AutoCanada Inc.
Annual Information Form
For the year ended December 31, 2009
March 22, 2010
TABLE OF CONTENTS
GENERAL DISCLOSURE MATTERS..................................................................................................................................... 1
Certain References and Glossary .......................................................................................................................................... 1
Date of Information ............................................................................................................................................................. 1
Forward Looking Information .............................................................................................................................................. 1
Non-GAAP Measures .......................................................................................................................................................... 3
CORPORATE STRUCTURE ................................................................................................................................................... 4
OVERVIEW AND DEVELOPMENT OF OUR BUSINESS ...................................................................................................... 7
Overview ............................................................................................................................................................................ 7
History and Recent Developments ....................................................................................................................................... 8
Significant Acquisitions....................................................................................................................................................... 9
DESCRIPTION OF THE AUTOCANADA BUSINESS ............................................................................................................ 9
Our Operations .................................................................................................................................................................... 9
Sources of Revenue and Gross Profit ................................................................................................................................. 10
Locations .......................................................................................................................................................................... 14
Acquisitions - Our Growth Strategy ................................................................................................................................... 15
Competition ...................................................................................................................................................................... 16
Our Competitive Strengths ................................................................................................................................................ 17
Inventories ........................................................................................................................................................................ 19
Automobile Dealership Franchise Agreements ................................................................................................................... 20
Financing .......................................................................................................................................................................... 22
Marketing ......................................................................................................................................................................... 23
Management Information Systems ..................................................................................................................................... 24
Employees ........................................................................................................................................................................ 24
Our Intellectual Property and Proprietary Rights ................................................................................................................ 25
Regulatory Matters and Policies ......................................................................................................................................... 25
CAPITAL STRUCTURE ........................................................................................................................................................ 27
AutoCanada Inc. ............................................................................................................................................................... 27
The Fund .......................................................................................................................................................................... 27
The Trust .......................................................................................................................................................................... 27
AutoCanada LP ................................................................................................................................................................. 29
Holding LPs and Dealer LPs .............................................................................................................................................. 29
AutoCanada GP ................................................................................................................................................................ 29
RISK FACTORS .................................................................................................................................................................... 30
Risks Related to Our Business and the Industry in Which We Operate ................................................................................ 30
DISTRIBUTIONS .................................................................................................................................................................. 39
Dividend Policy ................................................................................................................................................................ 39
Historical Distributions...................................................................................................................................................... 40
MARKET FOR SECURITIES ................................................................................................................................................ 41
Trading Price and Volume ................................................................................................................................................. 41
DIRECTORS AND OFFICERS .............................................................................................................................................. 42
Corporate Cease Trade Orders or Bankruptcies .................................................................................................................. 43
Penalties or Sanctions ........................................................................................................................................................ 43
Personal Bankruptcies ....................................................................................................................................................... 43
Conflicts of Interest ........................................................................................................................................................... 44
PROMOTERS ........................................................................................................................................................................ 44
LEGAL PROCEEDINGS AND REGULATORY ACTIONS ................................................................................................... 44
TRANSFER AGENT AND REGISTRAR ............................................................................................................................... 44
MATERIAL CONTRACTS .................................................................................................................................................... 44
INTEREST OF EXPERTS ...................................................................................................................................................... 45
AUDIT COMMITTEE INFORMATION ................................................................................................................................ 45
Charter of the Audit Committee ......................................................................................................................................... 45
Composition of the Audit Committee ................................................................................................................................. 45
Relevant Education and Experience ................................................................................................................................... 45
Prior Approval Policies and Procedures ............................................................................................................................. 46
External Auditor Service Fees (by category)....................................................................................................................... 47
SCHEDULE A GLOSSARY OF TERMS ................................................................................................................................. 1
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Certain References and Glossary
GENERAL DISCLOSURE MATTERS
In this Annual Information Form (“AIF”), unless the context otherwise requires, references to “AutoCanada”,
“ACI”, “we”, “us”, “our” or similar terms refer to AutoCanada Inc. together with its subsidiaries, the Dealer GPs
and the Dealer LPs and any other franchised automobile dealership owned by the foregoing parties. The disclosure
contained in this AIF is presented on the basis that we owned and operated the business that was formerly known as
AutoCanada Income Fund (the “Fund”) and was previously owned by Canada One Auto Group (“CAG”) for all
periods referred to in this AIF.
The “Glossary of Terms” attached as Schedule A to this AIF contains definitions of terms used in this AIF.
Date of Information
The information in this AIF is presented as of December 31, 2009, unless otherwise indicated.
Forward Looking Information
Certain statements contained in this AIF are forward-looking statements and information (collectively “forward-
looking statements”), within the meaning of the applicable Canadian securities legislation. We hereby provide
cautionary statements identifying important factors that could cause our actual results to differ materially from those
projected in these forward-looking statements. Any statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through
the use of words or phrases such as “will likely result”, “are expected to”, “will continue”, “is anticipated”,
“projection”, “vision”, “goals”, “objective”, “target”, “schedules”, “outlook”, “anticipate”, “expect”, “estimate”,
“could”, “should”, “expect”, “plan”, “seek”, “may”, “intend”, “likely”, “will”, “believe” and similar expressions are
not historical facts and are forward-looking and may involve estimates and assumptions and are subject to risks,
uncertainties and other factors some of which are beyond our control and difficult to predict. Accordingly, these
factors could cause actual results or outcomes to differ materially from those expressed in the forward-looking
statements. Therefore, any such forward-looking statements are qualified in their entirety by reference to the factors
discussed throughout this document.
In particular, material forward-looking statements in this annual information form include:
our intentions for future growth and its effect on financial operations;
our expectations regarding the future of the Canadian automotive retail industry;
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our expectation of the effect of current credit conditions on our future operations;
our belief that a higher percentage of all repair work will be performed at dealerships;
our goals of retaining long-term customers;
anticipation that lease options will be exercised;
our belief that attractive acquisitions may be available in 2010 and beyond;
our belief that there may be reluctance by some auto manufacturers to entertain a relationship with a public
multi-brand dealer group;
assumptions regarding the amount of time it takes for acquisitions and open points to achieve normalized
performance;
assumptions regarding our competitive strengths and their effect on operations in the future;
expectation that our supply of vehicles will meet the demand in our markets;
targets for inventory turnover and inventory management;
assumptions regarding other automobile manufacturer agreements;
potential future impact of provisions in our credit agreements;
our beliefs of the future impact of internet and e-commerce on the Company;
the outcome of labour negotiations with unionized employees;
assumptions regarding provincial government regulations in jurisdictions we do not operate in;
our anticipated compliance with governmental regulations and assumptions with respect to changes in
regulations;
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assumptions made in our discussion of risk factors;
assumptions we have made regarding future dividends of the Company;
Although we believe that the expectations reflected by the forward-looking statements presented in this release are
reasonable, our forward-looking statements have been based on assumptions and factors concerning future events
that may prove to be inaccurate. Those assumptions and factors are based on information currently available to us
about ourselves and the businesses in which we operate. Information used in developing forward-looking
statements has been acquired from various sources including third-party consultants, suppliers, regulators, and other
sources. In some instances, material assumptions are disclosed elsewhere in this release in respect of forward-
looking statements. We caution the reader that the following list of assumptions is not exhaustive. The material
factors and assumptions used to develop the forward-looking statements include but are not limited to:
no significant adverse changes to the automotive market, competitive conditions, the supply and demand of
vehicles, parts and service, and finance and insurance products or the political, economic and social
stability of the jurisdictions in which we operate;
no significant construction delays that may adversely affect the timing of dealership relocations and open
points;
no significant disruption of our operations such as may result from harsh weather, natural disaster, accident,
civil unrest, or other calamitous event;
no significant unexpected technological event or commercial difficulties that adversely affect our
operations;
continuing availability of economical capital resources; demand for our products and our cost of
operations;
no significant adverse legislative and regulatory changes; and
stability of general domestic economic, market, and business conditions
Because actual results or outcomes could differ materially from those expressed in any forward-looking statements,
investors should not place undue reliance on any such forward-looking statements. By their nature, forward-looking
statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, which
contribute to the possibility that the predicted outcomes will not occur. The risks, uncertainties and other factors,
many of which are beyond our control, that could influence actual results include, but are not limited to:
our access to capital due to uncertainty in the capital markets;
rapid appreciation or depreciation of the Canadian dollar relative to the U.S. dollar;
a sustained downturn in consumer demand and economic conditions in key geographic markets;
adverse conditions affecting one or more of our automobile manufacturers;
the ability of consumers to access automotive loans and leases;
competitive actions of other companies and generally within the automotive industry;
our dependence on sales of new vehicles to achieve sustained profitability;
our suppliers ability to provide a desirable mix of popular new vehicles;
the ability to continue financing inventory under similar interest rates;
our suppliers ability to continue to provide manufacturer incentive programs;
the loss of key personnel and limited management and personnel resources;
the ability to refinance credit agreements in the future;
changes in applicable environmental, taxation and other laws and regulations as well as how such laws and
regulations are interpreted and enforced
risks inherent in the ability to generate sufficient cash flow from operations to meet current and future
obligations
the ability to obtain automotive manufacturers’ approval for acquisitions;
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Please refer to the section entitled “Risk Factors” for a complete listing. Further, any forward-looking statement
speaks only as of the date on which such statement is made, and, except as required by applicable law, we undertake
no obligation to update any forward-looking statement to reflect events or circumstances after the date on which
such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time,
and it is not possible for management to predict all of such factors and to assess in advance the impact of each such
factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statement.
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Non-GAAP Measures
References to “EBITDA” are to earnings before interest expense (other than interest expense on floorplan financing
and other interest), income taxes, depreciation, amortization and asset impairment charges. Management believes
that, in addition to earnings or loss, EBITDA is a useful supplemental measure of both performance and cash
available for distribution before debt service, changes in working capital, capital expenditures and income taxes.
We have used Adjusted EBITDA as the basis for the analysis of our past financial performance. References to
“Adjusted EBITDA” are to EBITDA after adjusting for various items including the elimination of certain
shareholder remuneration paid by CAG as a private company, the deduction of compensation that would have been
paid to certain of our dealer principals had the Dealer Principal Compensation Arrangements been in effect for the
applicable periods, the addition of incremental insurance commissions that would have been paid to us had the new
insurance contract with our supplier been in effect for the applicable periods, the addition of incremental Adjusted
EBITDA we estimate we would have generated had Grande Prairie Hyundai been open for all of 2005 and the
addition of incremental Adjusted EBITDA we estimate we would have generated had we owned 100% of
Dartmouth Dodge for the applicable periods. Adjusted EBITDA is a measure that we believe facilitates the
comparability of the results of historical periods and the analysis of our financial performance.
References to “EBIT” are to EBITDA (as defined above) less depreciation and amortization. EBIT is a useful
supplemental measure used by management in the calculation of Return on Capital Employed (defined below).
References to “Free Cash Flow” are to cash provided by (used in) operating activities (including the net change in
non-cash working capital balances) less capital expenditure. Free cash flow is a measure used by management to
evaluate its performance. While the closest Canadian GAAP measure is cash provided by operating activities, free
cash flow is considered relevant because it provides an indication of how much cash generated by operations is
available after capital expenditures. It shall be noted that although we consider this measure to be free cash flow,
financial and non-financial covenants in our credit facilities and dealer agreements may restrict cash from being
available for distributions, re-investment in ACI, potential acquisitions, or other purposes. Investors should be
cautioned that free cash flow may not actually be available for growth or distributions of ACI.
References to ‘‘Absorption Rate’’ are to the extent to which the gross profits of a franchised automobile dealership
from parts, service and collision repair cover the costs of these departments plus the fixed costs of operating the
dealership, but does not include expenses pertaining to our head office. For this purpose, fixed operating costs
include fixed salaries and benefits, administration costs, occupancy costs, insurance expense, utilities expense and
interest expense (other than interest expense relating to floor plan financing) of the dealerships only and do not
include expenses pertaining to head office. Absorption rate is an operating measure commonly used in the retail
automotive industry as an indicator of the performance of the parts, service and collision repair operations of a
franchised automobile dealership. Absorption rate is not a measure recognized by GAAP and does not have a
standardized meaning prescribed by GAAP. Therefore, absorption rate may not be comparable to similar measures
presented by other issuers that operate in the retail automotive industry.
References to “Average Capital Employed” are to the average balance of interest bearing debt for the period
(including current portion of long-term debt, excluding revolving floorplan facilities) and the average balance of
shareholders’ equity for the period. Average capital employed is used to determine the amount of capital invested in
ACI and is used in the measure of Return on Capital Employed (described below). Management does not include
future income tax, non-interest bearing debt, or revolving floorplan facilities in the calculation of average capital
employed as it does not consider these items to be capital, but rather debt incurred to finance the operating activities
of ACI.
References to “Return on Capital Employed” are to EBIT (as defined above) divided by the Average Capital
Employed (defined above). Return on capital employed is a measure used by management to evaluate the
profitability of our invested capital. As a corporation, management of AutoCanada may use this measure to
compare potential acquisitions and other capital investments against our internally computed cost of capital to
determine whether the investment shall create value for our shareholders. Management may also use this measure to
look at past acquisitions, capital investments and ACI as a whole in order to ensure shareholder value is being
achieved by these capital investments.
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EBITDA, EBIT, Free Cash Flow, Absorption Rate, Average Capital Employed and Return on Capital Employed are
not earnings measures recognized by GAAP and do not have standardized meanings prescribed by GAAP. Investors
are cautioned that these non-GAAP measures should not replace net earnings or loss (as determined in accordance
with GAAP) as an indicator of ACI's performance, of its cash flows from operating, investing and financing
activities or as a measure of its liquidity and cash flows. ACI's methods of calculating EBITDA, EBIT, Free Cash
Flow, Absorption Rate, Average Capital Employed and Return on Capital Employed may differ from the methods
used by other issuers. Therefore, ACI's EBITDA, EBIT, Free Cash Flow, Absorption Rate, Average Capital
Employed and Return on Capital Employed may not be comparable to similar measures presented by other issuers.
CORPORATE STRUCTURE
ACI was incorporated under the CBCA on October 29, 2009, as “AutoCanada Inc.” in connection with participating
in the Arrangement.
The Fund was established on January 4, 2006 and is an unincorporated, open-ended trust governed by the laws of
the Province of Alberta and by the Fund Declaration of Trust.
The Trust was established on January 16, 2006 and is an unincorporated, open-ended trust governed by the laws of
the Province of Alberta and by the Trust Declaration of Trust.
AutoCanada GP is a corporation incorporated under the CBCA on October 21, 2005. AutoCanada GP is the general
partner of the Partnership and holds the shares of the general partners of the Holding LPs.
Holdings was incorporated under the CBCA on October 29, 2009, as “AutoCanada Holdings Inc.” in connection
with participating in the Arrangement.
The Partnership was a limited partnership formed under the laws of the Province of Manitoba on January 1, 2006.
The Partnership was dissolved on January 1, 2010.
7268769 Canada Inc. was incorporated under the CBCA on October 29, 2009 in connection with participating in the
Arrangement.
Each of the Holding LP’s and Dealer LPs are a limited partnership formed under the laws of the Province of
Manitoba. Each Dealer LP has been formed to acquire the assets and undertaking relating to one of the franchised
automobile dealerships owned by CAG.
The principal and head offices of the Fund, the Trust, AutoCanada GP and ACI are located at 200-15505
Yellowhead Trail, Edmonton, Alberta, T5V 1E5. The principal and head offices of each of the Dealer LPs are
located at the franchised automobile dealership owned by such entity. The registered office of ACI and each of the
Holding LP’s and Dealer LPs is located at 1000, 400 - 3rd Avenue S.W., Calgary, Alberta, T3E 2A3.
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Prior to December 31, 2009, ACI operated under the name of AutoCanada Income Fund under an income trust
structure as shown in the prior year Annual Information Form dated March 23, 2009 available on www.sedar.com.
Pursuant to converting to a corporation on December 31, 2009 as described below under “The Arrangement”, the
following chart illustrates our new corporate structure at December 31, 2009:
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On January 1, 2010 ACI carried out certain internal transactions to simplify its corporate structure. The following
chart illustrates our structure at January 1, 2010:
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OVERVIEW AND DEVELOPMENT OF OUR BUSINESS
Overview
AutoCanada is one of Canada’s largest multi-location automobile dealership groups, currently operating 22
franchised dealerships in British Columbia, Alberta, Manitoba, Ontario, New Brunswick and Nova Scotia. In 2009,
the 22 franchised automobile dealerships owned by ACI, sold approximately 23,000 vehicles and processed
approximately 300,000 service and collision repair orders in our 331 service bays. We have grown, and intend to
continue to grow, our business through the acquisition of franchised automobile dealerships in key markets, the
organic growth of our existing dealerships, the opening of new franchised automobile dealerships, or “Open Points”
and the management of franchised automobile dealerships.
See the table in “Description of the AutoCanada Business – Locations” for a list of the franchised automobile
dealerships owned by us as at March 22, 2010 and the year such dealership was opened or acquired by us or CAG.
We currently sell through our dealerships the following new vehicle brands: Chrysler, Dodge, Jeep, Nissan, Infiniti,
Volkswagen, Hyundai, Mitsubishi and Subaru. Vehicles manufactured by Chrysler Canada represented
approximately 72% of our total new vehicle sales in 2009. In addition, we sell a broad range of used vehicles. We
also offer a full range of parts, service and collision repair services and facilitate the sale of third party finance and
insurance products, extended warranties and replacement and after market automotive products.
The following charts illustrate the revenue and Adjusted EBITDA growth since 2005 for ACI and its predecessors.
Notes:
(1) Adjusted EBITDA is not a recognized measure under GAAP and does not have a standardized meaning prescribed by GAAP. Our
Adjusted EBITDA may not be comparable to similar measures presented by other issuers. See “Non-GAAP Measures”.
(2) Revenue information for our fiscal year ended December 31, 2005 is derived from the audited combined financial statements of CAG.
Revenue for 2006 is the combined unaudited results of CAG and the Fund for the year ended December 31, 2006. Adjusted EBITDA
for these years has been determined in the manner referred to in Note 1.
The Canadian retail automotive industry is highly fragmented with approximately 3,411franchised automobile
dealerships. We expect the Canadian automotive retail industry will continue to consolidate due to the rapid decline
in new vehicle sales over the past year, poor access to credit to finance dealerships, the need for increased operating
efficiencies and stronger customer loyalty processes in a competitive marketplace, and the possibility of forced
consolidation driven by the various auto manufacturers in Canada.
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History and Recent Developments
Our founder and Chief Executive Officer, Patrick Priestner, has been directly involved in the retail automotive
industry since 1974. He was one of the founders of a predecessor to CAG when, in 1993, it purchased a franchised
automobile dealership in Edmonton, Alberta that had been in business since 1952. In 2001, after growing the
business to five franchised automobile dealerships, we began to implement our strategy of becoming a national
multi-location automobile dealership group in Canada, a strategy that had been successfully executed by that time by
owners of several franchised automobile dealers in the United States.
Between 2001 and 2004, we grew by acquiring and successfully integrating the operations of nine existing
franchised automobile dealerships. In addition, on April 20, 2005, we opened our Grande Prairie Hyundai
dealership and on November 15, 2006, we opened our Sherwood Park Hyundai dealership. Both of these
dealerships were “open points” awarded to us by Hyundai. On May 3, 2007, we announced that we were awarded a
Mitsubishi open point dealership in Grande Prairie, Alberta which commenced operations during the summer of
2007, and which was relocated to new premises in the spring of 2008. In February 2007, and July 2007,
respectively, ACI provided financing to affiliates of CAG for the acquisition of Grande Prairie Nissan and Northland
Nissan (the “managed dealerships”), respectively, and in each case entered into a management agreement to provide
management services to such dealerships. In addition, in 2008 we purchased the assets and commenced operations
in respect to our Doner Nissan Infiniti (Newmarket Ontario) dealership (April 2008), Cambridge Hyundai (Ontario)
dealership (July 2008), and Maple Ridge (British Columbia) Volkswagen dealership (December 2008). In 2009, we
completed the transfer of ownership of the managed dealerships from affiliates of CAG to full ownership by
AutoCanada.
