2 0 1 7 A N N U A L R E P O R T 2017 Annual Report AUTOCANADA – 2017 ANNUAL REPORT What’s Inside 1 WHO WE ARE 5 Where We Operate 9 Strategy 17 Operations 21 Revenue Streams 29 Management Discussion & Analysis 69 Annual Financial Statements WWW.AUTOCAN.CA Our current multi-location automobile dealership model enables us to serve a diversified geographic customer base and enjoy benefits not available to single location dealerships. AUTOCANADA – 2017 ANNUAL REPORT AutoCanada (TSX:ACQ) AutoCanada is a leading North American multi-location automobile dealership group currently operating 68 franchised dealerships, comprised of 27 brands, in eight provinces in • New vehicle sales; • Used vehicle sales; • Parts, service & collision repair; and Canada as well as a group in Illinois, USA. Our • Finance and insurance. dealerships generate revenue from the follow- ing four inter-related business operations: Our Brands W H O W E A R E 3 WWW.AUTOCAN.CA AUTOCANADA – 2017 ANNUAL REPORT What’s Inside 1 Who We Are 5 WHERE WE OPERATE 9 Strategy 17 Operations 21 Revenue Streams 29 Management Discussion & Analysis 69 Annual Financial Statements WWW.AUTOCAN.CA AUTOCANADA – 2017 ANNUAL REPORT Where We Operate BRITISH COLUMBIA ALBERTA Abbotsford Volkswagen Chilliwack Volkswagen Island GM Airdrie Dodge Calgary Hyundai Crowfoot Hyundai Fish Creek Nissan Grande Prairie Subaru Ponoka Chrysler Grande Prairie Volkswagen Sherwood Park Hyundai Capital Jeep Dodge Grande Prairie Chrysler Grove Dodge Sherwood Park Volkswagen Maple Ridge Chrysler Courtesy Chrysler Grande Prairie Hyundai Hyatt Infiniti Tower Chrysler Maple Ridge Volkswagen Courtesy Mitsubishi Grande Prairie Mitsubishi North Edmonton Kia Northland Dodge Northland Hyundai Northland Nissan Okanagan Dodge Victoria Hyundai Crosstown Auto Centre Grande Prairie Nissan Northland Volkswagen SASKATCHEWAN MANITOBA ONTARIO QUÉBEC Dodge City Auto Mann-Northway Bridges GM Saskatoon Motor Products Audi Winnipeg Eastern Chrysler McNaught Cadillac 401 Dixie Hyundai 417 Infiniti 417 Nissan BMW Canbec BMW Laval MINI Mont Royal St. James Volkswagen Cambridge Hyundai MINI Laval Guelph Hyundai Hunt Club Nissan Toronto Chrysler Wellington Motors Mercedes-Benz Rive-Sud Planète Mazda NEW BRUNSWICK Moncton Chrysler NOVA SCOTIA Dartmouth Dodge ILLINOIS Grossinger Auto Group Grossinger City Cadillac Grossinger City Chevrolet Grossinger City Toyota Grossinger Hyundai Grossinger Kia Grossinger Motors Audi Grossinger Motors Lincoln Grossinger Motors Mercedes-Benz Grossinger Motors Subaru Grossinger Motors Volkswagen Grossinger Motors Volvo Grossinger Palatine Chevrolet Grossinger Toyota North North City Honda New Brunswick › 1 Nova Scotia › 1 Moncton Dartmouth Quèbec › 6 Illinois › 14 Laval Montreal Rive-Sud Mirabel Bloomington/Normal Chicago Lincolnwood Palatine W H E R E W E O P E R A T E 7 British Columbia › 10 Alberta › 22 Abbotsford Chilliwack Duncan Kelowna Maple Ridge Prince George Victoria Airdrie Calgary Edmonton Grande Prairie Ponoka Saskatchewan › 4 North Battleford Prince Albert Saskatoon Manitoba › 4 Ontario › 8 Cambridge Guelph Mississauga Ottawa Toronto Sherwood Park Winnipeg Spruce Grove WWW.AUTOCAN.CA We create long-term value for our shareholders with a strategy of disciplined acquisitions, operational excellence and prudent management of capital. AUTOCANADA – 2017 ANNUAL REPORT What’s Inside 1 Who We Are 5 Where We Operate 9 STRATEGY 17 Operations 21 Revenue Streams 29 Management Discussion & Analysis 69 Annual Financial Statements WWW.AUTOCAN.CA AUTOCANADA – 2017 ANNUAL REPORT Acquisition Strategy AutoCanada’s steady growth from its earliest days as a public company has been driven by acquisitions. We benefit from a highly-fragment- ed automotive retail market where there are an estimated 3,500 franchised automobile dealer- ships in Canada and close to 17,000 in the United States. AutoCanada is a key consolidator in the industry, as owners of stand-alone dealerships get older, and as their need – and cost – for capital • Add to our mix of brands (and ideally extend the number of OEM relation- ships we have), both in numbers and to better reflect the national mix of luxury, domestic and import brands • Diversify our geographical reach • Open or deepen our presence in a key market, through being a flagship store and/or part of a dealership cluster increases to meet the ongoing requirements from • Be accretive Original Equipment manufacturers (OEMs). In our growth, we look for each acquisition to: As we expand our relationships with OEMs, we open more opportunities of potential acquisitions of dealerships, which in turn allows us to generate further growth. Following an acquisition, we immediately focus on the integration of the store into our network. This involves working with the leadership at the dealer level to serve their customers, care for their employees and grow their business. We install our management information system at the deal- ership location as soon as possible. This makes financial, accounting and other operational data for that dealership easily accessible to our senior management. With access to this data, we can more efficiently incorporate our operating strate- gy at the newly acquired dealership. Because our management information system is scalable, we can integrate new acquisitions without significant- ly increasing the cost of operating the system. S T R A T E G Y 11 WWW.AUTOCAN.CA Operational Excellence The Company’s continued focus on operation- al excellence results in enhanced dealership performance. AutoCanada’s multi-location model serves a diversified geographic customer and revenue base while its dealership cluster strategy enables other scalable benefits. Our operations are decentralized with a centralized administra- tion and strategy. We are able to provide strong support to the dealership network through brand team platforms, which are better positioned to meet the needs of both our dealers and OEMs. Each of our franchised dealerships operates as a distinct profit centre, which allows our highly capable dealer principals to make key operating decisions within our financial and governance framework. AutoCanada has made significant investments in new technology and improving our websites to better accommodate our customers and improve our marketing and communication with potential customers. Our centralized mar- keting department continuously looks for ways to increase traffic to these sites and improve the functionality of the websites and user friendliness. How people buy cars has changed considerably over the last few years, which means our central- ized marketing department will continue to be a driving force in lead generation activities and search engine optimization, among other things, for our dealerships. AUTOCANADA – 2017 ANNUAL REPORT Beyond sales support, 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 organizational structure allows us to provide market specific responses to sales, service, mar- keting and inventory requirements while bene- fiting from the resources provided by an experi- enced and knowledgeable head office executive team. Operating a number of franchised auto- mobile dealerships also allows us to share market information amongst our dealerships selling the same brands and quickly identify any changes in consumer buying patterns. We benchmark the success of our dealership operations against each other and rapidly implement new and innovative ideas across our dealership group. Effective management of our inventory levels is critical to our business. Careful monitoring of inventories of new and used vehicles and parts by days of supply, both in units and dollar amount leads to increased profitability by minimizing interest expense incurred from financing our inventory, while maximizing our free cash flow through prudent management of our working capital requirements. S T R A T E G Y 13 WWW.AUTOCAN.CA Prudent Management of Capital Our disciplined approach to top line growth is matched by our determination to maintain cost control and balance sheet strength. Our continu- ous drive for efficiencies also ties into the working capital requirements contracted by our manufac- turer partners. Our centralized purchasing and shared resources operating structure enables effective cost management. It reduces costs for dealerships on everything from payroll to tires. Expense control and operating targets are also integral parts of our business planning – at each dealership and within the network overall. Our dealers are able to effectively manage inventory informed by our network’s access to market information and analytics like consumer buying patterns. Our bank credit agreements are flexible and efficient, providing enough capacity for both operating and capital expenditures and corporate (e.g. acquisitions) purposes. We are prudent managers of capital and contin- uously assess our capital allocation with a view to generate the highest return on capital for our shareholders. This includes acquisitions to grow AutoCanada and investment in operations and technology to improve our business, balanced with return of capital to AutoCanada’s share- holders in the form of quarterly dividends. The Company also has a Normal Course Issuer Bid to buyback, when it makes sense to do so, up to five per cent of the Company’s issued and outstand- ing Common Shares. AUTOCANADA – 2017 ANNUAL REPORT S T R A T E G Y 15 WWW.AUTOCAN.CA AUTOCANADA – 2017 ANNUAL REPORT What’s Inside 1 Who We Are 5 Where We Operate 9 Strategy 17 OPERATIONS 21 Revenue Streams 29 Management Discussion & Analysis 69 Annual Financial Statements WWW.AUTOCAN.CA Our operations provide a diverse revenue base that we believe mitigates the impact of fluctuations in new vehicle sales volumes and gross profit margins. AUTOCANADA – 2017 ANNUAL REPORT Operations Our multi-location automobile dealership net- Our franchised automobile dealerships operate as work is comprised of 77 new vehicle franchises, distinct profit centres where the dealer principals representing 27 brands at 68 dealership locations are given significant autonomy within overall across Canada and in Illinois, United States. We operating guidelines. This autonomy, combined serve a diversified geographic customer base, with the dealer principals’ understanding of their across major urban centers, and enjoy benefits local markets, enables the dealer principals to not available to single location dealerships. Our effectively run day-to-day operations, market to operations provide a diverse revenue base that we customers, recruit new employees and gauge believe mitigates the impact of fluctuations in new new opportunities in their local markets. vehicle sales volumes and gross profit margins. In addition, our expanding geographic footprint Our dealer principals are required to take an is increasingly lowering our exposure to regional active, hands-on approach to operating their economic downturns and our brand diversifica- respective dealerships. Each dealer principal is tion decreases our exposure to manufacturer-spe- supported by a complete management team cific risks such as brand perception or production that provides oversight and management over disruptions. By operating multiple dealerships every facet of the business. While each member – clusters – in metropolitan areas we are able to of a dealership’s management team, other than gain the advantages associated with a “platform” the dealership controllers, report directly to the of dealerships in a single geographic area. dealer principal, they also report to one or more members of our head office senior management While new vehicle sales generate approximately team. The dealership controllers report directly to 59% of our revenue, parts & service, and finance the head office finance group. Our reporting and & insurance provide higher profit margins and dealer support structures are designed to facili- collectively account for approximately 66% of tate the sharing of market intelligence, ideas and our gross profit, and have been historically more best practices throughout the entire AutoCanada stable throughout economic cycles. network. O P E R A T I O N S 19 WWW.AUTOCAN.CA AUTOCANADA – 2017 ANNUAL REPORT What’s Inside 1 Who We Are 5 Where We Operate 9 Strategy 17 Operations 21 REVENUE STREAMS 29 Management Discussion & Analysis 69 Annual Financial Statements WWW.AUTOCAN.CA AUTOCANADA – 2017 ANNUAL REPORT Revenue Streams NEWVEHICLE SALES % OF REVENUE NEWVEHICLE SALES % OF GROSS PROFIT 25.3 58.9 USEDVEHICLE SALES % OF REVENUE PARTSSERVICE &COLLISION % OF REVENUE 23.1 13.4 USEDVEHICLE SALES % OF GROSS PROFIT 8.4 PARTSSERVICE &COLLISION % OF GROSS PROFIT 41.3 FINANCE& INSURANCE % OF REVENUE FINANCE& INSURANCE % OF GROSS PROFIT 25.0 4.6 R E V E N U E S T R E A M S 23 WWW.AUTOCAN.CA New Vehicle Sales New vehicle sales are the driving force behind AutoCanada’s business. While all four revenue streams contribute to gross profit, new vehicle sales is still the primary focus. In 2017, 59% 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 revenues include new vehicle sales and lease transactions arranged by our deal- erships with third-party financial institutions which generally have shorter terms than finance transactions. This results in customers returning to a dealership more frequently than in the case of financed purchases. We believe that leas- ing provides a number of benefits to our other business lines, including customer loyalty to the leasing dealership for repairs and maintenance. In addition, leases provide us with a source of late-model, off-lease vehicles for our used vehicle inventory. Generally, leased vehicles remain under factory warranty for the term of the lease, allowing franchised automobile dealers to provide repairs and service to the customer throughout the lease term. 43,773 Units Sold 1,828 M Revenue 7.2% Gross Margin 131 M Gross Profit AUTOCANADA – 2017 ANNUAL REPORT Used Vehicle Sales Used vehicle sales are a key contributor 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 vehi- cle, perform reconditioning work on trade-ins and provide financing to used vehicle purchasers. 