements.

4.0 Selected Financial Information

4.1 Selected Annual Consolidated Results

The following table sets forth selected financial data and operating information for the Company for the 53 week period ended January 31, 2009 and the 52 week periods ended January 26, 2008 and January 27, 2007.

(In thousands, except per share amounts and other

operating information) FY2009 FY2008 FY2007

Summary of Operations:

Net sales 210,417$ 204,894$ 195,268$

Gross margin 46,829 52,408 53,543

SG&A 43,470 43,605 40,504

EBITDA (9,529) 4,418 12,539

Net income (loss) (12,341)$ (2,405)$ 4,137$

Income (loss) per Share:

Basic and diluted (0.19)$ (0.04)$ 0.07$

Weighted average common shares - basic 63,605,190 63,323,829 62,198,635

Weighted average common shares - diluted 63,605,190 63,323,829 63,110,717

Balance Sheet:

Cash and cash equivalents 6,788$ 8,369$ 5,413$

Working capital 3,039 9,592 6,335

Total assets 94,747 103,110 102,066

Long-term obligations including current portion 21,301 22,370 21,018

Shareholders' equity 45,654$ 56,923$ 58,685$

Other Operating Information:

Number of stores 134 134 125

Net sales per average gross square foot 490$ 509$ 566$

Average gross square footage per store 3,203 3,155 3,002

Total gross square footage 429,197 422,716 375,308

Adjustments to Normalize

The results in the above table outlining selected financial information are based on GAAP, except for EBITDA and other operating information. However, the discussions throughout the MD&A on results of operations are based on the Company’s GAAP results excluding transactions that, in management’s opinion, do not arise as part of the normal day-to-day operations and by excluding these items management believes readers are provided with a more meaningful comparison of results for the fiscal years 2009, 2008 and 2007.

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Goodwill and Intangible Assets Impairment

The Company completed its annual goodwill and intangible asset impairment test during the fourth quarter of fiscal 2009, as required by GAAP. As a result of the depressed capital markets and the current macroeconomic environment, which had a negative impact on the Company’s performance, the Company recognized a non-cash, goodwill and intangible assets impairment charge of $12.0 million (fiscal 2008 - $3.5 million; fiscal 2007 - $0.5 million) in accordance with the Canadian Institute of Chartered Accountants (“CICA”) Section 3062: “Goodwill and Other Intangible Assets”. The impairment charge does not affect the Company’s day-to-day business operations or cash position. Given the size of the impairment, the Company has separately disclosed this non-cash impairment in its statement of earnings and has also presented normalized results to exclude this non-cash charge.

Store Restructuring Costs

During fiscal 2009, the Company evaluated the performance of its test concept, Duke’s Northshore (“Duke’s”), and decided to take strategic action to close all four stores. One of the Duke’s stores was closed in the second quarter of fiscal 2009, with non-cash provisions taken in the fourth quarter of $0.7 million on the remaining three Duke’s stores, which will either be closed or rebranded in fiscal 2010. The total non-cash provision on these four stores for fiscal 2009 was $0.9 million, of which $0.5 million was recorded as capital asset impairments and $0.4 million as a provision for lease penalties and other exit costs. As at January 31, 2009, the balance in accounts payable and accrued liabilities remained unchanged at $0.4 million, and will be paid out by the Company in subsequent periods. Given the size of the Duke’s strategic restructuring, the Company has separately disclosed the provision in its statement of earnings and has also presented normalized results to exclude this non-cash, non-recurring charge.

Corporate Restructuring Costs

During fiscal 2008, the Company recorded corporate restructuring costs of $0.9 million as a result of centralizing its finance, human resources, information technology, store operations and store development functions. The majority of these costs related to termination benefits. The remainder of these costs were related to consulting, legal and other administrative expenses. Given the size of this restructuring, the Company has separately disclosed this charge in its statement of earnings and has also presented normalized results to exclude this non-recurring charge.

The following table reconciles the Company’s actual results to a normalized basis:

Net

(In thousands) EBITDA Income (Loss)

Actual results FY2009 (9,529) (12,341)

FY2008 4,418 (2,405)

FY2007 12,539 4,137

Goodwill and intangible assets impairment FY2009 12,000 9,108

FY2008 3,500 3,361

FY2007 500 500

Store restructuring costs FY2009 888 604

FY2008 - -

FY2007 - -

Corporate restructuring costs FY2009 - -

FY2008 885 576

FY2007 - -

Normalized results FY2009 3,359 (2,629)

FY2008 8,803 1,532 FY2007 13,039 4,637

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4.2 Selected Quarterly Consolidated Results

The table below includes selected data for the eight most recently completed quarters. This unaudited quarterly information has been prepared on the same basis as the annual consolidated financial statements. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period.

Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1FY2009 FY2009 FY2009 FY2009 FY2008 FY2008 FY2008 FY2008

Summary of Operations:

Net sales 64,759$ 61,723$ 45,019$ 38,916$ 62,389$ 59,082$ 42,426$ 40,997$EBITDA - normalized 3,306 4,844 (474) (4,317) 4,702 5,754 904 (2,557) EBITDA (9,409) 4,844 (647) (4,317) 1,062 5,711 836 (3,191) Net income (loss) - normalized 1,127 2,074 (1,636) (4,194) 2,233 2,619 (545) (2,775)

Net income (loss) (8,467)$ 2,074$ (1,754)$ (4,194)$ (1,219)$ 2,591$ (589)$ (3,188)$

Income (loss) per Share: (1)

Basic - normalized 0.02$ 0.03$ (0.03)$ (0.07)$ 0.04$ 0.04$ (0.01)$ (0.04)$

Basic and diluted (0.13)$ 0.03$ (0.03)$ (0.07)$ (0.02)$ 0.04$ (0.01)$ (0.05)$

(1) The sum of the quarters may not equal the fiscal year totals due to rounding and changes in weighted average shares outstanding.

(In thousands, except per share amounts)

The table below is a reconciliation of the Company’s normalized EBITDA to net income (loss):

Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1(In thousands) FY2009 FY2009 FY2009 FY2009 FY2008 FY2008 FY2008 FY2008

EBITDA - normalized 3,306$ 4,844$ (474)$ (4,317)$ 4,702$ 5,754$ 904$ (2,557)$ Less: Corporate restructuring costs - - - - 140 43 68 634

Store restructuring costs 715 - 173 - - - - - Goodwill and intangible assets impairment 12,000 - - - 3,500 - - -

EBITDA (9,409) 4,844 (647) (4,317) 1,062 5,711 836 (3,191) Less: Amortization 1,415 1,405 1,508 1,534 1,362 1,302 1,368 1,447

Interest and dividends on preferred shares 203 235 302 213 276 224 391 154 Income taxes (2,560) 1,130 (703) (1,870) 643 1,594 (334) (1,604)

Net income (loss) (8,467)$ 2,074$ (1,754)$ (4,194)$ (1,219)$ 2,591$ (589)$ (3,188)$

The table below is a reconciliation of the Company’s normalized net income (loss) to reported net income (loss):

Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

(In thousands) FY2009 FY2009 FY2009 FY2009 FY2008 FY2008 FY2008 FY2008

Net income (loss) - normalized 1,127$ 2,074$ (1,636)$ (4,194)$ 2,233$ 2,619$ (545)$ (2,775)$

Less (net of income tax):

Corporate restructuring costs - - - - 91 28 44 413

Store restructuring costs 486 - 118 - - - - -

Goodwill and intangible asset impairment 9,108 - - - 3,361 - - -

Net income (loss) (8,467)$ 2,074$ (1,754)$ (4,194)$ (1,219)$ 2,591$ (589)$ (3,188)$

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4.3 Summary of Results of Operations for the Fiscal Year

Net Sales

Net sales increased $5.5 million, or 2.7%, to $210.4 million for the 53 weeks ended January 31, 2009 from $204.9 million for the 52 weeks ended January 26, 2008. Comparable store sales for the Company for comparable 53 week periods decreased 0.4% while the West 49 banner experienced an increase of 0.1%. This compares to a 1.3% decrease in comparable store sales in the prior year for the Company and growth of 0.5% for the West 49 banner.

The first quarter of fiscal 2009 was very disappointing with an 8.1% decrease in comparable store sales for the Company. Since then, the Company has reaffirmed its merchandising and pricing strategies, improved merchandise flow and fought to regenerate sales in an increasingly challenging economy. This culminated in positive comparative store sales of 1.3% for both the Company’s Back-to-School selling season in the third quarter, as well as the Holiday selling season in the fourth quarter.

Gross Margin

Gross margin decreased $5.6 million to $46.8 million in the 53 weeks ended January 31, 2009 from $52.4 million in the 52 weeks ended January 26, 2008. As a rate to net sales, gross margin declined by 340 basis points to 22.2% in the 53 weeks ended January 31, 2009 from 25.6% in the 52 weeks ended January 26, 2008. The decline in gross margin was primarily due to reduced product margins and increased supply chain costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”), decreased $0.1 million to $43.5 million for the 53 weeks ended January 31, 2009 from $43.6 million during the 52 weeks ended January 26, 2008. As a rate to net sales, SG&A expenses were 20.7% for the 53 weeks ended January 31, 2009 compared to 21.3% in the 52 weeks ended January 26, 2008. The 60 basis point decrease in SG&A as a rate to net sales was mainly due to the continued focus on expense management.

Earnings before Interest, Income Taxes, Dividends, Depreciation and Amortization

On a normalized basis, excluding all restructuring costs of $0.9 million (2008 - $0.9 million) and the goodwill and intangible assets impairment charge of $12.0 million (fiscal 2008 - $3.5 million), EBITDA was $3.4 million during the 53 weeks ended January 31, 2009 from $8.8 million, for the 52 weeks ended January 26, 2008. The decrease in EBITDA is almost entirely due to the reductions in gross margin.

Amortization Expense

Amortization expense was $5.9 million in the 53 weeks ended January 31, 2009 up from $5.5 million in the 52 weeks ended January 26, 2008. The increase of $0.4 million in amortization expense was primarily the result of a full year of amortization of new, expanded and relocated stores from the prior year’s growth.

Provision for Income Taxes

The provision for income taxes was a recovery of $4.0 million for the 53 weeks ended January 31, 2009 as compared to a provision of $0.3 million in the 52 weeks ended January 26, 2008. The reduction in the provision for income taxes was based on the net loss adjusted for permanent and other differences, including the goodwill and intangible assets impairment.

Net Income (Loss)

The net loss for fiscal 2009, excluding the after-tax impact of the restructuring costs of $0.6 million (fiscal 2008 - $0.6 million) and the goodwill and intangible assets impairment charge of $9.1 million (fiscal 2008 - $3.4 million) was $2.6 million, or a $0.04 loss per share, compared to a normalized net income of $1.5 million, or $0.02 per share for fiscal 2008. The per share amounts have been calculated based on a weighted average of 63,605,190 common shares during the 53 weeks ended January 31, 2009 compared to a weighted average of 63,323,829 common shares during the 52 weeks ended January 26, 2008.

