Andrew Peller Annual Report 2018

Plain-text annual report

APL-AR2018-COVER-8.5x11-Bleeds-Hi-Res.indd 1 6/18/2018 9:32:19 AM OPERATIONAL HIGHLIGHTS FOR THE YEARS ENDED MARCH 31 (in thousands of Canadian dollars, except per share amounts) SALES AND EARNINGS Net sales EBITA Adjusted earnings * FINANCIAL POSITION Working capital Total assets Shareholders' equity PER SHARE Net earnings per Class A Share - basic and diluted DIVIDENDS Class A Shares, non-voting Class B Shares, voting MARKET VALUE Class A - HIGH Class A - LOW Class B - HIGH Class B - LOW ANALYTICAL INFORMATION Return on average shareholders' equity Return on average capital employed Ratio of current assets to current liabilities 2018 $ 363,897 52,860 29,303 2017 $ 342,606 45,137 25,608 104,417 457,780 220,246 0.71 0.1800 0.1565 19.04 10.60 18.80 10.80 15.2% 14.0% 2.1:1 78,825 327,478 177,317 0.64 0.1632 0.1420 13.00 8.38 13.00 8.67 15.7% 14.1% 2.0:1 *Adjusted earnings is defined as net earnings excluding restructuring costs, gains (losses) on derivative financial instruments, other expenses (income), non-recurring, non- operating (gains) and losses and the related income tax effect. CONTENTS REPORT TO SHAREHOLDERS THE YEAR’S TOP AWARDS MANAGEMENT’S DISCUSSION & ANALYSIS INDEPENDENT AUDITOR’S REPORT CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS TEN-YEAR SUMMARY DIRECTORS & OFFICERS SHAREHOLDER INFORMATION THE WINE SHOP RETAIL STORES EXCLUSIVE WINE OFFER FOR SHAREHOLDERS 1 5 7 22 23 28 59 61 62 63 65 Report to Shareholders Another Record Year Fiscal 2018 was another year of record financial and operating performance as strong organic revenue growth, our focus on higher margin premium brands, and the contribution from acquisitions completed during the year all contributed to a 14.3% increase in our net income. For the year ended March 31, 2018, sales rose 6.2% to $363.9 million, driven by increased consumer brand building, new product introductions, selective price increases and the contribution from the acquisition of three estate wineries completed in early October 2017. Not including the contribution from the acquisitions, the Company generated strong 3.7% organic sales growth in fiscal 2018. We continue to perform very well across all our well-established trade channels. Our business with provincial liquor stores, our network of company-owned retail stores in Ontario, our award-winning estate wineries, our sales to licensed restaurants and clubs, our export business, our two wine importing and marketing agencies, and our personal winemaking business all contributed to our record performance in fiscal 2018. In addition, the introduction of new brands and our entry into new markets continue to expand our distribution channels and customer base. Our strong performance during the year was supported by the continuing growth of the Canadian wine market where national retail wine sales rose 4.5% in fiscal 2018. Most of this gain came in the premium and ultra-premium categories, driven largely by sales of VQA products. With the increase in sales and our continuing focus on productivity and cost control, our gross margins strengthened again in fiscal 2018, rising to 41.3% of sales from 38.3% in the prior year. We are also making good progress in integrating our recent acquisitions into the Andrew Peller family, and expect to see further margin improvements as we realize operating synergies across our operations due to our increase in scale. As a result of our solid sales growth and strong gross margins, our adjusted earnings before interest, amortization, net unrealized gains and losses on derivative financial instruments, other expenses, and taxes (EBITA), and excluding one- time charges related to the acquisitions completed during the year, rose 23.7% to $57.2 million for the year ended March 31, 2018 compared to $46.2 million in the prior year. Net earnings for the year were $30.1 million or $0.71 per Class A Share, up from $26.4 million or $0.64 per Class A Share in fiscal 2017. Another Dividend Increase We were very pleased to announce a 13.9% increase in common share dividends in June 2018, our fifth increase in the last five years and a reflection of our continuing growth, strong performance, and confidence in the future. The Company has paid dividends every year since 1979, a remarkable track record of delivering value to shareholders, and we look for this momentum to continue going forward. 1 | ANDREW PELLER LIMITED 2018 Expanding our Presence in the Strong Canadian Wine Market In early October 2017 we completed the acquisition of three premium and well-established wineries located in British Columbia’s Okanagan Valley. The purchase of Gray Monk Estate Winery, Tinhorn Creek Vineyards, and Black Hills Estate Winery complement and strengthen our premium and ultra-premium VQA brand portfolio and enhance our presence in the strong western Canadian market. With these acquisitions the Company has become the largest producer and the market leader of quality VQA wines in the province, almost doubling our market share to an estimated 23% of the B.C. VQA business. With wine consumers increasingly interested in the high-value segment of the Canadian wine business, especially those wines coming from local producers, these new brands significantly increase our potential to capitalize on these trends. We believe our proven sales and marketing programs, combined with our well-established trade channel presence, will contribute to the long-term growth at all three of our new wineries. We were also very proud to officially open our Wayne Gretzky Estate Winery and Craft Distillery in June 2017. The new facility has quickly become a very popular destination for wine lovers in the Niagara wine region and a complement to all our estate wineries across Canada. We have seen significant growth in sales of their quality wines, and the launch of our Wayne Gretzky No. 99 ‘Red Cask’ Canadian Whisky is also performing very well, with future growth coming from the brand’s recent introduction into select markets in the United States. Taking Our Place Among the Best in the World At Andrew Peller we have always known we produce some of the world’s best wines, and recently we received a testament to our quality with the selection of our Thirty Bench 2015 Cabernet Franc as the world’s best varietal by the prestigious Decanter Magazine. Published in the UK, Decanter is recognized as the world’s leading authority on wine and wine quality. Their competition for the world’s best receives approximately 4,000 entries for each varietal being judged from producers around the globe, and we are very proud to have been awarded the world’s best Cabernet Franc in 2018. This award speaks volumes about the dedication and skill of not only our winemakers, but producers across Canada. We do rank among the world’s best. We received several other important awards at both domestic and international wine competitions during the year. At the Decanter World Wine Awards in London, England, our Thirty Bench, Trius and Gretzky wineries were also presented with numerous other platinum, gold and best in show medals. Our Trius 2015 Showcase Chardonnay won a gold medal at Chardonnay du Monde in France, and at the UK’s International Wine challenge, Peller Estates won gold medals for both its Signature Series Riesling and Vidal icewines, in addition to eight other prestigious awards. The Okanagan Spring Wine festival presented eleven gold medals across a number of our brands, and at the San Francisco World Spirits Competition, our Wayne Gretzky Canadian Crème was presented with a gold medal, plus three other key awards. ANDREW PELLER LIMITED 2018 | 2 These, and many other successes at wine competitions in Canada and around the world, are testaments to the quality we are producing at our wineries each and every day. We are very proud of these achievements and congratulate our winemakers for their commitment to helping us achieve our goals. Looking Ahead Over the last few years we have effectively implemented programs aimed at becoming Canada’s Number One wine and craft spirits company by delivering the best brand experience for every lifestyle, occasion and generation. Our vision is to “Pour Extraordinary into Everyday Life”, and our growth and record financial performance in fiscal 2018 has demonstrated we are well on our way to achieving our goals. Today Andrew Peller is recognized as one of Canada’s most successful wine producers with a reputation for quality and value, an industry-leading distribution network, well-established and popular brands, and proven programs that continue to build brand awareness and growing sales. Sales will continue to grow as we invest in our portfolio of powerful national and regional brands. Going forward we will build on this enviable market presence through innovative investments that drive growth. Fiscal 2019 will also benefit from a full year’s contribution from our recently-acquired BC wineries, and our further investments in building these leading brands. Operating profitability will continue to strengthen as we invest in our capacity and production efficiency through technological advancements that drive gross margin growth. As we complete the integration of our three new wineries, we expect further improvements in our overall profitability as we benefit from the resulting economies of scale and operating synergies. In addition to generating solid organic growth on our base business, we continue to prudently examine strategic acquisitions that further strengthen our brand portfolio and build on the success we have demonstrated with the seventeen purchases completed and successfully integrated since 1995. These initiatives and programs are targeted at growing our business and increasing profits with the ultimate goal of enhancing value for our shareholders. The Company has a successful track record of growth and strong operating performance for more than forty years, and we look forward to building on this success in the years ahead. 3 | ANDREW PELLER LIMITED 2018 On behalf of the Board of Directors and all shareholders, we thank our leadership team and many valued teammates at Andrew Peller for their dedication and hard work. Our people are our most important asset - it is their unwavering commitment that has led to our record results in the past and will continue to be our driving force going forward. John E. Peller Executive Chairman & CEO Randy A. Powell President ANDREW PELLER LIMITED 2018 | 4 Peller Estates (Niagara-on-the-Lake) Chardonnay du Monde – France Silver Medal 2015 Peller Estates AP Signature Series Chardonnay Indy International Wine Competition – Indiana, USA Double Gold – 2015 Family Series Riesling Los Angeles Int’l Wine Competition – USA Best of Class: Gold (96 Points) 2015 AP Signature Series Vidal Blanc Icewine Gold (94 Points) 2015 AP Signature Series Oak Aged Vidal Blanc Icewine All Canadian Wine Championships Double Gold – 2015 Family Series Riesling Double Gold – 2015 Private Reserve Cabernet Franc Gold – 2015 Private Reserve Cabernet Sauvignon Ontario Wine Awards Gold – 2015 Private Reserve Late Harvest Vidal Sandhill Winery (Okanagan) Paciﬁc Rim Wine Competition – USA Gold ‘Best of Class’ – 2014 Small Lots TWO Okanagan Spring Wine Festival – Best of Varietals Gold ‘Best Meritage Blend‘ – 2014 Small Lots Two Gold - 2016 Small Lots Viognier Los Angeles International Wine Competition Gold (92 Points) – 2014 Cabernet Merlot Sandhill Estate Vineyard Intervin International Wine Awards Gold – 2014 Small Lots ONE Phantom Creek Vineyard All Canadian Wine Championships Double Gold ‘Red Wine of the Year’ – 2014 Howard Soon Red Double Gold – 2014 Small Lots Syrah Phantom Creek Vineyard Gold – 2014 Cabernet Franc Sandhill Estate Vineyard Gold – 2014 Small Lots Sangiovese Sandhill Estate Vineyard Gold – 2014 Small Lots Petit Verdot Phantom Creek Vineyard Decanter World Wine Awards – UK Gold (95 points) 2015 AP Signature Series Oak Aged Vidal Icewine British Columbia Wine Awards PREMIER'S AWARD - 2015 Syrah Gold - 2016 Riesling Icewine Six Nations Wine Challenge – Australia Double Gold / 2nd Runner Up 2014 Sandhill Small Lots Syrah Phantom Creek Vineyard Trius Winery (Niagara-on-the-Lake) All Canadian Wine Championships Gold – Trius Brut Gold – 2015 Chardonnay Barrel Fermented Ontario Wine Awards Gold – 2015 Showcase Clean Slate Wild Ferment Sauvignon Blanc Gold – 2015 Trius Shiraz Gold – 2014 Showcase Vidal Icewine International Wine Challenge – UK Gold (Cnd. Icewine Trophy) – 2015 Showcase Riesling Icewine Gold – 2015 Showcase Vidal Icewine Korea Wine Challenge Gold Medal (Icewine Trophy) - 2015 Showcase Riesling Icewine Gold Medal – 2015 Showcase Vidal Icewine Gold Medal – 2015 Showcase Cabernet Franc Icewine WineAlign – National Wine Awards of Canada Platinum – 2015 Showcase Chardonnay Wild Ferment Oliveira Vineyard Gold – Brut Rosé Lieutenant Governor’s Award for Excellence in Ontario Wines 2015 Showcase Clean Slate Sauvignon Blanc Wild Ferment 2014 Showcase Vidal Icewine 2015 Showcase Riesling Ghost Creek Vineyard The Global Chardonnay Masters – UK Gold (93 Points) – 2016 Sandhill Chardonnay Terroir Driven Wine Intervin (Vines magazine) Canada Gold – 2014 Showcase Red Shale Cabernet Franc Six Nations Wine Challenge – Australia Gold – Trius Brut The Global Chardonnay Masters – UK Gold – 2015 Showcase Chardonnay Wild Ferment Oliveira Vineyard Sommelier Wine Awards, UK Gold – 2015 AP Signature Series Vidal Icewine WineAlign – National Wine Awards of Canada Gold – 2016 Private Reserve Rose Gold – 2015 Private Reserve Cabernet Franc Gold – 2015 AP Signature Series Vidal Icewine Intervin – Vines magazine – Canada Gold – Ice Cuvee Classic Gold – 2015 AP Signature Series Vidal Icewine Six Nations Wine Challenge – Australia Gold – 2015 Peller Estates Private Reserve Gamay Noir Black Cellar Paciﬁc Rim Wine Competition Gold ‘Best of Class’ – Cabernet Sauvignon Tempranillo Indy International Wine Competition – Indiana, USA Gold – Malbec Merlot Blend 13 Gold – Merlot Blend 4 Gold – Shiraz Cabernet Blend 19 Tasters Guild – Michigan, USA Gold – Pinot Grigio Chardonnay Blend 11 Gold – Cabernet Sauvignon Tempranillo Blend 9 Wayne Gretzky Estates (Niagara-on-the-Lake) Thirty Bench Wine Makers (Beamsville) Red Rooster Winery (Okanagan) Indy International Wine Competition – Indiana, USA Los Angeles International Wine Competition – USA Gold (91 Points) – 2015 No.99 Estate Series Cabernet Sauvignon Platinum ‘Best in Category’ Best Canadian White (96 points) Double Gold – 2015 Merlot Gold – 2016 Pinot Grigio Los Angeles International Wine Competition – USA Best of Class: Gold (94 Points) – 2015 No.99 Vidal Icewine Gold (92 Points) - 2015 No.99 Cabernet Franc Icewine Ontario Wine Awards Gold – 2015 Estate Series Shiraz Cabernet International Wine & Spirit Competition – UK Gold – 2015 Vidal Icewine Decanter World Wine Awards – UK Gold (95 points) – 2015 Vidal Icewine International Wine Challenge – UK Gold – 2015 Vidal Icewine Beverage Tasting Institute (Tastings Spirits Competition) Tastings.com Gold (90 Points) – Wayne Gretzky No.99 Ice Cask Whisky Gold (92 Points) – Wayne Gretzky No.99 Muscat Spirited Wine 88 Points – Wayne Gretzky No.99 Ninety Nine Proof Whisky 86 Points – Wayne Gretzky No.99 Vidal Spirited Wine Six Nations Wine Challenge – Australia Gold – 2015 Wayne Gretzky Estates Estate Series Shiraz Cabernet Gold (92 Points) – 2014 Small Lot Cabernet Franc All Canadian Wine Championships Gold – 2015 Winemakers Blend Riesling Decanter World Wine Awards – UK 2014 Small Lot Riesling Steel Post Vineyard WineAlign – National Wine Awards of Canada #2 – Top 25 Wineries in Canada #2 – Top 10 Wineries in Ontario Platinum – 2015 Small Lot Riesling Wild Cask Platinum – 2015 Small Lot Riesling Wood Post Vineyard Gold – 2014 Small Lot Riesling Triangle Vineyard Gold – 2014 Small Lot Chardonnay Six Nations Wine Challenge – Australia Trophy/Class Winner – 2015 Thirty Bench Winemaker’s Blend Riesling Gold – 2016 Gewurztraminer Gold – 2014 Thirty Bench Small Lot Riesling Steel Post Vineyard West Coast Wine Competition (East Meets West) California Gold – 2015 Red Rooster Hen House Sly White Paciﬁc Rim Wine Competition – USA Gold – 2015 The Coop Wicked White Gold – 2015 Hen House Rufﬂed Red Okanagan Life Magazine, Best of BC Wine Awards Gold – 2016 Rare Bird Series Viognier Okanagan Spring Wine Festival – Best of Varietals Best Viognier ‘Gold’ – 2016 Rare Bird Series Viognier Gold – 2016 Rare Bird Series Pinot Gris Gold – 2014 Reserve Merlot Dan Berger’s Intermatopmal Wine Competition (formerly known as Riverside International) Gold – ‘Best in Class’ – 2016 Pinot Blanc Los Angeles Int’l Wine Competition Gold (95 Points) ‘Best in Class’ – 2016 Pinot Blanc Gold (95 Points) – 2016 Riesling Intervin International Wine Awards Gold – 2016 Riesling Gold – 2014 Reserve Syrah British Columbia Wine Awards Platinum – 2016 Riesling Gold - 2016 Pinot Blanc Gold - 2015 Rare Bird Series Syrah Wayne Gretzky Estates (Okanagan) Syrah du Monde, France Gold– 2014 Wayne Gretzky Okanagan Signature Series Shiraz All Canadian Wine Championships Gold – 2015 Cabernet Sauvignon Syrah Gold – 2016 Signature Series Riesling Los Angeles Int’l Wine Competition Gold (92 Points) – 2015 Cabernet Sauvignon Syrah Gold (90 Points) – 2016 The Great White Intervin International Wine Awards Gold – 2015 Signature Series Chardonnay Panama Jack’s Harvest Challenge – USA Gold ‘Best in Class’ – Panama Jack’s Original Cream No Boats On Sunday Paciﬁc Rim Wine Competition Gold ‘Best in Class’ – 100% Canadian Cider Raven Conspiracy West Coast Wine Competition (East Meets West) California Double Gold ‘Best of Class’ – 2015 Raven Conspiracy White (BC) APL-AR2018-TOP-AWARDS-8.5x11-Bleeds-Hi-Res.indd 1 6/18/2018 10:01:41 AM Trius Winery (Niagara-on-the-Lake) All Canadian Wine Championships Gold – Trius Brut Gold – 2015 Chardonnay Barrel Fermented Gold – 2015 Trius Shiraz Gold – 2014 Showcase Vidal Icewine Peller Estates (Niagara-on-the-Lake) Chardonnay du Monde – France Silver Medal 2015 Peller Estates AP Signature Series Chardonnay Sandhill Winery (Okanagan) Paciﬁc Rim Wine Competition – USA Gold ‘Best of Class’ – 2014 Small Lots TWO Okanagan Spring Wine Festival – Best of Varietals Indy International Wine Competition – Indiana, USA Gold ‘Best Meritage Blend‘ – 2014 Small Lots Two Ontario Wine Awards Double Gold – 2015 Family Series Riesling Gold - 2016 Small Lots Viognier Gold – 2015 Showcase Clean Slate Wild Ferment Sauvignon Blanc Los Angeles Int’l Wine Competition – USA Best of Class: Gold (96 Points) 2015 AP Signature Series Vidal Blanc Icewine Gold (94 Points) Los Angeles International Wine Competition Gold (92 Points) – 2014 Cabernet Merlot Sandhill Estate Vineyard Intervin International Wine Awards 2015 AP Signature Series Oak Aged Vidal Blanc Icewine Gold – 2014 Small Lots ONE Phantom Creek Vineyard Gold – 2015 Showcase Vidal Icewine All Canadian Wine Championships Double Gold – 2015 Family Series Riesling Double Gold – 2015 Private Reserve Cabernet Franc Gold – 2015 Private Reserve Cabernet Sauvignon Ontario Wine Awards Gold – 2015 Private Reserve Late Harvest Vidal Decanter World Wine Awards – UK All Canadian Wine Championships Double Gold ‘Red Wine of the Year’ – 2014 Howard Soon Red Double Gold – 2014 Small Lots Syrah Phantom Creek Vineyard Gold – 2014 Cabernet Franc Sandhill Estate Vineyard Gold – 2014 Small Lots Sangiovese Sandhill Estate Vineyard Gold – 2014 Small Lots Petit Verdot Phantom Creek Vineyard British Columbia Wine Awards PREMIER'S AWARD - 2015 Syrah Gold (95 points) 2015 AP Signature Series Oak Aged Vidal Icewine Gold - 2016 Riesling Icewine Sommelier Wine Awards, UK Gold – 2015 AP Signature Series Vidal Icewine Six Nations Wine Challenge – Australia Double Gold / 2nd Runner Up Korea Wine Challenge Gold Medal (Icewine Trophy) - 2015 Showcase Riesling Icewine Gold Medal – 2015 Showcase Vidal Icewine Gold Medal – 2015 Showcase Cabernet Franc Icewine WineAlign – National Wine Awards of Canada Platinum – 2015 Showcase Chardonnay Wild Ferment Oliveira Vineyard Gold – Brut Rosé Lieutenant Governor’s Award for Excellence in Ontario Wines 2015 Showcase Clean Slate Sauvignon Blanc Wild Ferment 2014 Showcase Vidal Icewine 2014 Sandhill Small Lots Syrah Phantom Creek Vineyard 2015 Showcase Riesling Ghost Creek Vineyard The Global Chardonnay Masters – UK Intervin (Vines magazine) Canada Gold (93 Points) – 2016 Sandhill Chardonnay Terroir Driven Wine Gold – 2014 Showcase Red Shale Cabernet Franc Six Nations Wine Challenge – Australia Gold – Trius Brut The Global Chardonnay Masters – UK Gold – 2015 Showcase Chardonnay Wild Ferment Oliveira Vineyard WineAlign – National Wine Awards of Canada Gold – 2016 Private Reserve Rose Gold – 2015 Private Reserve Cabernet Franc Gold – 2015 AP Signature Series Vidal Icewine Intervin – Vines magazine – Canada Gold – Ice Cuvee Classic Gold – 2015 AP Signature Series Vidal Icewine Six Nations Wine Challenge – Australia Gold – 2015 Peller Estates Private Reserve Gamay Noir Wayne Gretzky Estates (Niagara-on-the-Lake) Thirty Bench Wine Makers (Beamsville) Red Rooster Winery (Okanagan) Indy International Wine Competition – Indiana, USA Double Gold – 2015 Merlot Gold – 2016 Pinot Grigio Los Angeles International Wine Competition – USA Best of Class: Gold (94 Points) – 2015 No.99 Vidal Icewine Gold (92 Points) - 2015 No.99 Cabernet Franc Icewine Gold (91 Points) – 2015 No.99 Estate Series Cabernet Sauvignon International Wine Challenge – UK Gold (Cnd. Icewine Trophy) – 2015 Showcase Riesling Icewine Ontario Wine Awards Gold – 2015 Estate Series Shiraz Cabernet International Wine & Spirit Competition – UK Gold – 2015 Vidal Icewine Decanter World Wine Awards – UK Gold (95 points) – 2015 Vidal Icewine International Wine Challenge – UK Gold – 2015 Vidal Icewine Beverage Tasting Institute (Tastings Spirits Competition) Tastings.com Gold (90 Points) – Wayne Gretzky No.99 Ice Cask Whisky Gold (92 Points) – Wayne Gretzky No.99 Muscat Spirited Wine 88 Points – Wayne Gretzky No.99 Ninety Nine Proof Whisky 86 Points – Wayne Gretzky No.99 Vidal Spirited Wine Six Nations Wine Challenge – Australia Gold – 2015 Wayne Gretzky Estates Estate Series Shiraz Cabernet Los Angeles International Wine Competition – USA Gold (92 Points) – 2014 Small Lot Cabernet Franc All Canadian Wine Championships Gold – 2015 Winemakers Blend Riesling Decanter World Wine Awards – UK Platinum ‘Best in Category’ Best Canadian White (96 points) 2014 Small Lot Riesling Steel Post Vineyard WineAlign – National Wine Awards of Canada #2 – Top 25 Wineries in Canada #2 – Top 10 Wineries in Ontario Platinum – 2015 Small Lot Riesling Wild Cask Platinum – 2015 Small Lot Riesling Wood Post Vineyard Gold – 2014 Small Lot Riesling Triangle Vineyard Gold – 2014 Small Lot Chardonnay Six Nations Wine Challenge – Australia Trophy/Class Winner – 2015 Thirty Bench Winemaker’s Blend Riesling Gold – 2014 Thirty Bench Small Lot Riesling