AutoCanada Inc.
Annual Report 2015

Plain-text annual report

2015ANNUALREPORT WHAT’S INSIDE 4 6 7 8 12 14 20 22 24 28 30 36 42 44 45 M1 F1 S1 Company Overview A Letter from Our Executive Chair A Letter from Our CEO & Our President Our 10 Year Evolution Results at a Glance Our Operations Industry Overview Recent Events Our People Company Values Strategies & Goals Company Growth Corporate Governance Financial Summary Shareholder Return Management’s Discussion & Analysis Consolidated Financial Statements Shareholder Information 3 COMPANY OVERVIEW AUTOCANADA (TSX:ACQ) Our dealerships derive their revenue from the following four inter-related business operations: new vehicle AutoCanada is Canada’s largest, and only publicly- sales; used vehicle sales; parts, service and collision listed, multi-location automobile dealership group, repair; and finance and insurance. While new vehicle currently operating 53 dealerships, comprised of 60 sales are the most important source of revenue, they franchises, in British Columbia, Alberta, Saskatchewan, generally result in lower gross profits than used vehicle Manitoba, Ontario, Quebec, New Brunswick and Nova sales, parts, service and collision repair operations Scotia. In 2015, our dealerships sold approximately and finance and insurance sales. Overall gross profit 62,800 vehicles and processed approximately margins will increase as revenues from higher margin 848,000 service and collision repair orders in our operations increase relative to revenues from lower 912 service bays. margin operations. 4 GRANDE PRAIRIE EDMONTON PRINCE GEORGE KELOWNA MONCTON VANCOUVER ISLAND CALGARY LOWER MAINLAND PONOKA WINNIPEG SASKATCHEWAN TORONTO (GTA) OTTAWA DARTMOUTH QUÉBEC VANCOUVER ISLAND Victoria Hyundai Island Chevrolet Buick GMC LOWER MAINLAND Abbotsford Volkswagen Chilliwack Volkswagen Maple Ridge Chrysler Dodge Jeep RAM FIAT Maple Ridge Volkswagen KELOWNA Okanagan Chrysler Dodge Jeep RAM Don Folk Chevrolet PRINCE GEORGE Northland Chrysler Dodge Jeep RAM FIAT Northland Hyundai Northland Nissan GRANDE PRAIRIE Grande Prairie Chrysler Dodge Jeep RAM FIAT Grande Prairie Hyundai Grande Prairie Mitsubishi Grande Prairie Nissan Grande Prairie Subaru Grande Prairie Volkswagen EDMONTON AREA Capital Chrysler Dodge Jeep RAM FIAT Crosstown Chrysler Dodge Jeep RAM FIAT North Edmonton KIA Lakewood Chevrolet Sherwood Buick GMC Sherwood Park Chevrolet Sherwood Park Hyundai Grove Chrysler Dodge Jeep RAM CALGARY AREA Airdrie Chrysler Dodge Jeep RAM Calgary Hyundai Courtesy Chrysler Dodge Jeep RAM Courtesy Mitsubishi Crowfoot Hyundai Fish Creek Nissan Hyatt Infiniti Northland Volkswagen Tower Chrysler Dodge Jeep RAM PONOKA Ponoka Chrysler Dodge Jeep RAM SASKATCHEWAN Bridges Chevrolet Buick GMC Dodge City Motors Mann-Northway Auto Source Saskatoon Motor Products WINNIPEG Audi Winnipeg Eastern Chrysler Dodge Jeep RAM McNaught Cadillac Buick GMC St. James Volkswagen TORONTO & GTA 401 Dixie Hyundai Cambridge Hyundai Toronto Chrysler Dodge Jeep RAM OTTAWA Hunt Club Nissan 417 Infiniti 417 Nissan QUÉBEC BMW Canbec / MINI Mont Royal BMW Laval / MINI Laval MONCTON Moncton Chrysler Dodge Jeep RAM DARTMOUTH Dartmouth Chrysler Dodge Jeep RAM 5 FROM OUR EXECUTIVE CHAIR As I think about 2015, it becomes clear that this was a year of challenges as well as opportunities. Many of our stores are located in markets which have been impacted by a decline in consumer confidence which directly impacts consumers’ willingness to buy a new vehicle. The impact of this was deeply apparent throughout last year and it will no doubt continue into 2016. It is for this reason that we have been focused on the strength of our balance sheet. We are disciplined retailers. We stick to the basics and the small details which are key to selling vehicles. And it shows – we have some of the best managed, highest volume stores anywhere in the country. We are laser focused. In times of slower economic growth, we are focused on our profitability and our process. If we can be good in the tough times, we can be great in the good times. We are deeply committed. No one is more committed to delivering value for our manufacturer partners, shareholders and customers than us – Steven, Tom, and each and every one of our team members, from management to the front line sales staff, are actively engaged in this pursuit. Thanks so much to all of our shareholders, bondholders and investors for trusting us with your capital. You have choice and we are grateful and fortunate to be yours. Thanks to all of our 3,700 employees and their families – it is truly a pleasure to work with you. Sincerely, Pat Priestner Executive Chair 6 We have some of the best managed, highest volume stores anywhere in the country AutoCanada is proud to congratulate Pat Priestner for winning the EY Entrepreneur of the Year Prairies award in 2015. This award is presented each year to one individual in the Prairies region in recognition of their business and personal accomplishments. FROM OUR CEO & OUR PRESIDENT By the time everyone reads this letter we will be part way through the year, and as such, We thought it would be prudent to discuss what priorities our team has been focused on this year. Fiscal 2015, which had the distinction of being compared to our all-time record year, took place in the midst of a challenging Alberta economy, home to 24 of our 53 dealerships. Within this difficult economic environment we faced sales and margins pressures, both of which we are focused on addressing and committed to resolving. Our team is working diligently on reviewing the confident that there are further opportunities to improve strategies of each dealership, relative to their particular gross profitability in our dealerships. total units sold. Success and achievements aside, we are markets, in order to make appropriate market sensitive adjustments with a focus of improving unit sales volumes, profitability and margins. We have a clear action plan for all of our dealerships whether they are located in Alberta or one of the other seven provinces that we operate in. Our plan is simple. We focus on the basics and only on the basics. Our ability to excel at the details is crucial to retailing and has been the cornerstone of our success. There are three key areas to our plan: • Improve new vehicle sales – We are placing a greater focus on digital marketing which we believe will provide more, and more cost effective, connections to our customers. And we have expedited the roll-out of a new sales process technology which will allow our dealerships to more effectively capture and use sales data and leads. • Improve net income – We are working with our dealerships to reduce expenses. We are focused on employee expenses, marketing fees and administration costs and expect to save $15 million annually by working closely with our dealerships to identify areas where reduced spends will not adversely impact sales. We recognize where we need to focus our efforts to achieve the results that we and our shareholders have come to expect and deserve, and we are singularly committed to focusing our efforts, over the coming year in particular, to implement our plan. This is our plan and we have the talent to achieve our goals. In closing, thank-you to our Founder and Executive Chair, our Board, our team, and of course each of our manufacturer partners. • Improve gross profit – We are working with our Sincerely, dealerships to manage profitability, especially in areas where sales have declined as a result of market conditions and lower unit volume. To be clear, this may mean focusing on more profitable sales at the expense of Steven Landry Chief Executive Officer Tom Orysiuk President 7 OUR 10 YEAR EVOLUTION EVOLUTION OF OUR COMPANY On May 11, 2006, the Company completed its initial public offering and became the only publicly-listed, multi-location dealership group in Canada. The Company operated 14 dealerships in 6 provinces with approximately 800 employees. The franchise brands sold included Chrysler, Dodge, Jeep, Hyundai, and Subaru. “We anticipate that the Company will continue to grow as we execute our growth strategy through accretive acquisitions of other franchised automotive dealers, continued organic growth and the commencement of operations at new franchised automotive dealerships that have been awarded to us by manufacturers.” — Pat Priestner (August 14, 2006) It is now 2016, and Management and the Company are excited to celebrate our 10th anniversary. Results and growth since 2006 has been astronomical – from 14 dealerships to 53, expanding East across two additional provinces, and now employing over 3,700 employees. Additionally, our franchises have grown to 19 brands. Management is pleased with the progress to date and is proud of the relationships established with the manufacturer partners. Our business model has proven a long history of profitability in the past 10 years, however, Management realizes the challenges and economic factors that are inevitable in the foreseeable future to the Company, and will adapt business practices and strategies to maintain momentum for growth. 8 211,068 111,112 NEW RETAIL VEHICLES SOLD SINCE 2006 (UNITS) USED RETAIL VEHICLES SOLD SINCE 2006 (UNITS) 3,943,800 $ 12,648,064,000 SERVICE & COLLISION REPAIRS SINCE 2006 (ORDERS) AGGREGATE REVENUE SINCE 2006 10 YEARS AT A GLANCE Revenue Gross Profit $694 $835 $826 $777 $869 $1,008 $1,102 $1,409 $2,215 $2,904 $113 $139 $147 $147 $150 $169 $190 $246 $373 $488 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 $ Stock Prices 45.9 44.5 24.2 15.35 9.88 9.25 3.75 4.70 2.19 6.40 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 DEALERSHIPS 2006 14 ➤ 2015 54 BRANDS 2006 5 ➤ 2015 19 SERVICE BAYS 2006 223 ➤ 2015 912 EMPLOYEES 2006 800 ➤ 2015 3700 9 “The Board believes the potential added cash flow from the dealership will be beneficial for our unitholders in the near term, and the establishment of a business relationship with another top automobile manufacturer such as Nissan Canada may also provide longer-term benefits.” — Gordon Barefoot (February 7, 2007) The Fund acquired its first Nissan dealership JAN 7, 2007 The Fund acquired its first Volkswagen dealership DEC 8, 2008 The Fund underwent a reorganization and converted the Trust to the corporation known as AutoCanada Inc. (AutoCanada) with common shares trading on the TSX under the symbol ACQ DEC 18, 2009 MAY 11, 2006 AutoCanada Income Fund (the Fund) completed an initial public offering NOV 5, 2007 The Fund was awarded its first Mitsubishi open point dealership OCT 6, 2009 Signed $20,000,000 revolving credit facility with HSBC Canada 10 “This investment, AutoCanada’s first with a GM Canada dealership, represents a significant milestone for the Company. Chevrolet is a very significant brand in the Canadian automotive landscape and we are extremely pleased that GM Canada has agreed to accept AutoCanada as part of the GM family.” — Pat Priestner (May 1, 2012) AutoCanada was awarded its first KIA open point dealership APR 20, 2012 AutoCanada acquired its first Audi dealership MAR 28, 2013 Completed private offering of $150 million aggregate principal amount of senior unsecured notes MAY 22, 2014 MAY 5, 2012 AutoCanada obtained approval from General Motors of Canada (GM) to invest in its first GM dealership MAY 22, 2014 AutoCanada acquired its first BMW and MINI dealerships NOV 11, 2015 AutoCanada provided a participatory loan to PPH, a holding company wholly owned by Pat Priestner, to fund 80% of the purchase of Whitby Oshawa Honda 11 2015 RESULTS AT A GLANCE OVERALL STATISTICS +6 +6 DEALERSHIPS FRANCHISES +20% UNITS SOLD +41% SERVICE ORDERS 2014: 48 2015: 54 2014: 56 2015: 62 2014: 52,147 2015: 62,799 2014: 601,597 2015: 847,702 $776 $870 $1,008 $1,102 $1,409 $2,904 $2,215 % MARGIN EBITDA 4.1 4.0 3.4 2.9 3.1 2.4 1.9 2009 2010 2011 2012 2013 2014 2015 2009 2010 2011 2012 2013 2014 2015 $18 $17 $29 $38 $58 $89 $90 TOTAL REVENUE EBITDA MARGIN ■ New Vehicles ■ Used Vehicles ■ Parts & Service ■ Finance & Insurance 12 INCOME STATISTICS +31% +.5% -39% REVENUE EBITDA FREE CASH FLOW -27% ADJUSTED EPS 2014: $2,214,778 2015: $2,903,803 2014: $89,434 2015: $89,838 2014: $63,723 2015: $38,675 2014: $2.24 2015: $1.64 OPERATING STATISTICS +24% NEW VEHICLE REVENUE +42% USED VEHICLE REVENUE +6% ABSORPTION RATE 2014: $1,342,346 2015: $1,668,237 2014: $495,352 2015: $704,569 2014: 85% 2015: 91% 13 OUR OPERATIONS Our current multi-location automobile dealership model of 53 automobile dealerships (60 franchises) located in eight provinces enables us to serve a diversified geographic customer base and enjoy benefits not available to single location dealerships. In addition, by operating multiple dealerships in certain metropolitan areas 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’ 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 dealership controllers, report directly to the dealer principal, they also report to one or more members of our head office senior management team. The dealership 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. AutoCanada was ranked #1 for Alberta Venture's Fast Growth 50 Program. AutoCanada's significant number of acquisitions fueled their success in the rated categories of growth in revenue, assets, capital expenditures, and employees. 14 SOURCES OF REVENUE AND GROSS PROFIT We generate revenues and gross profit from four inter-related revenue streams: new vehicle sales; used vehicle sales; parts, service and collision repair; and finance and insurance. PERCENTAGE OF 2015 SALES 24.3% 57.5% 13.3% 4.9% PERCENTAGE OF 2015 GROSS PROFIT 39.8% 8.3% 26.8% 25.1% ■ New Vehicles ■ Used Vehicles ■ Parts & Service ■ Finance & Insurance 15 REVENUE STREAMS NEW VEHICLE SALES New vehicle sales are the driving force behind AutoCanada’s business. While all four revenue streams generate gross profit, new vehicle sales is a primary focus. In 2015, 57.5% of our revenue was generated from new vehicle sales. In addition to the profit from the sale itself, a typical new vehicle sale (or lease transaction) creates other profit opportunities for our dealerships including the resale of trade-in vehicles, sale of third party finance products, the sale of vehicle service and insurance contracts in connection with the retail sale, and the 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 than finance transactions, resulting in customers returning to a dealership more frequently than in the case of financed purchases. In addition, leases provide us with a source of late-model, 13.4 BY THE NUMBERS 42.5 36.4 28.0 21.5 19.3 15.5 off-lease vehicles for our used vehicle inventory. Generally, $412 $515 $641 $683 $883 $1,342 $1,668 leased vehicles remain under factory warranty for the term 2009 2010 2011 2012 2013 2014 2015 of the lease, allowing franchised automobile dealers to 000s UNITS SOLD C$M REVENUE provide repairs and service to the customer throughout the lease term. We acquire our new vehicle inventory from automobile manufacturers. Automobile manufacturers allocate products TOTAL REVENUE among their dealerships based primarily on historical sales 8.5 8.6 volume and planned future sales. We have a team of new vehicle inventory analysts that monitor the dealership ordering process (including quantity by model and trim level), inventory stocking levels for in-transit and landed units, inventory turnover and projected days supply. We believe that our new vehicle analysts provide a valued service to our dealers to prevent ordering which may result in excess supply of vehicles as a result of improper models and trim levels. 7.3 7.4 7.5 7.9 7.3 $30 $38 $48 $58 $76 $106 $122 2009 2010 2011 2012 2013 2014 2015 % GROSS MARGIN C$M GROSS PROFIT GROSS PROFIT 16 USED VEHICLE SALES Used vehicle sales are also a key component to the overall success of AutoCanada. Our new vehicle operations provide our used vehicle operations with a large supply of high quality trade-ins and off-lease vehicles, which are the best sources of attractive used vehicle inventory. Our dealers supplement their used vehicle inventory with purchases from auctions, daily rental companies, and wholesalers. Used vehicle sales give us an opportunity to further increase our revenues by aggressively pursuing customer trade-in vehicles, increase service contract sales, provide parts and services required in the maintenance of the vehicle, perform reconditioning work on trade-ins and provide financing to used vehicle purchasers. BY THE NUMBERS 20.3 18.7 Vehicles that are acquired through trade-in are assessed for certain criteria to determine if it meets our requirements 9.7 8.8 8.7 10.4 9.5 to be sold as a retail unit. Vehicles which do not meet our criteria are sold through wholesale. We actively manage the quality and age of our used vehicle inventory and monitor our used inventory appraisal values, reconditioning costs, pricing, online marketing, stocking levels, turnover, and return on investment. We believe that $209 $203 $206 $243 $301 $495 $705 2009 2010 2011 2012 2013 2014 2015 000s UNITS SOLD C$M REVENUE TOTAL REVENUE monitoring these various processes results in greater sales 9.2 volumes, higher turnover, and ultimately a greater return 8.3 8.4 on investment. Manufacturer certified pre-owned vehicles typically sell at a premium compared to other used vehicles and are available only at franchised automobile dealerships, such as ours. We believe that the manufacturer’s warranty that comes with these certified vehicles increases our potential to retain the purchaser as a future parts and service customer since certified warranty work can only be performed at franchised automobile dealerships. 6.7 6.7 6.0 5.8 $20 $17 $17 $16 $20 $30 $41 2009 2010 2011 2012 2013 2014 2015 % GROSS MARGIN C$M GROSS PROFIT GROSS PROFIT 17 PARTS, SERVICE & COLLISION REPAIR Parts, Service and Collision Repair is an important part of our overall business, it not only provides high-margin revenue but also supports our overall approach to customer service, leading to customer retention and vehicle sales. Parts and service activity is generally considered countercyclical. In a downturn, consumers buy fewer new vehicles, but their older vehicles require more service. 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 BY THE NUMBERS 847.7 601.6 364.4 vehicles purchased at the dealerships when their vehicles are 301.3 309.7 305.3 309.5 due for periodic services. $108 $109 $110 $114 $142 $256 $388 2009 2010 2011 2012 2013 2014 2015 Parts are either used in repairs made in the service 000s SERVICE ORDERS C$M REVENUE department, sold at retail to customers, or sold at wholesale to independent repair shops and other dealerships. 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 inventory. We manage our parts inventories to a target of 45 days’ TOTAL REVENUE 51.5 52.5 52.4 51.8 50.3 50.0 49.3 supply on hand in order to be responsive to our customers’ $53 $56 $58 $60 $74 $129 $194 needs while managing our working capital. 2009 2010 2011 2012 2013 2014 2015 % GROSS MARGIN C$M GROSS PROFIT GROSS PROFIT 18 FINANCE, INSURANCE, & OTHER Every vehicle sale presents AutoCanada with an opportunity to increase profits through the sale of additional products such as third party financing or lease arrangements, extended warranties, service contracts and insurance products. We do not own a finance company and do not retain substantial credit risk after a customer has received financing. 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. 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. 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 arranged customer financing on a significant portion of the retail vehicles we sold in 2015. In addition to finance BY THE NUMBERS 62.8 52.1 38.4 31.0 28.0 23.1 24.2 $43 $44 $51 $61 $83 $121 $143 2009 2010 2011 2012 2013 2014 2015 000s UNITS SOLD C$M REVENUE TOTAL REVENUE commissions, opportunities are created to sell other profitable products, such as warranty and extended protection 90.7 90.7 89.5 92.1 91.8 91.2 89.9 products 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. 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. $39 $39 $46 $56 $76 $109 $131 2009 2010 2011 2012 2013 2014 2015 % GROSS MARGIN C$M GROSS PROFIT GROSS PROFIT 19 INDUSTRY OVERVIEW RETAIL AUTOMOTIVE INDUSTRY OVERVIEW The Canadian retail automotive industry is highly fragmented with approximately 3,567 franchised automobile dealerships and approximately 2,000 owners. We expect the Canadian automotive retail industry to continue to consolidate as the average age of automobile dealership owners continues to rise. AutoCanada has the ability to act as a key consolidator of the industry due to our access to capital and our reputation and expertise in the industry. While we are limited to those brands which have accepted public ownership, the opportunity for growth through acquisitions is immense. The auto retail sector is a key part of the economy and amounts to an annual spending of $128 billion in 2015, up 7.1% as compared to 20141. This sector represents the largest Canadian retail segment. 1Source: Stats Canada Statistics Canada. Table 080-0020 - Retail trade, sales by the North American Industry Classification System (NAICS), monthly (dollars), CANSIM (database) “Canadian auto sales climbed a stronger- than-expected 3% last year to a record high 1.90 million units. We expect volumes to be largely flat this year, as diverging trends between the industrial heartland and commodity-producing regions balance each other out. Stronger employment growth and economic activity in the export- reliant manufacturing provinces will lift volumes in these markets, but deteriorating fundamentals and weakening demographic and income trends will pressure volumes in other regions. However, unless Canadian economic growth falters below last year’s 1% pace, we still expect passenger vehicle sales to remain on par with record 2015 volumes.” — Scotiabank Global Auto Report (January 27, 2016) 20 THE HIGHLY COMPETITIVE RETAIL AUTOMOTIVE SECTOR to perform warranty repairs and with franchised and independent service centre chains, and independent repair shops for non-warranty repair and maintenance New Vehicles — In the new vehicle market, our business. We believe the principal competitive factors dealerships compete with other franchised automobile in the parts, service and collision repair business are dealerships. We believe the principal competitive location, quality of facility and service, the use of factors in the retail new vehicle business are consumer factory-approved replacement parts, familiarity with brand and model preferences, location, quality of an automobile manufacturer’s brands and models, facility and service, and price. We are subject to convenience, competence of technicians and price. competition from franchised automobile dealers that sell the same brands of new vehicles and other new vehicle brands. Finance and Insurance — In the finance and insurance market, we face competition in arranging financing for our customers’ vehicle purchases from a broad Used Vehicles — In the used vehicle market, our range of financial institutions. We believe the principal dealerships compete for the supply and resale of used competitive factors in the finance and insurance vehicles with other franchised automobile dealerships, business are convenience, interest rates and flexibility local independent used vehicle dealers, vehicle rental in contract length. We also face competition in the agencies and private sellers. We believe the principal sale of third party warranty, insurance and other competitive factors in the retail used vehicle business vehicle maintenance and protection products from are location, quality of merchandising, quality of the independent businesses which sell similar products. facility and service, the suitability of a franchise to the market in which it is located, and price and selection. Improvements in online private sale technologies have inherently increased the competition in the used vehicle market as private sellers now have a more cost- effective medium to sell their vehicles. We believe that auto dealerships have a distinct competitive advantage over private sellers due to our ability to provide multiple sources of financing, the ability to offer extended warranty and our direct access to dealer auctions which offer competitive pricing and we intend to focus our marketing efforts on these advantages. Parts, Service and Collision Repair — In the parts, service and collision repair market, our dealerships compete with other franchised automobile dealerships 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. Further, there continue to be manufacturers who continue to be reluctant to entertain a relationship with a public multi- brand dealer group. AutoCanada continues to work on developing relationships with these manufacturers. 21 RECENT EVENTS AutoCanada made a total of 6 dealership acquisitions (6 In the fall of 2015 we took steps to strengthen our balance franchises) in 2015, one of which included an investment sheet and also provide flexibility for future acquisitions, in a General Motors dealer. Additionally, the Company we completed a public offering of common shares and provided a participatory loan to a related party for the also increased the size of our revolving credit facility. purpose of purchasing a Honda dealership. During the We are pleased with the current year developments year, AutoCanada also relocated one dealership to a and we are excited to realize the long-term benefit of brand new facility. this year’s activity. Q1 Q2 Q3 Q4 NORTH WINNIPEG KIA March 16, 2015 Awarded an Open Point KIA dealership in AIRDRIE CHRYSLER DODGE JEEP RAM NORTHLAND CHRYSLER DODGE JEEP RAM May 11, 2015 September 9, 2015 Acquired Airdrie Northland Chrysler Chrysler Dodge Jeep Dodge Winnipeg, Manitoba Jeep Ram in relocated to a new by KIA Canada Inc. Construction is anticipated to commence in 2017. Airdrie, Alberta for 64,507 square foot total consideration facility owned by of $25.2 million. AutoCanada. DON FOLK CHEVROLET September 14, 2015 Acquired Don Folk Chevrolet in Kelowna, British Columbia through an 80% owned subsidiary for total consideration of $9.2 million. Additionally AutoCanada acquired the land and facilities of the dealership for $13.3 million. GROVE CHRYSLER DODGE JEEP RAM October 5, 2015 Acquired Grove Dodge Chrysler Jeep in Spruce Grove, Alberta through a 90% owned subsidiary for total consideration of $20.8 million. 22 In September 2015, Northland Chrysler Dodge Jeep RAM, in Prince George, British Columbia, relocated to a new facility. The new location has tripled its frontage and is in a prime location on the Yellowhead Highway. The new facility consists of a 64,507 square foot building with 15 service bays, two quick-lube bays and a state-of-the-art showroom. Q4 HUNT CLUB NISSAN CREDIT FACILITY PARTICIPATORY LOAN 417 INFINITI & 417 NISSAN EQUITY OFFERING November 1, 2015 November 18, 2015 November 30, 2015 December 7, 2015 December 14, 2015 Acquired Hunt Increased the size Provided Acquired 417 Infiniti AutoCanada closed Club Nissan, and of our revolving $8.4 million and 417 Nissan in a public offering the exclusive right credit facility participatory loan Ottawa, Ontario of common shares. to an Open Point from $200 million to PPH Holdings through a 90% 2,950,000 common Nissan Dealership, to $250 million. Ltd., a related party. subsidiary for total shares were issued in Ottawa, The increase in These funds were consideration of at a price of $25.50 Ontario through the credit facility used to fund 80% of $5.7 million. per share for gross a 90% owned provides additional PPH Holding Ltd.’s subsidiary for total financial flexibility purchase of Whitby consideration of to support Oshawa Honda. $13.8 million. acquisitions and other capital expenditures. proceeds of $75 million. 23 OUR PEOPLE EXECUTIVE MANAGEMENT TEAM The Company has established management compensation programs that are competitive to the AutoCanada strives to attract and retain experienced market. Management’s compensation is comprised of management with the expertise needed to succeed Base Salary and a Hybrid Incentive Plan. The annual in the retail automotive industry. Our management incentive plan aims to enhance the link between team is responsible for the overall management and pay and performance by aligning the financial and operations of the Company in order to ensure the long- operational interest and motivations of the Company’s term success of the Company. Management works management team with the annual financial returns of closely with the Board of Directors on strategy related the Company. It is designed to motivate management issues, monitoring of the financial performance of the to work toward common annual performance Company and other financial reporting matters. objectives while acknowledging and rewarding The success of the Company as a whole is driven by Management’s actions, as well as strategy, policies and procedures implemented at the corporate level. Our management team ensures that each dealership is managed effectively, is meeting Company-wide and dealership-specific performance targets, and is implementing corporate strategy. individual goal achievement. Through equity- based incentives, longer-term strategic actions by management are able to be appropriately recognized and rewarded. The compensation program is designed to focus management on successfully implementing the continuing strategic plan of the Company, improve retention of key members of the management team and attract talented individuals to the Company. Further, Management maintains consistent communication our management team has a significant stake in the with each dealership through regular meetings with performance of the Company through their direct and the dealer principal of each dealership. Performance indirect ownership of AutoCanada shares. is monitored through monthly reporting which allows management to quickly evaluate dealership success and implement new strategies as deemed necessary. 24 PAT PRIESTNER Executive Chair Mr. Priestner is the Founder of AutoCanada Inc. He has over 40 years of experience in the automotive industry including over 30 years as a franchised automobile dealership owner. Since 1998 Mr. Priestner has been the Vice-President of the Alberta Dealers Association Advertising Council. Previously he served as the Chairman of the Dealer Council DaimlerChrysler – Western Region, and as a Board member of Rocky Mountain Dealerships, Inc. an agriculture and construction equipment dealership group. STEVEN LANDRY Chief Executive Officer Mr. Landry joined us as our Chief Executive Officer in April 2016. Prior thereto, and since June 2014, he was the Chief Development Officer of ATCO Ltd. Prior thereto and since 2011, Mr Landry was the Managing Director & Chief Operating Officer of ATCO Australia. From 1982 to 2009, Mr. Landry held several progressively senior positions with Chrysler LLC and its predecessor's entities in Canada, USA and Europe. Positions held during this time include President and Chief Executive Officer of DaimlerChrysler Canada, President of Chrysler Europe as well as Executive Vice President, North America Sales & Marketing, and Global Service & Parts of Chrysler LLC. He received his Bachelor of Commerce from Saint Mary's University in 1982 and his Master of Business Administration from Michigan State University in 2000. TOM ORYSIUK President Mr. Orysiuk is the President of AutoCanada Inc., and is a Board member of Caritas Foundation. He joined AutoCanada as the Executive Vice-President and Chief Financial Officer in 2005. Previously he was the Chief Financial Officer of Liquor Stores Income Fund as well as Alberta Oats Milling Ltd. He has a Bachelor of Commerce from the University of Alberta and is a Chartered Accountant. STEVE ROSE Chief Operating Officer Mr. Rose is the Chief Operating Officer of AutoCanada Inc. He has over 20 years of automotive related experience. He joined AutoCanada as the Vice President Corporate Development, General Counsel and Secretary in January 2007. Previously he was the Vice President, General Counsel and Secretary of Chrysler Canada Ltd. He has a Bachelor of Commerce from Dalhousie University and a law degree from Osgoode Hall Law School. CHRIS BURROWS Chief Financial Officer Mr. Burrows is the Chief Financial Officer of AutoCanada Inc. He joined AutoCanada in September 2014. Previously he was the Chief Financial Officer of K-Bro Linen Inc. as well as the Vice President Finance, Administration & Tax with Stuart Olson. He has Bachelor of Science and Bachelor of Commerce degrees from the University of Alberta, and a Masters Degree from the University of Saskatchewan and Gonzaga University. He is a Chartered Accountant, a US (Illinois) Certified Public Accountant, a certified Human Resource Professional, and is ICD.D certified. ERIN OOR Vice President Corporate Development & Administration Mr. Oor is the Vice President of Corporate Development & Administration. He joined AutoCanada as Vice President Administration and General Counsel in June 2014. Previously he was the General Counsel and General Manager of Unified Alloys, and the General Counsel of Voodoo Vox Inc. He has a Bachelor of Arts and a law degree from the University of Alberta. He is a Member of Law Society of Alberta and Member of Law Society of Upper Canada. 25 expertise, shared support services such as IT support, legal, HR and benefits support, as well as operational support through its Sales and Inventory Operations, In 2014, the Company re-organized the corporate head Fixed Operations and Marketing teams. We also host office to form Dealers Support Services (DSS) in order separate Dealer, Fixed Operations, and Controller Line to fully direct the attention and efforts of corporate Group meetings. head office staff to those initiatives which drive profit or improvements to dealership operations, or which enhance customer service or our relationships with our key partners. This aligns corporate head office and our dealerships in providing long term shareholder value. Of all the assistance DSS is dedicated to bring to our dealerships, perhaps none is of greater value than its ability to leverage the expertise and experience of our dealership professionals. DSS regularly seeks opportunities to connect dealerships that have DSS’ purpose is to create and foster a retail automobile operational challenges in one area, with a dealership organization that marries the entrepreneurial strengths and advantages of the classic dealer/owner model with the discipline and process adherence of a public company model, all within a culture that values and promotes mutual respect, support and assistance. The means by which DSS seeks to achieve this is by empowering the very best General Managers/Dealer Principals to make the key dealership operating decisions on a day to day basis, within a financial and governance framework set out by DSS, all of which is supported by a motivated DSS team dedicated to providing to our dealer partners timely, relevant, and actionable information and advice to assist our dealerships to make ever better operating decisions. DSS is solely dedicated to providing advice, services and support to our dealer partners for the simple reason that their success is our success and the only way to achieve sustainable progress is by working together towards common goals. which has particular expertise in the same area. This enables an invaluable sharing of knowledge and expertise on a dealership employee peer-to-dealership employee peer basis. In the end, DSS is only as strong, and will be only as successful, as it’s ability to harness the knowledge and expertise of its individual dealership employees and make that available to others through dealership to dealership mentoring. The importance and power of sharing best practices cannot be We strongly believe in the “power of the group” and overstated, and DSS works hard to ensure that all of its ability to provide cost saving synergies, marketing its dealerships are given every opportunity to succeed. 26 DEALERSHIP TEAMS are responsible. Our dealer principals participate in an incentive plan that provides for the payment to them The success of AutoCanada is attributed to our of a percentage of the profit of the dealer principal’s people on the ground at each dealership. AutoCanada franchised automobile dealership. continuously aims to hire the best individuals in the retail automotive industry at our dealerships as these individuals drive our day-to-day operations and are the face of the Company to our customers. 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’ 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 dealership controllers, report directly to the dealer principal, they also report to one or more members of our head office senior management team. The dealership 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. Dealer principals are compensated, to a significant extent, on the basis of the financial performance of the franchised automobile dealership for which they 27 COMPANY VALUES 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. 28 CORPORATE SOCIAL RESPONSIBILITY AutoCanada takes pride in creating value for our shareholders, providing employees with rewarding careers, and giving back to our communities. Corporate social responsibility has always been a key value at AutoCanada. The AutoCanada team is passionate about making a significant difference in our communities. In 2015, our team members at DSS and the dealerships contributed to not-for-profit organizations and participated in many volunteer activities throughout Canada. The Chairman’s Club is a yearly incentive program that recognizes the outstanding achievements by our valued Top Product Advisors and Top Service Advisors. Each member of the Chairman’s Club have earned their CORPORATE ALIGNMENT induction due to hard work, customer service, diligence AutoCanada strives to deliver excellent customer and a desire to be the very best of the best. service along with an efficient process. Conference meetings are held regularly with representatives from each dealership to discuss areas for betterment, success We strongly believe stories, best practices, and to provide recognition for in sharing and helping a job well done. Ideas are communicated across all others. As well, there dealerships to allow all to learn and grow together. are few greater gifts than the gift of helping a child achieve their APPRECIATION EVENTS goals in life. Management and DSS staff also strive to show appreciation by travelling to dealerships to host employee appreciation events. This further promotes relationship strengthening and communication between all levels of staff. It is for these reasons that we implemented the Chairman’s Scholarship Program, which was designed to provide the deserving and eligible dependents of our Companies’ full-time employees with financial assistance to pursue post-secondary education. It is meant to recognize and reward young adults who take time out of their lives to give back to their community. The program is open to students currently, or soon- to-be enrolled, in full-time studies at a Canadian post-secondary educational institute, resulting in a Certificate, Degree or Diploma. Students must have at least one parent or guardian working full-time for at least one year at their dealership at the time of application and at the time the scholarship is awarded. 29 COMPANY STRATEGIES MAINTAIN STRONG RELATIONSHIPS WITH MANUFACTURER PARTNERS IMPLEMENT STRATEGIC PROCESS & BEST PRACTICES Our organizational structure allows us to provide market One of our main strategic aspects for growth specific responses to sales, service, marketing, and is to pursue opportunities through acquisitions inventory requirements from the resources provided and integrate and improve synergies for existing by our experienced and centralized DSS team. dealerships. Management and the Company strive to maintain excellent relationships with our manufacturer partners to build upon our current brand portfolios and to gain the acceptance of other new manufacturers over time. Developing strong mutual relationships with Manufacturers can also assist in the allocation of a desirable mix of popular new vehicles, which can provide adequate supply and generate high profit margins. UTILIZE 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. Our model enables us to benchmark and leverage the success of our dealership operations against each other and rapidly implement new and innovative ideas across our dealership group. 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. ATTRACT & EMPLOY TALENTED INDIVIDUALS Our Company understands the key driving force behind the operations are our team members. We strive to ensure compensation packages are effective and competitive within the industry and continuously research new retention-related initiates to help attract and retain quality employees. Training programs, supportive peer groups, and advancement opportunities are developed for employees to prepare Our diversified locations throughout Canada help for future growth. to mitigate the potential effect of adverse economic conditions in any one region of Canada. 