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4.4 Summary of Results of Operations for the Fourth Quarter

Net Sales

Net sales increased $2.4 million, or 3.8%, to $64.8 million in the 14 weeks ended January 31, 2009 from $62.4 million in the 13 weeks ended January 26, 2008. The increase was mostly attributable to the additional week in the quarter. Comparable store sales for the Company for the comparable 14 week period decreased by 0.5%, with the West 49 banner experiencing an increase of 0.3%. This compares to a 4.5% decrease in comparable store sales in the prior year for the Company and a 2.4% decrease for the West 49 banner.

Despite the volatile and uncertain economy, which was especially disappointing in November and early December, the Company executed well during the peak Holiday season with merchandising and pricing strategies producing positive comparative store sales of 1.3% during the five week selling period ended January 3, 2009. This has allowed the Company to maintain its customer base in a shrinking economy, while ensuring its product is current and proving that the Company remains very relevant to its customer.

Gross Margin

Gross margin decreased $1.1 million, to $16.3 million in the 14 weeks ended January 31, 2009 from $17.4 million in the 13 weeks ended January 26, 2008. As a rate to net sales, gross margin decreased by 270 basis points to 25.2% in the 14 weeks ended January 31, 2009 from 27.9% in the 13 weeks ended January 26, 2008. The decline in gross margin was primarily due to lower product margins and increased supply chain costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $13.0 million during the 14 weeks ended January 31, 2009, up $0.3 million from $12.7 million during the 13 weeks ended January 26, 2008. The increase is largely due to the additional week. As a rate to net sales, normalized SG&A expenses were 20.1% for the 14 weeks ended January 31, 2009, compared to 20.4% in the 13 weeks ended January 26, 2008. The decrease of 30 basis points in SG&A as a rate to net sales was mainly attributable to the continued focus on expense management.

Earnings before Interest, Income Taxes, Dividends, Depreciation and Amortization

On a normalized basis, excluding restructuring costs of $0.7 million (fiscal 2008 – $0.1 million), and the goodwill and intangible assets impairment charge of $12.0 million (fiscal 2008 - $3.5 million), EBITDA was $3.3 million during the 14 weeks ended January 31, 2009 compared to $4.7 million, during the 13 weeks ended January 26, 2008. The decline in EBITDA for the quarter was mainly due to lower gross margins.

Net Income

The net income, excluding the after-tax impact of restructuring costs and the goodwill and intangible assets impairment charge, for the 14 weeks ended January 31, 2009 was $1.1 million, or $0.02 per share compared to normalized net income of $2.2 million, or $0.04 per share in the 13 weeks ended January 26, 2008. The normalized net income per share has been calculated based on a weighted average of 63,773,369 common shares during the 14 weeks ended January 31, 2009 compared to a weighted average of 63,517,071 common shares during the 13 weeks ended January 26, 2008.

Subsequent Events

Subsequent to January 31, 2009, the Company opened a West 49 store at the Milton Centre, in Milton, Ontario. In addition, the company closed two stores: an Off The Wall store at Lougheed Town Centre, in Burnaby, British Columbia, due to lease expiry; and a Duke’s store at Park Royal Shopping Centre, in West Vancouver, British Columbia as part of the Company’s strategic decision to close this test concept.

5.0 Liquidity and Cash Flows

The Company’s principal capital requirements are to fund working capital needs, open new stores and expand and relocate existing stores in connection with its strategic plans. These capital requirements have generally been satisfied by a combination of cash flows from operations and borrowings under its credit facilities.

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5.1 Liquidity

During the year ended January 31, 2009, operations generated cash of $2.3 million (fiscal 2008 - $7.1 million). The decrease in cash from operations from the prior year was largely due to lower earnings during fiscal 2009, mainly due to lower gross margins. Investing activities used cash of $4.2 million (fiscal 2008 – $6.8 million) which were largely due to capital asset additions, partially offset by cash inducements from landlords. Capital asset additions were mainly for new store growth, relocations and expansions of some existing stores, as well as the first phase of a new retail merchandising system. Financing activities were essentially flat, as the incremental borrowing of $2.0 million in fiscal 2009 was largely offset by debt repayments. This compares to the prior year of net cash generated from financing activities of $2.6 million. Overall, cash balances ended for fiscal 2009 at $6.8 million, compared to $8.4 million in the prior year.

Due to the seasonality of the retail industry, working capital balances tend to fluctuate significantly throughout the year. Cash and cash equivalents are generally highest in the fourth quarter, and inventory and accounts payable balances tend to be considerably higher during the second and third quarters due to the Company’s merchandise purchase patterns in preparation for the Back-to-School and Holiday selling periods. The Company’s credit facilities are designed to support these seasonal fluctuations with a seasonal adjustment.

5.2 Cash Flows

Cash Flows Provided by Operating Activities

For the 53 weeks ended January 31, 2009, cash flows provided by operating activities were $2.3 million compared to $7.1 million in the same period last year. The $4.8 million change from last year was due mainly to the decrease in earnings from the prior year, adjusted for non-cash items, and a decreased investment in non-cash working capital.

Cash flows provided by operating activities were $11.0 million in the fourth quarter of fiscal 2008 compared to $12.4 million in the same period last year. The $1.4 million change from last year was mainly due to the decreased earnings in the period, adjusted for non-cash items, and a decreased investment in non-cash working capital.

Cash Flows Provided by Financing Activities

For the 53 weeks ended January 31, 2009, cash flows provided by financing activities were $0.3 million compared to $2.6 million in the same period last year. The change was mainly due to the reduced draw on the CAPEX credit facility of $2.0 million in the year, compared to a $4.2 million draw in the prior year.

Cash flows provided by financing activities were $0.9 million in the fourth quarter of fiscal 2009 compared to a use of funds of $0.1 million in the same period last year. The change was mainly due to the repayments on the CAPEX credit facility of $1.2 million in the quarter offset by a $2.0 million increase in long term debt.

Cash Flows Used by Investing Activities

For the 53 weeks ended January 31, 2009, cash flows used by investing activities were $4.2 million compared to $6.8 million in the same period last year. The change was mainly due to purchases of capital assets of $5.4 million compared to $7.7 million in the same period last year, combined with increased tenant inducements of $0.3 million.

For the fourth quarter of fiscal 2009, cash flows used by investing activities increased by $0.2 million to $1.4 million in the fourth quarter of fiscal 2009 compared to $1.2 million in the same period last year. The change was mainly due to purchases of capital assets of $1.6 million, less tenant inducement received of $0.2 million compared to $1.2 million of capital asset purchases in the same period last year.

Net Change in Cash and Cash Equivalents

For the 53 weeks ended January 31, 2009, the net result of the Company’s operating, financing and investing activities was a decrease in cash and cash equivalents balance of $1.6 million compared to an increase of $3.0 million in the same period last year.

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In the fourth quarter of fiscal 2009, the net change in the Company’s operating, financing and investing activities was an increase in cash and cash equivalents balance of $10.5 million compared to an increase of $11.0 million in the same period last year.

The table below sets out various categories of contractual obligations of the Company and the amounts due for each period as of January 31, 2009:

Within(In thousands) Total 1 year 2 - 3 years 4 - 5 years Thereafter

Long term debt 6,843$ 1,322$ 4,228$ 1,293$ -$

Operating leases 96,211 16,897 29,486 23,696 26,132

Preferred shares 5,223 33 5,190 - -

Total contractual obligations 108,277$ 18,252$ 38,904$ 24,989$ 26,132$

5.3 Capital Management

During fiscal 2009, the sources of capital included a $10.0 million revolving credit facility with a seasonal adjustment increase to $15.0 million from April 1 to September 30. In addition, a revolving term loan facility of $8.5 million has been available since August 29, 2008, previously at $6.5 million. Interest rates on these facilities were at prime plus 1.25% and 1.75%, respectively. These facilities are secured by general security agreements against all existing and future acquired assets of the Company, including a pledge of the shares West 49 Inc. holds in its subsidiaries.

The Company is subject to certain restrictions and covenants in respect of its credit facilities, including a minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum tangible net worth.

As at January 31, 2009, the Company was in violation of one of its bank covenants. Subsequent to January 31, 2009, the Company obtained a waiver for the default retroactive to January 31, 2009. The waiver obtained has the following conditions set forth based on historical operating needs: the maximum limit on the Company’s operating credit facility was reduced to $6.0 million from $10.0 million; the seasonal increase available on the operating line from April 1 to September 30 has been lowered to $12.0 million from $15.0 million; the term loan facility has been capped at $6.8 million, down from $8.5 million; and the credit facilities have also been changed to a demand basis from a 364-day committed line. Interest rates on these facilities are at prime plus 4.0% and 4.75%, respectively.

With uncertainties in the current economic environment, it is not uncommon for banks to remove unutilized credit facilities. Throughout the year, the Company has had varying amounts of unutilized credit facilities. The bank indebtedness on the operating credit facility ranged from nil to $9.0 million at the peak of the seasonal period. Management believes that the Company’s revised credit facilities, along with cash generated from operations, will be sufficient to fund its operations and anticipated capital expenditures during fiscal 2010. In addition, subsequent to January 31, 2009, the Company completed an amalgamation of various corporate entities that will allow it to realize a significant amount of non-capital tax losses carried forward from prior years which will reduce the amount of tax instalments by $1.7 million in fiscal 2010.

The Company’s credit facility renewal date is June 30, 2009. The Company anticipates that it may be in violation of another covenant at the end of the first quarter. The Company’s bank is aware of this, and the Company has already begun a full renewal process with the bank to negotiate mutually acceptable terms and anticipates this to be completed during the second quarter of fiscal 2010.

5.4 Related Party Transactions

During the year, the Company, in the normal course of operations, provided administrative, payroll and distribution services to 6271235 Canada Inc. (Prudhommes Factory Outlet, a clothing retailer) and considers these to be related party transactions on account that a Director of the Company wholly owns 6271235 Canada Inc. The outstanding amount due from 6271235 Canada Inc, as at January 31, 2009 was $10.0 thousand (2008 – $138.0 thousand), does not bear interest and has no specific terms of repayment. During the year, the Company earned $36.0 thousand (2008 - $45.0 thousand) in management fees for providing these services, which are included as other income in SG&A.

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6.0 Policies, Controls and Procedures

6.1 Significant Accounting Estimates

Estimates

The preparation of the Company’s consolidated financial statements, in accordance with Canadian generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Due to the inherent uncertainties in making such estimates, and the current economic environment, actual results reported in the near term could differ from those estimates. Estimates are used when accounting for items such as inventory valuation, estimated returns and allowances, amortization, gift card liability, impairment of long-lived assets, future income taxes and assumptions used when assessing goodwill and intangible assets. Management reviews these estimates on an ongoing basis, and believes that the most critical estimates and assumptions are in the following areas:

Revenue Recognition

Revenue includes sales to customers through stores operated by the Company. Sales are recognized at the time of sale and receipt of merchandise by the customer, net of any returns. Allowances for customer returns are estimated using the historical return patterns.

Upon the purchase of a gift card or issuance of a gift certificate, a liability is established for the cash value of the gift card or gift certificate. Revenue is recognized when the gift card or gift certificate is redeemed for merchandise. Gift card breakage is recognized by the Company when, based on historical patterns of redemption, the Company determines the cards or certificates will not be redeemed.