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, turn- over, and return on investment. We believe that monitoring these various processes results in greater sales volumes, higher turnover, and ulti- mately a greater return on investment. Manufacturer certified pre-owned vehicles typ- ically sell at a premium compared to other used vehicles and are available only at franchised auto- mobile dealerships. We believe that the manufac- turer’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 per- formed at franchised automobile dealerships. 19,379 Units Sold 716 M Revenue 6.1% Gross Margin 44 M Gross Profit R E V E N U E S T R E A M S 25 WWW.AUTOCAN.CA Parts Service & Collision Repair Parts, Service & 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 custom- er retention and vehicle sales. Parts and service activity is generally considered counter-cyclical. In a downturn, consumers buy fewer new vehi- cles, but their older vehicles require more service. A significant number of our customers return to our dealerships for other services after the vehicle warranty expires. Each dealership has systems in place to track customer maintenance records and notify owners of vehicles purchased at the deal- erships when their vehicles are due for periodic services. Parts are either used in repairs made in the service department, sold at retail to custom- ers, or sold at wholesale to independent repair shops and other dealerships. Our profitability in parts, service and collision re- pair can be attributed to our comprehensive man- agement 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’ supply on hand in order to be responsive to our customers’ needs while manag- ing our working capital. 870,616 Service Orders 417 M Revenue 51% Gross Margin 214 M Gross Profit AUTOCANADA – 2017 ANNUAL REPORT 141 M Revenue 92% Gross Margin 130 M Gross Profit Finance Insurance & Other Every vehicle sale presents us 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. The finance and insurance products our dealerships cur- rently 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 lend- ers 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 2016. In addition to finance commissions, opportunities are created to sell other prof- itable products, such as warranty and extended protec- tion 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 aver- age, which results in competitive advantages. R E V E N U E S T R E A M S 27 WWW.AUTOCAN.CA AUTOCANADA – 2017 ANNUAL REPORT What’s Inside 1 Who We Are 5 Where We Operate 9 Strategy 17 Operations 21 Revenue Streams 29 MANAGEMENT DISCUSSION & ANALYSIS 69 Annual Financial Statements WWW.AUTOCAN.CA (cid:2) Table of Contents 1. 2. 3. 4. 5. 6. 7. 8. 9. Reader Advisories Executive Summary Outlook Market Selected Annual Financial Information Selected Quarterly Financial Information Results of Operations Same Store Results Acquisitions, Relocations and Real estate 10. Liquidity and Capital Resources 2 3 5 6 10 11 12 19 23 26 11. 12. 13. 14. Outstanding Shares Dividends Free Cash Flow Critical Accounting Estimates and Accounting Policy Developments 15. Disclosure Controls and Internal Controls over Financial Reporting Risk Factors Forward looking Statements Non-GAAP Measures 16. 17. 18. 30 30 31 34 34 35 35 36 1. READER ADVISORIES results of the Company for the three month period and year ended December 31, 2016. This Management’s Discussion & Analysis (“MD&A”) was prepared as of March 15, 2018 to assist readers in understanding AutoCanada Inc.’s (the “Company” or “AutoCanada”) consolidated financial performance for the year ended December 31, 2017 and significant trends that may affect AutoCanada’s future performance. The following discussion and analysis should be read in conjunction with the audited annual consolidated financial statements and accompanying notes (the “Consolidated Financial Statements”) of AutoCanada as at and for the year ended December 31, 2017. Results are reported in Canadian dollars. Certain dollars have been rounded to the nearest thousand dollars, unless otherwise stated. Reference to the 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 year ended December 31, 2017 of the Company, and compares these to the operating 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 2017 Annual Information Form, dated March 15, 2018, is available on SEDAR at www.sedar.com and our website www.autocan.ca. Such additional information is not incorporated by reference herein, unless otherwise specified, and should not be deemed to be made part of this MD&A. Page M2 Š AutoCanada Š 2017 Annual Report 2. EXECUTIVE SUMMARY Performance vs. the Fourth Quarter of Prior Year The following table summarizes the Company’s operations for the quarter as well as year to date results: Consolidated Operational Data EBITDA attributable to AutoCanada shareholders1,2 Adjusted EBITDA attributable to AutoCanada Three months ended December 31 Year ended December 31 2017 2016 % Change 2017 2016 % Change 28,127 25,260 11.3% 111,812 94,486 18.3% shareholders1,2 21,880 19,038 14.9% 95,410 88,809 7.4% Net earnings attributable to AutoCanada shareholders1,2 Adjusted net earnings attributable to AutoCanada shareholders1,2 Basic EPS Adjusted diluted EPS2 Weighted average number of shares - Basic Weighted average number of shares - Diluted New retail vehicles sold (units) New fleet vehicles sold (units) Used retail vehicles sold (units) Total vehicles sold Revenue Gross Profit Gross Profit % Operating expenses Operating expenses % of Gross Profit Operating Profit Free cash flow Adjusted free cash flow Same Store New retail vehicles sold (units) Same Store New fleet vehicles sold (units) Same Store Used retail vehicles sold (units) Same Store Total vehicles sold Same Store Revenue Same Store Gross Profit Same Store Gross Profit % 17,089 13,785 24.0% 57,844 2,596 2128.2% 8,935 0.62 0.33 7,536 0.50 0.27 27,389,167 27,353,431 27,498,724 27,469,439 18.6% 24.0% 22.2% 39,926 42,665 0.09 2.11 1.45 1.55 0.1% 27,379,193 27,350,555 0.1% 27,473,995 27,455,686 6.9% 2244.4% 6.9% 0.1% 0.1% 8,444 1,378 4,653 14,475 733,060 125,210 17.1% 104,626 83.6% 26,505 29,496 15,996 7,196 1,349 4,051 12,596 647,099 110,249 17.0% 7,590 859 4,463 12,912 629,274 116,785 18.6% 97,397 83.4% 20,761 23,424 13,133 6,845 808 4,162 11,815 582,368 108,683 18.7% 11.3% 60.4% 4.3% 12.1% 16.5% 7.2% -8.2% 7.4% 0.2% 27.7% 25.9% 21.8% 5.1% 67.0% -2.7% 6.6% 11.1% 1.4% -8.7% 36,076 7,697 19,379 63,152 3,101,560 518,629 16.7% 426,253 82.2% 118,969 72,213 90,786 31,402 7,600 17,233 32,991 7,041 19,561 59,593 2,891,581 486,133 16.8% 400,417 82.4% 40,912 96,288 68,566 30,422 6,932 18,560 56,235 2,784,999 467,030 16.8% 55,914 2,730,659 459,984 16.8% 9.4% 9.3% -0.9% 6.0% 7.3% 6.7% -0.5% 6.5% -0.3% 190.8% -25.0% 32.4% 3.2% 9.6% -7.1% 0.6% 2.0% 1.5% -0.4% 1 2 Represents the portion attributable to AutoCanada Shareholders These financial measures have been calculated as described under “NON-GAAP MEASURES”. 2017 Full Year Highlights Š Revenue was $3.1 billion, up 7.3% compared with 2016. Revenue from same stores was up 2.0% year-over-year. Š Operating expenses of $426.3 million, as a percentage of gross profit improved to 82.2% from 82.4% in 2016. Š Gross profit was $518.6 million, up 6.7% compared with 2016, with gross profit as a percentage of revenue relatively flat at 16.7% from 16.8% in 2016. Š Sales of new vehicles were 43,773 in the year, up 9.3% over the prior year. Revenue from the sale of new vehicles was $1.8 billion, up 10.6% from 2016. New vehicles accounted for 58.9% of the Company’s total revenue and 25.3% of gross profit versus 57.2% of revenue and 24.3% of gross profit in 2016. Š Sales of used vehicles were 19,379 in 2017, down 1.0% from last year. Revenue from used vehicle sales was $716.0 million, down 1.3% from the prior year. Used vehicles accounted for 23.1% of the Company’s total revenue and AutoCanada Š 2017 Annual Report Š Page M3 8.4% of gross profit, versus 25.1% of revenue and 9.7% of gross profit in 2016. Š Parts, service and collision repair generated $416.7 million of revenue, up 8.8% from 2016. This accounted for 13.4% of the Company’s total revenue and 41.3% of its gross profit, versus 13.2% of revenue and 41.4% of gross profit in 2016. Š Finance insurance and other generated $141.3 million of revenue, an improvement of 8.6% from 2016. This accounted for 4.6% of the Company’s total revenue and 25.0% of its gross profit, up from 4.5% of revenue and 24.6% of profit in 2016. Š EBITDA attributable to AutoCanada shareholders increased by $17.3 million or 18.3% to $111.8 million from $94.5 million in the prior year. Š The Company generated net earnings attributable to AutoCanada shareholders of $57.8 million ($42.7 million on an adjusted basis), or $2.11 per share ($1.56 adjusted) versus $2.6 million in 2016 ($39.9 million adjusted) or $0.09 per share ($1.46 adjusted). Fourth Quarter Highlights Š Revenue was $733.1 million, up 16.5% compared with the fourth quarter of 2016. Same store revenue growth was up 11.1% in the fourth quarter of this year. Š Operating expenses of $104.6 million, as a percentage of gross profit were up to 83.6% from 83.4% over the same period in 2016. Š Gross profit was $125.2 million, up 7.2% compared with the same quarter in 2016, with gross profit as a percentage of revenue decreasing to 17.1% from 18.6%. Š Operating profit of $26.5 million is up 27.7% from 20.7 million in the fourth quarter of 2016. Š New vehicle sales were 9,822, up 16.3% from same period in 2016. Revenue from the sale of new vehicles was $417.6 million, up 20.0% from same period in 2016. The sale of new vehicles accounted for 57.0% of the Company’s total revenue and 24.0% of gross profit versus 55.3% of revenue and 21.4% of gross profit in the fourth quarter of 2016. Š Used vehicle sales were 4,653, up 4.3% from the same quarter last year. Revenue from the sale of used vehicles sales was $175.3 million, up 11.1% from same time last year. The sale of used vehicles accounted for 23.4% of the Company’s total revenue and 6.0% of gross profit, versus 21.4% of revenue and 8.6% of gross profit in the fourth quarter of 2016. Š Parts, service and collision repair generated $107.2 million of revenue, up 16.1% from same time 2016. This accounted for 14.6% of the Company’s total revenue and 45.5% of its gross profit, versus 14.7% of revenue and 45.3% of gross profit in the same quarter of 2016. Š Finance and insurance generated $33.0 million of revenue, an improvement of 6.1% from same period in 2016. This accounted for 4.5% of the Company’s total revenue and 24.5% of its gross profit, down from 4.9% of revenue and 24.6% of profit in the fourth quarter of 2016. Š EBITDA attributable to AutoCanada shareholders increased by $2.9 million or 11.3% to $28.1 million from $25.3 million same time last year. Š The Company generated net earnings attributable to AutoCanada shareholders of $17.1 million ($8.9 million on an adjusted basis), or $0.62 per share ($0.33 adjusted) versus $13.8 million in 2016 ($7.5 million adjusted) or $0.50 per share ($0.28 adjusted). Page M4 Š AutoCanada Š 2017 Annual Report 3. OUTLOOK The Canadian vehicle market established a new record for sales in 2017, surpassing the previous record set in 2016. Sales topped two million for the first time, with SUVs and trucks accounting for close to 7 out of 10 new vehicles sold in the country. Early projections for 2018 speak of a strong Canadian market continuing – the economy is doing well and interest rates continue to be low, but are expected to increase. For AutoCanada, a strong economy with low unemployment provides a healthy macro environment while the preference for trucks and SUVs sits well with the Company’s current product mix. AutoCanada will continue to add a wide range of new brands and dealerships in new and growing markets. New vehicle sales continue to be the initial touchpoint for building and growing customer relationships, including resale of trade-ins, sale of third-party service or insurance products and recurring service and repair business. Each of the Company’s business segments experienced gains in the fourth quarter and throughout 2017, with the exception of a slight downturn of used vehicle sales over the year. The Company’s continued focus on operational excellence resulted in enhanced dealership performance in 2017 and should continue to lead to further improvement in 2018. The Company’s multi-location model serves a diversified geographic customer and revenue base while its dealership cluster strategy enables other scalable benefits. The Company’s operations continue to be decentralized while it centralizes administration and strategy. It is able to provide strong support to its dealership network through brand team platforms, which are better positioned to meet the needs of both dealers and OEMs. The brand team platform approach had its first full year of operation in 2017 and the Company saw same store sales and profitability both increase. Growth will continue to be driven by the Company’s acquisition strategy. Two single dealership businesses were acquired in 2017, each adding a new OEM relationship (Mercedes-Benz and Mazda) and both joining a cluster of dealerships in the same urban market (Montreal). The Company also strengthened its relationship with General Motors in 2017, a move that should help foster further growth over the long-term. A Public Company Master Agreement (PCMA) permits AutoCanada’s direct ownership and voting control of GM Canada dealerships for the first time. On January 2, 2018 the Company closed an agreement with CanadaOne Auto Group, a company controlled by Patrick Priestner, the Company’s former CEO and founder. As part of that agreement, AutoCanada assumed control of five of the nine dealerships where it held a majority equity stake with no voting rights and CanadaOne Auto Group bought AutoCanada’s interest in the remaining four. Related to this agreement, AutoCanada will see decreases to Revenue, Gross Profit and Unit sales figures, given its divestiture of the four dealerships. Acquiring new dealerships and effectively integrating them is key to AutoCanada’s long-term success. The Company has made significant progress and will continue to look for further incremental improvements related to integration, operating efficiencies and deeper IT and analytical capabilities across its entire network of