30 RISKS Major risks for the Company include the availability of consumer credit access, lack of consumer confidence, the risk of not being able to successfully integrate new dealerships, and the risk of current dealerships under-performing. Management has taken steps to mitigate the risk as: • The weak economic conditions have had an adverse impact on consumer spending, credit availability, and consumer confidence, which are key drivers of the business. While management is unsure of when the Alberta economy will improve and the outlook for the retail automotive industry in Alberta remains challenging; we have taken steps to more effectively market our vehicles with a greater emphasis on cost effective digital marketing strategies and focus on gross margins where volumes are constrained. • Having a dedicated acquisitions team that is able to focus on forming manufacturer relationships and identifying premium acquisition targets. • In order to ensure that we obtain manufacturer approvals for acquisitions, we focus on current same store sales and leverage best ideas from dealerships that out-perform the market. • We have invested heavily in our head office staff and our support staff to ensure that acquisitions are successfully integrated through an on-boarding process including a detailed acquisition process, and monitoring of acquisition process, and detailed integration and training plans including dealer visits and team building. • Access to capital markets allows us to have the ability to fund future growth. A comprehensive discussion of the known risk factors is available in our 2015 Annual Information Form dated March 17, 2016, available on the SEDAR website at www.sedar.com. PERFORMANCE SCORECARD 2015 2014 Change % Financial Performance ($) Revenues Gross profit EBITDA1 Free cash flow2 2,903,803 2,214,778 487,709 373,149 89,838 89,434 38,675 63,723 Growth capital expenditures incurred 61,909 63,900 Financial Performance ($) New retail vehicles sold (units) 35,323 30,346 Used retail vehicles sold (units) 20,342 15,725 Number of repair orders completed 847,702 601,597 Number of vehicles retailed that had finance and insurance related products 55,507 45,133 Inventory turnover ratio Absorption rate (%)3 3.99 91% 4.23 85% Average Gross Profit (per unit) New retail vehicles Used retail vehicles Repair order completed Retailed unit that had finance and insurance related products 2,883 1,997 229 2,957 1,929 219 2,357 2,417 31% 31% -1% -39% -3% 16% 29% 41% 23% -3% 6% -3% 4% 5% -2% 1“EBITDA” is earnings before interest expense (other than interest expense on floorplan financing and other interest), income taxes, depreciation, amortization and asset impairment charges 2Free cash flow” is cash provided by (used in) operating activities (including the net change in non-cash working capital balances) less capital expenditure (not including acquisitions of dealerships and dealership facilities) 3Absorption 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 32 LOOKING FORWARD IMPROVE NEW RETAIL VEHICLE SALES MAINTAIN WORKING CAPITAL AND ADEQUATE CASH FLOW New retail vehicle sales is an area of primary focus as Management will be prudent in analyzing the cash it is the key to follow-up profit opportunities. Our plan flow to meet working capital requirements imposed is to continue to focus on digital marketing strategies by the manufacturer partners, while capitalizing and enhance our sales process technology. These will on areas of profitability and spending on capital lead to more cost effective lead sources and allow the expenditures and investments. All these factors will dealerships to more effectively capture, monitor, and contribute to the growth and increased long-term use sales data. profitability of the Company. IMPROVE GROSS PROFIT MARGINS AND INTEGRATE NEW STORES SUSTAIN POSITION FOR GROWTH Despite the economic slowdown occurring in the west, Our business model also allows us to benchmark the and Alberta in particular, all but two of our same stores success of each dealership operations against each in fiscal year 2015 were profitable. Although 45% of other and rapidly implement new and innovative ideas our dealerships are located in Alberta, the downward across the group. Market data and best practices are pressure was mitigated by growth in gross profit of our shared across the dealerships and inventory levels eastern dealerships. Management anticipates that there are carefully monitored to increase profitability will continue to be attractive buying opportunities and and minimize interest on financing inventory. Our the Company is in a position for further growth. Our integration process involves economies of sale to strong balance sheet, available liquidity, and access to utilize our consolidated purchasing power to achieve capital markets allows us to capitalize on opportunities. both cost and revenue synergies. We will patiently pursue our acquisition strategy to DECREASE VARIABLE OPERATING EXPENSES maximize our ability to take advantage of anticipated buying opportunities that times of economic uncertainty generally provide. Management and the Company will continue to strengthen relationships Decreasing $15 Million in operating expenses, without with manufacturer partners, and strive to increase the adversely impacting sales, is a prominent goal in performance of current brand portfolios and gain the fiscal 2016 and cost savings strategies have been acceptance of other new manufacturers over time. communicated to all our dealership teams across Canada. Management will periodically analyze actual expenses against forecasted and budgeted figures, and leverage cost saving initiatives across dealerships. 33 2015 GOALS ACHIEVED ONGOING CONSOLIDATE DEALER BODY GROUP To acquire an addition- al four to six dealer- ships by May, 2016. 2014 · 48 DEALERSHIPS 2015 · 54 DEALERSHIPS 6 dealerships were acquired in 2015: Airdrie Chrysler, Don Folk Chevrolet, Grove Dodge Chrysler Jeep, Hunt Club Nissan, 417 Nissan, and 417 Infiniti. Open Points to build and operate dealerships for Kia in North Winnipeg and Nissan in Barrhaven, Ottawa have also been awarded in 2015. INTEGRATE ACQUIRED STORES To successfully integrate newly acquired stores within two years. 2014 · 2 NEW SAME STORES 2015 · 5 NEW SAME STORES The five new 2015 same stores, Grande Prairie Volkswagen, Audi Winnipeg, St. James Volkswagen, Courtesy Chrysler, and Eastern Chrysler increased aggregate net income by 51% in 2015 over the prior year to acquisition. Best practices and centralization of processes have served as key factors in identifying areas for improvement and successful integration. LIQUIDITY To maintain working capital in excess of manufacturer require- ments and adequate cash flow. 2014 · $16 MILLION EXCESS WORKING CAPITAL 2015 · $26 MILLION EXCESS WORKING CAPITAL Net working capital was $121 million at December 31, 2015, which was in excess of the manufacturer requirement of $95 million. We have drawn $104 million on our $250 million revolving term facility, and have $146 million in readily available liquidity. In December 2015, we also closed a public offering which generated gross proceeds of $75 million to be used to reduce indebtedness of the revolving credit facility, fund future capital expenditures, and for general corporate purposes. 34 INCREASE GROSS PROFIT MARGINS To increase gross profit margins in all revenue streams. 2014 · 16.8% OVERALL GROSS PROFIT 2015 · 16.8% OVERALL GROSS PROFIT Management considers gross profit to be a key measure of overall corporate performance. The reduced economic activity, particularly in Western Canada, has negatively impacted gross profits. However, the decrease has been offset with higher sales and gross profits in the year as a direct result of acquisitions made. DECREASE VARIABLE OPERATING EXPENSES To reduce variable operating expenses as a percentage of gross profit. 2014 · 66.8% 2015 · 68.3% Operating expenses as a percentage of gross profit increased slightly by 1.5% in 2015. This increase is driven by the slowdown of the economy during the year and the time lag in the corresponding reduction of operating costs. Management is prudent in monitoring outflows and is working to realign operating costs with gross profit and expect improvement of gross profit in 2016. Centralization of suppliers’ contracts across dealership groups has also generated cost savings. IMPLEMENT PLANNED CAPITAL EXPENDITURES To implement capital plan based on the performance of the Company. 2014 · $207M BUDGETED 5 YEAR CAPITAL PLAN 2015 · SPENT $62 MILLION Largest capital expenditures in 2015 include: relocation of Northland Dodge ($14.5 million); new land purchased and/or construction cost for Maple Ridge Chrysler ($7.9 million), Sherwood Park Chevrolet ($12.5 million), Audi Winnipeg ($4.2 million); and new land purchased for Sherwood Park Volkswagen Open Point ($7.8 million) with the expectation of completion by fourth quarter of 2016. Management monitors the capital plan and performs robust analysis on all future capital expenditures prior to allocating funds. Due to the change in economic conditions, Management revised the capital plan to deferred capital expenditures into future years, leading to lower expenditures in 2015. CONTINUE TO CREATE VALUE FOR STAKE- HOLDERS To create value for stakeholders in the short-term and long- term. 2014 · $2.24 ADJUSTED EARNINGS PER SHARE 2015 · $1.64 ADJUSTED EARNINGS PER SHARE Management assesses past acquisitions, return on capital, and the Company as a whole to ensure shareholder value is being achieved by capital investments. Implementation of policies, procedures, and best practices are the key to successful integration and Management believes these are main drivers in delivering long term stakeholder value. 35 COMPANY GROWTH AutoCanada’s growth strategy has two main pillars. The first, organic growth, involves growing our existing dealerships through increase in sales volumes, improving gross margins and expanding market share. The second, growth through acquisitions, involves growing the AutoCanada footprint by acquiring dealerships and opening new dealerships through Open Point opportunities. 36 ORGANIC GROWTH GROWTH THROUGH ACQUISITIONS We continue to focus on those areas of our business that Our growth depends in large part on the ability to enable us to increase the profitability of our operations. acquire additional franchised automobile dealerships, Key areas include increasing same store gross profits manage expansion, control costs in operations and by controlling expenses and expanding margins at our integrate acquired franchised automobile dealerships. existing franchised automobile dealerships and those that are integrated into our operations on acquisition. Improve retail sales • Awareness of trends and changes in consumer patterns • Greater focus on digital marketing efforts Due to the economic slowdown occurring in the West, and Alberta in particular, Management anticipates that there will continue to be attractive buying opportunities, further enhancing long term shareholder value. Following the acquisitions of three dealerships in Ottawa during the fourth quarter of 2015, the Company continues to seek opportunities in Eastern Canada in the effort to further diversify. AutoCanada is in a • New sales process technology position to patiently pursue its acquisition strategy • More effectively capture and use sales data Reduce operating expenses • Centralize functional tasks • • Evaluate supplier contracts Reduce variable operating expenses as a percentage of gross profit thereby maximizing its ability to take advantage of anticipated buying opportunities that times of economic uncertainty generally provide. Management and the Company have excellent relationships with our manufacturer partners and believe that if we continue to perform well, we can build upon our current brand portfolios and gain the acceptance of other new manufacturers over time. During the fourth quarter, AutoCanada reached a deal to provide a participatory loan to PPH Holdings Ltd., a related party, for the purchase of Whitby- Oshawa Honda. In exchange for a loan equal to 80% of the purchase price of Whitby-Oshawa Honda, AutoCanada expects to receive approximately 80% of the net income of the dealership. While this is not a dealership that is owned by AutoCanada, it provides the Company with an additional source of revenue that was previously unavailable. 37 2015 COMPANY ACQUISITIONS AIRDRIE CHRYSLER DODGE JEEP RAM AutoCanada acquired Airdrie Chrysler Dodge Jeep RAM located in Airdrie, Alberta, on May 11, 2015. The dealership operates from a facility which includes an eight car showroom and twenty service bays. In 2014, the dealership retailed 935 new vehicles and 704 used vehicles. DON FOLK CHEVROLET AutoCanada acquired an 80% effective interest in Don Folk Chevrolet, located in Kelowna, British Columbia, on September 14, 2015. The dealership operates from a facility which includes a fifteen car showroom, fourteen service bays and six detail bays. In 2014, the dealership retailed 452 new vehicles and 304 used vehicles. GROVE CHRYSLER DODGE JEEP RAM AutoCanada acquired a 90% effective interest in Grove Chrysler Dodge Jeep RAM, located in Spruce Grove, Alberta, on October 5, 2015. The dealership operates from a 34,000 square foot leased facility which includes an eight car showroom, thirteen service bays, three detail bays and one alignment bay. In 2014, the dealership retailed 809 new vehicles and 407 used vehicles. HUNT CLUB NISSAN AutoCanada acquired a 90% effective interest in Hunt Club Nissan, located in Ottawa, Ontario, on November 1, 2015. The dealership operates from a 27,608 square foot leased facility which includes a twelve car showroom, thirteen service bays, four detail bays and one alignment bay. In 2014, the dealership retailed 1,109 new vehicles and 452 used vehicles. As part of the transaction, AutoCanada has also acquired the right to a new Nissan Open Point dealership in the Barrhaven area of Ottawa, Ontario. 417 NISSAN AND 417 INFINITI AutoCanada acquired a 90% effective interest in each of 417 Nissan and 417 Infiniti, located in Ottawa, Ontario, on December 7, 2015. The dealerships currently operate out of a shared 28,000 square foot leased facility with a fourteen car showroom and fifteen service bays. In 2014, the dealerships retailed 727 new vehicles and 180 used vehicles. 417 Infiniti will be relocated to a standalone leased facility adjacent to the current facility in early 2018. 38 39 CAPITAL PLAN A focus of the Company is to maintain a capital plan that accurately budgets for contemplated future capital projects while allowing the Company sufficient resources to operate in a difficult economic environment. Under our current capital plan we expect to spend $51.2 million in 2016, with a total of $193.8 being budgeted to the end of 2019, relating to currently contemplated capital projects. Since the end of the third quarter we have successfully developed a plan to defer $32.1 million of capital spending that was projected for 2016. Management closely monitors the capital plan and adjusts as appropriate based on Company performance, Manufacturer requirements and individual dealership needs. Our capital plan includes dealership relocations, dealership expansion and imaging requirements, and Open Point opportunities. The Company expects dealership relocations to provide long term earnings sustainability and result in significant improvements in revenues and overall profitability. Dealership expansions are required when current facilities are unable to meet customer demands. Dealership reimaging occurs when the Company is required by Manufacturers to undertaking imaging upgrades to our facilities. The Company expects that relocations and reimaging expenditures will attract more customers to our existing dealerships. AutoCanada is currently the holder of rights to four Open Point dealerships: Sherwood Park Volkswagen, North Winnipeg Kia, a Nissan in Calgary, and a Nissan in Ottawa. Management regularly reviews Open Point opportunities, if successful in being awarded these opportunities, additional costs arise to construct suitable facilities for the Open Points. Image: Sherwood Park Volkswagen Consturction Site 40 EQUITY OFFERING During the year, the Company completed a public offering of common shares for gross proceeds of $75 million. The Company used the net proceeds of this offering to reduce indebtedness under our revolving credit facility, which may subsequently be redrawn and applied as needed to fund future capital expenditures, including the potential acquisition of additional dealerships, and for general corporate and working capital purposes. 41 CORPORATE GOVERNANCE INDEPENDENT BOARD OF DIRECTORS BOARD COMPOSITION The Board is composed of eight members, five of whom AutoCanada considers good governance to be central are independent. AutoCanada strives to maintain to ensuring effective and efficient operations and a balanced Board with members from different the Board of Directors (the Board) are committed backgrounds which provides a wide-range of skill sets to reviewing and adapting governance practices to and expertise. The Board includes leading automotive meeting changes needs and to ensure compliance with industry experts as well as members from diverse regulatory requirements. backgrounds. Each member brings a different point OVERSIGHT of view and collaborate on decisions which allows the Board to act in the best interest of the shareholders. The Board is responsible for establishing and maintaining a culture of integrity in the conduct INVESTOR RELATIONS of the affairs of the Company. The Board seeks Throughout the year AutoCanada maintained to discharge this responsibility by satisfying itself consistent and direct communication with investors as to the integrity of the senior management of through conference calls, conference presentations the Company, and by overseeing and monitoring and investor tours. Management meets regularly Management to ensure a culture of integrity is with both institutional investors and analysts. maintained. Although directors may be nominated or To view investor relations presentations visit elected by shareholders to bring special expertise or www.autocan.ca/investors. a point of view to Board deliberations, they are not chosen to represent a particular constituency. The best interests of the Company and its shareholders must be paramount at all times. In order to maintain the integrity, transparency and accountability of the financial, administrative and management practices of AutoCanada, we maintain a Whistleblower policy providing direct and anonymous access to the Audit Committee Chair. BOARD MEMBERS Pat Priestner (Executive Chair), Steven Landry (Chief Executive Officer), and Tom Orysiuk (President), are members of both Management and the Board. The independent Board members of AutoCanada are detailed on the following page. 42 GORDON BAREFOOT Lead Director, Audit Committee Director since: 2009 Total Shares (units): 13,393 2015 Attendance: 100% 2015 Compensation: $125,462 Mr. Barefoot is the Executive Chairman of the Board of Corix Water Group and President of Cabgor Management Inc., a management consulting company. Previously he was Senior Vice-President and Chief Financial Officer of Terasen Inc., a natural gas distributor, and a retired partner of Ernst & Young LLP. He has a Bachelor of Commerce from the University of Manitoba, has been recognized a Fellow of the Chartered Accountants by the Chartered Professional Accountants of British Columbia, and also holds the ICD.D designation. MICHAEL ROSS Chair of the Governance and Compensation Committee Director since: 2009 Total Shares (units): 22,913 2015 Attendance: 100% 2015 Compensation: $117,000 Mr. Ross is a Board member of Fountain Tire, Camex Equipment Sales and Rentals Inc., Norseman Group Ltd., FYidoctors, G2 Integrated Solutions Holdings, LLC, Imagine Health Centres. He is President of M. H. Ross Management Ltd., a management consulting company. Previously he was a Founding Partner of Conroy Ross Partners, a business advisory company, and is a former partner of Ernst & Young LLP. He holds a Bachelor of Commerce from the University of Alberta and holds the CMA, CMC, CHRP and ICD.D designations. DENNIS DESROSIERS Governance and Compensation Committee Director since: 2009 Total Shares (units): 10,885 2015 Attendance: 100% 2015 Compensation: $100,000 Mr. DesRosiers has more than 40 years of experience in the automotive industry in Canada. He is the President of DesRosiers Automotive Consultants, Canada’s leading automotive sector consultants. He has a Bachelor of Arts in Economics from the University of Windsor and has been awarded the Queen Elizabeth II Diamond Jubilee Medal by the Governor General of Canada. BARRY JAMES Chair of the Audit Committee Governance and Compensation Committee Director since: 2014 Total Shares (units): 2,342 2015 Attendance: 100% 2015 Compensation: $114,684 Mr. James is a Board member and the Audit Committee Chair of Corus Entertainment and ATB Financial. He is also the Audit Committee Chair of the Government of the Province of Alberta, a Senator and Board member of the University of Alberta, and a Trustee of the University Hospital Foundation. He is President of Barry L. James Advisory Services Ltd., a private consulting firm. Previously Mr. James was a partner of PricewaterhouseCoopers LLP. He has a Bachelor of Commerce from the University of Alberta, has been recognized a Fellow of the Chartered Accountants by the Chartered Professional Accountants of Alberta, and also holds the ICD.D designation. MARYANN KELLER Audit Committee Director since: 2015 Total Shares (units): 1,808 2015 Attendance: 100% 2015 Compensation: $69,648 Ms. Keller joined the Board in 2015 with over 40 years of experience in the automotive industry. She is a Board member of DriveTime Automotive Group, a national dealership group in the USA, and Lee Auto Malls, a regional dealership group in Maine, USA, and is the Principal of Maryann Keller & Associates LLC, an automotive consultancy company. Previously she served on the Board of Directors of Sonic Automotive and Lithia Motors, public dealership groups in the USA. She has a Bachelor of Science from Rutgers University and a Master of Business Administration from Baruch College. 43 FIVE-YEAR FINANCIALS (In thousands of dollars, unless otherwise specified) 2015 2014 2013 2012 2011 INCOME STATEMENT DATA New Vehicles Used Vehicles 1,668,237 1,342,346 882,858 882,858 640,721 704,569 495,352 300,881 300,881 206,030 Parts, Service, & Collision Repair 387,614 255,707 142,343 142,343 110,465 Finance, Insurance, & Other 143,383 121,373 82,958 82,958 51,126 REVENUE 2,903,803 2,214,778 1,409,040 1,409,040 1,008,342 New Vehicles Used Vehicles 122,408 106,002 75,835 57,575 47,762 40,629 29,501 20,273 16,311 17,395 Parts, Service, & Collision Repair 193,868 128,566 73,755 59,643 57,699 Finance, Insurance, & Other 130,804 109,080 76,172 56,836 46,364 GROSS PROFIT 487,709 373,149 246,035 190,365 169,220 Gross Profit % Operating Expenses Operating Expenses as a % of Gross Profit Income From Investments in Associates Net Earnings Attributable to Autocanada Shareholders 16.8% 16.8% 17.5% 17.2% 16.80% 395,877 290,904 188,519 149,140 136,846 81.2% 78.0% 76.6% 78.3% 80.9% - 3,490 2,241 468 - 22,821 53,132 38,166 24,236 36,784 EBITDA1 89,838 89,434 58,469 37,885 29,070 SHARE INFORMATION Basic Earnings Per Share Diluted Earnings Per Share Adjusted Net Earnings Per Share $0.93 $0.92 $1.64 $2.31 $2.30 $2.24 $1.83 $1.83 $1.82 $1.22 $1.22 $1.22 $1.85 $1.85 $1.85 Basic Weighted Average Shares (Units) 24,574,022 23,018,588 20,868,726 19,840,802 19,880,930 Diluted Weighted Average Shares (Units) 24,674,083 23,139,403 20,934,828 19,840,802 19,880,930 Annual Dividend Rate Per Share $1.00 $0.94 $0.88 $0.72 $0.56 1“EBITDA” is earnings before interest expense (other than interest expense on floorplan financing and other interest), income taxes, depreciation, amortization and asset impairment charges 44 FIVE YEAR SHAREHOLDER RETURN PERFORMANCE GRAPH The Board recognizes that in a cyclical industry such as the retail automotive industry, AutoCanada’s focus is on long-term shareholder value growth. The following chart compares the cumulative total shareholder return, including the reinvestment of distributions, from January 1, 2011 to the end of the most recently completed financial year on December 31, 2015 for $100 invested in ACI Shares with the cumulative total return from the S&P/TSX Composite Index (Total Return). $ $ S&P/TSX Composite Index AutoCanada Inc. 978 950 100 100 137 91 328 98 111 122 518 112 2011 2011 2012 2013 2014 2015 PERFORMANCE GRAPH VALUES JAN 2011 DEC 2011 DEC 2012 DEC 2013 DEC 2014 DEC 2015 AutoCanada Inc. $100.00 $136.63 $327.68 $978.24 $949.61 $517.63 S&P/TSX Composite Index $100.00 $91.29 $97.85 $110.56 $122.23 $112.06 ACTUAL VALUES JAN 2011 DEC 2011 DEC 2012 DEC 2013 DEC 2014 DEC 2015 AutoCanada Inc. $4.70 $6.40 $15.35 $45.89 $44.50 $24.15 S&P/TSX Composite Index 13,443.22 11,955.09 12,433.53 13,621.55 14,632.44 13,009.95 45 MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the year ended December 31, 2015 (cid:2) Table of Contents 1. Reader Advisories 2. Our performance 3. Selected Annual Financial Information 4. Selected Quarterly Financial Information 5. Outlook 6. Market 7. Results of operations 8. Growth, acquisitions, relocations and real estate 9. Liquidity and capital resources M2 M3 M8 M9 M10 M12 M14 M25 M29 10. Business Combination Under Common Control M34 11. Outstanding shares 12. Dividends 13. Free cash flow 14. Critical accounting estimates and accounting policy developments 15. Disclosure controls and internal controls over financial reporting 16. Risk factors 17. Forward looking statements 18. Non-GAAP Measures M35 M35 M36 M39 M39 M40 M41 M44 1. READER ADVISORIES This Management’s Discussion & Analysis (“MD&A”) was prepared as of March 17, 2016 to assist readers in understanding AutoCanada Inc.’s (the “Company” or “AutoCanada”) consolidated financial performance for the year ended December 31, 2015 and significant trends that may affect AutoCanada’s future performance. The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and accompanying notes (the “Consolidated Financial Statements”) of AutoCanada as at and for the year ended December 31, 2015. Results are reported in Canadian dollars, unless otherwise stated. Certain dollars have been rounded to the nearest thousand dollars. References to notes are to the Notes of the Consolidated Financial Statements of the Company unless otherwise stated. To provide more meaningful information, this MD&A typically refers to the operating results for the three month period and the year ended December 31, 2015 of the Company, and compares these to the operating results of the Company for the three month period and the year ended December 31, 2014. Until July 11, 2014, the Company had investments in associates comprised of six General Motors dealerships and accounted for the investments utilizing the equity method, whereby the operating results of these investments were included in one line item on the statement of comprehensive income known as income from investments in associates. As a result, the Company did not incorporate the consolidated results of its investments in associates in its discussion and analysis prior to Q3 2014. On July 11, 2014, the Company completed a business combination under common control, resulting in the accounting consolidation of the results of its investments in associates using the predecessor values method. Management has provided comparative information and discussion of this business combination in “BUSINESS COMBINATION UNDER COMMON CONTROL.” This MD&A contains forward-looking statements. Please see the section “FORWARD-LOOKING STATEMENTS” for a discussion of the risks, uncertainties and assumptions used to develop our forward-looking information. This MD&A also makes reference to certain non-GAAP measures to assist users in assessing AutoCanada’s performance. Non-GAAP measures do not have any standard meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. These measures are identified and described under the section “NON-GAAP MEASURES.” Additional information regarding our Company, including our 2015 Annual Information Form, dated March 17, 2016, is available on SEDAR at www.sedar.com and our website www.autocan.ca. AutoCanada Š 2015 Annual Report Š Page M2 2. OUR PERFORMANCE Performance vs. the Prior Year 2015 has proven to be a challenging year for AutoCanada. AutoCanada’s higher sales and gross profit results in fiscal 2015 are a direct result of its acquisitions completed during the year. However, same store revenues and gross profit have decreased over the year. Due to the economic situation in Alberta, the Company has seen adverse changes to performance throughout 2015. Lower net earnings, same store sales and same store gross profits are a result of reduced economic activity, particularly in Western Canada. Management considers gross profit to be a key measure of overall corporate performance. Overall revenues can vary significantly year over year as a result of fluctuations in sales mix, fluctuations in lower margin fleet sales and used vehicle wholesale sales. As such, Management believes that gross profit is a key indicator of overall corporate performance. Gross profit increased in all revenue streams and overall gross profit increased by $114.6 million or 30.7% for the year ended December 31, 2015 when compared to the prior year. Gross profit increased due to increases across all four revenue streams as a result of 6 dealership acquisitions in 2015 as well as the impact of 17 acquisitions completed in 2014. However, same store gross profit decreased by $32.7 million or 11.7% for the year ended December 31, 2015 when compared to the prior year, which is due primarily to gross profit decreases in new vehicle retail, finance and insurance sales offset by increases in used vehicle retail. In light of the economic downturn experienced throughout the year, there has been a shift of consumers reducing purchases on new vehicles, and instead, purchasing used vehicles or bringing in their vehicles for servicing, evidenced by an increase in repair orders of 1.0% for same stores, 40.9% across all stores. Used vehicle same store gross profits increased by $0.5 million or 2.5% while gross profit margin has declined to 5.4% from 5.7% due to a change in consumer patterns. Due to the difficult economy, consumers who would typically purchase new vehicles are instead buying nearly-new used vehicles which have higher gross margin than the average used vehicle. Finance and insurance same store gross profit decreased by 15.2% while gross profit margin in this revenue stream stayed constant at 92.0% from 92.3% in the comparative period. The decline in finance and insurance gross profit, while significant, is less than the percentage decline in new vehicle retail sales and evidences the Company’s ability to retain this high margin business despite a challenging retail sales environment. The cause of the decrease in gross profit margin is due to consumers reducing their purchase of premium F&I products when buying a vehicle. Parts, service and collision same store gross profit decreased by 0.7% and gross profit margin decreased by 1.8% over the comparative period due a slight decrease in the average gross margin per repair order, offset by an increase in the number of repair orders completed in the year. The Company recorded a non-cash intangibles and goodwill impairment of $18.8 million, which is mainly attributable to lower activity in the Alberta stores due to economic downturn experienced in 2015, as previously mentioned. The Company has been focused on integrating the dealerships acquired in the prior year as well as dealerships acquired during the year. Due to the increase of acquisition activity over the past two years, integration of individual dealerships has been a main focus in ensuring the new dealerships implement policies and procedures, as well as best practises which we believe are main drivers in delivering long term shareholder value. Performance vs. the Canadian New Vehicle Market New vehicle same store gross profit decreased by $19.6 million or 23.4% and gross profit margin declined to 7.3% from 8.5%, as a result of tightening markets and lower achievement of sales volume incentives in certain stores. The Canadian automotive retail sector performed consistently with 2014. New light vehicle sales in Canada in the year ended December 31, 2015 were up 2.5% when compared to the same period in 2014 and surpassed 1.89 million in unit sales. Page M3 Š AutoCanada Š 2015 Annual Report Figures reported as new light vehicle sales in Canada include all types of vehicle sales, including retail, fleet and daily rentals, the breakout of which is not provided by manufacturers. The manufacturers do not publicly report retail sales by brand. Fleet and daily rental sales are not nearly as profitable as retail sales; hence, the Company’s strategy has been and continues to be focused on retail sales with the result that our dealerships do not fully participate in fleet and daily rental sales channels. Though Canadian automotive sales in 2015 were similar to 2014, the decrease in sales in the prairie provinces were offset by the increase in sales in British Columbia and Eastern Canada. Due to the economic downturn in 2015 as a result of crude oil prices negatively impacting consumer confidence, new vehicle sales in the prairie provinces decreased significantly, specifically in Alberta which decreased 12.0%, except for British Columbia which increased 6.9%. Unit sales in Alberta decreased 32,211 units. New light vehicle sales in Eastern Canada increased by 5.4%. The slowdown in the economy in the prairie provinces in 2015 hindered our ability to perform well in this market as our concentration of Alberta dealerships continued to hinder the Company’s new vehicle sales performance relative to the Canadian average change in light vehicle sales as reported by DesRosiers Automotive Consultants. It is unclear when the Alberta economy will improve and the outlook for the retail automotive industry in Alberta remains challenging. Management continues to work closely with its dealerships to ensure that they are adjusting their processes to best capitalize on all sales opportunities and is confident that progress is being made, with continued focus on non-same stores to improve margins throughout the integration period. The following table summarizes Canadian new light vehicle unit sales for the year ended December 31, 2015 by Province: 2015 Canadian New Vehicle Sales by Province1,2 British Columbia Alberta Saskatchewan Manitoba Ontario Quebec New Brunswick PEI Nova Scotia Newfoundland Total December Year to Date 2015 2014 207,163 236,208 53,793 55,820 760,521 444,557 43,288 7,906 54,352 34,877 193,798 268,419 56,467 55,916 718,523 420,757 41,417 7,418 53,441 35,217 Percent Change Unit Change 6.9% 13,365 (12.0)% (32,211) (4.7)% (2,674) (96) (0.2)% 5.8% 41,998 5.7% 23,800 1,871 4.5% 488 6.6% 911 1.7% (340) (1.0)% 1,898,485 1,851,373 2.5% 47,112 1 DesRosiers Automotive Consultants Inc. 2 Readers are cautioned that the above table includes sales channels that the Company does not fully participate in such as daily rentals. AutoCanada Š 2015 Annual Report Š Page M4 The following table summarizes the number of same stores for the year ended December 31, 2015 by Province: Number of Same Stores1 by Province Chrysler/FIAT Hyundai Volkswagen Nissan/Infiniti Audi Mitsubishi Subaru Total British Columbia Alberta Manitoba Ontario Atlantic Total 3 2 3 1 – – – 9 5 2 1 1 – 1 1 11 1 – 1 – 1 – – 3 – 2 – 1 – – – 3 2 – – – – – – 2 11 6 5 3 1 1 1 28 1 Same store means the franchised automobile dealership has been owned for at least 2 full years since acquisition. The dealership is then included in the quarter thereafter, for same store analysis. Same Store Revenue and Vehicles Sold Revenue Source (in thousands of dollars) December 31, 2015 December 31, 2014 % Change December 31, 2015 December 31, 2014 % Change For the Three Months Ended For the Year Ended 186,596 27,175 213,771 61,747 26,581 88,328 23,079 325,178 46,016 (21.0)% (37.6)% (23.1)% 16.4% (6.8)% 9.5% (22.1)% (14.2)% 2.6% 721,979 151,160 873,139 292,314 109,706 402,020 79,389 841,735 145,473 987,208 264,769 109,565 374,334 93,207 1,354,548 177,360 1,454,749 172,448 371,194 (12.1)% 1,531,908 1,627,197 5,092 976 2,702 8,770 7,794 (23.6)% (27.4)% (2.6)% (17.5)% (16.3)% 18,978 4,868 11,006 34,852 29,984 22,593 4,634 11,542 38,769 (10.1)% 34,135 (12.2)% (14.2)% 3.9% (11.6)% 10.4% 0.1% 7.4% (14.8)% (6.9)% 2.8% (5.9)% (16.0)% 5.0% (4.6)% New vehicles – Retail New vehicles – Fleet Total New vehicles Used vehicles – Retail Used vehicles – Wholesale Total Used vehicles Finance, insurance and other Subtotal Parts, service and collision repair Total New retail vehicles sold New fleet vehicles sold Used retail vehicles sold Total Total vehicles retailed 147,377 16,964 164,341 71,900 24,779 96,679 17,971 278,991 47,216 326,207 3,889 709 2,633 7,231 6,522 Page M5 Š AutoCanada Š 2015 Annual Report Same Store Gross Profit and Gross Profit Percentage Revenue Source (in thousands of dollars) December 31, 2015 For the Three Months Ended Gross Profit December 31, 2014 % Change Gross Profit % December 31, 2015 December 31, 2014 % Change New vehicles – Retail New vehicles – Fleet Total New vehicles Used vehicles – Retail Used vehicles – Wholesale Total Used vehicles Finance, insurance and other Subtotal Parts, service and collision repair Total 12,152 322 12,474 5,375 235 5,610 16,625 34,709 21,745 56,454 16,005 611 16,616 4,311 (29) 4,282 20,979 41,877 23,970 65,847 (24.1)% (47.3)% (24.9)% 24.7% 910.3% 31.0% (20.8)% (17.1)% (9.3)% (14.3)% 8.2% 1.9% 7.6% 7.5% 0.9% 5.8% 92.5% 12.4% 46.1% 17.3% 8.6% 2.2% 7.8% 7.0% (0.1)% 4.8% 90.9% 12.9% 52.1% 17.7% (0.4)% (0.3)% (0.2)% 0.5% 1.0% 1.0% 1.6% (0.5)% (6.0)% (0.4)% Revenue Source (in thousands of dollars) December 31, 2015 For the Year Ended Gross Profit December 31, 2014 % Change Gross Profit % December 31, 2015 December 31, 2014 % Change New vehicles – Retail New vehicles – Fleet Total New vehicles Used vehicles – Retail Used vehicles – Wholesale Total Used vehicles Finance, insurance and other Subtotal Parts, service and collision repair Total 63,035 1,045 64,080 21,170 631 21,801 73,017 158,898 88,821 247,719 82,187 1,475 83,662 20,264 1,003 21,267 86,055 190,984 89,451 (23.3)% (29.2)% (23.4)% 4.5% (37.1)% 2.5% (15.2)% (16.8)% (0.7)% 280,435 (11.7)% 8.7% 0.7% 7.3% 7.2% 0.6% 5.4% 92.0% 11.7% 50.1% 16.2% 9.8% 1.0% 8.5% 7.7% 0.9% 5.7% 92.3% 13.1% 51.9% 17.2% (1.1)% (0.3)% (1.2)% (0.5)% (0.3)% (0.3)% (0.3)% (1.4)% (1.8)% (1.0)% The following table summarizes same store total revenue for the three months period and year ended December 31, 2015 by Province: (in thousands of dollars) December 31, 2015 December 31, 2014 % Change December 31, 2015 December 31, 2014 % Change For the Three Months Ended For the Year Ended British Columbia Alberta Manitoba Ontario Atlantic Total 113,027 133,353 26,313 26,354 27,160 326,207 110,272 172,986 24,518 30,277 33,141 2.5% (22.9)% 7.3% (13.0)% (18.0)% 501,623 642,357 112,725 118,378 156,825 484,767 759,637 102,537 125,409 154,847 3.5% (15.4)% 9.9% (5.6)% 1.3% 371,194 (12.1)% 1,531,908 1,627,197 (5.9)% AutoCanada Š 2015 Annual Report Š Page M6 The following table summarizes same store gross profit for the three months and year ended December 31, 2015 by Province: (in thousands of dollars) December 31, 2015 December 31, 2014 % Change December 31, 2015 December 31, 2014 % Change For the Three Months Ended For the Year Ended British Columbia Alberta Manitoba Ontario Atlantic Total 20,326 19,393 6,615 4,328 5,792 56,454 20,407 31,734 5,067 3,335 5,304 (0.4)% (38.9)% 30.6% 29.8% 9.2% 65,847 (14.3)% 79,301 105,574 23,092 15,586 24,166 247,719 84,341 136,342 22,376 14,389 22,987 (6.0)% (22.6)% 3.2% 8.3% 5.1% 280,435 (11.7)% Page M7 Š AutoCanada Š 2015 Annual Report 3. SELECTED ANNUAL FINANCIAL INFORMATION The following table shows the results of the Company for the years ended December 31, 2015, December 31, 2014 and December 31, 2013. The results of operations for these years are not necessarily indicative of the results of operations to be expected in any given comparable period. (in thousands of dollars, except Gross Profit %, Earnings per share, and Operating Data) 2015 2014(1) 2013 Income Statement Data New vehicles Used vehicles Parts, service and collision repair Finance, insurance and other Revenue New vehicles Used vehicles Parts, service and collision repair Finance, insurance and other Gross profit Gross Profit % Operating expenses Operating expense as a % of gross profit Income from investments in associates Income from loan to associate Impairment (recovery) of intangible assets and goodwill Net earnings attributable to AutoCanada shareholders EBITDA attributable to AutoCanada shareholders(2) Basic earnings per share Diluted earnings per share Basic adjusted earnings per share Dividends declared per share Operating Data Vehicles (new and used) sold excluding GM Vehicles (new and used) sold including GM(3) New vehicles sold including GM(3) New retail vehicles sold New fleet vehicles sold Used retail vehicles sold Number of service & collision repair orders completed Absorption rate(2) # of dealerships at year end # of same store dealerships # of service bays at year end Same store revenue growth(4) Same store gross profit growth(4) Balance Sheet Data Cash and cash equivalents Trade and other receivables Inventories Revolving floorplan facilities 704,569 387,614 143,383 882,858 1,668,237 1,342,346 300,881 495,352 142,343 255,707 82,958 121,373 2,903,803 2,214,778 1,409,040 75,835 106,002 20,273 29,501 73,755 128,566 76,172 109,080 246,035 373,149 17.5% 16.8% 188,519 290,904 76.6% 78.0% 2,241 3,490 – – (746) (1,767) 38,166 53,132 58,469 89,434 1.83 2.31 1.83 2.30 1.82 2.24 0.88 0.94 122,408 40,629 193,868 130,804 487,709 16.8% 395,877 81.2% – 49 18,757 22,821 89,838 0.93 0.92 1.64 1.00 51,503 62,799 42,457 35,323 7,134 20,342 847,702 91% 54 28 912 (5.9)% (11.7)% 62,274 90,821 596,542 548,322 46,393 52,147 36,422 30,346 6,076 15,725 601,597 85% 48 23 822 8.9% 7.9% 72,462 92,138 563,277 527,780 35,774 40,136 28,024 20,523 4,876 10,375 364,361 87% 28 21 406 17.2% 17.5% 35,113 57,771 278,091 264,178 1 In conjunction with the business combination under common control completed on July 11, 2014, the Selected Annual Financial Information for 2014 includes the consolidated results of the Company’s GM stores from July 11, 2014. All 2014 financial information includes 100% of the results of the GM stores, except for Net earnings, EBITDA, and EPS amounts, which are presented net of non-controlling interests. Had the consolidation been effected for fiscal 2013, additional revenues of $205.6 million and gross profit of $33.1 million would have been recognized. EBITDA and absorption rate have been calculated as described under “NON-GAAP MEASURES”. 