Inventories

Inventories, which consist of fashion and apparel, footwear, accessories and equipment related to music, youth culture and action sports, are valued at the lower of cost and net realizable value with cost being determined on the weighted average basis. The cost of inventories includes the cost of purchases and estimates of the capitalized portion of other costs incurred in bringing the inventories to their present location and condition. Inventories owned by the Company are generally located at its warehouses and its retail locations. The Company records valuation adjustments to inventories based on the aging of inventories and estimated expected markdowns. The estimated reserve can be affected by changes in the Company’s markdown strategies and selling patterns that could result in a fluctuation in gross margin.

Impairment of Long-lived Assets

Management evaluates the ongoing value of assets associated with the Company’s retail stores. Long-lived assets are tested for recoverability on an annual basis or more frequently as events or changes in circumstances indicate that their carrying value exceeds the total undiscounted cash flows expected from their use and eventual disposition. The amount of the impairment loss is determined as the excess of the carrying value of the assets over their fair value.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair market value of the net identifiable assets of the acquired business. Goodwill and intangible assets are assessed for impairment on an annual basis or more frequently as events or circumstances change that indicate goodwill or intangible assets of a reporting unit may be impaired. When the carrying amount exceeds the fair value, an impairment charge is recognized in earnings in an amount equal to the excess of the carrying value over its fair market value

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Future Income Taxes

The Company follows the liability method of accounting for income taxes. Under this method, future income taxes are recognized for the future income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using the enacted and substantively enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the substantively enacted dates. Future income tax assets are recognized to the extent that it is more likely than not that they will be realized.

6.2 Impact of New Accounting Pronouncements

The Canadian Institute of Chartered Accountants (“CICA”) amended section 1400 “General Standards of Financial Statement Presentation” to include requirements to assess an entity’s ability to continue as a going concern. The new requirements are effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2008. Accordingly, the Company adopted the amendment to this standard on January 27, 2008. The adoption of this amendment did not have an impact on the Company’s consolidated financial statements.

The CICA issued four new accounting standards that became effective for the Company’s first quarter of fiscal 2009: Section 1535 “Capital Disclosures”, Section 3031 “Inventories”, Section 3862 “Financial Instruments – Disclosures” and Section 3863 “Financial Instruments – Presentation”. The Company applied these new accounting standards at the beginning of its 2009 fiscal year.

Capital Management Disclosures

Section 1535 “Capital Disclosures” establishes standards for disclosing information about an entity’s capital and how it is managed. Required disclosure includes information that enables users of an entity’s financial statements to evaluate its objectives, policies and processes for managing capital. This disclosure includes a description of capital under management, and disclosure of externally imposed capital requirements to which the entity is subject. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

Inventories

Section 3031 replaces Section 3030 “Inventories”. The objective of this new section is to prescribe the accounting treatment for inventories. This section requires inventories to be measured at the lower of cost and net realizable value and also provides guidance on the appropriate methods of determining cost and the impact of any write-downs to net realizable value. Reversals of previous write-downs to net realizable value where there is a subsequent increase in the value of inventories is now required. This reversal is limited to the extent of the initial write-down. Under this new accounting standard, the cost of inventories includes the cost of purchases and other costs incurred in bringing the inventories to their present location and condition.

The Company implemented this new accounting standard at the beginning of its 2009 fiscal year, on a retrospective basis, without restatement of prior periods. As a result of the retrospective application of this new standard, the opening deficit for fiscal 2009 has been adjusted by the difference in the measurement of opening inventories. The impact of this transitional adjustment was an increase in opening inventories of $1.2 million, an increase in current future income taxes payable of $0.4 million, and a decrease of $0.8 million to the opening deficit. As at January 31, 2009, the costs capitalized to inventory totaled $1.6 million.

Financial Instruments Disclosure and Presentation

Sections 3862 and 3863 replaced Section 3861 “Financial Instruments – Disclosure and Presentation”, with the exception of accounting for insurance contracts, which may still be accounted for in accordance with Section 3861. Section 3862 requires disclosure that enables financial statement users to evaluate the significance of financial instruments for an entity’s financial position and performance, the nature and extent of risks arising from financial instruments to which the entity is exposed, and the entity’s process for managing such risks. Section 3863 enhances a financial statement user’s understanding of the significance of financial instruments to an entity’s financial position, performance and cash flows by establishing standards for presentation of financial instruments and non-financial derivatives. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

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6.3 Future Changes in Accounting Policies

In February 2008, the CICA amended Section 1000 “Financial Statement Concepts” to clarify the criteria for recognition of an asset and the timing of recognition of expenses. This amendment is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company will apply this amendment at the beginning of its fiscal 2010 year. The Company is currently evaluating the impact that the adoption of this amendment will have on its consolidated financial statements.

In February 2008, the CICA issued Section 3064 “Goodwill and Intangible Assets”. Section 3064 replaced Section 3062 “Goodwill and Other Intangible Assets” and Section 3450 “Research and Development”. This new section provides additional guidance on the recognition, measurement, presentation and disclosure of goodwill and intangible assets. This standard is effective for interim and annual financial statements for fiscal years beginning on or after October 1, 2008. Accordingly, the Company will apply this new standard at the beginning of its fiscal 2010 year. The Company is currently evaluating the impact that the adoption of this Section will have on its consolidated financial statements.

In February 2008, the CICA announced that the Canadian Accounting Standards Board confirmed that the changeover to International Financial Reporting Standards (“IFRS”) from Canadian GAAP will be required for publicly accountable enterprises’ interim and annual financial statements effective for fiscal years beginning on or after January 1, 2011. Companies will be required to provide comparative information under IFRS for the previous fiscal year. The implementation of IFRS will be applicable for the Company for the first quarter of fiscal 2012, for which the current and comparative financial information will be presented in accordance with IFRS. The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the Company’s reported financial results.

In addition, the International Accounting Standards Board has projects underway that are expected to result in new pronouncements that continue to evolve IFRS, and as a result, IFRS as at the transition date is expected to differ from its current form.

Preliminary IFRS Impact Assessment

An initial evaluation or impact assessment has been completed to analyze potential significant differences between current IFRS and Canadian GAAP as they apply to the Company. The results of the assessment identified the following:

Preliminary analysis of all Canadian GAAP to IFRS differences and IFRS 1 elections, including a prioritization of high, medium and low impact areas for the Company;

Preliminary resource requirements; Preliminary training requirements; and Preliminary IFRS Transition Plan.

The initial assessment has identified some standards as having a higher likelihood for generating accounting differences including Intangible Assets (IAS 38), Impairment of Assets (IAS 36) and Business Combinations (IFRS 3), as well as the more extensive presentation and disclosure requirements under IFRS. The Company continues to analyze available accounting policy choices including IFRS 1 elections, and is therefore unable to quantify the exact impact of IFRS on the Company’s financial statements at this time.

IFRS Transition Plan

During fiscal 2010, the Company will finalize and implement a formal IFRS Transition Plan. This plan will include the following:

An established project structure and governance practices; Detailed timetable for fiscal 2010; Identification and allocation of resources (internal and external); Development and execution of a training program; Detailed analysis of all Canadian GAAP to IFRS differences; Detailed analysis and selection of all IFRS 1 elections; and Assessment of impact on data systems, internal controls over financial reporting, and business

activities, such as financing and compensation arrangements.

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IFRS Transition Disclosures

As the Company transitions from Canadian GAAP to IFRS, it is required to qualitatively disclose its implementation impacts. As the IFRS Transition Plan progresses, disclosure on accounting policy differences is expected to increase.

In January, 2009, the CICA issued Sections 1582 “Business Combinations”, 1601 “Consolidated Financial Statements” and 1602 “Non-Controlling Interests”, which replaced Sections 1581 “Business Combinations” and 1600 “Consolidated Financial Statements”. These new Sections harmonize Canadian accounting with the International Accounting Standards Board’s (IASB) International Financial Reporting Standard 3 “Business Combinations”. These new standards are to be applied prospectively for business combinations in the first annual reporting period beginning on or after January 1, 2011. The Company intends to apply these Sections at the beginning of its fiscal 2012 year, although earlier application is permitted. Assets and liabilities that arose from business combinations which precede the application date will not be adjusted upon adoption of the new standards. The Non-Controlling Interests standard is not applicable to the Company at this time.

6.4 Disclosure Controls and Procedures

Management is responsible for establishing and maintaining a system of controls and procedures over the public disclosure of financial and non-financial information regarding the Company. Disclosure controls and procedures are designed to seek to ensure that information required to be disclosed in reports filed with Canadian securities regulatory authorities is recorded, processed, summarized and reported on a timely basis, and is accumulated and communicated to senior management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

The Company’s system of disclosure controls and procedures includes, but is not limited to, a Disclosure Policy, a Code of Business Conduct, the effective functioning of a Disclosure Committee and internal controls over financial reporting. The Company’s management, including the CEO and the CFO, does not expect that the disclosure controls will prevent or detect all misstatements due to error or fraud. Because of the inherent limitations in all control systems, an evaluation of controls can provide only reasonable, not absolute, assurance that all control issues and instances of fraud or error, if any, have been detected. The Company is continually seeking to evolve and enhance its system of controls and procedures.

Based on the evaluation of the disclosure controls and procedures which included documentation review, enquiries and other procedures considered by management to be appropriate in the circumstances, the CEO and CFO have concluded that, to their knowledge, as at January 31, 2009, except for the weakness identified below in the internal control over financial reporting, the disclosure controls and procedures are designed and operating effectively.

6.5 Internal Control over Financial Reporting

Management is also responsible for establishing and maintaining appropriate internal controls over financial reporting. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal controls over financial reporting include, but are not limited to, policies and procedures related to accounting and reporting, and controls over systems that process transactions. The Company’s procedures for financial reporting also include the involvement of qualified financial professionals, senior management and the Company’s Audit Committee.

During fiscal 2009, management engaged the services of external consultants, independent of the Company’s external auditor, to provide additional advice and technical expertise relating to internal controls over financial reporting. During the process of management's review and evaluation of the design and operational effectiveness of the Company's internal control over financial reporting, the CEO and CFO have concluded that, as at January 31, 2009, the internal controls over financial reporting are effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP with the exception of the previously disclosed design weakness. As is indicative of many small companies, management has identified the existence of full competencies in the complex areas of taxation as an area requiring improvement. Risks associated with this weakness have the potential to result in material misstatements in the Company’s consolidated financial statements among other things. Senior management seeks to mitigate these risks by consulting with external experts to assist management in their analysis.

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Management does not intend to remediate the Company’s lack of in-house tax expertise as it does not believe it to be economically beneficial at this time and that the established procedures are sufficient at this time. It should be noted that a control system, no matter how well conceived or operated, can only provide reasonable assurance, not absolute assurance, that the objectives of the control system are met.

Management has evaluated whether there were changes in internal controls over financial reporting during the quarter ended January 31, 2009 that materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting. Management has determined that no material changes occurred during in the fourth quarter.