Steel Post Vineyard 280Number of Awards Won Nationally. West Coast Wine Competition (East Meets West) California Gold – 2015 Red Rooster Hen House Sly White Paciﬁc Rim Wine Competition – USA Gold – 2015 The Coop Wicked White Gold – 2015 Hen House Rufﬂed Red Okanagan Life Magazine, Best of BC Wine Awards Gold – 2016 Rare Bird Series Viognier Okanagan Spring Wine Festival – Best of Varietals Best Viognier ‘Gold’ – 2016 Rare Bird Series Viognier Gold – 2016 Rare Bird Series Pinot Gris Gold – 2014 Reserve Merlot Dan Berger’s Intermatopmal Wine Competition (formerly known as Riverside International) Gold – ‘Best in Class’ – 2016 Pinot Blanc Gold – 2016 Gewurztraminer Los Angeles Int’l Wine Competition Gold (95 Points) ‘Best in Class’ – 2016 Pinot Blanc Gold (95 Points) – 2016 Riesling Intervin International Wine Awards Gold – 2016 Riesling Gold – 2014 Reserve Syrah British Columbia Wine Awards Platinum – 2016 Riesling Gold - 2016 Pinot Blanc Gold - 2015 Rare Bird Series Syrah Black Cellar Paciﬁc Rim Wine Competition Gold ‘Best of Class’ – Cabernet Sauvignon Tempranillo Indy International Wine Competition – Indiana, USA Gold – Malbec Merlot Blend 13 Gold – Merlot Blend 4 Gold – Shiraz Cabernet Blend 19 Tasters Guild – Michigan, USA Gold – Pinot Grigio Chardonnay Blend 11 Gold – Cabernet Sauvignon Tempranillo Blend 9 Wayne Gretzky Estates (Okanagan) Syrah du Monde, France Gold– 2014 Wayne Gretzky Okanagan Signature Series Shiraz All Canadian Wine Championships Gold – 2015 Cabernet Sauvignon Syrah Gold – 2016 Signature Series Riesling Los Angeles Int’l Wine Competition Gold (92 Points) – 2015 Cabernet Sauvignon Syrah Gold (90 Points) – 2016 The Great White Intervin International Wine Awards Gold – 2015 Signature Series Chardonnay Panama Jack’s Harvest Challenge – USA Gold ‘Best in Class’ – Panama Jack’s Original Cream No Boats On Sunday Paciﬁc Rim Wine Competition Gold ‘Best in Class’ – 100% Canadian Cider Raven Conspiracy West Coast Wine Competition (East Meets West) California Double Gold ‘Best of Class’ – 2015 Raven Conspiracy White (BC) APL-AR2018-TOP-AWARDS-8.5x11-Bleeds-Hi-Res.indd 2 6/18/2018 10:01:42 AM MANAGEMENT’S DISCUSSION & ANALYSIS FOR THE THREE MONTHS AND YEAR ENDED MARCH 31, 2018 The following management’s discussion and analysis (“MD&A”) provides a review of corporate developments, results of operations, and financial position for the three months and year ended March 31, 2018 in comparison with those for the three months and year ended March 31, 2017 for Andrew Peller Limited (the “Company” or “APL”). This discussion is prepared as of June 6, 2018 and should be read in conjunction with the audited consolidated financial statements and accompanying notes contained therein for the years ended March 31, 2018 and 2017. Additional information relating to the Company, including the audited annual consolidated financial statements, MD&A and Annual Information Form for the years ended March 31, 2018 and March 31, 2017, is available on www.sedar.com. The financial years ending March 31, 2019, March 31, 2018 and March 31, 2017 are referred to as “fiscal 2019”, “fiscal 2018” and “fiscal 2017” respectively. All dollar amounts are expressed in Canadian dollars unless otherwise indicated. FORWARD-LOOKING INFORMATION Certain statements in this MD&A may contain “forward-looking statements” within the meaning of applicable securities laws including the “safe harbour provisions” of the Securities Act (Ontario) with respect to APL and its subsidiaries. Such statements include, but are not limited to, statements about the growth of the business in light of the Company’s acquisitions; its launch of new premium wines and spirits; sales trends in foreign markets; its supply of domestically grown grapes; and current economic conditions. These statements are subject to certain risks, assumptions, and uncertainties that could cause actual results to differ materially from those included in the forward-looking statements. The words “believe”, “plan”, “intend”, “estimate”, “expect”, or “anticipate”, and similar expressions, as well as future or conditional verbs such as “will”, “should”, “would”, “could”, and similar verbs often identify forward-looking statements. We have based these forward-looking statements on our current views with respect to future events and financial performance. With respect to forward-looking statements contained in this MD&A, the Company has made assumptions and applied certain factors regarding, among other things: future grape, glass bottle, and wine and spirit prices; its ability to obtain grapes, imported wine, glass, and other raw materials; fluctuations in foreign currency exchange rates; its ability to market products successfully to its anticipated customers; the trade balance within the domestic Canadian and international wine markets; market trends; reliance on key personnel; protection of its intellectual property rights; the economic environment; the regulatory requirements regarding producing, marketing, advertising, and labeling of its products; the regulation of liquor distribution and retailing in Ontario; the application of federal and provincial environmental laws; and the impact of increasing competition. These forward-looking statements are also subject to the risks and uncertainties discussed in the “Risks and Uncertainties” section and elsewhere in this MD&A and other risks detailed from time to time in the publicly filed disclosure documents of the Company which are available at www.sedar.com. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and assumptions which could cause actual results to differ materially from the conclusions, forecasts, or projections anticipated in these forward-looking statements. Because of these risks, uncertainties, and assumptions, you should not place undue reliance on these forward-looking statements. The Company’s forward-looking statements are made only as of the date of this MD&A, and except as required by applicable law, Andrew Peller Limited undertakes no obligation to update or revise these forward-looking statements to reflect new information, future events, or circumstances. Overview The Company is a leading producer and marketer of quality wines in Canada. With wineries in British Columbia, Ontario, and Nova Scotia, the Company markets wines produced from grapes grown in Ontario’s Niagara Peninsula, British Columbia’s Okanagan and Similkameen Valleys, and from vineyards around the world. The Company’s award- winning premium and ultra-premium Vintners’ Quality Alliance (“VQA”) brands include Peller Estates, Trius, Thirty Bench, Wayne Gretzky, Sandhill, Red Rooster, Black Hills Estate, Tinhorn Creek, Gray Monk Estates, Raven Conspiracy and Conviction. Complementing these premium brands are a number of popularly priced varietal brands including Peller Estates French Cross in Eastern Canada, Peller Estates Proprietors Reserve in Western Canada, Copper Moon, Black Cellar and XOXO. Hochtaler, Domaine D’Or, Schloss Laderheim, Royal, and Sommet are the Company’s key value priced brands. The Company imports wines from major wine regions around the world to blend with domestic wine to craft these quality and value priced brands. The Company also produces wine based liqueurs and cocktails under the brand Panama Jack and craft cider under the brand No Boats on Sunday. In October 2016, the Company launched its new Wayne Gretzky No. 99 Red Cask Canadian Whisky in certain markets across Canada and in 2017 expanded the Spirits portfolio with No. 99 Ice Cask, 99 Proof, and No. 99 Canadian Whisky Cream products. With a focus on serving the needs of all wine consumers, the Company produces and markets premium personal winemaking products through its 7 | ANDREW PELLER LIMITED 2018 wholly-owned subsidiary, Global Vintners Inc. (“GVI”), the recognized leader in personal winemaking products. GVI distributes products through over 170 Winexpert authorized retailers and more than 500 independent retailers across Canada, with additional distributors in the United States, the United Kingdom, New Zealand, Australia, and China. GVI’s award-winning premium and ultra-premium winemaking brands include Selection, Vintners Reserve, Island Mist, KenRidge, Cheeky Monkey, Traditional Vintage, and Cellar Craft. The Company owns and operates 101 well-positioned independent retail locations in Ontario under The Wine Shop, Wine Country Vintners, and Wine Country Merchants store names. The Company also operates Andrew Peller Import Agency and The Small Winemaker’s Collection Inc., importers and marketing agents for premium wines from around the world. The Company’s mission is to Pour Extraordinary into Everyday Life. The Company believes it achieves this objective by delivering to its customers and consumers the highest quality wines, spirits, refreshments, and experiences at the best possible value. To meet this goal, the Company invests in improvements in the quality of grapes, wines, and spirits raw materials, its winemaking and distillation capabilities, sales and marketing initiatives, tourism and hospitality experiences, and its quality management programs. Our achievement of this goal is evidenced in our award-winning products: VQA brands in Eastern Canada received a total of 184 awards in fiscal 2018 (up from 171 awards a year ago and 30% more awards than 2 years ago), including: 4 platinum, 47 gold, 78 silver, 41 bronze and 3 Lieutenant Governor Awards. VQA brands in Western Canada won a total of 96 awards this past fiscal. The Sandhill portfolio did exceptionally well with over 35 awards in total this year. Four of those awards were classified as “best in class” or double gold. The Company is focused on initiatives to reduce costs and enhance its production efficiencies through a continual review of its operations and cost structure with a view to enhancing profitability. The Company continues to expand and strengthen its distribution through provincial liquor boards, Ontario independent retail locations and grocery outlets under The Wine Shop, Wine Country Vintners, and Wine Country Merchants store names, estate wineries, restaurants, and other licensed establishments. This distribution network is supported by enhanced sales, marketing, and promotional programs. From time to time the Company also evaluates the potential for acquisitions and partnerships, both in Canada and internationally, to further complement its product portfolio and market presence. Recent Events On June 6, 2018, the Company’s Board of Directors approved a 13.9% increase in common share dividends for shareholders of record on June 29, 2018 payable on July 6, 2018. The annual dividend on Class A Shares was increased to $0.2050 per share from $0.1800 per share and the dividend on Class B Shares was increased to $0.1783 per share from $0.1565 per share. The Company has consistently paid common share dividends since 1979 and has increased dividends every year for the past five years. APL currently designates all dividends paid as “eligible dividends” for purposes of the Income Tax Act (Canada) unless indicated otherwise. On October 10, 2017, the Company acquired 100% of the operating assets of Black Hills Estate Winery (Black Hills) for cash consideration of approximately $31.3 million. Black Hills generates annual revenue of approximately $6.0 million and employs approximately 20 people. The results of operations from October 10, 2017 have been included in the audited annual consolidated financial statements for the period. On October 1, 2017, the Company acquired 100% of the common shares of Gray Monk Cellars Ltd. (Gray Monk) and certain operating assets held by related parties for consideration of approximately $36.4 million, of which $17.3 million was funded in cash and $19.1 million was funded by the issuance of 1,579,670 Class A non-voting common shares. The consideration transferred increased by $1.9 million, from $34.5 million to $36.4 million due to the appreciation of the Company’s Class A non-voting shares from September 8, 2017, the date the share purchase agreement was signed, to October 1, 2017, the date the acquisition closed. Gray Monk generates annual revenue of approximately $11.0 million and employs approximately 50 people. The results of operations from October 1, 2017 have been included in the audited annual consolidated financial statements for the period. On October 1, 2017, the Company acquired 100% of the common and preferred shares of Tinhorn Creek Vineyards Ltd. (Tinhorn) for cash consideration of approximately $28.9 million. Tinhorn generates annual revenue of approximately $7.0 million and employs approximately 50 people. The results of operations from October 1, 2017 have been included in the audited annual consolidated financial statements for the period. ANDREW PELLER LIMITED 2018 | 8 Results of Operations For the years ended March 31, (in $000, except per share amounts) Sales Gross margin Gross margin (% of sales) Selling and administrative expenses EBITA Adjusted EBITA Interest Net unrealized (gain) loss on derivative financial instruments Other (income) expenses Adjusted earnings Net earnings Earnings per share – basic and diluted - Class A Earnings per share – basic and diluted - Class B Adjusted earnings per share – basic and diluted – Class A Adjusted earnings per share – basic and diluted – Class B Dividend per share – Class A (annual) Dividend per share – Class B (annual) 2018 2017 (1) 2016 (1) $ 363,897 $ 342,606 $ 334,263 150,325 131,155 122,964 41.3% 97,465 52,860 57,225 5,345 (1,400) (3,842) 29,303 30,117 $0.71 $0.62 $0.69 $0.60 $0.1800 $0.1565 38.3% 86,018 45,137 46,246 3,078 (2,232) 120 25,608 26,350 $0.64 $0.55 $0.62 $0.54 $0.1632 $0.1420 36.8% 82,048 40,916 40,916 3,575 1,558 (40) 20,322 19,199 $0.46 $0.40 $0.46 $0.40 $0.1500 $0.1304 1 Adjusted EBITA, Adjusted earnings and Adjusted earnings per share figures have been restated to conform to the current year’s presentation Sales in fiscal 2018 increased 6.2% compared to fiscal 2017 due to organic growth across the majority of the Company’s products and trade channels, introduction of new products and new product categories, selective price increases in certain trade channels implemented during the year, and the contribution during the last half of the year from the acquisition of three estate wineries completed in early October 2017. Not including the contribution from the recent acquisitions, the Company generated organic growth in sales of 3.7% for the year ended March 31, 2018. The Company defines gross margin as gross profit excluding amortization. Gross margin as a percentage of sales improved to 41.3% for the year ended March 31, 2018 compared to 38.3% in the prior year. Gross margin in fiscal 2018 benefited from the discontinuation of lower performing products, increased focus on higher margin products, selective pricing increases, and the positive impact of the Company’s cost control initiatives. During fiscal 2018, the Company recorded a charge of $3.0 million to increase cost of goods sold to reflect the fair value of inventory acquired from the new wineries that had been sold since the acquisition dates. Management is continually focused on efforts to enhance production efficiency and productivity as well as developing synergies from the addition of the three new wineries acquired in October 2017. Selling and administrative expenses for the year ended March 31, 2018 included $3.2 million of expenses due to the addition of the three new wineries, as well as increased costs related to the operations of the new Wayne Gretzky Estate Winery and Craft Distillery, which opened in June 2017 and increased marketing support for new launches across the Company’s product portfolio. Included in selling and administrative expenses is $1.1 million in one-time professional and transition fees related to the acquisitions, which is comparable to the $1.1 million charged in fiscal 2017 for professional fees related to a strategic acquisition that was not completed. In fiscal 2018, selling and administrative expenses included $0.6 million in severance payments, compared to $1.3 million in post-retirement benefits for certain employees retiring during fiscal 2017. Selling and administrative expenses also increased by $0.8 million when compared to fiscal 2017 due to the increase in minimum wage in Ontario. The Company continues to increase its investment in its sales and marketing programs while remaining focused on ensuring a strong return on these investments. Earnings before interest, amortization, net unrealized gains and losses on derivative financial instruments, other (income) expenses, and income taxes (“EBITA”) was $52.9 million for the year ended March 31, 2018 compared to $45.1 million 9 | ANDREW PELLER LIMITED 2018 in the prior year. The increase in fiscal 2018 was due to the increase in sales across the Company’s established distribution network and the improved gross margin, partially offset by the increase in selling and administrative expenses and the reduction in margin related to the three new wineries due to the inventory fair value adjustment charged to cost of sales. Adjusted EBITA, which excludes from EBITA one-time acquisition related charges, was $57.2 million for the year ended March 31, 2018 compared to $46.2 million in fiscal 2017. Interest expense increased in fiscal 2018 compared to the prior year due primarily to long-term debt incurred to complete the three acquisitions in October 2017 and the write-off of $0.4 million in unamortized deferred financing fees related to the prior banking agreement that was amended on September 29, 2017. Amortization expense increased in fiscal 2018 due primarily to the addition of the three recently acquired wineries and the completion of the Wayne Gretzky Estate Winery and Craft Distillery in June 2017. The Company recorded net unrealized non-cash gains in fiscal 2018 and fiscal 2017 related to mark-to-market adjustments on interest rate swaps and foreign exchange contracts. The Company has elected not to apply hedge accounting and accordingly the change in fair value of these financial instruments is reflected in the Company’s consolidated statement of earnings each reporting period. These instruments are considered to be effective economic hedges and have enabled management to mitigate the short-term volatility of changing foreign exchange and interest rates. Other income in fiscal 2018 includes a one-time gain of $4.2 million on the acquisitions completed in October 2017. Adjusted earnings, defined as net earnings not including net unrealized gains and losses on derivative financial instruments, other (income) expenses, non-recurring, non-operating (gains) and losses, and the related income tax effect were $29.3 million for the year ended March 31, 2018 compared to $25.6 million in the prior year. Net earnings for the year ended March 31, 2018 were $30.1 million or $0.71 per Class A Share compared to $26.4 million or $0.64 per Class A Share in the prior year. The three acquired wineries contributed $8.6 million in sales, $1.1 million in EBITA and $0.4 million in net earnings in fiscal 2018 excluding acquisition related fees and margin adjustments as described below. The acquisitions contributed approximately $0.01 per Class A share in net earnings, which was offset by the dilution impact of the 1.6 million Class A shares issued to acquire one of the wineries. On acquisition the Company recorded an increase of $10.4 million to inventory to represent the fair value of the goods acquired. This increase will be expensed over time to the consolidated statement of earnings as finished goods are sold thus reducing gross margin. During fiscal 2018, the Company’s gross margin was reduced by $3.0 million as a result of this adjustment. It is expected that most goods acquired will be sold within one year of the acquisitions, and as such, the remaining balance of the fair value adjustment of $7.4 million will continue to be dilutive into fiscal 2019. Furthermore, one-time transaction and transition costs and restructuring costs, of which $1.4 million was expensed in fiscal 2018, also had a dilutive impact on earnings per share in fiscal 2018. The impact of these items reduced earnings per share by approximately $0.10 per Class A Share for the year ended March 31, 2018. Additional interest expense on debt used to fund the acquisitions and higher amortization on acquired assets will also have a dilutive impact. The above items have resulted in an overall dilution of $0.06 per Class A share for the year ended March 31, 2018. The Company believes that sales will continue to grow going forward due to strong positioning of key brands, the continued launch of new and innovative products in the Canadian wine, cider and spirits markets, continued growth in new wine-related markets, and the full year’s contribution from the three estate wineries acquired in October 2017 in fiscal 2019. The Company has exposure to foreign currency risk as purchases of bulk wine and concentrate are made in U.S. dollars, Australian dollars, and Euros. Fluctuating foreign currencies may have a positive or negative impact on gross margins. Management believes the impact on gross margin will be largely offset by the Company’s continued ability to leverage scale and successful cost control initiatives to reduce distribution, operating and packaging expenses, and raw material cost savings. The Company also uses foreign exchange forward contracts to protect against changes in foreign currency rates and, as at March 31, 2018, had locked in $4.7 million in U.S. dollar contracts at rates averaging $1.26 Canadian, €0.9 million in Euro con tracts at rates averaging $1.55 Canadian and $1.4 million in Australian dollar contracts at rates averaging $1.00 Canadian. These contracts expire at various dates through June 30, 2018. ANDREW PELLER LIMITED 2018 | 10 Quarterly Performance The following table outlines key quarterly highlights. (in $000, except per share amounts) Q4 18 Q3 18 Q2 18 Q1 18 Q4 17 (1) Q3 17 (1) Q2 17 (1) Q1 17 Sales Gross margin 79,817 103,583 91,857 $88,640 $72,295 $94,048 $88,357 $87,906 32,811 43,217 38,693 35,604 28,326 35,042 33,644 34,143 Gross margin (% of sales) 41.1% 41.7% 42.1% 40.2% 39.2% 37.3% 38.1% 38.8% EBITA Interest Adjusted EBITA Net unrealized gain on financial 4,279 1,749 5,740 17,833 16,290 14,458 5,865 11,886 12,583 14,803 1,656 1,157 783 813 702 780 783 20,175 16,852 14,458 5,865 12,167 13,411 14,803 instruments (833) (216) (285) Other expenses (income) Adjusted earnings (loss) Net earnings (loss) E.P.S. – Class A basic & diluted E.P.S. – Class B basic & diluted Adjusted E.P.S – Class A basic & 35 (4,092) (904) 12,402 (1,691) 14,391 $(0.04) $(0.03) $0.33 $0.29 70 9,556 9,226 $0.22 $0.19 (66) 145 8,249 8,191 $0.20 $0.18 (189) (15) 1,859 2,010 $0.05 $0.04 (868) (1,128) 52 7,741 8,137 $0.20 $0.17 56 7,450 7,630 $0.18 $0.16 (47) 27 8,558 8,573 $0.21 $0.18 diluted $(0.02) $0.29 $0.23 $0.20 $0.05 $0.19 $0.18 $0.20 Adjusted E.P.S – Class B basic & diluted $(0.02) $0.25 $0.20 $0.17 $0.04 $0.16 $0.16 $0.18 1 Adjusted EBITA, Adjusted earnings and Adjusted EPS figures have been restated to conform to the current year’s presentation The third quarter of the Company’s fiscal year is historically the strongest due to increased consumer purchasing of the Company’s products during the holiday season. Sales in the fourth quarter of fiscal 2018 increased 10.4% compared to the same quarter of fiscal 2017 due primarily to the contribution of the three new estate wineries acquired in early October 2017, selective price increases in certain trade channels, and strong organic growth across most of the Company’s trade channels. The three acquisitions contributed $3.7 million in sales in the fourth quarter of fiscal 2018. Not including the contribution from the recent acquisitions, the Company generated organic revenue growth of approximately 5.4% through the three months ended March 31, 2018. Gross margin for the three months ended March 31, 2018 was 41.1% of sales compared to 39.2% in the fourth quarter of fiscal 2017. The increase in gross margin is attributable to improved product mix, increased pricing, and raw material and packaging costs savings. During the fourth quarter of fiscal 2018, the Company recorded a charge of approximately $1.1 million to increase cost of goods sold to reflect the fair value of inventory acquired from the new wineries that had been sold since the acquisition dates. Selling and administrative expenses increased in the fourth quarter of fiscal 2018 compared to the fourth quarter of fiscal 2017 due to the addition of three new wineries acquired in October 2017 as well as an increase in marketing activities and support for recent new product launches. Included in selling and administrative expenses in the fourth quarter of 2018 is $0.1 million in one-time professional services fees and transition costs related to the three acquisitions completed in October 2017 and $0.6 million in severance payments. During the fourth quarter of fiscal 2017, selling and administrative expenses included $0.6 million in one-time costs related to restructuring. Interest expense increased in the fourth quarter of fiscal 2018 due primarily to long-term debt incurred to complete the three acquisitions in October 2017. Amortization expense also increased in the fourth quarter of fiscal 2018 due primarily to the addition of the three recently acquired wineries and the completion of the Wayne Gretzky Estate Winery and Craft Distillery in June 2017. 