2 3 Until July 10, 2014, the Company had investments in General Motors dealerships that were not consolidated. In Q3 2014, these GM dealerships were consolidated. This number includes 100% of vehicles sold by these dealerships in which we have less than 100% investment. Same store revenue growth & same store gross profit growth is calculated using franchised automobile dealerships that we have owned for at least 2 full years, excluding the GM stores, as these stores have been treated as acquisitions as at July 11, 2014. 4 AutoCanada Š 2015 Annual Report Š Page M8 4. SELECTED QUARTERLY FINANCIAL INFORMATION The following table shows the unaudited results of the Company for each of the eight most recently completed quarters. The results of operations for these periods are not necessarily indicative of the results of operations to be expected in any given comparable period. (in thousands of dollars, except Gross Profit %, Earnings per share, and Operating Data) Q4 2015(1) Q3 2015(1) Q2 2015(1) Q1 2015(1) Q4 2014(1,6) Q3 2014(1) Q2 2014 Q1 2014 Income Statement Data New vehicles Used vehicles Parts, service and collision repair Finance, insurance and other Revenue New vehicles Used vehicles Parts, service and collision repair Finance, insurance and other Gross profit Gross Profit % Operating expenses Operating expenses as a % of gross profit Income from investments in associates Income from loan to associate Impairment (recovery) of intangible assets and goodwill Net (loss) earnings attributable to AutoCanada shareholders(5) EBITDA attributable to AutoCanada shareholders(2,5) Basic earnings per share Diluted earnings per share Basic adjusted earnings per share Operating Data Vehicles (new and used) sold excluding GM Vehicles (new and used) sold including GM(3) New vehicles sold including GM(3) New retail vehicles sold New fleet vehicles sold Used retail vehicles sold # of service and collision repair orders completed Absorption rate(2) # of dealerships at period end # of same store dealerships # of service bays at period end Same store revenue growth(4) Same store gross profit growth(4) Balance Sheet Data Cash and cash equivalents Trade receivables Inventories Revolving floorplan facilities 77,680 37,267 93,139 37,778 34,300 10,949 48,336 35,088 368,242 167,100 102,220 34,752 672,314 27,482 10,326 51,760 34,354 123,922 379,094 148,579 91,225 36,355 655,253 29,325 7,808 45,687 31,109 113,929 471,018 483,435 345,542 179,270 194,956 163,243 92,951 99,304 31,671 39,182 781,205 816,877 633,407 25,765 34,861 8,354 11,000 49,859 43,913 27,407 33,955 128,673 129,675 105,439 456,810 289,918 216,524 85,969 158,779 102,025 40,724 46,078 27,038 20,713 730,536 465,059 363,930 17,799 23,792 5,551 6,505 20,593 23,373 19,180 24,077 63,123 77,747 18.4% 16.5% 15.9% 16.6% 17.4% 16.2% 16.7% 17.3% 50,699 81.8% 78.4% 77.6% 88.4% 79.2% 76.6% 76.2% 80.3% 893 – – 8,296 14,453 0.38 0.38 0.40 – 49 18,757 (7,361) 23,353 (0.29) (0.29) 0.34 – – (1,767) 14,240 24,605 0.60 0.59 0.52 359 – – 17,765 28,674 0.74 0.74 0.71 – – – 13,523 27,397 0.56 0.56 0.56 – – – 11,690 26,379 0.48 0.47 0.51 2,238 – – 12,831 21,702 0.59 0.59 0.61 – – – 4,969 12,687 0.20 0.20 0.23 35,086 9,637 38,913 34,714 118,350 100,824 100,568 101,310 90,283 93,175 90,695 59,227 13,092 17,086 12,018 9,985 2,033 5,068 14,723 17,739 12,296 9,929 2,367 5,443 12,345 14,150 9,210 8,016 1,194 4,940 230,772 93% 54 28 912 11,343 13,824 8,933 7,393 1,540 4,891 202,692 215,142 199,096 85% 48 23 822 12,774 15,415 10,570 8,907 1,663 4,845 216,427 85% 48 23 822 (12.1)% (6.9)% (2.8)% (3.5)% 10.9% (14.3)% (14.1)% (11.0)% (8.5)% 14,966 18,079 12,821 10,686 2,135 5,258 198,612 93% 45 23 734 9,887 8,766 12,414 9,945 8,658 6,570 5,980 4,773 1,146 1,132 2,761 2,861 97,559 91,999 92% 85% 34 28 23 23 406 516 8.9% 4.1% 13.0% 5.7% 11.4% 5.4% 8.1% 91% 50 26 862 94% 49 24 842 62,274 90,821 596,542 548,322 77,071 66,351 77,676 118,853 124,683 104,753 581,258 620,837 625,779 550,857 607,694 601,432 72,462 92,138 563,277 527,780 41,541 91,622 64,559 115,074 69,747 85,837 471,664 324,077 261,764 437,935 313,752 261,263 1 In conjunction with the business combination under common control completed on July 11, 2014, the Selected Quarterly Financial Information for Q3 2014, Q4 2014, Q1 2015, Q2 2015, Q3 2015, and Q4 2015 includes the consolidated results of the Company’s GM stores from July 11, 2014. All Q3 2014, Q4 2014, Q1 2015, Q2 2015, Q3 2015, and Q4 2015 financial information includes 100% of the results of the GM stores, except for Net earnings, EBITDA, and EPS amounts, which are presented net of non-controlling interests. EBITDA and absorption rate have been calculated as described under “NON-GAAP MEASURES.” 2 3 Until July 10, 2014, the Company had investments in General Motors dealerships that were not consolidated. In Q3 2014, 4 5 these GM dealerships were consolidated. This number includes 100% of vehicles sold by these dealerships in which we have less than 100% investment. Same store revenue growth and same store gross profit growth is calculated using franchised automobile dealerships that we have owned for at least 2 full years, excluding the GM stores, as these stores have been treated as acquisitions as at July 11, 2014. The results from operations have been lower in the first and fourth quarters of each year, largely due to consumer purchasing patterns during the holiday season, inclement weather and the reduced number of business days during the holiday season. As a result, our financial performance is generally not as strong during the first and fourth quarters than during the other quarters of each fiscal year. The timing of acquisitions may have also caused significant fluctuations in operating results from quarter to quarter. 6 Data presented for Q4, 2014 has been amended subsequent to initial presentation to correct an immaterial clerical error which impacted the computation of Q4, 2014. The annual 2014 results are unchanged as previously presented. Page M9 Š AutoCanada Š 2015 Annual Report 5. OUTLOOK The outlook regarding new retail vehicle sales in Canada is difficult to predict as manufacturers do not publicly disclose fleet and rental sales separately. Total Canadian new light vehicle unit sales of all types are currently forecasted to increase by 0.1% in 2016 as compared to the prior year as follows: New Vehicle Sales Outlook by Province 1 1994 – 2005 (Average) 2006 – 2012 (Average) 2013 2014 2015 2016F Canada Atlantic Central Quebec Ontario West Manitoba Saskatchewan Alberta British Columbia 1,446 102 936 366 570 408 42 36 166 164 1,600 1,745 135 120 994 1,061 415 409 646 585 549 486 54 45 58 46 257 223 180 172 1,851 137 1,898 140 1,139 1,205 444 761 553 56 54 236 207 420 719 575 56 56 269 194 1,900 138 1,222 450 772 540 56 53 220 211 1 Includes cars and light trucks (units presented above are in thousands.) Source: Scotia Economics - Global Auto Report, January 27, 2016. The Canadian economy remains flat overall, with continued downward pressure on the Alberta economy, mitigated by growth in British Columbia and Ontario. Economic uncertainty is expected to continue to define 2016. Canadian unemployment has increased to 7.3%, with unemployment at 7.9% in Alberta and 5.9% in Saskatchewan. With increased unemployment, our customers in Alberta and Saskatchewan are experiencing greater challenges in obtaining consumer retail financing. Management believes that increased unemployment and continued crude oil price volatility has negatively impacted consumer confidence in Alberta and Saskatchewan and continues to challenge the auto retail sector. To mitigate these impacts, Management has set a five point strategy: First, the Company continues to seek regional diversity to acquisitions when possible. Management believes the Company remains well positioned to continue to patiently seek out and acquire quality acquisitions at reasonable multiples which will provide sustainable, long term shareholder value. integration has been effective. Due to the increase of acquisition activity over the past two years, integration of individual dealerships has been a main focus. Implementation of policies, procedures, and best practices are the key to successful integration and Management believes these are main drivers in delivering long term shareholder value. Third, the Company continues to manage the balance sheet. In 2015, the Company successfully negotiated an increase to its revolving credit facility by $50 million. As part of this process, the Company had renegotiated its covenants for this facility, which, together with the Company’s free cash flow from operations, provide the necessary flexibility to meet all capital requirements, and provide the base to continue to pursue attractive acquisitions at reasonable multiples. The Company also used the proceeds from the equity offering for repayment of debt which strengthened the balance sheet by improving leverage ratios. Fourth, to expedite the roll-out of certain marketing and sales process technologies to our dealerships to maximize all sales opportunities in a more challenging economic climate. Second, the Company has directed resources to increase integration efforts for the dealerships recently acquired, as well as actively monitoring the dealerships acquired in the prior year to ensure Fifth, to review all costs within the group and reduce or eliminate where possible. We are working with our dealer partners on a cost saving initiative target of $15 million in annualized AutoCanada Š 2015 Annual Report Š Page M10 operating cost reduction across the group. This goal has been communicated to the group as well as Head Office with expected timeline for meeting set targets throughout 2016. In regard to future growth, Management is pleased with the quality of potential acquisitions currently in the pipeline and expects to acquire additional dealerships in 2016. Effective April 1, 2016, Steven Landry shall be appointed Chief Executive Officer, and Tom Orysiuk shall continue as President. In addition, effective May 6, 2016, Pat Priestner shall assume the role of non-executive Chair of the Board of Directors, which he shall hold with a target retirement date at the Annual General Meeting in May 2017. Steven Landry was most recently the Chief Development Officer for ATCO Ltd & Canadian Utilities Limited in Calgary, and previously the Managing Director & Chief Operating Officer for ATCO Australia. Prior to that, Steven Landry spent 27 years at the Chrysler Group where he held various global and executive positions including: Chief Executive Officer and President of DaimlerChrysler Canada, President of Chrysler Europe and Executive Vice President of North America at Chrysler LLC. Steven holds an MBA from Michigan State University and a Bachelor’s Degree in Business from Saint Mary’s University in Halifax, Nova Scotia. Steve Rose, Chief Operating Officer, shall retire from his position effective October 1, 2016. Christopher Burrows, Chief Financial Officer and Erin Oor, Vice-President, Corporate Development & Administration, continue in their current positions. Page M11 Š AutoCanada Š 2015 Annual Report 6. MARKET The Company’s geographical profile is illustrated below by number of dealerships and revenues and gross profit by province for the years ended December 31, 2015 and December 31, 2014. Location of Dealerships Number of Franchises2 Number of Dealerships2 Revenue Revenue % of Total Gross Profit Gross Profit % of Total December 31, 2015 British Columbia Alberta Saskatchewan Manitoba Ontario Quebec Atlantic Total 13 27 4 4 8 4 2 62 11 558,717 24 1,270,901 246,477 181,265 156,680 333,990 155,773 54 2,903,803 4 4 7 2 2 19% 87,465 44% 222,806 47,239 33,706 22,580 50,869 23,044 100% 487,709 8% 7% 5% 12% 5% 18% 46% 10% 7% 5% 10% 4% 100% December 31, 20141 Location of Dealerships Number of Franchises2 Number of Dealerships2 Revenue Revenue % of Total Gross Profit Gross Profit % of Total British Columbia Alberta Saskatchewan Manitoba Ontario Quebec Atlantic Total 12 25 4 4 5 2 4 56 10 507,574 22 1,080,632 118,692 156,263 108,404 80,762 162,451 48 2,214,778 4 4 4 2 2 23% 86,473 49% 189,797 19,952 27,192 15,202 12,192 22,341 100% 373,149 5% 7% 5% 4% 7% 23% 51% 6% 7% 4% 3% 6% 100% 1 2 The results of six GM stores operated by the Company during Q3 2014 were not consolidated until July 11, 2014, as the stores were accounted for as investments in associates. Commencing July 11, 2014, General Motors dealerships have been consolidated for accounting purposes and have been included in the total number of dealerships at Q3 2014. “Dealerships” refers to each physical storefront while “Franchises” refers to each separate franchise agreement. The following table sets forth the dealerships that we currently own and operate and the date opened or acquired by the Company or its predecessors, organized by location. Location Wholly-Owned Dealerships: Operating Name Franchise Year Opened or Acquired Same Store1 Abbotsford, British Columbia Chilliwack, British Columbia Kelowna, British Columbia Maple Ridge, British Columbia Maple Ridge Chrysler Jeep Dodge Abbotsford Volkswagen Chilliwack Volkswagen Okanagan Chrysler Jeep Dodge FIAT FIAT / Chrysler Volkswagen Volkswagen FIAT Maple Ridge, British Columbia Maple Ridge Volkswagen Prince George, British Columbia Northland Chrysler Jeep Dodge Prince George, British Columbia Northland Hyundai Prince George, British Columbia Northland Nissan Victoria Hyundai Victoria, British Columbia Airdrie Chrysler Jeep Dodge Ram Airdrie, Alberta Courtesy Chrysler Dodge Calgary, Alberta Calgary Hyundai Calgary, Alberta Crowfoot Hyundai Calgary, Alberta Courtesy Mitsubishi Calgary, Alberta Northland Volkswagen Calgary, Alberta Fish Creek Nissan Calgary, Alberta FIAT / Chrysler Volkswagen Chrysler Hyundai Nissan Hyundai Chrysler Chrysler Hyundai Hyundai Mitsubishi Volkswagen Nissan 2011 2011 2003 Y Y Y Y Y Y Y Y Y 2005 2008 2002 2005 2007 2006 2015 Q3 2017 2013 2014 Q3 2016 2014 Q3 2016 2014 Q3 2016 2014 Q3 2016 2014 Q4 2016 Y AutoCanada Š 2015 Annual Report Š Page M12 Location Operating Name Franchise Year Opened or Acquired Same Store1 Calgary, Alberta Calgary, Alberta Edmonton, Alberta Edmonton, Alberta Edmonton, Alberta Grande Prairie, Alberta Grande Prairie, Alberta Grande Prairie, Alberta Grande Prairie, Alberta Grande Prairie, Alberta Grande Prairie, Alberta Ponoka, Alberta Sherwood Park, Alberta Saskatoon, Saskatchewan Winnipeg, Manitoba Winnipeg, Manitoba Winnipeg, Manitoba Cambridge, Ontario Mississauga, Ontario Newmarket, Ontario Toronto, Ontario Moncton, New Brunswick Dartmouth, Nova Scotia Equity Investments: Infiniti Chrysler Hyatt Infiniti Tower Chrysler Jeep Dodge Ram Crosstown Chrysler Jeep Dodge FIAT FIAT / Chrysler FIAT / Chrysler Capital Chrysler Jeep Dodge FIAT Kia North Edmonton Kia Grande Prairie Chrysler Jeep Dodge FIAT Grande Prairie Hyundai Grande Prairie Subaru Grande Prairie Mitsubishi Grande Prairie Nissan Grande Prairie Volkswagen Ponoka Chrysler Jeep Dodge Sherwood Park Hyundai Dodge City Chrysler Jeep Dodge Ram Audi Winnipeg St. James Volkswagen Eastern Chrysler Jeep Dodge Cambridge Hyundai 401 Dixie Hyundai Newmarket Infiniti Nissan2 Toronto Chrysler Jeep Dodge Ram Moncton Chrysler Jeep Dodge Dartmouth Chrysler Jeep Dodge Chrysler Audi Volkswagen Chrysler Hyundai Hyundai Nissan / Infiniti Chrysler Chrysler Chrysler FIAT / Chrysler Hyundai Subaru Mitsubishi Nissan Volkswagen Chrysler Hyundai 2014 Q4 2016 2014 Q4 2016 1994 2003 2014 Q4 2016 Y Y 1998 2005 1998 2007 2007 2013 1998 2006 Y Y Y Y Y Y Y Y Y Y Y Y Y Y 2014 Q3 2016 2013 2013 2013 2008 2008 2008 2014 Q1 2017 2001 2006 Y Y Island Chevrolet Buick GMC Don Folk Chevrolet Lakewood Chevrolet Sherwood Park Chevrolet Sherwood Buick GMC Grove Dodge Chrysler Jeep Duncan, British Columbia Kelowna, British Columbia Edmonton, Alberta Sherwood Park, Alberta Sherwood Park, Alberta Spruce Grove, Alberta North Battleford, Saskatchewan Bridges Chevrolet Buick GMC Mann-Northway Auto Source Prince Albert, Saskatchewan Saskatoon Motor Products Saskatoon, Saskatchewan McNaught Cadillac Buick GMC Winnipeg, Manitoba BMW Laval and MINI Laval Laval, Quebec BMW Canbec and MINI Mont Royal Montreal, Quebec Hunt Club Nissan Ottawa, Ontario 417 Nissan Ottawa, Ontario 417 Infiniti Ottawa, Ontario General Motors General Motors General Motors General Motors General Motors Chrysler General Motors General Motors General Motors General Motors BMW / MINI BMW / MINI Nissan Nissan Infiniti 2013 Q4 2016 2015 Q4 2017 2014 Q4 2016 2012 Q4 2016 2012 Q4 2016 2015 Q1 2018 2014 Q1 2017 2014 Q4 2016 2014 Q4 2016 2014 Q4 2016 2014 Q1 2017 2014 Q3 2016 2015 Q1 2018 2015 Q1 2018 2015 Q1 2018 Dealership Loan Financing: Whitby, Ontario Whitby Honda3 Honda 2015 N/A 1 Same store means the franchised automobile dealership has been owned for at least 2 full years since acquisition. The dealership is then included in the quarter thereafter, for same store analysis. 2 As at December 31, 2015, this dealership was owned and operated by the Company. On February 24, 2016 the Company sold this location to an undisclosed party. Refer to Note 37 of the annual consolidated Financial Statements for additional information. See “GROWTH, ACQUISITIONS, RELOCATIONS AND REAL ESTATE” for more information related to this dealership loan financing arrangement. 3 Seasonality The results from operations historically have been lower in the first and fourth quarters of each year, largely due to consumer purchasing patterns during the holiday season, inclement weather and the reduced number of business days during the holiday season. As a result, our operating results are generally not as strong during the first and fourth quarters than during the other quarters of each fiscal year. The timing of acquisitions and the common control business combination may have also caused substantial fluctuations in operating results from quarter to quarter. Page M13 Š AutoCanada Š 2015 Annual Report 7. RESULTS OF OPERATIONS Annual Operating Results EBITDA attributable to AutoCanada shareholders for the year ended December 31, 2015 remained flat at $89.8 million, from $89.4 million when compared to the results of the Company for the same period in the prior year. The change in EBITDA attributable to AutoCanada shareholders for the year can be mainly attributed to acquisitions completed during 2015, offset by the slowdown in activity due to tightening markets. Adjusted EBITDA attributable to AutoCanada shareholders for the year ended December 31, 2015 increased by $4.7 million or 5.3% from $89.2 million to $93.9 million when compared to the results of the Company for the prior year. The following table illustrates EBITDA and adjusted EBITDA attributable to AutoCanada shareholders for the last three years of operations. (in thousands of dollars) Period from January 1 to December 31 Net earnings attributable to AutoCanada shareholders Impairment (recovery) of intangible assets Income taxes Depreciation of property and equipment Interest on long-term indebtedness EBITDA attributable to AutoCanada shareholders1 Add back: Share-based compensation attributed to changes in share price Revaluation of redemption liabilities2 Unrealized gain on embedded derivative Adjusted EBITDA attributable to AutoCanada shareholders1 2015 2014 2013 22,821 53,132 38,166 (746) 18,126 (1,767) 16,171 17,162 13,696 6,346 17,863 13,072 1,007 7,835 14,857 89,838 89,434 58,469 (272) 4,329 (42) (291) – 18 727 – – 93,853 89,161 59,196 1 2 This financial measure is identified and defined under the section “NON-GAAP MEASURES.” Redemption liabilities relate to put options held by certain non-controlling interests and are measured at fair value. Adjustments to fair value are recognized as income or expense through profit and loss. Pre-tax earnings attributable to AutoCanada shareholders decreased by $31.3 million or 44.5% to $39.0 million for the year ended December 31, 2015 from $70.3 million in the prior year. Net earnings attributable to AutoCanada shareholders decreased by $30.3 million or 57.0% to $22.8 million in the year of 2015 from $53.1 million when compared to the prior year. Income tax expense attributable to AutoCanada shareholders decreased by $1.0 million to $16.2 million in the year of 2015 from $17.2 million in the same period of 2014. Adjusted earnings attributable to AutoCanada shareholders decreased by $11.4 million or 22.1% to $40.2 million in 2015 from $51.6 million in the prior year. AutoCanada Š 2015 Annual Report Š Page M14 The following table reconciles net earnings to adjusted net earnings for the years ended December 31: (in thousands of dollars) Net earnings attributable to AutoCanada shareholders Add back: Impairment (recovery) of intangible assets, net of tax Share-based compensation attributed to changes in share price, net of tax Revaluation of redemption liabilities2 Unrealized gain on embedded derivative Adjusted net earnings attributable to AutoCanada shareholders1 Weighted average number of shares - Basic Weighted average number of shares - Diluted Adjusted net earnings per share attributable to AutoCanada shareholders - Basic1 Adjusted net earnings per share attributable to AutoCanada shareholders - Diluted1 2015 22,821 13,286 (200) 4,329 (42) 40,194 2014 53,132 (1,310) (216) – 18 51,624 2013 38,166 (746) 540 – – 37,960 24,574,022 23,018,588 20,868,723 24,674,083 23,149,776 20,868,732 1.64 1.63 2.24 2.23 1.82 1.82 1 2 This financial measure is identified and defined under the section “NON-GAAP MEASURES.” Redemption liabilities relate to put options held by certain non-controlling interests and are measured at fair value. Adjustments to fair value are recognized as income or expense through profit and loss. Revenues Revenues for the year ended December 31, 2015 increased by $689.0 million or 31.1% compared to the prior year. This increase was driven by increases in all four revenue streams as a result of 6 dealership acquisitions in 2015 as well as the impact of 17 acquisitions completed in 2014. New vehicle sales for the year increased by $325.9 million or 24.3% compared to the prior year due to an increase in new vehicle sales of 6,035 units or 16.6% and an increase in the average revenue per new vehicle sold of $2,437 or 6.5%. Used vehicle sales for the year increased by $209.2 million or 42.2% compared to the prior year due to an increase in used vehicle sales of 4,617 units or 29.4% and an increase in the average revenue per new vehicle sold of $3,135 or 10.0%. Finance and insurance revenue for the year increased by $22.0 million or 18.1% compared to the prior year. Parts, service and collision repair revenue increased by $131.9 million or 51.6% compared to the prior year mainly due to an increase in overall repair orders completed of 246,105 and a $32 or 7.5% increase in the average revenue per repair order completed. new vehicle revenues decreased by $114.1 million or 11.6% for the year ended December 31, 2015 over the same period in the prior year due to a decrease in new vehicle sales of 3,381 units or 12.4% offset by an increase in the average revenue per new vehicle sold of $357 or 1.0%. For the year ended December 31, 2015, used vehicle revenues increased by $27.7 million or 7.4% due to an increase in the average revenue per used vehicle sold of $4,095 or 12.6% offset by a decrease in used vehicle sales of 536 units or 4.6%. For the year ended December 31, 2015, same store finance, insurance and other revenue decreased by $13.8 million or 14.8% over the same period in 2014 mainly due to a decrease in the number of new and used vehicles retailed of 4,151 units offset by an increase in the average revenue per unit retailed of $17 or 0.6%. For the year ended December 31, 2015, parts, service and collision repair revenue increased by $4.9 million or 2.8%, mainly due to an increase in overall repair orders completed of 3,990 and a $8 or 1.9% increase in the average revenue per repair order completed. Gross Profit Revenues - Same Store Analysis Same store revenues decreased by $95.3 million or 5.9% in the year ended December 31, 2015 when compared to the same period in 2014. Same store Gross profit increased by $114.6 million or 30.7% for the year ended December 31, 2015 when compared to the prior year. As with revenues, gross profit increased due to increases across all four revenue streams as a result of 6 dealership acquisitions in Page M15 Š AutoCanada Š 2015 Annual Report 2015 as well as the impact of 17 acquisitions completed in 2014. Gross profit on the sale of new vehicles increased by $16.4 million or 15.5% for the year ended December 31, 2015 compared to the prior year which can be mainly attributed to an increase in new vehicle sales of 6,035 units or 16.6% offset by a decrease in the average gross profit per new vehicle sold of $121 or 6.5%. Used vehicle sales gross profit for the year ended December 31, 2015 increased by $11.1 million or 37.7% compared to the prior year which was mainly due to an increase in the average gross profit per vehicle retailed of $27 or 0.9% and an increase in the number of used vehicles retailed of 4,617 units. Finance and insurance gross profit increased by $21.7 million or 19.9% during the year ended December 31, 2015 compared to the prior year. Parts, service and collision repair gross profit increased by $65.3 million or 50.8% during the year ended December 31, 2015 compared to the prior year which can be mainly attributed to a decrease in the average gross profit per repair order completed of $15 or 7.0% offset by an increase in the number of repair orders completed of 246,105. Gross Profit - Same Store Analysis Same store gross profit decreased by 32.7 million or 11.7% for the year ended December 31, 2015 when compared to the prior year. For the year ended December 31, 2015, new vehicle gross profit decreased by $19.6 million or 23.4% which can be mainly attributed to a decrease in new vehicle sales of 3,381 units or 12.4% and a decrease in the average gross profit per new vehicle sold of $386 or 12.6%. For the year ended December 31, 2015, same store used vehicle gross profits increased by $0.5 million or 2.5% which was mainly due to an increase in the average gross profit per vehicle retailed of $138 or 7.5% offset by a decrease in the number of vehicles retailed of 536 units. For the year ended December 31, 2015, finance and insurance gross profit decreased by $13.0 million or 15.2% mainly attributed to a decrease in units retailed of 4,151 offset by an increase in the average gross profit per unit sold of $46 or 2.7%. For the year ended December 31, 2015, parts, service and collision repair gross profit decreased by $0.6 million or 0.7% which can be mainly attributed to a decrease in the average gross profit per repair order completed of $4 or 1.8% offset by an increase in the number of repair orders completed of 3,990. Operating expenses Operating expenses consist of four major categories: employee costs, selling and administrative costs, facility lease costs and depreciation of property and equipment. A significant portion of the Company’s operating costs are employee costs which are largely variable in nature. There is a balance between reducing staffing levels as a result of business contraction, and maintaining high-performing staff. Due to the competitive nature of the retail automotive industry, additional measures are employed to ensure that the high-performing staff are maintained during down-times, as a result any decrease in gross profit may not be met with a matched decrease in operating expenses. The Company operates a centralized marketing department and information technology department, both of which provide services to the dealerships in order to leverage the size of the group as a means to lower the operating costs of the dealerships. AutoCanada Š 2015 Annual Report Š Page M16 The following tables summarize operating expenses as a percentage of gross profit for the years ended December 31. When evaluated, operating expenses are broken into their fixed and variable components. Fixed expenses are costs that do not fluctuate with changes in sales volume while variable expenses are costs that vary depending on sales volume. Employee costs Administrative costs – Variable Total variable expenses Administrative Costs – Fixed Facility lease costs Depreciation of property and equipment Total fixed expenses Total operating expenses Year ended December 31, 2015 Year ended December 31, 2014 Change 50.4% 17.9% 68.3% 4.5% 4.5% 3.9% 12.9% 81.2% 49.9% 16.9% 66.8% 3.8% 3.7% 3.7% 11.2% 78.0% 0.5% 1.0% 1.5% 0.7% 0.8% 0.2% 1.7% 3.2% Operating expenses increased by 36.1% or $105.0 million during the year ended December 31, 2015 as compared to the prior year. Since many operating expenses are variable in nature, management considers operating expenses as a percentage of gross profit to be a good indicator of expense control. $245.7 million from $186.2 million in the prior year. Employee costs as a percentage of gross profit increased to 50.4% in 2015 from 49.9% in 2014. Our dealership employee pay structures are tied to meeting sales objectives, maintaining customer satisfaction indices, as well as improving gross profit and net income. The increase in the fixed portion of operating expenses is due to the growth of the Company since the fourth quarter of 2014, resulting in an increase in facility lease costs, depreciation of property and equipment, and the fixed portion of administrative costs. While the fixed costs would typically remain steady as a percentage of gross profit, the slowdown in the economy in the current year has caused this to rise. As the economy, and gross profit, improves, the fixed costs as a percentage of gross profit will also improve. For the year ended December 31, 2015, operating expenses as a percentage of gross profit increased to 81.2% in 2015 from 78.0% in the prior year. This increase is driven by the slowdown of the economy during the year and the time lag in the corresponding reduction of operating costs. We are currently working on realigning the operating costs with gross profit and expect improvement of gross profit in 2016. Employee costs During the year ended December 31, 2015, employee costs increased by $59.5 million to Page M17 Š AutoCanada Š 2015 Annual Report Administrative costs During the year ended December 31, 2015, selling and administrative costs increased by $32.1 million or 41.5% to $109.6 million from $77.5 million, primarily due to the 6 dealership acquisitions completed in 2015 as well as the impact of 17 acquisitions completed in 2014. Selling and administrative expenses as a percentage of gross profit increased to 22.4% from 20.7% in the same period of the prior year. During the year ended December 31, 2015, the Company incurred $0.5 million related to acquisitions compared to $1.4 million for the same period in 2014. These costs will vary based on the number of acquisitions completed each period. Facility lease costs During the year ended December 31, 2015, facility lease costs increased by 59.2% to $21.7 million from $13.6 million, primarily due to the 6 dealership acquisitions completed in 2015 as well as the impact of 17 acquisitions completed in 2014. Depreciation of property and equipment During the year ended December 31, 2015, depreciation of property and equipment increased by 38.4% to $18.9 million from $13.6 million, primarily due to the 6 dealership acquisitions completed in 2015 as well as the impact of 17 acquisitions completed in 2014. Impairment of intangible assets and goodwill The Company has a number of franchise agreements for its individual dealerships which it classifies as intangible assets. These intangible assets are tested for impairment at least annually as they are considered to be indefinite-lived intangible assets. The Company performed its annual test for impairment of its cash generating units (“CGUs”) in the fourth quarter of 2015. As a result of the tests performed, the Company recorded a net impairment of intangible assets and goodwill in the amount of $18.8 million (2014 - $1.8 million recovery). Of total net impairment, $10.6 million was related to intangible assets impairment and $8.2 million was related to goodwill impairment. Under IFRS, previously recognized impairment charges, with the exception of impairment charges related to goodwill, may potentially be reversed if the circumstances causing the impairment have improved or are no longer present. If such circumstances change, a new recoverable amount should be calculated and all or part of the impairment charge should be reversed to the extent the recoverable amount exceeds carrying value. Dealership Divestiture On December 19, 2015, the Company entered into an agreement to sell substantially all of the operating and fixed assets of Newmarket Infiniti Nissan located in Newmarket Ontario. Management made the decision to divest of this dealership due to weak performance of the dealership combined with a planned re-focus of capital resources from Newmarket, Ontario to Ottawa, Ontario. On February 25, 2016, the Company sold the operating and fixed assets of Newmarket Infiniti Nissan for net cash proceeds of $11,262 resulted in a pre-tax gain on divestiture of $4,359. Further details of the break-down of the transaction is disclosed in Note 37 of the annual consolidated financial statements for the year ended December 31, 2015. Income Taxes Income tax expense for the year ended December 31, 2015 decreased by $0.5 million to $17.8 million from $18.3 million in 2014. The Company recorded deferred tax recovery of $1.5 million (2014 - $3.3 million recovery) as a result of temporary differences between the tax basis and carrying value of these assets. The increase in the effective tax rate is due in part to the 2% increase in corporate income tax rates for the province of Alberta from 10% to 12%. All deferred income tax balances within the province of Alberta are calculated using the increased rate, as the reversal of the underlying temporary differences will reverse at this rate. The impact of this adjustment has increased the effective tax rate by 4.29%. Impairment of intangible assets and goodwill cause an additional impact on the increase in effective tax rate. The impairment of these assets are non-tax deductible expenses, causing a variance between net income for tax purposes and net income as reported on the Consolidated Statement of Financial Position. The impact of non-tax deductible impairment has increased the effective tax rate by 5.87%. The change in the Alberta tax rate has negatively impacted basic earnings per share for the year ended December 31, 2015, by $0.01 from $0.94 to $0.93 and the diluted earnings per share by $0.01 from $0.93 to $0.92. Until December 31, 2009, our previous trust structure was such that current income taxes were passed on to our unitholders. In conjunction with our conversion from a trust to a corporation, the Company became subject to normal corporate tax rates starting in 2010. The corporate income tax rate applicable to 2010 was approximately 29.0%; however, we did not pay any corporate income tax in 2010 due to the tax deductions available to us and the effect of the deferral of our partnership income. In December 2011, legislation was passed implementing tax measures outlined in the 2011 budget (Bill C-13), which included the elimination of the ability of a corporation to defer income as a result of timing differences in the year-end of the corporation and of any partnership of which it is a partner, subject to transitional relief over five years. AutoCanada Š 2015 Annual Report Š Page M18 Although the amounts below can change based on our future taxable income, the Company estimates the following amounts to be recorded as current income tax payable over the next two years in conjunction with the payment of the deferral. The Company notes that these amounts paid will be in addition to the normal current income tax payable of future years: (in thousands of dollars) Increase to current tax payable 2016 2017 1,366 1,707 The Company expects income tax to have a more significant effect on our free cash flow and adjusted free cash flow as the Company will now be required to pay current income taxes, as well as, income tax installments for the anticipated current tax expense for the fiscal year. Prior to 2012, the Company had not paid any corporate tax or installments for corporate tax. The payment of cash taxes will have an impact on adjusted free cash flow. Investors are cautioned that income taxes will have a more significant effect on the Company’s cash flow in the future, and as a result, prior year levels of adjusted free cash flow will inherently be lowered by cash taxes in the future. Finance costs The Company incurs finance costs on its revolving floorplan facilities, long term indebtedness and banking arrangements. Additionally, the Company incurs finance expense as a result of the revaluation of redemption liabilities, contingent consideration and embedded derivative. During the year ended December 31, 2015, finance costs on our revolving floorplan facilities increased by 25.9% to $13.2 million from $10.5 million in 2014 and finance costs on long term indebtedness increased by $7.1 million or 88.9%, to $14.9 million from $7.9 over the prior year. The increase to finance costs are mainly attributable to the 6 dealership acquisitions completed in 2015 as well as the impact of 17 acquisitions completed in 2014. Redemption liabilities relate to put options held by certain non-controlling shareholder interests (excluding Mr. Patrick Priestner) and are measured at fair value. The fair value of the liabilities are based on predefined formulas included in the universal shareholder agreements as executed at the time of acquisition. The fair value of the redemption liabilities are revalued at each reporting date. The redemption liabilities only become payable in the event the non-controlling shareholder exercises their put option, wherein the Company is required to acquire the non-controlling shareholder’s interest. During the year ended December 31, 2015, the net income of certain dealerships exceeded their annual income from the prior year, resulting in an increase in the cumulative net income for the purposes of revaluing the redemption liabilities. Consequently, a $4,329 increase to the fair value was recorded on the balance sheet with a corresponding expense charged to financing costs in 2015. Some of our manufacturers provide non-refundable credits on the finance costs for our revolving floorplan facilities to offset the dealership’s cost of inventory that, on average, effectively provide the dealerships with interest-free floorplan financing for the first 45 to 60 days of ownership of each financed vehicle. During the year ended December 31, 2015, the floorplan credits earned were $14,853 (2014 - $12,246). Accounting standards require the floorplan credits to be accounted for as a reduction in the cost of new vehicle inventory and subsequently a reduction in the cost of sales as vehicles are sold. The following table summarizes the net floorplan credits that were received in 2015. (in thousands of dollars) Net floorplan credits Q1 2015 Q2 2015 Q3 2015 Q4 2015 For the year ended December 31, 2015 3,305 4,301 3,640 3,607 14,853 Page M19 Š AutoCanada Š 2015 Annual Report Management believes that a comparison of floorplan financing costs to floorplan credits can be used to evaluate the efficiency of our new vehicle sales relative to stocking levels. The following table details the carrying cost of vehicles based on floorplan interest net of floorplan assistance earned: (in thousands of dollars) Floorplan financing Floorplan credits earned Net carrying cost of vehicle inventory For the Year Ended December 31, 2015 December 31, 2014 13,160 (14,853) (1,693) 10,452 (12,246) (1,794) Fourth Quarter Operating Results EBITDA attributable to AutoCanada shareholders for the three month period ended December 31, 2015 decreased by $1.2 million or 5.1% to $23.4 million, from $24.6 million when compared to the results of the Company for the same period in the prior year. The decrease in EBITDA attributable to AutoCanada shareholders for the quarter can be mainly attributed to tightening markets and lower achievement of sales volume incentives in certain stores. Adjusted EBITDA attributable to AutoCanada shareholders for the three month period ended December 31, 2015 increased by $1.7 million or 7.1% from $24.2 million to $25.9 million when compared to the results of the Company for the same quarter in the prior year. The following table illustrates EBITDA and adjusted EBITDA attributable to AutoCanada shareholders for the three months period ended December 31, for the last three years of operations: (in thousands of dollars) Period from October 1 to December 31 Net earnings attributable to AutoCanada shareholders Impairment (recovery) of intangible assets Income taxes Depreciation of property and equipment Interest on long-term indebtedness EBITDA attributable to AutoCanada shareholders1 Add back: Share-based compensation attributed to changes in share price Revaluation of redemption liabilities2 Unrealized gain on embedded derivative Adjusted EBITDA attributable to AutoCanada shareholders1 2015 2014 2013 9,553 (7,361) 14,240 (746) 18,126 (1,767) 3,490 4,998 2,069 4,179 388 2,995 23,353 24,605 14,754 3,474 4,866 4,248 (30) 2,566 (8) 248 – – 25,881 24,155 15,002 (447) – (3) 1 2 This financial measure is identified and defined under the section “NON-GAAP MEASURES.” Redemption liabilities relate to put options held by certain non-controlling interests and are measured at fair value. Adjustments to fair value are recognized as income or expense through profit and loss. Pre-tax earnings (loss) attributable to AutoCanada shareholders decreased by $23.1 million or 120.3% to ($3.9) million for the three month period ended December 31, 2015 from $19.2 million in the same period of the prior year. Net earnings (loss) attributable to AutoCanada shareholders decreased by $21.6 million or 152.1% to ($7.4) million in the fourth quarter of 2015 from a $14.2 million when compared to the prior year. Income tax expense attributable to AutoCanada shareholders decreased by $1.5 million to $3.5 million in the fourth quarter of 2015 from $5.0 million in the same period of 2014. Adjusted net earnings attributable to AutoCanada shareholders decreased by $4.1 million or 32.5% to $8.5 million in 2015 from $12.6 million in the same period of 2014. AutoCanada Š 2015 Annual Report Š PageM20 The following table reconciles net earnings to adjusted net earnings for the quarters ended December 31: (in thousands of dollars) Net earnings attributable to AutoCanada shareholders Add back: Impairment (recovery) of intangible assets, net of tax Share-based compensation attributed to changes in share price, net of tax Revaluation of redemption liabilities2 Unrealized gain on embedded derivative Adjusted net earnings attributable to AutoCanada shareholders1 2015 (7,361) 13,286 (22) 2,566 (8) 8,461 2014 14,240 (1,310) (332) – (3) 12,595 2013 9,553 (746) 184 – – 8,991 Weighted average number of shares - Basic Weighted average number of shares - Diluted 25,016,637 24,410,169 21,638,433 25,110,033 25,190,000 21,638,433 Adjusted net earnings per share attributable to AutoCanada shareholders - Basic1 Adjusted net earnings per share attributable to AutoCanada shareholders - Diluted1 0.34 0.34 0.52 0.50 0.42 0.42 1 2 This financial measure is identified and defined under the section “NON-GAAP MEASURES.” Redemption liabilities relate to put options held by certain non-controlling interests and are measured at fair value. Adjustments to fair value are recognized as income or expense through profit and loss. million or 23.1% for the fourth quarter of 2015 over the prior year due to a decrease in new vehicle sales of 1,470 units or 24.2% offset by an increase in the average revenue per new vehicle sold of $513 or 1.5%. Same store used vehicle revenues increased by $8.4 million or 9.5% for the three month period ended December 31, 2015 over the same period in the prior year due to increase in the average revenue per used vehicle sold of $4,028 or 12.3% offset by decrease in used vehicle sales of 69 units or 2.6%. Same store finance, insurance and other revenue decreased by $5.1 million or 22.1% for the three month period ended December 31, 2015 over the same period in 2014. This was due to increase in the average revenue per unit retailed of $198 or 6.7% and decrease in the number of new and used vehicles retailed, that had finance and insurance related products, of 1,272 units. Same store parts, service and collision repair revenue increased by $1.2 million or 2.6% for the fourth quarter of 2015 compared to the prior period and was primarily a result of increase in overall repair orders completed of 2,775 and a $4 or 0.9% decrease in the average revenue per repair order completed. Revenues Revenues for the three month period ended December 31, 2015 increased by $17.1 million or 2.6% compared to the same period of the prior year. This increase was driven by increases in two revenue streams as a result of 6 dealership acquisitions since the fourth quarter of 2014. New vehicle sales decreased by $10.9 million or 2.9% for the three month period ended December 31, 2015 to $368.2 million from $379.1 million in the same period of the prior year. Used vehicle sales increased by $18.5 million or 12.5% for the three month period ended December 31, 2015 compared to the same period of the prior year. Finance and insurance revenue decreased by $1.6 million or 4.4% for the three month period ended December 31, 2015 compared to the same period of the prior year. Parts, service and collision repair revenue increased by $11.0 million or 12.1% for the three month period ended December 31, 2015 compared to the same period of the prior year. Revenues - Same Store Analysis Same store revenue decreased by $45.0 million or 12.1% in the three month ended December 31, 2015 when compared to the same period in 2014. Same store new vehicle revenues decreased by $49.4 Page M21 Š AutoCanada Š 2015 Annual Report Gross Profit Gross Profit - Same Store Analysis Gross profit increased by $10.0 million, or 8.8% for the three month period ended December 31, 2015 compared to the same period in the prior year. Gross profit increased due to increases across three revenue streams as a result of 6 dealership acquisitions since the fourth quarter of 2014. Gross profit on the sale of new vehicles decreased by $1.8 million or 6.3% for the three month period ended December 31, 2015 compared to the same period in the prior year. The decrease in new vehicle gross profit can be attributed to a decrease in the number of new vehicles sold of 1,360 or 12.9% offset by an increase in the average gross profit per new vehicle sold of $210 or 7.6%. Used vehicle gross profit increased by $2.5 million or 32.3% for the three month period ended December 31, 2015 compared to the same period in the prior year due to an increase in the average gross profit per used vehicle retailed of $479 or 29.7% and an increase in the number of used vehicles sold of 95 units. Finance and insurance gross profit increased by $3.2 million or 10.6% during the fourth quarter of 2015. This increase can be mainly attributed to the increase in average gross profit per unit sold of $241 or 9.8%. Parts, service and collision repair gross profit increased by $6.1 million or 13.3% in the fourth quarter of 2015 as a result of increase in the number of repair orders completed of 14,345 offset by a decrease in the average gross profit per repair order completed of $13 or 6.2%. Same store gross profit decreased by $9.4 million or 14.3% for the three month period ended December 31, 2015 compared to the same period in the prior year. New vehicle gross profit decreased by $4.1 million or 24.9% in the three month period ended December 31, 2015 when compared to the same period in the prior year as a result of decrease in new vehicle sales of 1,470 units or 24.2% and decrease in the average gross profit per new vehicle sold of $25 or 0.9%. Used vehicle gross profit increased by $1.3 million or 31.0% in the three month period ended December 31, 2015 compared to the same period in the prior year. This was due to an increase in the average gross profit per used vehicle retailed of $546 or 34.5% offset by decrease in the number of used vehicles sold of 69 units. Parts, service and collision repair gross profit decreased by $2.2 million or 9.3% in the three month period ended December 31, 2015 when compared to the same period in the prior year as a result of increase in the number of repair orders completed of 2,775 offset by a decrease in the average gross profit per repair order completed of $26 or 11.5%. Finance and insurance gross profit decreased by $4.4 million or 20.8% in the three month period ended December 31, 2015 when compared to the prior year as a result of increase in the average gross profit per unit sold of $403 and a decrease in units retailed that had finance and insurance related products of 1,272. Operating expenses The following tables summarize operating expenses as a percentage of gross profit for the years ended December 31. When evaluated, operating expenses are broken into their fixed and variable components. Fixed expenses are costs that do not fluctuate with changes in sales volume while variable expenses are costs that vary depending on sales volume. Employee costs Administrative costs – Variable Total variable expenses Administrative Costs – Fixed Facility lease costs Depreciation of property and equipment Total fixed expenses Total operating expenses Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q4 2014 Change 54.9% 19.5% 74.4% 5.3% 4.8% 3.9% 14.0% 88.4% 49.3% 16.9% 66.2% 4.1% 3.9% 3.4% 11.4% 77.6% 48.7% 16.8% 65.5% 4.8% 4.2% 3.9% 12.9% 78.4% 49.4% 18.8% 68.2% 4.3% 5.0% 4.3% 13.6% 81.8% 48.7% 18.4% 67.1% 4.3% 4.0% 3.8% 12.1% 79.2% 0.7% 0.4% 1.1% —% 1.0% 0.5% 1.5% 2.6% AutoCanada Š 2015 Annual Report Š Page M22 Operating expenses increased by $11.0 million or 12.2%, to $101.3 million from $90.3 million during the three month period ended December 31, 2015 compared to the same period in the prior year. Operating expenses as a percentage of gross profit increased to 81.8% in the fourth quarter of 2015 from 79.2% in the same period of the prior year. This increase is driven by the slowdown of the economy during the fourth quarter and the time lag in the corresponding reduction of operating costs. Employee costs During the three month period ended December 31, 2015, employee costs increased by $4.0 million or 7.0%, to $60.8 million from $56.8 million in the prior year period. Employee costs as a percentage of gross profit stayed consistent compared to the same period of the prior year. Employee costs as a percentage of gross profit for the three month period ended December 31, 2015 decreased to 49.1% from 49.9% for the same period in the prior year. Our dealership employee pay structures are tied to meeting sales objectives, maintaining customer satisfaction indices, as well as improving gross profit and net income. Administrative costs During the three month period ended December 31, 2015, administrative costs increased by $4.2 million or 13.9%, to $34.4 million from $30.2 million primarily due to 6 dealership acquisitions since the fourth quarter of 2014. Administrative expenses as a percentage of gross profit increased to 27.7% in the fourth quarter of 2015 from 26.5% in the comparable period of 2014. During the three month period ended December 31, 2015, the Company incurred $0.2 million related to acquisitions compared to $0.4 million for the same period in 2014. These costs will vary based on the number of acquisitions completed each period. Facility lease costs During the three month period ended December 31, 2015, facility lease costs increased by $1.0 million or 22.0%, from $4.7 million to $5.7 million primarily due to 6 dealership acquisitions since the fourth quarter of 2014. Facility lease costs are 4.6% of gross profit for the three month period from 4.1% in the comparable period of 2014. Depreciation of property and equipment During the three month period ended December 31, 2015, depreciation of property and equipment increased by $0.7 million or 14.6%, to $5.2 million from $4.5 million primarily due to 6 dealership acquisitions since the fourth quarter of 2014. Depreciation expense makes up 4.2% of gross profit for the three month period from 4.0% in the comparable period of 2014. Income Taxes Income tax expense for the three month period ended December 31, 2015 decreased by $1.7 million to $3.3 million from $5.0 million in 2014. During the fourth quarter of 2015, the Company paid $11.0 million of cash taxes which relates to installments toward the 2015 taxation year. The payment of cash taxes will have an impact on adjusted free cash flow. Finance costs The Company incurs finance costs on its revolving floorplan facilities, long term indebtedness and banking arrangements. During the three month period ended December 31, 2015, finance costs on our revolving floorplan facilities decreased by 17.1% to $2.9 million from $3.5 million in the fourth quarter of 2014, and finance costs on long term indebtedness increased by $1.3 million or 46.0%, to $4.3 million from $2.9 million in the fourth quarter of 2015. The increase to finance costs is mainly attributable to the 6 dealership acquisitions since the fourth quarter of 2014. During the three months ended December 31, 2015, the net income of certain dealerships exceeded their quarterly net income from the comparative quarter, resulting in an increase in the cumulative net income for the purposes of revaluing the redemption liabilities. Consequently, a $2,566 increase to the fair value was recorded on the balance sheet with a corresponding expense charged to financing costs in the fourth quarter. Page M23 Š AutoCanada Š 2015 Annual Report Some of our manufacturers provide non-refundable credits on the finance costs for our revolving floorplan facilities to offset the dealership’s cost of inventory that, on average, effectively provide the dealerships with interest-free floorplan financing for the first 45 to 60 days of ownership of each financed vehicle. During the three month period ended December 31, 2015, the floorplan credits earned were $3,607 (2014 - $3,858) Accounting standards require the floorplan credits to be accounted for as a reduction in the cost of new vehicle inventory and subsequently a reduction in the cost of sales as vehicles are sold. Management believes that a comparison of floorplan financing costs to floorplan credits can be used to evaluate the efficiency of our new vehicle sales relative to stocking levels. The following table details the carrying cost of vehicles based on floorplan interest net of floorplan assistance earned: (in thousands of dollars) Floorplan financing Floorplan credits earned Net carrying cost of vehicle inventory For the Three Months Ended December 31, 2015 December 31, 2014 2,939 (3,607) (668) 3,293 (3,858) (565) AutoCanada Š 2015 Annual Report Š Page M24 8. GROWTH, ACQUISITIONS, RELOCATIONS AND REAL ESTATE At December 31, 2015, the Company operated 54 automotive dealerships (62 franchises) comprised of 39 dealerships (45 franchises) which are wholly owned, as well as investments in nine General Motors dealerships (nine franchises), two BMW dealerships (four franchises), one Chrysler dealership (one franchise), and three Nissan dealerships (three franchises), which the Company controls and consolidates for accounting purposes. Growth The Company has acquired 6 dealerships (6 franchises) in 2015. Acquisitions completed during the year are as follows: Airdrie Chrysler On May 11, 2015, the Company purchased substantially all of the operating and fixed assets of North Hill Motors (1975) Ltd. (“Airdrie Chrysler”), in Airdrie, Alberta, for total cash consideration of $21,595 and contingent consideration with a fair value of $3,608. The acquisition was financed by drawing on the Company’s revolving term facility. In 2014, the dealership retailed 935 new vehicles and 704 used vehicles. Don Folk Chevrolet On September 14, 2015, the Company, through an 80% owned subsidiary, DFC Holdings Inc., purchased substantially all of the operating and fixed assets of Don Folk Chevrolet Inc., a Chevrolet dealership, and 399573 B.C. Ltd., an auto body shop, (together “Don Folk Chevrolet”), located in Kelowna, British Columbia, for total cash consideration of $9,175. The acquisition was financed by drawing on the Company’s revolving term facility. To comply with GM Canada’s approval, Mr. Patrick Priestner, the Executive Chair of the Company, is required to have 100% voting control of Don Folk Chevrolet. In 2014, the dealership retailed 452 new vehicles and 304 used vehicles. Page M25 Š AutoCanada Š 2015 Annual Report The Company also purchased the land and facilities through a wholly-owned subsidiary, DFC Properties Inc., for $13,250. Grove Dodge Chrysler Jeep On October 5, 2015, the Company, through GRV C Holdings LP, purchased substantially all of the operating and fixed assets of Grove Dodge Chrysler Jeep Ltd. (“Grove Dodge”), in Spruce Grove, Alberta, for total cash consideration of $19,083 and contingent consideration with a fair value of $1,808. The acquisition was financed by drawing on the Company’s revolving term facility. In 2014, the dealership retailed 809 new vehicles and 407 used vehicles. As part of the transaction, the Company entered into an agreement with a former minority owner of Grove Dodge, whereby he acquired a 10% ownership interest in GRV C Holdings LP from the Company for cash consideration. Hunt Club Nissan and Ottawa Open Point On November 1, 2015, the Company, through AutoCanada HCN Holdings Inc., purchased substantially all of the operating and fixed assets of Hunt Club Nissan Ltd. (“Hunt Club Nissan”), in Ottawa, Ontario, as well as the exclusive right to build and operate a Nissan motor vehicle franchise on a designated property in southwest Ottawa. Total cash consideration for the transaction was $13,825. The acquisition was financed by drawing on the Company’s revolving term facility. In 2014, the dealership retailed 1,109 new vehicles and 452 used vehicles. As part of the transaction, the Company entered into an agreement with a former owner of Hunt Club Nissan, whereby he acquired a 10% ownership interest in AutoCanada HCN Holdings Inc. from the Company for cash consideration of $1,383. 417 Nissan and 417 Infiniti On December 7, 2015, the Company, through a 90% owned subsidiary, AutoCanada HCN Holdings Inc., purchased substantially all of the operating and fixed assets of 417 Infiniti Nissan Limited (“417 Nissan and 417 Infiniti”), in Ottawa, Ontario, for total cash consideration of $5,408. The acquisition was financed by drawing on the Company’s revolving term facility. In 2014, the dealership retailed 727 new vehicles and 180 used vehicles. Integration of New Dealerships and Investments Over the past year, the Company has opened and acquired six dealerships, and has been dedicating resources to ensure a successful integration of its newly acquired dealerships. As noted in our same store analysis, experience has shown that it takes a minimum of two full years in order to successfully integrate a store and achieve its anticipated performance objectives. The dealerships acquired in 2014 appear to be integrating well into their respective platforms and within the Company. The dealerships acquired in 2015 are still fairly new and being integrated into their respective platforms and within the Company. Management continues to work diligently on the integration of those dealerships and is very satisfied with the progress being made. The investments in the dealerships that we made in the third and fourth quarters of 2015 are fairly recent. As a result, we are still relatively early in the process of integrating these investments. We will continue to dedicate significant resources to newly acquired dealerships in order to successfully integrate acquisitions in an efficient manner. As a result, we expect to incur additional selling and administrative costs in the future in order to successfully integrate new dealerships into our model. Dealership Open Points Volkswagen – Sherwood Park, Alberta In February 2014, the Company announced that it had been awarded the right to a Volkswagen Open Point dealership in Sherwood Park, Alberta. The Company intends to construct an approximately 45,000 square foot facility in Sherwood Park, designed to Volkswagen Canada image standards, with construction to be completed and opened in the fourth quarter of 2016. The Volkswagen Open Point has a planning potential of 800 new vehicles annually which the Company anticipates achieving in two to three years of operation. Nissan – Calgary, Alberta On July 1, 2014, as part of the Company’s purchase of the Hyatt Group, the Company acquired the exclusive right to build and operate a Nissan dealership on a designated property in southeast Calgary. The purchase price for transfer of the right was $1.5 million, which was satisfied by the issuance of 18,753 common shares of AutoCanada at a deemed price of $79.99. The permit process in the City of Calgary had taken longer than expected, which caused some delay. Therefore, the dealership construction is now expected to begin late 2016 with anticipated opening in late 2017. The dealership will be constructed by a third party and subsequently leased by the Company. North Winnipeg Kia In March 2015, the Company announced that it has signed a Letter of Intent with Kia Canada Inc. (“Kia”) which, subject to the completion of requirements contained in the Letter of Intent, will award AutoCanada an Open Point Kia dealership in North Winnipeg, Manitoba. AutoCanada intends to operate the dealership out of a new facility, designed to Kia image standards, with construction anticipated to commence in early 2017. Nissan - Ottawa, Ontario On November 1, 2015, as part of the purchase of Hunt Club Nissan, the Company acquired the exclusive right to build and operate a Nissan motor vehicle franchise on a designated property in southwest Ottawa. AutoCanada intends to operate the dealership out of a new facility, designed to Nissan image standards, with construction anticipated to commence in second quarter of 2016 and anticipated opening in early 2017. Dealership Loan Financing On November 30, 2015, the Company loaned $8,422 to PPH Holdings Ltd (“PPH”). The Company holds no ownership interest in PPH, which is a company controlled, and formed, by Mr. Patrick Priestner (“Priestner”). The Company has no participation in the equity of PPH. PPH’s principal place of business is Alberta, Canada. Although the Company holds no voting rights in PPH the Company exercises significant influence by virtue of the existence of its loan and the provision of AutoCanada Š 2015 Annual Report Š Page M26 essential technical information required for operations, as well as through the relationship with Priestner, as AutoCanada’s Executive Chair. However, the Company does not have the power to make or block key decisions under the terms of the underlying agreements. As a result, the Company has accounted for its loan to PPH under the effective interest method and it is carried at amortized cost. Income from loan to PPH was $49 in 2015. Future Acquisition Opportunities Due to the economic slowdown occurring in Alberta, Management anticipates that there will continue to be attractive buying opportunities, further enhancing long term shareholder value, however, Management is not yet seeing a change in acquisition multiples. Additionally, the Company shall continue to seek opportunities elsewhere in Canada, where appropriate, so as to provide continued diversity. The Company is in a position to patiently pursue its acquisition strategy thereby maximizing its ability to take advantage of anticipated buying opportunities that times of economic uncertainty generally provide. Management and the Company have excellent relationships with our manufacturer partners and believe that if we can continue to perform well, we can build upon our current brand portfolios and hopefully gain the acceptance of other new manufacturers over time. Capital Plan The Company maintains a capital plan for contemplated future capital projects. Details of the capital plan are described below: Dealership Relocations Management estimates the total capital requirements of additional potential planned dealership relocations to be approximately $133.3 million by the second quarter of fiscal 2019, $83.5 million of this amount is to be financed. As noted above, the Company expects dealership relocations to provide long term earnings sustainability and result in significant improvements in revenues and overall profitability. Management continually updates its capital plan and as such the estimates provided may vary as delays occur or projects are added or removed. Current Dealership Expansion and Imaging Requirements The Company has identified approximately $37.5 million in capital costs that it may incur in order to expand or renovate various current locations by the end of fiscal 2019, $13.0 million of this amount is to be financed. The Company is required by its manufacturers to undertake periodic imaging upgrades to its facilities. Included above are the estimated costs and timing related to the re-imaging requirements by Hyundai Canada. The Company expects re-imaging to attract more customers to its dealerships. Open Point Opportunities Management regularly reviews potential open point opportunities. If successful in being awarded these opportunities, Management would then estimate additional capital costs in order to construct suitable facilities for open points. The Company estimates approximately $23.0 million in capital costs that it may incur by the end of fiscal 2017 related to currently awarded Open Points, $8.7 million of this amount is to be financed. If awarded in the future, Management will provide additional cost estimates and timing of construction. In order to be successful in some opportunities, Management may be required to secure appropriate land for the potential open points, in which case, additional land purchase costs may be incurred in the future. Page M27 Š AutoCanada Š 2015 Annual Report The following summarizes the capital plan for contemplated future capital projects as at December 31, 2015: (in millions of dollars) 2016 2017 2018 2019 Total Same Store Dealership Relocations Current Dealership Expansion and Imaging Requirements Capital Plan Expected to be Financed Non-Same Store Dealership Relocations Current Dealership Expansion and Imaging Requirements Open Point Opportunities Capital Plan Expected to be Financed Total Capital Plan Total Expected to be Financed 22.8 3.1 25.9 14.1 0.1 10.6 14.6 25.3 15.4 51.2 29.5 56.5 5.3 61.8 39.8 12.0 4.6 8.4 25.0 8.4 86.8 48.2 16.6 5.3 21.9 13.3 11.3 – – 11.3 7.9 33.2 21.2 – 8.6 8.6 – 95.9 22.3 118.2 67.2 14.0 – – 14.0 6.3 37.4 15.2 23.0 75.6 38.0 22.6 193.8 6.3 105.2 Notwithstanding the capital plan laid out above, expected capital expenditures are subject to deferral due to issues in obtaining permits, construction delays, changes in reimaging requirements or other delays that are normal to the construction process. The above is considered to be a guide for when the Company expects to perform capital expenditures, however, significant deferral may occur in the future. Management closely monitors the capital plan and adjusts as appropriate based on Company performance, Manufacturer requirements and individual dealership needs. Management performs a robust analysis on all future expenditures prior to the allocation of funds. Timing of dealership relocations is determined based on the dealership’s current performance, the market, and expected return on invested capital. It is expected that a dealership relocation will result in improved performance and increased profitability. AutoCanada Š 2015 Annual Report Š Page M28 9. LIQUIDITY AND CAPITAL RESOURCES Our principal uses of funds are for capital expenditures, repayment of debt, funding the future growth of the Company and dividends to Shareholders. We have historically met these requirements by using cash generated from operating activities and through short term and long term indebtedness. On December 14, 2015, the Company completed a $75.0 million equity offering which was used to pay down its revolving credit facility and replenish its capital. The Company maintains working capital in excess of manufacturer requirements which may be used for capital expenditures. The Company’s analysis of its available capital based on the balance sheet at December 31, 2015 is as follows: Š The Company had drawn $103.6 million on its $250.0 million revolving term facility. As a result of the above, as at December 31, 2015, the Company currently has approximately $146.4 million in readily available liquidity, not including future retained cash from operations, that it may deploy for growth expenditures including acquisitions. Note 25 of the annual consolidated financial statements of the Company for the year ended December 31, 2015 summarizes the Company’s remaining contractual maturity for its financial liabilities. Use of Proceeds The Company’s use of proceeds from the equity offering was for repayment of long-term indebtedness. Cash Flow from Operating Activities Cash flow from operating activities (including changes in non-cash working capital) of the Company for the year ended December 31, 2015 was $52.8 million (cash provided by operating activities of $51.5 million plus net increase change in non-cash working capital of $1.3 million) compared to $71.1 million (cash provided by operating activities of $66.8 million plus net increase in non-cash working capital of $4.3 million) in the prior year. Cash Flow from Investing Activities For the year ended December 31, 2015, cash flow from investing activities of the Company was a net outflow of $165.7 million as compared to a net outflow of $331.1 million in the prior year. The decrease was primarily due to $75.5 million in acquisitions compared to $270.0 million in 2014. Cash Flow from Financing Activities For the year ended December 31, 2015, cash flow from financing activities was a net inflow of $104.0 million as compared to a net inflow of $295.2 million in the prior year. The decrease was primarily due to proceeds of $146.4 million from the issuance of senior unsecured notes in 2014, as well as issuance of common shares in 2014 which exceeded issuance of shares in 2015 by $119.5 million. Credit Facilities and Floorplan Financing Details of the Company’s credit facilities and floorplan financing are included in Note 28 of the annual audited consolidated financial statements for the year ended December 31, 2015. Page M29 Š AutoCanada Š 2015 Annual Report Key Financial Covenants The Company is required by its debt agreements to comply with several financial covenants. The following is a summary of the Company’s actual performance against its financial covenants as at December 31, 2015: Financial Covenant Requirement Syndicated Revolver: Senior Secured Leverage Ratio1 Adjusted Total Leverage Ratio1 Fixed Charge Coverage Ratio Current Ratio Syndicated Floorplan: Current Ratio Tangible Net Worth Debt to Tangible Net Worth Shall not exceed 2.75 Shall not exceed 5.00 Shall not be less than 1.20 Shall not be less than 1.05 Q4 Actual Calculation Q3 Actual Calculation 1.38 4.09 1.72 1.18 1.74 4.30 1.60 1.14 Shall not be less than 1.10 Shall not be less than $40 million Shall not exceed 7.50 1.15 $89.4 million 4.67 1.15 $93.5 million 4.52 1 On September 30, 2015, amended terms and conditions of the syndicated revolver facility resulted in the Senior Secured Leverage Ratio changing from 2.00 to 2.75, and the Adjusted Total Leverage Ratio changing from 4.50 to 5.00. The covenants above are based on consolidated financial statements of the dealerships that are financed directly by the lender. As a result, the actual performance against the covenant does not necessarily reflect the actual performance of AutoCanada. The Company is required to comply with other covenants under the terms of its remaining credit agreements. The Company stress tests all covenants on a monthly and quarterly basis and notes that a significant further drop in performance would be necessary to breach the covenants. As at December 31, 2015, the Company is in compliance with all of its financial covenants. Financial Instruments Details of the Company’s financial instruments, including risks and uncertainties are included in Note 25 of the annual audited consolidated financial statements for the year ended December 31, 2015. Growth vs. Non-Growth Capital Expenditures Non-growth capital expenditures are capital expenditures incurred during the period to maintain existing levels of service. These include capital expenditures to replace property and equipment and any costs incurred to enhance the operational life of existing property and equipment. Non-growth capital expenditures can fluctuate from period to period depending on our needs to upgrade or replace existing property and equipment. Over time, we expect to incur annual non-growth capital expenditures in an amount approximating our depreciation of property and equipment reported in each period. Additional details on the components of non-growth property and equipment purchases are as follows: (in thousands of dollars) Leasehold improvements Machinery and equipment Furniture and fixtures Computer equipment Company & lease vehicles October 1, 2015 to December 31, 2015 January 1, 2015 to December 31, 2015 1,525 546 322 756 15 3,164 7,054 2,183 1,355 2,073 32 12,697 AutoCanada Š 2015 Annual Report Š Page M30 Amounts relating to the expansion of sales and service capacity are considered growth expenditures. Growth expenditures are discretionary, represent cash outlays intended to provide additional future cash flows and are expected to provide benefit in future periods. During the three month period and the year ended December 31, 2015, growth capital expenditures of $5.7 million and $61.9 million were incurred, respectively. These expenditures related primarily to land that was purchased for future dealership operations during the first three quarters of the year of $52.9 million, and construction on buildings of approximately $5.3 million during the fourth quarter. Dealership relocations are included as growth expenditures if they contribute to the expansion of sales and service capacity of the dealership. The following table provides a reconciliation of the purchase of property and equipment as reported on the Statement of Cash Flows to the purchase of non-growth property and equipment as calculated in the free cash flow section below: (in thousands of dollars) Purchase of property and equipment from the Statement of Cash Flows Less: Amounts related to the expansion of sales and service capacity Purchase of non-growth property and equipment October 1, 2015 to December 31, 2015 January 1, 2015 to December 31, 2015 8,879 (5,715) 3,164 74,606 (61,909) 12,697 Repairs and maintenance expenditures are expensed as incurred and have been deducted from earnings for the period. Repairs and maintenance expense incurred during the three month period and the year ended December 31, 2015, were $1.7 million and $6.2 million (2014 - $1.1 million and $3.5 million), respectively. vehicles, computer hardware and computer software. Management expects that our annual capital expenditures will increase in the future, as a function of increases in the number of locations requiring maintenance capital expenditures, the cost of opening new locations and increased spending on information systems. Planned Capital Expenditures Our capital expenditures consist primarily of leasehold improvements, the purchase of furniture and fixtures, machinery and equipment, service Financial Position For further information regarding planned capital expenditures, see “GROWTH, ACQUISITIONS, RELOCATIONS AND REAL ESTATE” above. The following table shows selected audited balances of the Company (in thousands) for December 31, 2015 and December 31, 2014, as well as unaudited balances of the Company at September 30, 2015, June 30, 2015, March 31, 2015, September 30, 2014, June 30, 2014, and March 31, 2014: (in thousands of dollars) December 31, 2015 September 30, 2015 June 30, 2015 March 31, 2015 December 31, 2014 September 30, 2014 June 30, 2014 March 31, 2014 Cash and cash equivalents Trade and other receivables Inventories Assets Revolving floorplan facilities Non-current debt and lease obligations 62,274 77,071 77,676 66,351 72,462 64,559 91,662 41,541 90,821 596,542 118,853 581,258 124,683 620,837 104,753 625,779 92,138 563,277 115,074 471,664 85,837 324,077 69,747 261,764 1,532,182 1,508,028 1,517,978 1,449,213 1,354,755 1,211,527 910,715 667,016 548,322 550,857 607,694 601,432 527,780 437,935 313,752 261,263 285,759 313,703 287,202 241,929 223,009 179,447 294,289 123,811 Page M31 Š AutoCanada Š 2015 Annual Report Net Working Capital The automobile manufacturers represented by the Company require the Company to maintain net working capital for each individual dealership. At December 31, 2015, the aggregate of net working capital requirements was approximately $95.0 million. At December 31, 2015, all working capital requirements had been met by each dealership. The working capital requirements imposed by the automobile manufacturers’ may limit our ability to fund capital expenditures, acquisitions, dividends, or other commitments in the future if sufficient funds are not generated by the Company. Net working capital, as defined by automobile manufacturers, may not reflect net working capital as determined using GAAP measures. As a result, it is possible that the Company may meet automobile manufacturers’ net working capital requirements without having sufficient aggregate working capital using GAAP measures. The Company defines net working capital amounts as current assets less current liabilities as presented in the consolidated financial statements. At December 31, 2015, the Company had aggregate working capital of approximately $121.1 million. The net working capital requirements above restrict the Company’s ability to transfer funds up from its subsidiaries, as each subsidiary dealership is required to be appropriately capitalized as explained above. In addition, our VCCI Facilities require the VW and Audi dealerships to maintain minimum cash and equity, which also restricts our ability to transfer funds up. Off Balance Sheet Arrangements The Company has operating lease commitments, with varying terms through 2037, to lease premises and equipment used for business purposes. The Company leases the majority of the lands and buildings used in its franchised automobile dealership operations from related parties and other third parties. The minimum lease payments over the upcoming fiscal years will be as follows: (in thousands of dollars) 2016 2017 2018 2019 2020 Thereafter Total $ 20,012 18,723 16,232 14,233 12,279 134,015 215,494 Information regarding our contractual obligations with respect to long-term debt, capital lease obligations and other long-term obligations is included in the Liquidity Risk section of Note 25 of the Company’s annual consolidated financial statements. Related Party Transactions Note 34 of the annual consolidated financial statements of the Company for the year ended December 31, 2015 summarizes the transactions between the Company and its related parties. Administrative support fees The Company currently earns administrative support fees from companies controlled by the Executive Chair of AutoCanada. The administrative support fees consist of a portion of human resource and fixed costs associated with providing technological and accounting support to these companies. The Company believes that providing support services to these companies provides value to both the companies supported and AutoCanada. By providing support, AutoCanada is able to reduce its overall fixed costs associated with accounting and information technology. Related party transactions are measured based on the proportionate allocation of actual costs incurred multiplied by the number of resources and/or hours provided to or used by the related party. There are no ongoing or continuing obligations of the Company to provide these services or for the related parties to utilize these services. AutoCanada Š 2015 Annual Report Š Page M32 Loans to related parties The Company structured the loan to PPH with the associated terms and conditions in order to satisfy the requirements of the manufacturer. It is the Company’s belief that this loan investment will provide future opportunities to finance further acquisitions thereby acquiring additional revenue and income streams from this manufacturer. Page M33 Š AutoCanada Š 2015 Annual Report 10. BUSINESS COMBINATION UNDER COMMON CONTROL On July 11, 2014, the Company completed a business combination under common control, resulting in the consolidation of the financial results of the Company’s investments in associates as further described in Notes 14 and 15 of the annual audited consolidated financial statements for the year ended December 31, 2014. The Company has provided a reconciliation below of its consolidated Statement of Comprehensive Income for the year ended December 31, 2015 to its financial results had the results from its investments in associates not been consolidated as at December 31, 2015. (in thousands of dollars) Revenue Cost of sales Gross Profit Operating expenses Operating profit before other income (expenses) Lease and other income, net Gain on disposal of assets, net Impairment of intangible assets Income from investments in associates Income from loan to associate Operating Profit Finance costs Finance income Net income for the year before taxation Income taxes Net and comprehensive income for the year Net and comprehensive income attributable to: AutoCanada shareholders Non–controlling interests Earnings per share Basic Diluted Weighted average shares Basic Diluted For the year ended December 31, 2015 (Including GM) Effects of GM Consolidation For the year ended December 31, 2015 (excluding GM) 2,903,803 (2,416,094) 487,709 (395,877) (550,691) 448,989 (101,702) 75,373 2,353,112 (1,967,105) 386,007 (320,504) 91,832 5,546 249 (18,757) – 49 78,919 (36,106) 2,292 45,105 17,791 27,314 22,821 4,493 27,314 0.93 0.92 24,574,022 26,674,083 (26,329) (1,510) (2) 2,293 9,474 – (16,074) 7,196 (277) (9,155) (4,902) (4,253) (354) (3,899) (4,253) – – – – 65,503 4,036 247 (16,464) 9,474 49 62,845 (28,910) 2,015 35,950 12,889 23,061 22,467 594 23,061 0.93 0.92 24,574,022 26,674,083 AutoCanada Š 2015 Annual Report Š Page M34 11. OUTSTANDING SHARES As at December 31, 2015, the Company had 27,459,683 common shares outstanding. Basic and diluted weighted average number of shares outstanding for the year ended December 31, 2015 were 24,574,022 and 26,674,083, respectively. As at December 31, 2015, the value of the shares held in trust was $1.3 million (2014 – $3.3 million) which was comprised of 70,933 in shares (2014 - 100,027) with a nil aggregate cost (2014 - nil). As at March 17, 2016, there were 27,459,683 shares issued and outstanding. 