dealerships. AutoCanada is actively looking to replace General Motors volume and net earnings through GM acquisitions. In addition to acquisitions, the Company pursues opportunisitic growth through planned capital projects, such as new dealership facilities, current dealership expansion and imaging requirements, and select open point opportunities. As at December 31, 2017, the Company has earmarked $142.7 million over five years for contemplated future capital projects. While the Auto industry is experiencing disruption including electric vehicles, ride sharing, autonomous vehicles and car ride service providers, AutoCanada considers these changes in the industry to be positive. The company has indicated to our OEM partners that we are prepared to pilot any new trends in the disruption looking for opportunities to improve customer sales and service interaction digitally and at our dealerships. AutoCanada Š 2017 Annual Report Š Page M5 4. MARKET The Company’s geographical profile is illustrated below by the number of dealerships, revenues and gross profit by province for the years ended December 31, 2017 and December 31, 2016. Location of Dealerships Number of Franchises1 Number of Dealerships1 Revenue Revenue % of Total Gross Profit Gross Profit % of Total December 31, 2017 British Columbia Alberta Saskatchewan Manitoba Ontario Quebec Atlantic Total 13 28 4 4 9 6 2 66 590,528 11 25 1,224,178 243,321 194,888 281,562 420,969 146,114 58 3,101,560 4 4 8 4 2 19% 39% 8% 6% 9% 14% 5% 100% 95,269 219,738 45,146 35,145 44,764 57,955 20,612 518,629 18% 42% 9% 7% 9% 11% 4% 100% 1 “Dealerships” refers to each physical storefront while “Franchises” refers to each separate franchise agreement. December 31, 2016 Location of Dealerships Number of Franchises1 Number of Dealerships1 Revenue British Columbia Alberta Saskatchewan Manitoba Ontario Quebec Atlantic Total 13 27 4 4 9 4 2 63 11 578,938 24 1,168,334 236,354 182,282 215,954 334,255 175,464 55 2,891,581 4 4 8 2 2 Revenue % of Total 20% 40% 8% 6% 8% 12% 6% 100% Gross Profit Gross Profit % of Total 92,404 213,108 44,977 33,789 31,879 47,441 22,535 486,133 19% 44% 9% 7% 6% 10% 5% 100% 1 “Dealerships” refers to each physical storefront while “Franchises” refers to each separate franchise agreement. The Company’s manufacturers profile is illustrated below by number of dealerships and revenues by manufacturer for the years ended December 31, 2017 and December 31, 2016. December 31, 2017 December 31, 2016 Manufacturer FCA General Motors Hyundai Nissan /Infiniti Volkswagen / Audi BMW / MINI Other Total Number of Franchises1 Number of Dealerships1 Revenue Revenue % of Total Number of Franchises1 Number of Dealerships1 Revenue 23 9 9 7 8 4 6 66 9 9 7 8 2 6 17 1,246,120 653,618 240,843 234,824 256,063 352,631 117,461 58 3,101,560 40% 21% 8% 8% 8% 11% 4% 100% 23 9 9 7 7 4 4 63 9 9 7 7 2 4 17 1,285,894 579,337 218,403 241,186 187,911 334,254 44,596 55 2,891,581 Revenue % of Total 44% 20% 8% 8% 6% 12% 2% 100% 1 “Dealerships” refers to each physical storefront while “Franchises” refers to each separate franchise agreement. Page M6 Š AutoCanada Š 2017 Annual Report Performance vs. the Canadian New Vehicle Market The Canadian automotive retail sector year to date has increased by 4.6% compared to the prior year. New light vehicle sales in Alberta for the year ended December 31, 2017 were up 11.3% and up 7.0% in British Columbia when compared to the prior year. The Company’s same store unit sales of new vehicles increased by 11.7% during the three month period ended December 31, 2017, and increased by 4.4% during the year ended December 31, 2017. The following table summarizes Canadian new light vehicle sales for the years ended December 31, 2017 and December 31, 2016 by Province: British Columbia Alberta Saskatchewan Manitoba Ontario Quebec Atlantic Total Canadian New Vehicle Sales by Province1,2 2017 2016 Percent Change Unit Change 233,615 244,302 55,260 61,661 837,480 462,087 144,393 218,235 219,421 50,888 55,654 806,500 458,287 139,914 7.0% 11.3% 8.6% 10.8% 3.8% 0.8% 3.2% 15,380 24,881 4,372 6,007 30,980 3,800 4,479 2,038,798 1,948,899 4.6% 89,899 1 2 DesRosiers Automotive Consultants Inc. Readers are cautioned that the above table includes sales channels that the Company does not fully participate in such as daily rentals, and small and medium size leasing companies that are not part of the franchise dealership network. December Year to Date Canadian New Vehicle Sales by Brand1,2 December 31, 2017 December 31, 2016 Percent Change Unit Change Audi BMW FCA General Motors Hyundai Infiniti Kia Mercedes-Benz MINI Mitsubishi Nissan Subaru Volkswagen Mazda 36,077 38,562 267,052 302,826 129,348 12,433 76,504 51,930 7,051 22,706 134,244 54,570 69,634 74,056 30,544 38,012 277,445 267,341 136,156 12,094 71,670 46,445 6,609 22,293 122,059 50,190 60,017 69,210 Total - AutoCanada Brands Other - Non-AutoCanada Brands Total 1,276,993 1,210,085 761,805 738,814 2,038,798 1,948,899 5,533 18.1% 1.4% 550 -3.7% -10,393 35,485 13.3% -6,808 -5.0% 339 2.8% 4,834 6.7% 5,485 11.8% 442 6.7% 413 1.9% 12,185 10.0% 4,380 8.7% 9,617 16.0% 4,846 7.0% 5.5% 3.1% 4.6% 66,908 22,991 89,899 1 2 DesRosiers Automotive Consultants Inc. Readers are cautioned that the above table includes sales channels that the Company does not fully participate in such as daily rentals, and small and medium size leasing companies that are not part of the franchise dealership network. AutoCanada Š 2017 Annual Report Š Page M7 List of Dealerships 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 Operating Name Wholly-Owned Dealerships: Franchise Year Opened or Acquired Same Stores1 Owned or Leased2 Abbotsford, BC Chilliwack, BC Kelowna, BC Maple Ridge, BC Maple Ridge, BC Prince George, BC Prince George, BC Prince George, BC Victoria, BC Airdrie, AB Calgary, AB Calgary, AB Calgary, AB Calgary, AB Calgary, AB Calgary, AB Calgary, AB Calgary, AB Edmonton, AB Edmonton, AB Edmonton, AB Grande Prairie, AB Grande Prairie, AB Grande Prairie, AB Grande Prairie, AB Grande Prairie, AB Grande Prairie, AB Ponoka, AB Sherwood Park, AB Sherwood Park, AB Spruce Grove, AB Saskatoon, SK Winnipeg, MB Winnipeg, MB Winnipeg, MB Cambridge, ON Mississauga, ON Ottawa, ON Ottawa, ON Ottawa, ON Guelph, ON Abbotsford Volkswagen Chilliwack Volkswagen Okanagan Chrysler Jeep Dodge FIAT Maple Ridge Chrysler Jeep Dodge FIAT ALFA ROMEO Maple Ridge Volkswagen Northland Chrysler Jeep Dodge Northland Hyundai Northland Nissan Victoria Hyundai Airdrie Chrysler Jeep Dodge Ram Courtesy Chrysler Dodge Calgary Hyundai Crowfoot Hyundai Courtesy Mitsubishi Northland Volkswagen Fish Creek Nissan Hyatt Infiniti Tower Chrysler Jeep Dodge Ram Crosstown Chrysler Jeep Dodge FIAT Capital Chrysler Jeep Dodge FIAT 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 Sherwood Park Volkswagen4 Grove Dodge Chrysler Jeep Dodge City Chrysler Jeep Dodge Ram Audi Winnipeg St. James Volkswagen Eastern Chrysler Jeep Dodge Cambridge Hyundai 401 Dixie Hyundai Hunt Club Nissan 417 Nissan 417 Infiniti Guelph Hyundai Volkswagen Volkswagen FCA FCA Volkswagen FCA Hyundai Nissan Hyundai FCA FCA Hyundai Hyundai Mitsubishi Volkswagen Nissan Infiniti FCA FCA FCA Kia FCA Hyundai Subaru Mitsubishi Nissan Volkswagen FCA Hyundai Volkswagen FCA FCA Audi Volkswagen FCA Hyundai Hyundai Nissan Nissan Infiniti Hyundai 2011 2011 2003 2005 2008 2002 2005 2007 2006 2015 2013 2014 2014 2014 2014 2014 2014 2014 1994 2003 2014 1998 2005 1998 2007 2007 2013 1998 2006 2016 2015 2014 2013 2013 2014 2008 2008 2015 2015 2015 2016 Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Leased Owned Leased Leased Leased Owned Owned Owned Owned Leased Leased Leased Leased Leased Leased Leased Leased Leased Leased Leased Owned Y Y Y Y Y Y Y Y Owned Owned Owned Owned Owned Owned Owned Owned Q2 2019 Owned Leased Q1 2018 Leased Y Owned Y Owned Y Owned Y Owned Y Leased Y Leased Q1 2018 Leased Q1 2018 Q1 2018 Leased Q1 2019 Owned Page M8 Š AutoCanada Š 2017 Annual Report Location Operating Name Guelph, ON Toronto, ON Montreal, QC Moncton, NB Dartmouth, NS Wellington Motors Toronto Chrysler Jeep Dodge Ram Mercedes-Benz Rive-Sud5 Moncton Chrysler Jeep Dodge Dartmouth Chrysler Jeep Dodge Equity Investments: Island Chevrolet Buick GMC Kelowna Chevrolet7 Lakewood Chevrolet7 Sherwood Park Chevrolet7 Sherwood Buick GMC7 Duncan, BC Kelowna, BC Edmonton, AB Sherwood Park, AB Sherwood Park, AB North Battleford, SK Bridges Chevrolet Buick GMC Mann-Northway Auto Source Prince Albert, SK Saskatoon Motor Products Saskatoon, SK McNaught Cadillac Buick GMC Winnipeg, MB BMW Laval and MINI Laval Laval, QB BMW Canbec and MINI Mont Royal Montreal, QB Planète Mazda6 Montreal, QC Dealership Loan Financing: Edmonton, AB Whitby, ON Southview Acura3 Whitby Honda3 Franchise FCA FCA Mercedes-Benz FCA FCA General Motors General Motors General Motors General Motors General Motors General Motors General Motors General Motors General Motors BMW / MINI BMW / MINI Mazda Acura Honda Year Opened or Acquired Same Stores1 Owned or Leased2 2016 2014 2017 2001 2006 2013 2015 2014 2012 2012 2014 2014 2014 2014 2014 2014 2017 2016 2015 Q1 2019 Owned Leased Leased Owned Leased Y Q2 2019 Y Y Y Y Y Y Y Y Y Y Y Y Y Q1 2020 N/A N/A Leased Owned Owned Leased Leased Owned Leased Leased Owned Owned Leased Leased N/A N/A 1 2 3 Same store (indicated with the letter “Y” in the table above) 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. This column summarizes whether the dealership real estate is owned or leased. For further detail on dealership loan financing, refer to “LIQUIDITY AND CAPITAL RESOURCES” section under Related Party Transactions. 4 On February 1, 2017, Sherwood Park Volkswagen open point opened for operations. 5 On May 1, 2017, the Company purchased all of the issued and outstanding shares of Mercedes-Benz Rive-Sud in Montreal, Quebec. See “ACQUISITIONS, RELOCATIONS, AND REAL ESTATE” for more information related to this dealership acquisition. 6 On December 1, 2017 the Company purchase 95% of the issued and outstanding shares of Planète Mazda in Montreal, Quebec. See “ACQUISITIONS, RELOCATIONS, AND REAL ESTATE” for more information related to this dealership acquisition. 7 On January 2, 2018 as part of the General Motors Transaction (M24) the Company sold 100% of its non-voting equity interests in these locations as disclosed in the annual consolidated financial statements of the company for the year ended December, 31, 2017 (Note 40). AutoCanada Š 2017 Annual Report Š Page M9 5. SELECTED ANNUAL FINANCIAL INFORMATION The following table shows the results of the Company for the years ended December 31, 2017, December 31, 2016 and December 31, 2015. The results of operations for these years are not necessarily indicative of the results of operations to be expected in any given comparable period. AutoCanada (in thousands of dollars, except Gross Profit %, Earnings per share, and Operating Data) 2017 2016 2015 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 Operating Profit2 Impairment (recovery) of intangible assets and goodwill Net earnings attributable to AutoCanada shareholders Adjusted net earnings attributable to AutoCanada shareholders2,4 EBITDA attributable to AutoCanada shareholders2 EBITDA % of Sales2 Free cash flow2 Adjusted free cash flow2 Basic earnings per share Diluted earnings per share Basic adjusted earnings per share2,4 Diluted adjusted earnings per share2,4 Dividends declared per share Operating Data Vehicles (new and used) sold New vehicles sold3 New retail vehicles sold3 New fleet vehicles sold3 Used retail vehicles sold3 # of service & collision repair orders completed3 Absorption rate2 # of dealerships at year end # of same store dealerships # of service bays at year end Same store revenue growth1 Same store gross profit growth1 1,827,559 716,045 416,690 141,266 1,652,795 725,430 382,933 130,423 1,668,237 704,569 387,614 143,383 3,101,560 2,891,581 2,903,803 130,984 43,738 214,310 129,597 518,629 16.7% 426,253 82.2% 118,969 (816) 57,844 42,665 111,812 3.6% 72,213 90,786 2.11 2.11 1.56 1.55 0.40 63,152 43,773 36,076 7,697 19,379 870,616 89% 58 49 999 2.0% 1.5% 118,297 47,192 201,259 119,385 486,133 16.8% 400,417 82.4% 40,912 54,096 2,596 39,926 94,486 3.3% 96,288 68,566 0.09 0.09 1.46 1.45 0.55 59,593 40,032 32,991 7,041 19,561 863,970 86% 55 44 928 (5.6)% (5.4)% 122,408 40,629 193,868 130,804 487,709 16.8% 395,877 81.2% 78,919 18,757 22,821 40,343 89,838 3.1% 38,675 38,796 0.93 0.92 1.64 1.64 1.00 62,799 42,457 35,323 7,134 20,342 847,702 91% 54 28 912 (5.9)% (11.7)% 1 2 3 4 Same stores revenue growth and same stores gross profit growth is calculated using franchised automobile dealerships that we have owned for at least 2 full years. These financial measures have been calculated as described under “NON-GAAP MEASURES”. This number includes 100% of vehicles and service and collision repair orders sold by dealerships in which we have less than 100% investment. In Q1 2017, the Company redefined the calculation of adjusted net earnings. Page M10 Š AutoCanada Š 2017 Annual Report 6. 