Note:
(1) Includes Dartmouth Dodge from 2005 to 2009, of which we have owned 50% since 2002 and purchased the remaining 50% in
February, 2006.
(2) From 2007 to 2008 two dealerships were managed or operated by ACI. In 2009, the two managed dealerships were fully acquired by
ACI, thus all 22 dealerships are now owned by ACI.
On May 11, 2006, we completed an initial public offering of 10,209,500 Units at a price of $10 per Unit, to raise
aggregate gross proceeds of $102,095,500. On May 31, 2006, the Over-Allotment Option was exercised, resulting
in the issuance by the Fund of 740,000 additional Units at a price of $10.00 per Unit for gross proceeds of
$7,400,000. The gross proceeds of the Offering were used by the Fund to indirectly acquire the assets and
undertaking of CAG and the gross proceeds of the Over-Allotment Option were used to indirectly redeem 740,000
Exchangeable Units. As a result of the Offering and the exercise of the Over-Allotment Option, there were
10,949,500 Units issued and outstanding. In August of 2008, the Fund received regulatory approval from the
Toronto Stock Exchange to purchase for cancellation, a maximum number of issued and outstanding units. During
the year ended December 31, 2008, the Fund purchased for cancellation 376,070 units. As at December 31, 2008,
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the Trust had cancelled all repurchased units. As a result of the normal course issuer bid, there were 10,573,430
Units issued and outstanding at December 31, 2008. At that time, the Fund owned an indirect 53.2% interest in
AutoCanada LP and CAG owned the remaining 46.8%.
On February 7, 2007, we granted consent to Patrick Priestner to own and operate a new Toyota dealership,
Sherwood Park Toyota. In 2008, Toyota Canada advised that they were not prepared to accept the Fund as a
purchaser of its dealerships. Upon receipt of outside legal advice, the Trustees of the Fund and AutoCanada
determined that it was in the best interests of the Fund and AutoCanada to waive the non-competition agreement as
it relates to the Sherwood Park Toyota dealership in consideration for a one-time payment that was made to
AutoCanada in the 2009 fiscal year.
The Arrangement
On December 17, 2009, unitholders of the Fund approved the conversion of the Fund into a corporation to be further
known as AutoCanada Inc. (the “Company” or “AutoCanada”), pursuant to the Arrangement involving, among
others, the Fund, AutoCanada and securityholders of the Fund. The Arrangement was completed on December 31,
2009.
The Arrangement has been accounted for as a continuity of interests of the Fund since there has been no change of
control and since AutoCanada will continue to operate the business of the Fund. Accordingly, this AIF reflects
AutoCanada as a corporation at December 31, 2009 and as AutoCanada Income Fund prior thereto. All references
to “shares” refer collectively to AutoCanada’s common shares on and subsequent to December 31, 2009 and to the
Fund units prior to the Arrangement. All references to “shareholders” refer collectively to holders of AutoCanada’s
shares on and subsequent to December 31, 2009 and to Fund unitholders prior to the Arrangement.
As a result of the Arrangement, unitholders of the Fund received one common share (“share”) of AutoCanada for
each one unit of the Fund. The trust structure of AutoCanada was reorganized into a publicly listed corporation,
which owns all of the Fund units. AutoCanada also now holds all the assets and liabilities, previously held, directly
or indirectly, by the Fund.
Significant Acquisitions
There were no significant acquisitions, for which disclosure is required under National Instrument 51-102, in the
year ended December 31, 2009.
DESCRIPTION OF THE AUTOCANADA BUSINESS
Our Operations
Our current multi-location automobile dealership model of 22 franchised automobile dealerships located in six
provinces enables us to serve a diversified geographic customer base and enjoy benefits not available to single
location dealerships. In addition, by operating three dealerships in Edmonton, Alberta, five dealerships in Grande
Prairie, Alberta, three dealerships in Prince George, British Columbia as well as two dealerships in Maple Ridge,
British Columbia we are able to gain the advantages associated with a “platform” of dealerships in a single
geographic area.
Our franchised automobile dealerships are operated as distinct profit centres in which the dealer principals are given
significant autonomy within overall operating guidelines. This autonomy, combined with the dealer principals’
thorough understanding of their local markets, enables the dealer principals to effectively run day-to-day operations,
market to customers, recruit new employees and gauge acquisition opportunities in their local markets. Our dealer
principals are required to take an active, hands-on approach to operating their respective dealerships. Each dealer
principal is supported by a complete management team that provides oversight and management over every facet of
the business. While each member of a dealership’s management team, other than the dealer controllers, reports
directly to the dealer principal, they also report to one or more members of our head office senior management team.
The dealer controllers report directly to the head office finance group. Our reporting structure is designed to
facilitate the sharing of ideas and market intelligence in an efficient and effective manner.
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Sources of Revenue and Gross Profit
We generate revenues and gross profit from four inter-related business operations: new vehicle sales; used vehicle
sales; parts, service and collision repair; and finance and insurance. The following two charts show our revenues
and gross profit from the four business operations since 2005 for the Fund and its predecessors.
Revenue by Business Operation (in millions of dollars)
834.8
826.5
776.9
693.7
485.6
Gross Profit by Business Operation (in millions of dollars)
138.9
147.2
142.0
113.1
76.4
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New Vehicle Sales
Our retail new vehicle sales include new vehicle sales and lease transactions and other similar agreements, which are
made by our franchised automobile dealerships. In addition to the profit from the sale itself, a typical new vehicle
sale or lease transaction creates key profit opportunities for our dealerships from the resale of any trade-in vehicle
purchased by the dealer, sale of third party finance or lease transactions and vehicle service and insurance contracts
in connection with the retail sale, and service and repair of the vehicle during and after the warranty period.
New vehicle leases, which are provided by third parties, generally have shorter terms, resulting in customers
returning to a dealership more frequently than in the case of financed purchases. In addition, leases provide us with
a steady source of late-model, off-lease vehicles for our used vehicle inventory. Generally, leased vehicles remain
under factory warranty for the term of the lease, allowing franchised automobile dealers to provide repairs and
service to the customer throughout the lease term. Over the past year, due to tighter credit conditions, ACI has
witnessed an unprecedented drop in new vehicle lease transactions. This has been a contributing factor to a decrease
in finance and insurance revenues and lower new vehicle retail sales. At this time, we can provide no assurance that
new vehicle lease transactions will return to historical levels.
The chart below shows our historical retail new vehicle sales over the past five years for ACI and its predecessors.
Retail New Vehicle Sales by AutoCanada (1)
9,141
7,503
11,135
11,554
11,117
2005
2006
2007
2008
2009
New Vehicles Sold (units)
Note:
(1) Includes 100% of the operating results of Dartmouth Dodge, of which we have owned 50% since 2002 and purchased the remaining
50% in February, 2006.
We acquire our new vehicle inventory from automobile manufacturers. Automobile manufacturers allocate products
among their dealerships based primarily on historical sales volume and planned sales.
We finance our inventory purchases through the floor plan financing provided by General Motors Acceptance
Corporation of Canada (“GMAC Canada”). Subject to floor plan limitations imposed by GMAC Canada and our
internally imposed days of supply guidelines, inventory selection and management occurs at the franchised
automobile dealer level.
Used Vehicle Sales
Used vehicle sales typically generate higher gross margins than new vehicle sales because of their limited
comparability and the subjective nature of their evaluation, which is dependent, among other things, upon a
vehicle’s age, warranty, mileage and condition. Valuations also vary based upon supply and demand factors, the
level of new vehicle incentives, the availability of retail financing, and general economic conditions.
Used vehicle sales give us an opportunity to, increase new and used vehicle sales by aggressively pursuing customer
trade-in vehicles, increase service contract sales, provide parts and services required in the maintenance of the
vehicle, and provide financing to used vehicle purchasers.
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Profits from used vehicle sales depend primarily on the ability of our franchised automobile dealers to obtain a high
quality supply of used vehicles at reasonable prices and to effectively manage that inventory. Our new vehicle
operations provide our used vehicle operations with a large supply of high quality trade-ins and off-lease vehicles,
which we believe are the best sources of attractive used vehicle inventory. Our dealers supplement their used
vehicle inventory with purchases at auctions, including manufacturer-sponsored auctions available only to
franchised dealers, and from wholesalers.
We actively manage the quality and age of our used vehicle inventory and seek to increase the profitability of our
used vehicle operations by participating in automobile manufacturer certification programs where available.
Various manufacturers provide franchised automobile dealers the opportunity to sell certified pre-owned vehicles,
which are often eligible for new vehicle benefits such as preferred vehicle finance rates, better automobile
warranties and an extension of the manufacturer’s warranty. Manufacturer certified pre-owned vehicles typically
sell at a premium compared to other used vehicles and are available only at franchised automobile dealerships.
Management believes that an extended manufacturer’s warranty increases our potential to retain the pre-owned
vehicle purchaser as a future parts and service customer since certified pre-owned warranty work can only be
performed at franchised automobile dealerships.
The chart below shows our historical retail used vehicle sales over the past five years for ACI and its predecessors.
Retail Used Vehicle Sales by AutoCanada (1)
8,501
6,085
9,640
9,916
9,733
2005
2006
2007
2008
2009
Used Vehicles Sold (units)
Note:
(1) Includes 100% of the operating results of Dartmouth Dodge, of which we have owned 50% since 2002 and purchased the remaining
50% in February, 2006.
Used vehicles are generally offered at our dealerships for an average of approximately 45 days. At the end of
90 days, vehicles which have not been sold to a retail buyer are generally either sold to an outside dealer or offered
at auction. Certain used vehicles acquired by us as “trade-ins” may not be suitable for sale in our used vehicle
business because of their age, mileage or physical condition. Rather than reconditioning these vehicles for resale by
us, we sell these vehicles immediately in the wholesale market. We do not regularly transfer used vehicles among
our dealerships, except to provide balanced inventories of used vehicles at each of our dealerships. We have
developed an integrated inventory system allowing us to closely monitor our sales of used vehicles.
In 2009 ACI, on a trial basis, commenced operation of a standalone used car operation under the name AutoCanada
Used Car Superstore in Edmonton, Alberta out of the former Capital Chrysler Jeep Dodge dealer location. The
operations of the AutoCanada Used Car Superstore were discontinued in 2009 as ACI’s lease agreement for the
facility expired during the year.
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Parts, Service and Collision Repair
Historically, the automotive repair industry has been highly fragmented, consisting of numerous small,
independently owned service and repair garages, including service and repair facilities as a part of most gasoline
service stations. However, management believes that the advanced technology used in vehicles has made it difficult
for independent repair shops to have the expertise required to perform higher margin repairs. Most of the service
and repair facilities at gasoline service stations have closed as the retail gasoline operators have abandoned this
business. We have made investments in recruiting and training qualified technicians to work in our service and
repair facilities. Additionally, automobile manufacturers require warranty work to be performed at their franchised
automobile dealerships. We believe that an increasing percentage of all repair work will be performed at dealerships
that have the sophisticated equipment and skilled personnel necessary to perform repairs and warranty work on
today’s complex vehicles.
Our profitability in parts, service and collision repair can be attributed to our comprehensive management system,
including the use of variable rate pricing structures, cultivation of strong customer relationships through an emphasis
on preventive maintenance and the efficient management of parts inventory.
We use variable rate structures in both the compensation paid to our service employees and the rates charged to our
customers that are designed to reflect the difficulty and sophistication of different types of repairs. The percentage
mark-ups on parts are also variably priced based on market conditions for different parts.
Revenues from parts, service and collision repair were approximately 14% of our total revenues and 38% of our
total gross profits in 2009.
Our franchised automobile dealers’ parts departments support their sales and service departments, selling factory-
approved parts for the vehicle makes and models sold by a particular franchised automobile dealer. Parts are either
used in repairs made in the service department, sold at retail to customers, or sold at wholesale to independent repair
shops and other dealerships. Certain of our dealerships have agreements with the automobile manufacturers that
provide pricing to support wholesale operations. Our dealers employ parts managers who oversee parts inventories
and sales. Our dealers also frequently share parts with each other. We continually monitor our parts inventories and
make necessary adjustments frequently.
One of our major goals is to retain each vehicle purchaser as a long-term customer of our parts, service and collision
repair department. A substantial number of our customers return to our dealerships for other services after the
vehicle warranty expires. Each dealership has systems in place to track customer maintenance records and notify
owners of vehicles purchased at the dealerships when their vehicles are due for periodic services. Parts, service and
collision repair activities are an integral part of our overall approach to customer service.
Finance and Insurance
Each sale of a vehicle provides us with the opportunity to sell third party purchase and lease financing and extended
warranty and insurance products.
In return for arranging third party purchase and lease financing for our customers we receive a fee from the third
party lender upon completion of the financing. These third party lenders include the automobile manufacturers’
captive finance companies and warranty divisions, selected commercial banks and a variety of other third party
lenders, including credit unions and regional auto finance lenders. We have negotiated incentive programs with
certain lenders whereby we receive additional fees upon reaching a specified volume of business. We do not own a
finance company and do not retain substantial credit risk after a customer has received financing. Under certain
circumstances we can become responsible for the credit obligations of our customers. For example, this would
occur where the loan documentation that we have submitted does not meet the lender’s requirements as stipulated in
their contract with us. If the customer defaults on their loan payments in these cases the related vehicle is assigned
to us as security for the loan and we are responsible to ensure collection of the loan or, in the alternative, we can
seize the vehicle which is security for the loan. Based on our historical results, this type of default happens very
infrequently.
We arranged customer financing on a significant portion of the retail vehicles we sold in 2009. In addition to
finance commissions, each vehicle sale creates opportunities to sell other profitable products, such as optional life,
13
dismemberment and disability insurance and extended warranties and various other products for the consumer. Our
size and volume capabilities enable us to acquire these products at reduced fees compared to the industry average,
which results in competitive advantages as well as acquisition related revenue synergies.
In late 2008, the automotive leasing business significantly declined as the ability for captive finance companies to
securitize asset back loans was eliminated. The absence of leasing will impact how we do business in the future as
consumer lease returns provided significant sales opportunities to dealerships as well as a significant source of
nearly new vehicles that could be offered for sale on our used vehicle lots. The credit crisis has also restricted our
ability to obtain financing through third parties to facilitate our customers’ purchase of vehicles as well as restricted
the amount that each customer can finance when purchasing a vehicle. From a financial perspective this has
resulted in a significant drop in our finance and insurance income in 2009 and will most likely continue through-out
2010 and until credit conditions return to normal.
We offer our customers a variety of insurance, vehicle warranty and extended protection products in connection with
purchases of new and used vehicles, including: service contracts, auto protection insurance, life disability and
dismemberment insurance as well as lease “wear and tear insurance”; and theft protection.
The finance and insurance products our dealerships currently offer are generally underwritten and administered by
independent third parties, including the automobile manufacturers’ captive finance companies. Under our
arrangements with the providers of these products, we either sell these products on a straight commission basis or
participate in future profits, if any, pursuant to a retrospective commission arrangement. We may be charged back
for unearned financing fees, insurance or service contract commissions in the event of early termination of these
contracts by the customers. ACI calculates and accrues a reserve for future potential chargebacks based on past
experience with the level of chargebacks incurred.
ACI intends to assist its dealerships in the provision of such services by creating a unified brand under which certain
of these services can be offered which may lead to increased market penetration, sales and profit.
Our historical revenues include commissions from the sale of life, dismemberment and disability insurance contracts
to customers when they purchased a vehicle. These insurance policies generally provide for repayment of the
vehicle loan or lease if the customer dies or is seriously injured before the loan is fully repaid, or provide for the
payment of the monthly loan obligations if the customer is disabled. We receive commissions on each policy sold.
In addition, we also participated in the underwriting profits or losses from these insurance contracts.
Locations
ACI reviews in the case of each location whether it wishes to own or lease the land and building. ACI presently
leases each of our locations, save for Cambridge Hyundai, which it owns. During the year, ACI committed to
purchase the land and building of the Doner Nissan Infiniti dealership that operates in Newmarket, Ontario in
October of the 2010 fiscal year for $6,000,000 less a $500,000 deposit previously made by ACI.
As indicated in the notes to the table below, thirteen of our locations are leased from affiliates of CAG. The total
rent expense in respect of our facilities in our fiscal year ended December 31, 2009 was approximately
$11.5 million, of which approximately $7.5 million was paid to wholly owned subsidiaries of CAG.
The following table shows the location of our dealerships as at December 31, 2009.
Franchised Automobile Dealership Name and
Location
Automobile
Manufacturer
Represented
Year
Established
Year Acquired
by Us
Alberta
Crosstown Chrysler Jeep Dodge, Edmonton (1) .
Ponoka Chrysler Jeep Dodge, Ponoka (1) ..........
Capital Chrysler Jeep Dodge, Edmonton (1) ......
Grande Prairie Chrysler Jeep Dodge, Grande Prairie (1)
Grande Prairie Subaru, Grande Prairie (1) ..........
Grande Prairie Hyundai, Grande Prairie (1)........
Chrysler
Chrysler
Chrysler
Chrysler
Subaru
Hyundai
1951
1975
1978
1986
1995
2005
1994
1998
2003
1998
1998
n/a
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Franchised Automobile Dealership Name and
Location
Automobile
Manufacturer
Represented
Year
Established
Year Acquired
by Us
Sherwood Park Hyundai, Sherwood Park (1) .....
Grande Prairie Mitsubishi, Grande Prairie (1) ....
Grande Prairie Nissan, Grande Prairie (1) ..........
British Columbia
Maple Ridge Chrysler Jeep Dodge, Maple Ridge
Maple Ridge Volkswagen, Maple Ridge
Okanagan Chrysler Jeep Dodge, Kelowna ........
Northland Chrysler Jeep Dodge, Prince George (1)
Northland Hyundai, Prince George (1) ...............
Victoria Hyundai, Victoria (1) ...........................
Northland Nissan, Prince George ....................
Manitoba
Thompson Chrysler Jeep Dodge, Thompson .....
Ontario
Colombo Chrysler Jeep Dodge, Woodbridge ....
Doner Nissan Infiniti, Newmarket
Cambridge Hyundai, Cambridge
New Brunswick
Moncton Chrysler Jeep Dodge, Moncton (1) ......
Nova Scotia
Dartmouth Chrysler Jeep Dodge, Dartmouth ....
Notes:
(1) Property leased from affiliates of CAG.
Hyundai
Mitsubishi
Nissan
Chrysler
Volkswagen
Chrysler
Chrysler
Hyundai
Hyundai
Nissan
2006
2007
1969
1975
1999
1985
1990
1990
1999
2007
n/a
n/a
2007
2005
2008
2003
2002
2005
2006
2007
Chrysler
1974
2003
Chrysler
Nissan and
Infiniti
Hyundai
1998
2005
1977
1996
2008
2008
Chrysler
1986
2001
Chrysler
1970
2006
We lease thirteen of our existing twenty-two locations from affiliates of CAG. Each of our leases from affiliates of
CAG has been independently reviewed and provide for market rent. For this purpose, “market rent” is defined as the
rental income that a property would most probably command in the open market as indicated by current rents being
paid for comparable space. The leases provide for a term, including options, of not less than 15 years. The initial
terms for these leases expire between February, 2011 and November, 2029. It is anticipated that all shall be
extended by exercising the options. In 2009 the rental expense has increased as ACI has relocated some dealerships
to new locations.
We lease eight of our facilities from arm’s length third parties. The leases for these locations expire between
September, 2010 and October, 2018. We hold options to renew four of these leases for terms ending between
August, 2013 and October, 2018. Management believes it has a good relationship with its landlords.
Acquisitions - Our Growth Strategy
Our objective is to be the largest and most profitable multi-location automobile dealership group in Canada. To
achieve this objective, we intend to grow primarily through targeted acquisitions in attractive markets while growing
our same store gross profits and focussing on cost containment and efficiency. We also continue to seek
opportunities to open or manage new franchised automobile dealerships.