12. DIVIDENDS Management reviews the Company’s financial results on a monthly basis. The Board of Directors reviews the financial results periodically to determine whether a dividend shall be paid based on a number of factors. The following table summarizes the dividends declared by the Company in 2015: Record date February 28, 2015 May 31, 2015 August 31, 2015 November 30, 2015 Payment date March 16, 2015 June 15, 2015 September 15, 2015 December 15, 2015 Per Share $ 0.25 0.25 0.25 0.25 1.00 Total $ 6,102 6,111 6,110 6,109 24,432 On February 19, 2016, the Board declared a quarterly eligible dividend of $0.25 per common share on AutoCanada’s outstanding Class A shares, payable on March 15, 2016 to shareholders of record at the close of business on February 29, 2016. As per the terms of the HSBC facility, we are restricted from declaring dividends and distributing cash if we are in breach of 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. At this time, the Company is within its covenants. Page M35 Š AutoCanada Š 2015 Annual Report 13. FREE CASH FLOW The Company has defined free cash flow to be cash flows provided by operating activities (including changes in non-cash operating working capital) less capital expenditures (excluding capital assets acquired by acquisitions or purchases of real estate). (in thousands of dollars, except unit and per unit amounts) Cash provided by operating activities Deduct: Purchase of property and equipment Free cash flow1 Weighted average shares outstanding at end of period Free cash flow per share Free cash flow - 12 month trailing Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014 12,420 20,139 21,004 (810) 42,276 9,093 10,918 8,850 (3,354) 9,066 (5,144) 14,995 (3,228) 17,776 (2,352) (3,162) (2,454) 39,822 (2,834) (1,057) (1,069) 6,259 9,861 7,781 25,016,637 24,440,080 24,424,598 24,409,574 24,410,169 24,103,670 21,832,777 21,685,876 0.36 (0.13) 0.36 0.26 0.45 0.61 1.63 0.73 38,675 69,431 60,695 52,780 63,723 32,256 33,137 36,762 1 This financial measure is identified and defined under the section “NON-GAAP MEASURES.” Management believes that the free cash flow can fluctuate significantly as a result of historical fluctuations in our business operations that occur on a quarterly basis as well as the resulting fluctuations in our trade receivables and inventory levels and the timing of the payments of trade payables and revolving floorplan facilities. Changes in non-cash working capital consist of fluctuations in the balances of trade and other receivables, inventories, finance lease receivables, other current assets, trade and other payables, vehicle repurchase obligations and revolving floorplan facilities. Factors that can affect these items include seasonal sales trends, strategic decisions regarding inventory levels, the addition of new dealerships, and the day of the week on which period end cutoffs occur. The following table summarizes the net increase (decrease) in cash due to changes in non-cash working capital for the years ended December 31, 2015 and December 31, 2014. (in thousands of dollars) Trade and other receivables Inventories Finance lease receivables Other current assets Trade and other payables Vehicle repurchase obligations Revolving floorplan facilities January 1, 2015 to December 31, 2015 January 1, 2014 to December 31, 2014 1,939 (3,584) 3,271 (1,761) 3,959 307 (2,867) 1,264 (2,735) (45,065) (4,587) (1,317) 8,179 126 49,738 4,339 AutoCanada Š 2015 Annual Report Š Page M36 Adjusted Free Cash Flow The Company has defined adjusted free cash flow to be cash flows provided by operating activities (before changes in non-cash operating working capital) less non-growth capital expenditures. (in thousands of dollars, except unit and per unit amounts) Cash provided by operating activities before changes in non-cash working capital Deduct: Purchase of non-growth property and equipment Adjusted free cash flow1 Weighted average shares outstanding at end of period Adjusted free cash flow per share Adjusted free cash flow - 12 month trailing Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014 11,242 23,082 22,386 (5,221) 19,125 23,192 16,497 7,984 (3,164) 8,078 (4,131) 18,951 (3,199) 19,187 (2,199) (7,420) (2,003) 17,122 (1,079) 22,113 (996) 15,501 (638) 7,346 25,016,637 24,440,080 24,424,598 24,409,574 24,410,169 24,103,670 21,832,777 21,685,876 0.32 0.78 0.79 (0.30) 0.70 0.92 0.71 0.34 38,796 47,840 51,002 47,316 62,082 56,891 49,404 47,269 1 This financial measure is identified and defined under the section “NON-GAAP MEASURES.” Management believes that non-growth property and equipment is necessary to maintain and sustain the current productive capacity of the Company’s operations and cash available for growth. Management believes that maintenance capital expenditures should be funded by cash flow provided by operating activities. Capital spending for the expansion of sales and service capacity is expected to improve future free cash and as such, is not deducted from cash flow provided by operating activities before changes in non-cash working capital in arriving at adjusted free cash flow. Adjusted free cash flow is a measure used by Management in forecasting and determining the Company’s available resources for future capital expenditure, repayment of debt, funding the future growth of the Company and dividends to Shareholders. In the year ending December 31, 2015, the Company paid approximately $36.0 million in corporate income taxes and tax installments. Accordingly, this reduced our adjusted free cash flow by this amount. The Company expects the payment of corporate income taxes to have a more significant negative affect on free cash flow and adjusted free cash flow. See “RESULTS FROM OPERATIONS – Income Taxes” for further detail regarding the impact of corporate income taxes on cash flow. Page M37 Š AutoCanada Š 2015 Annual Report Adjusted Return on Capital Employed The Company has defined Adjusted Return on Capital Employed to be EBIT (EBITDA, as defined in “NON-GAAP MEASURES”, less depreciation and amortization) divided by Average Capital Employed in the Company (average of shareholders’ equity and interest bearing debt, excluding floorplan financing, for the period, less the comparative adjustment defined below). Calculations below represent the results on a quarterly basis, except for the adjusted return on capital employed – 12 month trailing which incorporates the results based on the trailing 12 months for the periods presented. (in thousands of dollars, except unit and per unit amounts) Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014 EBITDA1,2 23,524 29,487 30,730 13,890 26,043 31,895 21,702 14,453 Deduct: Depreciation of property and equipment (5,176) (5,063) (4,461) (4,160) (4,423) (4,139) (2,550) (2,512) EBIT1,2 Average long-term debt Average shareholder’s equity Average capital employed1 Return on capital 18,348 312,471 481,112 793,583 2.3% 24,424 9,730 26,269 314,443 277,571 239,251 447,774 439,711 436,262 762,217 717,282 675,513 1.4% 3.2% 3.7% 21,620 204,514 440,513 645,027 3.4% 27,756 11,941 19,152 240,799 211,903 107,265 326,410 205,613 196,608 567,209 417,516 303,873 3.9% 4.9% 4.6% Comparative adjustment3 (13,191) (17,264) (17,264) (17,264) (17,264) (15,951) (15,951) (15,951) Adjusted average capital employed1 778,354 744,953 700,018 658,249 628,418 551,258 401,565 287,922 Adjusted return on capital employed1 2.4% 3.3% 3.8% 1.5% 3.4% 5.0% 4.8% 4.1% Adjusted return on capital employed - 12 month trailing 11.2% 12.7% 15.5% 16.5% 18.6% 19.3% 20.7% 25.1% 1 2 3 These financial measures are identified and defined under the section “NON-GAAP MEASURES.” EBITDA and EBIT used in the calculation of Adjusted Return on Capital Employed is calculated using the financial results including non-controlling interests. A comparative adjustment has been made in order to adjust for impairments and reversals of impairments of intangible assets. Due to the increased frequency of impairments and reversals of impairments, Management has provided an adjustment in order to freeze intangible assets at the pre-IFRS amount of $43,700. As a result, all differences from January 1, 2010 forward under IFRS have been adjusted at the post-tax rate at the time the adjustment to the intangible asset carrying amount was made. Management believes that the adjusted return on capital employed provides more useful information about the return on capital employed. Management believes that Adjusted Return on Capital Employed (see “NON-GAAP MEASURES”) is a good measure 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 the Company as a whole in order to ensure shareholder value is being achieved by these capital investments. The decrease in adjusted return on capital employed - 12 month trailing is caused by the volume of acquisitions over the past two years, compounded by the reduced economic activity in 2015. Management expects this measure to return to normal as the economy improves and the acquisitions are further integrated. AutoCanada Š 2015 Annual Report Š Page M38 14. CRITICAL ACCOUNTING ESTIMATES AND ACCOUNTING POLICY DEVELOPMENTS A complete listing of critical accounting policies, estimates, judgments and measurement uncertainty can be found in Notes 3 and 5 of the annual consolidated financial statements for the year ended December 31, 2015. Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB or International Financial Reporting Interpretations Committee (“IFRIC”) that are not yet effective for the period ended December 31, 2015. A listing of the standards issued which are applicable to the Company can be found in Note 4 of the annual consolidated financial statements for the year ended December 31, 2015. 15. DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING Disclosure Controls & Procedures Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed with securities regulatory authorities is recorded, processed, summarized, and reported on a timely basis, and is accumulated and communicated to the Company’s management, including the Chief Executive Office (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. As of December 31, 2015, the Company’s management, with participation of the CEO and CFO, evaluated the effectiveness of the design and operation of its disclosure controls and procedures, as defined in National Instrument 52-109 of the Canadian Securities Administrators, and have Page M39 Š AutoCanada Š 2015 Annual Report concluded that the Company’s disclosure controls and procedures are effective. Internal Controls over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal controls over financial reporting. These controls include policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. All control systems contain inherent limitations, no matter how well designed. As a result, the Company’s management acknowledges that its internal controls over financial reporting will not prevent or detect all misstatements due to error or fraud. In addition, management’s evaluation of controls can provide only reasonable, not absolute, assurance that all control issues that may result in material misstatements, if any, have been detected. Management, under the supervision of and with the participation of the Company’s CEO and CFO, evaluated the effectiveness of the Corporation’s internal controls over financial reporting (as defined under national Instrument 52–109 - Certification of Disclosure in Issuers’ Annual and Interim Filings). In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commissions (“COSO”) in Internal Control – Integrated Framework (2013). Based on that evaluation, management and the CEO and CFO have concluded that, as at December 31, 2014, the Corporation’s internal controls over financial reporting were effective. This evaluation took into consideration the Corporation’s Corporate Disclosure Policy and the functioning of its Disclosure Policy Committee. Changes in Internal Control over Financial Reporting There have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting during the year ended December 31, 2015. 16. RISK FACTORS We face a number of business risks that could cause our actual results to differ materially from those disclosed in this MD&A (See “FORWARD LOOKING STATEMENTS”). Investors and the public should carefully consider our business risks, other uncertainties and potential events as well as the inherent uncertainty of forward looking statements when making investment decisions with respect to AutoCanada. If any of the business risks identified by AutoCanada were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected. In such case, the trading price of our shares could decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business and operations. A comprehensive discussion of the known risk factors of AutoCanada and additional business risks is available in our 2015 Annual Information Form dated March 17, 2016, available on the SEDAR website at www.sedar.com. AutoCanada Š 2015 Annual Report Š Page M40 17. FORWARD LOOKING STATEMENTS Certain statements contained in the MD&A 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”, “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 the MD&A include: Š the belief that, as the Company continues to grow, operating expenses as a percentage of gross profit should improve as the Company achieves greater economies of scale; Š the impact of an increase or decrease of one new retail vehicle sold on estimated free cash flow; Š expectations to incur additional selling and administrative costs in the future to successfully integrate new dealerships; Š the belief that, if the Company can perform well, it will be able to Page M41 Š AutoCanada Š 2015 Annual Report build upon its current brand portfolios and hopefully gain the acceptance of other new manufacturers over time; Š commitments regarding future investments in additional GM dealerships; Š expectations to incur additional selling, general, and administrative costs in the future to facilitate the growth anticipated by the Company due to increased acquisition activity; Š estimates, intentions, and expectations regarding the capital plan, potential relocation of certain dealerships, dealership expansion needs, and Open Point opportunities; Š our belief that relocation of certain dealerships may provide incremental long-term earnings growth and better align some of our dealerships with the growth expectations of our manufacturer partners; Š the impact of dealership real estate relocations and purchases and its impact on liquidity, financial performance and the Company’s capital requirements; Š our belief that under a high growth scenario, cash from operating activities may not be sufficient to meet future capital needs and the potential need to seek additional capital in the form of debt or equity; Š our belief that our available liquidity is sufficient to complete our current capital expenditure commitments and to execute on additional dealership acquisitions; Š the impact of a significant decline in sales as a result of the inability to procure adequate supply of vehicles and/or lower consumer demand on cash flows from operations and our ability to fund capital expenditures; Š our expectation to incur annual non-growth capital expenditures in an amount approximating our amortization of property and equipment reported in each period; Š our expectation that growth expenditures will provide additional future cash flows and future benefit; Š our expectation to increase annual capital expenditures and the reasons for this expected increase; Š the impact of working capital requirements and its impact on future liquidity; Š the belief that a restriction from declaring dividends is not likely in the foreseeable future; Š our belief that free cash flow can fluctuate significantly and the impact of these fluctuations on our operations and performance; Š our belief that maintenance capital expenditures should be funded by cash flow provided by operating activities; Š our potential use of Adjusted Return on Capital Employed as a measure for comparison and analysis; Š guidance with respect to future acquisition and Open Point opportunities; Š our assumption on the amount of time it may take for an acquisition or Open Point to achieve normal operating results; Š expectations and estimates regarding income taxes and their effect on cash flow and dividends; Š assumptions over non-GAAP measures and their impact on the Company; Š management’s assumptions and expectations over the future economic and general outlook; Š the impact of economic stress on our compensation costs; Š belief that the recession experienced during fiscal 2008 and 2009 should not be used as a proxy to forecast an impact in 2016; Š the impact of economic uncertainty on the Company’s acquisition opportunities; Š the impact of seasonality on financial performance; Š outlook regarding vehicle sales in Canada in 2016; Š the impact of the decline in the exchange rate of the Canadian dollar to the US dollar; Š expectations of capital costs related to currently awarded Open Points; Š expectations that re-imaging will attract more customers to its dealerships; Š our belief that improvements in technology and process in its parts and service departments will continue to produce increasingly positive results; Š estimates regarding additional legal and administration expense for each acquisition; and Š the impact on the Company as a result of the lower oil prices and any related expectations. 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: Š no significant adverse changes to the automotive market, competitive conditions, the supply and demand of vehicles, parts and service, and finance and insurance products; Š no significant construction delays that may adversely affect the timing of dealership relocations and renovations; Š no significant disruption of our operations such as may result from harsh weather, natural disaster, accident, civil unrest, or other calamitous event; AutoCanada Š 2015 Annual Report Š Page M42 Š our suppliers’ ability to provide a desirable mix of popular new vehicles; Š the ability to continue financing inventory under similar interest rates; Š our suppliers’ ability to continue to provide manufacturer incentive programs; Š the loss of key personnel and limited management and personnel resources; Š the ability to refinance credit agreements in the future; Š changes in applicable environmental, taxation and other laws and regulations as well as how such laws and regulations are interpreted and enforced; Š risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations; and Š the ability to obtain automotive manufacturers’ approval for acquisitions. The Company’s most recent Annual Information Form and other documents filed with securities regulatory authorities (accessible through the SEDAR website www.sedar.com) describe the risks, material assumptions and other factors that could influence actual results and which are incorporated herein by reference. 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. Š no significant unexpected technological event or commercial difficulties that adversely affect our operations; Š continuing availability of economical capital resources; demand for our products and our cost of operations; Š no significant adverse legislative and regulatory changes; Š stability of general domestic economic, market, and business conditions; Š assumptions regarding other automobile manufacturer agreements; and Š assumptions regarding provincial government regulations. 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: Š rapid appreciation or depreciation of the Canadian dollar relative to the U.S. dollar; Š a sustained downturn in consumer demand and economic conditions in key geographic markets; Š adverse conditions affecting one or more of our automobile manufacturers; Š the ability of consumers to access automotive loans and leases; Š competitive actions of other companies and generally within the automotive industry; Š our dependence on sales of new vehicles to achieve sustained profitability; Š levels of unemployment in our markets and other macroeconomic factors; Page M43 Š AutoCanada Š 2015 Annual Report 18. NON-GAAP MEASURES Our MD&A contains certain financial measures that do not have any standardized meaning prescribed by Canadian GAAP. Therefore, these financial measures may not be comparable to similar measures presented by other issuers. Investors are cautioned these measures should not be construed as an alternative to net earnings (loss) or to cash provided by (used in) operating, investing, and financing activities determined in accordance with Canadian GAAP, as indicators of our performance. We provide these measures to assist investors in determining our ability to generate earnings and cash provided by (used in) operating activities and to provide additional information on how these cash resources are used. We list and define these “NON-GAAP MEASURES” below: EBITDA EBITDA is a measure commonly reported and widely used by investors as an indicator of a company’s operating performance and ability to incur and service debt, and as a valuation metric. The Company believes EBITDA assists investors in comparing a company’s performance on a consistent basis without regard to depreciation and amortization and asset impairment charges which are non-cash in nature and can vary significantly depending upon accounting methods or non-operating factors such as historical cost. 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. Adjusted EBITDA Adjusted EBITDA is an indicator of a company’s operating performance and ability to incur and service debt. The portion of share-based compensation related to changes in the share price and its impact on the Company’s cash-settled portions of its share-based compensation programs, the revaluation of redemption liabilities, and the unrealized gain or loss on embedded derivatives are added back to EBITDA to get to adjusted EBITDA. The Company considers share-based compensation related to changes in the share price to be non-cash in nature as we maintain a share purchase trust in which we purchase shares on the open market as these units are granted to reduce the cash flow risk associated with fluctuations in the share price. Share-based compensation, a component of employee remuneration, can vary significantly with changes in the price of the Company’s common shares. The revaluation of redemption liabilities, as well as the unrealized gain or loss on embedded derivatives, are also non-cash in nature. The Company believes adjusted EBITDA provides improved continuity with respect to the comparison of our operating results over a period of time. Adjusted net earnings and Adjusted net earnings per share Adjusted net earnings and adjusted net earnings per share are measures of our profitability. Adjusted net earnings is calculated by adding back the after-tax effect of impairment or reversals of impairment of intangible assets, impairments of goodwill, the revaluation of redemption liabilities, the unrealized gain or loss on embedded derivatives, and the portion of share-based compensation related to changes in the share price and its impact on the Company’s cash-settled portions of its share-based compensation programs. The Company considers this expense to be non-cash in nature as we maintain a share purchase trust in which we purchase shares on the open market as these units are granted to reduce the cash flow risk associated with fluctuations in the share price. Share-based compensation, a component of employee remuneration, can vary significantly with changes in the price of the Company’s common shares. Adding back these amounts to net earnings allows Management to assess the net earnings of the Company from ongoing operations. Adjusted net earnings per share is calculated by dividing adjusted net earnings by the weighted-average number of shares outstanding. EBIT EBIT is a measure used by Management in the calculation of Return on capital employed (defined below). Management’s calculation of EBIT is EBITDA (calculated above) less depreciation and amortization. AutoCanada Š 2015 Annual Report Š Page M44 Adjusted pre-tax earnings Adjusted pre-tax earnings are calculated by adding back the impairment or reversals of impairment of intangible assets and impairments of goodwill. Adding back these non-cash charges to pre-tax net earnings allows Management to assess the pre-tax net earnings of the Company from ongoing operations. Free Cash Flow 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 the Company, potential acquisitions, or other purposes. Investors should be cautioned that free cash flow may not actually be available for growth or distribution of the Company. 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 (not including acquisitions of dealerships and dealership facilities). Adjusted Free Cash Flow Adjusted free cash flow is a measure used by Management to evaluate its performance. Adjusted free cash flow is considered relevant because it provides an indication of how much cash generated by operations before changes in non-cash working capital is available after deducting expenditures for non-growth capital assets. It shall be noted that although we consider this measure to be adjusted 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 the Company, potential acquisitions, or other purposes. Investors should be cautioned that adjusted free cash flow may not actually be available for growth or distribution of the Company. References to “Adjusted free cash Page M45 Š AutoCanada Š 2015 Annual Report flow” are to cash provided by (used in) operating activities (before changes in non-cash working capital balances) less non-growth capital expenditures. Absorption Rate 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 ‘‘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. Average Capital Employed Average capital employed is a measure used by Management to determine the amount of capital invested in AutoCanada and is used in the measure of Return on Capital Employed (described below). Average capital employed is calculated as 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. 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 the Company. Adjusted Average Capital Employed Adjusted average capital employed is a measure used by Management to determine the amount of capital invested in AutoCanada and is used in the measure of Adjusted Return on Capital Employed (described below). Adjusted average capital employed is calculated as 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, adjusted for impairments of intangible assets, net of deferred tax. Management does not include future income tax, non-interest bearing debt, or revolving floorplan facilities in the calculation of adjusted average capital employed as it does not consider these items to be capital, but rather debt incurred to finance the operating activities of the Company. Return on Capital Employed 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 the Company as a whole in order to ensure shareholder value is being achieved by these capital investments. Return on capital employed is calculated as EBIT (defined above) divided by Average Capital Employed (defined above). Adjusted Return on Capital Employed Adjusted 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 the Company as a whole in order to ensure shareholder value is being achieved by these capital investments. Adjusted return on capital employed is calculated as EBIT (defined above) divided by Adjusted Average Capital Employed (defined above). Cautionary Note Regarding Non-GAAP Measures EBITDA, EBIT, Free Cash Flow, Absorption Rate, Average Capital Employed, Return on Capital Employed, Adjusted Average Capital Employed and Adjusted 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 the Company’s performance, of its cash flows from operating, investing and financing activities or as a measure of its liquidity and cash flows. The Company’s methods of calculating EBITDA, EBIT, Free Cash Flow, Absorption Rate, Average Capital Employed, Return on Capital Employed. Adjusted Average Capital Employed and Adjusted Return on Capital Employed may differ from the methods used by other issuers. Therefore, the Company’s EBITDA, EBIT, Free Cash Flow, Absorption Rate, Average Capital Employed, Return on Capital Employed, Adjusted Average Capital Employed and Adjusted Return on Capital Employed may not be comparable to similar measures presented by other issuers. AutoCanada Š 2015 Annual Report Š Page M46 2015CONSOLIDATED FINANCIALSTATEMENTS December 31, 2015 Independent Auditor’s Report To the Shareholders of AutoCanada Inc. We have audited the accompanying consolidated financial statements of AutoCanada Inc. and its subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2015 and 2014 and the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of AutoCanada Inc. and its subsidiaries as at December 31, 2015 and 2014 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants March 17, 2016 Edmonton, Canada Page F2 Š AutoCanada Š 2015 Annual Report AutoCanada Inc. Consolidated Statements of Comprehensive Income For the Years Ended (in thousands of Canadian dollars except for share and per share amounts) Revenue (Note 7) Cost of sales (Note 8) Gross profit Operating expenses (Note 9) Operating profit before other income (expense) Lease and other income, net Gain (loss) on disposal of assets, net (Impairment) recovery of intangible assets, net (Note 24) Income from investments in associates (Note 15) Income from loan to associate (Note 16) Operating profit Finance costs (Note 11) Finance income (Note 11) Net income for the year before taxation Income taxes (Note 12) Net and comprehensive income for the year Net and comprehensive income for the year attributable to: AutoCanada shareholders Non-controlling interests Net earnings per share attributable to AutoCanada shareholders (Note 32) Basic Diluted Weighted average shares (Note 32) Basic Diluted December 31, 2015 $ December 31, 2014 $ 2,903,803 (2,416,094) 487,709 (395,877) 2,214,778 (1,841,629) 373,149 (290,904) 91,832 5,546 249 (18,757) – 49 78,919 (36,106) 2,292 45,105 17,791 27,314 22,821 4,493 27,314 0.93 0.92 82,245 5,524 (183) 1,767 3,490 – 92,843 (20,363) 2,147 74,627 18,335 56,292 53,132 3,160 56,292 2.31 2.30 24,574,022 23,018,588 24,674,083 23,139,403 The accompanying notes are an integral part of these consolidated financial statements. Approved on behalf of the Company: Gordon R. Barefoot, Director Barry L. James, Director AutoCanada Š 2015 Annual Report Š Page F3 AutoCanada Inc. Consolidated Statements of Financial Position (in thousands of Canadian dollars) ASSETS Current assets Cash and cash equivalents (Note 18) Trade and other receivables (Note 19) Inventories (Note 20) Current tax recoverable Current portion of finance lease receivables (Note 21) Other current assets Assets held for sale (Note 23) Restricted cash (Note 18) Property and equipment (Note 22) Loan to associate (Note 16) Long-term portion of finance lease receivables (Note 21) Intangible assets (Note 24) Goodwill (Note 24) Other long-term assets (Note 26) LIABILITIES Current liabilities Bank indebtedness (Note 18) Trade and other payables (Note 27) Revolving floorplan facilities (Note 28) Current tax payable Vehicle repurchase obligations (Note 29) Current indebtedness (Note 28) Current portion of redemption liabilities (Note 17) Liabilities held for sale (Note 23) Long-term indebtedness (Note 28) Deferred income tax (Note 12) Redemption liabilities (Note 17) EQUITY Attributable to AutoCanada shareholders Attributable to Non-controlling interests December 31, 2015 $ December 31, 2014 $ 62,274 90,821 596,542 6,920 4,012 4,760 27,482 792,811 6,288 278,385 8,470 6,546 399,648 32,956 7,078 72,462 92,138 563,277 – 3,537 5,166 – 736,580 – 214,938 – 10,292 356,612 32,852 6,713 1,532,182 1,357,987 898 86,284 548,322 – 1,846 11,484 6,338 14,493 669,665 285,759 25,838 40,891 1,022,153 451,945 58,084 510,029 2,181 82,670 527,780 9,708 1,539 4,651 7,665 – 636,194 223,009 28,195 34,133 921,531 381,428 55,028 436,456 1,532,182 1,357,987 Commitments and contingencies (Note 30) The accompanying notes are an integral part of these consolidated financial statements. Page F4 Š AutoCanada Š 2015 Annual Report AutoCanada Inc. Consolidated Statements of Changes in Equity For the Years Ended (in thousands of Canadian dollars) Attributable to AutoCanada shareholders Share capital $ Contributed surplus $ Accumulated deficit $ Total $ Non- controlling interests $ Total Equity $ Balance, January 1, 2015 Net and comprehensive income Dividends declared on common shares 434,572 – (Note 32) Non-controlling interests arising on acquisitions (Note 13) Recognition of redemption liability granted to non-controlling interests (Note 13) Distributions by subsidiaries to non-controlling interests (Note 17) Common shares issued (Note 32) Treasury shares acquired (Note 32) Shares settled from treasury (Note 32) Share-based compensation – – – – 72,702 (89) 1,052 – Balance, December 31, 2015 508,237 4,721 – (57,865) 381,428 22,821 22,821 55,028 436,456 27,314 4,493 – – – – – – (1,052) 617 4,286 (24,432) (24,432) – (24,432) – – 5,847 5,847 (1,102) (1,102) – (1,102) – – – – – – 72,702 (89) – 617 (7,284) – – – – (7,284) 72,702 (89) – 617 (60,578) 451,945 58,084 510,029 Attributable to AutoCanada shareholders Share capital $ Contributed surplus $ Accumulated deficit $ Total capital $ Non- controlling interests $ Equity $ Balance, January 1, 2014 Net and comprehensive income Dividends declared on common shares 232,938 – (Note 32) Non-controlling interests arising on business combinations and acquisitions (Notes 13 & 14) Recognition of redemption liability granted to non-controlling interests (Notes 13 & 14) Distributions by subsidiaries to non-controlling interests (Note 17) Common shares issued (Note 32) Treasury shares acquired (Note 32) Shares settled from treasury (Note 32) Share-based compensation Balance, December 31, 2014 – – – – 203,655 (2,776) 755 – 434,572 4,758 – (47,454) 190,242 53,132 53,132 – 190,242 56,292 3,160 – – – – – – (760) 723 4,721 (21,745) (21,745) – (21,745) – – 52,309 52,309 (41,798) (41,798) – (41,798) – – – 203,655 (2,776) – (5) – 723 – (441) (441) – 203,655 (2,776) – (5) – 723 – (57,865) 381,428 55,028 436,456 The accompanying notes are an integral part of these consolidated financial statements. AutoCanada Š 2015 Annual Report Š Page F5 AutoCanada Inc. Consolidated Statements of Cash Flows For the Years Ended (in thousands of Canadian dollars) Cash provided by (used in): Operating activities Net and comprehensive income Income taxes (Note 12) Amortization of prepaid rent Depreciation of property and equipment (Note 22) (Gain) loss on disposal of assets Impairment (recovery) of intangible assets (Note 24) Share-based compensation – equity-settled Share-based compensation – cash-settled Income from investment in associates (Note 15) Income taxes paid Gain on embedded derivative (Note 11) Revaluation of redemption liability (Note 17) Revaluation of contingent consideration (Note 36) Net change in non-cash working capital (Note 35) Investing activities Business acquisitions, net of cash acquired (Note 13) Investments in associates (Note 15) Dividends received from investments in associates (Note 15) Combination of entities under common control (Note 14) Purchases of property and equipment (Note 22) Proceeds on sale of property and equipment Loan to associate (Note 16) Additions to restricted cash Financing activities Proceeds from long-term indebtedness Repayment of long-term indebtedness Common shares repurchased (Note 32) Dividends paid (Note 32) Dividends paid to non-controlling interests by subsidiaries (Note 17) Proceeds from issuance of common shares (Note 32) Proceeds from senior unsecured notes (Note 28) Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year (Note 18) Cash and cash equivalents at end of year (Note 18) December 31, 2015 $ December 31, 2014 $ 27,314 17,791 452 18,860 (249) 18,757 617 (490) – (35,999) (42) 4,329 149 1,264 52,753 (76,480) – – – (74,606) 143 (8,470) (6,288) (165,701) 338,730 (274,670) (89) (24,432) (7,284) 71,788 – 104,043 (8,905) 70,281 61,376 56,292 18,335 452 13,624 183 (1,767) 723 (487) (3,490) (16,824) (243) – – 4,339 71,137 (269,983) (43,900) 1,458 4,699 (23,441) 32 – – (331,135) 770,449 (787,945) (2,776) (21,745) (441) 191,262 146,362 295,166 35,168 35,113 70,281 The accompanying notes are an integral part of these consolidated financial statements. Page F6 Š AutoCanada Š 2015 Annual Report AutoCanada Inc. Notes to the Financial Statements For the Years Ended December 31, 2015 and 2014 (in thousands of Canadian dollars except for share and per share amounts) 1 General Information 3 Significant Accounting Policies AutoCanada Inc. (“AutoCanada” or the “Company”) is incorporated in Alberta, Canada with common shares listed on the Toronto Stock Exchange (“TSX”) under the symbol of “ACQ”. The business of AutoCanada, held in its subsidiaries, is the operation of franchised automobile dealerships in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia and New Brunswick. The Company offers a diversified range of automotive products and services, including new vehicles, used vehicles, vehicle leasing, vehicle parts, vehicle maintenance and collision repair services, extended service contracts, vehicle protection products and other after-market products. The Company also arranges financing and insurance for vehicle purchases by its customers through third-party finance and insurance sources. The address of its registered office is 200, 15511 123 Avenue NW, Edmonton, Alberta, Canada, T5V 0C3. 