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) 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 Operating profit2 Impairment (recovery) of intangible assets and goodwill Net earnings (loss) attributable to AutoCanada shareholders Adjusted net earnings attributable to AutoCanada shareholders 2,4 EBITDA attributable to AutoCanada shareholders 2 EBITDA % of Sales2 Free cash flow2 Adjusted free cash flow2 Basic earnings per share Diluted earnings per share Basic adjusted earnings per share2,4 Diluted adjusted earnings per share2,4 Dividends declared per share Operating Data Vehicles (new and used) sold3 New vehicles sold3 New retail vehicles sold3 New fleet vehicles sold3 Used retail vehicles sold3 # of service and collision repair orders completed3 Absorption rate2 # of dealerships at period end # of same store dealerships1 # of service bays at period end Same store revenue growth1 Same store gross profit growth1 Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 92,310 31,133 417,626 497,711 558,682 353,540 348,107 444,482 497,025 363,181 175,251 192,473 182,913 165,408 157,724 179,582 208,016 180,108 95,585 100,317 94,721 107,156 104,816 113,983 90,735 33,529 36,899 28,862 33,027 39,571 39,324 29,344 733,060 834,571 894,902 639,027 629,274 753,178 842,257 666,872 31,578 34,410 27,267 12,950 13,758 10,420 47,676 52,957 47,669 30,733 33,577 26,353 125,210 137,969 143,823 111,627 116,785 122,937 134,702 111,709 16.3% 16.0% 16.8% 18.6% 99,041 107,932 96,047 97,397 83.4% 80.6% 80.1% 86.0% 20,761 (28,776) 28,442 20,483 17.1% 16.5% 16.1% 17.5% 104,626 110,560 112,897 98,170 83.6% 80.1% 78.5% 87.9% 26,505 30,287 46,539 15,638 30,033 36,806 38,555 25,590 7,563 11,140 13,095 11,940 56,915 53,805 56,306 47,284 30,699 36,218 35,867 26,813 25,042 10,064 52,957 28,722 (816) – – – – 54,096 – – 17,089 12,100 24,977 3,678 13,785 (32,619) 14,158 7,272 8,935 13,581 15,547 4,602 7,536 10,327 15,523 6,253 3.8% 3.1% 28,127 25,827 43,722 14,136 2.7% 4.9% 29,496 31,114 10,982 621 15,996 23,296 36,277 15,217 0.13 0.13 0.17 0.17 0.10 0.62 0.62 0.33 0.33 0.10 0.91 0.91 0.57 0.57 0.10 0.44 0.44 0.50 0.50 0.10 14,475 17,132 18,490 13,055 8,508 6,753 1,755 4,547 9,822 12,014 13,429 8,444 10,334 10,545 2,884 1,680 1,378 5,061 5,118 4,653 25,260 4.5% 23,424 13,133 0.50 0.50 0.28 0.27 0.10 12,912 8,449 7,590 859 4,463 3.6% 23,842 27,072 18,312 3.2% 4,045 6,035 0.27 0.27 0.23 0.23 0.25 3.7% 30,897 37,922 27,766 21,632 0.53 0.53 0.57 0.57 0.10 (1.19) (1.19) 0.38 0.38 0.10 15,955 17,425 13,301 8,502 10,983 12,098 7,078 9,374 1,424 2,724 4,799 5,327 8,949 2,034 4,972 224,006 220,669 228,872 197,069 217,418 209,912 227,446 209,194 83% 53 27 898 (9.2)% (3.2)% (3.1)% (5.8)% (11.0)% (5.3)% (5.5)% 86% 82% 87% 55 56 57 44 47 47 977 928 949 0.1% (7.1)% (10.0)% 1.1% (1.2)% 90% 58 49 999 11.1% 1.4% 87% 57 48 977 2.9% 6.3% 89% 53 33 898 90% 53 27 898 1 2 3 4 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. Same store growth is in comparison with the same quarter in the prior year. These financial measures have been calculated as described under “NON-GAAP MEASURES”. This number includes 100% of vehicles and service and collision repair orders sold by dealerships in which we have less than 100% investment. In Q1 2017, the Company redefined the calculation of adjusted net earnings. AutoCanada Š 2017 Annual Report Š Page M11 7. RESULTS OF OPERATIONS Fourth Quarter Operating Results EBITDA attributable to AutoCanada shareholders for the quarter increased by $2.9 million or 11.3% to $28.1 million, from $25.3 million when compared to the results of the Company for the same period in the prior year. The increase in EBITDA attributable to AutoCanada shareholders for the quarter is a result of an increase in gross profit as a result of additional stores added since the prior year as well as improved profitability of existing stores. Adjusted EBITDA attributable to AutoCanada shareholders for the quarter ended December 31, 2017 increased by $2.9 million or 14.9% from $19.0 million to $21.9 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 month period ended December 31, for the last three years of operations: (in thousands of dollars) Period from October 1 to December 31 Net earnings (loss) attributable to AutoCanada shareholders Impairment (recovery) of intangible assets and goodwill2 Income taxes2 Depreciation of property and equipment2 Interest on long-term indebtedness2 EBITDA attributable to AutoCanada shareholders1 Add back: Share-based compensation attributed to changes in share price Revaluation of redemption liabilities Revaluation of contingent consideration Unrealized gain on embedded derivative Non-recurring settlement income Adjusted EBITDA attributable to AutoCanada shareholders1 2017 2016 2015 17,089 13,785 (7,361) – 18,126 (3,136) 3,474 4,964 4,866 4,947 4,248 4,263 2,531 4,634 4,310 28,127 25,260 23,353 105 (1,470) (4,840) (17) – (30) 69 2,566 (4,397) 149 (416) (8) 15 (1,518) – 21,880 19,038 26,030 1 2 This financial measure is identified and defined under the section “NON-GAAP MEASURES”. Represents the portion attributable to AutoCanada shareholders. Net earnings attributable to AutoCanada shareholders increased by $3.3 million or 24.0% to $17.1 million in the fourth quarter of 2017 from $13.8 million when compared to the prior year. Income tax expense attributable to AutoCanada shareholders increased by $2.5 million to $5.0 million in the fourth quarter of 2017 from $2.5 million in the same period of 2016. Page M12 Š AutoCanada Š 2017 Annual Report Adjusted net earnings attributable to AutoCanada shareholders increased by $1.4 million or 18.6% to $8.9 million for the quarter from $7.5 million in the same period of the prior year. The following table reconciles net earnings to adjusted net earnings for the three month period ended December 31: (in thousands of dollars) Net earnings (loss) attributable to AutoCanada shareholders Add back: Impairment (recovery) of intangible assets and goodwill, net of tax Share-based compensation attributed to changes in share price, net of tax Revaluation of redemption liabilities Revaluation of contingent consideration Unrealized gain on embedded derivative Non-recurring settlement income, net of tax Adjusted net earnings attributable to AutoCanada shareholders1,2 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 2017 2016 2015 17,089 13,785 (7,361) (2,296) 51 (4,397) (416) 15 (1,111) 8,935 13,286 (22) 2,566 149 (8) – 8,610 27,389,167 27,353,431 25,016,637 27,498,724 27,469,439 25,110,033 – 78 (1,470) (4,840) (17) – 7,536 0.33 0.33 0.28 0.27 0.34 0.34 1 2 This financial measure is identified and defined under the section “NON-GAAP MEASURES”. In Q1 2017, the Company redefined the calculation of adjusted net earnings. Annual Operating Results EBITDA attributable to AutoCanada shareholders for the year ended December 31, 2017 increased by $17.3 million or 18.3% to $111.8 million, from $94.5 million when compared to the results of the Company for the same period in the prior year. The increase in EBITDA attributable to AutoCanada shareholders for the year is a result of an increase in gross profit as a result of additional stores added since the prior year as well as improved profitability of existing stores. Adjusted EBITDA attributable to AutoCanada shareholders for the year ended December 31, 2017 increased by $6.6 million or 7.4% from $88.8 million to $95.4 million when compared to the results of the Company in the prior year. The following table illustrates EBITDA and adjusted EBITDA attributable to AutoCanada shareholders for the year ended December 31, for the last three years: (in thousands of dollars) Period from January 1 to December 31 Net earnings attributable to AutoCanada shareholders Impairment (recovery) of intangible assets and goodwill 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 liabilities Unrealized loss (gain) on embedded derivative Revaluation of contingent consideration Non-recurring management transition cost Non-recurring settlement income Adjusted EBITDA attributable to AutoCanada shareholder1 2017 2016 2015 57,844 2,596 22,821 (3,136) 51,180 18,126 19,800 5,826 16,171 19,410 18,432 17,863 17,894 16,452 14,857 111,812 94,486 89,838 30 (2,869) 15 (416) 1,684 (14,846) (272) 4,329 (42) 149 – – 95,410 88,809 94,002 (75) (765) 3 (4,840) – – 1 This financial measure is identified and defined under the section “NON-GAAP MEASURES”. AutoCanada Š 2017 Annual Report Š Page M13 For the year ended December 31, 2017, pre-tax earnings attributable to AutoCanada shareholders increased by $69.2 million to $77.6 million from $8.4 million in the same period of the prior year. Net earnings attributable to AutoCanada shareholders increased by $55.2 million to $57.8 million in the year ended December 31, 2017 from $2.6 million when compared to the prior year due to impairment of intangible assets recognized during the prior year. Income tax expense attributable to AutoCanada shareholders increased by $14.0 million to $19.8 million in the year ended December 31, 2017 from $5.8 million in the same period of 2016. Adjusted net earnings attributable to AutoCanada shareholders increased by $2.8 million or 6.9% to $42.7 million in 2017 from $39.9 million in the prior year. The following table reconciles net earnings to adjusted net earnings for the year ended December 31: (in thousands of dollars) Net earnings attributable to AutoCanada shareholders Add back: Impairment (recovery) of intangible assets and goodwill, net of tax Share-based compensation attributed to changes in share price, net of tax Revaluation of redemption liabilities Revaluation of contingent consideration Unrealized loss (gain) on embedded derivative Non-recurring management transition cost, net of tax Non-recurring settlement income, net of tax Adjusted net earnings attributable to AutoCanada shareholders1,2 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 2017 57,844 2016 2,596 2015 22,821 (2,295) 42,987 13,286 22 (2,869) (416) 15 1,231 (10,867) 42,665 (55) (765) (4,840) 3 – – 39,926 (200) 4,329 149 (42) – – 40,343 27,379,193 27,350,555 24,574,022 27,473,995 27,455,686 24,674,083 1.56 1.55 1.46 1.45 1.64 1.64 1 2 This financial measure is identified and defined under the section “NON-GAAP MEASURES”. In Q1 2017, the Company redefined the calculation of adjusted net earnings. Page M14 Š AutoCanada Š 2017 Annual Report Revenues The following table summarizes revenue for the three months and year ended December 31: New vehicles Used vehicles Finance, insurance and other Parts, service and collision repair Gross Profit Three Months Ended December 31 Year Ended December 31 2017 $ 417,626 175,251 33,027 107,156 2016 $ 348,107 157,724 31,133 92,310 Change $ 69,519 17,527 1,894 14,846 2017 $ 2016 $ 1,827,559 716,045 141,266 416,690 1,652,795 725,430 130,423 382,933 Change $ 174,764 (9,385) 10,843 33,757 733,060 629,274 103,786 3,101,560 2,891,581 209,979 The following table summarizes gross profit for the three months and year ended December 31: New vehicles Used vehicles Finance, insurance and other Parts, service and collision repair Three Months Ended December 31 Year Ended December 31 2017 $ 30,033 7,563 30,699 56,915 2016 $ 25,042 10,064 28,722 52,957 125,210 116,785 Change $ 4,991 (2,501) 1,977 3,958 8,425 2017 $ 130,986 43,738 129,596 214,309 2016 $ Change $ 118,297 47,192 119,385 201,259 12,689 (3,454) 10,211 13,050 518,629 486,133 32,496 New vehicles Finance, insurance and other New vehicle revenue increased by 20.0% for the quarter and 10.6% for the year. Gross profit increased in the quarter for new vehicles as a result of an increase in new vehicles sold of 1,373, and increased gross profit per unit of $94 compared to Q4, 2016. The increase in gross profit in the year from new vehicles is due to an increase in new vehicles sold of 3,741 and an increase in gross profit per unit of $37 compared to the same period of the prior year. Used vehicles Used vehicle revenue increased by 11.1% for the quarter and incurred a decrease of 1.3% for the year. The decrease in gross profit in the quarter from used vehicles is due to a decline in gross profit per unit of $630, offset by a quarterly increase in used vehicles sold of 190 compared to Q4, 2016. The decrease in gross profit in the year from used vehicles is due to a decline in gross profit per unit of $156 and a decline in used vehicles sold of 182 compared to the same period of the prior year. Finance and insurance products are sold with both new and used retail vehicles, but a larger proportion are sold in conjunction with new retail vehicles. Finance and insurance revenue increased by 6.1% for the quarter and 8.3% compared to prior year. This resulted in an increased gross profit of 6.9% for the quarter and 8.6% for the year. Parts, service and collision repair Parts, service and collision repair revenues increased by 16.1% in the quarter and 8.8% for the year. The increase in gross profit in the quarter from parts, service and collision repair is due to an increase in gross profit per order of $11 and a quarterly increase in repair orders of 6,588 compared to Q4, 2016. The increase in gross profit in the year from parts, service and collision repair is due to an increase in gross profit per order of $13 and an increase in repair orders of 6,646 compared to the same period of the prior year. AutoCanada Š 2017 Annual Report Š Page M15 Absorption rate1 Absorption rate measures 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. The following table summarizes Absorption rate since the 2013 fiscal year: 87 % 85 % 86 % 89 % 91 % 2013 2014 2015 2016 2017 The positive change in Absorption rate for fiscal 2017 is a strong indicator that the increase in gross profit for Parts, service and collision repair was greater than the corresponding increase in related departmental and overall dealership fixed expenses. 1 This financial measure is identified and defined under the section “NON-GAAP MEASURES”. Operating expenses Operating costs consist of four major categories: Employee costs Employee costs are the costs associated with employing staff both at the dealerships and at AutoCanada’s head office. Dealership employees are largely commission based, resulting in employee costs being substantially variable in nature. Our dealership pay structures are tied to meeting sales objectives, maintaining customer satisfaction indices, as well as improving gross profit and net income. Administrative costs Administrative costs comprise the remaining costs of running our dealerships. Advertising, utilities, service shop consumables, information processing, insurance, and consulting costs comprise a significant portion of the administrative costs. Administrative costs can be either fixed or variable in nature. The Company operates a centralized marketing department and information technology Page M16 Š AutoCanada Š 2017 Annual Report 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. Facility lease costs Facility lease costs relate to the cost of leasing dealership facilities not owned by AutoCanada. Facility lease costs are fixed in nature as lease contracts are based on the market value of the property and are long-term. Depreciation of property and equipment Depreciation of property and equipment relates to the depreciation of the dealership assets including buildings, machinery and equipment, leasehold improvements, company and lease vehicles, furniture, and computer hardware. Depreciation rates vary based on the nature of the asset. 