As a result of market turmoil, and the credit crises, ACI did not complete any acquisitions during the year ended
December 31, 2009.
Management believes that there may be acquisition opportunities in the Canadian automotive retail market at
attractive purchase multiples in 2010. ACI would consider pursuing acquisition opportunities if a favourable
opportunity presents itself and if the acquisition could potentially provide incremental value to Shareholders. ACI is
concerned that the recent going concern and restructuring issues relating to some of the domestic auto
15
manufacturers, including Chrysler LLC, caused those auto manufacturers with whom ACI does not have a
relationship, or who are related to same, to be increasingly reluctant to entertain a relationship with a public multi-
brand dealer group which has cross obligations among its dealer entities. As a result, ACI has no assurance that any
manufacturer with whom it does not presently have a relationship, or who are related to same, will approve ACI as a
franchisee. Having said same, subject to the credit markets and the economy, Management is reasonably confident
that it shall acquire one or two acquisitions or open points in respect to its current or related brands.
Organic Growth
We continue to focus on those areas of our business that enable us to increase the profitability of our operations.
Key areas include increasing same store gross profits by controlling expenses and expanding margins at our existing
franchised automobile dealerships and those that are integrated into our operations on acquisition.
Targeted Acquisitions
Automobile manufacturers have adopted policies that limit the number of their franchised automobile dealerships
we are permitted to own at the metropolitan, regional or national level. We are near the limit imposed by Chrysler
Canada on the number of their franchised automobile dealerships that we may own. See “Automobile Dealership
Franchise Agreements — Automobile Manufacturers’ Limitations on Acquisitions”.
We regularly review acquisition opportunities for both domestic and import brand dealerships in various regions in
Canada.
New Locations for Franchised Automobile Dealerships (Open Points)
The retail automotive industry is a mature industry and rights to open new franchised automobile dealerships are
rarely awarded by the automobile manufacturers. However, from time to time automobile manufacturers may seek
to establish new dealerships in attractive markets. The right to open a new franchised automobile dealership in a
specific location granted by an automobile manufacturer to a dealer is referred to in the industry as an Open Point.
Generally a new franchised automobile dealership is fully performing within one to three years depending on the
manufacturer and location.
ACI will review on a case by case basis whether to own or lease a particular dealership facility. In either case, ACI
would incur the costs of equipping and furnishing these facilities, including the costs relating to the integration of
our management information systems into the new dealerships. These costs vary by dealership depending upon size
and location.
On March 13, 2009, a commitment to purchase lands located at 17385 Leslie Street, Newmarket, ON, the land on
which Doner Infiniti Nissan operates from, was transferred from a related party to ACI, thereby committing ACI to
purchase the above land for $6,000,000 (which is equal to its appraised value as of February 7, 2009) less a
$500,000 deposit made by ACI, on or before October 1, 2010.
Competition
We operate in a highly competitive industry. In each of our markets, consumers have a number of choices in
deciding where to purchase a new or used vehicle or where to have a vehicle serviced. According to various
industry sources, there are approximately 3,411 franchised automobile dealerships in the retail automotive industry
in Canada. In addition, there are numerous independent used vehicle dealers.
New Vehicles — In the new vehicle market, our dealerships compete with other franchised automobile
dealerships in their markets. We believe the principal competitive factors in the retail new vehicle business are
consumer brand and model preferences, location, quality of facility and service, and price. We are subject to
competition from franchised automobile dealers that sell the same brands of new vehicles and other new vehicle
brands. We do not have any cost advantage in purchasing new vehicles from the automobile manufacturers.
Used Vehicles — In the used vehicle market, our dealerships compete for the supply and resale of used
vehicles with other franchised automobile dealerships, local independent used vehicle dealers, vehicle rental
agencies and private parties. We believe the principal competitive factors in the retail used vehicle business are
16
location, quality of facility and service, the suitability of a franchise to the market in which it is located, price and
selection.
Parts, Service and Collision Repair — In the parts, service and collision repair market, our dealerships
compete with other franchised automobile dealerships to perform warranty repairs and with franchised and
independent service centre chains, and independent repair shops for non-warranty repair and maintenance business.
We believe the principal competitive factors in the parts, service and collision repair business are location, quality of
facility and service, the use of factory-approved replacement parts, familiarity with an automobile manufacturer’s
brands and models, convenience, competence of technicians and price.
Finance and Insurance — In the finance and insurance market, we face competition in arranging financing for
our customers’ vehicle purchases from a broad range of financial institutions. We believe the principal competitive
factors in the finance and insurance business are convenience, interest rates and flexibility in contract length.
Acquisitions — We compete with owners of other franchised automobile dealerships and, in some cases,
individual investors for acquisitions. An acquisition of an existing franchised automobile dealership requires the
approval of the automobile manufacturer and the manufacturer may approve our competitors as a purchaser of the
dealership rather than us. As mentioned above, ACI is concerned that the recent going concern and restructuring
issues relating to some of the domestic auto manufacturers, including Chrysler LLC, may cause those auto
manufacturers with whom ACI does not have a relationship, or who are related to same, to be increasingly reluctant
to entertain a relationship with a public multi-brand dealer group which has cross obligations among its dealer
entities. As a result, ACI has no assurance that any manufacturer with whom it does not presently have a
relationship, or who are related to same, will approve ACI as a franchisee.
Our Competitive Strengths
We believe our principal competitive strengths include the following:
Our Multi-Location Automobile Dealership Model
Economies of Scale — Our size and consolidated purchasing power provide both cost and revenue synergies.
Cost synergies include achieving lower prices for items such as insurance, advertising, benefit plans and information
systems. Revenue synergies include being a preferred provider for retail service and warranty contracts and earning
higher commissions on finance and insurance activities.
Decentralized Operations and Centralized Administrative and Strategic Functions — Our organizational
structure allows us to provide market specific responses to sales, service, marketing and inventory requirements
while benefiting from the resources provided by an experienced and knowledgeable head office executive team.
“Best Practices” — Our model enables us to benchmark the success of our dealership operations against each
other and rapidly implement new and innovative ideas across our dealership group.
Geographic Diversification — Our diversified locations throughout Canada help to mitigate the potential effect
of adverse economic conditions in any one region of Canada.
Inventory Management — Operating a number of franchised automobile dealerships allows us to share market
information amongst our dealerships selling the same brands and quickly identify any changes in consumer buying
patterns.
Ability to Attract and Retain Key Employees — Our size and performance allow us to attract and retain key
employees both at the dealership level and at our head office.
Portfolio of Brands Suited to the Markets in which We Operate
We seek to supply new vehicles of the type and at the price points that we believe are or will be in demand in our
markets.
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Strong Relationships with Automobile Manufacturers
Our strong relationships with certain automobile manufacturers have enabled us to source, finance and close new
acquisitions, manage our business in an efficient manner and secure the rights to new dealerships awarded by the
manufacturers. See “Acquisitions” “Our Growth Strategy — New Locations for Franchised Automobile
Dealerships (Open Points)”.
Higher Margin Sales
While new vehicle sales are our most significant source of revenue, we placed additional focus on our higher margin
sources of revenue, which are the sale of used vehicles, parts, service and collision repair and finance and insurance
sales.
We also derive substantial revenues and gross profits from fees and commissions earned on the sale of finance and
insurance products, which produce higher margins than sales of new and used vehicles. See “Our Operations —
Sources of Revenue and Gross Profit — Finance and Insurance”.
Experienced and Incentivized Senior Management with a Significant Retained Interest
Our management team has extensive experience and expertise in the retail automotive industry. Patrick Priestner,
our Chief Executive Officer, has over 30 years of industry experience, including over 25 years as an owner of
franchised automobile dealerships. Robert Clark joined us as our President in June, 2004 after 17 years of
experience in various senior positions at Chrysler Canada where he last served as Vice President, Sales and Service.
Tom Orysiuk joined us as our Executive Vice-President and Chief Financial Officer in November of 2005. Prior to
joining AutoCanada, Mr. Orysiuk served as Chief Financial Officer of Liquor Stores Income Fund and its
Predecessor entities. Prior thereto, Mr. Orysiuk held several senior executive and financial positions with over 20
years of experience. Steve Rose joined us in January, 2007 as Vice-President of Corporate Development, General
Counsel and Secretary of AutoCanada Inc. Prior to joining AutoCanada, Mr. Rose was with Chrysler Canada for 14
years, most recently serving as Vice President, General Counsel and Secretary, where he was responsible for all
legal affairs of the Canadian company. Mr. Rose brings over 20 years experience serving in corporate counsel
positions and advising on corporate finance and mergers and acquisitions. See “Trustees, Directors and Officers —
Management Profiles”.
At the corporate level, Mr. Priestner and certain other senior executive officers have a significant stake in our
performance through their indirect ownership, through CAG, of an approximate 46.8% interest in our business as at
March 22, 2010. As at March 22, 2010, Mr. Priestner had a controlling interest in CAG of 74%; as at March 22,
2010, Mr. Clark had a 7.5% interest in CAG; and our other senior management team had minority interests for the
remaining 18.5% of CAG. These and other members of our senior management may also be paid bonuses based on
incentive plans in place.
In conjunction to the conversion to a corporation, AutoCanada discontinued the AutoCanada Unit Option Plan. At
the time of its discontinuance, no options granted were “in-the-money”. Effective November 6, 2009, in
anticipation of the conversion to a corporation, we established the ACI Stock Option Plan (“the Plan”) under which
options may be granted to our directors, officers, employees and consultants, in order to provide an opportunity for
these individuals to increase their proprietary interest in our long-term success. At December 31, 2009, no options
had been granted under the Plan. Options issued under the Plan vest at a rate of one third on the three subsequent
award date anniversaries. All the options must be exercised over specified periods not to exceed ten years from the
dates granted.
No stock options have been issued under the Plan and the Compensation Committee of ACI has engaged an
independent consulting firm to review and provide recommendations to the Compensation Committee of the
appropriate short term and long term compensation program for the executive team.
Dealer principals are compensated, to a significant extent, on the basis of the financial performance of the franchised
automobile dealership for which they are responsible. Our dealer principals participate in an incentive plan that
provides for the payment to them of 15% of the EBITDA of the dealer principal’s franchised automobile dealership.
The compensation of department managers and salespeople is similarly based upon departmental profitability and
individual performance, respectively.
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Inventories
Effective management of our inventory levels is critical to our business. Careful monitoring of inventories of new
and used vehicles and parts by days of supply, both in units and dollar amount leads to increased profitability by
minimizing interest expense incurred from financing our inventory, while maximizing our free cash flow through
prudent management of our working capital requirements.
New Vehicles
Automobile manufacturers allocate their budgeted production among franchised automobile dealerships largely
based on historical selling patterns of the given dealership. Automobile manufacturers also take into account the
dynamics of each marketplace and look to the number of new vehicle registrations by type to assess the automobile
manufacturers’ expected market share for each of their product offerings. Through their own analysis, automobile
manufacturers determine a “minimum sales responsibility” for each of their dealers which is effectively a minimum
selling volume.
Although automobile manufacturers determine a targeted volume of product that each dealer is expected to sell, the
decision to purchase inventory is the dealer’s, subject to meeting the minimum inventory levels required by the
franchise or sales and service agreements with the automobile manufacturers. Our dealers prepare an annual plan at
the start of each year, which is then revised and updated throughout the year with the filing of monthly plans.
In general, lead times for delivery of new vehicles are expected to be six to eight weeks from the time of placing our
order. We generally expect to manage our new vehicle inventory to approximately 75 days supply (which generally
includes approximately 30 days of “in transit” time) although variations are common due to in-transit times to ship
vehicles from factories in North America to our Western Canadian locations. During certain times of the year
certain plants operated by our OEM’s are shut down for maintenance due to declines in market demand or scheduled
maintenance. As we become aware of plant closures we occasionally increase inventory of the effected product
lines.
We finance our inventory purchases (known in the industry as floor plan financing) through revolving floorplan
facility which we have arranged through GMAC Canada. See “Financing - Floor Plan Financing”. GMAC Canada
establishes credit limits for each of our dealerships based on levels of inventory turnover.
We are able to mitigate interest expense from floor plan financing by effectively managing new vehicle inventories
and turning our inventory regularly through continuing sales and smaller but more frequent orders, while complying
with the minimum inventory requirements in our agreements with the automobile manufacturers.
Used Vehicles
Used vehicle inventory is typically acquired either through trade-ins on new or used vehicle sales, lease returns or
auctions. In order to facilitate a new vehicle sale, we often take a customer’s previously owned vehicle as partial
consideration. If the used vehicle fits our criteria for used vehicle inventory, we recondition the vehicle in our
service department before returning the vehicle to our sales lot in less than one week. In evaluating used vehicles
for our inventory we consider age, brand, mileage and general fit within our respective marketplace. If a trade-in
vehicle does not meet our criteria, we typically sell the vehicle to a wholesaler, a used vehicle dealership or through
auction.
We acquire a significant amount of our used vehicle inventory through trade-ins and use auctions to supplement this
inventory. Most automobile manufacturers, including Chrysler Canada, regularly conduct closed auctions
exclusively for its franchised automobile dealers to purchase off-lease and fleet vehicles. These vehicles typically
meet our inventory criteria.
We also acquire vehicles through several other auto auctions. Some of these auctions are limited to franchised
automobile dealers, while others are open to all interested parties. The used vehicle inventory at each of our
dealerships is monitored at both the dealership and at head office. Our target is to turn our used vehicle inventory
every six weeks.
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If vehicles are not receiving interest from potential customers our dealers either reduce the suggested price or sell
the vehicle to a wholesaler.
Our used vehicle inventory is financed by a combination of working capital and our revolving floor plan facilities.
Parts Inventory
Each of our franchised automobile dealerships has a Parts Manager who is responsible for the procurement and
management of our parts inventories. We manage our parts inventories to a target of 1.7 months supply on hand in
order to be responsive to our customers’ needs while managing our working capital. Each of our dealerships’ Parts
Managers monitors inventories for stale parts. Certain automobile manufacturers allow us to return up to six percent
of our purchases each year for full refund. The effective identification of stale parts inventory allows us to reduce
our working capital requirements. In addition, our Parts Managers monitor lost sales resulting from not having a
customer’s requested part in our inventory. Measuring these lost sales enables us to change our stocking patterns
and minimize future lost sales while at the same time improving customer service. Our parts inventory is financed
by our working capital.
Automobile Dealership Franchise Agreements
Each of our franchised automobile dealerships is operated by a Dealer LP pursuant to automobile dealership
franchise or sales and service agreements between the applicable automobile manufacturer and the Dealer LP. The
typical dealership franchise or sales and service agreement specifies the location at which the Dealer LP has both the
right and obligation to sell the automobile manufacturer’s vehicles and related parts and products and to perform
certain approved services. The agreement grants the Dealer LP the non-exclusive right to use and display the
automobile manufacturer’s trademarks, service marks and designs in the form and manner approved by the
automobile manufacturer. The dealer principal must be an active participant in the business of the Dealer LP and its
dealership, and must be approved by the automobile manufacturer under the franchise or sales and service
agreement for that dealership. Our agreement with Hyundai requires us to obtain its approval of the individuals
appointed as directors of the general partners of the Dealer LPs operating under dealership agreements with it.
The allocation of new vehicles among franchised automobile dealers is subject to the discretion of the automobile
manufacturer, which generally does not guarantee dealers exclusivity within a given territory. A franchise
agreement may impose requirements on the franchised automobile dealer concerning such matters as the
showrooms, the facilities and equipment for servicing vehicles, the maintenance of minimum levels of vehicles and
parts inventories, the maintenance of minimum net working capital, the achievement of certain sales targets,
minimum customer service and satisfaction standards and the training of personnel. Compliance with these
requirements is closely monitored by the automobile manufacturer. In addition, most automobile manufacturers
require each franchised automobile dealer to submit monthly and annual financial statements.
We are subject to additional provisions contained in supplemental agreements, framework agreements or franchise
addenda. These agreements impose requirements similar to those discussed above, as well as limitations on changes
in our ownership or management and limitations on our market share of total vehicles sold by a particular
automobile manufacturer.
Termination or Non-renewal of Franchise Agreements
Our dealership franchise or sales and service agreements are for indefinite terms or specified terms (which may be
one year) with automatic renewals for successive terms unless either party elects not to renew the term of the
agreement. Generally, our dealership franchise or sales and service agreements provide for termination by the
automobile manufacturer under certain circumstances, including insolvency or bankruptcy of the franchised
automobile dealer, failure to adequately operate the franchised automobile dealership, failure to maintain any
license, permit or authorization required for the conduct of business, or material breach of other provisions of the
agreement.
Provisions Affecting a Change of Control or Ownership
The Chrysler Approval Agreement was recently restated, effective December 31, 2009, and prohibits a change of
control of ACI without the prior approval of Chrysler Canada unless ACI thereafter disposes of the Chrysler Dealer
20
LPs within certain timelines. It also prohibits: (i) a change in control of the Chrysler Holding LP; (ii) the acquisition
of more than 10% of ACI Shares by an OEM, or (iii) the sale of all or substantially all of the assets of Chrysler
Holding LP or of the shares of any of the general partners of the Chrysler Dealer LPs, except to an affiliate. In
addition, CAG has agreed with Chrysler Canada that, until January 1, 2015, without the prior written consent of
Chrysler Canada, CAG will not transfer or give control over any ACI Shares that results in CAG holding less than
either: (i) 75% of the equity or voting interest in ACI that CAG held on January 1, 2010, or (ii) a 25% equity or
voting interest in ACI, on a fully diluted basis, and CAG will not permit a change of control of CAG. Acquisition of
ACI Shares by ACI shareholders in violation of these ownership restrictions or actions by CAG under this
agreement with Chrysler Canada are generally outside of AutoCanada’s control and may result in the termination of
one or more franchises, which may have a material and adverse effect on ACI.
Under a supplemental agreement with Nissan Canada, if any person or entity acquires more than 20% of ACI, or a
group of persons or entities acquire more than 50% of ACI, and, in either case, Nissan Canada, acting reasonably,
determines that such persons or entities do not have interests compatible with those of Nissan Canada, or are
otherwise not qualified to have an ownership interest in a Nissan or Infiniti dealership, then Nissan Canada shall be
entitled to require ACI to divest its ownership interest in those Nissan and Infiniti dealerships owned by ACI.
We may be required to enter into similar agreements with the other automobile manufacturers, or those related to
same, with whom we deal or wish to deal.
Our dealership franchise or sales and service agreements require the approval of the applicable automobile
manufacturer to any change in the ownership of the franchised automobile dealership.
Actions by our Shareholders or prospective Shareholders that would violate certain of the above restrictions are
generally outside of our control. For example, we cannot control a change of control of ACI or the acquisition by
another automobile manufacturer of more than 10% of our outstanding Shares. In addition, these restrictions may
also limit our ability to finance future acquisitions through the issue of additional Shares or other equity securities.
If we are unable to renegotiate these restrictions, we may be inhibited in our ability to acquire additional franchised
automobile dealerships. These restrictions also may impede our ability to raise required capital or to issue Shares, or
securities exchangeable into Shares, as consideration for future acquisitions.
Although our franchise or sales and service agreements may not be renewed and may be terminated by the
automobile manufacturer in certain circumstances, automobile manufacturers have rarely chosen to take such action
in the case of well managed and well capitalized dealerships - See “Risk Factors”. If any of our franchise or sales
and service agreements is terminated, or if certain automobile manufacturers’ rights under their agreements with us
are triggered, our operations could be significantly compromised.
Indemnities and other Agreements
Our supplemental agreements with Chrysler Canada and Hyundai also contain provisions which require us to
indemnify the respective automobile manufacturer for breaches of the applicable agreement, for claims made against
the automobile manufacturer arising out of the creation of ACI or in respect of the Offering and, in the case of
Hyundai, from any acts or omissions under any applicable securities laws, including any claim arising from any
misrepresentation or public oral statement made by us.