7.0 Growth Strategy and Outlook

7.1 Growth Strategy

The Company’s vision is to be the retail destination of choice for Canadian tweens and teens seeking to fulfill their action sports lifestyle needs. The Company will fulfill its vision and achieve its objectives through executing a growth strategy which is primarily focused on maximizing returns at existing locations (through improving gross margins; leveraging expenses; and driving comparable store sales) as well as growing its stores across Canada (by opening new stores in existing markets and expanding into new markets).

7.2 Future Outlook

The economic downturn that began in 2008 has continued to evolve into a global economic meltdown, negatively impacting consumer confidence across Canada. While spending by the Company’s tween and teen target market consumers has historically been thought of as recession resistant, the effects have been far more reaching and volatile than the past, and Canadian youth are looking to make their dollars go further.

Management and the Board of Directors continue to believe in the strong growth potential of the Company over the next several years. However, in light of the current macroeconomic environment and constraints in the capital markets, management will continue to be prudent and definitive in the actions taken to preserve and grow market share and strengthen the profitability of the Company. This means that maximizing the value from existing operations will continue to take precedence over other elements of our growth strategy over the near term. As such, store growth will likely be limited to four or five new stores and only a few major renovation/relocations in fiscal 2010. In addition, the Company will continue to reassess underperforming stores, and intends to close two to four stores in fiscal 2010 as opportunities to exit leases arise.

8.0 Risk Management

The Company attempts to mitigate and manage risks wherever possible through various tactics including continuous monitoring of its internal and external environments for threats and opportunities, planning for the risk with contingency plans and protecting against the risk of loss with insurance, where applicable. The risks described below are inherent in the Company’s normal course of business and have the potential to impact the financial performance of the Company. The risks included here are not exhaustive. The Company operates in a very competitive and rapidly changing environment. New risk factors may emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company.

8.1 Economic Conditions

Current Economic Downturn

The apparel retail industry can be affected by macroeconomic factors, including changes in national, regional, and local economic conditions, employment levels, salary and wage levels, interest and currency exchange rates, taxation and consumer spending patterns. The current global economic downturn has adversely impacted the Canadian retail landscape primarily in the form of reduced consumer confidence and could negatively affect consumers’ willingness to purchase the Company’s products as they reduce their discretionary spending. Moreover, current economic conditions may adversely affect the ability of the Company’s manufacturers and/or suppliers to obtain the credit necessary to fund their working capital needs, which could negatively impact their ability to continue to provide products to the Company. If the current economic conditions persist or deteriorate, sales of the Company’s products could be adversely affected and the Company may face obsolescence issues with its inventory, either of which could have a material adverse impact on its operating results and financial condition.

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The Company’s sales also depend on the continuing popularity of malls as shopping and leisure-time destinations for tweens and teens. The current economic recession and uncertain economic outlook in Canada may further lower consumer spending levels and cause a decrease in mall traffic or new mall development, each of which could adversely affect the Company.

Currency Exchange Rates

The Company’s foreign currency exchange rate risk is generally limited to currency fluctuations between the Canadian and United States (U.S.) dollar. The Company is exposed to foreign exchange rate variability on its merchandise purchases in U.S. dollars. Pricing is determined in advance with considerable lead times, and significant fluctuations in foreign exchange rates could have an impact on the Company’s operating results and financial condition. The Company does not currently engage in any foreign currency hedging activities due to the relatively small volume of transactions in U.S. dollars.

A significant portion of the Company’s merchandise purchases are made through Canadian distributors of U.S. suppliers. Similar to the above, pricing is determined in advance with considerable lead times, and significant fluctuations in foreign exchange rates could have immediate positive or negative affects on the Company’s ability to be price competitive. Since the Company’s pricing is locked in for longer periods of time, this competitive pricing delay can be adjusted by the Company in the short-term through markdowns or other means, which could have significant positive or negative effects on the Company’s operating results and financial condition.

8.2 Banking Arrangements

Aside from cash flows from operations, the Company is dependent on borrowings under its credit facilities to support its seasonal cash requirements. The current global financial market downturn has resulted in severe restrictions on credit availability in most parts of the world, including Canada. Credit contraction in financial markets may hurt the Company's ability to borrow funds to meet its anticipated cash needs and access credit in the event that it identifies an acquisition opportunity or some other opportunity that would require a significant investment in resources.

A significant decrease in the operating results of the Company could adversely affect the Company’s ability to maintain required financial ratios under the Company’s credit facilities. Required financial ratios include a minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum tangible net worth. The Company is also subject to a maximum amount of capital expenditure per annum. If these financial ratios are not maintained or the capital expenditure limit is exceeded, the lender will have the option to terminate the facilities and require immediate repayment of all amounts outstanding under the credit facilities. If the Company were unable to obtain waivers or renegotiate acceptable lending terms, there can be no guarantee that the Company would be able to obtain a new credit agreement with another bank or group of lenders on similar terms or at all and this could have an adverse effect on the Company.

8.3 Competition

The Canadian retail apparel and accessory industry is highly competitive. The Company competes with other retailers for manufacturers and/or suppliers, customers, suitable store locations, qualified associates and management personnel. In addition, given the close proximity of many of the Company’s stores to the U.S., cross-border shopping also presents a constant risk. The Company currently competes directly with street-level alternative stores located primarily in metropolitan areas as well as with other mall-based teenage-focused retailers such as, but not limited to: Bluenotes™, American Eagle Outfitters™, Old Navy™, Below the Belt™, The GAP™ and boathouse™. The Company may also experience increased competition from additional non-Canadian retailers moving into the Canadian marketplace. Among the other retailers who could enter the Canadian marketplace are PacSun™ (Pacific Sunwear™), Zumiez™ and Hot Topic™. Some of the Company’s competitors are larger and may have greater resources than the Company. Direct competition with these and other retailers may increase significantly in the future, which could require the Company, among other things, to lower its prices. Failure to develop and implement appropriate competitive strategies could have an adverse effect on the Company.

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8.4 Merchandise

Dependence on Manufacturers and/or Suppliers

The Company’s financial results also depend on its ability to maintain access to manufacturers and/or suppliers who develop and sell current action sport, fashion, music and pop culture related merchandise as well as the Company’s ability to purchase merchandise in sufficient quantities and to do so at competitive prices. Although the Company acquires its merchandise from various manufacturers and/or suppliers, many of them limit the quantity of merchandise produced and sold to the Company as a result of capacity limitations and other factors. There is no guarantee that the Company will be able to maintain its relationships with its manufacturers and/or suppliers on current terms or that the Company will obtain the quantity of merchandise it seeks at competitive prices in the future. Any inability to acquire suitable merchandise, or the loss of one or more key manufacturers and/or suppliers could have an adverse effect on the Company.

Unfavourable trends or developments, including among others, fluctuations in the price of raw materials, the unavailability of certain products, the loss of or inability to obtain leased premises on reasonable terms, transportation disruptions, strikes, lock-outs, labour unrest and/or financial difficulties affecting the Company’s manufacturers and/or suppliers, may cause a significant reduction in the availability or quality of products and services purchased by the Company. There can be no assurance that the Company will be able to find alternate manufacturers and/or suppliers which could have an adverse impact on the Company.

As a diverse and multi-channel retailer, the Company promotes many brands as part of its normal course of business. Damage to the reputation of any of these brands or the reputation of the manufacturers and/or suppliers of these brands could negativelyimpact consumer opinions of the Company and/or its related products and have an adverse effect on the Company.

Private Label Merchandise

The Company’s private label merchandise generally carries higher margins than its other merchandise. Accordingly, if the Company fails to anticipate, identify and react to trends with its private label merchandise, particularly the ideal mix of private label versus branded merchandise, then it could have an adverse effect on the Company.

Merchandise Sourcing

A significant portion of merchandise sold by the Company is sourced from manufacturers and/or suppliers requiring advance notice periods in order to supply the quantities that the Company requires. Lead times may adversely impact the Company’s ability to respond to changing consumer preferences, resulting in inventory levels that are insufficient to meet demand or in merchandise that may have to be sold at lower prices. The inability of a manufacturer and/or supplier to ship orders in a timely manner could also cause the Company to fail to meet the merchandise requirements of its stores, which could result in lost sales and dissatisfied customers. Interruptions in the Company’s sourcing could have an adverse effect on the Company and inappropriate inventory levels may negatively impact the Company’s performance.

In addition, a significant portion of the Company’s private label merchandise is manufactured outside of Canada, principally in Asia and the United States, through arrangements with distributors and agents. The Company’s distributors and agents are subject to the risks generally associated with doing business abroad, including foreign government regulations, political instability, the imposition of additional regulations relating to imports, the imposition of additional duties, taxes and other charges on imports, significant fluctuations in the value of the dollar against foreign currencies or restrictions on the transfer of funds.

8.5 Information Systems

The Company has experienced significant growth over the last several years. While the Company regularly evaluates its information systems capabilities and requirements, there can be no assurance that its existing information systems will be adequate to support future growth or will remain adequate to support the existing needs of the Company’s business. In order to support future growth, and to consolidate the many different platforms across the Company’s business areas, the Company has begun to undertake a significant information system implementation for all banners. One banner was completed in fiscal 2009. The Company intends to convert all banners to the new common point-of-sale and merchandising system. Such projects include inherent risks associated with replacing existing systems, such as system disruptions and the failure to accurately capture data, among others. Information system disruptions, if not anticipated and appropriately mitigated, could have an adverse effect on the Company.

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8.6 Human Resources

There can be no assurance that the Company will be able to maintain key personnel at either the senior management or retail level. The success of the Company depends upon the efforts of key personnel and, accordingly, its ability to retain and attract qualified personnel, maintain good relations with its personnel, and to continue to successfully grow the business. The loss of the services of one or more of these individuals, or the lack of certain in-house specialized expertise (for example, in tax and other areas), could have an adverse effect on the Company, and could lead to disclosure errors among other things.

8.7 Relationships with Commercial Landlords

The Company operates its stores with the majority situated in urban malls and other similar urban centres on premises leased to the Company by various commercial landlords. While the Company is able to change its merchandise mix and relocate stores in order to maintain its competitiveness, it may be restricted from vacating a current store location without breaching its contractual obligations and incurring, for example, lease related expenses up to the remaining term of the lease. In some cases, the long-term nature of the leases may limit the Company’s ability to respond to changes in the demographics or retail environment at any location. As at January 31, 2009, the remaining terms of the various leases ranged from less than one year to ten years, with the average remaining term of the lease being approximately five years.

The Company’s financial results, business and operations are impacted by the Company’s relationships with its numerous commercial landlords and their agents and representatives. There can be no assurance that the Company will maintain positive working relationships with such persons and entities which, if compromised, could impact the Company’s ability to operate its stores, open new stores and to renew leases on existing stores, among other things. This could, accordingly, have an adverse effect on the Company.

8.8 Legal and Policies

Laws and Regulations

Changes to laws, regulations, policies, rules, orders, practices, methods and similar, including but not limited to accounting adjustments and changes in accounting policies and methods (collectively, “Laws and Practices”), as well as changes in the interpretation, implementation or enforcement of Laws and Practices, could adversely affect the Company. The Company may also incur significant costs in the course of complying with any changes to applicable Laws and Practices. The Company’s failure to comply with applicable Laws and Practices could result in judgments, sanctions and/or financial penalties against the Company which could adversely impact the Company in a number of ways, including potential negative impacts on its reputation.