11 | ANDREW PELLER LIMITED 2018 EBITA declined to $4.3 million for the three months ended March 31, 2018 compared to $5.9 million in the same quarter in fiscal 2017 primarily due to the fair value adjustment to cost of goods sold and the increase in selling and administration costs related to the recent acquisitions. Adjusted EBITA was $5.7 million for the three months ended March 31, 2018 compared to $5.9 million for the three months ended March 31, 2017. The Company generated an adjusted loss for the three months ended March 31, 2018 of $0.9 million compared to adjusted earnings of $1.9 million in the same prior year period. The net loss was $1.7 million or $0.04 per Class A Share for the three months ended March 31, 2018 compared to net earnings of $2.0 million or $0.05 per Class A Share in the fourth quarter of fiscal 2017. Liquidity and Capital Resources As at (in $000) Current assets Property, plant, and equipment Intangibles Goodwill Derivative financial instruments Total assets Current liabilities Long-term debt Long-term derivative financial instruments Post-employment benefit obligations Deferred income Deferred income tax Shareholders’ equity Total liabilities and shareholders’ equity March 31, 2018 March 31, 2017 March 31, 2016 $ 198,014 188,191 17,733 53,638 204 $ 457,780 $ 93,597 116,257 - 5,140 - 22,540 220,246 $ 457,780 $ 160,567 118,838 10,600 37,473 - $ 327,478 $ 81,742 46,678 642 5,279 - 15,820 177,317 $ 327,478 $ 150,867 108,929 11,040 37,473 - $ 308,309 $ 79,202 48,202 1,529 5,947 102 15,591 157,736 $ 308,309 The changes to the Company’s balance sheet as at March 31, 2018 compared to March 31, 2017 related primarily to the acquisition of three estate wineries completed in early October 2017. Of the overall increase in inventory at March 31, 2018 compared to March 31, 2017, approximately $21.7 million related to inventory from the three wineries acquired in October 2017. The remaining increase in inventory is due to an increase in inventory volumes on hand as the harvest was larger compared to prior year, as well as an increase in spirits due to new market and product launches. The Company continued to benefit from improved information technology systems introduced to monitor and control the Company’s supply chain. These systems include improvements to the Company’s ability to manage supply shortages and excesses. Inventory is dependent on the increase of domestically grown grapes that are used in the sale of premium and ultra-premium wines that are held for a longer period than imported wine. These grapes are typically aged for one to three years before they are sold. The cost of producing wine from domestically grown grapes is also significantly higher than wine purchased on international markets. Accounts receivable are predominantly with provincial liquor boards and, to a lesser extent, licensed establishments and independent retailers of consumer made wine products. The Company had $16.5 million of accounts receivable with provincial liquor boards at March 31, 2018, all of which is expected to be collectible. The balance represents amounts due from licensees, export customers, and independent retailers of consumer made wine products. The amount of accounts receivable that was 30 days past due was $1.5 million at March 31, 2018. Against these amounts an allowance for doubtful accounts of $0.2 million has been provided which the Company has determined represents a reasonable estimate of amounts that may not be collectible. Property, plant, and equipment increased at March 31, 2018 compared to the prior year end due to investments in the three estate wineries acquired in October 2017. Other capital expenditures during fiscal 2018 related to completion of the new Wayne Gretzky Estate Winery and Craft Distillery which opened on June 7, 2017 and other operational investments at the Company’s Ontario production facilities. As part of the acquisitions of the three estate wineries, the Company recorded intangible assets of $8.1 million, relating to brands and customer lists, and goodwill of $16.2 million. ANDREW PELLER LIMITED 2018 | 12 On September 29, 2017, the Company amended and restated its debt facilities. Amendments included a revised maturity date of September 29, 2022, revised financial covenants and updated applicable margins based on the Company’s leverage. Additionally, the total borrowing limit was increased to $310.0 million and separated into two facilities: a revolving, non-amortizing facility with a borrowing limit of $90.0 million to be used for day-to-day operations, distributions and capital expenditures and a revolving, amortizing investment facility with a borrowing limit of $220.0 million to be used for acquisitions or capital expenditures. Each draw on the investment facility is subject to a new amortization schedule and annual repayments increase over the term. The initial draw on the investment facility was used to refinance the previous operating and capital term loans and fund the acquisitions of the three British Columbia premium estate wineries in early October 2017. Up to September 30, 2018, monthly principal repayments of $0.5 million are required on the revolving, amortizing investment facility based on the initial draw. Thereafter, monthly principal repayments of $0.8 million are required. At March 31, 2018, the applicable margin was 1.90% (March 31, 2017 – 1.25%). Overall bank debt increased to $171.7 million at March 31, 2018 compared to $87.7 million at March 31, 2017. The increase in bank debt is due primarily to $79.0 million drawn on the Company’s credit facility related to the above- mentioned estate winery acquisitions. The increase in bank debt has been partially offset by the strong earnings in fiscal 2018, the positive impact of working capital management, and regularly scheduled debt repayments. With the increase in debt, the Company’s debt to equity ratio increased to 0.78:1 at March 31, 2018 compared to 0.49:1 at March 31, 2017. At March 31, 2018, the Company had unutilized debt capacity in the amount of $42.7 million on its operating facility and $94.7 million on its investment facility. The following table outlines the Company’s contractual obligations as at March 31, 2018: As at March 31, 2018 (in $000) < 1 year 2 - 3 years 4 - 5 years > 5 years Long-term debt Leases and royalties Pension obligations Grape and bulk wine purchase contracts Packaging purchase contracts Bulk whiskey purchase contracts Interest rate swap Foreign exchange forwards Total contractual obligations $ 8,135 5,092 514 79,100 30,392 525 123,758 2,740 8,720 $ 135,218 $ 20,982 6,419 734 77,282 1,457 80 106,954 4,828 - $ 111,782 $ 96,350 4,373 576 56,850 - - 158,149 2,934 - $ 161,083 - 8,176 888 144,276 - - 153,340 - - $ 153,340 Total $ 125,467 24,060 2,712 357,508 31,849 605 542,201 10,502 8,720 $ 561,423 Management expects to generate sufficient cash flow from operations to meet its debt servicing, principal payment, and working capital requirements over both the short and long-term through increased profitability and strong management of working capital and capital expenditures. The Company regularly reviews all of its assets to ensure appropriate returns on investment are being achieved and that they fit with the Company’s long-term strategic objectives. For the year ended March 31, 2018, the Company generated cash from operating activities, after changes in non-cash working capital items, of $21.7 million compared to $25.6 million in the prior year. Investing activities were $97.8 million in fiscal 2018 compared to $20.5 million in the prior year. The increase in fiscal 2018 includes $77.4 million related to the acquisition of the three estate wineries in October 2017. The remaining investing activities related to capital expenditures to improve operations, as well as costs incurred related to the completion of the new Wayne Gretzky Estate Winery and Craft Distillery which officially opened on June 7, 2017. Financing activities for the year ended March 31, 2018 included a $79.0 million increase in long-term debt related to the acquisition of the three estate wineries in October 2017. Working capital as at March 31, 2018 increased to $104.4 million compared to $78.8 million at March 31, 2017. The increase in working capital was due to increases in inventory and accounts receivable due primarily to the acquisitions completed in October 2017, partially offset by increases in current debt. Shareholders’ equity as at March 31, 2018 was $220.2 million or $4.99 per common share compared to $177.3 million or $4.16 per common share as at March 31, 2017. The increase in shareholders’ equity was due to the issuance of Class A Shares to fund a portion of the purchase price for one of the acquired wineries and strong net earnings, partially offset by the payment of dividends and net actuarial losses on post-employment benefit plans. 13 | ANDREW PELLER LIMITED 2018 Common Shares Outstanding The Company is authorized to issue an unlimited number of Class A and Class B Shares. Class A Shares are non-voting and are entitled to a dividend in an amount equal to 115% of any dividend paid or declared on Class B Shares. Class B Shares are voting and convertible into Class A Shares on a one-for-one basis. Shares outstanding Class A Shares Class B Shares Total March 31, 2018 March 31, 2017 March 31, 2016 35,471,185 8,702,095 44,173,280 33,581,487 9,012,123 42,593,610 33,581,487 9,012,123 42,593,610 On October 2, 2017, the Company issued approximately 1.6 million Class A Shares to fund a portion of the purchase price for one of the acquisitions. In March 2018, approximately 0.3 million Class B Shares were converted into Class A shares on a one-for-one basis. Strategic Outlook and Direction Andrew Peller Limited is committed to a strategy of growth that focuses on the expansion of its core business as a producer and marketer of quality wines and wine related products through concentrating on and developing leading brands that meet the needs of our consumers and customers. Over the long term the Company believes higher-priced premium wine and spirits sales will continue to grow in Canada, generating higher margins and increased profitability compared to its lower-priced products. The Company has also entered the spirits category, through its strategic alliance with Wayne Gretzky, and has introduced sangrias and ciders through its own brand labels. The market for wine in Canada continues to grow due to a movement toward the consumption of wine by young consumers who have adopted wine as their beverage of choice, an aging population that favours the more sophisticated experience that wine offers, and the reported health benefits of moderate wine consumption. The Company has focused its product development and sales and marketing initiatives by capitalizing on the trend of increased wine consumption and expects to see continued sales growth. The Company will continue to closely monitor its costs and will react quickly to changes to risks and opportunities in the marketplace. The Company will continue to launch wine and other craft alcohol brands in the future and increase its use of differentiated package formats. The Company will also expand product offerings outside the traditional table wine segment into other alcoholic beverages where it is able to leverage its detailed knowledge of growth opportunities in the Canadian market. The Company will also make packaging design changes that are more appealing to its target markets and are consistent with its initiative to be more environmentally friendly. Increased focus will be made on coordination between the Company’s business-to-consumer trade channels to provide customers with a more intimate awareness of its broad product portfolio. New product launches and directed focus to support key brands through all of the Company’s distribution channels will continue to receive increased marketing and sales support. The Company expects to increase its investments in capital expenditures over the next five years to increase capacity, support its ongoing commitment to producing the highest-quality wines and spirits, and improve productivity. The Company also expects to invest additional funds in the next five years in vineyards and operations in Western Canada to support the three recent acquisitions. Improvements to enhance the coordination throughout its supply chain have been implemented recently and benefits have begun to accrue. Investments made over the past few years are expected to continue to result in increased sales and improved profitability. The Company plans to dedicate further resources towards rectifying unfair trade barriers and taxes by continuing to work closely with other members of the Canadian wine industry and the Canadian and provincial governments. From time to time the Company evaluates investment opportunities, including acquisitions, which support its strategic direction. ANDREW PELLER LIMITED 2018 | 14 Risks and Uncertainties The Company’s sales of wine and spirits are affected by general economic conditions such as changes in discretionary consumer spending and consumer confidence, future economic conditions, changes to Inter-Provincial trade laws, tax laws, and the prices of its products. A steep and sustained decline in economic growth may cause a lower demand for the Company’s products. Such general economic conditions could impact the Company’s sales through the Company’s estate wineries, distillery and restaurants, direct sales through licensed establishments, and export sales through duty free shops. The Company believes that these effects would likely be temporary and would not have a significant impact on financial performance. The Canadian wine market continues to be the target of low-priced imported wines from regions and countries that subsidize wine production and grape growing as well as providing sizeable export incentives on subsidies. Many of these countries and regions prohibit or restrict the sale of imported wine in their own domestic markets. The Company, along with other members of the Canadian wine industry, are working with the Canadian government to improve support for the domestic industry. The Company operates in a highly competitive industry and the dollar amount and unit volume of sales could be negatively impacted by its inability to maintain or increase prices, changes in geographic or product mix, a general decline in beverage alcohol consumption, or the decision of retailers or consumers to purchase competitive products instead of the Company’s products. Retailer and consumer purchasing decisions are influenced by, among other things, the perceived absolute or relative overall value of the Company’s products including their quality or pricing compared to competitive products. Unit volume and dollar sales could also be affected by purchasing, financing, operational, advertising, or promotional decisions made by provincial agencies and retailers which could affect supply of or consumer demand for the Company’s products. APL could also experience higher than expected selling and administrative expenses if it finds it necessary to increase the number of its personnel, advertising, or promotional expenditures to maintain its competitive position. APL expects to increase the sales of its premium wines in Canada principally through the sale of VQA wines, and as a result, is dependent on the quality and supply of domestically grown premium quality grapes. If any of the Company’s vineyards or the vineyards of our grape suppliers experience certain weather variations, natural disasters, pestilence, other severe environmental problems, or other occurrences, APL may not be able to secure a sufficient supply of grapes, a situation which could result in a decrease in production of certain products from those regions and/or result in an increase in costs. The inability to secure premium quality grapes could impair the ability of the Company to supply certain wines to its customers. APL has developed programs to ensure it has access to a consistent supply of premium quality grapes and wine. The price of grapes is determined through negotiations with the Ontario Grape Growers Marketing Board in Ontario and with independent growers in British Columbia. Foreign exchange risk exists on the purchases of bulk wine and concentrate that are primarily made in United States dollars, Euros, and Australian dollars. The Company’s strategy is to hedge approximately 50% - 80% of its foreign exchange requirements throughout the fiscal year and to regularly review its on-going requirements. APL enters into a series of foreign exchange contracts as a hedge against movements in U.S. dollar, Euro, and Australian dollar exchange rates. The Company does not enter into foreign exchange contracts for trading or speculative purposes. These contracts are reviewed periodically. Based on the Company’s forecasts for foreign currency purchases and the amount of foreign exchange forward contracts outstanding at March 31, 2018, each one percent change in the value of the U.S. dollar, Euro or the Australian dollar would impact the Company’s net earnings by an estimated $0.2 million, $0.1 million and $0.1 million respectively. The Company purchases glass, bag in box, tetra paks, and other components used in the bottling and packaging of wine and spirits. The largest component in the packaging of wine and spirits is glass, of which there are few domestic or international suppliers. There is currently only one commercial supplier of glass in Canada that is able to supply glass to APL’s specifications. Any interruption in supply could have an adverse impact on the Company’s ability to supply its markets. APL has taken steps to reduce its dependence on domestic suppliers through the development of relationships with several international producers of glass and through carrying increased inventory of selected bottles. The Company operates in a highly regulated industry with requirements regarding the production, distribution, marketing, advertising, and labelling of wine and spirits. These regulatory requirements may inhibit or restrict the Company’s ability to maintain or increase strong consumer support for and recognition of its brands and may adversely affect APL’s business strategies and results of operations. Privatization of liquor distribution and retailing has been implemented in 15 | ANDREW PELLER LIMITED 2018 varying degrees across the country. The recent regulatory changes relating to privatization in Ontario and sales through grocery outlets remains a risk to the Company through its impact on the Company’s retail operations. The wine industry and the domestic and international market in which the Company operates are consolidating. This has resulted in fewer, but larger, competitors who have increased their resources and scale. The increased competition from these larger market participants may affect the Company’s pricing strategies and create margin pressures resulting in potentially lower revenues. Competition also exerts pressure on existing customer relationships which may affect APL’s ability to retain existing customers and increase the number of new customers. The Company has worked to improve production efficiencies, selectively increase pricing to increase gross margin, and implement a higher level of promotion and advertising activity to remain competitive. APL and other wine industry participants also generally compete with other alcoholic beverages like beer and spirits for consumer acceptance, loyalty, and shelf space. Any legalization of recreational cannabis may also have an impact on consumption of wine and other beverage alcohol products. No assurance can be given that consumer demand for wine and premium wine products will continue at current levels in the future. Federal and provincial governments impose excise, other taxes, and mark-ups on beverage alcohol products which have been subject to change. Significant increases in excise and other taxes on beverage alcohol products could materially and adversely affect the Company’s financial condition or results of operations. Federal and provincial governmental agencies extensively regulate the beverage alcohol products industry concerning such matters as