In addition, our agreement with Hyundai requires us to obtain its approval of the individuals appointed as directors
of each general partner of the Dealer LPs operating under dealer agreements with it, and to issue a 15% interest in
the Dealer LP directly or indirectly to the dealer principal of that Dealer LP on terms determined by its general
partner. We are also required to maintain directors and officers’ and certain other types of insurance. We are in
discussions with Hyundai regarding the possible amendment of these requirements.
Automobile Manufacturers’ Limitations on Acquisitions
We are required to obtain the consent of the applicable automobile manufacturer before we can acquire any
additional franchised automobile dealerships that can sell the vehicles produced by that automobile manufacturer.
Our automobile manufacturers impose limits on the number of franchised automobile dealerships we are permitted
to own at the national, regional and metropolitan levels. These limits vary according to the agreements we have
21
with each of the automobile manufacturers but are generally based on fixed numerical limits or on a fixed
percentage of the aggregate sales of the automobile manufacturer.
Our agreement with Chrysler Canada currently limits our ability to acquire or open additional Chrysler Canada
franchised automobile dealerships if this would result in the 36 month average sales of new Chrysler Canada
vehicles from our Chrysler Canada dealerships exceeding the following percentages of 36 month average sales of
new Chrysler Canada vehicles: 8% of sales in Canada (increased by Chrysler Canada from the original mandate of
5%); 15% of sales in any province; and 30% of sales in a major metropolitan market (as defined in the agreement).
At December 31, 2009, our annual average sales of new Chrysler Canada vehicles over the preceding 36 months
comprised 5.32% of national sales, 12.49% of sales in Alberta, 17.19% of sales in British Columbia and 42.44% of
sales in the major metropolitan market of Edmonton, Alberta (the provinces and major metropolitan area in which
we have the highest concentration of Chrysler Canada franchised automobile dealerships).
Subject to Nissan’s consent otherwise, our agreement with Nissan limits ACI’s ownership, to that number of Nissan
or Infiniti dealerships, which aggregated, do not have sales greater than:
(i)
(ii)
(iii)
5% of Nissan’s national sales and Infiniti’s national sales, respectively;
5% of Nissan’s total sales within a Region; and
5% of all Nissan dealerships or 10% of all Infiniti dealerships.
In addition, ACI shall not own or manage more than 1 Nissan or Infiniti dealership in a metropolitan market
comprised of 2-3 dealerships of the same brand; more than 2 Nissan or Infiniti dealerships in a metropolitan market
comprised of between 4-10 dealerships of the same brand; or more than 3 Nissan or Infiniti dealerships in a
metropolitan market comprised of 11 or more dealerships of the same brand.
Management believes that all other automobile manufacturers have similar requirements. Unless we renegotiate
these agreements or receive the consent of the automobile manufacturers, we may be prevented from making further
acquisitions upon reaching the limits provided for in these agreements. We are near the limit imposed by Chrysler
Canada with respect to the number of additional Chrysler Canada franchised automobile dealerships that we may
acquire or open.
Financing
Floor Plan Financing
Franchised automobile dealerships finance their new vehicle inventory (and in some instances a portion of their used
vehicle inventory) by way of floor plan financing, which is offered by the automobile manufacturers’ captive
finance companies, banks and specialty lenders.
Although the structures used in floor plan financing vary, a floor plan lender typically finances 100% of the
purchase price of a new vehicle from the time of purchase by the dealership (which occurs when production of the
new vehicle is completed).
In the second quarter of 2009, ACI signed an agreement with GMAC Canada (“GMAC facility”) to provide ACI
with wholesale floorplan financing for the twenty of our dealerships. All of the amounts owed under the revolving
floorplan facility with CFC were paid out and all owned dealerships were financed through GMAC Canada.
In the fourth quarter of 2009, ACI added the remaining two dealerships, Grande Prairie Nissan and Northland
Nissan (the “Managed Dealerships”), to the GMAC facility in connection with the transfer of the Managed
Dealerships from ownership under CAG (a related party) to legal ownership by AutoCanada. As a result, ACI has
fully paid its obligations under the Bank of Nova Scotia Revolving Floorplan Facility prior to December 31, 2009
and no longer has any obligation to the Bank of Nova Scotia with respect to floorplan financing.
The new GMAC facility provides the dealerships of ACI with financing for new, used and demonstrator inventory,
subject to a maximum of new, used and demonstrator units to be financed based on the financing needs of each of
our individual dealerships.
The floor plan notes payable are collateralized by a general security agreement consisting of a first security interest
on all new, used and demonstrator vehicles financed by GMAC Canada in the dealerships as part of the new
22
wholesale floorplan financing agreement.
Credit Facilities
During the fourth quarter of 2009, ACI signed an agreement with HSBC Bank Canada (“HSBC”) whereby HSBC
shall provide AutoCanada with a $20 million revolving loan (“The HSBC Facility”). On October 26, 2009 ACI
used the HSBC Facility to refinance its Fixed Term Loan with Chrysler Financial Canada. As a result of this
transaction, the Facility with Chrysler Financial Canada has been terminated and ACI no longer has any financial
obligation to Chrysler Financial Canada.
The HSBC Facility is a 365 day fully committed, extendible revolving loan. The HSBC Facility’s maturity date is
October 26, 2010, however the facility may be extended for an additional 365 days prior to the maturity of the
facility at the request of AutoCanada and upon approval by HSBC. If the HSBC Facility is not extended by HSBC,
repayment of the outstanding amount is not due until October 26, 2011. The HSBC Facility will bear interest at
HSBC’s Prime Rate plus 1.65% (currently 3.90% at the date of this MD&A).
The HSBC Facility is secured by all of the present and future assets of AutoCanada Holdings Inc. (a subsidiary of
AutoCanada Inc.), the various Limited Partnerships and the General Partners of each dealership within AutoCanada.
As part of a priority agreement signed by HSBC, GMAC Canada and the Fund, the collateral for the HSBC Facility
excluded all new, used, and demonstrator inventory financed with the Revolving Floorplan Facility provided by
GMAC Canada (discussed below in Floor Plan Financing section).
The HSBC Facility requires maintenance of certain financial covenants. The financial covenants of the HSBC
Facility consist of the following:
(i)
(ii)
(iii)
(iv)
The Debt to Tangible Net Worth ratio, including floorplan, must not exceed 7.50:1. Intangible
assets to be deducted from Tangible Net Worth, and shareholder loans to be added to tangible net
worth and deducted from debt, if postponed to HSBC; tested quarterly
The Debt to Tangible Net Worth ratio, excluding floorplan, must not exceed 2.50:1. Intangible
assets to be deducted from Tangible Net Worth, and shareholder loans to be added to tangible net
worth and deducted from debt, if postponed to HSBC; tested quarterly
The Current Ratio, net of flooring, shall not be less than 1.20:1 at any time; tested quarterly
The Fund must maintain a minimum cash deposit balance with HSBC Bank Canada of
$10,000,000.
Additional information relating to the HSBC Facility can be found on SEDAR (www.sedar.com).
Marketing
Print and Media Advertising
Our advertising and marketing efforts are focused at the local market level, with the aim of building our business
with a broad base of repeat, referral and new customers. Our primary advertising medium is local newspapers,
followed by radio, direct mail, the internet and the yellow pages. The retail automotive industry has traditionally
used locally produced, largely non-professional materials, often developed under the direction of each franchised
automobile dealership’s dealer principal. We have created common marketing materials for our brand names at
some of our dealerships using professional advertising agencies.
Internet and e-Commerce
We believe that the Internet and e-commerce represents a potential opportunity to build our franchised automobile
dealerships’ brands and expand the geographic borders of their markets. We use the scope and size of our
operations to expand the use of the Internet in our sales of new and used vehicles, as we believe our customers are
increasingly using the Internet as a key part of their product research.
Each of our franchised automobile dealerships has established a website that incorporates a professional design to
reinforce the dealership’s unique brand and advanced functionalities to ensure that the website can hold the attention
23
of customers and perform the informational and interactive functions for which the internet is uniquely suited.
Automobile manufacturer website links provide our dealerships with key sources of referrals. Many of our
dealerships use the internet to communicate with customers both prior to vehicle purchase and after purchase to
coordinate and market maintenance and repair services.
Over the past year, ACI has been making investments in new technology and improving our websites to better
accommodate our customers and improve our marketing and communication with potential customers. ACI has also
been analyzing our internet sales processes and working to improve our internet lead generation process in order to
improve our conversion ratio of successful internet sales leads. Internet marketing represents a significant
opportunity for our dealerships to improve customer relationships and increase sales in all areas of the business and
we hope to realize returns on these investments in the future.
Management Information Systems
We consolidate financial, accounting and operational data received from our franchised automobile dealerships
nationwide through an exclusive private communications network.
Our financial information, operational and accounting data and other related statistical information are consolidated,
processed and maintained at our headquarters in Edmonton, Alberta and Maple Ridge, British Columbia on a
network of server computers and work stations. There is also an off-site storage maintained by ADP. The flexible
nature of our installed network allows for accumulation, processing and distribution of information using ADP and
Reynolds and Reynolds computing programs. These two companies provide software for many companies in
Canada, including franchised automobile dealerships. All sales and expense information, and other data related to
the operations of each of our dealerships are entered at each location. This system allows our senior management to
access detailed information on a “real time” basis from all of our dealerships regarding, for example, the makes and
models of vehicles in our inventory, the mix of new and used vehicle sales, the number of vehicles being sold or
leased, the percentage of vehicles for which we arranged financing or sold ancillary products and services, the profit
margins achieved on sales and the relative performances of our dealerships to each other. This information is also
available to each of our dealer principals. Reports can be generated that set forth and compare revenue and expense
data by department and by dealership, allowing our management to quickly analyze the results of operations,
identify trends in the business and focus on areas that require attention or improvement.
We believe that our management information system is a key factor in successfully incorporating newly acquired
businesses. Following each acquisition, we install our management information system at the dealership location as
soon as possible for the dealership utilizing ADP, thereby quickly making financial, accounting and other
operational data for that dealership easily accessible to our senior management. With access to this data, we can
more efficiently incorporate our operating strategy at the newly acquired dealership. Because our management
information system is scalable, we can integrate new acquisitions without significantly increasing the cost of
operating the system.
We continue to upgrade our dealer management system with newer versions of ADP. Under our current
arrangement, we lease dealer management systems from both ADP and Reynolds and Reynolds.
Employees
As of December 31, 2009 we employed approximately 1,100 individuals. Management believes that our employee
relations are excellent and a strong contributing factor to our success.
Our employees in parts, service and collision repair and sales activities at Moncton Chrysler Jeep Dodge and Maple
Ridge Chrysler Jeep Dodge are represented by labour unions. The collective bargaining agreement with the union at
Moncton Chrysler Jeep Dodge expired in 2009. The dealership is currently in negotiations with the labour union
representing our employees at this dealership and meetings are to be held in April to continue to negotiate the
agreement. We can provide no assurances that we will successfully negotiate a new agreement with the labour
union; however we are hopeful that we can come to an agreement that is fair and equitable for both parties. The
collective bargaining agreement with the union at Maple Ridge Chrysler Jeep Dodge expires on June 30, 2010. We
have never experienced a strike, lock-out or other labour disturbance.
24
Our Intellectual Property and Proprietary Rights
Registration of the trademark “AutoCanada” and the corresponding logo have been applied for in Canada by ACI.
We also own other trademarks, trade names and various domain names, including autocan.ca, autocanada.net and
autocanada.biz.
Regulatory Matters and Policies
National Automobile Dealer Arbitration Program (“NADAP”)
In addition to our dealership franchise or sales and service agreements, our relationships with automobile
manufacturers are governed by NADAP. NADAP is a program organized by the Canadian Vehicle Manufacturers’
Association, the Association of International Automobile Manufacturers of Canada and CADA that provides rules
for dispute resolution between the automobile manufacturers and the franchised automobile dealers in the Canadian
automobile industry.
The NADAP Rules provide for the mediation and arbitration of disputes between an automobile manufacturer and
its franchised automobile dealers involving: the interpretation or application of the dealership agreement; the
renewal or termination of the dealership agreement; the length of a cure period provided by the automobile
manufacturer in light of any franchised automobile dealer deficiencies to be cured; the sale or transfer of the
franchised automobile dealership; whether a dealer owes money to an automobile manufacturer (or vice versa); and
the decision of an automobile manufacturer to appoint or relocate a dealership into the market of an existing dealer.
The NADAP Rules provide that an existing franchised automobile dealer can challenge an automobile
manufacturer’s proposal to create a new dealership or relocate a dealership, with identical brands, in a location that
is within eight kilometres (in metropolitan areas) of the existing dealership’s location (20 kilometres if relocated
more than two kilometres closer to the existing dealership in non-metropolitan areas). Some of our agreements with
the automobile manufacturers contain waivers by us of certain NADAP Rules.
NADAP was established in 1997 for an initial five year term. The existing NADAP Rules were adopted in 2007 for
a further five year term.
Dealership Code of Conduct
We have developed and implemented a code of conduct that reflects our commitment to conducting our business in
accordance with the highest ethical standards. Our code of conduct is intended to provide guidance on recognizing
and dealing with ethical issues, provide mechanisms to report unethical conduct, and help foster a culture of
honesty, integrity and accountability. The code deals with, among other things, advertising standards, clarity of
pricing, sales techniques and standards, customer relationships and other matters. The code of conduct applies to all
of our directors, officers and employees and sets policies and standards that go beyond mere compliance with the
minimum legal standards. A copy of the code of conduct may be obtained from our website at www.autocan.ca or
from SEDAR at www.sedar.com.
Governmental Regulations
A number of federal, provincial and local regulations affect our marketing, selling, financing and servicing of
vehicles.
Each of the jurisdictions in which we operate regulates the licensing of franchised automobile dealers. Our dealers
and salespeople must be licensed, and must comply with ongoing provincial regulations in order to maintain their
licensed status. Dealerships are also generally prohibited under provincial laws from employing individuals in
certain automobile repair positions unless the individuals are appropriately certified. In addition, our dealerships are
subject to various consumer protection laws which regulate sales transactions and advertising. Dealerships that offer
financing products must also comply with regulations concerning matters such as credit agreement provisions, cost
of borrowing disclosure and advertising regarding the terms of credit. Other provinces into which we may expand
our operations in the future are likely to have similar requirements.
The Provinces of Alberta, British Columbia and Ontario have established self-regulatory bodies which are
responsible for licensing automobile dealers and their sales and management personnel, as well as overseeing
25
consumer protection legislation applicable to motor dealers, including standard setting and enforcement, compliance
with advertising restrictions, complaint resolution and public industry education. Operating under delegated
authority from their respective provincial governments, these bodies administer and enforce compliance with many
of the provincial laws which affect the day-to-day operations of automobile dealers.
The sale of third party financing products to our customers is subject to federal and provincial truth-in-lending,
consumer leasing, financing regulations, instalment finance laws and insurance laws.
We believe that we comply substantially with all laws and regulations affecting our business and do not have any
material liabilities under such laws and regulations and that compliance with all such laws and regulations do not,
individually or in the aggregate, have a material adverse effect on our capital expenditures, earnings or competitive
position and we do not anticipate that such compliance will have a material effect on us in the future.
Environmental Matters
We are subject to a wide range of environmental laws and regulations, including those governing discharges into the
air and water, the storage of petroleum substances and chemicals, the handling and disposal of wastes and the
remediation of contamination. As with dealerships generally, and service and parts and collision repair centre
operations in particular, our business involves the generation, use, handling and disposal of hazardous or toxic
substances and wastes. Pursuant to these laws, provincial environmental agencies have established approved
methods for the handling, storage, treatment, transportation and disposal of regulated substances and wastes with
which we must comply.
Our business also involves the use of above ground and underground storage tanks. Under applicable laws and
regulations, we are responsible for the proper use, maintenance and abandonment of our regulated storage tanks and
for remediation of subsurface soils and groundwater impacted by releases from existing or abandoned storage tanks.
In addition to these regulated tanks, we own, operate, or have otherwise closed in-place other underground and
above ground devices or containers (such as automotive lifts and service pits) that may not be classified as regulated
which could or may have released stored materials into the environment, thereby potentially obligating us to clean
up any contaminated soils or groundwater resulting from such releases.
We are also subject to laws and regulations governing remediation of contamination at or from our facilities or to
which we send hazardous or toxic substances or wastes for treatment, recycling or disposal.
All dealership locations are subject to the obtaining of Phase I environmental assessments from independent
environmental consultants prior to purchase. The only location at which these environmental assessments identified
contaminants in excess of applicable standards is the Crosstown Chrysler location in Edmonton, Alberta. The
Investment and Acquisition Agreement provides for an indemnity from CAG and the Principal Shareholders in
respect of the environmental condition of each of ACI’s locations that were acquired when ACI was created, as well
as certain related covenants requiring CAG to maintain at least a 20% equity interest in ACI (on a fully-diluted
basis) until certain conditions are satisfied.
Environmental laws and regulations are very complex and it has become difficult for businesses that routinely
handle hazardous and non-hazardous wastes to achieve and maintain full compliance with all applicable
environmental laws. Like any business involved in the repair and servicing of vehicles, from time to time we
experience incidents and encounter conditions that are not in compliance with environmental laws and regulations.
However, none of our dealerships have been subject to any material environmental liabilities in the past and we do
not anticipate that any material environmental liabilities will be incurred in the future.
Environmental laws and regulations and their interpretation and enforcement are changed frequently and we believe
that the trend of more expansive and stricter environmental legislation and regulations is likely to continue. Hence,
there can be no assurance that compliance with environmental laws or regulations or the future discovery of
unknown environmental conditions will not require additional expenditures by us, or that such expenditures would
not be material. See “Risk Factors — Risks Related to Our Business — Governmental Regulations and
Environmental Regulation Compliance Costs”.
26
AutoCanada Inc.
CAPITAL STRUCTURE
The authorized capital of ACI consists of an unlimited number of ACI Shares and an unlimited number of preferred
shares.
Common Shares
Holders of ACI Shares are entitled to one vote per share at meetings of shareholders of ACI, to receive dividends if,
as and when declared by the board of directors of ACI and to receive pro rata the remaining property and assets of
ACI upon its dissolution or winding-up, subject to the rights of shares having priority over the ACI Shares. Holders
of ACI Shares may make use of the various shareholder remedies available pursuant to the CBCA.
Preferred Shares
Each series of preferred shares consist of such number of shares and having such rights, privileges, restrictions and
conditions as may be determined by the board of directors of ACI prior to the issuance thereof. Holders of preferred
shares, except as required by law, will not be entitled to vote at meetings of shareholders of ACI. With respect to the
payment of dividends and distribution of assets in the event of liquidation, dissolution or winding-up of ACI,
whether voluntary or involuntary, the preferred shares are entitled to preference over the ACI Shares and any other
shares ranking junior to the preferred shares from time to time and may also be given such other preferences over
the ACI Shares and any other shares ranking junior to the preferred shares as may be determined at the time of
creation of such series.
The Fund
An unlimited number of Units and may be issued pursuant to the Declaration of Trust. All of the Units of the Fund
are owned by ACI.
Units
Each Unit is transferable and represents an equal undivided beneficial interest in any distributions from the Fund,
whether of net income, net realized capital gains (other than net realized capital gains distributed to redeeming
Unitholders) or other amounts, and in the net assets of the Fund in the event of termination or winding-up of the
Fund. All Units are of the same class with equal rights and privileges. The Units are not subject to future calls or
assessments, and entitle the Unitholders thereof to one vote for each whole Unit held at all meetings of Voting
Unitholders. Units are redeemable at any time on demand by the Unitholders.
The Trust
An unlimited number of Trust Units may be issued pursuant to the Trust Declaration of Trust. Trust notes may be
issued pursuant to the Trust Note Indenture.
Trust Units and Distributions
All of the Trust Units are held by the Fund. The Trust Units are redeemable at any time on demand by the holders
thereof. The Trust Trustees are also entitled to call for redemption, from time to time and at any time, of all or part
of the outstanding Trust Units registered in the name of the holders thereof (other than the Fund) at the same
redemption price as described above for each Trust Unit called for redemption, calculated with reference to the date
the Trust Trustees approved the redemption of Trust Units.