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. The following tables summarize operating expenses as a percentage of gross profit, 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. Operating expenses as a % of Gross Profit 2017 2016 Change 2017 2016 Change Three Months Ended December 31 Year Ended December 31 Employee costs before management transition costs Management transition costs Administrative costs - Variable Total Variable Expenses Administrative costs - Fixed Facility lease costs Depreciation of property and equipment Total fixed expenses Total operating expenses 50.6% –% 19.3% 69.9% 4.3% 5.1% 4.2% 13.6% 83.5% 51.1% –% 18.0% 69.1% 5.0% 5.1% 4.2% 14.3% 83.4% (0.5)% –% 1.3% 0.8% (0.7)% –% –% (0.7)% 0.1% 50.7% 0.3% 17.8% 68.8% 4.7% 4.7% 4.0% 13.4% 82.2% 50.7% 17.4% 68.6% –% 0.5% (0.2)% 0.4% 0.2% 4.9% (0.2)% 4.8% (0.1)% 4.1% (0.1)% 13.8% (0.4)% 82.4% (0.2)% Total Operating expenses Impairment of intangible assets and goodwill Total operating expenses remained relatively flat in the quarter and year over year. Variable Expenses Total variable expenses for the quarter and year remained relatively flat, changing by 0.8% and 0.2% respectively. Employee costs have decreased in the quarter by 0.5% of operating expenses as a percentage of gross profit and remained flat versus the previous year. Variable administrative costs increased 1.3% in the quarter and 0.4% year over year as a percentage of gross profit. Fixed Expenses Total fixed expenses for the quarter decreased by 0.7% and the year by 0.4%. Fixed administrative costs decreased, for both the quarter and year to date, as a percentage of gross profit. Facility lease costs and depreciation of property and equipment saw a 0.1% decrease for the year to date, as a percentage of gross profit. 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, or more frequently if events or changes in circumstances indicate that they may be impaired. 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. The Company performed a test for all cash generating units for the year ended December 31, 2017. As a result of the test performed, the Company recorded a recovery of $0.8 million of intangible assets. (2016 impairment of $54.1 million). AutoCanada Š 2017 Annual Report Š Page M17 Income Taxes The following table summarizes income taxes for the three months and year ended December 31: Current tax Deferred tax Income tax expense Income tax expense is recognized based on management’s best estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual rates used for the year ended December 31, 2017 was 26.8% (December 31, 2016 - 27.2%). Finance costs The Company incurs finance costs on its revolving floorplan facilities, long-term indebtedness and banking arrangements. During the quarter ended December 31, 2017, finance costs on our revolving floorplan facilities increased by 28.9% to $4.2 million from $3.2 million compared to Q4 2016, mainly due to increased inventory as a result of the two dealership acquisitions and one open point completed in 2017. For the year ended December 31, 2017, finance costs on our revolving floorplan facilities increased Three Months Ended December 31 Year Ended December 31 2017 $ 2016 $ 13,254 (8,193) (6,157) 9,144 Change 19,411 (17,337) 2017 $ 2016 $ Change 20,901 1,812 12,316 (3,741) 8,585 5,553 5,061 2,987 2,074 22,713 8,575 14,138 by 17.0% to $14.5 million from $12.4 million in the same period of the prior year. 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. 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: Three Months Ended December 31 Year Ended December 31 2017 2016 Change 2017 2016 Change 4,187 (4,114) 3,247 (3,860) 940 (254) 686 14,515 (17,054) 12,408 (14,634) 2,107 (2,420) (2,539) (2,226) (313) (in thousands of dollars) Floorplan financing Floorplan credits earned Net carrying cost of vehicle inventory 73 (613) Page M18 Š AutoCanada Š 2017 Annual Report 8. SAME STORES RESULTS Same store is defined as a franchised automobile dealership that has been owned for at least two full years since acquisition. The dealership is then included in the quarter thereafter, for same store analysis. The Company believes that it takes two years for an acquired dealership or Open Point to achieve normal operating results. The dealerships which have been acquired over the past two years are integrating well into their respective platforms and within the Company. Five dealerships were added to same stores since the start of 2017. We believe that there continues to be opportunities within these dealerships and continue to dedicate significant resources to newly acquired dealerships to successfully integrate acquisitions in an efficient manner. As a result, we expect to incur additional selling and administrative costs in the future to successfully integrate new dealerships into our model. The following table summarizes the number of same stores for the period ended December 31, 2017 by Province: Number of Same Stores by Province FCA Hyundai General Motors Volkswagen Nissan/Infiniti Mitsubishi BMW Audi Subaru KIA Total British Columbia Alberta Saskatchewan Manitoba Ontario Quebec Atlantic Total 4 2 1 3 1 – – – – – 7 4 3 2 3 2 – – 1 1 11 23 1 – 3 – – – – – – – 4 1 – 1 1 – – – 1 – – 4 1 2 – – – – – – – – 3 – – – – – – 2 – – – 2 2 – – – – – – – – – 2 16 8 8 6 4 2 2 1 1 1 49 Same Store Revenue and Vehicles Sold Three Months Ended December 31 Year Ended December 31 2017 2016 % Change 2017 2016 % Change (in thousands of dollars) 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 305,414 263,304 55,818 60,883 366,297 319,122 108,508 104,085 43,149 48,866 157,374 147,234 29,409 30,367 554,038 495,765 86,603 93,061 16.0% 9.1% 14.8% 4.2% 13.2% 6.9% 3.3% 11.8% 7.5% 1,320,350 320,444 1,279,471 274,973 1,640,794 451,736 196,014 1,554,444 459,887 230,598 647,750 129,979 690,485 123,567 2,418,523 366,476 2,368,496 362,163 Total 647,099 582,368 11.1% 2,784,999 2,730,659 New retail vehicles sold New fleet vehicles sold Used retail vehicles sold Total Total vehicles retailed 7,196 1,349 4,051 6,845 808 4,162 12,596 11,815 11,247 11,007 5.1% 67.0% (2.7)% 6.6% 2.2% 31,402 7,600 17,233 56,235 48,635 30,422 6,932 18,560 55,914 48,982 3.2% 16.5% 5.6% (1.8)% (15.0)% (6.2)% 5.2% 2.1% 1.2% 2.0% 3.2% 9.6% (7.1)% 0.6% (0.7)% AutoCanada Š 2017 Annual Report Š Page M19 Revenues - Same Store Analysis Same store revenue increased by $64.7 million or 11.1%, and $54.3 million or 2.0%, for the three month period and the year ended December 31, 2017 respectively when compared to the same period in the prior year. of 111 units or 2.7% offset by a increase in the average revenue per used vehicle sold of $3,473 or 9.8%. For the year ended December 31, 2017, used vehicle revenues decreased by $42.7 million or 6.2% due to a decrease in used vehicle sales of 1,327 units or 7.1%, offset by an increase in the average revenue per used vehicle sold of $385 or 1.0%. New vehicle revenues increased by $47.2 million or 14.8% for the fourth quarter of 2017 over the prior year due to an increase in new vehicle sales of 892 units or 11.7% and an increase in the average revenue per new vehicle sold of $1,168 or 2.8%. Same store new vehicle revenues increased by $86.4 million or 5.6% for the year ended December 31, 2017 over the same period in the prior year due to a increase in new vehicle sales of 1,648 units or 4.4% and an increase in the average revenue per new vehicle sold of $456 or 1.1%. Same store used vehicle revenues increased by $10.1 million or 6.9% for the three month period ended December 31, 2017 over the same period in the prior year due to a decrease in used vehicle sales Same store parts, service and collision repair revenue increased by $6.5 million or 7.5% for the fourth quarter of 2017 compared to the prior period. For the year ended December 31, 2017, parts, service and collision repair revenue increased by $4.3 million or 1.2%. Same store finance, insurance and other revenue increased by $1.0 million or 3.3% for the three month period ended December 31, 2017 over the same period in 2016. For the year ended December 31, 2017, same store finance, insurance and other revenue increased by $6.4 million or 5.2% over the same period in 2016. Same Store Gross Profit and Gross Profit Percentage Revenue Source (in thousands of dollars) 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 Three Months Ended December 31 Gross Profit Gross Profit % 2017 2016 % Change 2017 2016 24,008 1,677 25,685 6,588 1,088 7,676 27,748 61,109 49,140 21,389 1,580 22,969 8,220 1,146 9,366 26,755 59,090 49,593 110,249 108,683 12.2% 6.1% 11.8% (19.9)% (5.1)% (18.0)% 3.7% 3.4% (0.9)% 1.4% 7.9% 2.8% 7.0% 6.1% 2.2% 4.9% 91.4% 11.0% 52.8% 17.0% 8.1% 2.8% 7.2% 7.9% 2.7% 6.4% 91.0% 11.9% 57.3% 18.7% Page M20 Š AutoCanada Š 2017 Annual Report Revenue Source (in thousands of dollars) 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 Gross Profit - Same Store Analysis Same store gross profit increased by $1.6 million or 1.4% and $7.0 million or 1.5% for the three month period and the year ended December 31, 2017 respectively when compared to the same period in the prior year. Same store new vehicle gross profit increased by $2.7 million or 11.8% in the three month period ended December 31, 2017 when compared to 2016 as a result of an increase in new vehicle sales of 892 units or 11.7%, and an increase in the average gross profit per new vehicle sold of $5 or 0.2%. For the year ended December 31, 2017, new vehicle gross profit increased by $4.6 million or 4.2% which can be mainly attributed to a increase in new vehicle sales of 1,648 units or 4.4% offset by an decrease in the average gross profit per new vehicle sold of $7 or 0.2%. Same store used vehicle gross profit decreased by $1.7 million or 18.0% in the three month period ended December 31, 2017 over the prior year. This was due to a decrease in the number of used vehicles sold of 111 units and an decrease in the average gross profit per used vehicle retailed of $355 or (15.8)%. For the year ended December 31, 2017, same store used Year Ended December 31 Gross Profit Gross Profit % 2017 2016 % Change 2017 2016 110,168 5,934 116,102 36,706 5,902 42,608 118,552 277,262 189,768 104,793 6,665 111,458 39,667 5,172 44,839 112,777 269,074 190,910 467,030 459,984 5.1% (11.0)% 4.2% (7.5)% 14.1% (5.0)% 5.1% 3.0% (0.6)% 1.5% 8.3% 1.9% 7.1% 8.1% 3.0% 6.6% 91.2% 11.5% 51.8% 16.8% 8.1% 2.9% 7.2% 8.7% 1.9% 6.5% 91.5% 11.4% 53.2% 16.8% vehicle gross profit decreased by $2.2 million or 5.0% which was mainly due to an increase in the average gross profit per vehicle retailed of $57 or 2.4% offset by a decrease in the number of vehicles retailed of 1,327 units. Same store parts, service and collision repair gross profit decreased by $0.5 million or 0.9% in the three month period ended December 31, 2017 when compared to the same period in the prior year. For the year ended December 31, 2017, parts, service and collision repair gross profit decreased by $1.1 million or 0.6%. Same store finance and insurance gross profit increased by $1.0 million or 3.7% in the three month period ended December 31, 2017 when compared to the prior year as a result a increase in units retailed of 1,165, offset by an decrease in the average gross profit per unit sold of $188. For the year ended December 31, 2017, finance and insurance gross profit increased by $5.8 million or 5.1% and can be attributed to a increase in units retailed of 583, and an increase in the average gross profit per unit sold of $91. AutoCanada Š 2017 Annual Report Š Page M21 The following table summarizes same store total revenue for the three months and year ended December 31, 2017 by Province: (in thousands of dollars) 2017 2016 % Change 2017 2016 % Change Three Months Ended December 31 Year Ended December 31 British Columbia Alberta Saskatchewan Manitoba Ontario Quebec Atlantic Total 133,885 259,195 58,179 45,688 26,681 93,012 30,459 116,036 236,376 54,582 42,626 21,042 81,198 30,508 647,099 582,368 15.4% 9.7% 6.6% 7.2% 26.8% 14.5% (0.2)% 11.1% 590,528 1,148,533 243,321 194,888 108,984 352,631 146,114 578,938 1,121,811 236,354 182,282 101,555 334,255 175,464 2,784,999 2,730,659 2.0% 2.4% 2.9% 6.9% 7.3% 5.5% (16.7)% 2.0% The following table summarizes same store gross profit for the three months and year ended December 31, 2017 by Province: Three Months Ended December 31 Year Ended December 31 (in thousands of dollars) British Columbia Alberta Saskatchewan Manitoba Ontario Quebec Atlantic Total 2016 % Change 2017 21,879 49,135 10,289 8,142 3,991 12,323 4,490 20,578 49,817 10,625 7,663 3,463 12,045 4,492 110,249 108,683 6.3% (1.4)% (3.2)% 6.3% 15.2% 2.3% –% 1.4% 2017 95,268 206,227 45,146 35,144 15,590 49,043 20,612 467,030 2016 % Change 92,404 204,034 44,977 33,789 14,804 47,441 22,535 459,984 3.1% 1.1% 0.4% 4.0% 5.3% 3.4% (8.5)% 1.5% Page M22 Š AutoCanada Š 2017 Annual Report 9. ACQUISITIONS, RELOCATIONS AND REAL ESTATE Dealership Operations and Expansion Our goals are to maximize the profit potential of every store and to generate incremental growth through accretive acquisitions. In 2017 we acquired two stores, and opened a Volkswagen open point in early 2017, bringing the total number of dealerships we operate to 58, representing 66 franchises. We continue to focus on our acquisition strategy, concentrating on growth throughout Canada with a greater diversification in both geography and brand. The Company is being patient with our acquisition strategy, focusing on acquisitions that are accretive and provide diversity. The Company plans to diversify across Canada through the acquisition of flagship stores in major markets. Management and the Company have excellent relationships with our manufacturer partners, providing the Company with greater opportunities with brands we currently operate. Mercedes-Benz Rive-Sud On May 1, 2017, the Company purchased all of the voting shares of 8421722 Canada Inc., which owns and operates a Mercedes-Benz dealership in Montreal, Quebec, along with all of the opearting and fixed assets of 9343091 Canada Inc. which owns and operates the dealership’s collision centre (together “Mercedes-Benz Rive-Sud”), for total cash consideration of $16.1 million. The acquisition was funded by drawing on the Company’s revolving term facility. This dealership