licensing, trade practices, permitted and required labelling, advertising, and relations with consumers and retailers. Certain federal and provincial regulations also require warning labels and signage. New or revised regulations, increased licensing fees, requirements, taxes, or mark-ups could also have a material adverse effect on the Company’s financial condition or results of operations. The Company’s future operating results also depend on the ability of its officers and other key employees to continue to implement and improve its operating and financial systems and manage the Company’s significant relationships with its suppliers and customers. The Company is also dependent upon the performance of its key senior management personnel. The Company’s success is linked to its ability to identify, hire, train, motivate, promote, and retain highly qualified management. Competition for such employees is intense and there can be no assurances that the Company will be able to retain current key employees or attract new key employees. Increases in the minimum wage across Canada will also continue to negatively affect the profitability of the Company. It is estimated that increases in Ontario will increase selling and administrative expenses by approximately $3 million in the coming year. The Company has certain defined benefit pension plans. The expense and cash contributions related to these plans depend on the discount rate used to measure the liability to pay future benefits and the market performance of the plan assets set aside to pay these benefits. The Company’s Pension Committee reviews the performance of plan assets on a regular basis and has a policy to hold diversified investments. Nevertheless, a decline in long-term interest rates or in asset values could increase the Company’s costs related to funding the deficit in these plans. The competitive nature of the wine industry internationally has resulted in the discounting of retail prices of wine in key markets such as the United States and the United Kingdom. Although significant price discounting may occur in Canada beyond current levels, the Company believes that its product quality, advertising, and promotional support along with its competitive pricing strategies will effectively mitigate the impact of this to the Company. The Company considers its trademarks, particularly certain brand names and product packaging, advertising and promotion design, and artwork to be of significant importance to its business and ascribes a significant value to these intangible assets. APL relies on trademark laws and other arrangements to protect its proprietary rights. There can be no assurance that the steps taken by APL to protect its intellectual property rights will preclude competitors from developing confusingly similar brand names or promotional materials. The Company believes that its proprietary rights do not infringe upon the proprietary rights of third parties, but there can be no assurance in this regard. As an owner and lessee of property the Company is subject to various federal and provincial laws relating to environmental matters. Such laws provide that the Company could be held liable for the cost of removal and remediation of hazardous substances on its properties. The failure to remedy any situation that might arise could lead to claims against the Company. A perceived failure to maintain high ethical, social, and environmental standards could have an adverse effect on the Company’s reputation. ANDREW PELLER LIMITED 2018 | 16 The success of the Company’s brands depends upon the positive image that consumers have of those brands. Contamination of APL’s products, whether arising accidentally or through deliberate third-party action, or other events that harm the integrity or consumer support for those brands could adversely affect their sales. Contaminants in raw materials purchased from third parties and used in the production of the Company’s products or defects in the fermentation process could lead to low product quality as well as illness among, or injury to, consumers of the products and may result in reduced sales of the affected brand or all of the Company’s brands. Non-IFRS Measures The Company utilizes EBITA (defined as earnings before interest, amortization, net unrealized gains and losses on derivative financial instruments, other (income) expenses, and income taxes) and Adjusted EBITA (EBITA before non- recurring expenses such as acquisition transaction and transition costs) to measure its financial performance. EBITA and Adjusted EBITA are not recognized measures under IFRS; however, management believes that EBITA and Adjusted EBITA are useful supplemental measures to net earnings as these measures provide readers with an indication of earnings available for investment prior to debt service, capital expenditures, and income taxes, as well as provide an indication of recurring earnings compared to prior periods. The Company calculates EBITA and Adjusted EBITA as follows. For the three months and years ended March 31, (in $000) Net earnings (loss) Add: Interest Provision for income taxes Amortization of plant and equipment used in production Amortization of equipment and intangibles used in selling and administration Net unrealized gains on derivative financial instruments Other (income) expenses EBITA Acquisition transaction and transition costs Fair value adjustment for acquired inventory sold during the period Adjusted EBITA 1 Adjusted EBITA figures have been restated to conform to the current year’s presentation Three Months Year 2018 2017 (1) 2018 2017 (1) $ (1,691) $ 2,010 $ 30,117 $ 26,350 1,749 1,411 1,782 1,826 (833) 35 813 597 1,763 886 (189) (15) 5,345 10,937 6,891 4,812 (1,400) (3,842) 3,078 7,895 6,549 3,377 (2,232) 120 $ 4,279 $ 5,865 $ 52,860 $ 45,137 363 1,098 - - 1,393 2,972 1,109 - $ 5,740 $ 5,865 $ 57,225 $ 46,246 Readers are cautioned that EBITA and Adjusted EBITA should not be construed as an alternative to net earnings determined in accordance with IFRS as an indicator of the Company’s performance or to cash flows from operating, investing, and financing activities as a measure of liquidity and cash flows. The Company also utilizes gross margin (defined as sales less cost of goods sold, excluding amortization) as calculated below. For the three months and years ended March 31, (in $000) Sales Less: Cost of goods sold, excluding amortization Gross margin Gross margin (% of sales) Three Months 2018 2017 Year 2018 2017 $ 79,817 $ 72,295 $ 363,897 $ 342,606 47,006 43,969 213,572 211,451 $ 32,811 $ 28,326 $ 150,325 $ 131,155 41.1% 39.2% 41.3% 38.3% 17 | ANDREW PELLER LIMITED 2018 The Company calculates adjusted earnings and adjusted earnings per share as follows. For the three months and years ended March 31, (in $000) Net earnings (loss) Three Months Year 2018 2017 (1) 2018 2017 (1) $ (1,691) $ 2,010 $ 30,117 $ 26,350 Net unrealized gains on derivative financial instruments (833) (189) (1,400) (2,232) Other expenses (income) Acquisition transaction and transition costs Fair value adjustment for acquired inventory sold during the period Income tax effect of the above Adjusted earnings (loss) Adjusted earnings (loss) per share – Class A Adjusted earnings (loss) per share – Class B 35 363 1,098 124 (15) (3,842) - - 53 1,393 2,972 63 120 1,109 - 261 $ (904) $ 1,859 $ 29,303 $ 25,608 $(0.02) $(0.02) $0.05 $0.04 $0.69 $0.60 $0.62 $0.54 1 Adjusted earnings and Adjusted earnings per share figures have been restated to conform to the current year’s presentation The Company’s method of calculating EBITA, Adjusted EBITA, gross margin, adjusted earnings, and adjusted earnings per share may differ from the methods used by other companies and accordingly, may not be comparable to the corresponding measures used by other companies. Transactions with Related Parties The Company is controlled by Jalger Limited, which owns 57.4% of the Company’s Class B voting shares. No individual has sole voting power or control in respect of the shares of the Company owned by Jalger Limited. The compensation expense recorded for directors and members of the Executive Management Team of the Company is shown below: For the year ended March 31, (in $000) Compensation and short-term benefits Post-employment benefits Stock based compensation expense Payments to a share purchase plan 2018 $ 3,848 296 1,422 - 2017 $ 6,951 302 - 381 $ 5,566 $ 7,634 The compensation and short-term benefits expense consists of amounts that will primarily be settled within twelve months. Financial Statements and Accounting Policies The Company’s consolidated financial statements have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board (“IASB”). Critical Accounting Estimates During the year management is required to make estimates and assumptions that are inherently uncertain. These estimates can vary with respect to the level of judgment involved and ultimately the impact that these estimates may have on the Company's financial statements. Estimates are deemed to be critical when a different estimate could reasonably be used or where changes are reasonably likely to occur which could materially affect the Company’s financial position or financial performance. The Company’s significant accounting policies are discussed in the notes to the consolidated financial statements for the years ended March 31, 2018 and March 31, 2017. Critical estimates inherent in these accounting policies are set out below: ANDREW PELLER LIMITED 2018 | 18 Business combinations For each business combination, the Company measures the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. The determination of fair value requires the Company to make assumptions, estimates, and judgments regarding future events. The allocation process is inherently subjective and impacts the amounts assigned to individual identifiable assets and liabilities, including the fair value of finished goods inventory, long-lived assets, the recognition and measurement of any identified intangible assets, and the final determination of the amount of goodwill or gain on acquisition. The inputs to the exercise of judgments include legal, contractual, business and economic factors. As a result, the purchase price allocation impacts the Company’s reported assets and liabilities and future net earnings due to the impact on future cost of goods sold, amortization, and impairment tests. Impairment of goodwill and indefinite life intangible assets Testing goodwill for impairment at least annually involves estimating the recoverable amount of the cash generating units to which goodwill is allocated. This requires making assumptions about future cash flows, growth rates, and discount rates. Testing indefinite life intangible assets for impairment at least annually involves estimating the fair value using the relief of royalty method. This requires making assumptions about royalty rates, growth rates, and discount rates. These assumptions are inherently uncertain and as such, actual amounts may vary from these assumptions and cause significant adjustments. Management has concluded that a 10% change in any key assumption in the impairment tests would not result in an impairment of goodwill or indefinite life intangible assets as at March 31, 2018 and March 31, 2017. Post-employment benefits Measuring the liability for post-employment benefits uses assumptions for the discount rates, increases in compensation, increases in medical costs, and timing of the payment of benefits. Actual amounts may vary from these assumptions and cause significant adjustments. Fair value of grapes at the point of harvest Where possible, the fair value of grapes at the point of harvest is determined by reference to local market prices for grapes of a similar quality and same varietal. For grapes for which local market prices are not readily available, the average price of similar grapes is used. Actual amounts may vary from these assumptions and cause significant adjustments. Recently Adopted Accounting Policies Business combinations Business combinations are accounted for using the acquisition method. The consideration transferred by the Company is measured as the fair value of assets transferred and equity instruments issued at the date of completion of the acquisition. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at fair value at the acquisition date. The excess of the consideration transferred over the fair value of the net assets acquired is recorded as goodwill. If the consideration transferred is less than the share of the net assets acquired, the difference is recognized directly in the consolidated statement of earnings as a gain on acquisition. Results of operations of a business acquired are included in the Company’s consolidated financial statements from the date of the business acquisition. Acquisition costs incurred are expensed and included in selling and administrative expenses. Share based compensation The Company can grant stock options, performance share units (PSUs), and deferred share units (DSUs) to employees under its share based compensation plan. All share based compensation arrangements are equity-settled in Class A non- voting common shares. Equity-settled share based payments to employees are measured at the fair value of the equity instrument granted. An option valuation model (Black-Scholes) is used to fair value stock options issued to employees on the date of grant. The grant date fair value of equity-settled share based awards is recognized as compensation expense with a corresponding increase in equity reserves over the related service period provided to the Company. The total amount of expense recognized in profit or loss is determined by reference to the fair value of the options granted or share awards, which factors in the number of options expected to vest. Equity-settled share based payment transactions are not remeasured once the grant date fair value has been determined except in cases where the share based payment is linked to non-market performance conditions. Stock options vest in tranches (graded vesting) and accordingly, the expense is recognized in vesting tranches. PSUs vest in full at the end of the third fiscal year after the date of grant and accordingly, 19 | ANDREW PELLER LIMITED 2018 the expense is recognized evenly over the vesting period. DSUs vest immediately and accordingly, the expense is recognized in full at the date of grant. Compensation expense is recognized over the applicable vesting period by increasing contributed surplus based on the number of awards expected to vest. At the end of each reporting period, the Company revises its estimates of the number of awards that are expected to vest based on the non-market performance vesting conditions. The Company recognizes the impact of the revision to original estimates, if any, in the consolidated statements of earnings, with a corresponding adjustment to contributed surplus. Statement of cash flows In January 2016, the IASB issued an amendment to IAS 7, Statement of Cash Flows, introducing additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendments were effective for annual periods beginning on or after January 1, 2017. The new requirements were adopted effective April 1, 2017. The adoption of these amendments did not have a material impact on the consolidated financial statements. Income taxes In January 2016, the IASB issued amendments to IAS 12, Income Taxes to clarify the requirements for recognizing deferred tax assets on unrealized losses. The amendments clarify the accounting for deferred tax where an asset is measured at fair value and that fair value is below the asset’s tax base. They also clarify certain other aspects of accounting for deferred tax assets. The amendments were effective for annual periods beginning on or after January 1, 2017. The new requirements were adopted effective April 1, 2017. The adoption of these amendments did not have a material impact on the consolidated financial statements. Recently Issued Accounting Pronouncements During July 2014, the IASB issued the complete version of IFRS 9, Financial Instruments - Classification and Measurement of Financial Assets and Financial Liabilities. IFRS 9 will replace IAS 39, Financial Instruments - Recognition and Measurement. In addition, IFRS 7, Financial Instruments - Disclosures was amended to include additional disclosure requirements on transition to IFRS 9. The mandatory effective date of applying these standards is for annual periods beginning on or after January 1, 2018. The standard uses a single approach to determine whether a financial asset is measured at amortized cost or fair value. The approach is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used. The standard requires that for financial liabilities measured at fair value, any changes in an entity’s own credit risk are generally to be presented in other comprehensive income instead of net earnings. A new hedge accounting model is included in the standard, as well as increased disclosure requirements about risk management activities for entities that apply hedge accounting. The adoption of these amendments is not expected to have a material impact on the consolidated financial statements. During May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which supersedes IAS 18, Revenue, and IAS 11, Construction Contracts. The standard details a revised model for the recognition of revenue from contracts with customers. In April 2016, the IASB has amended IFRS 15 to clarify the guidance on identifying performance obligations, licenses of intellectual property, and principal versus agent. The amendments also provide additional practical expedients on transition. The standard is effective for first interim periods within annual periods beginning on or after January 1, 2018. During the year the Company carried out a detailed review of the current recognition criteria for revenue against the requirements of IFRS 15. This review closely examined its agency wine businesses, presentation of certain customer related trade spending and timing of recognition of certain promotional discounts. Based on preliminary work completed, the adoption of this standard is not expected to have a material impact on the consolidated financial statements. In January 2016, the IASB issued IFRS 16, Leases, which will replace IAS 17, Leases and related Interpretations. The new standard will be effective for fiscal years beginning on or after January 1, 2019, with early adoption permitted provided the Company has adopted IFRS 15, Revenue from Contracts with Customers. The new standard requires lessees to recognize a lease liability reflecting future lease payments and a “right-of-use asset” for virtually all leases contracts, and record it on the statement of financial position, except with respect to lease contracts that meet limited exception criteria. Given that the Company has significant contractual obligations in the form of operating leases under IAS 17, there will be a material increase to both assets and liabilities on adoption of IFRS 16, and material changes to the timing ANDREW PELLER LIMITED 2018 | 20 of recognition of expenses associated with the lease arrangements. The Company is analyzing the new standard to determine the impact of adopting this standard. Evaluation of Disclosure Controls and Procedures and Internal Control over Financial Reporting Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information required to be disclosed by the Company in reports filed with or submitted to various securities regulators are recorded, processed, summarized and reported within the time periods specified. This information is gathered and reported to the Company’s management, including the Chief Executive Office (“CEO”) and Chief Financial Officer (“CFO”) on a timely basis so that decisions can be made regarding the Company’s disclosures to the public. The Company’s management, under the supervision of, and with the participation of the CEO and CFO, have designed and maintained the Company’s disclosure controls and procedures as required in Canada by “National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings”. Internal Controls Over Financial Reporting Internal controls over financial reporting are procedures designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use, and transactions are properly recorded and reported. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to reliability of financial reporting and financial statement presentation. Designing, establishing, and maintaining adequate internal controls over financial reporting is the responsibility of management. Internal controls over financial reporting is a process designed by, or under the supervision of senior management and effected by the Board of Directors to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company’s financial statements in accordance with IFRS. For the year ended March 31, 2018, there have been no material changes in the Company’s internal controls over financial reporting or changes to disclosure controls and procedures that materially affected or were likely to affect, the Company’s internal control systems. As at June 6, 2018, the CEO and CFO of the Company have evaluated the effectiveness of the Company’s internal controls over financial reporting. Based on these evaluations, the CEO and CFO have concluded that the controls and procedures were operating effectively. 21 | ANDREW PELLER LIMITED 2018 INDEPENDENT AUDITOR’S REPORT June 6, 2018 Independent Auditor’s Report To the Shareholders of Andrew Peller Limited We have audited the accompanying consolidated financial statements of Andrew Peller Limited and its subsidiaries, which comprise the consolidated balance sheets as at March 31, 2018 and 2017 and the consolidated statements of earnings, comprehensive income, changes in equity and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Andrew Peller Limited and its subsidiaries as at March 31, 2018 and 2017 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants ANDREW PELLER LIMITED 2018 | 22 Consolidated Balance Sheets As at March 31, 2018 and 2017 (in thousands of Canadian dollars) Assets Current assets Accounts receivable (note 21) Inventories (note 5) Biological assets (note 7) Prepaid expenses and other assets Current portion of derivative financial instruments (note 21) Property, plant and equipment (note 6) Intangible assets (note 8) Goodwill (note 9) Derivative financial instruments (note 21) Liabilities Current liabilities Bank indebtedness (note 10) Accounts payable and accrued liabilities (note 11) Dividends payable Income taxes payable (note 14) Current portion of derivative financial instruments (note 21) Current portion of long-term debt (note 12) Long-term debt (note 12) Long-term derivative financial instruments (note 21) Post-employment benefit obligations (note 13) Deferred income taxes (note 14) Shareholders’ Equity Capital stock (note 15) Contributed surplus (note 16) Retained earnings Accumulated other comprehensive loss $ $ $ 2018 2017 $ $ $ 31,406 160,154 1,901 4,401 152 198,014 188,191 17,733 53,638 204 457,780 47,324 33,404 1,935 2,775 24 8,135 93,597 116,257 - 5,140 22,540 237,534 26,097 1,673 196,713 (4,237) 220,246 26,973 129,088 1,400 3,106 - 160,567 118,838 10,600 37,473 - 327,478 36,620 36,260 1,690 2,348 418 4,406 81,742 46,678 642 5,279 15,820 150,161 6,967 - 174,193 (3,843) 177,317 $ 457,780 $ 327,478 Director Director The accompanying notes are an integral part of these consolidated financial statements. 