The Trust makes monthly cash distributions of its cash available for distribution. The amount of cash to be
distributed monthly per Trust Unit to the Trust Unitholders is equal to a pro rata share of distributions on or in
respect of Partnership Units owned by the Trust and all other amounts, if any, from any other investments from time
to time held by the Trust received in such period, less amounts which are paid, payable, incurred or provided for in
such period in connection with: (i) administrative expenses and other obligations of the Trust; (ii) amounts that may
27
be paid by the Trust in connection with any cash redemptions or repurchases of Trust Units or repayments of
Trust Notes; (iii) satisfaction of its debt service obligations (principal and interest) on Trust Notes and other
indebtedness, if any; and (iv) any amount that the Trust Trustees may reasonably consider to be necessary to provide
for the payment of any costs or expenses, including any tax liability of the Trust, that have been or are reasonably
expected to be incurred in the activities and operations of the Trust (to the extent that such costs or expenses have
not otherwise been taken into account in the calculation of the cash available for distribution of the Trust).
Such distributions are payable to holders of record of Trust Units on the last business day of each month and are
paid within 15 days following each month end. The cash distributions payable by the Trust are received by the Fund
prior to its related cash distribution to Unitholders.
Trust Notes
Trust Notes are reserved by the Trust to be issued exclusively to holders of Trust Units as full or partial payment of
the redemption price of Trust Units and the Trust Notes are issuable in Series 1 and/or Series 2.
Each Series 1 Trust Note will bear interest at a market rate to be determined by the Trust Trustees at the time of
issuance thereof, payable on the 15th day of each calendar month that such Series 1 Trust Note is outstanding and
will mature on a date which is no later than the first anniversary of the date of issuance thereof. Each Series 2
Trust Note will bear interest at a market rate to be determined by the Trust Trustees at the time of issuance thereof,
payable on the 15th day of each calendar month that such Series 2 Trust Note is outstanding and will mature on the
25th anniversary of the date of issue of the Trust Units being redeemed.
On maturity, the Trust will repay the Trust Notes by paying to the Trustee under the Trust Note Indenture, in cash,
an amount equal to the principal amount of the outstanding Trust Notes that have then matured, together with
accrued and unpaid interest if any, thereon. The Trust Notes will be redeemable at the option of the Trust prior to
maturity, in whole or in part, at a redemption price equal to the principal amount thereof plus accrued and unpaid
interest if any, thereon, payable in cash. The Trust Notes will be direct unsecured obligations of the Trust, ranking
pari passu with other unsecured liabilities of the Trust.
Exercise of Certain Voting Rights Attached to Securities of the Trust, the Partnership and AutoCanada GP
The Declaration of Trust provides that the Fund will not vote any securities of the Trust, the Partnership,
AutoCanada GP or any of their respective subsidiaries to authorize any transaction which is adverse to the
Unitholders including, among other things:
•
•
•
•
any sale, lease or other disposition of all or substantially all of the assets of the Trust, the Partnership,
AutoCanada GP or any of their respective subsidiaries except in conjunction with an internal reorganization or
good faith pledges or mortgages in the ordinary course of business or in connection with permitted guarantees
of the Trust, AutoCanada GP, the Partnership, as applicable, or permitted charge, pledge or lien;
any amalgamation, arrangement, merger or capital reorganization of the Trust, AutoCanada GP, the Partnership
or any of their respective subsidiaries with any other entity, except in conjunction with an internal
reorganization;
the winding-up or dissolution of the Trust, AutoCanada GP or the Partnership prior to the end of the term of the
Fund except in conjunction with an internal reorganization; or
any material amendment to the constating documents of the Trust, AutoCanada GP or the Partnership to change
the authorized Unit or partnership capital or partnership interests which may be prejudicial to the Fund,
without the authorization of the Voting Unitholders by a Special Resolution.
28
AutoCanada LP
AutoCanada LP was dissolved on January 1, 2010.
Holding LPs and Dealer LPs
All of the limited partnership interests in each Dealer LP are held indirectly, by the Trust, except for 15% interests in
the Dealer LPs that own our Hyundai dealerships which are held by our dealer principals responsible for those
dealerships. This interest may be acquired by us if the dealer principal’s employment with us is terminated for any
reason. The limited partnership interests in each Holding LP are held indirectly by the Trust.
Distributions
The general partners of the Dealer LPs cause the Dealer LPs to distribute to the Holding LPs a substantial portion of
their respective available cash as set out below. Distributions are made on or about the 15th day following the end
of each month. Distributions to the Holding LPs are received by the Holding LPs in time for the Holding LPs to
make its related distributions on its Partnership Units. The general partners of the Dealer LPs may, in addition,
cause any of the Dealer LPs to make a distribution at any other time.
Available cash of a Dealer LP consists, in general, of all of the Dealer LP’s cash, after satisfaction of:
(cid:1)
(cid:1)
(cid:1)
general and administrative expenses and other expense obligations;
debt service obligations on indebtedness of the Dealer LP;
incentive bonuses under the applicable Dealer Principal Employment Agreement and incentive
bonuses under the AutoCanada Bonus Plan;
(cid:1) working capital requirements of the Dealer LP, including the working capital required under the
franchise or sales and service agreement with the automobile manufacturer; and
(cid:1)
any other amounts that the Dealer GP, as general partner of the Dealer LP, may consider reasonably
necessary for the payment of any liability or expense that has been or is reasonably expected to be
incurred in the activities or operations of the Dealer LP, for reasonable reserves (including amounts
on account of working capital and capital expenditures and to stabilize distributions).
The amount distributed from time to time by any Dealer LP on interests in the Dealer LPs is determined by the
board of directors of its general partner.
The income and loss of the Dealer LPs for each fiscal year, including income or loss for tax purposes is allocated, as
to 0.005% thereof, to the general partner thereof and, as to 99.995% thereof, to the Partnership or, where a dealer
principal holds an interest in the Dealer LP, 84.995% to the Partnership and 15% to the dealer principal.
The fiscal year end of the Dealer LPs is December 31.
AutoCanada GP
AutoCanada GP is authorized to issue an unlimited number of common shares. A holder of a common share is
entitled to one vote for each share held by such holder, to receive dividends as and when declared by the directors of
AutoCanada GP in an equal amount per common share and to share equally in the assets and properties of
AutoCanada GP on a per share basis distributed to shareholders of AutoCanada GP on the liquidation or winding up
of AutoCanada GP.
29
RISK FACTORS
The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and
uncertainties not currently known to us or that we currently deem immaterial also may impair our business
operations. If any of the following risks actually occur, our business, results of operations and financial condition,
and the amount of cash available for distribution to our Shareholders, could suffer.
Risks Related to Our Business and the Industry in Which We Operate
Risks Related to the Retail Automotive Industry
Capital Markets
Uncertainty in the capital markets risks greater difficulty to access capital, as well as possible higher interest rates
and less favourable terms.
Economic Conditions
Unfavourable economic conditions may negatively impact ACI’s financial viability. The decline in economic
conditions could also increase ACI’s financing costs, decrease net earnings, limit access to capital markets and
negatively impact the availability of credit facilities to ACI.
Currency Fluctuations
Rapid appreciation or depreciation of the Canadian dollar relative to the U.S. dollar impacts the relative price of
used and new vehicles, as well as vehicle parts in Canada relative to the U.S., making the same either more
attractive, in the case of a depreciation, or less attractive, in the case of appreciation, thus posing risks to some of
ACI’s operations. In response to the rapid change in the value of the Canadian dollar when compared U.S. dollar
manufacturers may or may not adjust prices or incentives to accommodate such changes, and, if adjusted, could
amend or discontinue same at any time. In addition, such currency appreciation could have a negative impact on
businesses that operate in the communities in which ACI’s dealerships are located which could in turn, negatively
impact the dealerships’ performance.
Overall Consumer Demand
ACI’s business is heavily dependent on consumer demand and preferences. ACI’s revenues will be materially and
adversely affected if there is a severe or sustained downturn in overall levels of consumer spending. Retail vehicle
sales are cyclical and historically have experienced periodic downturns characterized by oversupply and weak
demand. These cycles are often dependent on general economic conditions and consumer confidence, as well as the
level of discretionary personal income and credit availability.
Availability of Consumer Credit
In the consumer finance market, tight credit conditions have resulted in a decrease in the availability of automotive
loans and leases and more stringent lending restrictions. If the unfavourable economic conditions continue or worsen
and the availability of automotive loans and leases remains limited, vehicle sales and margins will likely be lower
than expected. To the extent that consumers are unable to obtain financing vehicle sales may be adversely affected.
Substantial Competition in Vehicle Sales and Services
The retail automotive industry is highly competitive. Depending on the geographic market, ACI is in competition
with: franchised automobile dealerships in markets that sell the same or similar makes of new and used vehicles
offered, in some cases at lower prices than ACI, private market buyers and sellers of used vehicles’ service centre
chain stores, independent service and repair shops, and other providers of financing and insurance contracts.
ACI is also in competition with regional and national vehicle rental companies that sell their used rental vehicles. As
ACI seeks to acquire franchised automobile dealerships in new markets, ACI may face significant competition while
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striving to gain market share. Some of ACI’s competitors may have greater financial, marketing and personnel
resources and lower overhead and sales costs. ACI does not have any cost advantage in purchasing new vehicles
from OEMs and may typically rely on advertising, merchandising, sales expertise, service reputation and dealership
location in order to sell new vehicles. AutoCanada’s OEM Agreements do not grant AutoCanada the exclusive right
to sell a manufacturer’s product within a given geographic area. ACI’s revenues and profitability may be materially
and adversely affected if competing dealerships expand their market share or are awarded additional franchises by
manufacturers that supply ACI’s dealerships.
In addition to competition for vehicle sales, ACI’s franchised automobile dealerships compete with other franchised
automobile dealerships to perform warranty repairs and with other franchised automobile dealerships, franchised
and independent service centre chains and independent garages for non-warranty repair and routine maintenance
business. ACI’s franchised automobile dealerships compete with other franchised automobile dealerships, service
stores and automobile parts retailers in their parts operations. ACI believes that the principal competitive factors in
service and parts sales are the quality of customer service, the use of factory-approved replacement parts, familiarity
with an OEM’s brands and models, convenience, the competence of technicians, location, and price. A number of
regional or national chains offer selected parts and services at prices that may be lower than ACI’s franchised
automobile dealerships’ prices. ACI is also in competition with a broad range of financial institutions in arranging
financing for customers’ vehicle purchases.
Dependence upon Vehicle Sales
The success of ACI’s franchised automobile dealerships will depend in large part on the level of vehicle sales
generally, and the level of demand for and sales of the brands of vehicles ACI sells. New vehicle sales will generate
the majority of ACI’s total revenue and lead to sales of higher-margin products, including the sales of used vehicles,
parts, service and collision repair operations and finance products. A majority of ACI’s new vehicle sales operations
will be vehicles manufactured by Chrysler Canada under the brand names “Chrysler”, “Jeep” and “Dodge”. If one
or more of the brands that separately or collectively account for a significant percentage of ACI’s new vehicle sales
suffer from decreasing consumer demand, or are no longer offered for sale by the manufacturers, ACI’s new vehicle
sales and related revenues may be materially reduced.
Management recognizes that in the long term, much will depend upon Fiat’s success in developing its strategic
alliance with Chrysler Group LLC. If the Fiat/Chrysler alliance fails to produce new or updated products that are
competitive in the marketplace, ACI’s new vehicle sales will be negatively affected. A failure of the Fiat/Chrysler
alliance would be likely to have a material adverse affect on our operations.
Management also recognizes that in the short term, our new vehicle sales may be adversely affected by Chrysler’s
lack of new and updated product. Various reports in the media suggest that products incorporating the Fiat/Chrysler
alliance may not be available until at least 2011 or 2012. Until this time, ACI’s Chrysler Jeep Dodge dealerships,
which represent a significant portion of ACI’s revenue, may underperform due to lack of new or updated product.
Mix of New Vehicles
ACI depends on OEMs to provide a desirable mix of popular new vehicles. OEMs generally allocate their vehicles
among their franchised automobile dealerships based on the sales history of each franchised automobile dealership.
If ACI’s franchised automobile dealerships experience prolonged sales slumps, OEMs may cut back their allotments
of popular vehicles to ACI’s franchised automobile dealerships and new vehicle sales and profits may decline.
Interest Rates
ACI currently finances purchases of new and, to a lesser extent, used vehicle inventory under a floor plan borrowing
arrangement under which ACI is charged interest at floating rates. ACI may obtain capital for acquisitions and for
some working capital purposes under a similar arrangement. As a result, ACI’s debt service expenses may rise with
increases in interest rates. Rising interest rates may also have the effect of depressing demand in the interest rate
sensitive aspects of ACI’s business, particularly new and used vehicle sales, because many customers finance their
vehicle purchases. As a result, rising interest rates may have the effect of simultaneously increasing costs and
reducing revenues.
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OEM Incentive Programs
ACI’s franchised automobile dealerships depend on OEMs for certain sales incentives, warranties and other
programs that are intended to promote and support new vehicle sales. Some key incentive programs will include
customer rebates on new vehicles, franchised automobile dealership incentives on new vehicles, special financing or
leasing terms, warranties on new and used vehicles and sponsorship of used vehicle sales by authorized new vehicle
franchised automobile dealerships.
A reduction or discontinuation of key OEMs’ incentive programs may reduce ACI’s new vehicle sales volume
resulting in decreased vehicle sales and related revenues.
Seasonality
The retail automotive industry is subject to seasonal variations in revenues. Demand for vehicles is generally lower
during the first and fourth quarters of each year. Accordingly, ACI’s revenues and operating results will generally be
lower in the first and fourth quarters than in the second and third quarters. Therefore, if conditions surface during the
second or third quarters that adversely affect vehicle sales, such as depressed economic conditions or similar adverse
conditions, revenues for the year will be disproportionately adversely affected.
Import Product Restrictions and Foreign Trade Risks
A significant portion of ACI’s new vehicle business involve the sale of vehicles, parts or vehicles containing parts
that are manufactured outside Canada. As a result, ACI’s operations are subject to customary risks of importing
merchandise, including fluctuations in the relative values of currencies, import duties, exchange controls, trade
restrictions, work stoppages and general political and socio-economic conditions in foreign countries. Canada, or the
countries from which ACI’s products are imported may, from time to time, impose new quotas, duties, tariffs or
other restrictions, or adjust presently prevailing quotas, duties or tariffs, which may affect operations and the ability
to purchase imported vehicles and/or parts at reasonable prices.
Risks Related to Our Business
The Loss of Key Personnel and Limited Management and Personnel Resources
ACI’s success depends to a significant degree upon the continued contributions of the ACI management team,
particularly the senior management and service and sales personnel. Additionally, OEM franchise agreements may
require the prior approval of the applicable OEM before any change is made in franchised automobile dealership
general managers. Consequently, the loss of the services of one or more of these key employees may materially
impair the efficiency and productivity of operations.
In addition, ACI may need to hire additional managers during expansionary periods. The market for qualified
employees in the industry and in the regions in which ACI operates, particularly for general managers and sales and
service personnel, is highly competitive and may lead to increased labour costs during periods of low
unemployment. The loss of the services of key employees or the inability to attract additional qualified managers
may adversely affect the ability of ACI’s franchised automobile dealerships to conduct their operations in
accordance with the standards set by the head office management.
Unfavourable Conditions in Key Geographic Markets
ACI’s performance is subject to local economic, competitive and other conditions prevailing in the particular
geographic areas of ACI’s franchised automobile dealerships. Because the majority of ACI’s dealerships are located
in Alberta and British Columbia, their performance may be subject to local economic, competitive and other
conditions prevailing in one or both of those provinces.
Ability to Refinance Credit Agreements in the Future
On October 6, 2009, ACI signed a Credit Facility Agreement with HSBC providing for a $20 million revolving loan.
On October 26, 2009 ACI used the Credit Facility Agreement to refinance its Fixed Term Loan with Chrysler
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Financial Canada. At the end of the two year period at which time the Credit Facility Agreement will become due
for repayment, if not extended by HSBC, ACI will be obliged to repay the outstanding amount or seek refinancing
which may not be available on favourable terms. If agreement on a new facility is reached, it may have negative
consequences such as:
• We may be required to dedicate a substantial amount of our cash flow from operations to required
payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital
expenditures, acquisitions, distributions, and other general activities.
• Covenants relating to new credit agreements may limit our ability to obtain financing for working capital,
capital expenditures, acquisitions, and other general activities.
• Covenants relating to new credit agreements may limit our flexibility in planning for, or reacting to,
changes in our business and the industry in which we operate.
Credit Agreements
The degree to which the Dealer LPs are and ACI are currently leveraged or may be leveraged in the future could
have important consequences to the ACI shareholders including:
• ACI’s ability to obtain additional financing for working capital, capital expenditures or acquisitions in the
future may be limited;
•
•
a significant portion of ACI’s cash flow from operations could become dedicated to the payment of the
principal of and interest on its indebtedness, thereby reducing funds available for future operations;
certain borrowings are at variable rates of interest, which exposes ACI to the risk of increased interest rates;
and
• ACI may be more vulnerable to economic downturns and be limited in its ability to withstand competitor
pressures.
These factors may increase the sensitivity of the cash available for use on capital expenditures or acquisitions to
interest rate variations and could have a negative impact on the ability to make dividend payments to the ACI
shareholders.
The Credit Facility Agreement contains numerous restrictive covenants that will limit the discretion of the ACI’s
management with respect to certain business matters. These covenants place significant restrictions on, among other
things:
•
•
•
•
•
•
•
the incurrence of additional debt and guarantees of any debt, except purchase money debt to a maximum
aggregate amount;
capital expenditures;
the creation of liens;
the payment of dividends;
the ability to make investments and finance acquisitions;
the sale of any of AutoCanada’s assets except in the normal course of the operation of the business; and
the merger or consolidation with another entity.
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These restrictions could limit ACI’s financial flexibility, prohibit or limit strategic initiatives and limit the ability to
grow and respond to competitive changes. ACI may also be prevented from taking advantage of business
opportunities that arise because of the restrictions contained in the Credit Facility Agreement. In addition, the Credit
Facility Agreement contains a number of financial covenants that require AutoCanada to meet certain financial
ratios and financial conditions the effect of which could require ACI to take certain action to reduce ACI’s debt or
take some other action should ACI not satisfy these financial ratios or tests. These restrictions, and the factors
referred to above, may also inhibit ACI from refinancing the Credit Facility Agreement at all or on terms that are
favourable to ACI, and could have a negative impact on the ability to make dividend payments to the ACI
shareholders.
ACI may not enter into a reconstruction, reorganization, amalgamation, merger or other similar arrangement with
any other person, as defined in the Credit Facility Agreement, as this is an event of default, entitling HSBC to
require immediate repayment of the Credit Facility Agreement.
A failure by ACI to comply with the obligations in the Credit Facility Agreement could result in a default which, if
not cured or waived, could result in a termination of distributions by the Partnership and permit acceleration of the
relevant indebtedness. If the indebtedness under the Credit Facility Agreement were to be accelerated, there can be
no assurance that the assets of ACI would be sufficient to repay in full that indebtedness. There can be no assurance
that future borrowings or equity financing will be available to ACI or available on acceptable terms, in an amount
sufficient to repay this indebtedness or to meet ACI’s needs.
ACI’s wholesale floorplan financing is provided by GMAC. GMAC provides inventory financing for new and used
vehicles through this credit facility. As standard with all wholesale financing arrangements, the GMAC wholesale
financing agreement provides is a discretionary line of credit and that may be modified, suspended, or terminated at
any time, at GMAC’s sole discretion.