represents our first Mercedes-Benz franchise and we are extremely pleased to have added a top selling luxury brand to our portfolio and look forward to sustained success and growth with Mercedes-Benz. Planete Mazda On December 1, 2017, the Company purchased 95% of the issued and outstanding shares of Planete Mazda, which owns and operates a Mazda dealership in Montreal, Quebec, for total cash consideration of $5.8 million. The acquisition was funded by drawing on the Company’s revolving term facility. This dealership represents our first Mazda dealership and becomes our 23rd brand. History has shown that within two years a newly acquired store adopts AutoCanada processes and culture. As we expand our presence into eastern Canada we are establishing regional and brand specialists whose role it is to ensure that every store in our portfolio meets not only our volume and profit targets but also every automaker sales and customer satisfaction objectives. AutoCanada continues to diligently evaluate acquisition opportunities. We believe that we have sufficient capital to be able to acquire stores that meet our specific criteria. While our focus remains on flagship stores in each market, we are also targeting smaller stores that offer both organic growth as well as synergies with our other local stores. General Motors Transaction On December 7, 2017, we announced two new agreements that strengthened our relationship with GM Canada. We executed a Public Company Master Agreement (PCMA) with GM Canada that permits AutoCanada’s direct ownership and control of GM Canada dealerships. As part of that agreement, on January 2, 2018 the company closed an agreement with CanadaOne Auto Group, a company controlled by the Company’s former CEO and founder, Mr. Patrick Priestner, seeing AutoCanada assume control of five of the nine GM Canada dealerships where it held a majority equity stake with no voting rights, and CanadaOne Auto Group buying AutoCanada’s interest in four dealerships. AutoCanada received a one-time net payment of approximately $23 million from CanadaOne Auto Group as part of the transaction. The New PCMA has allowed AutoCanada to outright own and operate GM dealerships along with our dealer partners. This creates an opportunity for us to evaluate future GM opportunities and further expand our relationship with GM Canada. Related to the agreement made with CanadaOne Auto Group, we will see decreases to Revenue, Gross Profit, and Unit sales figure in the interim as we evaluate current and future opportunities. AutoCanada Š 2017 Annual Report Š Page M23 For the year ended December 31, 2017 Revenue Gross Profit Proportion of ownership interest1 New vehicles sold Kelowna Chevrolet Lakewood Chevrolet Sherwood Park Chevrolet Sherwood Park Buick GMC Total 57,145 8,827 83,147 12,271 123,590 20,403 110,187 17,436 374,069 58,937 80% 75% 31% 31% 524 688 1,265 1,067 3,544 Operating Data New fleet vehicles sold Used retail vehicles sold 334 661 120 197 276 310 675 569 1,312 1,830 Vehicles (new and used) sold 1,134 1,659 2,060 1,833 6,686 1 Through the various interest in subsidiaries as disclosed in the annual consolidated financial statements of the company for the year ended December, 31, 2017 (Note 18). Dealership Open Points Dealership Relocations The retail automotive industry is a mature industry and rights to open new franchised automobile dealerships are rarely awarded by the automobile manufacturers. However, from time to time automobile manufacturers may seek to establish new dealerships in attractive markets. The right to open a new franchised automobile dealership in a specific location granted by an automobile manufacturer to a dealer is referred to in the industry as an Open Point. Generally a new franchised automobile dealership is fully performing within one to three years depending on the manufacturer and location. The Company will review on a case-by-case basis whether to own or lease a particular dealership facility. In either case, the Company would incur the costs of equipping and furnishing these facilities, including the costs relating to the integration of our management information systems into the new dealerships. These costs vary by dealership depending upon size and location. Nissan – Calgary, Alberta The dealership construction is expected to begin late 2018 with anticipated opening in mid 2019. The dealership will be constructed by a third party and subsequently leased by the Company. Capital Plan The Company maintains a capital plan for contemplated future capital projects. Details of the capital plan are described below: Page M24 Š AutoCanada Š 2017 Annual Report Management estimates the total capital requirements of currently planned dealership relocations to be approximately $47.3 million to the end of 2021. 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 $78.4 million in capital costs that it may incur in order to expand or renovate various current locations through to the end of 2022. The Company is required by its manufacturers to undertake periodic imaging upgrades to its facilities. 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 point. The Company estimates approximately $17.0 million in capital costs that it may incur by the end of 2019 related to awarded Open Points. If awarded in the future, Management will provide additional cost estimates and further information regarding the proposed timing of construction. In order to be successful in some opportunities, Management may be required to secure appropriate land for the potential open point, in which case, additional land purchase costs may be incurred in the future. The following summarizes the capital plan for contemplated future capital projects: (in millions of dollars) 2018 2019 2020 2021 2022 Total Same Store Dealership Relocations Current Dealership Expansion and Imaging Requirements Capital Plan Expected to be financed Cash Outlay1 Non Same Store Current Dealership Expansion and Imaging Requirements Open Point Opportunities Capital Plan Expected to be financed Cash Outlay1 Total Capital Plan Total Cash outlay 4.8 19.4 24.2 2.9 11.5 15.3 26.8 8.6 14.5 8.4 22.9 – 16.5 11.5 28.0 – – 18.1 – – 47.3 72.7 120.0 11.5 21.3 18.2 22.9 28.0 18.1 108.5 2.0 3.9 5.9 2.9 3.0 30.1 24.3 1.7 13.1 14.8 8.6 6.2 41.6 24.4 1.0 – 1.0 – 1.0 – – – – – 1.0 – 1.0 – 1.0 5.7 17.0 22.7 11.5 11.2 23.9 23.9 28.0 28.0 19.1 142.7 19.1 119.7 1 Refers to amount expected to be funded by internal Company cash flow. During the year, the Company re-examined its capital expenditures and has reduced its planned capital budgets. At December 31, 2016, the five year capital plan was $145.3 million. As a result of increased focus on reducing capital expenditures, the five year capital plan at December 31, 2017 is $142.7 million. 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, economic factors, 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, expected economic conditions, 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 2017 Annual Report Š Page M25 10. LIQUIDITY AND CAPITAL RESOURCES Our principal uses of funds are for capital expenditures, repayment of debt, funding the future growth of the Company and paying dividends to Shareholders. We have historically met these requirements by using cash generated from operating activities and through short-term and long-term indebtedness. Under our franchise agreements, manufacturers require us to maintain a minimum level of working capital. We maintain 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, 2017 is as follows: Š The Company had drawn $143.8 million on its $250.0 million revolving term facility. As a result of the above, as at December 31, 2017, the Company currently has approximately $106.2 million in readily available liquidity, not including future retained cash from operations, that it may deploy for growth expenditures including acquisitions. Cash Flow from Operating Activities Cash flow from operating activities (including changes in non-cash working capital) of the Company for the year ended was $78.8 million (cash provided by operating activities of $94.6 million minus net change in non-cash working capital of $15.8 million) compared to $104.7 million (cash provided by operating activities of $76.1 million plus net change in non-cash working capital of $28.6 million) in the same period of the prior year. Cash Flow from Investing Activities For the year ended December 31, 2017, cash flow from investing activities of the Company was a net outflow of $49.2 million as compared to a net outflow of $100.9 million in the same period of the prior year. Cash Flow from Financing Activities For the year ended December 31, 2017, cash flow from financing activities was a net outflow of $38.1 million as compared to a net inflow of $37.8 million in the same period of 2016. Credit Facilities and Floor Plan Financing Details of the Company’s credit facilities and floorplan financing are included in Note 30 of the annual audited consolidated financial statements for the year ended December 31, 2017. Page M26 Š AutoCanada Š 2017 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, 2017: Financial Covenant Requirement Q4 2017 Actual Calculation Q3 2017 Actual Calculation Syndicated Revolver: Senior Secured Leverage Ratio Adjusted Total Leverage Ratio Fixed Charge Coverage Ratio Current Ratio Syndicated Floorplan: Current Ratio Tangible Net Worth (millions) 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 Shall not be less than 1.05 Shall not be less than $40 million Shall not exceed 7.50 1.46 3.79 2.92 1.18 1.12 81.8 5.56 1.44 3.76 3.55 1.13 1.15 87.2 4.59 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, 2017, 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 27 of the annual audited consolidated financial statements for the year ended December 31, 2017. 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 amortization 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 October 1, 2017 to December 31, 2017 January 1, 2017 to December 31, 2017 298 409 476 307 1,490 755 1,770 872 899 4,296 AutoCanada Š 2017 Annual Report Š Page M27 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, 2017, growth capital expenditures of $7.0 million and $20.5 million were incurred, respectively. These expenditures relate primarily to land and buildings that were purchased for future dealership operations during 2017. 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, 2017 to December 31, 2017 January 1, 2017 to December 31, 2017 9,017 (7,527) 1,490 24,831 (20,534) 4,297 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, 2017, were $1.8 million and $6.9 million (2016 - $1.7 million and $6.2 million), respectively. machinery and equipment, service 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, For further information regarding planned capital expenditures, see “GROWTH, ACQUISITIONS, RELOCATIONS AND REAL ESTATE” above. Financial Position The following table shows selected audited balances of the Company (in thousands) for December 31, 2017 and December 31, 2016, as well as unaudited balances of the Company at September 30, 2017, June 30, 2017, March 31, 2017, September 30, 2016, June 30, 2016, and March 31, 2016: (in thousands of dollars) Cash and cash equivalents Trade and other receivables Inventories Total Assets Revolving floorplan facilities Non-current debt and lease obligations Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 94,660 79,931 659,593 104,966 137,155 636,685 95,417 157,275 629,171 100,402 113,688 701,559 103,221 85,587 619,718 96,368 108,363 597,831 77,582 115,427 555,957 72,878 116,092 628,641 1,761,046 1,693,533 1,698,290 1,707,063 1,600,615 1,547,344 1,548,879 1,578,225 600,578 293,273 688,173 330,563 624,847 338,212 532,283 295,922 569,581 291,408 582,695 330,351 616,144 331,803 634,655 332,450 Page M28 Š AutoCanada Š 2017 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, 2017, the aggregate of net working capital requirements was approximately $109.0 million. At December 31, 2017, 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. 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: 2018 2019 2020 2021 2022 Thereafter Total 18,892 16,429 14,430 14,199 13,731 130,759 208,440 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 27 of the Company’s annual consolidated financial statements. Related Party Transactions Note 37 of the annual consolidated financial statements of the Company for the year ended December 31, 2017 summarizes the transactions between the Company and its related parties. Transactions with Companies Controlled by the Former Chair of the Board of Directors of AutoCanada Until May 5, 2017, Mr. Patrick Priestner was the Chair of AutoCanada and was a related party as a result of his position on the Board of Directors of AutoCanada. Prior to Priestner’s retirement on May 5, 2017, the company had financial transactions with entities controlled by Priestner. Priestner is the controlling shareholder of Canada One Auto Group (“COAG”) and its subsidiaries, which beneficially own approximately 8.6% (2016 – 8.6%) of the Company’s shares. 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 were approved by the Company’s independent members of the Board of Directors. The Company continues to provide services to entities controlled by Priestner, which are provided at market rates. Loan to related parties The Company has provided dealership loan financing to PPH Holdings Ltd. (“PPH”), a company controlled and formed by Priestner. The Company holds no ownership interest in PPH or its subsidiaries. The loans to associates have been structured as executed to satisfy the requirements of the manufacturer. AutoCanada Š 2017 Annual Report Š Page M29 11. OUTSTANDING SHARES As at December 31, 2017, the Company had 27,459,683 common shares outstanding. Basic and diluted weighted average number of shares outstanding for the year ended December 31, 2017 12. DIVIDENDS were 27,379,193 and 27,473,995, respectively. As at December 31, 2017, the value of the shares held in trust was $1.8 million (2016 – $1.8 million) which was comprised of 70,783 (2016 - 103,244) in shares with a nil aggregate cost. As at March 15, 2018, there were 27,459,683 shares issued and outstanding. 