Intellectual Property

If the Company fails to enforce or maintain any of its intellectual property rights, it may be unable to capitalize on its efforts to establish and maintain brand equity. All registered trade-marks in Canada can be challenged pursuant to provisions of the Trade-marks Act (Canada) and if any of the Company’s intellectual property is ever successfully challenged, this may have an adverse impact on the Company. There can also be no assurance that any of the Company’s efforts to register or protect its intellectual property will be successful. The use of unregistered trade-marks, registered trade-marks and licensed trade-marks, among other things, can also be challenged. Moreover, it is possible that the Company’s licenses to use certain intellectual property will be terminated or not renewed. The loss of any brand could have an adverse effect on the Company.

In non-Canadian jurisdictions the Company may not own or have the right to use identical or similar trade-marks, licenses and other intellectual property owned by the Company in Canada. Third parties may also use such intellectual property in jurisdictions other than Canada in a manner that diminishes its value. If this occurs, the value of the Company’s intellectual property may suffer and net sales of the Company could decline. Similarly, negative publicity or events associated with such intellectual property in jurisdictions both in and outside of Canada may negatively affect the image and reputation of the Company, resulting in a decline in net sales of the Company.

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Legal and Regulatory Proceedings

The Company may be subject to legal proceedings including those related to product liability, intellectual property infringement and any other proceedings arising out of its business. Such potential liability may be material to the Company and may adversely affect its ability to continue operations. In addition, the Company may be subject to actions by governmental or regulatory authorities in connection with its operations. Such actions may result in fines or penalties, revocations of consents, permits, approvals or licenses or other similar actions, which could be material and may adversely impact the results of operations of the Company. The Company’s current insurance coverage may not be adequate to cover any or all of the potential losses, liabilities and damages that could result from the actions referred to above. Publicity resulting from any allegations may also adversely affect the Company, regardless of whether such allegations are true or whether the Company is ultimately held liable.

8.9 Insurance Coverage

The Company uses its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view of maintaining appropriate insurance coverage on its assets at a reasonable cost and on suitable terms. This may result in insurance coverage that, in the event of a substantial loss, may not be sufficient to cover the full market value or current replacement cost of its assets. This could, accordingly, have an adverse effect on the Company.

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MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL INFORMATION

Preparation of the consolidated financial statements accompanying this annual report and the presentation of all other information in the report are the responsibility of management. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and reflect management’s best estimates and judgments. The financial information contained elsewhere in this annual report has been reviewed to ensure consistency with that in the consolidated financial statements.

Management maintains a system of internal controls over accounting and financial reporting. This system is designed to provide reasonable assurance that relevant and reliable financial information is produced, and that the Company’s assets are adequately safeguarded and appropriately accounted for.

The Board of Directors carries out its responsibility for oversight and approval of the consolidated financial statements and other financial information in this annual report principally through its independent directors of the Audit Committee. The Audit Committee meets regularly with management and the external auditors to discuss the results of audit examinations and to review the financial statements and financial reporting matters. The Audit Committee reports its findings to the Board of Directors for consideration in approving the annual consolidated financial statements to be issued to shareholders.

The consolidated financial statements have been audited by Deloitte & Touche LLP, Chartered Accountants, who have full access to the Audit Committee with and without the presence of management. Their report follows.

Kenneth Fowler Salvatore Baio Chairman President and Chief Executive Officer April 21, 2009

AUDITORS’ REPORT

To the Shareholders of West 49 Inc.

We have audited the consolidated balance sheets of West 49 Inc. as at January 31, 2009 and January 26, 2008 and the consolidated statements of operations and comprehensive loss, deficit, and cash flows for the 53 week period ended January 31, 2009 and the 52 week period ended January 26, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we 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 Company as at January 31, 2009 and January 26, 2008 and the results of its operations and its cash flows for the 53 week period ended January 31, 2009 and the 52 week period ended January 26, 2008 in accordance with Canadian generally accepted accounting principles.

Chartered Accountants Licensed Public Accountants Burlington, Ontario April 21, 2009

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WEST 49 INC. – FISCAL 2009 FINANCIAL STATEMENTS

WEST 49 INC.

CONSOLIDATED BALANCE SHEETS

January 31, January 26,(In thousands of dollars) 2009 2008

Assets

Current

Cash and cash equivalents 6,788$ 8,369$

Accounts receivable 1,226 1,537

Income taxes receivable 16 -

Inventories (Note 3) 28,552 24,998

Future income taxes (Note 17) 1,326 -

Prepaid expenses 741 459

38,649 35,363

Capital assets (Note 7) 26,897 28,205

Deferred costs (Note 8) 640 755

Due from related parties (Note 20) 10 138

Future income taxes (Note 17) 2,142 -

Goodwill (Note 9) 12,580 21,054

Intangible assets (Note 10) 13,829 17,595

94,747$ 103,110$

Liabilities

CurrentAccounts payable and accrued charges 27,792$ 23,203$

Income taxes payable - 614

Current portion of long-term debt (Note 11) 6,843 1,023

Current portion of deferred lease obligations (Note 12) 942 868

Current preferred shares (Note 13) 33 63

35,610 25,771

Long-term debt (Note 11) - 5,448

Future income taxes (Note 17) - 1,875

Deferred lease obligations (Note 12) 8,293 7,903

Preferred shares (Note 13) 5,190 5,190

49,093 46,187

Shareholders' Equity

Share capital (Note 15) 63,371 62,961

Contributed surplus (Note 16) 2,054 2,238

Deficit (19,771) (8,276)

45,654 56,923

94,747$ 103,110$

AS AT

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

On behalf of the Board of Directors:

Kenneth Fowler Salvatore Baio Chairman President and Chief Executive Officer

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WEST 49 INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE PERIODS ENDED(In thousands of dollars except per share amounts) January 31, January 26,

2009 2008

(53 weeks) (52 weeks)

Net sales 210,417$ 204,894$

Cost of sales 163,588 152,486

Gross margin 46,829 52,408

Selling, general and administrative expenses 43,470 43,605

Income before other expenses 3,359 8,803

Other expenses:

Dividends on preferred shares 351 424

Interest expense on long-term debt 602 621

Amortization 5,862 5,479

Restructuring costs (Note 5) 888 885

Goodwill and intangible asset impairments (Notes 9 & 10) 12,000 3,500

19,703 10,909

Loss before income taxes (16,344) (2,106)

(Recovery) provision for income taxes (Note 17) (4,003) 299

Net loss and comprehensive loss (12,341)$ (2,405)$

Basic and diluted loss per share (Note 18) (0.19)$ (0.04)$


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WEST 49 INC.

CONSOLIDATED STATEMENTS OF DEFICIT

FOR THE PERIODS ENDED(In thousands of dollars) January 31, January 26,

2009 2008


Deficit, beginning of period as previously reported (8,276)$ (5,871)$

Impact of adoption of new accounting standard,

Section 3031 - Inventories (Note 3) 846 -

Deficit, beginning of period as restated (7,430) (5,871)

Net loss (12,341) (2,405)

Deficit, end of period (19,771)$ (8,276)$


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WEST 49 INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE PERIODS ENDED(In thousands of dollars) January 31, January 26,

2009 2008


Operating Activities

Net loss (12,341)$ (2,405)$

Non-cash items included above:

Amortization of capital assets 5,622 5,169

Amortization of deferred costs 292 246

Amortization of deferred lease inducements (1,073) (833)

Amortization of intangible assets 240 310

Future income taxes (Notes 3 & 17) (5,747) (2,283)

Impairment or disposition of store assets (Note 7) 1,400 61

Goodwill and intangible assets impairment (Notes 9 & 10) 12,000 3,500

Straight-line rent expense 281 484

Stock based compensation 226 554

900 4,803

Changes in non-cash working capital

from operations (Note 19) 1,434 2,283

Net cash flows provided by operating activities 2,334 7,086

Financing Activities

Due from related parties 128 (120)

Increase in deferred costs (183) (23)

Increase in long-term debt 2,000 4,150

Issuance of common stock - 89

Redemption of preferred shares (30) -

Repayment of long-term debt (1,628) (1,448)

Net cash flows provided by financing activities 287 2,648

Investing Activities

Additions to capital assets (5,370) (7,693)

Deferred lease inducements received 1,168 855

Proceeds from disposition of capital assets - 60

Net cash flows used by investing activities (4,202) (6,778)

Net change in cash and cash equivalents (1,581) 2,956

Cash and cash equivalents, beginning of period 8,369 5,413

Cash and cash equivalents, end of period 6,788$ 8,369$

Supplemental Disclosure

Interest paid 619$ 567$

Dividends paid on preferred shares 368 424

Income taxes paid 2,425 3,841


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTSJanuary 31, 2009 and January 26, 2008

WEST 49 INC. – FISCAL 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations

Operations

West 49 Inc. (the “Company”) is a leading Canadian specialty retailer of fashion and apparel, footwear, accessories and equipment related to the youth action sports lifestyle. The Company’s stores, which are primarily mall-based, carry a variety of high-performance, premium brand name and private label products that fulfill the lifestyle needs of identified target markets, primarily tweens and teens. At January 31, 2009, the Company operated 134 stores in nine provinces under seven banners, consistent with the prior year. The Company also operated online with www.boardzone.com and www.shop.west49.com.

2. Summary of Significant Accounting Policies

Basis of Presentation

These consolidated financial statements and accompanying notes have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. All significant inter-company balances and transactions with its wholly-owned subsidiaries have been eliminated upon consolidation.

Fiscal Year

The Company’s fiscal year is determined on a 52 or 53 week period, ending on the last Saturday of January each year. The Company’s 2009 fiscal year (“FY 2009”) consisted of a 53 week period ended January 31, 2009 compared to the prior year (“FY 2008”) of a 52 week period ended January 26, 2008. Each month within the fiscal year is either a four or five week period based on the four-five-four week reporting schedule.

Estimates

The preparation of the Company’s consolidated financial statements, in accordance with Canadian generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Due to the inherent uncertainties in making such estimates, and the current economic environment, actual results reported in the near term could differ from those estimates. Estimates are used when accounting for items such as inventory valuation, estimated returns and allowances, amortization, gift card liability, impairment of long-lived assets, future income taxes and assumptions used when assessing goodwill and intangible assets. Management reviews these estimates on an ongoing basis.

Revenue Recognition

Revenue includes sales to customers through stores operated by the Company. Sales are recognized at the time of sale and receipt of merchandise by the customer, net of any returns. Allowances for customer returns are estimated using the historical return patterns.

Revenue is recognized upon shipment to the customer for orders placed through the Company’s online websites. Shipping and handling fees charged to the Company’s internet customers are included in net sales. Amounts paid by the Company for internet shipping and handling expenses are included in cost of sales.

Upon the purchase of a gift card or issuance of a gift certificate, a liability is established for the cash value of the gift card or gift certificate. Revenue is recognized when the gift card or gift certificate is redeemed for merchandise. Gift card breakage is recognized by the Company when, based on historical patterns of redemption, the Company determines the cards or certificates will not be redeemed.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash in the bank, less outstanding cheques.