Governmental Regulations and Environmental Regulation Compliance Costs
ACI is subject to a wide range of federal, provincial and municipal laws and regulations, such as local licensing
requirements, consumer protection laws and environmental requirements governing, among other things, discharges
into the air and water, above ground and underground storage of petroleum substances and chemicals, handling and
disposal of wastes and remediation of contamination arising from spills and releases. ACI is also subject to the rules
imposed by self regulation authorities in various jurisdictions. If ACI violates these laws and regulations, ACI may
be subject to civil and criminal penalties, or a cease and desist order may be issued against the operations that are
not or are alleged not to be in compliance. ACI’s future acquisitions may also be subject to governmental regulation,
including antitrust reviews. ACI believes that all of the franchised automobile dealerships comply in all material
respects with all applicable laws and regulations relating to ACI’s business, but future laws and regulations may be
more stringent and require ACI to incur significant additional costs. See “Information Concerning AutoCanada
Income Fund - Regulatory Matters and Policies” for more information.
Intangible Assets
Intangible assets are subject to impairment assessments at least annually (or more frequently when events or
circumstances indicate that an impairment may have occurred) by applying a fair-value based test. ACI may be
required to incur impairment charges in the future.
International Financial Reporting Standards
The Canadian Accounting Standards Board confirmed in February 2008 that publicly accountable entities will be
required to adopt International Financial Reporting Standards (IFRS) for interim and annual financial statements
beginning on or after January 1, 2011.
ACI has developed a multiyear transition plan which includes four phases: diagnostic; project planning; impact
assessment and policy design; and implementation. In 2008, ACI completed the diagnostic phase and has identified
the relevant differences between GAAP and IFRS. In 2009, ACI completed the project planning stage which
outlined the project budget, training requirements, key milestones and implementation plans. ACI is currently in the
impact assessment and policy design stage and is assessing the impact of policy alternatives on its financial
statements, systems, processes and controls.
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ACI has performed a preliminary review of the impact of IFRS on its systems, processes and controls. No
significant impacts have been identified with respect to its information systems or day-to-day accounting processes.
ACI has identified opportunities to improve its financial reporting process for the preparation of annual and
quarterly disclosure requirements and has engaged a professional services firm to assist in the design and
implementation of the identified opportunities and assist in the development of IFRS compliant financial statements.
In addition, senior members of ACI’s finance team have attended various IFRS training sessions and are engaged in
the conversion process in order to ensure a smooth transition.
ACI has completed its impact assessments of accounting policies identified in its diagnostic phase of the project that
were expected to have a significant impact on the financial statements and is currently performing analysis over
accounting policies identified in its diagnostic phase of the project that were expected to have a moderate to low
impact on the financial statements. As the transition progresses, ACI will provide increased clarity into the
anticipated consequences of any significant accounting policy changes identified.
Changes in accounting policies and processes and collection of additional information for disclosure may require
modifications to ACI’s information technology systems and processes as well as its system of internal controls. The
impact on internal controls over financial reporting and disclosure controls and procedures will be determined
during the impact assessment and policy design phase.
Insurance Coverage
ACI maintains insurance coverage in respect of various potential liabilities, including theft and the accidental loss of
value of assets from risks, in amounts, with such insurers, and on such terms as considered appropriate, taking into
account all relevant factors. However, there are certain types of losses, generally of a catastrophic nature, such as
earthquakes and floods that may be uninsurable or not economically insurable. ACI uses discretion in determining
amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance
coverage on assets and the business at a reasonable cost and on suitable terms. This may result in insurance coverage
that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current
replacement cost of the lost investment. Certain factors also might make it unattractive to use insurance proceeds to
replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance
proceeds received might not be adequate to recover the economic position with respect to such property. There are
no assurances that ACI’s insurance coverage will continue to be available on reasonable terms, including reasonable
premium, deductible and co-insurance requirements, or that ACI’s insurer will not disclaim coverage of any future
claim. ACI’s business, financial condition, liquidity and results of operations could be materially and adversely
affected if any of the foregoing developments were to occur.
Governmental Laws and Regulations
The automotive retailing industry is subject to a wide range of laws and regulations. With respect to motor vehicle
sales, leasing, and the sale of finance, insurance, and other products at ACI stores, ACI will be subject to various
laws and regulations, the violation of which could subject ACI to lawsuits or government investigations and adverse
publicity. The violation of laws and regulations may also jeopardize relationships with various stakeholders, which
could result in inability to operate under the present conditions and would adversely affect operations.
Risks Related to Our Acquisition Strategy
OEMs’ Restrictions on Acquisitions
ACI is required to obtain the consent of the applicable OEM before acquiring any additional franchised automobile
dealerships. ACI cannot provide assurance that the OEMs will consent to future acquisitions, or consent in a timely
manner, particularly in the case of manufacturers with whom ACI does not have a prior relationship, which may
prevent ACI from being able to take advantage of a market opportunity. Only those OEMs that AutoCanada
presently represents have accepted AutoCanada as a franchisee. ACI will continue to seek the acceptance of
additional OEMs. ACI cannot offer any assurances regarding the acceptance of ACI as a franchisee of these other
OEMs. Obtaining OEM consent for acquisitions may also take a significant amount of time, which may negatively
affect the ability to acquire an attractive target. In addition, under an applicable franchise agreement, an OEM may
have a right of first refusal to acquire a franchised automobile dealership that ACI’s seeks to acquire. Many OEMs
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place limits on the total number of franchises, or the market share of its vehicles, that any group of affiliated
franchised automobile dealerships may obtain. The OEMs have also placed generic limits on the number of
franchises or share of total franchises or vehicle sales maintained by an affiliated franchised automobile dealership
group on a national, regional or local basis. OEMs may also tailor these types of restrictions to particular franchised
automobile dealership groups. ACI may have difficulty in obtaining additional franchises from OEMs once
franchise limits have been reached.
As a condition to granting their consent to acquisitions, OEMs may impose additional restrictions. OEMs’
restrictions typically prohibit changes of control or extraordinary corporate transactions such as mergers, sales of a
substantial amount of assets or the removal of a dealer principal without the consent of the OEM and the use of
franchised automobile dealership facilities to sell or service new vehicles of other OEMs. OEMs may direct ACI to
apply resources to capital projects that ACI may not otherwise have chosen to participate in. OEMs may direct ACI
to implement costly capital improvements to franchised automobile dealerships as a condition for maintaining
existing franchise agreements with them. OEMs also typically require that their franchises meet specific standards of
appearance. These factors, either alone or in combination, could cause ACI to divert financial resources to capital
projects from uses that management believes may be of higher long-term value.
Integration of Acquisitions
ACI’s growth depends in large part on the ability to acquire additional franchised automobile dealerships, manage
expansion, control costs in operations and integrate acquired franchised automobile dealerships. In pursuing this
strategy of acquiring other franchised automobile dealerships, ACI faces risks commonly encountered with growth
through acquisition strategies. These risks include, but are not limited to, incurring significantly higher capital
expenditures and operating expenses, failing to integrate the operations and personnel of the acquired franchised
automobile dealerships, entering new markets with which ACI is unfamiliar, incurring undiscovered liabilities at
acquired franchised automobile dealerships, disrupting ongoing business, diverting management resources, failing to
maintain uniform standards, controls and policies, impairing relationships with employees, OEMs and customers as
a result of changes in management, causing increased expenses for accounting and computer systems, failing to
obtain OEMs’ consents to acquisitions of additional franchises, and incorrectly valuing acquired entities.
ACI may not adequately anticipate all the demands that growth will impose on personnel, procedures and structures,
including financial and reporting control systems, data processing systems and management structure. Moreover,
failure to retain qualified management personnel at any acquired franchised automobile dealership may increase the
risk associated with integrating the acquired franchised automobile dealership. If ACI cannot adequately anticipate
and respond to these demands, ACI may fail to realize acquisition synergies and resources will be focused on
incorporating new operations into ACI’s structure rather than on areas that may be more profitable. In addition,
although ACI will conduct a prudent level of investigation regarding the operating condition of the businesses
purchased, in light of the circumstances of each transaction, there is an unavoidable level of risk that remains
regarding the actual operating condition of these businesses. Until ACI assumes operating control of such business
assets, ACI may not be able to ascertain the actual value of the acquired entity.
Financing Constraints
There is substantial indebtedness represented by the floor plan financing used to finance new and used vehicle
inventories. This debt is repayable on demand and in the event that repayment is demanded, ACI cannot provide
assurances that ACI could find an alternative floor plan provider. ACI anticipates funding any future acquisitions
from internal sources. In the event that cash flow is not sufficient, ACI’s acquisition strategy would be constrained.
ACI may finance some acquisitions in whole or in part by issuing additional ACI Shares as full or partial
consideration for acquired franchised automobile dealerships. The extent to which ACI will be able or willing to
provide ACI Shares for acquisitions will depend on the market value of the ACI Shares from time to time and the
willingness of potential acquisition candidates to accept ACI Shares as part of the consideration for the sale of their
businesses.
Management cannot determine the costs of equity at a future point in time and if new equity cannot be issued at a
favourable cost, ACI may not be able to continue to grow through acquisitions or through opening new dealerships.
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Competition with Other Franchised Automobile Dealerships
ACI believes that the Canadian retail automotive market is fragmented and offers many potential acquisition
candidates that meet acquisition target criteria. However, ACI will compete with several other franchised
automobile dealerships, some of which may have greater financial and other resources. In addition, ACI will
compete with other franchised automobile dealerships and private investors in the acquisition of franchised
automobile dealerships, and this competition for attractive acquisition targets may result in fewer acquisition
opportunities and increased acquisition costs. ACI will have to forego acquisition opportunities to the extent that
acquisitions can’t be negotiated on acceptable terms.
Risks Related to Our Dependence on Automobile Manufacturers
Adverse Conditions Affecting One or More OEMs
The success of ACI’s franchised automobile dealerships depends to a great extent on OEMs’ financial condition,
marketing efforts, vehicle design, production capabilities, reputation, management, and labour relations. Adverse
conditions affecting these and other important aspects of OEMs’ operations and public relations may adversely
affect the ability to market vehicles to the public and, as a result, significantly and detrimentally affect profitability.
Similarly, the late delivery of vehicles from OEMs, which sometimes occurs during periods of new product
introductions, can lead to reduced sales during those periods. ACI has no control over labour disturbances at any
OEMs, and labour disturbances at OEMs may restrict the supply of new vehicles, and therefore have an adverse
affect upon operations.
The majority of AutoCanada’s vehicles are manufactured by Chrysler and therefore ACI will be particularly
susceptible to the overall sales and acceptance of vehicles manufactured by Chrysler. Chrysler and its new strategic
partner FIAT have developed a future operating plan, the success of which will materially impact the ongoing
viability and success of Chrysler, the results of which we are economically dependent on.
AutoCanada Automobile Dealership Franchise Agreements
Each of AutoCanada’s franchised automobile dealerships operates under the terms of an OEM Agreement with the
OEM of each vehicle brand it carries. AutoCanada’s franchised automobile dealerships may obtain new vehicles
from OEMs, sell new vehicles and display OEMs’ trademarks only to the extent permitted under these agreements.
As a result of AutoCanada’s dependence on the rights under these agreements, OEMs exercise a great deal of
control over the day-to-day operations and the terms of an OEM Agreement implicate key aspects of operations,
acquisition strategy and capital spending. Each of AutoCanada’s OEM Agreements provides the OEM with the right
to terminate the agreement under specified circumstances and, in certain agreements, to elect not to renew the
agreement on an annual basis. AutoCanada’s OEM Agreement include provisions that permit the OEM to terminate
the agreement or direct AutoCanada to divest the subject franchised automobile dealerships if the franchised
automobile dealership undergoes a change of control or if the dealer principal named in the agreement changes
without the approval of the OEM. However, historically in the franchised automobile dealership industry, in the case
of well managed and well capitalized dealerships, the OEM Agreement are rarely terminated involuntarily or not
renewed by the manufacturer.
Assuming the OEM Agreements are assigned to ACI, in the event that a breach of the provisions in OEM
Agreement, ACI may be required to sell franchised automobile dealerships operating under agreements with the
OEMs to purchasers approved by the OEMs, or the agreement may be terminated by the manufacturer. The OEM
Agreement also provides the OEM with the right to purchase from AutoCanada any franchise that AutoCanada
seeks to sell. Provisions such as these may provide OEMs with superior bargaining positions in the event that they
seek to terminate franchise agreements or renegotiate the agreements on terms that are disadvantageous to ACI.
ACI’s results of operations may be materially and adversely affected to the extent that the franchise rights become
compromised or operations restricted due to the terms of the OEM Agreement or if ACI losses substantial
franchises.
Restrictions on Ownership Thresholds and the Sale of AutoCanada’s Business
ACI has entered into the Chrysler Approval Agreement, the Hyundai Framework Agreement and the Nissan
Ownership Agreement.
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The Chrysler Approval Agreement was recently restated, effective December 31, 2009, and prohibits a change of
control of ACI without the prior approval of Chrysler Canada unless ACI thereafter disposes of the Chrysler Dealer
LPs within certain timelines. It also prohibits: (i) a change in control of the Chrysler Holding LP; (ii) the acquisition
of more than 10% of ACI Shares by an OEM, or (iii) the sale of all or substantially all of the assets of Chrysler
Holding LP or of the shares of any of the general partners of the Chrysler Dealer LPs, except to an affiliate. In
addition, CAG has agreed with Chrysler Canada that, until January 1, 2015, without the prior written consent of
Chrysler Canada, CAG will not transfer or give control over any ACI Shares that results in CAG holding less than
either: (i) 75% of the equity or voting interest in ACI that CAG held on January 1, 2010, or (ii) a 25% equity or
voting interest in ACI, on a fully diluted basis, and CAG will not permit a change of control of CAG. Acquisition of
ACI Shares by ACI shareholders in violation of these ownership restrictions or actions by CAG under this
agreement with Chrysler Canada are generally outside of AutoCanada’s control and may result in the termination of
one or more franchises, which may have a material and adverse effect on ACI.
The Hyundai Framework Agreement requires AutoCanada to obtain its approval of the individuals appointed as
directors of the general partners of the Dealer LPs operating under dealership agreements with it. These restrictions
may affect the marketability of ACI’s business as a going concern, or the ability to introduce other investors into
parts of the business.
Under the Nissan Ownership Agreement, if any person or entity acquires more than 20% of AutoCanada, or a group
of persons or entities acquire more than 50% of AutoCanada, and, in either case, Nissan Canada, acting reasonably,
determines that such persons or entities do not have interests compatible with those of Nissan Canada, or are
otherwise not qualified to have an ownership interest in a Nissan or Infiniti dealership, then Nissan Canada shall be
entitled to require AutoCanada to divest its ownership interest in those Nissan and Infiniti dealerships owned by
AutoCanada. Moreover, if AutoCanada is unable to obtain the requisite approval to a change of control or sale of the
business in a timely manner AutoCanada may not be able to take advantage of a market opportunity. These
restrictions may also prevent or deter prospective acquirers from acquiring control of ACI and, therefore, may
materially and adversely impact the value of ACI Shares.
ACI expects that other OEMs may require similar agreements.
Maintenance of Minimum Working Capital
The OEM Agreements require AutoCanada to maintain a specified minimum amount of working capital at each of
AutoCanada’s franchised automobile dealerships, and prohibit any distribution by a franchised automobile
dealership if these minimum working capital requirements are not maintained. Compliance with these minimum
working capital requirements may affect the amount of cash available to pay dividends on the ACI Shares.
Risks Related to ACI’s Shares
Payment of Dividends
As a corporation, ACI’s dividend policy is at the discretion of its board of directors. Future dividends, if any, will
depend on results of operations, cash requirements, financial condition, contractual restrictions, business
opportunities, provisions of applicable law and other factors that the board of directors may deem relevant.
Accordingly, the payment of dividends by ACI and the level thereof will be uncertain.
The ability of the Dealer LPs to make advances and distributions to ACI to enable ACI to make dividend payments
to ACI shareholders is subject to applicable laws and contractual restrictions contained in various agreements.
Unpredictability and Volatility of ACI Shares
The market price of ACI Shares could be subject to significant fluctuations in response to variations in quarterly
operating results, dividends, and other factors. In addition, industry specific fluctuations in the stock market may
adversely affect the market price of the ACI Shares regardless of operating performance. There can be no assurance
that the price of the ACI Shares will remain at current levels. In addition, the securities markets have experienced
significant price and volume fluctuations from time to time in recent years that often have been unrelated or
disproportionate to the operating performance of particular issuers. These broad fluctuations may adversely affect
the market price of the ACI Shares.
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Dilution
ACI is authorized to issue an unlimited number of ACI Shares and an unlimited number of preferred shares issuable
in series for consideration and on terms and conditions as established by the board of directors of ACI without the
approval of its shareholders. The Shareholders have no pre-emptive rights in connection with such further issues.
Requirements as a Public Issuer
As a public issuer with listed equity securities, ACI must comply with certain laws, regulations and requirements,
certain additional provisions relating to corporate governance and certification of financial statements and disclosure
controls and related regulations and requirements of the TSX that are not required of a private company. Complying
with new statutes, regulations and requirements occupies a significant amount of the time of the board of directors,
management and officers, increases costs and expenses, and may divert management’s attention from other business
concerns.
Substantial Interest of CAG
The members of the COAG Group are expected to own 46.82% of the ACI Shares on a fully-diluted basis. As a
result, the COAG Group has a substantial influence over AutoCanada’s affairs and business.
This concentration of ownership, as well as various provisions contained in AutoCanada’s agreements with OEMs,
could have the effect of discouraging, delaying or preventing a change in control of ACI or unsolicited acquisition
proposals that an ACI shareholder might consider favourable. These provisions include ownership requirements and
limits and approval rights with respect to the composition of the board of directors of the general partners of certain
of the Dealer LPs. Thus, the concentration of ownership and such provisions may materially and adversely impact
the value of the ACI Shares.
Dividend Policy
DISTRIBUTIONS
Management reviews ACI’s financial results on a monthly basis. The Board of Directors reviews the financial
results on a quarterly basis, or as requested by Management, and determine whether a dividend shall be paid based
on a number of factors.
On February 13, 2009, in view of the continued market unpredictability, general economic deterioration both within
the auto industry and generally, rising unemployment, and tight credit markets, the Board of Directors (previously
the Board of Trustees) had concluded that it was prudent to reduce monthly distribution from $0.0833 per unit
($1.00 per unit annually) to $0.0417 per unit ($0.50 per unit annually), commencing February 2009, in order to
provide additional financial flexibility.
On March 14, 2009, in response to the continued deteriorating retail credit markets and continued economic decline,
the Board of Directors (previously the Board of Trustees) determined it would be prudent to temporarily suspend
distributions until such time as market conditions stabilize.
Cautionary Note Regarding Future Dividends
Future quarterly dividends of AutoCanada will be reviewed by our Board of Directors and adjusted from time to
time to reflect current business conditions. Our ability to pay dividends and the actual amount of such dividends
will be dependent upon, among other things, our financial performance, our debt covenants and obligations, our
ability to refinance our debt obligations on similar terms and at similar interest rates, our working capital
requirements, our future tax obligations, and our future capital requirements. We will be continuing to temporarily
suspend our quarterly dividend due to the current economic uncertainty.
As per the terms of the HSBC facility, we are restricted from declaring dividends and distributing cash if we are in
breach of our financial covenants or our available margin and facility limits or if such dividend would result in a
breach of our covenants or our available margin and facility limits.
39
Historical Distributions
The following table summarizes the distributions declared by the Fund from inception on January 4, 2006 to
December 31, 2009 (including operations from May 11, 2006 to December 31, 2009).