2 Basis of Presentation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board (“IASB”) and Canadian Generally Accepted Accounting Principles (“GAAP”) as set out in the CPA Canada Handbook – Accounting (“CPA Handbook”). The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are described in Note 5. These financial statements were approved for issue by the Board of Directors on March 17, 2016. The significant accounting policies used in the preparation of these consolidated financial statements are as follows: Basis of measurement The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value, including derivative instruments, redemption liabilities and liabilities for cash-settled share-based payment arrangements. Principles of consolidation The consolidated financial statements comprise the financial statements of AutoCanada and its subsidiaries. Subsidiaries are all entities over which the Company has control. For accounting purposes, control is established by an investor when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date control is transferred to the Company, and are no longer consolidated on the date control ceases. Non-controlling interests represent equity interests in subsidiaries owned by outside parties. The share of net assets of subsidiaries attributable to non-controlling interests is presented as a component of equity. Intercompany transactions, balances, income and expenses, and gains or losses on transactions are eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the accounting policies adopted by the Company. AutoCanada Š 2015 Annual Report Š Page F7 Business combinations Business combinations are accounted for using the acquisition method of accounting. This involves recognizing identifiable assets (including intangible assets not previously recognised by the acquiree) and liabilities (including contingent liabilities) of acquired businesses at fair value at the acquisition date. The excess of acquisition cost over the fair value of the identifiable net assets acquired is recorded as goodwill. If the acquisition cost is less than the fair value of the net assets acquired, the fair value of the net assets is re-assessed and any remaining difference is recognized directly in the consolidated statement of comprehensive income. Transaction costs are expensed as incurred. Any subsequent change to the fair value of contingent consideration liabilities is recognized in the consolidated statement of comprehensive income. Investments in associates An associate is an entity over which the Company has significant influence, but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights, but with considerations over the relationships between the investors and the investees. Investments in associates are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee after the date of acquisition. The Company’s investment in associates includes goodwill identified on acquisition. Loans to associates are accounted for using the effective interest method as outlined in the financial instruments policy note. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognized in other comprehensive income is reclassified to profit or loss, where appropriate. Page F8 Š AutoCanada Š 2015 Annual Report The Company’s share of post-acquisition profit or loss is recognized in the income statement, and its share of post-acquisition movements in other comprehensive income is recognized in other comprehensive income with a corresponding adjustment to the carrying amount of the investment. When the Company’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Company does not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. The Company determines at each reporting date whether there is any objective evidence that the investment in associate is impaired. If this is the case, the Company calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount adjacent to its share of profit or loss of the associate in the consolidated statement of comprehensive income. Profits and losses resulting from upstream and downstream transactions between the Company and its associate are recognized in the Company’s financial statements only to the extent of unrelated investors’ interests in the associate. Unrealized losses are eliminated unless the transaction provides evidence of an impairment of the assets transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Company. Dilution gains and losses arising from the investment in the associate are recognized in the consolidated statement of comprehensive income. Revenue recognition (a) Vehicles, parts, service and collision repair Revenue from the sale of goods and services is measured at the fair value of the consideration receivable, net of rebates. It excludes sales related taxes and intercompany transactions. Revenue is recognized when the risks and rewards of ownership have been transferred to the customer, the revenue and costs can be reliably measured and it is probable that economic benefits will flow to the Company. In practice, this means that revenue is recognized when vehicles are invoiced and physically delivered to the customer and payment has been received or credit approval has been obtained by the customer. Revenue for parts, service and collision repair is recognized when the service has been performed. (b) Finance and insurance The Company arranges financing for customers through various financial institutions and receives a commission from the lender based on the difference between the interest rate charged to the customer and the interest rate set by the financing institution, or a flat fee. The Company also receives commissions for facilitating the sale of third-party insurance products to customers, including credit and life insurance policies and extended service contracts. These commissions are recorded as revenue at the time the customer enters into the contract and the Company is entitled to the commission. The Company is not the obligor under any of these contracts. In the case of finance contracts, a customer may prepay or fail to pay their contract, thereby terminating the contract. Customers may also terminate extended service contracts, which are fully paid at purchase, and become eligible for refunds of unused premiums. In these circumstances, a portion of the commissions the Company receives may be charged back to the Company based on the terms of the contracts. The revenue the Company records relating to commissions is net of an estimate of the amount of chargebacks the Company will be required to pay. This estimate is based upon historical chargeback experience arising from similar contracts, including the impact of refinance and default rates on retail finance contracts and cancellation rates on extended service contracts and other insurance products. Taxation (a) Deferred tax Deferred tax is recognized on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the statement of financial position. Deferred tax is calculated using tax rates and laws that have been enacted or substantively enacted at the end of the reporting period, and which are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred tax liabilities: Š are recognized for all taxable temporary differences; and Š are not recognized on temporary differences that arise from goodwill which is not deductible for tax purposes. Deferred tax assets: Š are recognized to the extent it is probable that taxable profits will be available against which the deductible temporary differences can be utilized; and Š are reviewed at the end of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are not recognized in respect of temporary differences that arise on initial recognition of assets and liabilities acquired other than in a business combination. (b) Current tax Current tax expense is based on the results for the period as adjusted for items that are not taxable or not deductible. Current tax is calculated using tax rates and laws that were enacted or substantively enacted at the end of the reporting period. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. Provisions are established where appropriate on the basis of amounts expected to be paid to the tax authorities. AutoCanada Š 2015 Annual Report Š Page F9 Manufacturer incentives and other rebates Various incentives from manufacturers are received based on achieving certain objectives, such as specified sales volume targets. These incentives are typically based upon units sold to retail or fleet customers. These manufacturer incentives are recognized as a reduction of new vehicle cost of sales when earned, generally at the latter of the time the related vehicles are sold or upon attainment of the particular program goals. Manufacturer rebates to our dealerships and assistance for floorplan interest are reflected as a reduction in the carrying value of each vehicle purchased by us. These incentives are recognized as a reduction to the cost of sales as the related vehicles are sold. Manufacturer advertising rebates that are reimbursements of costs associated with specific advertising expenses are earned in accordance with the respective manufacturers’ reimbursement-based advertising assistance programs, which is typically after the corresponding advertising expenses have been incurred, and are reflected as a reduction in advertising expense included in administrative costs as an operating expense in the consolidated Statement of Comprehensive Income. Financial instruments Financial assets and financial liabilities are recognized on the consolidated Statement of Financial Position when the Company becomes a party to the contractual provisions of the financial instrument. All financial instruments are required to be measured at fair value on initial recognition. The Company’s own credit risk and the credit risk of the counter-party are taken into consideration in determining the fair value of financial assets and financial liabilities. Financial assets are recognized on the settlement date, which is the date on which the asset is delivered to or by the Company. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or were transferred and the Company has transferred substantially all risks and rewards of ownership. Page F10 Š AutoCanada Š 2015 Annual Report The Company’s financial assets, including cash and cash equivalents, trade and other receivables and loans to associates, are classified as loans and receivables at the time of initial recognition. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are initially recognized at fair value plus transaction costs and subsequently carried at amortized cost using the effective interest method. Cash and cash equivalents Cash and cash equivalents include amounts on deposit with financial institutions and amounts with the Bank of Nova Scotia (“Scotiabank”) that are readily available to the Company (See Note 25 – Financial instruments – Credit risk for explanation of credit risk associated with amounts held with Scotiabank). Trade and other receivables Trade and other receivables are amounts due from customers, financial institutions and suppliers that arise from providing services or sale of goods in the ordinary course of business. Trade and other receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the consolidated Statement of Comprehensive Income within operating expenses. When a trade and other receivable is uncollectible, it is written off against the allowance account for trade and other receivables. Subsequent recoveries of amounts previously written off are credited against operating expenses in the consolidated Statement of Comprehensive Income. Inventories New, used and demonstrator vehicle inventories are recorded at the lower of cost and net realizable value with cost determined on a specific item basis. Parts and accessories inventories are carried at the lower of cost and net realizable value. Inventories of parts and accessories are accounted for using the “weighted-average cost” method. In determining net realizable value for new vehicles, the Company primarily considers the age of the vehicles along with the timing of annual and model changeovers. For used vehicles, the Company considers recent market data and trends such as loss histories along with the current age of the inventory. Parts inventories are primarily assessed considering excess quantity and continued usefulness of the part. The risk of loss in value related to parts inventories is minimized since excess or obsolete parts can generally be returned to the manufacturer. Assets held for sale Non-current assets and associated liabilities are classified as assets held for sale when their carrying amount is to be recovered principally through a sale transaction, rather than continuing use, and a sale is highly probable. Assets designated as held for sale are held at the lower of carrying amount at designation and fair value less costs to sell. Depreciation is not charged against property, plant and equipment classified as held for sale. Property and equipment Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. Residual values, useful lives and methods of depreciation are reviewed, and adjusted if appropriate, at each financial year end. Land is not depreciated. Other than as noted below, depreciation of property and equipment is provided for over the estimated useful life of the assets on the declining balance basis at the following annual rates: Machinery and equipment Furniture, fixtures and other Company & lease vehicles Computer hardware 20% 20% 30% 30% Buildings are depreciated on a straight-line basis over the estimated useful lives of the buildings. Useful lives are determined based on independent appraisals. The useful life of leasehold improvements is determined to be the lesser of the lease term or the estimated useful life of the improvement. Leasehold improvements are depreciated using the straight-line method over the useful life of the asset. Depreciation of leased vehicles is based on a straight line depreciation of the difference between the cost and the estimated residual value at the end of the lease over the term of the lease. Leased vehicle residual values are regularly reviewed to determine whether depreciation rates are reasonable. Intangible assets and goodwill (a) Intangible assets Intangible assets consist of rights under franchise agreements with automobile manufacturers (“dealer agreements”). The Company has determined that dealer agreements will continue to contribute to cash flows indefinitely and, therefore, have indefinite lives due to the following reasons: Š Certain of our dealer agreements continue indefinitely by their terms; and Š Certain of our dealer agreements have limited terms, but are routinely renewed without substantial cost to the Company. AutoCanada Š 2015 Annual Report Š Page F11 Intangible assets are carried at cost less accumulated impairment losses. When acquired in a business combination, the cost is determined in connection with the purchase price allocation based on their respective fair values at the acquisition date. When market value is not readily determinable, cost is determined using generally accepted valuation methods based on revenues, costs or other appropriate criteria. (b) Goodwill Goodwill represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets of the acquired subsidiary at the date of acquisition, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of a cash-generating unit (“CGU”) include the carrying amount of goodwill relating to the CGU sold. Impairment Impairments are recorded when the recoverable amount of assets are less than their carrying amounts. The recoverable amount is the higher of an asset’s fair value less cost to sell or its value in use. Impairment losses, other than those relating to goodwill, are evaluated for potential reversals of impairment when events or changes in circumstances warrant such consideration. (a) Non-financial assets The carrying values of non-financial assets with finite lives, such as property and equipment, are assessed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. (b) Intangible assets and goodwill The carrying values of all intangible assets are reviewed for impairment whenever Page F12 Š AutoCanada Š 2015 Annual Report events or changes in circumstances indicate that their carrying amounts may not be recoverable. Additionally, the carrying values of identifiable intangible assets with indefinite lives and goodwill are tested annually for impairment. Specifically: Š Our dealer agreements with indefinite lives are subject to an annual impairment assessment. For purposes of impairment testing, the fair value of our dealer agreements is determined using a combination of a discounted cash flow approach and earnings multiple approach. Š For the purpose of impairment testing, goodwill is allocated to cash-generating units (“CGU”) based on the level at which management monitors it, which is not higher than an operating segment before aggregation. Goodwill is allocated to those CGU’s that are expected to benefit from the business combination in which the goodwill arose. Trade and other payables Trade and other payables are obligations to pay for goods or services that have been acquired in the ordinary course of business. Trade and other payables are recognized initially at fair value and subsequently measured at amortized cost, and are classified as current liabilities if payment is due within one year or less. Provisions represent liabilities for which the amount or timing is uncertain. Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present value of the expected expenditures to settle the obligation using a discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in provision due to passage of time is recognized as interest expense. Leases The Company as a lessor: Lease obligations are classified as either operating or finance, based on the substance of the transaction at inception of the lease. Classification is re-assessed if the terms of the lease are changed. (a) Finance leases Leases in which substantially all the risks and rewards of ownership are transferred are classified as finance leases. The Company as a lessor: When assets are leased out under a finance lease, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. The method for allocating gross earnings to accounting periods is referred to as the “actuarial method”. The actuarial method allocates rentals between finance income and repayment of capital in each accounting period in such a way that finance income will emerge as a constant rate of return on the lessor’s net investment in the lease. The Company as a lessee: Assets meeting finance lease criteria are capitalized at the lower of the present value of the related lease payments or the fair value of the leased asset at the inception of the lease. Minimum lease payments are apportioned between the finance charge and the liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. (b) Operating leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. When assets are leased out under an operating lease, the asset is included in the balance sheet based on the nature of the asset. Lease income on operating leases is recognised over the term of the lease on a straight-line basis. The Company as a lessee: Payments under an operating lease (net of any incentives received from the lessor) are recognized on a straight-line basis over the period of the lease. Redemption liabilities The potential cash payments related to put options issued by the Company over the equity of subsidiary companies are accounted for as financial liabilities when such options may only be settled other than by exchange of a fixed amount of cash, or another financial asset, or for a fixed number of shares in the subsidiary. The amount that may become payable under the option on exercise is initially recognised at fair value within redemption liabilities with a corresponding charge directly to equity attributable to AutoCanada shareholders. Subsequently, if the Company revises its estimates, the carrying amount of the redemption liability is adjusted and the adjustment will be recognised as income or expenses in the consolidated Statement of Comprehensive Income. Options that are not exercisable for at least one year from the balance sheet date are presented as non-current liabilities. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds. Where any group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s shareholders until the shares are cancelled or reissued. Where such ordinary shares are AutoCanada Š 2015 Annual Report Š Page F13 subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s shareholders. Dividends Dividends on common shares are recognized in the Company’s consolidated financial statements in the period the dividends are declared by the Company’s Board of Directors. Earnings per share Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the treasury stock method, which assumes that the cash that would be received on the exercise of options is applied to purchase shares at the average price during the period and that the difference between the number of shares issued on the exercise of options and the number of shares obtainable under this computation, on a weighted average basis, is added to the number of shares outstanding. Antidilutive options are not considered in computing diluted earnings per share. 4 Accounting standards and amendments issued but not yet adopted Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB or International Financial Reporting Interpretations Committee (“IFRIC”) that are not yet effective for the financial year ended December 31, 2015. The standards issued that are applicable to the Company are as follows: Š IFRS 9, Financial Instruments – the new standard will ultimately replace IAS 39, Financial Instruments: Recognition and Measurement. The replacement of IAS 39 is a multi-phase project with the objective of improving and simplifying the reporting for financial instruments and the issuance of IFRS 9 is part of the first phase. This standard becomes effective on January 1, 2018, with earlier adoption permitted. Page F14 Š AutoCanada Š 2015 Annual Report Š IFRS 15, Revenue from Contracts with Customers – in May 2014, the IASB issued IFRS 15, which supersedes IAS 18, Revenue, IAS 11, Construction Contracts, and other interpretive guidance associated with revenue recognition. IFRS 15 provides a single model to determine how and when an entity should recognize revenue, as well as requiring entities to provide more informative, relevant disclosures in respect of its revenue recognition criteria. IFRS 15 is to be applied prospectively and is effective for annual periods beginning on or after January 1, 2018, with earlier application permitted. Š IFRS 16, Leases – in January 2016, the IASB issued IFRS 16, which replaces IAS 17, Leases, and its associate interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the asset being leased. For those assets determined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance sheet accounting model that is similar to current finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting remains similar to current accounting practice. The standard is effective for annual periods beginning on or after January 1, 2019, with early application permitted for entities that apply IFRS 15. The Company is in the process of evaluating the impact that the new standards may have on the financial statements. 5 Critical accounting estimates, judgments & measurement uncertainty The preparation of financial statements requires management to make estimates and judgments about the future. Estimates and judgments are continuously evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Critical estimates and assumptions in determining the value of assets and liabilities: Intangible assets and goodwill Intangible assets and goodwill generally arise from business combinations. The Company applies the acquisition method of accounting to these transactions, which involves the allocation of the cost of an acquisition to the underlying net assets acquired based on their respective estimated fair values. As part of this allocation process, the Company must identify and attribute values to the intangible assets acquired. These determinations involve significant estimates and assumptions regarding cash flow projections, economic risk and weighted average cost of capital. These estimates and assumptions determine the amount allocated to intangible assets and goodwill. If future events or results differ significantly from these estimates and assumptions, the Company may record impairment charges in the future. The Company tests, at least annually, whether intangible assets and goodwill have suffered impairment, in accordance with its accounting policies. The recoverable amounts of CGU’s have been estimated based on the greater of fair value less costs to dispose and value-in-use calculations (see Note 24). Inventories Inventories are recorded at the lower of cost and net realizable value with cost determined on a specific item basis for new and used vehicles. In determining net realizable value for new vehicles, the Company primarily considers the age of the vehicles along with the timing of annual and model changeovers. For used vehicles, the Company considers recent market data and trends such as loss histories along with the current age of the inventory. The determination of net realizable value for inventories involves the use of estimates. Redemption liabilities Redemption liabilities arise during business combinations where non-controlling interest shareholders have the right to require the Company to redeem their equity interests in certain non-wholly owned subsidiaries (See Note 17). The redemption amounts are determined with reference to the future profitability generated by those subsidiaries and their operating businesses. The Company will initially recognise a financial liability at the present value of the estimated redemption amount, and at the end of each subsequent reporting period, the Company will revisit its estimates. If the Company revises its estimates, the Company will adjust the carrying amount of the financial liability to reflect revised estimated profitability and the adjustments will be recognised as income or expenses in the consolidated statement of comprehensive income. Loan to associate The loan to associate is carried at amortized cost using the effective interest method. This method applies the effective interest rate to the estimated future cash flows in order to calculate the carrying value of the loan each period. The effective interest rate is calculated at inception of the loan using an estimate of future cash flows. The cash flows related to the loan are tied to both the base interest rate as well as the related licensing fees, and the licensing fees are determined based on gross margins of the associate. Key estimates and assumptions involved in determining the effective interest rate and the carrying value are the cash flow projections, specifically the gross margins of the associate. Refer to Note 36 for further information about methods and assumptions used in determining the carrying value. Critical judgments in applying accounting policies: Associates When assessing control over an investee, an investor considers the nature of its relationship with other parties and whether those other parties are acting on the investor’s behalf; that is, acting as a de facto agent. The determination of whether other parties are acting as de facto agents requires judgment, AutoCanada Š 2015 Annual Report Š Page F15 considering not only the nature of the relationship but also how those parties interact with each other and the investor. (a) Loan to associate AutoCanada has provided a loan to PPH Holdings Ltd. (“PPH”) for which the voting interests are held 100% by Mr. Patrick Priestner (“Priestner”), the Executive Chair of the Company, (as described in Note 16). When assessing whether the Company has control of PPH, management has considered the nature of the loan, the Company’s relationship with Priestner and whether the Company has the ability to direct decision-making rights of Priestner pertaining to its loan to PPH. In making this assessment, the prevailing consideration is that the loan to PPH is repayable at any time without recourse, and which grants the Company no power to control PPH. AutoCanada’s returns from PPH are derived from interest on the loan and license fees based on gross profit, as such, operating decisions made by Priestner impacting operating profit or net income will impact his returns but will not affect AutoCanada’s returns. Priestner is not considered to be a de facto agent of AutoCanada as it relates to PPH. The following facts were also considered to assess the relationship between AutoCanada and Priestner as it relates to PPH: Š Regardless of employment at AutoCanada, Priestner’s interest in PPH would remain with full ability to control decisions as they pertain to PPH; Š The loan agreement stipulates that the loan’s performance, repayment or prepayment will not in any way have any consequences in relation to the employment of Priestner at AutoCanada; Š Priestner has not relied on any financial support from AutoCanada in making his investment in PPH, and therefore the risk of loss and reward to Priestner personally is significant; Š There are no contractual rights providing AutoCanada with decision making power over Priestner, additionally AutoCanada is Page F16 Š AutoCanada Š 2015 Annual Report not involved in the operational decision making of PPH. Š Priestner’s level of expertise and knowledge in operating PPH; Š Priestner has the ability to prepay or repay the loan at any time and no ability of AutoCanada to block such a transaction; and, When combining these considerations with the fact that Priestner is the sole director of the Board of PPH, and therefore governs relevant activities of the investee, management has concluded that AutoCanada does not have power over PPH, and therefore has not consolidated this associate. Should the nature of the relationship and/or the relevant agreements between Priestner and the Company change in the future, this assessment would need to be further evaluated. (b) Investments in associates On July 11, 2014, Canada One Auto Group Ltd. (“COAG”), a company controlled by Priestner, completed a secondary offering of shares in AutoCanada held by COAG and its subsidiaries. As a result of the transaction, COAG reduced its ownership interest in AutoCanada to 9.6% of the outstanding common voting shares. On December 14, 2015, the Company completed a public offering of common shares further reducing the ownership interest to 8.6% (Note 34). The reduction in ownership caused the Company to re-evaluate its significant judgment dealing with the accounting for its investments in associates (the “investees”). Since the Company does not hold voting shares in the investees, the Company evaluated whether it exercised power over the investees through a de facto agency relationship with its Executive Chair in respect of these investments. The following facts were considered to assess the relationship between AutoCanada and its Executive Chair: Š The Company has contractual rights to participate in any issuance or sale of securities that would impact its proportionate interest in the investees, as well as a right of first refusal to purchase Priestner’s shares in applicable circumstances; Š The Company has the ability to control the decision making of the Executive Chair by virtue of the employment agreement with the Executive Chair. Should the Executive Chair no longer be employed by the Company, this assessment would need to be further evaluated; Š The directors and officers of the investees are related parties to the Company; and Š The Company is involved in the operational decision making of its investees. Prior to the secondary offering, the Executive Chair was considered to have de facto control over AutoCanada, which was considered an overarching factor in concluding that he also controlled the investees. The loss of de facto control over AutoCanada changed the Company’s assessment with respect to a number of factors, including those listed above. As a result of its assessment, management concluded that, as of July 11, 2014, the Company has power over its investees, and has consolidated the results of its investees on a common control basis using the predecessor values method. (See Note 14) Effective January 1, 2015, Priestner transitioned out of the role of CEO and into the role of Executive Chair and remains an employee of the Company. The Company has assessed that this change does not change the nature of his relationship with the Company. Should the nature of the relationship and/or the relevant agreements between Priestner and the Company change in the future, this assessment would need to be further evaluated. Combinations with entities under common control There is currently no guidance in IFRS on the accounting treatment for business combinations among entities under common control. As such, the Company has elected to consolidate the assets and liabilities of the investees using the predecessor values method on a prospective basis. The application of this method applies the concept of IAS 8 Accounting Policies, Changes in Estimates, and Errors whereby if no applicable standard or interpretation exists, then management must develop a policy that is relevant to the decision-making needs of the users, and that is reliable. 6 Segment information Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker (“CODM”), the Company’s CEO, who is responsible for allocating resources and assessing performance of the operating segment. The Company has identified one reportable business segment since the Company is operated and managed on a dealership basis. Dealerships operate a number of business streams such as new and used vehicle sales, parts, service and collision repair and finance and insurance products. Management is organized based on the dealership operations as a whole rather than the specific business streams. These dealerships are considered to have similar economic characteristics and offer similar products and services which appeal to a similar customer base. Additionally, these dealerships have similar expected long-term growth rates and similar average gross margins. As such, the results of each dealership have been aggregated to form one reportable business segment. The CODM assesses the performance of the operating segment based on a measure of both revenue and gross profit. 7 Revenue New vehicles Used vehicles Finance, insurance and other Parts, service and collision repair 2015 $ 2014 $ 1,668,237 1,342,346 495,352 121,373 255,707 704,569 143,383 387,614 2,903,803 2,214,778 AutoCanada Š 2015 Annual Report Š Page F17 8 Cost of sales New vehicles Used vehicles Finance, insurance and other Parts, service and collision repair 9 Operating expenses Employee costs (Note 10) Administrative costs(1) Facility lease costs Depreciation of property and equipment (Note 22) 2015 $ 2014 $ 1,545,829 1,236,344 465,851 12,293 127,141 663,940 12,579 193,746 2,416,094 1,841,629 2015 $ 245,703 109,593 21,721 18,860 2014 $ 186,161 77,478 13,641 13,624 395,877 290,904 (1) Administrative costs include professional fees, consulting services, technology-related expenses, selling and marketing, and other general and administrative costs. 10 Employees Operating expenses incurred in respect of employees were: Wages, salaries and commissions Withholding taxes and insurance Employee benefits Other benefits 11 Finance costs and finance income Finance costs: Interest on long-term indebtedness Unrealized gain on embedded derivative (Note 28) Revaluation of redemption liabilities (Note 17) Revaluation of contingent consideration Floorplan financing Other interest expense Finance income: Short-term bank deposits 2015 $ 221,723 13,112 10,854 14 2014 $ 170,804 8,040 6,677 640 245,703 186,161 2015 $ 2014 $ 14,909 (42) 4,329 149 13,160 3,601 36,106 7,850 (243) – – 10,452 2,304 20,363 (2,292) (2,147) Cash interest paid during the year ended December 31, 2015 was $31,463 (2014 – $20,605). Page F18 Š AutoCanada Š 2015 Annual Report 12 Taxation Components of income tax expense were as follows: Current tax Deferred tax Total income tax expense Factors affecting tax expense for the year: Comprehensive income before taxes Comprehensive income before tax multiplied by the standard rate of Canadian corporate tax of 28.2% (2014 – 25.8%) Effects of: Impact of non-deductible (non-taxable) items Change in deferred tax rate Difference between future and current tax rate Adjustment to deferred taxes not previously recognized Reversal of deferred tax on outside basis of equity investments Other, net Income tax expense 2015 $ 2014 $ 19,290 21,610 (3,275) (1,499) 17,791 18,335 2015 $ 2014 $ 45,105 74,627 12,719 19,276 2,646 1,933 (657) 934 – 216 (259) 60 16 – (754) (4) 17,791 18,335 AutoCanada Š 2015 Annual Report Š Page F19 The movements of deferred tax assets and liabilities are shown below: Deferred tax assets (liabilities) January 1, 2014 Benefit (expense) to consolidated statement of comprehensive income Deferred tax acquired on acquisition Deferred tax acquired on combination of entities under common control Measurement period adjustment Deferred tax on share issuance costs Other December 31, 2014 Benefit (expense) to consolidated statement of comprehensive income Deferred tax on share issuance costs Other Deferred income from partnerships $ Property and equipment $ Goodwill and intangible assets $ Lease receivables $ Restricted partnership losses $ Other $ Total $ – – – (9,290) (725) (11,101) 2,702 2,886 (2,473) – – – – – – – – – – (5,090) (5,920) (3,532) 2,416 – – – – – (6,588) 2,161 (22,168) (3,532) (321) (43) (21,480) 321 (161) 3,275 – – – – (5,090) 300 (9,152) – 2,416 – 1,820 16 – 1,820 16 – 1,932 (28,195) 5,383 – – 48 – – (4,457) 696 – – – – – – – (171) 1,499 914 (56) 914 (56) December 31, 2015 (1,205) 2,209 (26,625) (2,836) – 2,619 (25,838) Income tax expense is recognized based on the weighted average annual income tax rate. The blended annual statutory rate used for the year ended December 31, 2015 was 28.2% (December 31, 2014, 25.8%). During the period, the Government of Alberta enacted an increase in the corporate income tax rate from 10% to 12%. As a result, the Company increased its current and deferred income tax rates with a corresponding increase to current and deferred income tax expense. The increase in the tax rate has reduced net and comprehensive income for the year ended December 31, 2015 by $983. Changes in the deferred income tax components are adjusted through deferred tax expense. Of the above components of deferred income taxes, $2,288 of the deferred tax liabilities are expected to be expensed within 12 months. In the course of preparing the 2015 consolidated financial statements, it was determined that goodwill and deferred income tax liabilities pertaining to the July 11, 2014 common control business combination were understated by $3,232. This adjustment has been reflected in the comparative financial statements. Page F20 Š AutoCanada Š 2015 Annual Report 13 Business acquisitions During the year ended December 31, 2015, the Company completed five business acquisitions comprising six automotive dealerships, representing six franchises. All acquisitions have been accounted for using the acquisition method. Acquisitions completed during this period are as follows: Airdrie Chrysler On May 11, 2015, the Company purchased substantially all of the operating and fixed assets of North Hill Motors (1975) Ltd. (“Airdrie Chrysler”), in Airdrie, Alberta, for total cash consideration of $21,595 and contingent consideration with a fair value of $3,608. The acquisition was financed by drawing on the Company’s revolving term facility. The contingent consideration arrangement requires the Company to pay, in cash, to the former owners of Airdrie Chrysler, an amount up to $4,000 based on the achievement of certain targets. The full amount will be paid if either the cumulative net income before tax exceeds a predefined level or if cumulative Chrysler new vehicle sales in Alberta exceeds a specified threshold. If neither target is met the amount paid is reduced by the lesser of the equivalent percentage to the percentage shortfall of each target. The potential undiscounted amount of all future payments that the Company could be required to make under this arrangement is between $0 and $4,000. The maximum amount of future payments has been put into a trust account to be paid out upon achievement or cancellation of the contingent consideration arrangement. This amount is recorded as restricted cash (see Note 18). The fair value of the contingent consideration arrangement of $3,608 was estimated by assessing the probability of the above targets being met and the potential percentage shortfall. This is a level 3 fair value measurement (Note 36). Don Folk Chevrolet On September 14, 2015, the Company, through an 80% owned subsidiary, DFC Holdings Inc., purchased substantially all of the operating and fixed assets of Don Folk Chevrolet Inc., a Chevrolet dealership, and 399573 B.C. Ltd., an auto body shop, (together “Don Folk Chevrolet”), located in Kelowna, British Columbia, for total cash consideration of $9,175. The acquisition was financed by drawing on the Company’s revolving term facility. To comply with GM Canada’s approval, Priestner, the Executive Chair of the Company, is required to have 100% voting control of Don Folk Chevrolet. In accordance with the terms of the ownership structure for GM dealerships approved by GM Canada, the Company holds an 80% non-voting equity interest in Don Folk Chevrolet, with Priestner, being named Dealer Operator, personally holding a 15% equity interest and 100% voting control of Don Folk Chevrolet. The remaining 5% equity interest is held by minority shareholders. The transaction was reviewed and approved by the Company’s independent members of its Board of Directors. The Company also purchased the land and facilities through a wholly-owned subsidiary, DFC Properties Inc., for $13,250. Grove Dodge On October 5, 2015, the Company, through GRV C Holdings LP, purchased substantially all of the operating and fixed assets of Grove Dodge Chrysler Jeep Ltd. (“Grove Dodge”), in Spruce Grove, Alberta, for total cash consideration of $19,083 and contingent consideration with a fair value of $1,808. The acquisition was financed by drawing on the Company’s revolving term facility. As part of the transaction, the Company entered into an agreement with a former minority owner of Grove Dodge, whereby he acquired a 10% ownership interest in GRV C Holdings LP from the Company for cash consideration of $2,088. The contingent consideration arrangement requires GRV C Holdings LP to pay, in cash, to the former owners of Grove Dodge, an amount up to $2,500, based on the achievement of certain targets. The full amount will be paid if the cumulative net income before tax exceeds AutoCanada Š 2015 Annual Report Š Page F21 a predefined level. If the target is not met, the amount paid is reduced by the equivalent percentage to the percentage of the shortfall of the target. southwest Ottawa for total cash consideration of $100. The acquisitions were financed by drawing on the Company’s revolving term facility. The potential undiscounted amount of all future payments that the Company could be required to make under this arrangement is between $0 and $2,500. The maximum amount of future payments has been put into a trust account to be paid out upon achievement or cancellation of the contingent consideration arrangement. The Company’s share of this amount is $2,250 and is recorded as restricted cash (Note 18). The fair value of the continent consideration arrangement of $1,808 was estimated by assessing the probability of the above targets being met and the potential percentage shortfall. This is a level 3 fair value measurement (Note 36). Hunt Club Nissan and Ottawa Open Point On November 1, 2015, the Company, through AutoCanada HCN Holdings Inc., purchased substantially all of the operating and fixed assets of Hunt Club Nissan Ltd. (“Hunt Club Nissan”), in Ottawa, Ontario, for total cash consideration of $13,725. In addition, the Company purchased the exclusive right to build and operate a Nissan motor vehicle franchise on a designated property in As part of the transaction, the Company entered into an agreement with the former owner of Hunt Club Nissan, whereby he acquired a 10% ownership interest in AutoCanada HCN Holdings Inc. from the Company for cash consideration of $1,383. 