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Inventories

Inventories, which consist of fashion and apparel, footwear, accessories and equipment related to music, youth culture and action sports, are valued at the lower of cost and net realizable value with cost being determined on the weighted average basis. The cost of inventories includes the cost of purchases and estimates of the capitalized portion of other costs incurred in bringing the inventories to their present location and condition. Inventories owned by the Company are generally located at its warehouses and its retail locations. The Company records valuation adjustments to inventories based on the aging of inventories and estimated expected markdowns. The estimated reserve can be affected by changes in the Company’s markdown strategies and selling patterns that could result in a fluctuation in gross margin.

Capital Assets

Capital assets are stated at cost and are amortized on a straight-line basis over their estimated useful lives as follows:

Leasehold improvements Term of lease Furniture and fixtures 10 years Equipment 5 years Computer equipment 5 years Computer software 3 years Retail management system 7 years

Capital assets under development are not amortized until the asset is in use. This typically relates to stores under construction, store fixtures and equipment pending installation, or information technology under development. During fiscal 2009, the Company had implemented, and began amortizing, the first phase of a new retail management system.

Impairment of Long-lived Assets

Management evaluates the ongoing value of assets associated with the Company’s retail stores. Long-lived assets are tested for recoverability on an annual basis or more frequently as events or changes in circumstances indicate that their carrying value exceeds the total undiscounted cash flows expected from their use and eventual disposition. The amount of the impairment loss is determined as the excess of the carrying value of the assets over their fair value.

Deferred Costs

Deferred costs include deferred lease costs and deferred financing fees. Deferred lease costs represent expenses incurred in negotiating store leases. The deferred lease costs are amortized on a straight-line basis over the remaining term of the lease. Deferred financing fees represent bank financing and professional fees incurred in obtaining the Company’s credit facilities. The financing costs are amortized on a straight-line basis over the term of the facility.


Goodwill represents the excess of the purchase price over the fair market value of the net identifiable assets of the acquired business. Goodwill and intangible assets are assessed for impairment on an annual basis or more frequently as events or circumstances change that indicate goodwill or intangible assets of a reporting unit may be impaired. When the carrying amount exceeds the fair value, an impairment charge is recognized in earnings in an amount equal to the excess of the carrying value over its fair market value. Intangible assets with finite lives include non-competition agreements, customer lists and the online computer system which are amortized on a straight-line basis over a three to five year period.

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Future Income Taxes

The Company follows the liability method of accounting for income taxes. Under this method, future income taxes are recognized for the future income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using the enacted and substantively enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the substantively enacted dates. Future income tax assets are recognized to the extent that it is more likely than not that they will be realized.

Deferred Lease Obligations

Certain lease agreements provide for the Company to receive lease inducements from landlords to assist in the financing of certain capital assets. Lease inducements are recorded as a deferred lease credit and amortized as a reduction of rent expense on a straight-line basis over the term of the related lease.

The Company records rent expense on a straight-line basis over the term of the lease. Accordingly, reasonably assured rent escalations are amortized over the lease term. Free rent fixturing periods are capitalized as leaseholds and amortized on a straight-line basis over the term of the lease.

Translation of Foreign Currencies

Foreign currency assets and liabilities are translated into Canadian dollars at exchange rates in effect at the balance sheet dates. Foreign currency revenues and expenses are translated into Canadian dollars at the rates approximating the rate of exchange prevailing on the dates of the transactions. Gains and losses arising from fluctuations in exchange rates are recognized in earnings.

Stock Based Compensation

The Company uses the fair-value method of accounting for stock options granted to employees. Under the fair-value method, the estimated fair-value of the stock options granted is recognized over the applicable vesting period as a charge to stock based compensation expense and a credit to contributed surplus. When the options granted are exercised, the proceeds and the related amount in contributed surplus are credited to share capital.

Financial Instruments

The Company’s financial assets and liabilities are initially recorded at fair value and subsequently measured based on their assigned classifications as follows:

Asset / Liability Category Measurement

Cash and cash equivalents Held-for-trading Fair value

Accounts receivable Loans and receivables Amortized cost

Due from related parties Loans and receivables Amortized cost

Bank indebtedness Other liabilities Amortized cost

Accounts payable Other liabilities Amortized cost

Long-term debt Other liabilities Amortized cost

Preferred shares Other liabilities Amortized cost

Other balance sheet accounts, such as inventories, prepaid expenses, current and future income taxes, deferred costs, goodwill, intangible assets, capital assets, and deferred lease obligations are not financial instruments.

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Transaction costs related to financial liabilities, classified as other than held-for-trading, are recorded as a reduction in the carrying value of the debt and included in the amortized cost measurement. Transaction costs incurred for the Company’s credit facilities have been recorded as other non-current assets and are amortized over the term of the facility in accordance with EIC 101 “Debtor’s Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements”.

Embedded derivatives are required to be separated and measured at fair value if certain criteria are met. Embedded derivatives include elements of contracts whose cash flows move independently from the host contract. The Company did not have any significant embedded derivatives that required separate accounting and disclosure for fiscal 2009 and fiscal 2008.

Hedge Accounting

The Company does not participate in any hedging activities.

3. Change in Accounting Policies

The Canadian Institute of Chartered Accountants (“CICA”) amended section 1400 “General Standards of Financial Statement Presentation” to include requirements to assess an entity’s ability to continue as a going concern. The new requirements are effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2008. Accordingly, the Company adopted the amendment to this standard on January 27, 2008. The adoption of this amendment did not have an impact on the Company’s consolidated financial statements.

The CICA issued four new accounting standards that became effective for fiscal 2009: Section 1535 “Capital Disclosures”, Section 3031 “Inventories”, Section 3862 “Financial Instruments – Disclosures” and Section 3863 “Financial Instruments – Presentation”. The Company applied these new accounting standards at the beginning of its 2009 fiscal year.

Capital Management Disclosures

Section 1535 “Capital Disclosures” establishes standards for disclosing information about an entity’s capital and how it is managed. Required disclosure includes information that enables users of an entity’s financial statements to evaluate its objectives, policies and processes for managing capital. This disclosure includes a description of capital under management, and disclosure of externally imposed capital requirements to which the entity is subject. The only affect of the adoption of this standard were the additional disclosures in Note 6.

Inventories

Section 3031 replaced Section 3030 “Inventories”. The objective of this new section is to prescribe the accounting treatment for inventories. This section requires inventories to be measured at the lower of cost and net realizable value and also provides guidance on the appropriate methods of determining cost and the impact of any write-downs to net realizable value. Reversals of previous write-downs to net realizable value where there is a subsequent increase in the value of inventories is now required. This reversal is limited to the extent of the initial write-down. Under this new accounting standard, the cost of inventories includes the cost of purchases and other costs incurred in bringing the inventories to their present location and condition.

The Company implemented this new accounting standard at the beginning of its 2009 fiscal year, on a retrospective basis, without restatement of prior periods. As a result of the retrospective application of this new standard, the opening deficit for fiscal 2009 has been adjusted by the difference in the measurement of opening inventories. The impact of this transitional adjustment was an increase in opening inventories of $1.2 million, an increase in current future income taxes payable of $0.4 million, and a decrease of $0.8 million to the opening deficit. As at January 31, 2009, the costs capitalized to inventory totaled $1.6 million.

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Included in cost of sales for the 53 weeks ended January 31, 2009 is $122.2 million of inventories recognized as an expense (fiscal 2008 - $113.6 million). During the period, there were no significant write-downs of inventories as a result of net realizable value being lower than cost, and there were no significant reversals of write-downs from previous periods. All of the Company’s inventories are pledged as security for the credit facilities.

Financial Instruments Disclosure and Presentation

Sections 3862 and 3863 replaced Section 3861 “Financial Instruments – Disclosure and Presentation”, with the exception of accounting for insurance contracts, which may still be accounted for in accordance with Section 3861. Section 3862 requires disclosure that enables financial statement users to evaluate the significance of financial instruments for an entity’s financial position and performance, the nature and extent of risks arising from financial instruments to which the entity is exposed, and the entity’s process for managing such risks. Section 3863 enhances a financial statement user’s understanding of the significance of financial instruments to an entity’s financial position, performance and cash flows by establishing standards for presentation of financial instruments and non-financial derivatives. The only affect of the adoption of this standard were the additional disclosures in Note 14.

4. Future Changes in Accounting Policies

Financial Statement Concepts

In February 2008, the CICA amended Section 1000 “Financial Statement Concepts” to clarify the criteria for recognition of an asset and the timing of recognition of expenses. This amendment is effective for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company will apply this amendment at the beginning of its fiscal 2010 year. The Company is currently evaluating the impact that the adoption of this amendment will have on its consolidated financial statements.


In February 2008, the CICA issued Section 3064 “Goodwill and Intangible Assets”. Section 3064 replaced Section 3062 “Goodwill and Other Intangible Assets” and Section 3450 “Research and Development”. This new section provides additional guidance on the recognition, measurement, presentation and disclosure of goodwill and intangible assets. This standard is effective for interim and annual financial statements for fiscal years beginning on or after October 1, 2008. Accordingly, the Company will apply this new standard at the beginning of its fiscal 2010 year. The Company is currently evaluating the impact that the adoption of this Section will have on its consolidated financial statements.

International Financial Reporting Standards (“IFRS”)

In February 2008, the CICA announced that the Canadian Accounting Standards Board confirmed that the changeover to International Financial Reporting Standards (“IFRS”) from Canadian GAAP will be required for publicly accountable enterprises’ interim and annual financial statements effective for fiscal years beginning on or after January 1, 2011. Companies will be required to provide comparative information under IFRS for the previous fiscal year. The implementation of IFRS will be applicable for the Company for the first quarter of fiscal 2012, for which the current and comparative financial information will be presented in accordance with IFRS. The Company is currently evaluating the impact that the adoption of IFRS will have on its consolidated financial statements.

Business Combinations

In January 2009, the CICA issued Sections 1582 “Business Combinations”, 1601 “Consolidated Financial Statements” and 1602 “Non-Controlling Interests”, which replaced Sections 1581 “Business Combinations” and 1600 “Consolidated Financial Statements”. These new Sections harmonize Canadian accounting with the International Accounting Standards Board’s (IASB) International Financial Reporting Standard 3 “Business Combinations”. These new standards are to be applied prospectively for business combinations in the first annual reporting period beginning on

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or after January 1, 2011. The Company intends to apply these Sections at the beginning of its fiscal 2012 year, although earlier application is permitted. Assets and liabilities that arose from business combinations which precede the application date will not be adjusted upon adoption of the new standards. The Non-Controlling Interests standard is not applicable to the Company at this time.

5. Restructuring Costs

During fiscal 2009, the Company evaluated the performance of its test concept, Duke’s Northshore, and decided to take strategic action to close all four stores. One of the stores was closed in the second quarter of fiscal 2009. The remaining three stores will either be closed or rebranded in fiscal 2010. The non-cash provision on these four stores totaled $0.9 million for fiscal 2009, of which $0.5 million was recorded as capital asset impairments and $0.4 million as a provision for lease penalties and other exit costs. As at January 31, 2009, the balance in accounts payable and accrued liabilities remained unchanged at $0.4 million, and will be paid out by the Company in subsequent periods.