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 2017: Record date February 28, 2017 May 31, 2017 August 31, 2017 November 30, 2017 Payment date March 15, 2017 June 15, 2017 September 15, 2017 December 15, 2017 Per Share $ 0.10 0.10 0.10 0.10 0.40 Total $ 2,735 2,739 2,739 2,739 10,952 On February 23, 2018 the Board declared a quarterly eligible dividend of $0.10 per common share on AutoCanada’s outstanding Class A shares, payable on March 15, 2018 to shareholders of record at the close of business on March 1, 2018. 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 these covenants. Page M30 Š AutoCanada Š 2017 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 Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 activities 31,479 32,091 12,255 2,967 24,930 32,594 40,374 6,831 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 (1,983) 29,496 (977) 31,114 (1,273) 10,982 (2,346) 621 (1,506) 23,424 (1,697) 30,897 (2,452) 37,922 (2,786) 4,045 27,389,167 27,389,473 27,378,919 27,358,766 27,353,431 27,347,585 27,338,767 27,362,440 0.15 1.39 1.13 0.02 0.86 1.08 1.14 0.40 trailing 72,213 66,141 65,924 92,864 96,288 81,930 66,028 45,882 1 This financial measure is identified and defined under the section “NON-GAAP MEASURES”. Management believes that the free cash flow (see “NON-GAAP MEASURES”) 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 in cash due to changes in non-cash working capital for the years ended December 31, 2017 and December 31, 2016. (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, 2017 to December 31, 2017 January 1, 2016 to December 31, 2016 (10,176) (104,383) 1,978 2,418 (18,496) (283) 113,102 (15,840) 8,031 (8,765) 1,014 150 2,670 4,948 20,535 28,583 AutoCanada Š 2017 Annual Report Š Page M31 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 Adjusted free cash flow per share Adjusted free cash flow - Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 17,486 24,070 37,355 15,721 14,344 28,996 24,050 8,754 (1,490) (774) (1,078) (504) (1,211) (1,230) (2,418) (2,719) 15,996 6,035 27,389,167 27,389,473 27,378,919 27,358,766 27,353,431 27,347,585 27,338,767 27,362,440 21,632 27,766 13,133 15,217 23,296 36,277 0.58 0.85 1.32 0.56 0.48 1.02 0.79 0.22 12 month trailing 90,786 87,923 92,393 77,748 68,566 63,511 54,696 52,251 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, 2017, the Company paid approximately $9.9 million in 2016 corporate income taxes and 2017 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 M32 Š AutoCanada Š 2017 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 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 EBITDA1,2 31,124 29,978 47,757 17,228 28,536 26,915 30,845 21,010 Deduct: Depreciation of property and equipment EBIT1,2 Average long-term debt Average shareholder’s equity Average capital employed1 Return on capital (5,213) (5,297) (5,082) (4,852) (4,921) (4,860) (4,822) (4,954) 25,911 339,741 534,338 874,079 3.0% 24,681 12,376 42,675 353,315 357,103 351,986 526,209 510,610 498,732 879,524 867,713 850,718 1.5% 4.9% 2.8% 23,615 333,310 491,026 824,336 2.9% 22,055 16,056 26,023 315,678 310,281 300,520 503,163 516,513 510,595 818,841 826,794 811,115 2.0% 2.7% 3.1% Comparative adjustment3 24,371 25,959 25,959 25,959 25,959 (13,191) (13,191) (13,191) Adjusted average capital employed1 899,244 905,482 893,672 876,677 830,720 805,650 813,603 797,924 Adjusted return on capital employed1 2.9% 2.7% 4.8% 1.4% 2.8% 2.7% 3.2% 2.0% Adjusted return on capital employed - 12 month trailing 12.2% 12.1% 11.8% 9.9% 10.9% 10.6% 11.2% 11.7% 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 is expected to 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. AutoCanada Š 2017 Annual Report Š Page M33 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 6 of the annual consolidated financial statements for the year ended December 31, 2017. 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, 2017. A listing of the standards issued which are applicable to the Company can be found in Note 5 of the annual consolidated financial statements for the year ended December 31, 2017. The Company adopted the amendments to IAS 7, Statement of Cash Flows, effective for the annual consolidated financial statements commencing January 1, 2017. 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, 2017, 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 Page M34 Š AutoCanada Š 2017 Annual Report Canadian Securities Administrators, and have 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, 2017, 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, 2017. 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 2017 Annual Information Form dated March 15, 2018 available on the SEDAR website at www.sedar.com. 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”, “shall” 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. Details of the Company’s material forward-looking statements are included in the Company’s most recent Annual Information Form. 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. AutoCanada Š 2017 Annual Report Š Page M35 18. NON-GAAP MEASURES 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, the unrealized gain or loss on embedded derivatives, gains or losses on dealership divestitures and certain non-recurring items are added back to EBITDA to get to adjusted EBITDA. The Company believes adjusted EBITDA provides a better representation of continuing operations and improved continuity with respect to the comparison of our operating results over a period of time. Adjusted EBITDA attributable to AutoCanada shareholders refers to the parent portion of consolidated financial results. Non-controlling interest (the portion of ownership not attributable to the parent) is excluded. 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, gains or losses on dealership divestitures and certain non-recurring items. Adding back these amounts to net earnings allows management to better assess the net earnings of the Company from continuing 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. 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: Operating profit Operating profit is a measure commonly reported and widely used by investors as an indicator of a company’s operating performance. The Company believes Operating profit assists investors in analyzing a company’s performance before the costs of debt and other financing, also excluding other gains or losses and income taxes. References to “Operating profit” are to earnings before interest expense interest income, other gains or losses and income taxes. 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. EBITDA attributable to AutoCanada shareholders refers to the parent portion of consolidated financial results. Non-controlling interest (the portion of ownership not attributable to the parent) is excluded. Page M36 Š AutoCanada Š 2017 Annual Report 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 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. AutoCanada Š 2017 Annual Report Š Page M37 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. Page M38 Š AutoCanada Š 2017 Annual Report AUTOCANADA – 2017 ANNUAL REPORT What’s Inside 1 Who We Are 5 Where We Operate 9 Strategy 17 Operations 21 Revenue Streams 29 Management Discussion & Analysis 69 ANNUAL FINANCIAL STATEMENTS WWW.AUTOCAN.CA Annual Financial Statements Consolidated Financial Statements For the year ended December 31, 2017 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, 2017 and December 31, 2016 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, 2017 and December 31, 2016 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants March 15, 2018 Edmonton, Canada Page F2 Š AutoCanada Š 2017 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 8) Cost of sales (Note 9) Gross profit Operating expenses (Note 10) Operating profit before other income (expense) Lease and other income, net (Note 12) Gain on disposal of assets, net Recovery (impairment) of intangible assets, net (Note 26) Income from loans to associate (Note 25) Operating profit Finance costs (Note 13) Finance income (Note 13) Other gains (Note 14) Net income for the year before taxes Income taxes (Note 15) 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 34) Basic Diluted Weighted average shares (Note 34) Basic Diluted December 31, 2017 $ December 31, 2016 $ 3,101,560 (2,582,931) 518,629 (426,253) 2,891,581 (2,405,448) 486,133 (400,417) 92,376 21,431 1,345 816 3,001 118,969 (36,038) 2,294 3,285 88,510 22,713 65,797 57,844 7,953 65,797 2.11 2.11 85,716 5,171 2,956 (54,096) 1,165 40,912 (31,664) 2,121 5,785 17,154 8,575 8,579 2,596 5,983 8,579 0.09 0.09 27,379,193 27,350,555 27,473,995 27,455,686 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 2017 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 19) Trade and other receivables (Note 20) Inventories (Note 21) Current tax recoverable Current portion of finance lease receivables (Note 22) Other current assets Assets held for sale (Note 23) Restricted cash (Note 19) Property and equipment (Note 24) Loans to associate (Note 25) Long-term portion of finance lease receivables (Note 22) Other long-term assets (Note 28) Intangible assets (Note 26) Goodwill (Note 26) LIABILITIES Current liabilities Bank indebtedness (Note 19) Trade and other payables (Note 29) Revolving floorplan facilities (Note 30) Current tax payable Vehicle repurchase obligations (Note 31) Current indebtedness (Note 30) Current portion of redemption liabilities (Note 18) Liabilities held for sale (Note 23) Long-term indebtedness (Note 30) Deferred income tax (Note 15) Redemption liabilities (Note 18) EQUITY Attributable to AutoCanada shareholders Attributable to Non-controlling interests December 31, 2017 $ December 31, 2016 $ 94,660 79,931 659,593 – 89 3,504 163,642 1,001,419 4,106 350,354 18,100 51 5,029 359,996 21,991 103,221 85,587 619,718 2,262 3,797 4,219 1,556 820,360 6,558 342,768 14,726 5,747 7,110 378,982 24,364 1,761,046 1,600,615 136 63,295 634,655 9,033 6,511 2,666 16,300 132,683 865,279 332,450 25,710 – 226 90,131 582,695 – 6,794 21,679 22,752 – 724,277 330,351 24,683 23,712 1,223,439 1,103,023 488,272 49,335 537,607 440,081 57,511 497,592 1,761,046 1,600,615 Commitments and contingencies (Note 32) The accompanying notes are an integral part of these consolidated financial statements. Page F4 Š AutoCanada Š 2017 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 $ Non- controlling Interests $ Total $ Total Equity $ 507,886 – 5,223 – (73,028) 440,081 57,844 57,844 57,511 497,592 65,797 7,953 Balance, January 1, 2017 Net and comprehensive income Dividends declared on common shares (Note 34) Dividends declared by subsidiaries to non-controlling interests (Note 18) Transactions with non-controlling interests (Note 36) Non-controlling interests arising on acquisitions (Note 16) Derecognition of redemption liability granted to non-controlling interests (Note 36) Recognition of redemption liability granted to non-controlling interests (Note 16) Treasury shares acquired (Note 34) Shares settled from treasury (Note 34) Share-based compensation (Note 11) – – – – – – (31) 913 – Balance, December 31, 2017 508,768 – – – – – – – (913) 1,079 5,389 (10,952) (10,952) – (10,952) – – (12,300) (12,300) (640) (640) (4,133) (4,773) – – 304 304 1,197 1,197 (306) – – – (306) (31) – 1,079 – – – – – 1,197 (306) (31) – 1,079 (25,885) 488,272 49,335 537,607 Attributable to AutoCanada shareholders Share capital $ Contributed surplus $ Accumulated deficit $ Non- controlling Interests $ Total $ Total Equity $ 508,237 – 4,286 – (60,578) 451,945 2,596 2,596 58,084 510,029 8,579 5,983 – – (15,046) (15,046) – (15,046) Balance, January 1, 2016 Net and comprehensive income Dividends declared on common shares (Note 34) Dividends declared by subsidiaries to non-controlling interests (Note 18) Treasury shares acquired (Note 34) Shares settled from treasury (Note 34) Share-based compensation (Note 11) – (1,301) 950 – Balance, December 31, 2016 507,886 – – (950) 1,887 5,223 – – – – – (1,301) – 1,887 (6,556) – – – (6,556) (1,301) – 1,887 (73,028) 440,081 57,511 497,592 The accompanying notes are an integral part of these consolidated financial statements. AutoCanada Š 2017 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 15) Amortization of prepaid rent Depreciation of property and equipment (Note 24) Gain on disposal of assets Impairment (recovery of impairment) of intangible assets (Note 26) Share-based compensation – equity-settled (Note 11) Share-based compensation – cash-settled Unrealized loss on embedded derivative (Note 13) Revaluation of redemption liabilities (Note 14) Revaluation of contingent consideration (Note 14) Income taxes paid Net change in non-cash working capital (Note 38) Investing activities Reductions (additions) to restricted cash (Note 19) Reclassification to assets held for sale (Note 23) Business acquisitions, net of cash acquired (Note 16) Proceeds on divesture of dealership (Note 17) Purchases of property and equipment (Note 24) Proceeds on sale of property and equipment Loans to associate (Note 25) Financing activities Proceeds from long-term indebtedness Repayment of long-term indebtedness Common shares repurchased, net of settled (Note 34) Dividends paid (Note 34) Dividends paid to non-controlling interests by subsidiaries (Note 18) Transactions with non-controlling interests (Note 36) Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year (Note 19) Cash and cash equivalents at end of year (Note 19) December 31, 2017 $ December 31, 2016 $ 65,797 22,713 452 20,444 (1,345) (816) 1,079 (503) 15 (2,869) (416) (9,919) (15,840) 78,792 2,390 (6,672) (20,961) – (24,831) 4,267 (3,374) (49,181) 121,846 (133,485) 882 (10,952) (12,300) (4,073) (38,082) (8,471) 102,995 94,524 8,579 8,575 452 19,557 (2,956) 54,096 1,887 (452) 3 (765) (5,020) (7,810) 28,583 104,729 (270) – (40,859) 10,077 (63,702) 121 (6,256) (100,889) 251,282 (191,550) (351) (15,046) (6,556) – 37,779 41,619 61,376 102,995 The accompanying notes are an integral part of these consolidated financial statements. Page F6 Š AutoCanada Š 2017 Annual Report AutoCanada Inc. Notes to the Financial Statements For the Years Ended December 31, 2017 and 2016 (in thousands of Canadian dollars except for share and per share amounts) 1 General Information 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 6. These financial statements were approved for issue by the Board of Directors on March 15, 2018. 