23 | ANDREW PELLER LIMITED 2018 Consolidated Statements of Earnings For the years ended March 31, 2018 and March 31, 2017 (in thousands of Canadian dollars, except per share amounts) Sales Cost of goods sold, excluding amortization (note 17) Amortization of plant and equipment used in production Gross profit Selling and administration (note 17) Amortization of equipment and intangible assets used in selling and administration Interest Net unrealized gain on derivative financial instruments (note 21) Other (income) expense (note 17) Earnings before income taxes Provision for (recovery of) income taxes (note 14) Current Deferred Net earnings for the year Net earnings per share (notes 15 and 18) Basic and diluted Class A shares Class B shares $ 2018 363,897 213,572 6,891 143,434 97,465 4,812 5,345 (1,400) (3,842) 41,054 11,797 (860) 10,937 2017 342,606 211,451 6,549 124,606 86,018 3,377 3,078 (2,232) 120 34,245 7,664 231 7,895 30,117 $ 26,350 0.71 0.62 $ $ 0.64 0.55 $ $ $ $ The accompanying notes are an integral part of these consolidated financial statements. ANDREW PELLER LIMITED 2018 | 24 Consolidated Statements of Comprehensive Income For the years ended March 31, 2018 and March 2017 (in thousands of Canadian dollars) Net earnings for the year Items that are never reclassified to net earnings Net actuarial losses on post-employment benefit plans (note 13) Deferred income taxes (note 14) Other comprehensive loss for the year 2018 2017 $ 30,117 $ 26,350 (533) 139 (394) (9) 2 (7) Net comprehensive income for the year $ 29,723 $ 26,343 The accompanying notes are an integral part of these consolidated financial statements. 25 | ANDREW PELLER LIMITED 2018 Consolidated Statements of Changes in Equity For the years ended March 31, 2018 and March 31, 2017 (in thousands of Canadian dollars) Capital stock Contributed surplus Retained earnings Accumulated other comprehensive loss Total shareholders’ equity $ 154,605 $ (3,836) $ 157,736 Balance at April 1, 2016 $ 6,967 $ Net earnings for the year Net actuarial losses (net of $2 deferred tax recovery) (note 13) Net comprehensive income for the year Dividends (Class A $0.163 per share, Class B $0.142 per share) Balance at March 31, 2017 Balance at April 1, 2017 Net earnings for the year Net actuarial losses (net of $139 deferred tax recovery) (note 13) Net comprehensive income for the year - - - - $ $ 6,967 6,967 $ $ - - - Issuance of Class A non-voting shares (note 4) 19,130 Share based compensation (note 16) Dividends (Class A $0.180 per share, Class B $0.156 per share) - - - - - - - - - - - - - 1,673 26,350 - 26,350 $ $ (6,762) $ $ 174,193 174,193 30,117 - 30,117 - - - (7,597) - (7) (7) - 26,350 (7) 26,343 (6,762) (3,843) $ 177,317 (3,843) $ 177,317 - 30,117 (394) (394) - - - (394) 29,723 19,130 1,673 (7,597) Balance at March 31, 2018 $ 26,097 $ 1,673 $ 196,713 $ (4,237) $ 220,246 The accompanying notes are an integral part of these consolidated financial statements. ANDREW PELLER LIMITED 2018 | 26 Consolidated Statements of Cash Flows For the years ended March 31, 2018 and March 31, 2017 (in thousands of Canadian dollars) Cash provided by (used in) Operating activities Net earnings for the year Adjustments for non-cash items Gain on acquisition of subsidiary Loss (gain) on disposal of property, plant and equipment Amortization of plant, equipment and intangible assets Interest expense Provision for income taxes Net unrealized gain on derivative financial instruments Share based compensation expense Post-employment benefits Deferred income Interest paid Income taxes paid Change in non-cash working capital items related to operations (note 20) Investing activities Acquisition of subsidiaries, net of cash acquired Proceeds from disposal of property, plant and equipment Purchase of property, plant and equipment Purchase of intangible assets Financing activities Increase in bank indebtedness Drawings of long-term debt Repayment of long-term debt Deferred financing costs Dividends paid Cash - Beginning and end of year Supplementary information Property, plant and equipment and intangible assets acquired that were unpaid in cash and included in accounts payable and accrued liabilities $ $ The accompanying notes are an integral part of these consolidated financial statements. 27 | ANDREW PELLER LIMITED 2018 2018 2017 $ 30,117 $ 26,350 (4,164) 181 11,703 5,345 10,937 (1,400) 1,673 (672) - (4,600) (11,484) 37,636 (15,889) - (174) 9,926 3,078 7,895 (2,232) - (677) (102) (3,101) (7,741) 33,222 (7,658) 21,747 25,564 (77,438) - (19,996) (378) - 175 (19,836) (822) (97,812) (20,483) 10,642 79,000 (5,003) (1,222) (7,352) 76,065 2,919 3,000 (4,181) (194) (6,625) (5,081) - $ - 384 $ 1,196 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS March 31, 2018 and March 31, 2017 (in thousands of Canadian dollars, except per share amounts) 1 Nature of operations Andrew Peller Limited (the Company) produces and markets wine, spirits and wine related products. The Company’s products are produced and sold predominantly in Canada. The Company is incorporated under the Canada Business Corporations Act and is domiciled in Canada. The address of its head office is 697 South Service Road, Grimsby, Ontario, L3M 4E8. 2 Summary of significant accounting policies Basis of presentation These consolidated financial statements have been prepared in compliance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). These consolidated financial statements were approved by the Board of Directors for issue on June 6, 2018. Basis of measurement The consolidated financial statements have been prepared under the historical cost convention, except for derivatives, which are measured at fair value, and biological assets, which are measured at fair value less costs to sell. Basis of consolidation These consolidated financial statements include the accounts of the Company and all subsidiary companies. Subsidiaries are those entities the Company controls by having the power to govern their financial and operating policies. Subsidiaries are fully consolidated from the date on which control is obtained by the Company and are de- consolidated from the date control ceases. Intercompany transactions, balances, income and expenses, and profits and losses are eliminated. Business combinations Business combinations are accounted for using the acquisition method. The consideration transferred by the Company is measured as the fair value of assets transferred and equity instruments issued at the date of completion of the acquisition. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at fair value at the acquisition date. The excess of the consideration transferred over the fair value of the net assets acquired is recorded as goodwill. If the consideration transferred is less than the net assets acquired, the difference is recognized directly in the consolidated statements of earnings as a gain on acquisition. Results of operations of a business acquired are included in the Company’s consolidated financial statements from the date of the business acquisition. Acquisition costs incurred are expensed and included in selling and administrative expenses. Foreign currency translation The consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency. ANDREW PELLER LIMITED 2018 | 28 Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than the Company’s functional currency are recognized in the consolidated statements of earnings. Revenue The Company records a sale when: it has transferred the risks and rewards of ownership of the goods to the buyer; the Company has no continuing managerial involvement over the goods; it is probable the consideration will be received by the Company; and the amount of revenue and costs related to the transaction can be measured reliably. For transactions with provincial liquor boards, licensee retail stores and wine kit retailers, the Company’s terms are primarily “FOB shipping point.” Accordingly, sales are recorded when the product is shipped from the Company’s distribution facilities. Sales to consumers through retail stores, winery restaurants, and estate wineries are recorded when the product is purchased. Excise taxes collected on behalf of the federal government, licensing fees, and levies paid on wine sold through the Company’s independent retail stores in Ontario, product returns, breakage, promotional and advertising allowances, and discounts provided to customers are deducted from gross revenue to arrive at sales. Cost of goods sold Cost of goods sold includes the cost of finished goods inventories sold during the year, inventory writedowns and revaluations of agricultural produce to fair value less costs to sell at the point of harvest. Inventories Inventories are valued at the lower of cost and net realizable value. Cost is determined on an average cost basis. The Company utilizes a weighted average cost calculation to determine the value of ending inventory (bulk wine and finished goods). Average cost is determined separately for import wine and domestic wine and is calculated by varietal and vintage year. Grapes produced from vineyards controlled by the Company that are part of inventories are measured at their fair value less costs to sell at the point of harvest. The Company includes borrowing costs in the cost of certain wine inventories that require a substantial period of time to become ready for sale. Property, plant and equipment Property, plant and equipment are carried at cost less accumulated amortization. Cost includes borrowing costs for assets that require a substantial period of time to become ready for use. Amortization of buildings, vines and vineyard infrastructure and machinery and equipment is calculated on the straight-line basis in amounts sufficient to amortize the cost of buildings, vines and vineyard infrastructure and machinery and equipment over their estimated useful lives as follows: Buildings Vines and vineyard infrastructure Machinery and equipment Land is carried at cost and is not amortized. 40 years 20 years 5 to 20 years Vines and vineyard infrastructure amortization commences in the year the vineyard yields a crop that approximates 50% of expected annual production. 29 | ANDREW PELLER LIMITED 2018 Biological assets The Company measures biological assets, consisting of grapes grown on vineyards controlled by the Company, at cost, which approximates fair value as there has been minimal biological transformation since the initial cost incurred. The initial costs incurred are comprised of direct expenditures required to enable the biological transformation of agricultural produce. At the point of harvest, the fair value of biological assets is determined by reference to local market prices for grapes of a similar quality and the same varietal. At this point, agricultural produce is measured at fair value less cost to sell, which becomes the basis for the cost of inventories after harvest. Gains or losses arising from a change in fair value less costs to sell are included in the consolidated statements of earnings in the period in which they arise. Intangible assets Intangible assets include brands, customer contracts, customer lists, contract co-packaging arrangements, software and customer-based relationships. These intangible assets are recorded at their estimated fair value on the date of acquisition or at cost for regular way purchases. Brands Customers Contract packaging Software Other Amortization method n/a straight-line straight-line straight-line straight-line Useful life indefinite 10 - 20 years 10 years 5 years 5 years Remaining useful life indefinite 3 - 16 years 1 year 3 - 5 years 1 year Brands have been assessed as having an indefinite life because the expected usage, period of control and other factors do not limit the life of these assets. Intangible assets with an indefinite life are not amortized but are tested for impairment at least annually or more frequently if events or circumstances indicate the asset might be impaired. To test for impairment the Company primarily compares the amount of royalty the Company would have to pay in an arm’s length licensing arrangement to secure access to the same rights to its carrying value. If necessary, the fair value is also considered. An impairment charge is recorded to the extent the carrying value exceeds the fair value. Management has determined there was no impairment in intangible assets for the years ended March 31, 2018 and 2017. Goodwill Goodwill represents the cost of a business combination in excess of the fair values of the net tangible and identifiable intangible assets acquired. Goodwill is not amortized but is tested for impairment on an annual basis, or more frequently if circumstances indicate goodwill may be impaired. The Company assigns goodwill combined with other assets to a cash generating unit (CGU) based on certain regions and product lines, which is the lowest level at which the combined assets generate independent cash inflows. To test for impairment the Company primarily compares a CGU’s value in use, determined based on expected future discounted cash flows, to its carrying value. If necessary, a CGU’s fair value is also considered. An impairment charge is recorded to the extent the carrying value of a CGU exceeds the greater of the CGU’s fair value and its value in use. An impairment loss in respect of goodwill cannot be reversed. Management has determined there is no impairment in goodwill for the years ended March 31, 2018 and 2017. ANDREW PELLER LIMITED 2018 | 30 Post-employment benefits The Company sponsors defined contribution pension plans, defined benefit pension plans, post-employment medical benefit plans, and other post-employment benefit plans for certain employees. Contributions to the defined contribution pension plans are recognized as an expense as services are rendered by employees. The costs of the defined benefit plans, the post-employment medical benefit plans, and other post-employment benefit plans are actuarially determined and include management’s best estimate of expected plan investment performance, the interest rate on the plan obligation, salary escalation, expected retirement ages, and medical cost escalation. The liability recognized in the consolidated balance sheets in respect of these plans is the present value of the defined benefit obligation at the end of the reporting period as determined by the Company’s actuary less the fair value of plan assets adjusted for the unamortized portion of negative past service credits. The current service cost, amortization of past service credits, and the interest cost net of the expected return on plan assets are recognized in earnings in the period they arise. Adjustments arising from actuarially determined gains or losses are recognized in other comprehensive loss in the period in which they arise. The corresponding change in shareholders’ equity is adjusted to retained earnings for the year. Deferred income Advance payments received for use of the Company’s assets are initially recorded in deferred income. The income is recognized on a straight-line basis in net earnings over the period of use. Financial instruments and hedge accounting The Company classifies its financial instruments into the following categories: loans and receivables, liabilities at amortized cost, and financial assets and liabilities at fair value through profit or loss. The Company has chosen to not apply hedge accounting to any of its derivative financial instruments. As a result of this policy choice, these derivative instruments are recorded initially and subsequently at fair value and the change in the fair value is recorded directly in the consolidated statements of earnings. The Company classifies accounts payable and accrued liabilities, dividends payable, bank indebtedness, and long- term debt as liabilities at amortized cost. Accounts payable and accrued liabilities and dividends payable are initially measured at the amount to be paid, which approximates fair value because of the short-term nature of these liabilities. Subsequently, they are measured at amortized cost. Bank indebtedness and long-term debt are measured initially at fair value, net of transaction costs incurred and subsequently at amortized cost using the effective interest method. Accounts receivable are classified as loans and receivables. Accounts receivable are primarily amounts due from customers from the sale of goods or the rendering of services. The Company maintains an allowance for doubtful accounts to record an estimate of credit losses. When no recovery of an amount owing is possible, the account receivable is reduced directly. Transaction costs related to long-term debt are netted against the carrying value of the liability and are then amortized over the expected life of the instrument using the effective interest method. The Company recognizes financial instruments when it becomes a party to the terms of the instrument and has elected to use “trade date” accounting for regular way purchases and sales of financial assets. Embedded derivatives (elements of contracts whose cash flows move independently from the host contract similar to a stand-alone derivative) are required to be separated and measured at fair value if certain criteria are met. Management reviewed its contracts and determined the Company does not currently have any embedded derivatives in these contracts that require separate accounting and disclosure. 31 | ANDREW PELLER LIMITED 2018 Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the consolidated statements of earnings on a straight-line basis over the period the asset is used under the lease. Leases under which the Company has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the inception of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Payments on finance leases are allocated to the liability and expense so as to recognize a constant rate of interest on the remaining balance of the liability. Assets acquired under finance leases are amortized over their useful lives. Impairment of non-financial assets The Company reviews long-lived assets and definite life intangible assets for impairment when events or circumstances indicate an asset may be impaired. Assets are assigned to a CGU based on the lowest level at which they generate independent cash inflows. When there is an indication of impairment, an impairment charge is recorded to the extent the carrying value of a CGU exceeds the greater of the CGU’s fair value less costs to dispose and its value in use, determined by discounting expected cash flows (recoverable amount). An impairment loss is reversed if a CGU’s recoverable amount increases to the extent that the related assets’ carrying amounts are no larger than the amount that would have been determined, net of amortization, had no impairment loss been recorded. Net earnings per share Basic net earnings per share have been calculated using the weighted average number of Class A and Class B shares outstanding during the year. Diluted net earnings per share have been calculated by considering the impact of any potential ordinary shares that are dilutive on the two classes of shares when considered together. Dividends Dividends on Class A and Class B shares are recognized in the period in which they are formally declared by the Board of Directors. Segmented information The Company produces and markets wine and spirits products in Canada. A significant portion of the Company’s sales are made to the liquor control boards in each province in which the Company transacts business. Management has concluded that the chief operating decision maker allocates resources and assesses performance of the Company on a consolidated basis. Furthermore, based on the type of products sold and the fact that its customers are similar in nature, the Company operates in a single operating segment. In addition, substantially all of the Company’s sales are made in Canada. As a result, management has concluded the Company operates in one geographic segment. Income taxes Current income tax is the expected amount of tax payable or recoverable on taxable income or loss during the period. Current income tax may also include adjustments to taxes payable or recoverable in respect of previous periods. The Company accounts for deferred income taxes based on temporary differences, which are the differences between the carrying amount of an asset or liability and its tax base. Deferred income taxes are provided for all temporary differences between the carrying amount and tax bases of assets and liabilities, except for those arising from the initial recognition of goodwill or for those arising from the initial recognition of an asset or liability in a transaction that is not a business combination and has no impact on earnings or taxable income or loss. Deferred income tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The deferred income tax ANDREW PELLER LIMITED 2018 | 32 provision recorded in net earnings and other comprehensive loss represents the change during the year in deferred income tax assets and deferred income tax liabilities. Contingencies In the ordinary course of business activities, the Company may be contingently liable for litigation and claims. Management believes adequate provisions have been recorded in the accounts where required. Although it is not possible to accurately estimate the extent of potential claims, if any, management believes the ultimate resolution of such contingencies would not have a material adverse effect on the financial position of the Company. Comprehensive income Comprehensive income is comprised of net earnings and other comprehensive loss. Other comprehensive loss represents the change in equity for a period that arises from transactions that are required to be or are elected to be recognized outside of net earnings. The Company has chosen to record actuarial gains and losses on defined benefit pension plans and other post-employment benefit plans in other comprehensive loss in the period incurred. Equity The Company separately presents changes in equity related to capital stock, contributed surplus, retained earnings and accumulated other comprehensive loss in the consolidated statements of changes in equity. Share based compensation The Company grants stock options, performance share units (PSUs) and deferred share units (DSUs) to employees and directors under its share based compensation plan. All share based compensation arrangements are equity-settled in Class A non-voting common shares. Equity-settled share based payments to employees are measured at the fair value of the equity instrument granted. An option valuation model (Black-Scholes) is used to fair value stock options issued to employees on the date of grant. The grant date fair value of equity-settled share based awards is recognized as compensation expense with a corresponding increase in equity reserves over the related service period provided to the Company. The total amount of expense recognized in profit or loss is determined by reference to the fair value of the options granted or share awards, which factors in the number of options expected to vest. Equity-settled share based payment transactions are not remeasured once the grant date fair value has been determined, except in cases where the share based payment is linked to non-market performance conditions. Stock options vest in tranches (graded vesting) and accordingly, the expense is recognized in vesting tranches. PSUs vest in full at the end of the third fiscal year after the date of grant and accordingly, the expense is recognized evenly over the vesting period. DSUs vest immediately and accordingly, the expense is recognized in full at the date of grant. Compensation expense is recognized over the applicable vesting period by increasing contributed surplus based on the number of awards expected to vest. At the end of each reporting period, the Company revises its estimates of the number of awards that are expected to vest based on the non-market performance vesting conditions. The Company recognizes the impact of the revision to original estimates, if any, in the consolidated statements of earnings, with a corresponding adjustment to contributed surplus. Recently adopted accounting pronouncements In January 2016, the IASB issued an amendment to IAS 7, Statement of Cash Flows, introducing additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendments are effective for annual periods beginning on or after January 1, 2017. The adoption of these amendments did not have a material impact on the consolidated financial statements. 