During fiscal 2008, the Company recorded corporate restructuring costs of $0.9 million as a result of centralizing its finance, human resources, information technology, store operations and store development functions. The majority of these costs related to termination benefits. The remainder of these costs were related to consulting, legal and other administrative expenses. As at January 31, 2009, there were no liabilities outstanding with respect to these costs (fiscal 2008 - $0.1 million remained outstanding in liabilities).

6. Capital Management Disclosures

The Company views its capital as a combination of net debt and shareholders’ equity. Net debt is comprised of interest-bearing debt less cash and cash equivalents, including the convertible preferred shares.

The Company’s objective in managing capital is to ensure adequate liquidity to fund its current operations and future growth strategy while maintaining a conservative approach towards financial risk management and ensuring the Company’s ability to continue as a going concern.

The Company’s primary uses of capital are to fund leasehold improvements for new stores, the expansion of existing stores and other capital expenditures incurred by the Company. The Company currently funds these requirements through the use of its credit facilities and internally generated cash flows.

As at January 31, 2009 and January 26, 2008, total capital under management was as follows:

(In thousands) FY2009 FY2008

Current portion of long-term debt 6,843$ 1,023$

Long-term debt - 5,448 Current preferred shares 33 63

Preferred shares 5,190 5,190 Less: cash and cash equivalents (6,788) (8,369)

Net debt 5,278 3,355

Shareholders' equity 45,654 56,923

Capital under management 50,932$ 60,278$

During fiscal 2009, the sources of capital included a $10.0 million revolving credit facility with a seasonal adjustment increase to $15.0 million from April 1 to September 30. In addition, a revolving term loan facility of $8.5 million has been available since August 29, 2008, previously at $6.5 million. Interest rates on these facilities were at prime plus 1.25% and 1.75%, respectively. These facilities are secured by general security agreements against all existing and future acquired assets of the Company, including a pledge of the shares West 49 Inc. holds in its subsidiaries.

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The Company is subject to certain restrictions and covenants in respect of its credit facilities, including a minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum tangible net worth.

As at January 31, 2009, the Company was in violation of one of its bank covenants. Subsequent to January 31, 2009, the Company obtained a waiver for the default retroactive to January 31, 2009. The waiver obtained has the following conditions set forth based on historical operating needs: the maximum limit on the Company’s operating credit facility was reduced to $6.0 million from $10.0 million; the seasonal increase available on the operating line from April 1 to September 30 has been lowered to $12.0 million from $15.0 million; the term loan facility has been capped at $6.8 million, down from $8.5 million; and the credit facilities have also been changed to a demand basis from a 364-day committed line. Interest rates on these facilities are at prime plus 4.0% and 4.75%, respectively.

With uncertainties in the current economic environment, it is not uncommon for banks to remove unutilized credit facilities. Throughout the year, the Company has had varying amounts of unutilized credit facilities. The bank indebtedness on the operating credit facility ranged from nil to $9.0 million at the peak of the seasonal period. Management believes that the Company’s revised credit facilities, along with cash generated from operations, will be sufficient to fund its operations and anticipated capital expenditures during fiscal 2010. In addition, subsequent to January 31, 2009, the Company completed an amalgamation of various corporate entities that will allow it to realize a significant amount of non-capital tax losses carried forward from prior years which will reduce the amount of tax instalments by $1.7 million in fiscal 2010.

The Company’s credit facility renewal date is June 30, 2009. The Company anticipates that it may be in violation of another covenant at the end of the first quarter. The Company’s bank is aware of this, and the Company has already begun a full renewal process with the bank to negotiate mutually acceptable terms and anticipates this to be completed during the second quarter of fiscal 2010.

Management considers the Company’s capital management requirements when preparing and updating annual budgets. The annual budgets are approved by the Board of Directors. In order to maximize flexibility to finance the Company’s growth strategy and be able to take advantage of additional new capital investments, the Company does not currently pay out dividends to common shareholders.

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7. Capital Assets

Accumulated Net Book Value

(In thousands) Cost Amortization FY2009

Leasehold improvements 27,595$ 10,492$ 17,103$

Furniture and fixtures 8,985 3,518 5,467

Equipment 3,113 2,051 1,062

Computer equipment 3,492 2,010 1,482

Computer software 1,561 1,438 123

Retail management system 1,688 28 1,660

46,434$ 19,537$ 26,897$

Accumulated Net Book Value

(In thousands) Cost Amortization FY2008

Leasehold improvements 25,702$ 7,304$ 18,398$

Furniture and fixtures 9,165 2,674 6,491

Equipment 2,973 1,482 1,491

Computer equipment 2,651 1,518 1,133

Computer software 1,824 1,132 692

Vehicles 59 59 -

42,374$ 14,169$ 28,205$

During the fourth quarter, the Company completed its annual review of long-lived assets and tested each store for recoverability. Based on this review, the Company has provided $0.4 million (fiscal 2008 - $0.1 million) for impairments related to stores where the carrying value of the assets exceeds the undiscounted cash flows expected over the remaining term of the leases. Under management’s review, these stores may continue to be operated, closed or be rebranded.

Other losses on stores closed or relocated in the ordinary course of business during the year totaled $0.1 million (fiscal 2008 – a gain of $0.1 million).

In addition, the Company also recorded store restructuring costs of $0.9 million as a result of restructuring its Duke’s Northshore stores, as further described in Note 5. These costs included capital asset impairments of $0.5 million (fiscal 2008 - nil).

Assets capitalized throughout the Company’s 2009 fiscal year relating to the new retail management system totaled $1.7 million, of which $1.3 million relates to the next phase of implementation and was not amortized at year end.

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8. Deferred Costs

Accumulated Net Book Value Net Book Value

(In thousands) Cost Amortization FY2009 FY2008

Lease costs 931$ 429$ 502$ 569$

Financing fees 374 236 138 186 .

1,305$ 665$ 640$ 755$

9. Goodwill

The change in the carrying amount of goodwill is as follows:

(In thousands) FY 2009 FY2008

Balance, opening 21,054$ 24,554$ Goodwill impairment (8,474) (3,500)

Balance, closing 12,580$ 21,054$

During the fourth quarter of fiscal 2009, the Company completed a review of its goodwill and recorded an impairment charge of $8.5 million (fiscal 2008 - $3.5 million). The 2009 impairment was significantly impacted by the depressed capital markets and the current macroeconomic environment, which had a negative impact on the Company’s performance.

10. Intangible Assets

The change in the carrying amount of intangible assets is summarized below:

Accumulated Net Book Value Net Book Value

(In thousands) Cost Amortization FY2009 FY2008

Trademarks and tradenames 13,829$ -$ 13,829$ 17,100$ Finite life intangibles 945 945 - 495

14,774$ 945$ 13,829$ 17,595$

During the fourth quarter of fiscal 2009, the Company completed a review of intangible assets and recorded an impairment charge of $3.5 million (fiscal 2008 – nil). Of this amount, $0.2 million related to finite life intangibles and $3.3 million related to trademarks and tradenames. The impairment was significantly impacted by the depressed capital markets and the current macroeconomic environment, which had a negative impact on the Company’s performance.

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11. Long-term Debt

The following schedule sets out details of long-term debt:


Term loan, bearing interest at prime plus 1.75% (2008 - prime plus1.50%), repayable over four years, maturing in January 2012 4,843$ 6,457$

Term loan, bearing interest at prime plus 1.75%, repayable

over four years, maturing in January 2013 2,000 -

Capital lease obligations - 14

6,843 6,471

Less: current portion of long-term debt (6,843) (1,023)

-$ 5,448$

As at January 31, 2009, the term loans have been classified as current in accordance with the Emerging Issues Committee of the CICA’s Abstract 122 (Balance Sheet Classification of Callable Debt) as a result of the demand feature contained in the waiver of covenant default obtained from the Company’s banker subsequent to year end. In addition, subsequent to January 31, 2009, the waiver amended interest rates on the term loans to be prime plus 4.75%. Refer to Note 6 for further details.

The scheduled repayments for the term loans are presented below:

RepaymentFiscal years ending (in thousands) Amounts

2010 1,322$

2011 2,114

2012 2,114

2013 1,105

2014 188

6,843$

12. Deferred Lease Obligations


Deferred lease inducements 5,751$ 5,754$

Deferred rent 3,484 3,017 9,235 8,771

Less: current portion of deferred lease inducements (942) (868)

8,293$ 7,903$

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13. Preferred Shares

The preferred shares are non-voting, and are entitled to cumulative quarterly dividends at a rate equal to prime plus 2% per annum. These shares are convertible at the option of the holder into common shares on a one to one basis. They are redeemable and retractable at $1 per share. For the year ended January 31, 2009, the Company has received waivers from the majority of the preferred shareholders outlining that they have forfeited their rights to redeem their shares until December 1, 2010. The remaining shares have been classified as current liabilities. Dividends on these shares are recognized in earnings.

The following schedule sets out details of the preferred shares:

(In thousands, except share

amounts) Shares Value Shares Value

Balance, opening 5,253,354 5,253$ 5,253,354 5,253$

Shares redeemed (30,000) (30) - -

5,223,354 5,223 5,253,354 5,253

Less: current preferred shares (33,224) (33) (63,224) (63)

Balance, closing 5,190,130 5,190$ 5,190,130 5,190$

FY2009 FY2008

14. Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, amounts due from related parties, accounts payable and accrued charges, long-term debt and preferred shares. The carrying value of the short-term financial instruments approximates their fair value due to the short period to maturity. The carrying value of the long-term debt and preferred shares approximates their fair value given the current market rates associated with these instruments.

The carrying values of the Company’s financial instruments as at January 31, 2009 and January 26, 2008 were as follows:


Held-for-trading 6,788$ 8,369$ Loans and receivables 1,236 1,675 Other liabilities 39,858 34,927

Credit risk

The Company is exposed to credit risk due to unexpected losses that could occur if a third party to a financial instrument fails to satisfy its contractual obligations. Credit risk for the Company arises from cash and cash equivalents held with banks and financial institutions, as well as outstanding accounts receivable. The Company’s maximum exposure to credit risk is equal to the carrying value of the financial assets. The accounts receivable balances of the Company primarily consist of amounts due from landlords for tenant allowances. Management considers the level of credit risk to be low due to the credit-worthiness of the third parties involved.

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Liquidity risk

The Company is subject to the risk that it might not meet demands to fund its financial obligations as they come due if there is an excess of financial obligations over available financial assets. The Company manages liquidity risk through careful monitoring and forecasting of its cash flows and maintains assets that can be liquidated into cash in a timely manner as needed.

The maturities of the contractual obligations of the Company’s financial liabilities as at January 31, 2009, are as follows:

Within(In thousands) Total 1 year 2 - 3 years 4 - 5 years

Accounts payable and accrued charges 27,792$ 27,792$ -$ -$ Long-term debt 6,843 1,322 4,228 1,293

Preferred shares 5,223 33 5,190 -

Total contractual obligations 39,858$ 29,147$ 9,418$ 1,293$

Market risk

The Company is subject to certain risks associated with changes in economic factors including foreign currency exchange rates and interest rate fluctuations.