(In thousands of dollars)
Record date
Payment date
May 31, 2006
June 30, 2006
July 31, 2006
August 31, 2006
September 30, 2006
October 31, 2006
November 30, 2006
December 31, 2006
June 15, 2006
July 17, 2006
August 15, 2006
September 15, 2006
October 16, 2006
November 15, 2006
December 15, 2006
January 15, 2007
January 31, 2007
February 28, 2007
March 31, 2007
April 30, 2007
May 31, 2007
June 29, 2007
July 31, 2007
August 31, 2007
September 28, 2007
October 31, 2007
November 30, 2007
December 31, 2007
February 15, 2007
March 15, 2007
April 16, 2007
May 15, 2007
June 15, 2007
July 16, 2007
August 15, 2007
September 17, 2007
October 15, 2007
November 15, 2007
December 17, 2007
January 15, 2008
January 31, 2008
February 28, 2008
March 31, 2008
April 30, 2008
May 30, 2008
June 30, 2008
July 31, 2008
August 29, 2008
September 30, 2008
October 31, 2008
November 28, 2008
December 31, 2008
February 15, 2008
March 17, 2008
April 15, 2008
May 15, 2008
June 16, 2008
July 15, 2008
August 15, 2008
September 15, 2008
October 15, 2008
November 17, 2008
December 15, 2008
January 15, 2009
January 30, 2009
February 27, 2009
N/A(1)
February 16, 2009
March 16, 2009
N/A(1)
Fund Units
Declared
$
Paid
$
Exchangeable Units
Paid
$
Declared
$
Total
Declared
$
Paid
$
618
912
912
912
912
912
912
912
7,002
912
912
912
912
912
912
912
913
912
913
912
912
10,946
912
912
912
912
912
912
912
912
907
906
884
881
10,874
881
441
-
1,322
618
912
912
912
912
912
912
912
7,002
912
912
912
912
912
912
912
913
912
913
912
912
10,946
912
912
912
912
912
912
912
912
907
906
884
881
10,874
881
441
-
1,322
525
775
775
775
775
775
775
775
5,950
775
775
775
775
775
775
776
775
776
775
776
775
9,303
775
775
775
775
775
776
776
776
776
776
776
775
9,306
775
388
-
1,163
525
775
775
775
775
775
775
775
5,950
775
775
775
775
775
775
776
775
776
775
776
775
9,303
775
775
775
775
775
776
776
776
776
776
776
775
9,306
775
388
-
1,163
1,143
1,687
1,687
1,687
1,687
1,687
1,687
1,687
12,952
1,687
1,687
1,687
1,687
1,687
1,687
1,688
1,688
1,688
1,688
1,688
1,687
20,249
1,687
1,687
1,687
1,687
1,687
1,688
1,688
1,688
1,683
1,682
1,660
1,656
20,180
1,656
829
-
2,485
1,143
1,687
1,687
1,687
1,687
1,687
1,687
1,687
12,952
1,687
1,687
1,687
1,687
1,687
1,687
1,688
1,688
1,688
1,688
1,688
1,687
20,249
1,687
1,687
1,687
1,687
1,687
1,688
1,688
1,688
1,683
1,682
1,660
1,656
20,180
1,656
829
-
2,485
(1) No further distributions since those disclosed above have been declared as at the date of this AIF. No record
date or payment date is applicable.
40
Trading Price and Volume
MARKET FOR SECURITIES
Prior to the conversion to a corporation, AutoCanada’s shares (previously Units) were listed and posted for trading
on the Toronto Stock Exchange under the symbol “ACQ.UN”. Subsequent to December 31, 2009, the corporation’s
shares are listed and posted for trading on the Toronto Stock Exchange under the symbol “ACQ”. The following
table sets forth certain trading information for the Units on the Toronto Stock Exchange for the most recently
completed financial year based on information believed to be reliable by ACI:
Month
2009
High
Low
Close
Volume
January
February
March
April
May
June
July
August
September
October
November
December
2.36
2.00
1.52
1.44
1.86
2.00
1.84
3.45
3.26
3.09
3.90
3.77
1.55
1.33
0.64
0.80
0.99
1.51
1.63
1.65
2.76
2.70
2.82
3.40
2.01
1.40
0.82
1.23
1.80
1.79
1.70
3.15
2.98
2.94
3.51
3.75
2,786,163
618,811
843,740
454,094
634,770
596,864
407,414
705,340
309,080
240,146
1,905,640
188,544
41
DIRECTORS AND OFFICERS
The following table sets forth the name, place of residence, positions for each of the directors and officers of ACI,
together with their principal occupations during the last five years and the number of ACI Shares they currently
hold. The directors of ACI shall hold office until the next annual meeting of shareholders or until their respective
successors have been duly elected or appointed.
Name and Province or State, and
County of Residence
Position
Principal Occupation
No. of ACI
Shares(4)
9,000
10,000
26,000
10,000
3,500
GORDON R. BAREFOOT(1)(2)(3)
British Columbia, Canada
Director and Chair
(Former Trustee of the
Fund and Trust)
Director
(Former Trustee of the
Fund and Trust)
Director
(Former Trustee of the
Fund and Trust)
R.E.T. (RUSTY) GOEPEL(1)(2)(3)
British Columbia, Canada
ROBIN (ROB) SALMON(1)(2)
Alberta, Canada
MICHAEL (MIKE) ROSS(3)
Alberta, Canada
DENNIS S. DESROSIERS(2)
Ontario, Canada
Board Director and Consultant, Corix Water Group
of companies; President, Cabgor Management Inc.,
a management consulting company and Board
Director of ISE Limited and various other
corporations; prior thereto Chief Financial Officer
of Terasen Inc. (a natural gas distributor) and other
various senior executive positions from 1998 to
2005
Senior Vice President, Raymond James Ltd. (a
brokerage firm); Board Director of Telus
Corporation; Baytex Energy Fund; Amerigo
Resources; and Spur Ventures Inc.
Chief Financial Officer, Almac Machine Works
Ltd.; prior thereto Chief Financial Officer of
ViRexx Medical Corp. (a biotechnology company)
from 2001 to 2005
Director
Managing Partner, Conroy Ross Partners (business
advisory and executive search firm)
Director
(Former Trustee of the
Fund and Trust)
President, DesRosiers Automotive Consultants Inc.
(an automobile manufacturer consultant)
PATRICK J. (PAT) PRIESTNER(5)
Alberta Canada
Chief Executive Officer
and Director
Prior to November 2005, President and Dealer
Principal at COAG since 1993. Board Director of
Rocky Mountain Dealerships Inc.
9,307,500(5)
ROBERT A. (BOB) CLARK(7)
Alberta, Canada
President and Director
THOMAS L. ORYSIUK
Alberta, Canada
Executive Vice-President
and Chief Financial
Officer
Prior to November 2005, President of COAG since
2004; prior thereto Vice President, Sales and
Service and various other senior executive
positions with DaimlerChrysler Canada since 1987
Prior to November 2005, Chief Financial Officer
for Liquor Stores Income Fund since June, 2004;
prior thereto Chief Financial Officer of Alberta
Oats Milling Ltd. and a principal with Dito Capital
Ltd since 2002
S.R.E. (STEVE) ROSE
Alberta Canada
Vice-President, Corporate
Development, General
Counsel and Secretary
Prior to January 2007, Vice President, General
Counsel and Secretary of Chrysler Canada, and
assistant general counsel and assistant secretary of
Chrysler Canada and its predecessors since 1992
KELLY O’CONNELL
Alberta, Canada
Chief Operating Officer
Prior to October 2009, Chief Operating Officer and
then Senior Vice President for Go Auto since April
2008; prior thereto President of Kelly O’Connell
Group (automotive consultant and trainer) since
January 2007; and prior thereto Senior Trainer of
Joe Verde Group since January 2003
-
10,000(6)
-
-
42
__________
Notes:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Member of the audit committee of ACI.
Member of the nominating and governance committee of ACI.
Member of the compensation committee of ACI.
This information has been based upon information furnished by the individual and upon reports filed on the System for
Electronic Disclosure by Insiders (SEDI) at www.sedi.ca.
Patrick J. (Pat) Priestner holds 74% of the outstanding voting securities of COAG. The remaining 26% of the outstanding voting
securities of COAG are held by employees of AutoCanada or dealerships operated by AutoCanada.
These Shares are registered in the name of Mr. Orysiuk’s wife, Heidi Orysiuk.
Robert A. Clark holds 7.5% of the outstanding voting securities of COAG.
As of March 22, 2010, directors and executive officers of ACI, as a group, beneficially own or control or direct,
directly or indirectly (including through the members of the COAG Group), an aggregate of 9,380,300 ACI Shares,
approximately 47.18% of the issued and outstanding ACI Shares.
Corporate Cease Trade Orders or Bankruptcies
To the knowledge of the Directors, other than as disclosed herein, no member of the Management Group is, or
within the ten years prior to the date hereof, has been, a trustee, director or executive officer of any company that,
while that person was acting in that capacity: (i) was the subject of a cease trade order or similar order, or an order
that denied the relevant company access to any exemption under Canadian securities legislation, for a period of
more than 30 consecutive days; or (ii) was subject to an event that resulted, after the director or executive officer
ceased to be a trustee, director or executive officer, in ACI being the subject of a cease trade or similar order or an
order that denied the relevant company access to any exemption under securities legislation, for a period of more
than 30 consecutive days.
To the knowledge of the Directors, other than as disclosed herein, no member of the Management Group or a
Shareholder holding a sufficient number of securities of ACI to affect materially the control of the fund, is, or
within the ten years prior to the date hereof, has been, a trustee, director or executive officer of any company that,
while that person was acting in that capacity: (iii) or within a year of that person ceasing to act in that capacity,
became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or
instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee
appointed to hold its assets.
Mr. Barefoot was a Director of EarthFirst Canada Inc. until mid November 2009. EarthFirst Canada Inc. sought
creditor protection in November 2008 and through a court approved process successfully settled with creditors in
November 2009. Effective March 2, 2010, EarthFirst Canada Inc. amalgamated with Maxim Power Corp.
Penalties or Sanctions
To the knowledge of the Directors, no member of the Management Group or a Shareholder holding a sufficient
number of Shares of ACI to affect materially the control of ACI has been subject to any penalties or sanctions
imposed by a court relating to Canadian securities legislation or by a Canadian securities regulatory authority or has
entered into a settlement agreement with a Canadian securities authority, or any other penalties or sanctions imposed
by a court or regulatory body that would likely be considered important to a reasonable investor in making an
investment decision.
Personal Bankruptcies
To the knowledge of the Directors, no member of the Management Group or a Shareholder holding a sufficient
number of Shares of ACI to affect materially the control of ACI has, during the ten years prior to the date hereof,
become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or became subject to
or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or
trustee appointed to hold such person’s assets.
43
Conflicts of Interest
Other than as disclosed herein, to the knowledge of the Directors, there are no existing or potential material conflicts
of interest among us and any member of the Management Group.
PROMOTERS
CAG and Patrick Priestner may be considered to have been promoters of ACI within the three most recently
completed years by reason of their initiative in organizing the business and affairs of the Fund - See “Overview and
Development of Our Business”.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
Other than as disclosed below and herein, we are not aware of any legal proceedings to which we are or were a party
to, or that any of our property is or was the subject of, during our financial year ended December 31, 2009, where
such claims do not exceed 10% of our current assets. In addition, we are not aware of any penalties or sanctions
imposed against us by a court relating to securities legislation or by a securities regulatory authority during our
financial year ended December 31, 2009 or any other penalties or sanctions imposed by a court or regulatory body
against us that would likely be considered important to a reasonable investor in making an investment decision, and
we have not entered into any settlement agreements with a court relating to securities legislation or with a securities
regulatory authority during our financial year ended December 31, 2009.
From time to time, we are named in claims involving the manufacture of vehicles, contractual disputes and other
matters arising in the ordinary course of our business. Currently, no legal proceedings are pending against us that, in
management’s opinion, could be expected to have a material adverse effect on our business, financial condition or
results of operations.
Because of their vehicle inventory and the nature of their business, franchised automobile dealerships generally
require significant levels of insurance covering a broad variety of risks. Our insurance program includes three
umbrella policies with a total per occurrence and aggregate limit of $15 million. We also have insurance on our
leased property, comprehensive coverage for our vehicle inventory, garage liability and general liability insurance,
employee dishonesty insurance and errors and omissions insurance in connection with our vehicle sales and
financing activities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Shares is Valiant Trust Company at its principal offices in Calgary, Alberta
and Toronto, Ontario.
MATERIAL CONTRACTS
The only contracts entered into by us, that are material to us and that were entered into within the most recently
completed financial year, or before the most recently completed financial year but are still in effect, are as follows:
1. Chrysler Standard Dealer Sales and Service Agreement and Additional Terms has been signed by
each Dealership and sets out the terms under which each Dealership may sell new Chrysler, Dodge
and Jeep vehicles
2.
3.
4.
5.
6.
the HSBC Facility described under “Financing — Credit Facilities”;
the Chrysler Approval Agreement;
the Hyundai Framework Agreement;
the Nissan Framework Agreement;
the GMAC Floorplan Agreement;
44
7.
8.
9.
10.
11.
the Fund Declaration of Trust;
the Administration Agreement;
the Trust Declaration of Trust;
the Trust Note Indenture; and
the Partnership Agreement (dissolved January 1, 2010)
The contracts listed above are filed on SEDAR at www.sedar.com.
INTEREST OF EXPERTS
There is no person or company whose profession or business gives authority to a statement made by such person or
company and who is named as having prepared or certified a statement, report or valuation described or included in
a filing, or referred to in a filing, made under NI 51-102 by ACI during, or related to, its most recently completed
financial year other than PricewaterhouseCoopers LLP, the external auditors of ACI.
None of the partners, employees or consultants of PricewaterhouseCoopers LLP have any registered or beneficial
interests, direct or indirect, in any of ACI’s securities or other property or of RMDI’s associates or affiliates either at
the time they prepared the statement, report or valuation prepared by it, at any time thereafter or to be received by
them.
AUDIT COMMITTEE INFORMATION
Charter of the Audit Committee
The audit committee charter of ACI is attached as Schedule B to this AIF.
Composition of the Audit Committee
The audit committee of ACI consists of Gordon R. Barefoot, R.E.T. (Rusty) Goepel and Robin (Rob) Salmon.
Each member of the audit committee of the Fund is independent and financially literate; as such terms are
defined in Multilateral Instrument 52-110 – Audit Committees.
Relevant Education and Experience
The education and experience of each audit committee member of ACI that is relevant to the performance of his
responsibilities as an audit committee member is described below:
Gordon R. Barefoot – Mr. Barefoot is a chartered accountant. Mr. Barefoot was, until November, 2005, the Senior
Vice President, Finance & Chief Financial Officer of Terasen Inc. where he served in various senior executive
positions since July, 1998. Mr. Barefoot is currently a member of the audit committee of one other public company
and two other private entities. Mr. Barefoot also served on the board of directors of Nventa Biopharmaceuticals
Corporation until June of 2008. Prior to joining Terasen, Mr. Barefoot was a partner of Ernst & Young, where,
during a 20 year career, he worked with a variety of clients in a broad range of industries. Each of the foregoing
positions required Mr. Barefoot to have an understanding of, and assess, accounting principles, including in the
context of estimates, accruals and reserves, as well as have an understanding of internal controls and procedures for
financial reporting. The positions also required Mr. Barefoot to prepare, analyze and evaluate financial statements
and supervise others who prepared analyzed and evaluated financial statements. Mr. Barefoot also participates in
accounting seminars and programs to help maintain the skill and knowledge necessary to perform his duties as the
chair of the audit committee.
R.E.T. (Rusty) Goepel– Mr. Goepel is currently the Senior Vice President of Raymond James Ltd., a Canadian
investment dealer. Mr. Goepel has held various positions in the investment dealer industry in Canada since 1969
45
(including various senior executive positions). Mr. Goepel was one of the founders in 1989 of Goepel Shields Ltd,
the predecessor to Raymond James Ltd. Mr. Goepel is currently a member of the board of directors of four other
public entities. As a result, Mr. Goepel has an understanding of accounting principles, including in the context of
estimates, accruals and reserves, and has regularly reviewed internal controls and procedures for financial reporting.
Robin (Rob) Salmon – Mr. Salmon is a chartered accountant. Mr. Salmon is currently the Chief Financial Officer of
Almac Machine Works Ltd. and was the Chief Financial Officer of ViRexx from September, 2001 until November,
2005. Mr. Salmon was also a director of ViRexx until 2004 and corporate secretary thereafter. From May 2003
until December 2004, Mr. Salmon served as the Chief Financial Officer and director of AltaRex Medical Corp.
Prior to September, 2001, from September, 2000, Mr. Salmon was the Chief Financial Officer of Indico
Technologies Limited. Prior thereto, Mr. Salmon was a partner of KPMG LLP, where, during a 20 year career, he
focused on taxation and corporate finance for private and public companies. In the foregoing positions, Mr. Salmon
was responsible for, and supervised others engaged in, preparing, analyzing and evaluating financial statements and
for understanding and assessing accounting principles, including in the context of estimates, accruals and reserves,
as well as implementing internal controls and procedures for financial reporting.
Prior Approval Policies and Procedures
The audit committee of ACI must pre-approve all non-audit services to be provided to ACI or its subsidiaries by
ACI’s external auditor, other than non-audit services where:
(a)
the aggregate amount of all such non-audit services that were not pre-approved is reasonably expected
to constitute no more than five per cent of the total amount of fees paid by ACI and its subsidiaries to
ACI’s external auditor during the fiscal year in which the services are provided;
(b) ACI or its subsidiaries, as the case may be, did not recognize the services as non-audit services at the
time of the engagement; and
(c)
the services are promptly brought to the attention of the audit committee of ACI and approved, prior to
the completion of the audit, by the audit committee of ACI or by one or more of its members to whom
authority to grant such approvals had been delegated by the audit committee of ACI.
46
External Auditor Service Fees (by category)
The following table sets forth, by category, the fees billed by PricewaterhouseCoopers LLP, ACI’s auditors, for the
year ended December 31, 2009:
Fee category
Audit fees
Audit-related fees
Tax fees
All other fees
Total
2009
$382,986
−
$25,700
$66,912
$475,598
2008
$413,627
−
$37,870
$23,000
$474,497
“Audit fees” include all fees paid to PricewaterhouseCoopers LLP for the audit of the annual consolidated financial
statements, review of the interim financial statements and other services in connection with regulatory filings.
ADDITIONAL INFORMATION
Additional information relating to us may be found on SEDAR at www.sedar.com. Additional information,
including directors’ and officers’ remuneration and indebtedness, principal holders of our securities and securities
authorized for issuance under equity compensation plans, as applicable, is contained in our information circular for
our most recent annual meeting of Shareholders that involves the election of Directors. Additional financial
information is provided in our audited consolidated financial statements and management’s discussion and analysis
for our most recently completed financial year.
47
SCHEDULE A
GLOSSARY OF TERMS
“ACI” means AutoCanada Inc., a corporation incorporated under the CBCA;
“ACI Share” means a common share in the capital of ACI;
“ACI Stock Option Plan” or “The Plan” means the stock option plan of ACI;
“Administration Agreement” means the administration agreement between the Fund, the Trust and the
Partnership, pursuant to which the Partnership acts as administrator of the Fund and the Trust.
“Arrangement” means the arrangement involving the Fund, ACI and certain other entities that was carried out
pursuant to the CBCA, on December 31, 2009;
“Arrangement Agreement” means the arrangement agreement dated November 6, 2009, among the Fund, the
Trust, the Partnership, Holdings, ACI and the members of the COAG Group pursuant to which the Fund, the Trust,
the Partnership, Holdings, ACI and the members of the COAG Group have implemented the Arrangement, a copy of
which has been filed on SEDAR;
“ADP” means ADP Dealer Services Ltd.
“affiliate” has the meaning provided for in Rule 45-106 of the Ontario Securities Commission as at the date of this
AIF.
“AIF” means this annual information form of the Fund for the year ended December 31, 2007.
“AutoCanada” means the Fund and its interests in the Trust, the Partnership, AutoCanada GP, the Dealer LPs and
any other franchised automobile dealership owned or operated by the foregoing parties or CAG.
“AutoCanada #Co” means 7268769 Canada Inc., a corporation incorporated under the CBCA;
“AutoCanada GP” means AutoCanada GP Inc., a corporation incorporated under the CBCA;
“AutoCanada Option Plan” means the AutoCanada 2006 Incentive Unit Option Plan.
“BNS” means the Bank of Nova Scotia.
“BNS Revolving Floorplan Facility” means the Revolving Floorplan Facility from the Bank of Nova Scotia.