417 Nissan and 417 Infiniti On December 7, 2015, the Company, through a 90% owned subsidiary, AutoCanada HCN Holdings Inc., purchased substantially all of the operating and fixed assets of 417 Infiniti Nissan Limited (“417 Nissan and 417 Infiniti”), in Ottawa, Ontario, for total cash consideration of $5,408. The acquisition was financed by drawing on the Company’s revolving term facility. Recognition of redemption liabilities During the year ended December 31, 2015, $1,102 of redemption liabilities were recognized in connection with the business acquisitions completed. These liabilities relate to put options held by certain non-controlling interests. Page F22 Š AutoCanada Š 2015 Annual Report The business acquisitions completed during the year ended December 31, 2015 are summarized as follows: Airdrie Chrysler $ Don Folk Chevrolet $ Grove Dodge $ Hunt Club Nissan $ 417 Nissan and 417 Infiniti $ Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Long term assets Property and equipment Intangible assets Total assets Current liabilities Trade and other payables Revolving floorplan facility Long term liabilities Deferred income tax Total liabilities Net assets acquired Goodwill Non-controlling interests Total net assets acquired Cash consideration Contingent consideration Total consideration 2 313 20,074 6 20,395 642 18,196 39,233 20 17,672 17,692 – 17,692 21,541 3,662 – 25,203 21,595 3,608 25,203 1 201 962 56 1 398 9,930 59 1,220 10,388 14,074 7,395 360 17,298 22,689 28,046 269 – 269 – 277 9,535 9,812 – 269 9,812 22,420 5 (1,835) 18,234 2,657 (2,088) 20,590 18,803 20,590 – 16,995 1,808 20,590 18,803 4 113 7,890 15 8,022 404 9,353 17,779 196 4,005 4,201 137 4,338 13,441 384 (1,383) 12,442 12,442 – 12,442 Total $ 9 2,622 44,979 189 47,799 15,687 55,706 1 1,597 6,123 53 7,774 207 3,464 11,445 119,192 398 5,675 6,073 1,160 36,887 38,047 – 137 6,073 5,372 36 (541) 4,867 4,867 – 4,867 38,184 81,008 6,744 (5,847) 81,905 76,489 5,416 81,905 Acquisitions completed during the year ended December 31, 2015 generated revenue and net earnings of $83,320 and $1,354, respectively, since the time of acquisition. The purchase prices allocated, as presented above, are estimates and subject to change due to finalization of the associated allocations. Acquisition related costs of $474 have been charged to administrative expenses in the consolidated statement of comprehensive income for the year ended December 31, 2015. The full amount of acquired receivables is expected to be collected. Goodwill arose on these acquisitions due to the potential future revenue growth and synergies expected to occur. The Company used the fair value method to measure the non-controlling interest, resulting in goodwill including both the non-controlling interests’ share and the parent’s share of goodwill. Prior year business acquisitions During the year ended December 31, 2014, the Company completed eight business acquisitions comprising thirteen automotive dealerships, including fifteen franchises. All acquisitions have been accounted for using the acquisition method. Acquisitions completed during this period are as follows: AutoCanada Š 2015 Annual Report Š Page F23 BMW Canbec and MINI Mont Royal Tower Chrysler On June 1, 2014, the Company purchased 100% of the voting shares of Automobile Canbec Inc. (“BMW Canbec”), which owns and operates a BMW franchise and a MINI franchise, both located in Montreal, Quebec, for total cash consideration of $27,000. The acquisition was funded by drawing on the Company’s revolving term facility. Dodge City On June 16, 2014, the Company purchased substantially all of the operating and fixed assets of Dodge City Auto 1984 Ltd. (“Dodge City”), in Saskatoon, Saskatchewan, for total cash consideration of $34,229. The acquisition was financed by drawing on the Company’s revolving term facility. Hyatt Group of Dealerships Between the period of June 23, 2014 and July 1, 2014, the Company purchased all of the operating and fixed assets of 678938 Alberta Ltd. (“Calgary Hyundai”), 1446691 Alberta Ltd. (“Crowfoot Hyundai”), 998699 Alberta Ltd. (“Hyatt Mitsubishi”), 588338 Alberta Ltd. (“Northland Volkswagen”), 969642 Alberta Ltd. (“Fish Creek Nissan”), and 1791109 Alberta Ltd. (“Hyatt Infiniti”), herein referred to as (the “Hyatt Group”), located in Calgary, Alberta, for total cash consideration of $91,389. The initial purchase price of the Hyatt Group was financed by drawing on the Company’s revolving term facility. In addition, the Company issued 18,753 common shares at a deemed price of $79.99 per share (for total consideration of $1,500) on July 1, 2014 as consideration for the purchase of the exclusive right to build and operate a Nissan motor vehicle franchise on a designated property in southeast Calgary. On August 18, 2014, the Company purchased substantially all of the operating and fixed assets of Tower Chrysler Plymouth Ltd. (“Tower Chrysler”), in Calgary, Alberta, for total cash consideration of $20,438. The acquisition was financed by drawing on the Company’s revolving term facility. Lakewood Chevrolet On September 2, 2014, the Company purchased a 75% non-voting equity interest in the shares of Lakewood Chevrolet (“Lakewood”), a Chevrolet dealership located in Edmonton, Alberta, for total cash consideration of $19,800. The acquisition was financed with cash from operations. To comply with GM Canada’s approval, Priestner is required to have 100% voting control of Lakewood. In accordance with the terms of the ownership structure for GM dealerships approved by GM Canada, the Company purchased a 75% non-voting equity interest, with Priestner being named Dealer Operator, personally holding a 15% equity interest and 100% voting control of the dealership. The remaining 10% equity interest is held by the dealership’s general manager. The transaction was reviewed and approved by the Company’s independent members of its Board of Directors. As part of the acquisition agreement, the non-controlling interest has an option to put the shares back to Lakewood at any time following the expiry of 36 months from the acquisition date. As a result, this interest has been recorded as a liability carried at fair value. The Company also purchased the dealership land and facility through a wholly-owned subsidiary, Lakewood Properties Inc., for $19,000. Of the $1,200 goodwill purchased on the acquisition of the land and building, 17%, or $204, was purchased by Priestner. Page F24 Š AutoCanada Š 2015 Annual Report Toronto Chrysler On October 20, 2014, the Company purchased substantially all of the operating and fixed assets of Toronto Dodge Chrysler Ltd. (“Toronto Chrysler”), in Toronto, Ontario, for total cash consideration of $2,159. The acquisition was financed with cash from operations. Bridges Chevrolet On November 24, 2014, the Company, through an 80% owned subsidiary, NBFG Holdings Inc. (“NBFG”), purchased the assets of Bridges Chevrolet Buick GMC Ltd. (“Bridges Chevrolet”), a Chevrolet dealership located in North Battleford, Saskatchewan, for total cash consideration of $4,577. The acquisition was financed with cash from operations. To comply with GM Canada’s approval, Priestner is required to have 100% voting control of Bridges Chevrolet. In accordance with the terms of the ownership structure for GM dealerships approved by GM Canada, the Company purchased an 80% non-voting equity interest, with Priestner, being named Dealer Operator, personally holding a 15% equity interest and 100% voting control of the dealership. The remaining 5% equity interest is held by minority shareholders. The transaction was reviewed and approved by the Company’s independent members of its Board of Directors. The Company also purchased the dealership land and facility through a wholly-owned subsidiary, NBFG Properties Inc., for $3,000. BMW Laval and MINI Laval On December 15, 2014, the Company, through an 85% owned subsidiary, AutoCanada B Holdings Inc., purchased the assets of Auto Boulevard St. Martin Inc. (“BMW Laval”) which owns and operates a BMW franchise and a MINI franchise, both located in Laval, Quebec, for total cash consideration of $22,516 and contingent consideration with a present value of $2,353. The acquisition was financed with cash from operations. As part of the transaction, the Company entered into an agreement with the former majority owner of BMW Laval, whereby he retained the remaining ownership interest in the two Laval franchises as well as acquired a 15% ownership interest in BMW Canbec from the Company for cash consideration. The non-controlling interest in BMW Canbec at the date of the transaction was equal to $2,729. In addition to the business, the Company also purchased the land and a building used for business operations through a wholly-owned subsidiary, LMB Properties Inc., for $31,233. Recognition of redemption liabilities During the year ended December 31, 2014, $8,687 of redemption liabilities were recognized in connection with the business acquisitions completed. These liabilities relate to put options held by certain non-controlling interests. AutoCanada Š 2015 Annual Report Š Page F25 The business acquisitions completed during the year ended December 31, 2014 are summarized as follows: BMW Canbec $ Dodge City $ Hyatt Group $ Tower Chrysler $ Lakewood Chevrolet $ Toronto Chrysler $ Bridges Chevrolet $ BMW Laval $ Total $ Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Long term assets Property and equipment Intangible assets Other long-term assets Total assets Current liabilities Bank indebtedness Trade and other payables Revolving floorplan facility Long term liabilities Long-term indebtedness Deferred income tax Total liabilities Net assets acquired Goodwill Non-controlling interest Total net assets acquired Cash consideration Equity instruments Contingent consideration Total – 3 2 2 2,350 – 1 2 2,360 6,715 25,504 312 32,531 512 16,075 121 16,711 693 48,448 223 49,366 4,096 15,078 6,489 24,494 1,439 82,415 12 51,717 – – 47,694 133,220 1,435 – – 2,113 658 348 120 16,175 37 16,334 2,344 14,659 – 33,337 – 318 22,092 25,640 13,313 13,971 44,569 44,917 14,095 14,413 – 1,776 27,416 – – 13,971 – – 44,917 – – 14,413 24,301 2,699 33,723 506 88,303 3,086 18,924 1,514 2,187 12,216 53 16,806 18,115 25,417 – 60,338 – 2,887 11,460 14,347 – 3,314 17,661 42,677 2,723 64 2,031 67 2,162 148 1,643 – 3,953 – – 1,867 1,867 – – 1,867 2,086 73 71 14,091 3,729 1,576 36,386 158,411 839 14 1,660 40,131 175,701 12 3,236 32,890 68,757 3,625 18,042 185,373 – 435 423 8,521 91,486 430,266 – – 1,435 175 3,112 9,611 – 31,191 138,587 175 34,303 149,633 – – 415 415 5,090 – 175 34,718 155,138 8,346 56,768 275,128 14,700 3,724 375 – – – – (6,804) – (1,144) (4,390) (12,338) 27,000 27,000 – 34,229 34,229 – 91,389 89,889 1,500 20,438 20,438 – 38,596 38,596 – 2,159 2,159 – 7,577 56,102 277,490 7,577 53,749 273,637 1,500 – – – – – – – – – 2,353 2,353 consideration 27,000 34,229 91,389 20,438 38,596 2,159 7,577 56,102 277,490 Acquisitions completed during the year ended December 31, 2014 generated revenue and net earnings of $329,775 and $11,270, respectively, during the year of acquisition. The purchase prices allocated, as presented above, are the original estimates and subject to change due to finalization of the associated allocations. Acquisition related costs of $1,629 were charged to administrative expenses in the consolidated statement of comprehensive income for the year ended December 31, 2014. Goodwill arose on these acquisitions due to the potential future revenue growth and synergies expected to occur. Goodwill generated on the acquisitions of BMW Canbec and Lakewood Chevrolet is not deductible for tax purposes. The Company used the fair value method to measure the non-controlling interest, resulting Page F26 Š AutoCanada Š 2015 Annual Report in goodwill including both the non-controlling interests’ share and the parent’s share of goodwill. 14 Business combination under common control Subsequent to the secondary offering completed on July 11, 2014 (see Note 32), the Company has consolidated its investments in associates, comprising six automotive dealerships (see Note 15), as a common control business combination using the predecessor values method (see Note 5). The combining entities are ultimately controlled by the same parties prior and subsequent to the business combination, which is considered a transaction under common control. The Company elected to apply predecessor accounting to the transaction and, as such, all assets and liabilities are incorporated by the Company at their predecessor carrying values and no fair value adjustments are recorded. No goodwill arose as a result of the transaction. The combination was applied on a prospective basis. The Company used the fair value method to measure the non-controlling interests, as a result goodwill recorded includes both the non-controlling interests’ share and the parent’s share of the goodwill which was created on the date of the initial investment. The business combination under common control as at July 11, 2014 is summarized as follows: Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Long term assets Property and equipment Intangible assets Finance lease receivables Goodwill Other long-term assets Total assets Current liabilities Trade and other payables Revolving floorplan facility Due to related parties Long term liabilities Long-term indebtedness Provisions and other non-current liabilities Deferred income tax Total liabilities Net assets acquired Non-controlling interest Total net assets acquired Total $ 4,699 17,541 82,454 700 105,394 12,920 72,487 9,242 13,896 640 214,579 11,966 75,277 2,968 90,211 9,823 15 9,152 109,201 105,378 (37,242) 68,136 Business combinations under common control during the year ended December 31, 2014 generated revenue and net earnings of $250,866 and $10,273, respectively, during the year then ended. AutoCanada Š 2015 Annual Report Š Page F27 Recognition of redemption liabilities During the year ended December 31, 2014, $33,111 of redemption liabilities were recognized in connection with the business combination under common control. These liabilities relate to put options held by certain non-controlling interests. 15 Investments in associates Prior to the business combination under common control that occurred on July 11, 2014, the Company’s investments in associates were as follows: Dealer Holdings Ltd. During 2012, the Company acquired a 60.8% participating, non-voting common share interest in Dealer Holdings Ltd. (“DHL”). DHL is an entity formed between a subsidiary of AutoCanada and Priestner. DHL was formed to acquire General Motors of Canada (“GM Canada”) franchised dealerships, whereby Priestner is required to maintain voting control of the dealerships, in accordance with the agreement with GM Canada. All shareholders participate equally in the equity and economic risks and rewards of DHL and its interests, based on the percentage of ownership. The investment in DHL was reviewed and approved by the independent members of AutoCanada’s Board of Directors. DHL’s principal place of business is Alberta, Canada. During 2012, DHL acquired a 51% voting equity interest in Nicholson Chevrolet (now operating as Sherwood Park Chevrolet) and a 51% voting equity interest in Petersen Buick GMC (now operating as Sherwood Buick GMC), both dealerships are located in Sherwood Park, Alberta. As part of the acquisition agreement, the non-controlling interest has an option to put the shares back to Sherwood Park Chevrolet, Sherwood Park GMC commencing January 1, 2017. As a result of DHL’s investments, the Company indirectly acquired a 31% interest in Sherwood Park Chevrolet and a 31% interest in Sherwood Park GMC. Green Isle G Auto Holdings Inc. On March 1, 2013, the Company invested a total of $7,057 to acquire an 80.0% participating, Page F28 Š AutoCanada Š 2015 Annual Report non-voting common share interest in Green Isle G Auto Holdings Inc. (“Green Isle”). Green Isle is an entity formed between a subsidiary of AutoCanada and Priestner. Green Isle was formed to acquire General Motors of Canada (“GM Canada”) franchised dealerships, whereby Priestner is required to maintain voting control of the dealerships, in accordance with the agreement with GM Canada. All shareholders participate equally in the equity and economic risks and rewards of Green Isle and its interests, based on the percentage of ownership. The investment in Green Isle was reviewed and approved by the independent members of AutoCanada’s Board of Directors. Green Isle’s principal place of business is British Columbia, Canada. On March 1, 2013, a subsidiary of Green Isle acquired 100% of the operating assets of Peter Baljet Chevrolet Buick GMC (now operating as Island GMC) in Duncan, British Columbia. Prairie Auto Holdings Ltd. On March 10, 2014, the Company invested a total of $41,651, consisting of $32,578 in cash and 205,000 common shares of AutoCanada issued (at a value of $9,073) to acquire an 82.353% equity interest in Prairie Auto Holdings Ltd. (“PAH”). PAH is an entity formed between a subsidiary of AutoCanada and Priestner. PAH was formed to acquire General Motors of Canada (“GM Canada”) franchised dealerships, whereby Priestner is required to maintain voting control of the dealerships, in accordance with the agreement with GM Canada. All shareholders participate equally in the equity and economic risks and rewards of PAH and its interests, based on the percentage of ownership. The investment in PAH was reviewed and approved by the independent members of AutoCanada’s Board of Directors. PAH’s principal place of business is Saskatchewan, Canada. On March 10, 2014, PAH acquired an 85% equity interest in the shares of Saskatoon Motor Products Ltd. (“SMP”), a Chevrolet dealership in Saskatoon, Saskatchewan, and Mann-Northway Auto Source (“MNAS”), a Chevrolet Buick GMC Cadillac dealership in Prince Albert, Saskatchewan. As part of the acquisition agreement, the non-controlling interest has an option to put the shares back to SMP and MNAS at any time following the expiry of 36 months from the acquisition date. To comply with GM Canada’s approval, Priestner is required to have 100% voting control of PAH. Waverley BG Holdings Ltd. On April 1, 2014, the Company invested a total of $11,322 to acquire an 80.0% participating, non-voting common share interest in Waverley BG Holdings Inc. (“WBG”). WBG is an entity formed between a subsidiary of AutoCanada and Priestner. WBG was formed to acquire General Motors of Canada (“GM Canada”) Carrying value of Investments in Associates franchised dealerships, whereby Priestner is required to maintain voting control of the dealerships, in accordance with the agreement with GM Canada. All shareholders participate equally in the equity and economic risks and rewards of WBG and its interests, based on the percentage of ownership. The investment in WBG was reviewed and approved by the independent members of AutoCanada’s Board of Directors. WBG’s principal place of business is Manitoba, Canada. On April 1, 2014, WBG acquired 100% of the operating assets of McNaught Buick Cadillac GMC (“McNaught”) in Winnipeg, Manitoba. The following table summarizes the Company’s consolidated carrying value of its investments in associates: Balance, January 1, 2014 Investments during the year Income from investments in associates Dividends received Combination of entities under common control (Note 14) Balance, December 31, 2014 Balance, December 31, 2015 16 Loan to associate PPH Holdings Ltd. On November 30, 2015, the Company loaned $8,421 to PPH. The Company holds no ownership interest in PPH, which is a company controlled, and formed, by Priestner. The loan was used by PPH to acquire Whitby Oshawa Honda (‘Whitby”). The Company has no participation in the equity of PPH or Whitby. PPH’s principal place of business is Alberta, Canada. Although the Company holds no voting rights in PPH the Company exercises significant DHL $ Green Isle $ PAH $ WBG $ Total $ 5,361 – 835 (458) (5,738) – – 7,770 – 892 (1,000) (7,662) – 41,651 1,317 – (42,968) – 11,322 446 – (11,768) 13,131 52,973 3,490 (1,458) (68,136) – – – – – – – – influence by virtue of the existence of its loan and the provision of essential technical information required for operations, as well as through the relationship with Priestner, as AutoCanada’s Executive Chair. However, the Company does not have the power to make or block key decisions under the terms of the underlying agreements. As a result, the Company has accounted for its loan to PPH under the effective interest method and it is carried at amortized cost. Refer to Note 34 for disclosure over related parties. AutoCanada Š 2015 Annual Report Š Page F29 Summarized financial information – PPH Holdings Ltd. The following table summarizes the consolidated financial information of PPH as at December 31, 2015: Current assets Non-current assets Current liabilities Non-current liabilities Carrying amount $ 10,199 9,667 7,336 9,409 For the year ended December 31, 2015, on a consolidated basis, PPH generated revenue of $5,601 and total net comprehensive income of $61. For the year ended December 2015, on a consolidated basis, income relating to the company’s loan to PPH are as follows: Interest Income Licensing Fees Income from loan to associate 17 Interests in subsidiaries $ 35 14 49 The Company owns 100% of most subsidiaries, but also has a controlling interest in certain subsidiaries that also have non-controlling interests held by other parties. The interests in these subsidiaries are summarized as follows: Proportion of ownership interests held by non-controlling interests Proportion of voting rights held by non- controlling interests Distributions paid to non- controlling interests 2015 $ Distributions paid to non- controlling interests 2014 $ Principal place of business Subsidiary Alberta Dealer Holdings Ltd. Green Isle G Auto Holdings Inc. British Columbia Saskatchewan Prairie Auto Holdings Ltd. Manitoba Waverley BG Holdings Inc. Alberta LWD Holdings Ltd. Saskatchewan NBFG Holdings Inc. Quebec AutoCanada B Holdings Inc. AutoCanada HCN Holdings Inc. Ontario DHL, Green Isle, WBG, NBFG and AutoCanada B Holdings Inc. also have put options whereby the non-controlling shareholders are able to sell their shares back to the Company. These put options are recognized as redemption liabilities and measured at their fair value on the statement of financial position as $47,229 (2014 – $41,798). The change in fair value of $4,329 is recorded in finance costs on the statement of comprehensive income (Note 11). The fair value is determined based on the dealership equity value of the related subsidiary (Note 36). Those Page F30 Š AutoCanada Š 2015 Annual Report 69% 20% 30% 20% 25% 20% 15% 10% 100% 100% 100% 100% 100% 100% 15% 10% 3,485 300 1,950 359 275 165 750 – 7,284 385 56 – – – – – – 441 options eligible to be executed during fiscal 2016 are presented as current liabilities. The underlying nature of the subsidiaries are holding companies which hold automotive dealerships. For purposes of disclosures, the non-controlling interest profit and loss, and accumulated non-controlling interest of the subsidiaries at the end of the reporting period are reported in aggregate as the subsidiaires are similar in nature and risk based on assessment of the interest and industry classification. 18 Cash and cash equivalents Cash at bank and on hand Short-term deposits Cash and cash equivalents (excluding bank indebtedness) Bank indebtedness Cash and cash equivalents Restricted cash (Note 13) Cash and cash equivalents and restricted cash December 31, 2015 $ December 31, 2014 $ 52,936 9,338 62,274 (898) 61,376 6,288 67,664 65,244 7,218 72,462 (2,181) 70,281 – 70,281 Short-term deposits includes cash held with Scotiabank. The Company’s revolving floorplan facility agreements allow the Company to hold excess cash in accounts with Scotiabank, which is used to offset our finance costs on revolving floorplan facilities. The Company has immediate access to this cash unless we are in default of our facilities, in which case the cash may be used by Scotiabank in repayment of our facilities. See Note 25 for further detail regarding cash balances held with Scotiabank. The remaining short-term deposits are term deposits that bear interest at 0.55%. Restricted cash is held in a trust account and earns interest at 0.95-2.06%. Interest included in restricted cash is $38. 19 Trade and other receivables Trade receivables Less: Allowance for doubtful accounts Net trade receivables Other receivables Trade and other receivables December 31, 2015 $ December 31, 2014 $ 83,166 (1,885) 81,281 9,540 90,821 87,336 (968) 86,368 5,770 92,138 The aging of trade and other receivables at each reporting date was as follows: Current Past due 31 – 60 days Past due 61 – 90 days Past due 91 – 120 days Past due > 120 days December 31, 2015 $ December 31, 2014 $ 78,889 7,117 2,919 962 934 90,821 78,266 8,421 3,679 623 1,149 92,138 The Company is exposed to normal credit risk with respect to its accounts receivable and maintains provisions for potential credit losses. Potential for such losses is mitigated because there is no significant exposure to any single customer and because customer creditworthiness is evaluated before credit is extended. AutoCanada Š 2015 Annual Report Š Page F31 20 Inventories New vehicles Demonstrator vehicles Used vehicles Parts and accessories December 31, 2015 $ December 31, 2014 $ 441,764 35,830 91,144 27,804 596,542 427,341 26,452 84,349 25,135 563,277 During the year ended December 31, 2015, $2,403,515 of inventory (2014 – $1,829,337) was expensed as cost of sales which included write-downs on used vehicles of $2,250 (2014 – $901). As at December 31, 2015, the Company had recorded reserves for inventory write downs of $6,786 (2014 – $4,896). During the year ended December 31, 2015, $5,795 of demonstrator expense (2014 – $3,176) was included in administrative costs. During the year ended December 31, 2015, demonstrator reserves decreased by $428 (2014 – increased by $1,984). 21 Finance lease receivables Current portion of finance lease receivables Finance lease receivables Unearned finance income – current Long-term portion of finance lease receivables Finance lease receivables Unearned finance income – long-term Gross receivables from finance leases: No later than 1 year Later than 1 year and no later than 5 years Later than 5 years Unearned future finance income on finance leases Net investment in finance leases Net investment in finance lease: No later than 1 year Later than 1 year and no later than 5 years Later than 5 years Page F32 Š AutoCanada Š 2015 Annual Report December 31, 2015 $ December 31, 2014 $ 4,556 (544) 4,012 7,081 (535) 6,546 4,556 7,081 – 11,637 (1,079) 10,558 4,012 6,546 – 10,558 4,308 (771) 3,537 11,153 (861) 10,292 4,308 11,153 – 15,461 (1,632) 13,829 3,537 10,292 – 13,829 22 Property and equipment Cost: January 1, 2014 Capital expenditures Acquisitions of dealership assets Acquisitions of real estate Disposals Transfers to inventory, net December 31, 2014 Capital expenditures Acquisitions of dealership assets Acquisitions of real estate Disposals Transfers to assets held for sale Transfers to inventory, net December 31, 2015 Accumulated depreciation: January 1, 2014 Acquisitions of dealership assets Depreciation Disposals Transfers to inventory, net December 31, 2014 Depreciation Disposals Transfers to assets held for sale Transfers to inventory, net December 31, 2015 Carrying amount: December 31, 2014 December 31, 2015 Company & lease vehicles $ Leasehold Improvements $ Machinery & Equipment $ Land & buildings $ Furniture, fixtures & other $ Computer hardware $ Total $ 10,819 280 18,926 – – (4,825) 25,200 34 509 – – (26) (3,083) 22,634 (1,900) (6,285) (4,168) – 5,390 (6,963) (4,405) – 5 5,147 (6,216) 18,237 16,418 7,240 2,084 13,317 – (35) – 22,606 7,238 202 – (646) – – 29,400 (2,651) (5,550) (1,310) 34 – (9,477) (2,204) 637 – – 14,395 1,709 10,069 – (209) – 25,964 2,435 965 – (555) (116) – 103,785 – 53,533 16,824 – – 174,142 – 13,250 60,500 – (11,130) – 28,693 236,762 (8,363) (5,635) (1,735) 189 – (15,544) (2,449) 421 79 – (4,404) – (4,852) – – (9,256) (7,076) – 1,435 – (11,044) (17,493) (14,897) 13,129 18,356 10,420 11,200 164,886 221,865 6,024 953 4,030 – (294) – 10,713 2,165 479 – (228) (70) – 13,059 (3,606) (2,005) (733) 259 – (6,085) (1,179) 170 40 – (7,054) 4,628 6,005 4,827 147,090 1,591 6,617 3,768 103,643 16,824 (783) (4,825) – (245) – 9,941 268,566 14,106 2,234 15,687 282 60,500 – (2,006) (577) (11,514) (172) (3,083) – 11,708 342,256 (3,251) (2,491) (826) 265 – (6,303) (1,547) 548 135 – (24,175) (21,966) (13,624) 747 5,390 (53,628) (18,860) 1,776 1,694 5,147 (7,167) (63,871) 3,638 214,938 4,541 278,385 Fully depreciated assets are retained in cost and accumulated depreciation accounts until such assets are removed from service. Proceeds from disposals are netted against the related assets and the accumulated depreciation and included in the statement of operations and comprehensive income. Land and buildings with a carrying value of $51,495 (2014 – $42,575) are pledged as collateral against bank borrowings. 23 Assets held for sale Land During the year, the Company committed to a plan to sell a parcel of land held in Winnipeg, Manitoba. The carrying cost of the land is $1,556 at December 31, 2015. No decommissioning liability exists on the land. Efforts to sell the land have commenced and the sale is expected to be completed during fiscal 2016. The Company has also committed to a plan to sell a parcel of land in Newmarket, Ontario with a carrying amount of $3,485. No decommissioning liability exists on the land. Efforts to sell the land have commenced and the sale is expected to be completed during fiscal 2016. AutoCanada Š 2015 Annual Report Š Page F33 Newmarket Transaction On December 19, 2015, the Company entered into an agreement to sell substantially all of the operating and fixed assets of Newmarket Infiniti Nissan located in Newmarket, Ontario for net proceeds of $11,262, resulting in a pre-tax gain on sale of $4,359. The sale transaction closed on February 25, 2016 (Note 37). Property, plant and equipment Trade and other receivables Inventory Intangible assets Other current assets Total Assets Trade and other payables Revolving floorplan facilities Total Liabilities Net Assets December 31, 2015 $ 4,779 2,001 13,569 2,053 39 22,441 1,015 13,478 14,493 7,948 24 Intangible assets and goodwill Intangible assets consist of rights under franchise agreements with automobile manufacturers (“dealer agreements”). Cost: January 1, 2014 Acquisitions (Note 13) Business combination under common control Measurement period adjustment December 31, 2014 Acquisitions (Note 13) Measurement period adjustment Transfer to assets held for sale December 31, 2015 Accumulated impairment: January 1, 2014 Recovery of impairment December 31, 2014 Impairment, net of recovery of impairment December 31, 2015 Carrying amount: December 31, 2014 December 31, 2015 Page F34 Š AutoCanada Š 2015 Annual Report Intangible assets $ Goodwill $ Total $ 102,197 185,373 72,487 – 360,057 55,706 – (2,053) 413,710 5,212 (1,767) 3,445 10,617 14,062 6,672 108,869 14,700 200,073 86,383 13,896 (2,416) (2,416) 32,852 392,909 62,450 1,500 (2,053) 6,744 1,500 – 41,096 454,806 – – – 8,140 8,140 5,212 (1,767) 3,445 18,757 22,202 356,612 399,648 32,852 389,464 32,956 432,604 Cash generating units have been determined to be individual dealerships. The following table shows the carrying amount of indefinite-lived identifiable intangible assets and goodwill by cash generating unit: Cash Generating Unit Intangibles Goodwill Total Intangibles Goodwill Total December 31, 2015 $ December 31, 2014 $ AJ AE AN Y AI AS AQ A AF AV Z AM V AC U AG AT D B E AL AU AH AA W C AB Other CGUs less than $5,000 27,807 22,802 25,417 24,494 21,809 18,196 18,044 21,687 20,384 17,298 15,078 14,659 15,520 12,496 8,602 9,263 9,253 9,626 9,431 8,497 5,273 7,395 6,591 5,369 5,799 5,828 4,619 28,411 6,135 – 381 506 428 1,669 3,724 – 992 2,657 2,699 1,514 236 941 3,441 950 384 – – – 2,176 5 409 – 201 – – 3,508 33,942 22,802 25,798 25,000 22,237 19,865 21,768 21,687 21,376 19,955 17,777 16,173 15,756 13,437 12,043 10,213 9,637 9,626 9,431 8,497 7,449 7,400 7,000 5,369 6,000 5,828 4,619 31,919 27,807 25,733 25,417 24,494 21,809 – 18,044 21,687 20,384 – 15,078 14,659 15,520 12,496 8,602 9,263 – 9,626 9,431 8,497 5,273 – 6,591 11,431 5,799 4,635 8,824 25,512 6,135 967 2,722 506 1,580 – 3,724 – 617 – 2,699 1,514 236 705 3,441 950 – – – – 2,176 – 409 570 201 – 177 3,253 33,942 26,700 28,139 25,000 23,389 – 21,768 21,687 21,001 – 17,777 16,173 15,756 13,201 12,043 10,213 – 9,626 9,431 8,497 7,449 – 7,000 12,001 6,000 4,635 9,001 29,035 399,648 32,956 432,604 356,612 32,852 389,464 AutoCanada Š 2015 Annual Report Š Page F35 The following table shows the impairments (recoveries of impairment) of indefinite-lived identifiable intangible assets and goodwill by cash generating unit. Cash Generating Unit Intangibles Goodwill Total Intangibles Goodwill Total December 31, 2015 $ December 31, 2014 $ C J R X AA AB AD AE AI AN AS Net impairment (recovery) (1,193) (2,053) – – 6,061 4,205 666 2,931 – – – 10,617 – – – – 784 337 89 1,444 1,152 2,341 1,993 (1,193) (2,053) – – 6,845 4,542 755 4,375 1,152 2,341 1,993 8,140 18,757 (1,215) – (531) (21) – – – – – – – (1,767) – – – – – – – – – – – – (1,215) – (531) (21) – – – – – – – (1,767) The valuation methodology used to assess the recoverable value of the CGUs uses level 2 inputs, indirectly derived from the market, where possible, for key assumptions such as the discount rate. Where level 2 inputs are not available, as is the case with the growth rate, the Company uses level 3 inputs, which are unobservable to the market, but reflect management’s best estimates from historical performance and expectations for the future. The following table shows the recoverable amounts of CGUs with impairments or recoveries of impairments recorded in either the current year or prior year: Cash Generating Unit C J R X AA AB AD AE AI AN AS December 31, 2015 $ December 31, 2014 $ 6,736 2,053 2,339 2,361 6,682 5,550 2,104 25,778 25,200 32,421 20,036 5,302 – 1,678 3,769 9,512 8,586 1,800 23,874 25,807 34,285 – Impairment test of indefinite life intangible assets intangible assets impairment test are described as follows: The Company performed its annual test for impairment at December 31, 2015. As a result of the test performed, the Company recorded an impairment in the amount of $18,757 for the year ended December 31, 2015 (2014 – recovery of impairment of $1,767). The valuation techniques, significant assumptions and sensitivities applied in the Valuation Techniques The Company did not make any changes to the valuation methodology used to assess impairment since the impairment test on transition to IFRS. The recoverable amount of each CGU was based on the greater of fair value less cost to sell and value in use. Page F36 Š AutoCanada Š 2015 Annual Report Value in Use Value in use (“VIU”) is predicated upon the value of the future cash flows that a business will generate going forward. The discounted cash flow (“DCF”) method was used which involves projecting cash flows and converting them into a present value equivalent through discounting. The discounting process uses a rate of return that is commensurate with the risk associated with the business or asset and the time value of money. This approach requires assumptions about revenue growth rates, operating margins, and discount rates. Fair value less costs to dispose Fair value less costs to dispose (“FVLCD”) assumes that companies operating in the same industry will share similar characteristics and that Company values will correlate to those characteristics. Therefore, a comparison of a CGU to similar companies may provide a reasonable basis to estimate fair value. Under this approach, fair value is calculated based on EBITDA (“Earnings before interest, taxes, depreciation and amortization”) multiples comparable to the businesses in each CGU. Data for EBITDA multiples was based on recent comparable transactions and management estimates. Multiples used in the test for impairment for each CGU were in the range of 5.5 to 11.0 times forecasted EBITDA. Significant Assumptions for Value in Use Growth The assumptions used were based on the Company’s internal budget which is approved by the Board of Directors. The Company projected revenue, gross margins and cash flows for a period of one year, and applied growth rates for years thereafter commensurate with Company and industry forecasts. Management applied a 2% terminal growth rate in its projections. In arriving at its forecasts, the Company considered past experience, economic trends and inflation as well as industry and market trends. Discount Rate The Company applied a discount rate in order to calculate the present value of its projected cash flows. The discount rate represented the Company’s internally computed weighted average cost of capital (“WACC”) for each CGU with appropriate adjustments for the risks associated with the CGU’s in which intangible assets are allocated. The WACC is an estimate of the overall required rate of return on an investment for both debt and equity owners and serves as the basis for developing an appropriate discount rate. Determination of the discount rate requires separate analysis of the cost of equity and debt, and considers a risk premium based on an assessment of risks related to the projected cash flows of each CGU. Significant Assumptions for Fair Value Less Costs to Dispose EBITDA The Company’s assumptions for EBITDA were based on the Company’s internal budget which is approved by the Board of Directors. The Company projected EBITDA for a period of one year and reduced the amount for allocation of corporate overhead based on a percentage of gross profit for each CGU as compared to gross profit of the Company. As noted above, data for EBITDA multiples was based on recent comparable transactions and management estimates. Costs to dispose Management applied a percentage of 1.0% of the estimated purchase price in developing an estimate of costs to dispose, based on historical transactions. AutoCanada Š 2015 Annual Report Š Page F37 Additional Assumptions Key assumptions used in performing the impairment test include discount rates, dealership growth rate, perpetual growth rate, expected gross margin percentage and operating expense levels. The key assumptions used in performing the impairment test, by CGU, were as follows: Basis of Recoverable Amount Discount Rate Perpetual Growth Rate A B C D E J L R U V W X Y Z AA AB AC AD AE AF AG AH AI AJ AL AM AN AQ AS AT AU AV CGUs less than 5,000, combined Sensitivity The recoverable amount for the CGUs that were in excess of their carrying values was 272% of the carrying values of the applicable CGUs based on a weighted average. As there are CGUs that have intangible assets with original costs that exceed their current year carrying values, the Company expects future impairments and recoveries of impairments to occur as market conditions change and risk premiums used in developing the discount rate change. Page F38 Š AutoCanada Š 2015 Annual Report FVLCD FVLCD VIU FVLCD FVLCD FVLCD FVLCD VIU FVLCD FVLCD FVLCD FVLCD VIU FVLCD VIU VIU FVLCD FVLCD FVLCD VIU FVLCD FVLCD FVLCD FVLCD FVLCD FVLCD VIU FVLCD FVLCD FVLCD FVLCD FVLCD FVLCD/VIU 11.99% 12.29% 11.69% 12.59% 12.59% 11.54% 12.44% 12.14% 11.39% 11.99% 11.69% 11.24% 