Foreign currency risk

The Company is exposed to foreign exchange rate variability resulting from its merchandise purchases from foreign sources, primarily the United States. Pricing is determined in advance with considerable lead times, and significant fluctuations in foreign exchange rates could have an impact on the Company. The Company does not currently engage in any foreign currency hedging activities.

As at January 31, 2009 and January 26, 2008 the Company was exposed to foreign currency exchange rate risk through financial instruments denominated in U.S. dollars. These amounts are presented below in their Canadian dollar equivalent:


Cash and cash equivalents 202$ 176$

Accounts payable and accrued charges 560 382

Interest rate risk

The Company is subject to interest rate fluctuations on its bank indebtedness, long-term debt and preferred shares. Interest on these financial instruments is subject to fluctuation of prime rate as established by the Bank of Canada. As at January 31, 2009, the Company’s long-term debt and preferred shares were subject to floating interest rates. The dollar impact of the interest rate risk to which the Company is exposed is not considered to be material to the Company’s results of operations, financial position or cash flows. The Company estimates that a 100 basis point increase or decrease in prime rate would result in an increase or decrease of $0.1 million in interest and dividend expense on an annualized basis, excluding the effects of seasonality.

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15. Share Capital

Authorized

The authorized capital of the Company consists of an unlimited number of common shares and an unlimited number of preferred shares.

Issued

Common shares

A summary of the common shares issued is detailed below:

(In thousands, except share

amounts) Shares Value Shares Value

Balance, opening 63,544,819 62,961$ 63,199,319 62,438$

Shares issued - Modes Freedom acquisition 250,000 408 200,000 326

Shares issued - Stock options exercised - - 95,500 147

Shares issued - Other 8,700 2 50,000 50

Balance, closing 63,803,519 63,371$ 63,544,819 62,961$

FY2009 FY2008

During fiscal 2009, the Company issued 250,000 of the shares that were held in escrow pursuant to the purchase transaction with Modes Freedom Inc. in fiscal 2005. The issuance of these shares increased the Company’s share capital and decreased contributed surplus by $0.4 million. This is the final issuance of shares held in escrow pursuant to this agreement.

Stock Option Plan

The Company’s stock option plan provides for directors, officers, key employees, consultants of the Company and its subsidiaries, an opportunity to purchase common shares through options.

The Company issued 150,000 options in fiscal 2009 with a weighted average exercise price of $0.85 per option. The estimated fair value of these options is $36.0 thousand and will be expensed in Contributed Surplus over the vesting periods of one to three years. Fair values were determined as $0.24 per option using the Black-Scholes option-pricing model, with the following assumptions: expected stock price volatility of 60%; a risk free interest rate of 3.7%; expected time until exercise of 8.3 years; and annual dividends of nil.

The Company did not issue any stock options during fiscal 2008.

A summary of the Company’s stock option transactions is detailed below:

Weighted WeightedAverage Average

Options Exercise Price Options Exercise Price

Balance, opening 1,398,030 1.39$ 1,823,530 1.40$

Options granted 150,000 0.85 - -

Options exercised - - (95,500) 0.94

Options forfeited (129,000) 1.42 (330,000) 1.57

Balance, closing 1,419,030 1.33$ 1,398,030 1.39$

FY2009 FY2008

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The following table summarizes information about stock options outstanding:

Weighted

Range of Number of Average Weighted Weighted

Exercise Outstanding Remaining Average Number Average

Prices Options Contractual Life (1) Exercise Price Exercisable Exercise Price

$0.84 - $0.86 259,030 8.0 0.85$ 109,030 0.85$

$1.01 - $1.59 1,034,500 6.4 1.42 1,034,500 1.42

$1.60 - $1.68 125,500 6.9 1.61 121,500 1.61

1,419,030 6.8 1.33$ 1,265,030 1.39$

(1) Weighted average remaining contractual life is expressed in years

Options Outstanding FY2009 Options Exercisable FY2009

Weighted Range of Number of Average Weighted Weighted

Exercise Outstanding Remaining Average Number AveragePrices Options Contractual Life (1) Exercise Price Exercisable Exercise Price

$0.50 - $0.85 129,030 7.0 0.85$ 129,030 0.85$

$1.01 - $1.59 1,139,000 7.5 1.43 1,105,667 1.42

$1.60 - $1.68 130,000 7.9 1.61 122,000 1.60

1,398,030 7.5 1.39$ 1,356,697 1.38$

(1) Weighted average remaining contractual life is expressed in years

Options Outstanding FY2008 Options Exercisable FY2008

16. Contributed Surplus

A summary of contributed surplus activities is detailed below:


Balance, opening 2,238$ 2,118$

Employee stock based compensation 228 500

Other stock based compensation (2) 54

Options exercised - (58)

Shares released from escrow and other (410) (376)

Balance, closing 2,054$ 2,238$

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17. Income Taxes

A reconciliation comparing income taxes calculated at the Canadian statutory rate to the amount recorded in the consolidated financial statements is as follows:


Combined federal and provincial statutory income tax rate 32.30% 34.92%

Net loss before income taxes (16,344)$ (2,106)$

Expected income tax provision (5,279) (735)

Change in income taxes resulting from:

Non-deductible expenses 44 43

Dividends on preferred shares 114 148

Stock based compensation 74 193

Impairment of goodwill and intangible assets 479 1,083

Adjustments of prior year taxes and other (5) 2

Adjustments due to changes in tax rates 570 (435)

(Recovery) provision for Income taxes (4,003)$ 299$

Represented by:

Current income taxes 1,341$ 2,582$

Future income taxes (5,344) (2,283)

(4,003)$ 299$

The components of future taxes are as follows:


Tax loss carry-forward 4,611$ 2,123$

Deferred financing costs (118) 102

Capital assets, net of lease inducements (598) (697)

Goodwill 1,574 (232)

Other intangibles (2,960) (4,009) Deferred rent 959 838

Future income tax assets (liabilities) 3,468$ (1,875)$

Current future income tax assets 1,326$ -$

Long-term future income tax assets (liabilities) 2,142 (1,875)

3,468$ (1,875)$

50



As at January 31, 2009, the Company had non-capital losses of approximately $15.1 million (fiscal 2008 - $6.9 million) available to reduce future years’ income for income tax purposes. These losses, which have been recognized in the above future tax balance, expire as follows:

Fiscal years ending (in thousands) Tax Losses

2014 92$

2015 33

2026 195

2027 1,850

2028 4,595

2029 8,361

15,126$

Subsequent to January 31, 2009, the Company completed an amalgamation of various corporate entities that will allow it to realize a significant amount of non-capital tax losses carried forward from prior years which will reduce the amount of tax instalments by $1.7 million in fiscal 2010.

18. Loss per Share

Basic loss per share is calculated using the total net loss divided by the weighted average number of common shares outstanding during the year of 63,605,190 (fiscal 2008 - 63,323,829).

Diluted income per share is calculated based on total net income, adding back preferred share dividends, divided by the weighted average number of common shares including the effect of outstanding options using the “treasury stock” method, and outstanding preferred shares using the “if converted” method. Since net income was in a loss position for the year, the effect of these calculations was antidilutive.

19. Supplemental Cash Flow Information

The cash generated from non-cash working capital is made up of changes related to operations in the following accounts:


Accounts receivable 311$ 1,470$

Inventories (2,304) (973)

Prepaid expenses (282) 332

Accounts payable and accrued charges 4,339 2,614

Income taxes payable / receivable (630) (1,160)

1,434$ 2,283$

During fiscal 2009, capital assets were acquired at an aggregate cost of $5.5 million (2008 - $8.2 million), of which $0.1 million (fiscal 2008 - $0.5 million) were non-cash rent adjustments relating to free rent during fixturing periods.

51



20. Related Party Transactions

The Company, in the normal course of operations, provided administrative, payroll and distribution services to 6271235 Canada Inc. (Prudhommes Factory Outlet, a clothing retailer) and considers these to be related party transactions on account that a Director of the Company wholly owns 6271235 Canada Inc. The outstanding amount due from 6271235 Canada Inc, as at January 31, 2009 was $10.0 thousand (fiscal 2008 - $138.0 thousand), does not bear interest and has no specific terms of repayment. The Company earned $36.0 thousand in annual management fees for fiscal 2009 (fiscal 2008 - $45.0 thousand), which approximates the cost in the provision of these services, and are included as other income in selling, general and administrative expenses. These transactions are recorded at the exchange amount.

21. Commitments

Minimum lease payments under operating leases relating to retail stores, premises and equipment of the Company for the next five years are as follows:

LeaseFiscal years ending (in thousands) Commitments

2010 16,897$

2011 15,512

2012 13,974

2013 12,245

2014 11,451

Thereafter 26,132

96,211$

In addition to these rental payments, the leases generally provide for the payment by the Company of real estate taxes, percentage rent and other operating expenses.

22. Segmented Reporting

In accordance with CICA Section 1701 “Segment Disclosures”, the Company has identified seven operating segments (West 49, Billabong, Duke’s Northshore, Off The Wall, Amnesia/Arsenic, D-Tox and online retailing) that reflect the basis used by management to review performance and make operating decisions. These seven operating segments have been aggregated into one reportable segment encompassing all retail banners based on their similar economic characteristics, products and class of customer. The presentation of one reportable segment by the Company meets the qualitative and quantitative requirements presented in CICA Section 1701 “Segment Disclosures”.

23. Subsequent Events

Subsequent to January 31, 2009, the Company obtained a waiver from its bank in respect to the violation of a loan covenant. See Note 6 for further details.

The Company also completed an amalgamation of various corporate entities subsequent to January 31, 2009, that will allow it to realize a significant amount of its non-capital tax losses carried forward from prior years which will reduce the amount of tax instalments by $1.7 million in fiscal 2010. See Note 17 for further details.

24. Comparative Figures

Certain comparative figures have been reclassified to conform to the presentation adopted for the current year.

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Corporate Information

Kenneth FowlerChairman

Salvatore BaioDirector, President and Chief Executive Officer

Maureen FowlerDirector

Roy Cairns*Director

Arthur Ellis*Director

Cos Georganas*Director

Rhonda BiddixChief Financial Officer and Corporate Secretary

*member of the Audit Committee of the Board of Directors

1100 Burloak Drive, Suite 200 Burlington, ON L7L 6B2 Telephone: (905) 336-5454 Fax: (905) 336-3490 Investor Relations Email: [email protected]

Investor Information Transfer Agent

Equity Transfer & Trust Company 200 University Avenue, Suite 400 Toronto, ON M5H 4H1

Auditors

Deloitte & Touche LLPChartered Accountants Licensed Public Accountants 1005 Skyview Drive, Suite 202 Burlington, ON L7P 5B1

Listing

Toronto Stock Exchange Symbol: WXX De

sign

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pro

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ion

by E

quic

om, a

TM

X Gr

oup

Com

pany

.

1100 Burloak Drive, Suite 200 Burlington, ON L7L 6B2

F: 905.336.3490

T: 905.336.5454

[email protected]

West 49 Inc.