33 | ANDREW PELLER LIMITED 2018 In January 2016, the IASB issued amendments to IAS 12, Income Taxes, to clarify the requirements for recognizing deferred tax assets on unrealized losses. The amendments clarify the accounting for deferred tax where an asset is measured at fair value and that fair value is below the asset’s tax base. They also clarify certain other aspects of accounting for deferred tax assets. The amendments are effective for annual periods beginning on or after January 1, 2017. The adoption of these amendments did not have a material impact on the consolidated financial statements. Recently issued accounting pronouncements During July 2014, the IASB issued the complete version of IFRS 9, Financial Instruments - Classification and Measurement of Financial Assets and Financial Liabilities. IFRS 9 will replace IAS 39, Financial Instruments - Recognition and Measurement. In addition, IFRS 7, Financial Instruments - Disclosures, was amended to include additional disclosure requirements on transition to IFRS 9. The mandatory effective date of applying these standards is for annual periods beginning on or after January 1, 2018. The standard uses a single approach to determine whether a financial asset is measured at amortized cost or fair value. The approach is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used. The standard requires that for financial liabilities measured at fair value, any changes in an entity’s own credit risk are generally to be presented in other comprehensive income instead of net earnings. A new hedge accounting model is included in the standard, as well as increased disclosure requirements about risk management activities for entities that apply hedge accounting. The adoption of these amendments is not expected to have a material impact on the consolidated financial statements. During May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which supersedes IAS 18, Revenue, and IAS 11, Construction Contracts. The standard details a revised model for the recognition of revenue from contracts with customers. In April 2016, the IASB amended IFRS 15 to clarify the guidance on identifying performance obligations, licences of intellectual property and principal versus agent. The amendments also provide additional practical expedients on transition. The standard is effective for first interim periods within annual periods beginning on or after January 1, 2018. During the year, the Company carried out a detailed review of the current recognition criteria for revenue against the requirements of IFRS 15. This review closely examined its agency wine businesses, presentation of certain customer related trade spending and timing of recognition of certain promotional discounts. Based on preliminary work completed, the adoption of this standard is not expected to have a material impact on the consolidated financial statements. In January 2016, the IASB issued IFRS 16, Leases, which will replace IAS 17, Leases and related interpretations. The new standard will be effective for fiscal years beginning on or after January 1, 2019, with early adoption permitted provided the Company has adopted IFRS 15, Revenue from Contracts with Customers. The new standard requires lessees to recognize a lease liability reflecting future lease payments and a “right-of-use asset” for virtually all leases contracts, and record it on the consolidated statement of financial position, except with respect to lease contracts that meet limited exception criteria. Given that the Company has significant contractual obligations in the form of operating leases under IAS 17, there will be a material increase to both assets and liabilities on adoption of IFRS 16, and material changes to the timing of recognition of expenses associated with the lease arrangements. The Company is analyzing the new standard to determine the impact of adopting this standard. 3 Critical accounting estimates and judgments The preparation of consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods and the extent of and the reported amounts in disclosures. Actual results may vary from current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the period in which they change. Specific areas of uncertainty include but are not limited to: ANDREW PELLER LIMITED 2018 | 34 Business combinations For each business combination, the Company measures the identifiable assets acquired and the liabilities assumed at their acquisition-date fair values. The determination of fair value requires the Company to make assumptions, estimates and judgments regarding future events. The allocation process is inherently subjective and impacts the amounts assigned to individual identifiable assets and liabilities, including the fair value of finished goods inventory, long-lived assets, the recognition and measurement of any identified intangible assets and the final determination of the amount of goodwill or gain on acquisition. The inputs to the exercise of judgments include legal, contractual, business and economic factors. As a result, the purchase price allocation impacts the Company’s reported assets and liabilities and future net earnings due to the impact on future cost of goods sold, amortization and impairment tests. Impairment of goodwill and indefinite life intangible assets Testing goodwill for impairment at least annually involves estimating the recoverable amount of the CGUs to which goodwill is allocated. This requires making assumptions about future cash flows, growth rates and discount rates. Testing indefinite life intangible assets for impairment at least annually involves estimating the fair value using the relief of royalty method. This requires making assumptions about royalty rates, growth rates and discount rates. These assumptions are inherently uncertain and as such, actual amounts may vary from these assumptions and cause significant adjustments. Management has concluded that a 10% change in any key assumption in the impairment tests would not result in an impairment of goodwill or indefinite life intangible assets as at March 31, 2018 and 2017. Post-employment benefits Measuring the liability for post-employment benefits uses assumptions for the discount rates, increases in compensation, increases in medical costs and the timing of the payment of benefits. Actual amounts may vary from these assumptions and cause significant adjustments. Fair value of grapes at the point of harvest Where possible, the fair value of grapes at the point of harvest is determined by reference to local market prices for grapes of a similar quality and same varietal. For grapes for which local market prices are not readily available, the average price of similar grapes is used. Actual amounts may vary from these assumptions and cause significant adjustments. 4 Acquisitions During the year, the Company made the following acquisitions: � On October 1, 2017, the Company acquired 100% of the common shares of Gray Monk Cellars Ltd. (Gray Monk) and certain operating assets held by related parties for consideration of $36,384, of which $17,254 was funded in cash and $19,130 was funded by the issuance of 1,579,670 Class A non-voting common shares. Gray Monk generates annual revenue of approximately $11,000 and employs approximately 50 people. The results of operations from October 1, 2017 have been included in these consolidated financial statements. Since the date of acquisition, Gray Monk has generated revenue of $4,951 and net income of $1,069. � On October 1, 2017, the Company acquired 100% of the common and preferred shares of Tinhorn Creek Vineyards Ltd. (Tinhorn) for cash consideration of $28,880. Tinhorn generates annual revenue of approximately $7,000 and employs approximately 50 people. The results of operations from October 1, 2017 have been included in these consolidated financial statements. Since the date of acquisition, Tinhorn has generated revenue of $3,191 and has incurred a net loss of $376. 35 | ANDREW PELLER LIMITED 2018 � On October 10, 2017, the Company acquired 100% of the operating assets of Black Hills Estate Winery (Black Hills) for cash consideration of $31,328. Black Hills generates annual revenue of approximately $6,000 and employs approximately 20 people. The results of operations from October 10, 2017 have been included in these consolidated financial statements. Since the date of acquisition, Black Hills has generated revenue of $544 and has incurred a net loss of $266. These acquisitions have been accounted for as business combinations. The following table summarizes the amounts paid or payable at the dates of the acquisitions and the allocation of the purchase prices to the identifiable assets acquired and liabilities assumed based on management’s estimate of the fair values: Gray Monk Cellars Ltd. Tinhorn Creek Vineyards Ltd. Black Hills Estate Winery Assets acquired Cash Receivables Inventories Current portion of biological assets Prepaid expenses and other assets $ Property, plant and equipment Intangible assets - brand Intangible assets - customer lists Goodwill Liabilities assumed Debt Accounts payable and accrued liabilities Income taxes payable Deferred income taxes Net assets acquired Total purchase consideration 24 $ - $ 934 11,882 312 71 13,223 20,356 2,440 - 5,190 41,209 - 1,358 114 3,353 4,825 36,384 36,384 468 7,977 - 107 8,552 27,459 1,439 - - 37,450 62 532 - 3,812 4,406 33,044 28,880 Total 24 1,402 23,478 312 190 25,406 60,851 6,439 1,680 16,165 - $ - 3,619 - 12 3,631 13,036 2,560 1,680 10,975 31,882 110,541 - - - 554 554 62 1,890 114 7,719 9,785 31,328 100,756 31,328 96,592 Gain on acquisition $ - $ 4,164 $ - $ 4,164 Recognized goodwill reflects the value assigned to expected future synergies and an assembled workforce within the companies. The gain on acquisition relating to the purchase of Tinhorn was a result of the limited number of market participants with the resources to acquire the assets and business of this scale. The gain on acquisition has been recorded as other income (expense) in the consolidated statements of earnings. ANDREW PELLER LIMITED 2018 | 36 5 Inventories Packaging materials and supplies Bulk wine and spirits Finished goods Interest included in the cost of inventories 2018 8,177 85,780 66,197 160,154 644 $ $ $ 2017 9,627 70,806 48,655 129,088 566 $ $ $ Inventory writedowns recognized as an expense amounted to $1,306 (2017 - $1,906). The cost of inventories recognized as an expense and included in cost of goods sold, excluding amortization, was $212,266 (2017 - $209,545). 6 Property, plant and equipment $ $ $ At March 31, 2016 Cost Accumulated amortization Net carrying amount Year ended March 31, 2017 Additions Disposals Amortization Closing net carrying amount At March 31, 2017 Cost Accumulated amortization Net carrying amount Year ended March 31, 2018 Additions Additions from acquisition (note 4) Disposals Amortization Vines, vineyard land and infrastructure Buildings Machinery and equipment Total 40,374 $ (8,069) 45,343 $ (18,066) 116,585 $ 207,118 (98,189) (72,054) 32,305 27,277 44,531 108,929 Land 4,816 $ - 4,816 - - - 573 - (1,329) 9,777 - (1,227) 8,213 (1) (6,097) 18,563 (1) (8,653) 4,816 $ 31,549 $ 35,827 $ 46,646 $ 118,838 4,816 $ - 4,816 - 30,988 - - 40,947 $ (9,398) 55,120 $ (19,293) 122,325 $ 223,208 (104,370) (75,679) 31,549 35,827 46,646 118,838 395 6,119 (72) (1,814) 2,771 21,705 - (1,838) 16,012 2,039 (109) (6,843) 19,178 60,851 (181) (10,495) Closing net carrying amount $ 35,804 $ 36,177 $ 58,465 $ 57,745 $ 188,191 At March 31, 2018 Cost Accumulated amortization $ 35,804 $ - 47,373 $ (11,196) 79,596 $ (21,131) 139,285 $ 302,058 (113,867) (81,540) Net carrying amount $ 35,804 $ 36,177 $ 58,465 $ 57,745 $ 188,191 37 | ANDREW PELLER LIMITED 2018 Included in buildings and machinery and equipment are assets amounting to $1,562 (2017 - $12,378) that are under development and are not being amortized. Contractual commitments to purchase property, plant and equipment were $12,272 as at March 31, 2018 (2017 - $2,890). 7 Biological assets Biological assets consist of grapes prior to harvest that are controlled by the Company. The Company owns and leases land in Ontario and British Columbia to grow grapes in order to secure a supply of quality grapes for the making of wine. During the year ended March 31, 2018, the Company harvested grapes valued at $7,150 (2017 - $6,238). The changes in the carrying amount of biological assets are as follows: Carrying amount - Beginning of year $ 1,400 $ 2018 Acquisitions (note 4) Net increase in fair value less costs to sell due to biological transformation Transferred to inventory on harvest Net gain Biological assets 2017 1,196 - 6,442 (6,238) 204 312 7,339 (7,150) 501 $ 1,901 $ 1,400 The Company is exposed to financial risk because of the long period of time between the cash outflow required to plant grape vines, cultivate vineyards, and harvest grapes and the cash inflow from selling wine and related products from the harvested grapes. Substantially all of the grapes from owned and leased vineyards are used in the Company’s winemaking processes. Owned and leased vineyards, in combination with supply contracts with grape growers, are used to secure a supply of domestic grapes. These strategies reduce the financial risks associated with changes in grape prices. ANDREW PELLER LIMITED 2018 | 38 8 Intangible assets Brands - indefinite life Customers Contract packaging Software Other Total At March 31, 2016 Cost Accumulated amortization and impairment $ 4,175 $ 11,147 $ 1,100 $ 2,133 $ 1,917 $ 20,472 (200) (5,821) (863) (897) (1,651) (9,432) Net carrying amount 3,975 5,326 237 1,236 266 11,040 Year ended March 31, 2017 Additions Amortization - - - (647) - (110) 833 (384) - (132) 833 (1,273) Closing net carrying amount $ 3,975 $ 4,679 $ 127 $ 1,685 At March 31, 2017 Cost Accumulated amortization and impairment $ 4,175 $ 11,147 $ 1,100 $ 2,966 (200) (6,468) (973) (1,281) (1,783) (10,705) Net carrying amount 3,975 4,679 127 1,685 134 10,600 Year ended March 31, 2018 Additions Additions from acquisitions (note 4) Amortization - 6,439 - - 1,680 (734) - - (110) 384 - (493) Closing net carrying amount $ 10,414 $ 5,625 $ 17 $ 1,576 $ $ 134 $ 10,600 1,917 $ 21,305 - - (33) 384 8,119 (1,370) 101 $ 17,733 1,917 $ 29,808 $ $ At March 31, 2018 Cost Accumulated amortization and impairment $ 10,614 $ 12,827 $ 1,100 $ 3,350 (200) (7,202) (1,083) (1,774) (1,816) (12,075) Net carrying amount $ 10,414 $ 5,625 $ 17 $ 1,576 $ 101 $ 17,733 9 Goodwill In order to test goodwill for impairment, the Company allocates the carrying value of goodwill to CGUs based on the lowest level that goodwill is monitored for internal management purposes. The aggregate carrying amount of goodwill allocated to each unit is as follows: Ontario and eastern Canadian wine Western Canadian wine Personal winemaking products 2018 3,134 26,695 23,809 53,638 $ $ 2017 3,134 10,530 23,809 37,473 $ $ 39 | ANDREW PELLER LIMITED 2018 The Company determined the recoverable amount of the related CGUs by estimating their value in use. Key assumptions used are: Pre-tax discount rate Period of projected cash flows Growth rate beyond period of projected cash flows 2018 12% 5 years 3% 2017 11% 5 years 3% The Company uses past experience and current expectations about future performance in projecting cash flows, which are based on financial budgets for five years. For the period after five years, the Company projects cash flows using an assumed growth rate, which is based on expectations about long-term economic growth in Canada and any known industry specific factors that may influence long-term growth in the Canadian wine industry. The discount rate is estimated by referring to external sources of information about the cost of capital and the leverage of companies that operate in a similar industry to the Company and that are of similar size. The rate determined is then adjusted to a pre-tax basis. 10 Bank indebtedness Significant terms of the Company’s operating loan facility are summarized below. The floating rates are stated in relation to the one to six-month Canadian Dealer Offered Rate (CDOR). Bank indebtedness Significant terms Committed until Borrowing limit Interest rate Unused amount 11 Accounts payable and accrued liabilities Trade payables Accrued liabilities Deferred revenue - gift cards Foreign exchange forward contracts liability (note 21) Deferred income 2018 2017 $ 47,324 $ 36,620 September 29, 2022 $90,000 CDOR + 1.90% $42,676 July 31, 2021 $90,000 CDOR + 1.25% $53,380 $ 2018 22,211 10,796 397 - - 33,404 $ $ $ 2017 23,725 12,045 380 8 102 36,260 ANDREW PELLER LIMITED 2018 | 40 12 Long-term debt Revolving, amortizing loan - Investment facility Term loan - Operating facility Term loan - Capital facility Other Less: Financing costs Less: Current portion $ $ 2018 125,255 - - 212 125,467 1,075 124,392 8,135 $ 116,257 $ 2017 - 48,333 2,925 319 51,577 493 51,084 4,406 46,678 On September 29, 2017, the Company amended and restated its debt facilities. Amendments include a revised maturity date of September 29, 2022, revised financial covenants and updated applicable margins based on the Company’s leverage. Additionally, the total borrowing limit was increased to $310,000 and separated into two facilities: a revolving, non-amortizing facility with a borrowing limit of $90,000 to be used for day-to-day operations, distributions and capital expenditures and a revolving, amortizing investment facility with a borrowing limit of $220,000 to be used for acquisitions or capital expenditures. Each draw on the investment facility is subject to a new amortization schedule and required annual repayments increase over the term of the loan. The initial draw on the investment facility was used to refinance the previous operating and capital term loans and to fund acquisitions. Monthly principal repayments of $535 are required on the revolving, amortizing investment facility based on the initial draw until September 30, 2018. Thereafter, monthly principal repayments of $803 are required. As at March 31, 2018, the applicable margin was 1.90% (2017 - 1.25%). Unamortized financing costs relating to the refinanced facilities of $435 as at September 29, 2017 were expensed to interest expense in the consolidated statements of earnings. Financing costs of $1,222 were incurred to amend the debt facilities and these costs will be amortized over the new term of the loan. On October 31, 2017, the Company terminated its existing swap agreements and entered into a new swap agreement to fix the interest rate on the balance outstanding on the investment facility. Until September 29, 2022, the interest rate is fixed at 2.25%, plus the applicable margin. The Company and its subsidiaries have provided their assets as security for these loans. Interest expense on long-term debt during the year was $3,227 (2017 - $1,858). 