“CADA” means Canadian Automobile Dealer’s Association.
“CAG” means Canada One Auto Group Ltd. and its subsidiaries.
“CBCA” means the Canada Business Corporations Act and the regulations thereto, as amended.
“CDS” means The Canadian Depository for Securities Limited or a successor thereof.
“Chrysler Canada” means Chrysler Canada Inc., formerly known as DaimlerChrysler Canada Inc.;
“Chrysler Financial” means Chrysler Financial (a division of Chrysler Canada Financial Services Canada Inc.;
“Credit Facility Agreement” means the credit facility agreement dated October 6, 2009, between AutoCanada and
a major Canadian Bank;
“Dealer LP” means a limited partnership established under the laws of the Province of Manitoba to carry on the
business of owning and operating one of AutoCanada LP’s franchised automobile dealerships, as well as activities
ancillary thereto.
1
“Dealer principal” means an individual, approved by the automobile manufacturer, who is responsible for the day
to day management and operations of a franchised automobile dealership.
“Declaration of Trust” means the declaration of trust by which the Fund is governed, as it may be amended,
supplemented or restated from time to time.
“Depositary” means Valiant Trust Company at its offices set out in the Letter of Transmittal;
“Director” means the Director appointed pursuant to Section 260 of the CBCA;
“Exchange Agreement” means the exchange agreement entered into between the Fund, the Trust, the Partnership,
AutoCanada GP, CAG and Mr. Priestner.
“Exchangeable Units” means the Exchangeable Units of the Partnership having the attributes described in this AIF.
“floor plan financing” is a type of asset-based financing used by franchised automobile dealerships to finance their
new (and in some instances used) vehicle inventories. See “Financing — Floor Plan Financing”.
“fully-diluted” in respect to the number of securities of any person to be issued and outstanding at such time means
the number of such securities of such person that would be issued and outstanding at such time if all rights to acquire
or be issued such securities under all issued and outstanding rights of conversion, exchange, issue or purchase had
been exercised at such time, including, in the case of the Fund, the exchange of all Exchangeable Units for Units.
“Fund” means AutoCanada Income Fund, an unincorporated, open-ended trust established under the laws of the
Province of Alberta.
“Fund Declaration of Trust” means the declaration of trust by which the Fund is governed, as it may be amended,
supplemented or restated from time to time;
“Fund Priority Distribution” has the meaning ascribed thereto under “AutoCanada LP-Ranking”.
“GAAP” means generally accepted accounting principles in Canada.
“GMAC Canada” means General Motors Acceptance Corporation of Canada Limited;
“GMAC Floorplan Agreement” means the agreement dated June 5, 2009, between AutoCanada and GMAC;
“Holding GP” means a corporation incorporated under the CBCA to operate as a general partner of each Holding
LP;
“Holding LP” means a limited partnership established under the laws of the Province of Manitoba to carry on
certain franchised automobile dealerships of AutoCanada, as well as activities ancillary thereto, following the
Arrangement;
“Holdings” means AutoCanada Holdings Inc., a corporation incorporated under the CBCA;
“Holdings Common Shares” means the common shares in the capital of Holdings;
“Hyundai” means Hyundai Auto Canada, a division of Hyundai Motor America, a California corporation.
“Hyundai Framework Agreement” means the framework agreement dated April 28, 2006, as amended on April 2,
2007, among Hyundai Auto Canada Corp. (by way of assignment from Hyundai Auto Canada), the Fund, certain
members of the COAG Group and certain Dealer LP’s;
“Investment and Acquisition Agreement” means the investment and acquisition agreement entered into between
the Fund, the Trust, the Partnership, AutoCanada GP, the Dealer LPs, CAG and the Principal Shareholders.
2
“LP Units” means the units representing an interest as a limited partner of the Partnership designated as LP Units
and having the attributes described in this AIF.
“Management Group” means the directors of ACI and directors and executive officers of AutoCanada GP and/or
the Partnership.
“Mitsubishi” means Mitsubishi Motor Sales of Canada, Inc.
“NADAP Rules” means the rules adopted by the Canadian Vehicle Manufacturer’s Association, the Association of
International Automobile Manufacturers of Canada and CADA that provide for dispute resolution between the
automobile manufacturers and the franchised automobile dealerships in the Canadian automobile industry.
“NI 51-102” means National Instrument 51-102 – Continuous Disclosure Obligations;
“Nissan Framework Agreement” means the multiple market ownership agreement dated March 26, 2008, between
Nissan Canada Inc. and ACI;
“Non-Competition Agreement” means the non-competition agreement entered into by CAG, the Principal
Shareholders and AutoCanada upon the closing of the Offering, which provided that, for certain specified periods,
CAG and Patrick Priestner shall not be involved in, or have a direct or indirect interest in, any business that
competes with our business and each of the Principal Shareholders shall not be involved in, or have a direct or
indirect interest in, the retail automotive dealership business.
“OEM” means original equipment manufacturers;
“OEM Agreements” means the dealership franchise or sales and service agreements entered into by each of the
Dealer LPs with the applicable OEM;
“Offering” means the initial public offering of Units issued and sold by the Fund.
“Open Point” means a new franchised automobile dealership opened, or to be opened, pursuant to the right to open
a new franchised automobile dealership in a specific location granted to a dealer by an automobile manufacturer.
“Over-Allotment Option” means the option granted by the Fund to the underwriters to the Offering to purchase up
to 765,715 additional Units, which was exercisable for a period of 30 days from the closing of the Offering.
“Partnership” means AutoCanada LP, a limited partnership established under the laws of the Province of Manitoba.
“Partnership Agreement” means the Partnership limited partnership agreement.
“Partnership Units” means units representing an interest as a limited partner of the Partnership, including the LP
Units and the Exchangeable Units.
“Plans” means trusts governed by registered retirement savings plans, registered retirement income funds, deferred
profit sharing plans and registered education savings plans, each as defined in the Tax Act.
“Principal Shareholders” means Patrick J. (Pat) Priestner, Robert A. (Bob) Clark, Daniel (Dan) Wincentaylo,
Florendo (Joe) Medina, and Thomas (Tom) Orysiuk, the indirect equity shareholders of Canada One Auto Group
Ltd.
“Redemption Date” has the meaning ascribed thereto under “Capital Structure - The Fund Units”
“Redemption Price” has the meaning ascribed thereto under “Capital Structure - The Fund Units”
“Reynolds and Reynolds” means the Reynolds and Reynolds Company.
“Securities” means, collectively, the Units and the Special Voting Units;
3
“Securityholders” means, collectively, the holders of Securities;
“Series 1 Trust Notes” means the series 1 notes of the Trust issued under the Trust Note Indenture.
“Series 2 Trust Notes” means the series 2 notes of the Trust issued under the Trust Note Indenture.
“Special Resolution” means a resolution passed by the affirmative vote of the holders of not less than 66 2/3% of
the Voting Units who voted in respect of that resolution at a meeting of Voting Unitholders at which a quorum was
present or a resolution or instrument signed in one or more counterparts by the holders of not less than 66 2/3% of
the Voting Units entitled to vote on such resolution.
“Special Voting Units” means units of the Fund to be issued to represent voting rights in the Fund that accompany
the Exchangeable Units.
“Subaru” means Subaru Canada Inc.
“Subsidiary” has the meaning provided for in the CBCA, read as if the word “body corporate” includes a trust,
partnership, limited liability company or other form of business organization.
“Tax Act” means the Income Tax Act (Canada) and the regulations thereunder, as amended.
“Trust” means AutoCanada Operating Trust, an unincorporated, open-ended trust established under the laws of the
Province of Alberta.
“Trust Declaration of Trust” means the declaration of trust by which the Trust is governed, as it may be amended,
supplemented or restated from time to time.
“Trust Note Indenture” means the note indenture governing the Trust Notes entered into between the Trust and
Computershare Fund Company of Canada.
“Trust Notes” means, collectively, the Series 1 Trust Notes and Series 2 Trust Notes.
“Trust Trustees” means the trustees of the Trust.
“Trust Units” means units of the Trust.
“Trustees” means the trustees of the Fund.
“TSX” means the Toronto Stock Exchange.
“Unitholders” means the holders of Units.
“Units” means Units of the Fund other than Special Voting Units.
“Voting Unitholders” means the holders of Voting Units.
“Voting Units” means Units and Special Voting Units.
4
SCHEDULE B
AUTOCANADA INC.
AUDIT COMMITTEE CHARTER
The term “ACI” refers to AutoCanada Inc., the term “Board” refers to the board of directors of ACI. The term
“Governance Agreements” refers to the corporate bylaws of ACI.
PURPOSE
The Audit Committee (the “Committee”) is a standing committee appointed by the Board to assist the Board in
fulfilling its oversight responsibilities with respect to ACI's financial reporting including responsibility to:
oversee the integrity of ACI's consolidated financial statements and financial reporting process, including
the audit process and ACI's internal accounting controls and procedures and compliance with related legal
and regulatory requirements;
oversee the qualifications and independence of ACI's external auditors;
oversee the work of ACI's financial management and external auditors in these areas; and
provide an open avenue of communication between the external auditors, the Board, the board of directors
of the GP, and the officers (collectively, “Management”) of ACI.
In addition, the Committee will review and/or approve any other matter specifically delegated to the Committee by
the Board.
COMPOSITION AND PROCEDURES
In addition to the procedures and powers set out in any resolution of the Board, the Committee will have the
following composition and procedures:
1.
Composition
The Committee shall consist of no fewer than three members. None of the members of the Committee shall be an
officer or employee of ACI or the GP or any of their respective subsidiaries and each member of the Committee
shall be an “independent director” (in accordance with the definition of “independent director” from time to time
under the requirements or guidelines for audit committee service under applicable securities laws and the rules of
any stock exchange on which ACI's shares are listed for trading); provided that the fact that a director is also a
director of the GP will not disqualify the director from being a member of the Committee provided that the director
would otherwise be eligible to be a member of the Committee.
2.
Appointment and Replacement of Committee Members
Any member of the Committee may be removed or replaced at any time by the Board and shall automatically cease
to be a member of the Committee upon ceasing to be a director. The Board may fill vacancies on the Committee by
election from among its members. The Board shall fill any vacancy if the membership of the Committee is less than
three directors. If and whenever a vacancy shall exist on the Committee, the remaining members may exercise all its
power so long as a quorum remains in office. Subject to the foregoing, the members of the Committee shall be
elected by the Board annually and each member of the Committee shall hold office as such until the next annual
meeting of shareholders after his or her election or until his or her successor shall be duly elected and qualified.
3.
Financial literacy
All members of the Committee must be “financially literate” (as that term is interpreted by the Board in its
reasonable judgment or as may be defined from time to time under the requirements or guidelines for audit
committee service under securities laws and the rules of any stock exchange on which ACI's shares are listed for
1
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trading) or must become financially literate within a reasonable period of time after his or her appointment to the
Committee.
4.
Separate Executive Meetings
The Committee will endeavour to meet at least once every quarter, and more often as warranted, with the Chief
Financial Officer of ACI and the external auditors in separate executive sessions to discuss any matters that the
Committee or each of these groups believes should be discussed privately.
5.
Professional Assistance
The Committee may retain special legal, accounting, financial or other consultants to advise the Committee at ACI's
expense.
6.
Reliance
Absent actual knowledge to the contrary (which will be promptly reported to the Board), each member of the
Committee shall be entitled to rely on (i) the integrity of those persons or organizations within and outside ACI from
which it receives information, (ii) the accuracy of the financial and other information provided to the Committee by
such persons or organizations and (iii) representations made by ACI or the GP or their respective senior
managements and the external auditors, as to any information, technology, internal audit and other non-audit
services provided by the external auditors to ACI and its subsidiaries.
7.
Review of Charter
The Committee will periodically review and reassess the adequacy of this Charter as it deems appropriate and
recommend changes to the Board. The Committee will evaluate its performance with reference to this Charter. The
Committee will approve the form of disclosure of this Charter, where required by applicable securities laws or
regulatory requirements, in the annual proxy circular or annual report of ACI.
8.
Delegation
The Committee may delegate from time to time to any person or committee of persons any of the Committee's
responsibilities that lawfully may be delegated.
9.
Reporting to the Board
The Committee will report through the Committee Chair to the Board following meetings of the Committee on
matters considered by the Committee, its activities and compliance with this Charter.
SPECIFIC MANDATES OF THE COMMITTEE
The Committee will:
A.
In Respect of ACI's External Auditors
(1)
(2)
review the performance of the external auditors of ACI who are
accountable to the Committee and the Board as the representatives of
the shareholders of ACI, including the lead partner of the independent
auditor team and make recommendations to the Board as to the
reappointment or appointment of the external auditors of ACI to be
proposed in ACI's proxy circular for shareholder approval and shall
have authority to terminate the external auditors;
review the reasons for any proposed change in the external auditors of
ACI which is not initiated by the Committee or Board and any other
significant issues related to the change, including the response of the
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incumbent auditors, and enquire as to the qualifications of the proposed
replacement auditors before making its recommendation to the Board;
approve the terms of engagement and the compensation to be paid by
ACI to ACI's external auditors;
review the independence of ACI's external auditors, including a written
report from the external auditors respecting their independence and
consideration of applicable auditor independence standards;
approve in advance all permitted non-audit services to be provided to
ACI or any of its affiliates by the external auditors or any of their
affiliates, subject to any de minimus exception allowed by applicable
law; the Committee may delegate to one or more designated members
of the Committee the authority to grant pre-approvals required by this
subsection;
review the disclosure with respect to its pre-approval of audit and non-
audit services provided by ACI's external auditors;
approve any hiring by ACI or its subsidiaries of employees or former
employees of ACI's external auditors;
review a written or oral report describing:
(3)
(4)
(5)
(6)
(7)
(8)
a)
b)
c)
critical accounting policies and practices to be used in ACI's
annual audit,
financial
treatments of
alternative
information within
generally accepted accounting principles that have been
discussed with management and that are significant to ACI's
consolidated financial statements, ramifications of the use of
such alternative disclosures and treatments, and the treatment
preferred by the external auditors, and
other material written communication between ACI's external
auditors and management, such as any management letter or
schedule of unadjusted differences;
(9)
(10)
(11)
review with the external auditors and management the general audit
approach and scope of proposed audit of the consolidated financial
statements of ACI, the objectives, staffing, locations, co-ordination and
reliance upon management in the audit, the overall audit plans, the
audit procedures to be used and the timing and estimated budgets of the
audits;
if a review engagement report is requested of the external auditors,
review such report before the release of ACI's interim consolidated
financial statements; and
discuss with the external auditors any difficulties or disputes that arose
with management during the course of the audit, any restrictions on the
scope of activities or access to requested information and the adequacy
of management's responses in correcting audit-related deficiencies.
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B.
In Respect of ACI's Financial Disclosure
(1)
review with the external auditors and Management:
a)
b)
c)
d)
e)
f)
g)
h)
ACI's audited consolidated financial statements and the notes
and Managements' Discussion and Analysis relating to such
consolidated financial statements, the annual report, the annual
information form, the financial information of ACI contained
in any prospectus or information circular or other disclosure
documents or regulatory filings of ACI, the recommendations
for approval of each of the foregoing from each of the
Chairman of the Board, CEO and CFO and based on such
recommendations provide, where applicable,
its own
recommendations to the Board for their approval and release
of each of the foregoing to the public;
ACI's interim consolidated financial statements and the notes
and Managements' Discussion and Analysis relating to such
consolidated financial statements, the recommendations for
approval of each of the foregoing from each of the Chairman
the Board, CEO and CFO and based on such
of
recommendations provide, where applicable,
its own
recommendations to the Board for their approval and release
of each of the foregoing to the public;
the quality, appropriateness and acceptability of ACI's
accounting principles and practices used in its financial
reporting, changes in ACI's accounting principles or practices
and the application of particular accounting principles and
disclosure practices by Management to new transactions or
events;
all significant financial reporting issues and judgments made
in connection with the preparation of ACI's consolidated
financial statements, including the effects of alternative
methods in respect of any matter considered significant by the
external auditor within generally accepted accounting
principles on the consolidated financial statements and any
“second opinions”
from an
independent or other audit firm or advisor with respect to the
accounting treatment of a particular item;
sought by Management
the effect of regulatory and accounting initiatives on ACI's
financial
consolidated
disclosures;
statements and other
financial
any reserves, accruals, provisions or estimates that may have a
significant effect upon the consolidated financial statements of
ACI;
the use of special purpose entities and the business purpose
and economic effect of off balance sheet transactions,
arrangements, obligations, guarantees and other relationships
of ACI and their impact on the reported financial results of
ACI;
any legal matter, claim or contingency that could have a
significant impact on the consolidated financial statements,
ACI's compliance policies and any material reports, inquiries
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regulators or
or other correspondence
governmental agencies and the manner in which any such
legal matter, claim or contingency has been disclosed in ACI's
consolidated financial statements;
received
from
i)
j)
review the treatment for financial reporting purposes of any
significant transactions that are not a normal part of ACI's
operations; and
the use of any “pro forma” or “adjusted” information not in
accordance with generally accepted accounting principles.
review and resolve disagreements between Management and ACI's
external auditors regarding financial reporting or the application of any
accounting principles or practices;
review earnings press releases, as well as financial information and
earnings guidance provided to analysts and ratings agencies, it being
understood that such discussions may, in the discretion of the
Committee, be done generally (i.e., by discussing the types of
information to be disclosed and the type of presentation to be made)
and that the Committee need not discuss in advance each earnings
release or each instance in which ACI gives earning guidance;
establish and monitor procedures for the receipt and treatment of
complaints received by ACI regarding accounting, internal accounting
controls or audit matters and the anonymous submission by employees
of concerns regarding questionable accounting or auditing matters and
review periodically with the Management these procedures and any
significant complaints received;
receive from the Chief Executive Officer and the Chief Financial
Officer a certificate certifying in respect of each annual and interim
report the matters such officers are required to certify in connection
with the filing of such reports under applicable securities laws; and
review and discuss ACI's major financial risk exposures and the steps
taken to monitor and control such exposures, including the use of any
financial derivatives and hedging activities.
(2)
(3)
(4)
(5)
(6)
C.
In Respect of Insurance
(1)
review periodically insurance programs relating to ACI and its
investments.
D.
In Respect of Internal Controls
(1)
(2)
review the adequacy and effectiveness of ACI's internal accounting and
financial controls based on recommendations from Management and
the external auditors for the improvement of accounting practices and
internal controls; and
oversee compliance with internal controls and the Joint Code of
Business Conduct.
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E.
In respect of Other Items
(1)
(2)
(3)
(4)
(5)
on an annual basis review and assess committee member attendance
and performance and report thereon to the Board and review this
Charter and, if required implement amendments to this Charter;
on a quarterly basis review compliance with Governance Agreements
with respect to matters that relate to the financial statements of ACI;
on a quarterly basis review the prior quarter distributions;
on an annual basis review the performance of the Board under the
Board's mandate;
on a quarterly basis review compliance with the Joint Disclosure Policy
of ACI.
OVERSIGHT FUNCTION
While the Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Committee
to plan or conduct audits or to determine that ACI's consolidated financial statements are complete and accurate or
are in accordance with GAAP and applicable rules and regulations. These are the responsibilities of Management
and ACI's external auditors. The Committee, its Chair and any Committee members identified as having accounting
or related financial expertise are members of the Board, appointed to the Committee to provide broad oversight of
the financial, risk and control related activities of ACI, and are specifically not accountable or responsible for the
day-to-day operation or performance of such activities. Although the designation of a Committee member as having
accounting or related financial expertise for disclosure purposes or otherwise is based on that individual's education
and experience, which that individual will bring to bear in carrying out his or her duties on the Committee, such
designation does not impose on such person any duties, obligations or liability that are greater than the duties,
obligations and liability imposed on such person as a member of the Committee and Board in the absence of such
designation. Rather, the role of a Committee member who is identified as having accounting or related financial
expertise, like the role of all Committee members, is to oversee the process, not to certify or guarantee the internal or
external audit of ACI's financial information or public disclosure.