12.29% 11.39% 11.69% 11.69% 11.99% 11.99% 11.39% 11.39% 11.99% 11.99% 11.99% 11.99% 12.29% 12.29% 12.29% 11.39% 12.29% 12.14% 12.29% 12.29% 11.24-14.44% 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 The recoverable amount of each CGU is sensitive to changes in market conditions and could result in material changes in the carrying value of intangible assets in the future. Based on sensitivity analysis, no reasonably possible change in key assumptions would cause the recoverable amount of any CGU to have a significant change from its current valuation except for the CGUs identified below. CGUs, which use VIU as the basis of recoverable amount, for which a reasonably possible change in key assumptions would cause an impairment, along with the change required for an impairment to occur: Cash Generating Unit Y AF Increase in Discount Rate Decrease in Growth Rate Recoverable amount Carrying amount Recoverable amount exceeds carrying amount 1.90% 2.20% 1.50% 4.20% 40,506 29,306 33,255 21,729 7,251 7,577 CGUs, which use FVLCTD as the basis of recoverable amount, for which a reasonably possible change in key assumptions would cause an impairment, along with the change required for an impairment to occur: Cash Generating Unit Z E 25 Financial instruments Decrease in Multiple Recoverable amount Carrying amount Recoverable amount exceeds carrying amount 2.7 1.7 29,542 29,306 24,713 10,932 4,829 18,374 Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset and financial liability are disclosed in the accounting policies. The Company’s financial assets have been classified as loans and receivables. The Company’s financial liabilities have been classified as other financial liabilities. The carrying values of financial instruments approximate their fair values, excluding the senior unsecured notes. The fair value of the senior unsecured notes is $139,125. Details of the carrying value of the Company’s financial assets and financial liabilities are disclosed below: Financial assets Cash and cash equivalents Trade and other receivables Current portion of finance lease receivables Loan to associate Long-term portion of finance lease receivables Restricted cash Financial liabilities Bank indebtedness Current indebtedness Long-term indebtedness Revolving floorplan facilities Trade and other payables Current portion of redemption liabilities Redemption liabilities December 31, 2015 $ December 31, 2014 $ 62,274 90,821 4,012 8,470 6,546 6,288 898 11,484 285,759 548,322 86,284 6,338 40,891 72,462 92,138 3,537 – 10,292 – 2,181 4,651 223,009 527,780 82,670 7,665 34,133 Financial Risk Management Objectives The Company’s activities are exposed to a variety of financial risks of varying degrees of significance which could affect the Company’s ability to achieve its strategic objectives. AutoCanada’s overall risk management program focuses on the unpredictability of financial and economic markets and seeks to reduce potential adverse effects on the Company’s financial performance. Risk AutoCanada Š 2015 Annual Report Š Page F39 management is carried out by financial management in conjunction with overall corporate governance. The principal financial risks to which the Company is exposed are described below. Market Risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign currency and interest rates. Foreign Currency Risk Foreign currency risk arises from fluctuations in foreign exchange rates and the degree of volatility of these rates relative to the Canadian dollar. The Company is not significantly exposed to foreign currency risk with respect to its financial instruments as it engages in minimal transactions denominated in currencies other than the Canadian dollar. Interest Rate Risk The Company’s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management section of this note as well as the indebtedness note (see Note 28). The sensitivity analysis below has been determined based on the exposure to interest rates at the reporting date and stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period. The amounts below represent the absolute change to the reported account, an increase in the basis point would result in a positive amount and a decrease in the basis point would result in a negative amount. A 100 basis point change and 200 basis point change is used when reporting interest risk internally to key management personnel and represents management’s assessment of the possible change in interest rates. Finance costs Finance income Credit Risk The Company’s exposure to credit risk associated with its accounts receivable is the risk that a customer will be unable to pay amounts due to the Company or its subsidiaries. Concentration of credit risk with respect to contracts-in-transit and accounts receivable is limited primarily to automobile manufacturers and financial institutions. Credit risk arising from receivables with commercial customers is not significant due to the large number of customers dispersed across various geographic locations comprising our customer base. Details of the aging of the Company’s trade and other receivables is disclosed in Note 19. The Company evaluates receivables for collectability based on the age of the receivable, the credit history of the customer and past collection experience. Allowances are provided for potential losses that have been incurred at the balance sheet date. The amounts disclosed on the balance sheet for Page F40 Š AutoCanada Š 2015 Annual Report +/- 200 Basis Point +/- 100 Basis Point 2015 $ 13,295 146 2014 $ 11,544 143 2015 $ 6,647 73 2014 $ 5,772 72 accounts receivable are net of the allowance for doubtful accounts, details of which are disclosed in Note 19. Concentration of cash and cash equivalents exists due to the significant amount of cash held with Scotiabank (see Note 18 for further discussion of the Company’s concentration of cash held on deposit with Scotiabank). The syndicated revolving floorplan facility (see Note 28) allows our dealerships to hold excess cash (used to satisfy working capital requirements of our various OEM partners) in an account with Scotiabank which bears interest at 2.43% at December 31, 2015 (2014- 2.43%). These cash balances are fully accessible by our dealerships at any time, however in the event of a default by a dealership in its floorplan obligation; the cash may be used to offset unpaid balances under the facility. As a result, there is a concentration of cash balances risk to the Company in the event of a default under the facility. Liquidity Risk Liquidity risk is the risk that the Company is not able to meet its financial obligations as they become due or can do so only at excessive cost. The Company’s activity is financed through a combination of the cash flows from operations, borrowing under existing credit facilities and the issuance of equity. Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents and the availability of funding through adequate amounts of committed credit facilities. One of management’s primary goals is to maintain an optimal level of liquidity through the active management of the assets and liabilities as well as cash flows. The following tables detail the Company’s remaining contractual maturity for its financial liabilities. The amounts below have been determined based on the undiscounted contractual maturities of the financial liabilities. Contractual interest payable includes interest that will accrue to these liabilities. 2016 $ 2017 $ 2018 $ 2019 $ Thereafter $ Total $ December 31, 2015 Bank indebtedness Trade and other payables Revolving floorplan facilities Redemption liabilities Senior unsecured notes HSBC revolving term facility Vehicle repurchase obligations RBC lease financing Scotiabank lease financing BMO lease financing Servus mortgage VCCI mortgage BMW mortgage Other long-term debt Contractual interest payable December 31, 2014 Bank indebtedness Trade and other payables Revolving floorplan facilities Redemption liabilities Senior unsecured notes HSBC revolving term facility Vehicle repurchase obligations RBC lease financing Scotiabank lease financing BMO lease financing Servus mortgage VCCI mortgage BMW mortgage Other long-term debt Contractual interest payable 898 86,284 548,322 – – – – – – 1,102 6,337 39,790 – – – 103,591 – – – – 24 456 – – 258 248 213 213 797 768 3,642 1,537 11,466 14,593 14,370 – – 1,846 7,797 435 346 239 213 737 1,717 – – – – – – – – – – 269 213 757 1,808 9,390 – – – – 149,739 – – – – – 4,543 3,180 17,122 – 25,358 898 86,284 548,322 47,229 149,739 103,591 1,846 7,797 915 346 5,557 4,032 20,181 8,704 75,177 669,764 57,382 121,093 12,437 199,942 1,060,618 2015 $ 2016 $ 2017 $ 2018 $ Thereafter $ Total $ 2,181 82,670 527,780 7,665 – – 1,539 2,690 422 352 230 56 742 159 – – – – – – – 2,690 364 352 239 56 737 1,556 11,739 11,614 – – – – – – – 34,133 – – – 38,925 – – 2,454 2,690 63 197 45 352 258 248 56 56 797 768 16 1,439 11,491 10,240 – – – – 149,739 – – – – – 4,811 869 17,879 – 34,306 2,181 82,670 527,780 41,798 149,739 38,925 1,539 10,524 1,046 1,101 5,786 1,093 20,923 3,170 79,390 638,225 17,608 51,374 52,854 207,604 967,665 AutoCanada Š 2015 Annual Report Š Page F41 26 Other long-term assets Prepaid rent Other assets 27 Trade and other payables Trade payables Accruals and provisions Sales tax payable Wages and withholding taxes payable December 31, 2015 $ December 31, 2014 $ 5,838 1,240 7,078 6,205 508 6,713 December 31, 2015 $ December 31, 2014 $ 46,443 11,974 4,710 23,157 86,284 42,378 9,983 4,413 25,896 82,670 The following table provides a continuity schedule of all recorded provisions: January 1, 2014 Provisions arising during the year Amounts expired or disbursed December 31, 2014 Provisions arising during the year Amounts expired or disbursed December 31, 2015 Finance and insurance (a) $ 1,548 1,374 (921) 2,001 Other $ 967 228 (784) Total $ 2,515 1,602 (1,705) 411 2,412 1,245 (1,334) 257 (129) 1,502 (1,463) 1,912 539 2,451 (a) Represents an estimated chargeback reserve provided by the Company’s third party underwriter of finance and insurance products. Page F42 Š AutoCanada Š 2015 Annual Report 28 Indebtedness This note provides information about the contractual terms of the Company’s interest-bearing debt, which is measured at amortized cost. For more information about the Company’s exposure to interest rate, foreign currency and liquidity risk, see Note 25. Revolving floorplan facilities Revolving floorplan facilities – Syndicate (i) Revolving floorplan facilities – VCCI (ii) Revolving floorplan facilities – BMW Financial (iii) Revolving floorplan facilities – RBC (iv) Revolving floorplan facilities – Scotiabank (v) Indebtedness Senior unsecured notes (vi) Senior unsecured notes Embedded derivative Unamortized deferred financing costs HSBC revolving term facility (vii) HSBC revolving term facility Unamortized deferred financing costs Other long-term debt: Lease financing – RBC (viii) Lease financing – Scotiabank (ix) Lease financing – BMO (x) Servus mortgage (xi) VCCI mortgages (xii) BMW mortgage (xiii) Other long-term debt Total indebtedness Current indebtedness Long-term indebtedness December 31, 2015 $ December 31, 2014 $ 348,840 33,086 72,111 70,790 23,495 548,322 149,739 (24) (2,907) 146,808 103,591 (688) 102,903 7,797 915 346 5,557 4,032 20,181 8,704 297,243 11,484 285,759 340,829 27,625 66,017 78,431 14,878 527,780 149,739 18 (3,444) 146,313 38,925 (1,221) 37,704 10,524 1,046 1,101 5,786 1,093 20,923 3,170 227,660 4,651 223,009 Terms and conditions of outstanding loans are as follows: i The Company’s syndicated floorplan credit facility (the “Facility”) is provided by Scotiabank and the Canadian Imperial Bank of Commerce (“CIBC”) with Scotiabank serving as administrative agent to the Facility. The availability of the Facility is $550,000 and bears a rate of Bankers’ Acceptance plus 1.15% (2.17% as at December 31, 2015) per annum. The Facility is collateralized by each individual dealership’s inventories that are directly ii financed by Scotiabank, a general security agreement with each dealership financed, and a guarantee from AutoCanada Holdings Inc., a subsidiary of the Company. The revolving floorplan facilities (“VCCI facilities”) are available from VW Credit Canada, Inc. (“VCCI”) to finance new, used and demo vehicles for all of the Volkswagen and Audi dealerships. The VCCI facilities bear interest at Royal Bank of Canada (“RBC”) prime rate plus 0% – 0.75% for new and demo vehicles and RBC prime rate plus 0.25-1.25% for used vehicles AutoCanada Š 2015 Annual Report Š Page F43 (RBC prime rate was 2.70% at December 31, 2015). The maximum amount of financing provided by the VCCI facilities is $46,930. The VCCI facilities are collateralized by all of the dealerships’ assets financed by VCCI and all cash and other collateral in the possession of VCCI and a general security agreement over the Volkswagen and Audi dealerships. The individual notes payable of the VCCI facilities are due when the related vehicle is sold. iii The revolving floorplan facilities (the “BMW Facilities”) are available from BMW Financial Services Canada (“BMW Financial”), a division of BMW Canada Inc., to finance new, used, demo and mobility vehicles for the BMW and MINI dealerships. The BMW Facilities have a current advance limit of $103,150. The BMW Facilities bear a variable interest rate of prime minus 0.40% per 360-day annum (2.30% at December 31, 2015). The BMW Facilities are collateralized by the dealerships’ movable and immovable property. iv The Royal Bank of Canada (“RBC”) v provides floorplan financing for new, used and demo vehicles for eight of the Company’s dealerships (the “RBC Facilities”). The RBC Facilities bear interest rates of RBC’s Cost of Funds Rate (1.63% as at December 31, 2015) plus 0.40%-1.35% and provide a maximum amount of financing of $136,500. The RBC Facilities are collateralized by the new, used, and demo inventory financed by RBC and a general security agreement from the General Motors dealerships financed by RBC. Scotiabank provides floorplan financing for new, used and demo vehicles for three of the Company’s dealerships (the “Scotiabank Facilities”). The Scotiabank Facilities bear interest rates of Scotia Fixed Flooring Rate (0.93% at December 31, 2015) plus 0.93%-1.70% and provide a maximum amount of financing of $50,400. The Scotiabank Facilities are collateralized by the new, used, and demo inventory financed by Scotiabank and a general security agreement from the Company’s General Motors dealerships financed by Scotiabank. Page F44 Š AutoCanada Š 2015 Annual Report vi On May 22, 2014 the Company completed a private offering of $150,000 5.625% Senior Unsecured Notes due May 25, 2021 (the “Notes”). The Notes were issued at par. Interest is payable semi-annually on May 15 and November 15 of each year the Notes are outstanding. In connection with the issuance of the Notes, the Company incurred issue costs of $3,638 which were recorded as a deduction from the carrying amount of the long-term debt. The proceeds from the Notes were used to repay the Company’s revolving term facility. The Notes agreement contains certain redemption options whereby the Company can redeem all or part of the Notes at prices set forth in the agreement from proceeds of equity offering or following certain dates specified in the agreement. In addition, the Note holders have the right to require the Company to redeem the Notes or a portion thereof, at the redemption prices set forth in the agreement in the event of change in control or in the event certain asset sale proceeds are not re-invested in the time and manner specified in the agreement. These redemption features constitute embedded derivatives that are required to be separated from the Notes and measured at fair value. The embedded derivative components of these compound financial instruments are measured at fair value at each reporting date with gains or losses in fair value recognized through profit or loss. vii On November 18, 2015, the Company amended the existing Credit Agreement with HSBC Bank Canada (“HSBC”) Alberta Treasury Branches (“ATB”), and RBC, with HSBC acting as administrative agent to the Credit Agreement. The revised Credit Agreement provides the Company with a $250,000 revolving operating facility that may be used for general corporate purposes, including repayment of existing indebtedness, funding working capital requirements, capital expenditures and financing acquisitions. Fees and interest on borrowings under the Credit Agreement are subject to a pricing grid whereby the pricing level is determined by the leverage ratio. Based on the Company’s Leverage Ratio, as defined by the Lender, the interest rate on the loan ranges from HSBC’s prime rate plus 0.75% to HSBC’s prime rate plus 2.00%. As at December 31, 2015, the Company is in the first of five tiers of the pricing grid, with the first tier providing interest rates of HSBC’s prime rate plus 2.00% (4.70% at December 31, 2015). Amounts drawn under the Credit Agreement as at December 31, 2015 are due May 22, 2018 and may be extended annually for an additional 364 days at the request of the Company and upon approval by the lenders. The Credit Agreement is collateralized by all of the present and future assets of AutoCanada Holdings Inc., a subsidiary of AutoCanada Inc., and all of its subsidiaries. As part of a priority agreement signed by HSBC, Scotiabank, VCCI, BMW Financial, and the Company, the collateral for the Credit Agreement excludes all new, used and demo inventory financed with Scotiabank, VCCI, RBC and BMW Financial revolving floorplan facilities. viii RBC provides financing for the lease vehicles of two of the Company’s GM dealerships (the “RBC lease financing”). The RBC lease financing bear interest rates of RBC’s Costs of Funds Rate (1.63% at December 31, 2015) plus 0.90% - 1.50% and provide a maximum amount of financing of $15,000 repayable over the terms of the contract in varying amounts of principal. The RBC lease financing are collateralized by the lease vehicles under the related lease agreements. The RBC lease financing is due on demand. ix Scotiabank provides financing for the lease vehicles of two of the Company’s dealerships (the “Scotiabank lease financing”). The Scotiabank lease financing bear interest rates of Scotiabank’s Cost of Funds Rate plus 1.25% (3.78% at December 31, 2015) and provide a maximum amount of financing of $2,500 repayable over the terms of the contract in varying amounts of principal. The Scotiabank lease financing is collateralized by the lease vehicles under the related lease agreement. x The Bank of Montreal (“BMO”) provides financing for the lease vehicles of one of the Company’s GM dealerships (the “BMO lease financing”). The BMO lease financing bear interest rates of BMO’s Dealership Finance Base Rate plus 1.65% (2.93%-3.59%, depending on term, at December 31, 2015) and provides financing of $346 repayable over the terms of the contract in varying amounts of principal. The BMO lease financing is collateralized by a general security agreement, a standard fixed rate prepayment agreement, and a priority agreement with General Motors Acceptance Corporation and other secured lenders. The BMO lease financing is due on demand. xi Servus Credit Union provides the Company with a mortgage (the “Servus Mortgage”). The Servus Mortgage bears a fixed annual rate of 3.90% and is repayable with monthly blended installments of $38, originally amortized over a 20 year period with term expiring September 27, 2017. The Servus Mortgage requires certain reporting requirements and financial covenants and is collateralized by a general security agreement consisting of a first fixed charge over the property. At December 31, 2015, the carrying amount of the property was $9,204. xii VCCI provides the Company with mortgages (the “VCCI Mortgages”), which bear interest at a floating rate of interest per annum equal to the Royal Bank of Canada’s prime rate plus 0.15%-0.50% (2.85%-3.20% at December 31, 2015). The VCCI Mortgages are repayable with fifty-nine equal blended monthly payments of $27 amortized over a twenty year period with term expiring in between April 2019 and February 2020. The VCCI Mortgages have certain reporting requirements and financial covenants and are collateralized by a general security agreement consisting of a first fixed charge over the properties. At December 31, 2015, the carrying amount of the properties was $11,268. xiii BMW Financial provides the Company with a mortgage (the “BMW Mortgage”), which bears a fixed rate of interest per annum of AutoCanada Š 2015 Annual Report Š Page F45 3.80%. The BMW Mortgage is repayable with sixty equal blended monthly payments of $124, amortized over a twenty year period with term expiring on December 31, 2019. The BMW Mortgage has certain reporting requirements and is collateralized by the property and any other present and future property, rights and assets, movable or immovable, and a general security agreement consisting of a first fixed charge over the property. At December 31, 2015, the carrying amount of the property was $31,023. 29 Vehicle repurchase obligations The Company provides a corporate fleet customer with vehicles for individual terms not to exceed six months, at which time the Company has an obligation to repurchase each vehicle at a predetermined amount. The Company has determined that the transactions shall be treated as operating leases, whereby the Company acts as lessor. As a result, the Company has recorded the contractual repurchase amounts as outstanding vehicle repurchase obligations and have classified the liability as current due to the short term nature of the instruments. 30 Commitments and contingencies Commitments The Company has operating lease commitments, with varying terms through 2037, to lease premises used for business purposes. The Company leases certain lands and buildings used in its franchised automobile dealership operations from related parties (Note 34) and other third parties. The future aggregate minimum lease payments under non-cancelable operating leases are as follows: 2016 2017 2018 2019 2020 Thereafter December 31, 2015 $ 20,012 18,723 16,232 14,233 12,279 134,015 215,494 Page F46 Š AutoCanada Š 2015 Annual Report Lawsuits and legal claims The Company’s operations are subject to federal, provincial and local environmental laws and regulations in Canada. While the Company has not identified any costs likely to be incurred in the next several years, based on known information for environmental matters, the Company’s ongoing efforts to identify potential environmental concerns in connection with the properties it leases may result in the identification of additional environmental costs and liabilities. The magnitude of such additional liabilities and the costs of complying with environmental laws or remediating contamination cannot be reasonably estimated at the balance sheet date due to lack of technical information, absence of third party claims, the potential for new or revised laws and regulations and the ability to recover costs from any third parties. Thus the likelihood of any such costs or whether such costs would be material cannot be determined at this time. In addition to the matters described above, the Company is engaged in various legal proceedings and claims that have arisen in the ordinary course of business. The outcome of all of the proceedings and claims against the Company, including those described above, is subject to future resolution, including the uncertainties of litigation. Based on information currently known to the Company and after consultation with outside legal counsel, management believes that the probable ultimate resolution of any such proceedings and claims, individually or in the aggregate, will not have a material adverse effect on the financial condition of the Company, taken as a whole. Letters of guarantee The Company has outstanding letters of guarantee totaling $1,015 as at December 31, 2015 (2014 - $470) with various due dates. The Company will settle obligations as they arise for which these letters have been issued as security and it is not the Company’s intent that draws will be made on these letters. Capital Commitments Restricted Share Units (RSUs) At December 31, 2015, the Company is committed to capital expenditure obligations in the amount of $35,484 (2014 - 39,691). 31 Share-based payments The Company operates a combination of cash and equity-settled compensation plan under which it receives services from employees as consideration for cash payments. The plan is described below: The Company grants RSUs to designated management employees entitling them to receive a combination of cash and common shares based on the Company’s share price at each vesting date. The RSUs are also entitled to earn additional units based on dividend payments made by the Company and the share price on date of payment. The RSUs granted are scheduled to vest evenly over three years conditional upon continued employment with the Company. The following table shows the change in the number of RSUs for the years ended: Outstanding, beginning of the year Settled – equity Settled – cash Granted Dividends reinvested Impact of movements in share price Outstanding, end of the year 2015 Number of RSUs 2015 Amount $ 2014 Number of RSUs 2014 Amount $ 84,772 (31,558) (21,039) 30,452 2,208 – 3,772 (1,211) (808) 1,302 69 (1,558) 107,680 (26,222) (22,026) 23,823 1,517 – 64,835 1,566 84,772 4,941 (1,345) (1,106) 1,207 84 (9) 3,772 Deferred Share Units (DSUs) Independent members of the Board of Directors are paid a portion of their annual retainer in the form of DSUs. They may also elect to receive up to 100% of their remaining cash remuneration in the form of DSUs. The underlying security of DSUs are the Company’s common shares and are valued based on the Company’s average share price for the five business days prior to the date on which Directors’ fees are paid. The DSUs are also entitled to earn additional units based on dividend payments made by the Company and the share price on date of payment. The DSUs granted are scheduled to vest upon the termination date of the Director, at which time, the DSUs will be settled in cash no earlier than the termination date and no later than December 15 of the calendar year following the Director’s termination date. The following table shows the change in the number of DSUs: Outstanding, beginning of the year Settled Granted Dividends reinvested Impact of movements in share price Outstanding, end of the year 2015 Number of DSUs 2015 Amount $ 2014 Number of DSUs 2014 Amount $ 16,612 – 8,481 566 – 25,659 739 – 304 19 (442) 620 12,184 (838) 5,017 249 – 16,612 559 (37) 223 11 (17) 739 AutoCanada Š 2015 Annual Report Š Page F47 32 Share capital Common shares of the Company are voting shares and have no par value. The authorized common share capital is an unlimited number of shares. The following table shows the common shares issued from January 1, 2015 to December 31, 2015: Public offering(a) December 14, 2015 2,950,000 25.50 72,702 (a) Share issuance amount is net of issuance costs of $3,437 and future income tax on the issuance costs of $914. The following table shows the common shares issued from January 1, 2014 to December 31, 2014: Number $/share Amount Acquisition of Prairie Auto Holdings Ltd. (Note 15) Acquisition of Hyatt Group (Note 13) Public offering(b) Deemed price Number per share Amount March 10, 2014 July 1, 2014 July 11, 2014 205,000 18,753 2,565,000 2,788,753 44.26 79.99 78.00 – 9,073 1,500 193,082 203,655 (b) Share issuance amount is net of issuance costs of $8,808 and future income tax on the issuance costs of $1,820. Restricted Share Unit Trust A trust (“Trust”) was formed to hedge the risk of future share price increases from the time the RSUs and DSUs (see Note 31) are granted to when they are fully vested and can be exercised. The beneficiaries of the Trust are members of the Executive and Senior Management Team who participate in the long-term incentive compensation plan called the RSU Plan and independent members of the Board of Directors who participate in the DSU Plan. Under the Trust Agreement, the third party trustee will administer the distribution of cash and shares to the beneficiaries upon vesting, as directed by the Company. Dividends earned during the twelve month period ended December 31, 2015 on the shares held in trust of $89 are reinvested to purchase additional shares. The shares held in the Trust are accounted for as treasury shares and have been deducted from the Company’s consolidated equity as at December 31, 2015. As the Company controls the Trust, it has included the Trust in its consolidated financial statements for the year ended December 31, 2015. The following table shows the change in shareholders’ capital: Outstanding, beginning of the year Common shares issued Treasury shares acquired Dividends reinvested Treasury shares settled Outstanding, end of the year 2015 Number 24,409,656 2,950,000 – (2,463) 31,557 27,388,750 2015 Amount $ 2014 Number 72,702 – (89) 1,052 434,572 21,638,089 2,788,753 (41,833) (1,574) 26,221 508,237 24,409,656 2014 Amount $ 232,938 203,655 (2,687) (89) 755 434,572 As at December 31, 2015, 70,933 (2014 – 100,027) common shares were held in trust for the Restricted Share Unit Plan, resulting in a total of 27,459,683 (2014 – 24,509,683) common shares issued. Dividends Dividends are discretionary and are determined based on a number of factors. Dividends are subject to approval of the Board of Directors. During the year ended December 31, 2015, eligible dividends totaling $1.00 per common share were declared and paid, resulting in total payments of $24,432 (2014 – $21,745). Page F48 Š AutoCanada Š 2015 Annual Report Earnings per share Basic earnings per share was calculated by dividing earnings attributable to common shares by the sum of the weighted-average number of shares outstanding during the period. Basic earnings per share are adjusted by the dilutive impact of the RSUs to calculate the diluted earnings per share. Earnings used in determining earnings per share from continuing operations are presented below: 2015 $ 2014 $ 22,821 53,132 2015 2014 24,574,022 23,018,588 120,815 100,061 24,674,083 23,139,403 Earnings attributable to common shares The weighted-average number of shares outstanding is presented below: Basic Adjustment for RSUs Diluted 33 Capital disclosures The Company’s objective when managing its capital is to safeguard the Company’s assets and its ability to continue as a going concern while at the same time maximize the growth of the business, returns to shareholders, and benefits for other stakeholders. No specific targets or ratios are set by the Company. The Company views its capital as the combination of long-term indebtedness, long-term lease obligations and equity. The calculation of the Company’s capital is summarized below: Long-term indebtedness (Note 28) Equity The Company manages its capital structure in accordance with changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust its capital structure, the Company may assume additional debt, refinance existing debt 34 Related party transactions Transactions with Companies Controlled by the Executive Chair of AutoCanada During the year ended December 31, 2015, the Company had financial transactions with entities controlled by the Company’s Executive Chair. Priestner is the controlling shareholder of Canada One Auto Company (“COAG”) and its subsidiaries, which beneficially own approximately 8.6% of the Company’s shares. December 31, 2015 $ December 31, 2014 $ 285,759 510,029 795,788 223,009 436,456 659,465 with different characteristics, sell assets to reduce debt, issue new shares or adjust the amount of dividends paid to its shareholders. The Company was in compliance with its debt covenants at December 31, 2015. In addition to COAG, Priestner is the controlling shareholder of other companies from which AutoCanada earns administrative fees. These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. All significant transactions between AutoCanada and companies controlled by Priestner are approved by the Company’s independent members of the Board of Directors. AutoCanada Š 2015 Annual Report Š Page F49 a Rent paid to companies with common c Loans to related parties directors During the year ended December 31, 2015, total rent paid to companies controlled by Priestner amounted to $2,846 (2014 – $2,853). The Company currently leases two of its facilities from affiliates of COAG. The Company’s independent Board of Directors has received advice from a national real estate appraisal Company that the market rents at each of the COAG properties were at fair market value rates at inception. b Administrative support fees During the year ended December 31, 2015, total administrative support fees received from companies controlled by Priestner amount to $977 (2014 – $848). During the year ended December 31, 2015, an interest only, unsecured loan of $8,421 was made to a company controlled by Priestner. The loan is due on November 30, 2035, can be prepaid at any time, and carries interest at a variable rate (2015 – 5%). The interest rate on the loan is adjusted annually by way of mutual agreement and is intended to approximate a market rate of interest available under an arms-length agreement. The loan agreement also provides licensing fees to the Company benchmarked to approximate a total return to the Company equal to 80% of PPH’s net income. Total interest charged relating to the loan was $35 and the total licensing fee was $14. As at December 31, 2015 there was $35 interest receivable and $14 of licensing fees receivable related to the loan. (See Note 16) Commitments with Companies controlled by the Executive Chair of AutoCanada The Company has operating lease commitments, with varying terms through 2029, to lease the lands and buildings used in certain of its franchised automobile dealerships from COAG, a Company controlled by Priestner. The future aggregate minimum lease payments under non-cancelable operating leases with COAG are as follows: 2016 2017 2018 2019 2020 Thereafter December 31, 2015 $ 2,458 2,458 2,458 2,458 2,458 20,261 32,551 Key management personnel compensation Key management personnel consists of the Company’s executive officers and directors. Key management personnel compensation is as follows: Employee costs (including Directors) Short-term employee benefits Share-based payments Page F50 Š AutoCanada Š 2015 Annual Report 2015 $ 2014 $ 3,106 4,451 209 1,997 1,181 222 5,325 5,841 Payable to related parties Included in trade and other payables at December 31, 2015 is $465 (December 31, 2014 – $2,327) payable to non-controlling interests. Theses amounts are unsecured and non interest bearing. 35 Net change in non-cash working capital Changes in non-cash working capital consist of fluctuations in the balances of trade and other receivables, inventories, other current assets, trade and other payables, vehicle repurchase obligations and revolving floorplan facilities. Factors that can affect these items include seasonal sales trends, strategic decisions regarding inventory levels, the addition of new dealerships, and the day of the week on which period end cutoffs occur. The following table summarizes the net increase in cash due to changes in non-cash working capital for the years ended: Trade and other receivables Inventories Finance lease receivables Other current assets Trade and other payables Vehicle repurchase obligations Revolving floorplan facilities 36 Fair value of financial instruments The Company’s financial instruments at December 31, 2015 are represented by cash and cash equivalents, trade and other receivables, loan to associate, finance lease receivables, trade and other payables, revolving floorplan facilities, vehicle repurchase obligations, long-term indebtedness and redemption liabilities. The fair values of cash equivalents, trade and other receivables, finance lease receivables, trade and other payables, and revolving floorplan facilities approximate their carrying values due to their short-term nature. The long-term indebtedness has a carrying value that approximates the fair value due to the floating rate nature of the debt, While there is a portion that has a fixed rate, the long-term indebtedness has a carrying value that is not materially different from its fair value. Senior unsecured notes have a fair value that is different than the carry value, refer to Note 25. Embedded derivatives (Level 2) and redemption liabilities (Level 3) are remeasured at fair value each reporting period with the December 31, 2015 $ December 31, 2014 $ 1,939 (3,584) 3,271 (1,761) 3,959 307 (2,867) 1,264 (2,735) (45,065) (4,587) (1,317) 8,179 126 49,738 4,339 gain or loss being recognized through profit or loss. The fair value of the loan to associate is estimated by discounting the future cash flows associated with the debt at market interest rates. (Level 3) The fair value was determined based on the prevailing and comparable market interest rates. The fair value hierarchy categorizes fair value measurement into three levels based upon the inputs to valuation technique, which are defined as follows: Š Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. Š Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). Š Level 3 – Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). AutoCanada Š 2015 Annual Report Š Page F51 There were no transfers between the levels of the fair value hierarchy during the year. Opening balance January 1, 2014 Acquisitions (Note 13) Business combination under common control (Note 14) Closing balance December 31, 2014 Acquisitions (Note 13) Loan to associate (Note 16) Gain (loss) recognised in net income Closing balance December 31, 2015 Loan to associate Redemption Liabilities $ Contingent Consideration $ Loan to Associate $ – (8,687) (33,111) (41,798) (1,102) – (4,329) (47,229) – (2,353) – (2,353) (5,416) – (149) (7,918) – – – – – 8,421 49 8,470 Total $ – (11,040) (33,111) (44,151) (6,518) 8,421 (4,429) (46,677) Loan to associate are carried at amortized cost using the effective interest method and is categorized as Level 3 in the fair value hierarchy. At inception of the instrument the effective interest rate is calculated using an estimate of future cash flows. In each subsequent period the carrying value is recalculated by taking the revised expected future cash flows discounted using the effective interest rate. The resulting adjustment to the carrying amount is recorded within income from loan to associate in operating profit. The fair value of the loan is calculated by taking the expected future cash flows discounted using the market rate for the instrument. The carrying value of the loan to associate at December 31, 2015, is $8,470 and the fair value of the loan to associate at December 31, 2015 is $8,470. The significant unobservable input in the Level 3 valuation under the discounted cash flow method are the cash flows which are tied to both the base interest rate as well as the related licensing fees. The licensing fees are determined based on gross margins of the associate. The expected gross margins of the associate are supported by historical margins, existing contracts, brand market performance and other factors affecting the operations of the associate. 37 Subsequent events Dividends On February 19, 2016, the Board of Directors of the Company declared a quarterly eligible dividend of $0.25 per common share on the Company’s outstanding Class A common shares, payable on March 15, 2016 to shareholders of record at the close of business on February 29, 2016. Dealership divestiture On February 25, 2016, the Company sold the operating assets of its Newmarket Infiniti Nissan dealership located in Newmarket, Ontario. Net cash proceeds of $11,262 resulted in a pre-tax gain on divestiture of $4,359. The break-down of the transaction was as follows: Property, plant and equipment Trade and other receivables Inventory Intangible assets Total Assets Trade and other payables Revolving floorplan facilities Total Liabilities Net assets disposed of Net proceeds on divestiture Net gain on divestiture Page F52 Š AutoCanada Š 2015 Annual Report 4,832 76 9,858 2,053 16,819 165 9,751 9,916 6,903 11,262 4,359 CORPORATE INFORMATION AUTOCANADA INC. Shareholder Information AutoCanada Inc. Senior Management Patrick Priestner, Chair Steven Landry, Chief Executive Officer Thomas Orysiuk, President Stephen Rose, Chief Operating Officer Christopher Burrows, Chief Financial Officer Erin Oor, Vice-President Corporate Development and Administration Board of Directors Gordon Barefoot – Lead Director Michael Ross Dennis DesRosiers Barry James Maryann Keller Patrick Priestner Steven Landry Thomas Orysiuk Head Office #200 – 15511 123 Avenue NW Edmonton, Alberta T5V 0C3 www.autocan.ca Investor Relations ir@autocan.ca Auditors PricewaterhouseCoopers LLP Edmonton, Alberta Legal Counsel Borden Ladner Gervais LLP Calgary, Alberta Shares Listed Toronto Stock Exchange Trading Symbol: ACQ Transfer Agent Computershare Annual General Meeting Friday May 6, 2016 10:00 a.m. Mountain Time Hilton Doubletree West Edmonton Hotel Room SBCC5 16615-109 Avenue Edmonton, Alberta AutoCanada 2015 Annual Report Page S1 AutoCanada Inc. 200 - 15511 123 Avenue NW Edmonton, AB T5V 0C3 www.autocan.ca 

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