41 | ANDREW PELLER LIMITED 2018 13 Post-employment benefits Defined contribution plans The total expenses for the defined contribution savings plans were $1,630 (2017 - $1,519). Defined benefit plans The Company has funded defined benefit pension plans. The Company also has an unfunded post-retirement medical benefits plan for certain employees and provides a monthly wine allowance to retired employees, which are collectively referred to as other post-employment benefits. Nature The Company’s defined benefit pension plans pay benefits based on a percentage of final average salary. There are two defined benefit pension plans in British Columbia with members who continue to accrue benefits. New employees are no longer entitled to accrue benefits under these defined benefit pension plans. There is one defined benefit pension plan in Ontario and no further benefits accrue to the members of this plan. All members of the defined benefit pension plan in Ontario have retired. The Company is responsible for administering these pension plans and determining investment policies. A committee of the Company’s Board of Directors is responsible for overseeing the Company’s defined benefit pension plans. Regulatory information The defined benefit pension plans are governed by the Pension Benefits Standards Act in British Columbia and the Pension Benefits Act in Ontario. An appointed actuary prepares a valuation at least every three years for each of the plans. These valuations determine the Company’s minimum contributions. The minimum contributions are primarily based on the normal going concern cost, the funding deficit amortized over 15 years, and the solvency deficit amortized over five years. The solvency deficit is calculated assuming the plan is wound up on the effective date of the valuation. Contributions could be reduced in certain instances via a funding holiday if requirements of the relevant regulations are met, which normally requires the plan to have a surplus above certain threshold levels. Risks The defined benefit plan’s assets are invested in mutual funds. The investment mix for each plan is chosen with the objective that sufficient assets will be available to pay benefits as they come due and to achieve a reasonable return at an acceptable level of risk to stakeholders. The defined benefit plans subject the Company to market, interest rate, currency, price, credit, liquidity and longevity risks, which are typical of such plans. The most significant of these risks is that the expense and cash contributions related to these plans depend on the discount rate used to measure the liability to pay future benefits and the market performance of the plan’s assets set aside to pay these benefits. A decline in long-term interest rates or in asset values could increase the Company’s costs related to funding the deficit in these plans. ANDREW PELLER LIMITED 2018 | 42 Amounts pertaining to defined benefit plans are as follows: Pension benefits Other post- employment benefits 2018 Total 22,320 $ - $ 22,320 $ $ (650) 805 1,398 (1,346) 22,527 24,889 559 892 (1,346) (566) 147 358 $ $ - - 91 (91) - 2,710 72 99 (91) (33) 9 (32) 24,933 2,406 $ $ 2,734 2,734 $ $ Pension benefits Other post- employment benefits 559 87 646 $ $ (589) $ 1,362 $ 13.1 $ $ $ $ 72 99 171 56 128 10.4 (650) 805 1,489 (1,437) 22,527 27,599 631 991 (1,437) (599) 156 326 27,667 5,140 2018 Total 631 186 817 (533) 1,490 12.8 $ $ $ $ $ $ $ $ $ Plan assets Fair value - Beginning of year Return on plan assets excluding amounts in interest income Interest income Company’s contributions Benefits paid Fair value - End of year Plan obligations Accrued benefit obligations - Beginning of year Total current service cost Interest cost Benefits paid Remeasurements Experience gain Loss from change in demographic Loss (gain) from change in financial assumptions assumptions Accrued benefit obligations - End of year Post-employment benefit obligations Benefit plan expense Current service cost Net interest cost on defined benefit liability Net benefit plan expense Amount recognized in other comprehensive loss Net actuarial (loss) gain Expected contributions for the year ending March 31, 2019 Weighted average duration of the defined benefit obligations in years 43 | ANDREW PELLER LIMITED 2018 Plan assets Fair value - Beginning of year Return on plan assets excluding amounts in interest income Interest income Company’s contributions Benefits paid Fair value - End of year Plan obligations Accrued benefit obligations - Beginning of year Total current service cost Interest cost Benefits paid Remeasurements Experience loss (gain) Loss from change in financial assumptions Accrued benefit obligations - End of year Post-employment benefit obligations Benefit plan expense Current service cost Net interest cost on defined benefit liability Net benefit plan expense Amount recognized in other comprehensive loss Net actuarial (loss) gain Expected contributions for the year ending March 31, 2018 Weighted average duration of the defined benefit obligations in years Pension benefits Other post- employment benefits 2017 Total 20,966 $ - $ 20,966 177 804 1,397 (1,024) 22,320 24,084 520 916 (1,024) 76 317 24,889 2,569 Pension benefits 520 112 632 $ $ $ $ $ $ (216) $ 1,357 $ 14.7 - - 109 (109) - 2,829 88 109 (109) (231) 24 2,710 2,710 Other post- employment benefits 88 109 197 207 122 11.1 $ $ $ $ $ $ $ $ 177 804 1,506 (1,133) 22,320 26,913 608 1,025 (1,133) (155) 341 27,599 5,279 2017 Total 608 221 829 (9) 1,479 12.7 $ $ $ $ $ $ $ $ $ ANDREW PELLER LIMITED 2018 | 44 The significant actuarial assumptions adopted in measuring the Company’s accrued benefit obligations and benefits costs are as follows: Discount rate for expenses Discount rate for obligations Rate of compensation increase Rate of medical cost increases Retirement age Inflation rate Mortality tables 2018 2017 3.6% 3.5% 2.5% 5.0% 60 - 65 years 2.0% MI-2017 3.8% 3.6% 2.5% 5.0% 60 - 65 years 2.0% CPM-B 2014 Private table The following table outlines the impact of a reasonable change in significant assumptions assuming all other assumptions are held constant. Changes in numerous assumptions may occur at the same time, which could increase or decrease the impact. With respect to a 1% increase or decrease in the inflation rate, the analysis excludes any impact this would have on the discount rate, medical cost trend rates and the rate of compensation increase. 2018 Pension benefits Other post- employment benefits Pension benefits 2017 Other post- employment benefits Increase (decrease) in the post-employment benefit obligations 1% increase in the discount rate 1% decrease in the discount rate 1% increase in the rate of compensation increase 1% decrease in the rate of compensation increase 1% increase in the inflation rate 1% decrease in the inflation rate $ (2,928) $ 3,583 (267) 301 $ (3,301) $ 4,023 667 (604) 360 (326) 5 (5) - - 952 (840) 365 (329) (263) 339 10 (9) - - At March 31, 2018, the accumulated actuarial losses recognized in other comprehensive loss were $5,725 (2017 - $5,192). Plan assets The plan assets consist of the following: Mutual funds Fixed income Equity $ $ 16,177 6,350 22,527 2018 72% 28 100% $ $ 16,094 6,226 22,320 2017 72% 28 100% 45 | ANDREW PELLER LIMITED 2018 14 Income taxes Current tax on earnings for the year Adjustments in respect of prior years Provision for current income taxes Change in temporary differences Impact of change in tax rate Other Provision for (recovery of) deferred income taxes $ $ 2018 11,797 - 11,797 (714) (1) (145) (860) 2017 9,220 (1,556) 7,664 72 14 145 231 Total provision for income taxes $ 10,937 $ 7,895 The Company’s income tax expense consists of the following: Provision for income taxes at blended statutory rate of 26.05% (2017 - 25.98%) Permanent differences and non-deductible items Deferred tax liability required for purchased assets Future tax rate differential Future income tax rate changes Refunds relating to prior years Other The movement of the deferred income tax account is as follows: At beginning of year Deferred tax liability recognized on acquired assets (note 4) Provision for (recovery of) deferred income taxes in net earnings Recovery of deferred income taxes in other comprehensive loss At end of year 2018 2017 $ 10,696 (741) 228 185 (1) - 570 8,897 346 - - 14 (1,357) (5) 10,937 $ 7,895 2018 15,820 7,719 (860) (139) $ 2017 15,591 - 231 (2) 22,540 $ 15,820 $ $ $ $ ANDREW PELLER LIMITED 2018 | 46 The significant temporary differences giving rise to the deferred income tax liability are comprised of the following: Deferred income tax liability Accelerated tax depreciation and deductions on property, plant and equipment Accelerated tax deductions on intangible assets $ 12,681 $ 2,287 $ (27) 12,654 1,826 1,884 (375) 1,912 2,054 (2,019) March 31, 2016 (Recovery) provision in net earnings March 31, 2017 Deferred tax liability recognized on acquisition of assets (Recovery) provision in net earnings Tax deductions on inventory Tax deductions on goodwill Total - $ - 3,171 $ 18,139 - (402) - 3,171 17,737 3,891 (1,872) (52) 659 7,719 (1,348) March 31, 2018 $ 16,364 $ 1,947 $ 2,019 $ 3,778 $ 24,108 Deferred income tax asset March 31, 2016 (Recovery) provision in net earnings Recovery in other comprehensive loss March 31, 2017 (Recovery) provision in net earnings Recovery in other comprehensive loss Fair value change on derivatives Post- employment benefits $ (862) $ 583 - (279) 366 - (1,554) $ 175 (2) (1,381) 175 (139) Other Total (132) $ (125) - (257) (53) - (2,548) 633 (2) (1,917) 488 (139) March 31, 2018 $ 87 $ (1,345) $ (310) $ (1,568) 47 | ANDREW PELLER LIMITED 2018 15 Capital stock Authorized Unlimited preference shares Unlimited Class A shares, non-voting Unlimited Class B shares, voting Issued Class A shares, non-voting Class B shares, voting Number of shares 35,471,185 8,702,095 44,173,280 $ $ 2018 Amount Number of shares 25,711 386 33,581,487 9,012,123 $ 26,097 42,593,610 $ 2017 Amount 6,567 400 6,967 All of the issued Class A and Class B shares are fully paid and have no par value. Class A shares are non-voting and are entitled to a dividend in an amount equal to 115% of any dividend paid or declared on Class B shares. Class B shares are voting and convertible into Class A shares on a one-for-one basis. In March 2018, 310,028 Class B shares were converted into Class A shares on a one-for-one basis. Quarterly dividends of $0.0450 (previously $0.0408) per Class A share and $0.0391 (previously $0.0355) per Class B share were approved by the Board of Directors on June 7, 2017 and are formally declared in each quarter. The authorized share capital of the Company also consists of an unlimited number of preference shares, issuable in one or more series, of which 33,315 are designated as preference shares, Series A. As at March 31, 2018 and 2017, there were no preference shares issued or outstanding. Stock purchase plan The Company’s full-time salaried and certain hourly employees participate in a Company sponsored stock purchase plan. Under the terms of the plan, employees can purchase a certain number of Class A shares on an annual basis. Employees are required to pay 67% of the market price per Class A share. The Company is responsible for the remainder of the cost and, during 2018, expensed $197 (2017 - $268) related to the employee program. In fiscal 2017, officers of the Company participated in an Equity Incentive Program, where Class A shares of the Company were purchased on their behalf from the open market. During 2018, this program was replaced by the share based compensation program as described in note 16. ANDREW PELLER LIMITED 2018 | 48 16 Share based compensation On September 13, 2017, the Company established a new share based compensation plan comprised of stock options, PSUs and DSUs. The impact of the share based compensation expense is summarized as follows: 241,600 stock options (2017 - nil) (a) 72,750 performance share units (2017 - nil) (b) 69,559 deferred share units (2017 - nil) (c) 2018 259 146 1,268 1,673 $ $ The stock options, PSUs and DSUs are equity settled and as such, the expense associated with these instruments is recorded as a share based compensation expense through the consolidated statements of earnings and comprehensive income with a corresponding entry made to contributed surplus on the consolidated balance sheets. The maximum number of shares that may be issued under all share based compensation arrangements implemented by the Company, including the stock option plan, the PSU plan and the DSU plan, may not exceed 10% of the total number of Class A non-voting common shares issued and outstanding from time to time. As at March 31, 2018, the Company had 3,358,149 Class A non-voting common shares reserved for issuance under the share based compensation arrangements. a) Stock options The Company has a stock option plan under which options to purchase Class A non-voting common shares may be granted to officers and employees of the Company. Options granted under the plan have an exercise price of not less than the volume weighted average trading price of the Class A non-voting common shares where they are listed for the five trading days prior to the date of the grant. Options granted vest in tranches, equally over a three-year period on each anniversary of the grant date, commencing on the first anniversary of the grant date. The Company’s stock option transactions during the year were as follows: Balance - March 31, 2017 Granted on September 21, 2017 Granted on November 13, 2017 Forfeited on November 17, 2017 Forfeited on February 9, 2018 Forfeited on February 28, 2018 Forfeited on March 16, 2018 Weighted average exercise price per share - 11.66 12.80 (11.66) (11.66) (11.66) (11.66) Number of options - $ 252,300 17,600 (1,900) (1,700) (6,300) (18,400) 241,600 $ 11.74 The stock options granted on September 21, 2017 expire on September 21, 2027. The stock options granted November 13, 2017 expire on November 13, 2027. 49 | ANDREW PELLER LIMITED 2018 For options granted during the year, the fair value was estimated on the grant date using the Black-Scholes fair value option pricing model using the following weighted average assumptions: Weighted average fair value per share option Expected volatility (1) Dividend yield Risk-free interest rate Weighted average expected life in years $3.41 30.43% 1.75% 1.00% 10 (1) Expected volatility was determined using historical volatility. No stock options granted under the share based compensation plan have vested or been exercised as at March 31,2018. b) PSU plan The Company has established a PSU plan for employees and officers of the Company. PSUs represent the right to receive Class A non-voting common shares settled by the issuance of treasury shares or shares purchased on the open market. PSUs vest in full at the end of the third fiscal year after the grant date. The number of units that will vest is determined based on the achievement of certain performance conditions (i.e., financial targets) established by the Board of Directors and are adjusted by a factor, which ranges from 0.5 to 2.0, depending on the achievement of the targets established. Therefore, the number of units that will vest and are exchanged for Class A non-voting common shares may be higher or lower than the number of units originally granted to a participant. The Company’s PSU transactions during the year were as follows: Balance - March 31, 2017 Granted on September 21, 2017 Granted on November 13, 2017 Forfeited on November 17, 2017 Forfeited on February 9, 2018 Forfeited on February 28, 2018 Forfeited on March 16, 2018 Number of units Grant date fair value per unit - $ 76,280 4,690 (560) (510) (1,570) (5,580) - 11.66 12.80 (11.66) (11.66) (11.66) (11.66) 72,750 $ 11.74 No PSUs granted under the share based compensation plan have vested or been exercised as at March 31, 2018. c) DSU plan The Company has established a DSU plan for employees, officers and Directors of the Company. DSUs represent the right to receive Class A non-voting common shares settled by the issuance of treasury shares or shares purchased on the open market. DSUs vest immediately, but are only exercisable when the participant’s employment with the Company ceases, or when the participant is no longer a director of the Company. ANDREW PELLER LIMITED 2018 | 50 The Company’s DSU transactions during the year were as follows: Balance - March 31, 2017 Granted on March 13, 2018 Granted on March 31, 2018 Number of units Grant date fair value per unit - $ 9,780 59,779 69,559 $ - 18.41 18.22 18.25 No DSUs granted under the share based compensation plan have been exercised as at March 31, 2018. 17 Nature of expenses The nature of expenses included in selling and administration and cost of goods sold, excluding amortization, are as follows: Raw materials and consumables Employee compensation and benefits Advertising, promotion and distribution Occupancy Repairs and maintenance Other external charges Other (income) expenses are as follows: Gain on acquisition (note 4) Ongoing maintenance costs related to Port Moody winery facility (a) Income related to Port Moody winery facility (b) Other $ 2018 174,825 67,712 28,504 11,885 6,708 21,403 2017 173,225 63,412 24,025 11,169 6,803 18,835 311,037 $ 297,469 2018 (4,164) $ 572 (101) (149) (3,842) $ 2017 - 524 (404) - 120 $ $ $ $ a) During fiscal 2006, the Company closed its Port Moody winery facility and transferred production to its winery operations in Kelowna, British Columbia. Effective July 1, 2012, the property was expropriated for a five-year period. The cost of maintaining this idle facility and costs associated with its expropriation amounted to $572 in 2018 (2017 - $524). b) Income amounting to $101 (2017 - $404) was recorded related to the Company’s idle Port Moody property related to expropriation notices received by the Company. 51 | ANDREW PELLER LIMITED 2018 18 Net earnings per share Class A Class B 2018 Total Net earnings attributed for the year - basic and diluted $ 24,545 $ 5,572 $ 30,117 Weighted average number of shares outstanding - basic and diluted 34,539,843 8,986,571 Net earnings per share - basic and diluted $ 0.71 $ 0.62 Net earnings attributed for the year - basic and diluted Weighted average number of shares outstanding - basic and diluted Net earnings per share - basic and diluted $ $ 19 Commitments Class A Class B 2017 Total 21,363 $ 4,987 $ 26,350 33,581,487 9,012,123 0.64 $ 0.55 In certain instances, the Company leases land for the purpose of operating vineyards. The terms of the land leases are 30 and 32 years, which expire in 2036 and 2029, respectively. Under the terms of one land lease, the Company has the option to agree in advance to purchase any grapes grown on the property at fair value for five or more years after the termination of the lease. The Company also has a right of first refusal to purchase the land under both land leases. The terms of such a purchase would be negotiated based on market conditions existing at the time of the purchase. The Company leases various storage facilities, offices, and retail locations. The remaining terms of these leases range between one and ten years. The Company also leases various equipment and vehicles with remaining lease terms between one and five years. In many cases, the Company has renewal options for fair market rental prices at the time of renewal. The Company’s minimum lease payments as at March 31, 2018 under long-term non-cancellable leases are outlined in note 21 along with its other contractual obligations. In 2018, minimum lease payments of $6,249 (2017 - $5,289) were recognized as an expense. ANDREW PELLER LIMITED 2018 | 52 20 Non-cash working capital items The change in non-cash working capital items related to operations is comprised of the change in the following items: Accounts receivable Inventories and current portion of biological assets Prepaid expenses and other assets Accounts payable and accrued liabilities 2018 (3,031) (7,615) (1,105) (4,138) $ (15,889) $ $ $ 2017 1,250 (9,626) (1,324) 2,042 (7,658) 21 Financial instruments Classification of financial instruments The classification and measurement of the financial assets and liabilities, as well as their carrying amounts and fair values are as follows: Assets/liabilities Category Measurement Carrying amount Loans and receivables Amortized cost Amortized cost Other liabilities $ 31,406 $ 47,324 Accounts receivable Bank indebtedness Accounts payable and accrued liabilities Dividends payable Long-term debt Interest rate swap asset Foreign exchange forward contracts asset Other liabilities Other liabilities Other liabilities Derivatives Amortized cost Amortized cost Amortized cost Fair value Derivatives Fair value 33,404 1,935 124,392 180 152 Carrying amount Assets/liabilities Category Measurement Accounts receivable Bank indebtedness Accounts payable and accrued liabilities Dividends payable Long-term debt Interest rate swap liability Foreign exchange forward contracts liability Loans and receivables Amortized cost Amortized cost Other liabilities $ 26,973 $ 36,620 Other liabilities Other liabilities Other liabilities Derivatives Amortized cost Amortized cost Amortized cost Fair value Derivatives Fair value 36,252 1,690 51,084 1,060 8 2018 Fair value 31,406 47,324 33,404 1,935 124,392 180 152 2017 Fair value 26,973 36,620 36,252 1,690 51,084 1,060 8 The Company’s interest rate swaps and foreign exchange contracts are derivatives and are recorded at fair value. As a result, unrealized gains and losses are included each period through earnings, which reflect changes in fair value. Fair value The fair value of accounts receivable, accounts payable and accrued liabilities and dividends payable approximates their carrying value because of the short-term maturity of these instruments. 53 | ANDREW PELLER LIMITED 2018 The fair value of bank indebtedness and long-term debt is equivalent to its carrying value because the variable interest rate is comparable to market rates. The fair value of the interest rate swaps used to fix the interest rate on long-term debt is included in the current and long-term derivative financial instruments in the consolidated balance sheets. The fair value of foreign exchange forward contracts is determined based on the difference between the contract rate and the forward rate at the date of the valuation. The fair value of the interest rate swaps is determined based on the difference between the fixed interest rate in the contract that will be paid by the Company and the forward curve of the floating interest rates that are expected to be paid by the counterparty. The fair value of foreign exchange forward contracts and the interest rate swaps are adjusted to reflect any changes in the Company’s or the counterparty’s credit risk. Fair value estimates are made at a specific point in time, using available information about the instrument. These estimates are subjective in nature and often cannot be determined with precision. The net unrealized gain on derivative financial instruments is comprised of: Unrealized gains on foreign exchange forward contracts Unrealized gains on interest rate swaps 2018 160 1,240 1,400 $ $ 2017 1,118 1,114 2,232 $ $ The fair value measurements of the Company’s financial instruments are classified in the hierarchy below according to the significance of the inputs used in making the fair value measurements. Quoted prices in active markets for identical assets Significant observable inputs other than quoted prices Asset/liability (Level 1) (Level 2) Interest rate swap asset Foreign exchange forward contracts asset $ - $ - 180 $ 152 Asset/liability Quoted prices in active markets for identical assets (Level 1) Significant observable inputs other than quoted prices (Level 2) 2018 Significant unobservable inputs (Level 3) - - 2017 Significant unobservable inputs (Level 3) Interest rate swap liability Foreign exchange forward contracts liability $ - $ - 1,060 $ 8 - - ANDREW PELLER LIMITED 2018 | 54 Objectives and policy relating to financial risk management Interest rate risk The Company is exposed to interest rate risk as a result of cash balances, floating rate debt, and interest rate swaps. Of these risks, the Company’s principal exposure is that increases in the floating interest rates on its debt, if unmitigated, could lead to decreases in cash flow and earnings. The Company’s objective in managing interest rate risk is to achieve a balance between minimizing borrowing costs over the long term, ensuring it meets borrowing covenants, and ensuring it meets other expectations and requirements of investors. To meet these objectives, the Company’s policy is to effectively fix the rates on long-term debt to match the duration of investments in long-lived assets and to use floating rate funding for short-term borrowing. The Company has effectively fixed its interest rate on its long-term debt until September 2022 by entering into interest rate swaps. The interest rate swaps are measured at fair value. An unrealized gain of $1,240 (2017 - $1,114) was recognized on the interest rate swaps, which are classified as a component of the net unrealized gain on derivative financial instruments in the consolidated statements of earnings. The Company’s short-term borrowings are funded using a floating interest rate and as such are sensitive to interest rate movements. As at March 31, 2018, with other variables unchanged, a 100 basis point change in interest rates would impact the Company’s net earnings by approximately $350 (2017 - $271), exclusive of the mark-to-market adjustments on the interest rate swaps. Credit risk Credit risk arises from cash, derivative financial instruments and accounts receivable. The Company places its cash and cash equivalents with major Canadian financial institutions. Counterparties to derivative contracts are also major financial institutions. Credit risk for trade receivables is monitored through established credit monitoring activities. Over 50% of the Company’s accounts receivable balance relates to amounts owing from Canadian provincial liquor boards. Excluding accounts receivable from Canadian provincial liquor boards, the Company does not have a significant concentration of credit risk with any single counterparty or group of counterparties. Amounts owing from Canadian provincial liquor boards represent $16,509 (2017 - $14,115) of the total accounts receivable for which no allowance has been provided. Of the remaining non-provincial liquor board balances, $1,483 (2017 - $948) was over thirty days past due as at March 31, 2018. An allowance for doubtful accounts of $162 (2017 - $127) has been provided against these accounts receivable amounts, which the Company has determined represents a reasonable estimate of amounts that may be uncollectible. Sales to its largest customer, a provincial Crown corporation, were $64,215 (2017 - $60,415) during the year ended March 31, 2018. Sales to its second largest customer, a branch of a provincial government, were $42,622 (2017 - $41,304) during the year. An analysis of accounts receivable is as follows: Liquor boards Non-liquor boards Current Past due 0 - 30 days, due on delivery accounts Past due 0 - 30 days Past due 31 - 60 days Past due > 60 days Allowance for doubtful accounts 55 | ANDREW PELLER LIMITED 2018 2018 $ 16,509 $ 11,110 913 1,553 786 697 (162) $ 31,406 $ 2017 14,115 10,709 534 794 332 616 (127) 26,973 The change in the allowance for doubtful accounts was as follows: Balance - Beginning of year Provision for current year Bad debts Balance - End of year Liquidity risk 2018 127 110 (75) 162 $ $ 2017 124 141 (138) 127 $ $ The Company incurs obligations to deliver cash or other financial assets on future dates. Liquidity risk inherently arises from these obligations, which include requirements to repay debt, purchase grape inventory and make operating lease payments. The Company manages liquidity risk by maintaining adequate cash and cash equivalent balances and by appropriately utilizing its operating line of credit. Company management continuously monitors and reviews both actual and forecasted cash flows and matches the maturity profile of financial assets and financial liabilities. Accounts payable and accrued liabilities are generally due within 30 days. The following table outlines the Company’s contractual undiscounted obligations. The Company analyzes contractual obligations for financial liabilities in conjunction with other commitments in managing liquidity risk. Contractual obligations include long-term debt, the expected payments under swap agreements that fix the Company’s interest rate on long-term debt, operating leases and commitments on short-term forward foreign exchange contracts used to mitigate the currency risk on purchases denominated in foreign currencies as at March 31, 2018. $ Long-term debt Leases and royalties Pension obligations Grape and bulk wine purchase contracts Packaging purchase contracts Bulk whiskey purchase contracts Interest rate swap Foreign exchange forwards < 1 year 8,135 $ 5,092 514 79,100 30,392 525 123,758 2,740 8,720 2 - 3 years 4 - 5 years 20,982 $ 6,419 734 77,282 1,457 80 96,350 $ 4,373 576 56,850 - - 106,954 4,828 - 158,149 2,934 - > 5 years - $ 8,176 888 144,276 - - 153,340 - - Total 125,467 24,060 2,712 357,508 31,849 605 542,201 10,502 8,720 Total contractual obligations $ 135,218 $ 111,782 $ 161,083 $ 153,340 $ 561,423 The Company’s obligations under its interest rate swaps and foreign exchange forward contracts are stated above on a gross basis rather than net of the corresponding contractual benefits. The Company has entered into grape purchase contracts with certain suppliers to purchase their crops at the time of harvest for prices set by the market. The amount of the commitment will change based on the total tonnes harvested or the prices set by the market for specific grapes and the amount included in the table above represents management’s best estimate of the Company’s commitment over the periods noted. Foreign exchange risk Certain of the Company’s purchases are denominated in US dollars (US$), euro (EUR) or Australian dollars (AU$). Any increases or decreases to the foreign exchange rates could increase or decrease the Company’s earnings. To mitigate the exposure to foreign exchange risk, the Company has entered into forward foreign currency contracts. ANDREW PELLER LIMITED 2018 | 56 The Company’s foreign exchange risk arises on the purchase of bulk wine and concentrate, which are priced in US dollars, euro and Australian dollars. The Company’s strategy is to hedge approximately 50% to 80% of its annual foreign exchange requirements prior to or during the beginning of each fiscal quarter. As at March 31, 2018, the Company has forward foreign currency contracts to buy US$4,700 at rates ranging between $1.23 and $1.27, EUR900 at rates averaging 1.55 and AU$1,400 at rates averaging $1.00. These contracts mature at various dates to June 2018. After considering the offsetting impact of these forward contracts, a 1% increase or decrease to the exchange rate of the US dollar, the euro or the Australian dollar would impact the Company’s net earnings by approximately $197 (2017 - $162), $68 (2017 - $27) or $111 (2017 - $98), respectively. The Company has elected to not use hedge accounting and as a result, has recognized unrealized foreign exchange gains of $160 (2017 - $1,118) in the consolidated statements of earnings as a component of the net unrealized gain on derivative financial instruments and has recorded the fair value of $152 in the current portion of derivative financial instruments (2017 - $8 liability recorded in accounts payable and accrued liabilities) in the consolidated balance sheets. 22 Capital disclosures The Company’s objective when managing capital is to safeguard the Company’s ability to continue as a going concern, to provide an adequate return to shareholders and to meet external capital requirements on debt and credit facilities. The Company’s capital consists of cash, bank indebtedness, long-term debt and shareholders’ equity. The primary uses of capital are to make increases to non-cash working capital, fund maintenance and growth-related capital expenditures, pay dividends and finance acquisitions. In order to meet the Company’s objectives in managing capital, the Company prepares annual budgets of cash, earnings and capital expenditures that are updated during the year as necessary. The annual budget is approved by the Board of Directors. As part of the existing debt agreement, the Company is subject to financial covenants, which consist of the following: � funded debt to a rolling twelve-month EBITDA, which is defined as consolidated earnings before interest, amortization and taxes excluding unusual and non-recurring items that are agreed to by the Company and the lender; and � fixed charge coverage ratio. Compliance with these covenants is monitored by management on a quarterly basis. As at March 31, 2018 and March 31, 2017, the Company was in compliance with these covenants. 23 Related parties and management compensation The Company is controlled by Jalger Limited, which owns 57.4% of the Company’s Class B voting shares. No individual has sole voting power or control in respect of the shares of the Company owned by Jalger Limited. 57 | ANDREW PELLER LIMITED 2018 Compensation of directors and executives The compensation expense recorded for directors and members of the Executive Management Team of the Company is shown below: Compensation and short-term benefits Post-employment benefits Share based compensation expense Payments to a share purchase plan 2018 3,848 296 1,422 - $ 5,566 $ 2017 6,951 302 - 381 7,634 $ $ The compensation and short-term benefits expense consists of amounts that will primarily be settled within twelve months. 24 Segmented information During the year, export sales were $12,247 (2017 - $12,177), primarily in the United States. The remainder of sales occurred in Canada. All of the Company’s assets are located in Canada. 25 Events after the reporting period On June 6, 2018, the Company’s Board of Directors approved a 14% increase in the quarterly dividend for holders of its Class A and Class B shares, from $0.0450 per Class A share and $0.0391 per Class B share to $0.0513 per Class A share and $0.0446 per Class B share. This increased quarterly dividend will be paid on July 6, 2018 to shareholders of record at the close of business on June 29, 2018. ANDREW PELLER LIMITED 2018 | 58 TEN-YEAR SUMMARY (in thousands of Canadian dollars, except per share amounts) Sales and earnings Net sales EBITA Net earnings (loss) Financial position Working capital Total assets Shareholders’ equity Per share (10) Net earnings (loss) (10) Basic & diluted Class A Basic & diluted Class B Dividends (10) Class A Shares, non-voting Class B Shares, voting Number of shares outstanding (in thousands of shares) (10) Class A Shares, non-voting Class B Shares, voting Other information Return on average shareholders’ equity (8) Return on average capital employed (9) 2018 2017 2016 $ 363,897 52,860 30,117 $ 342,606 45,137 26,350 $ 334,263 40,916 19,199 2015 Restated (7) $ 315,697 35,184 (7) 15,224 (7) $ 297,824 33,729 14,021 2014 104,417 457,780 220,246 78,825 327,478 177,317 71,665 308,309 157,736 68,982 301,519 (7) 147,375 (7) 44,564 301,015 138,003 0.71 0.62 0.180 0.156 35,471 8,702 44,173 15.2% 14.0% 0.64 0.55 0.163 0.142 33,581 9,012 42,593 0.46 0.40 0.150 0.130 33,581 9,012 42,593 15.7% 12.6% 14.1% 13.2% 0.36 (7) 0.32 (7) 0.140 0.122 33,882 9,012 42,894 10.6% (7) 11.0% (7) 0.34 0.29 0.133 0.116 33,882 9,012 42,894 10.5% 10.8% (1) Excludes the net impact of discontinued operations. (2) Excludes the after-tax impact of mark-to-market adjustments on an interest rate swap. (3) Includes an after-tax gain of $11.9 million for the sale of Granville Island Brewing Company Ltd. and Mainland Beverage (4) Excludes an after-tax gain of $11.9 million for the sale of Granville Island Brewing Company Ltd. and Mainland Beverage Distribution Ltd. Distribution Ltd. 59 | ANDREW PELLER LIMITED 2018 2013 Restated (6) 2012 2011 Restated (5) 2010 $ 289,143 33,489 (6) 14,519 (6) $ 276,883 32,651 13,001 $ 265,420 31,544 (5) 11,223 (5) $ 263,151 (3) 27,354 (3) 21,661 (3) 41,670 296,519 129,701 (6) 34,869 285,552 120,552 27,643 (5) 267,996 (5) 114,297 (5) 29,357 263,716 113,665 2009 Restated (1) $ 251,136(1) 23,359(1) (125) 29,203 293,507 96,791 0.35 (6) 0.30 (6) 0.120 0.105 33,882 9,012 42,894 11.6%(6) 11.1%(6) 0.31 0.27 0.120 0.105 33,882 9,012 42,894 11.1% 11.5% 0.26 (5) 0.22 (5) 0.110 0.096 33,882 9,012 42,894 9.8% (5) 11.6% (5) 0.50 (3) 0.43 (3) 0.110 0.096 35,664 9,012 44,676 6.8% (2,4) 9.1% (2,4) ($0.00) ($0.00) 0.110 0.096 35,664 9,012 44,676 6.0% (2) 7.9% (2) (5) March 31, 2012 and subsequent periods have been prepared in accordance with International Financial Reporting Standards ("IFRS"). The March 31, 2011 period was restated in accordance with IFRS. Amounts for March 31, 2010 and prior have not been prepared in accordance with IFRS. They have been presented in accordance with Canadian GAAP prior to IFRS transition and may not be comparable to subsequent periods. (6) Restated to reflect the adoption of the amendments to IAS 19. (7) Restated to reflect the adoption of the amendments to IAS 16 and IAS 41. (8) Return on average shareholders' equity is calculated as net earnings divided by average shareholders’ equity. (9) To determine return on average capital employed, return is calculated as EBITA less amortization. Capital employed is calculated as total assets less non-interest bearing liabilities. For 2008 and prior periods certain non-interest-bearing debt was included in capital employed and may not be comparable to subsequent periods. (10) Restated to reflect the three-for-one stock split completed in October of 2016. ANDREW PELLER LIMITED 2018 | 60 Officers JOHN E. PELLER Executive Chairman & Chief Executive Officer RANDY A. POWELL President PETER B. PATCHET CFO and Executive Vice-President, IT SHAWN B. MACLEOD Executive Vice-President, Marketing SARA E. PRESUTTO Executive Vice-President, Human Resources ERIN L. ROONEY Executive Vice-President, Sales BRENDAN P. WALL Executive Vice-President, Operations GREGORY J. BERTI Vice-President, Government Relations and Export JAMES H. COLE Vice-President, Retail and Estate Wine Group GAVIN J. HAWTHORNE Vice-President, Sales & Marketing GVI CRAIG D. MCDONALD Vice-President, Winemaking DIRECTORS & OFFICERS Directors JOHN E. PELLER Burlington, Ontario Executive Chairman & CEO Andrew Peller Limited MARK W. COSENS Burlington, Ontario Managing Director Kilbride Capital Partners LORI C. COVERT Halifax, Nova Scotia Corporate Director RICHARD D. HOSSACK, PhD Toronto, Ontario Corporate Director MICHELLE E. MALLETT DIEMANUELE President & CEO Trillium Health Partners Toronto, Ontario PERRY J. MIELE Burlington, Ontario Chairman and Partner Beringer Capital A. ANGUS PELLER M.D. Toronto, Ontario Senior Medical Consultant Medcan Health Management Inc. Honorary Directors C. WILLIAM DANIEL, O.C. Toronto, Ontario JOHN F. PETCH, O.C. Toronto, Ontario BRIAN J. SHORT Hamilton, Ontario 61 | ANDREW PELLER LIMITED 2018 SHAREHOLDER INFORMATION Head Office ANDREW PELLER LIMITED 697 South Service Road Grimsby, Ontario L3M 4E8 Tel: (905) 643-4131 Fax: (905) 643-4944 Stock Exchange TORONTO Symbols: ADW.A/ADW.B Shareholder Inquiries Computershare Inc. operates Investor Services services for inquiries regarding changes of address, stock transfers, registered shareholdings, dividends and lost certificates. Phone: Fax: 1-800-564-6253 toll free North America (International 514-982-7555) 1-866-249-7775 toll free North America (International 416-263-9524) Rgistrar and Transfer Agent COMPUTERSHARE INVESTOR SERVICES INC. Internet: Auditors PRICEWATERHOUSECOOPERS LLP Bankers BANK OF MONTREAL NATIONAL BANK RABOBANK ROYAL BANK OF CANADA TORONTO DOMINION BANK www.computershare.com The Investors section offers enrolment for self-service account management for registered shareholders through Investor Centre. Mail: Computershare Investor Services 100 University Avenue, 9th Floor Toronto, Ontario M5J 2Y1 Investor Relations For additional information regarding the Company’s activities, please contact: Peter Patchet Chief Financial Officer and Executive Vice President, Information Technology at the Head Office address or by email at: info@andrewpeller.com 2018 Annual Shareholders’ Meeting The 2018 Annual Meeting of Shareholders’ will be held at the Wayne Gretzky Estate Winery & Craft Distillery, Niagara-on-the-Lake, Ontario on Wednesday, September 12, 2018 at 3:00 p.m. ANDREW PELLER LIMITED 2018 | 62 AJAX SOBEYS WITHIN GROCERY AISLE 955 WESTNEY ROAD S. (905) 6831705 SOBEYS 260 KINGSTON ROAD W. (905) 4286500 REAL CANADIAN SUPERSTORE 30 KINGSTON ROAD W. (905) 4287829 ANCASTER SOBEYS WITHIN GROCERY AISLE 977 GOLF LINKS ROAD (905) 6481465 FORTINOS 54 WILSON STREET (905) 3040094 BARRIE ZEHRS 11 BRYNE DRIVE (705) 7258121 BARRIE ESSA CENTRE 555 ESSA ROAD UNIT#5 (705) 7971480 BOLTON ZEHRS 487 QUEEN STREET S. (905) 8574166 BRAMALEA METRO 25 PEEL CENTRE DRIVE (905) 7934246 BRAMPTON FOOD BASICS CENTENNIAL MALL 227 VODDEN STREET (905) 4592386 SOBEYS WITHIN GROCERY AISLE 930 NORTH PARK DRIVE (905) 7939071 BROCKVILLE REAL CANADIAN SUPERSTORE 1972 PARKEDALE AVE. (613) 3428477 BURLINGTON FORTINOS WITHIN GROCERY AISLE 2025 GUELPH LINE (905) 3363849 MARILU’S MARKET 4025 NEW STREET (905) 6328580 SOBEYS WITHIN GROCERY AISLE 1250 BRANT STREET (905) 3198670 WALKERS PLACE 3505 UPPER MIDDLE ROAD (905) 3369101 LAKESIDE SHOPPING VILLAGE 5353 LAKESHORE ROAD (905) 6818282 CAMBRIDGE ZEHRS 180 HOLIDAY INN DRIVE (519) 6511145 ZEHRS 400 CONESTOGA BLVD. (519) 6241103 NO FRILLS 980 FRANKLIN BLVD (519) 6222552 COLLINGWOOD LOBLAWS 12 HURONTARIO STREET (705) 4462237 METRO WITHIN GROCERY AISLE 640 FIRST STREET EXTENSION (705) 4441730 EAST YORK SOBEYS 1015 BROADVIEW AVE. (416) 4677760 ETOBICOKE LOBLAWS WITHIN GROCERY AISLE 380 THE EAST MALL (416) 6959567 FERGUS ZEHRS 800 TOWER STREET S. (519) 7877721 GEORGETOWN REAL CANADIAN SUPERSTORE WITHIN GROCERY AISLE 171 GUELPH STREET (905) 8771815 GRIMSBY REAL CANADIAN SUPERSTORE 361 SOUTH SERVICE ROAD (905) 9459982 63 | ANDREW PELLER LIMITED 2018 GUELPH ZEHRS 297 ERAMOSA ROAD (519) 8247922 ZEHRS HARTSLAND PLAZA WITHIN GROCERY AISLE 160 KORTRIGHT ROAD, W. (519) 8379293 NO FRILLS 167 SILVERCREEK PARKWAY (519) 8370540 HAMILTON FORTINOS 50 DUNDURN STREET S. (905) 5284003 MILTON LONGOS 1079 MAPLE AVE (905) 6938850 MISSISSAUGA SOBEYS 5602 10th LINE W. (905) 8580123 CREDIT LANDING SHOPPING CENTRE 228 LAKESHORE ROAD W. (905) 2718686 SOUTH COMMON CENTRE 2150 BURNHAMTHORPE ROAD W. (905) 8209958 FORTINOS EASTGATE MALL WITHIN GROCERY AISLE 75 CENTENNIAL PARKWAY N. (905) 5614504 NEWMARKET METRO 1111 DAVIS DRIVE (905) 8530401 FORTINOS WITHIN GROCERY AISLE 1579 MAIN STREET W. (905) 5228882 KESWICK ZEHRS 24018 WOODBINE AVE. (905) 4768544 KINGSTON LOBLAWS WITHIN GROCERY AISLE 1048 MIDLAND AVE. (613) 3896139 KITCHENER ZEHRS 750 OTTAWA STREET S. (519) 7452183 LOBLAW SUPERSTORE WITHIN GROCERY AISLE 39 875 HIGHLAND ROAD W. (519) 7425844 LONDON METRO ADELAIDE CENTRE WITHIN GROCERY AISLE 1030 ADELAIDE STREET N. (519) 6793717 METRO WITHIN GROCERY AISLE 395 WELLINGTON STREET S. (519) 6497180 LOBLAWS 3040 WONDERLAND ROAD S. (519) 6682224 REAL CANADIAN SUPERSTORE WITHIN GROCERY AISLE 18120 YONGE STREET N. (905) 8952412 METRO 16640 YONGE STREET (905) 8303448 NIAGARA ON THE LAKE THE OUTLET COLLECTION 300 TAYLOR ROAD (905)7040550 WINE COUNTRY VINTNERS 27 QUEEN STREET (905) 4681881 NORTH YORK LOBLAW GREAT FOOD 3501 YONGE STREET (416) 4817699 OAKVILLE SOBEYS 511 MAPLE GROVE DRIVE (905) 3383042 LONGOS 469 CORNWALL ROAD (905) 3380880 SOBEYS ABBEY PLAZA 1500 UPPER MIDDLE ROAD W. (905) 8472944 ORANGEVILLE ZEHRS, HERITAGE MALL 50 4TH AVE. (519) 9428752 OSHAWA METRO 285 TAUNTON ROAD E. (905) 5716167 REAL CANADIAN SUPERSTORE 1385 HARMONY ROAD N. (905) 4381800 NO FRILLS 1300 KING STREET E. (905) 7283767 OTTAWA SOUTHGATE SHOPPING CENTRE 2515 BANK STREET (613) 5235837 SOBEYS 187 METCALFE STREET (613) 5655062 METRO WITHIN GROCERY AISLE 50 BEECHWOOD AVENUE (613) 7464300 (Ottawa) GLOUCESTER YOUR INDEPENDENT GROCER 671 RIVER ROAD (613) 8223080 (Ottawa) NEPEAN LOBLAWS 59 ROBERTSON ROAD (613) 8207219 LOBLAWS 1460 MERIVALE ROAD (613) 7235507 (Ottawa) VANIER LOBLAWS WITHIN GROCERY AISLE 100 MCARTHUR ROAD (613) 7499618 OWEN SOUND ZEHRS 1150 SIXTEENTH STREET E. (519) 3718664 PETERBOROUGH REAL CANADIAN SUPERSTORE 769 BORDEN AVE. (705) 7402513 PICKERING YOUR INDEPENDENT GROCER 1900 DIXIE ROAD (905) 8316705 SCARBOROUGH METRO WITHIN GROCERY AISLDE 3221 EGLINTON AVE. E. (416) 2672795 SIMCOE SOBEYS WITHIN GROCERY AISLE 470 NORFOLK STREET S. (519) 4261033 ST. CATHARINES FRESCHO 318 ONTARIO STREET (905) 6858898 ZEHRS, PEN CENTRE 221 GLENDALE AVE. (905) 6884767 ZEHRS, FAIRVIEW MALL WITHIN GROCERY AISLE 285 GENEVA STREET (905) 6467363 REAL CANADIAN SUPERSTORE 411 LOUTH STREET (905) 6859779 GRANTHAM PLAZA 400 SCOTT STREET (905) 9340981 LAKESHORE SQUARE PLAZA 33 LAKESHORE ROAD (905) 9375093 ST. THOMAS REAL CANADIAN SUPERSTORE 1063 TALBOT STREET (519) 6336343 STITTSVILLE YOUR INDEPENDENT GROCER WITHIN GROCERY AISLE 1251 MAIN STREET (613) 8313837 TORONTO 1002 BAY STREET S. (416) 9299706 METRO 656 EGLINTON AVE. E. (416) 4850093 LOBLAWS WITHIN GROCERY AISLE 50 MUSGRAVE STREET (416) 6936336 LONGOS 93 LAIRD DRIVE (416) 4241362 LOBLAWS WITHIN GROCERY AISLE 3671 DUNDAS STREET W. (416) 7628635 QUEENS QUAY 228 QUEENS QUAY W. (416) 5988880 SOBEYS 125 THE QUEENSWAY (416) 2018221 YORKVILLE VILLAGE 87 AVENUE ROAD (416) 9236336 ST. LAWRENCE WINE MARKET 93 FRONT STREET E. (416) 3641811 SOBEYS URBAN FRESH 22 FORT YORK BLVD. (416) 6230793 LOBLAWS 650 DUPONT STREET (416) 5338484 METRO 1230 QUEEN STREET WEST (416) 5339180 BLOOR WEST VILLAGE 2273 BLOOR STREET W. (416) 7668654 UXBRIDGE ZEHRS WITHIN GROCERY AISLE 323 TORONTO STREET S. (905) 8525008 WATERDOWN WATERDOWN SHOPPING CENTRE 255 DUNDAS STREET E. (905) 6893420 WATERLOO ZEHRS, BEECHWOOD PLAZA 450 ERB STREET W. (519) 7475897 ZEHRS 315 LINCOLN ROAD (519) 7467226 WELLAND ZEHRS 821 NIAGARA STREET (905) 7149521 WHITBY SOBEYS 1615 DUNDAS STREET E. (905) 7284118 REAL CANADIAN SUPERSTORE WITHIN GROCERY AISLE 200 TAUNTON ROAD (905)6687568 WHITBY TOWN SQUARE 3050 GARDEN STREET (905) 4305314 WINDSOR METRO WITHIN GROCERY AISLE 3100 HOWARD AVENUE (519) 9728346 WOODBRIDGE LONGOS 9200 WESTON ROAD (905) 3033055 ANDREW PELLER LIMITED 2018 | 64 Complimentary Delivery within Ontario - $25 Charge to other select provinces Complimentary Delivery within Ontario - $25 Charge to other select provinces Complimentary Delivery within Ontario - $25 Charge to other select provinces Complimentary Delivery within Ontario - $25 Charge to other select provinces Complimentary Delivery within Ontario - $25 Charge to other select provinces Complimentary Delivery within British Columbia - $25 Charge to other select provinces – Applicable to BC Taxes Complimentary Delivery within British Columbia - $25 Charge to other select provinces – Applicable to BC Taxes Complimentary Delivery within British Columbia - $25 Charge to other select provinces – Applicable to BC Taxes Complimentary Delivery within British Columbia - $25 Charge to other select provinces – Applicable to BC Taxes Complimentary Delivery within British Columbia - $25 Charge to other select provinces – Applicable to BC Taxes APL-AR2018-COVER-8.5x11-Bleeds-Hi-Res.indd 2 6/18/2018 9:32:20 AM

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