3 Significant Accounting Policies 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. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the accounting policies adopted by the Company. AutoCanada Š 2017 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. 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 generally recognized for all taxable temporary differences; and Page F8 Š AutoCanada Š 2017 Annual Report 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. 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 the Company. 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 instruments have expired or were transferred and the Company has transferred substantially all risks and rewards of ownership. The Company’s financial assets, including cash and cash equivalents, trade and other receivables, finance lease receivables, restricted cash and loans to associates, are classified as loans and receivables. 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. AutoCanada Š 2017 Annual Report Š Page F9 The Company’s financial liabilities include bank indebtedness, trade and other payables, revolving floorplan facilities, vehicle repurchase obligations, long-term indebtedness, contingent consideration, and redemption liabilities. Financial liabilities are measured at amortized cost except for redemption liabilities and contingent consideration which are carried at fair value through profit or loss. Cash and cash equivalents Cash and cash equivalents include amounts on deposit with financial institutions and amounts with Scotiabank that are readily available to the Company (See Note 27 – 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 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 and equipment classified as held for sale. Page F10 Š AutoCanada Š 2017 Annual Report 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 and lease vehicles Computer equipment 20% 20% 30% 30% Buildings are depreciated on a straight-line basis over the estimated useful lives of the buildings ranging from ten to forty-five years. 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 Specific dealer agreements continue indefinitely by their terms; and Š Specific dealer agreements have limited terms, but are routinely renewed without substantial cost to the Company. 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. Goodwill is carried at cost less accumulated impairment losses. 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. AutoCanada Š 2017 Annual Report Š Page F11 (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 with indefinite lives and goodwill are reviewed for impairment whenever 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 CGUs based on the level at which management monitors it, which is not higher than an operating segment before aggregation. Goodwill is allocated to those CGUs 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. 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 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. Page F12 Š AutoCanada Š 2017 Annual Report 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. The Company as a lessor: When assets are leased out under an operating lease, the asset is included in the consolidated Statement of Financial Position 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 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, AutoCanada Š 2017 Annual Report Š Page F13 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 New accounting pronouncement adopted in 2017 The Company adopted the amendments to IAS 7, Statement of Cash Flows, effective for the annual consolidated financial statements commencing January 1, 2017 (see Note 30). 5 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, 2017. The standards issued that are applicable to the Company are as follows: IFRS 9 – Financial instruments IFRS 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. The Company will adopt the new standard on January 1, 2018. The Company does not expect the new guidance to have a significant impact on the classification and measurement of its financial instruments for the following reasons: Š Other than its loans to associate, which will likely be recorded at fair value, the Company does not currently hold any financial assets that would be accounted for differently under the new standard; Š The Company does not have any financial liabilities designated at fair value through profit or loss, which are the only liabilities impacted by the new standard; and Š The Company does not currently have any outstanding hedges that would require reassessment under the updated hedge accounting rules. The new impairment model requires the recognition of impairment provisions based on expected credit losses rather than only incurred credit losses as is the case under IAS 39. This will apply to the Company’s trade and other receivables, finance lease receivables and loans to associate. We do not expect our financial performance or disclosure to be materially affected by the application of the standard. IFRS 15 – Revenue from contracts with customers This standard will replace IAS 18 which covers revenue arising from the sale of goods and the rendering of services and IAS 11 which covers construction contracts. The new standard is based on the principle that revenue is recognized when control of a good or service transfers to a customer. The standard permits either a full retrospective or a modified retrospective approach for the adoption. The Company will adopt the new standard on January 1, 2018. We do not expect our financial performance or disclosure to be materially affected by the application of the standard. IFRS 16 – Leases IFRS 16 was issued in January, 2016. It will result in almost all leases being recognized on the statement of financial position, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognized. The only exceptions are short-term and low-value leases. The accounting for lessors will not significantly change. Page F14 Š AutoCanada Š 2017 Annual Report The standard will affect primarily the accounting for the Company’s operating leases. The Company has not yet determined the extent to which these lease commitments will result in the recognition of a right of use asset and a liability for future payments and how this will affect the Company’s profit and classification of cash flow. Some of the commitments may be covered off by the exception for short-term and low-value leases and some commitments may relate to arrangements that will not qualify as leases under IFRS 16. The standard is mandatory for first interim periods within annual reporting periods beginning on or after January 1, 2019. The Company intends to adopt the standard from January 1, 2019. 6 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 or more frequently if events or changes in circumstances indicate that they may be impaired, in accordance with its accounting policies. The recoverable amounts of CGUs have been estimated based on the greater of fair value less costs to dispose and value-in-use calculations (see Note 26). 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 18). 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 their 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. AutoCanada Š 2017 Annual Report Š Page F15 Loans to associate The loans to associate are 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 loans each period. The effective interest rate is calculated at inception of the loans using an estimate of future cash flows. The cash flows related to the loans 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. 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 39 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, considering not only the nature of the relationship but also how those parties interact with each other and the investor. (a) Investments in subsidiaries On May 6, 2016, Mr. Patrick Priestner (“Priestner”), then Executive Chair of the Company, transitioned from his role as an employee and assumed the role of non-executive Chair of the Board of Directors (“Chair”). Priestner also signed an agreement effective May 6, 2016 (the “Agreement”) giving the Company certain rights as it relates to its investments in subsidiaries (the “investees”). The agreement was for a 14 month term, automatically renewable for successive one year terms, and cancellable by either party subject to a one year notice period. The following facts were considered to assess the relationship between AutoCanada and Priestner: Factors indicative of Priestner controlling the investees: Š As a function of owning 100% of the voting shares of the investees, and in the absence of other contractual arrangements, Priestner possesses the legal right to control decisions as they pertain to the investees; Š Priestner has not relied on any financial support from the Company in making his investments, and therefore the risk of loss and reward to Priestner personally is significant; and Š Priestner’s level of expertise and knowledge in operating the investees Factors indicative of the Company controlling the investees: 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 retained effective control of the relevant activities that will impact its investment returns through execution of the Agreement, which provides the Company with, among other things, the ability to hire, manage and terminate the general managers of the relevant dealerships; Š The directors and officers of the investees are related parties of the Company; and Š The Company is involved in the operational decision making of its investees in a fashion consistent with its wholly-owned dealerships Page F16 Š AutoCanada Š 2017 Annual Report Prior to the change in employment status, the Company concluded that it had power over its investees through a de facto agency relationship with Priestner in respect of these investments. As a result of the signing of the Agreement, management has concluded that it continues to have power over the relevant activities and therefore control of the investees. As a result, the financial results of the investees continue to be consolidated in the Company’s financial statements. On May 5, 2017, Priestner retired from his position as Chair. As a result of this change, the Company has updated its assessment of the relationship between Priestner and the Company as it relates to its investments in these investees. As a result of the reassessment it was concluded that the Company continues to control these investees through an agreement giving the Company control over the activities that will impact its investment returns. On January 2, 2018 the Company reorganized its ownership interest in its investees. The details of this transaction are described in Note 23 and Note 40. (b) Loans to associate AutoCanada has provided loans to PPH Holdings Ltd. (“PPH”) for which the voting interests are held 100% by Priestner, as described in Note 25. When assessing whether the Company has control of PPH, management has considered the nature of the loans, 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 considerations are that the loans to PPH are repayable at any time without recourse, and grant the Company no power to control PPH. AutoCanada’s returns from PPH are derived from interest on the loans 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. 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 agreements stipulate that the loans’ performance, repayment or prepayment will not in any way have any consequences in relation to the position 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 the Company is not involved in the operational decision making of PPH; Š Priestner’s level of expertise and knowledge in operating PPH; and Š Priestner has the ability to prepay or repay the loans at any time and AutoCanada has no ability to block such a transaction. 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. As a result of Priestner’s change in employment from Executive Chair to non-executive Chair of the Board of Directors, then to retirement, the Company has assessed the relationship between Priestner and the Company as it relates to PPH. As a result of the reassessment, it was concluded that AutoCanada does not control and should not consolidate PPH. 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. AutoCanada Š 2017 Annual Report Š Page F17 7 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. 8 Revenue New vehicles Used vehicles Finance, insurance and other Parts, service and collision repair 9 Cost of sales New vehicles Used vehicles Finance, insurance and other Parts, service and collision repair 10 Operating expenses Employee costs1 (Note 11) Administrative costs2 Facility lease costs Depreciation of property and equipment (Note 24) 2017 $ 2016 $ 1,827,559 1,652,795 725,430 130,423 382,933 716,045 141,266 416,690 3,101,560 2,891,581 2017 $ 2016 $ 1,696,575 1,534,498 678,238 11,038 181,674 672,307 11,669 202,380 2,582,931 2,405,448 2017 $ 264,768 116,605 24,436 20,444 2016 $ 248,976 108,363 23,521 19,557 426,253 400,417 1 2 Employee costs include management transition expenses. Administrative costs include professional fees, consulting services, technology-related expenses, marketing, and other general and administrative costs. Page F18 Š AutoCanada Š 2017 Annual Report 11 Employee costs Operating expenses incurred in respect of employees were: Wages, salaries and commissions Withholding taxes and insurance Employee benefits Share-based compensation Other benefits 12 Lease and other income 2017 $ 237,257 13,599 12,582 1,079 251 2016 $ 223,536 12,797 10,696 1,887 60 264,768 248,976 During the year ended December 31, 2017, the Company recognized $14,846 relating to a non-recurring settlement from an automobile manufacturer which has been included in lease and other income. The settlement has been recognized net of estimated related expenses. 13 Finance costs and finance income Finance costs: Interest on long-term indebtedness Unrealized loss on embedded derivative (Note 30) Floorplan financing Other interest expense Finance income: Finance income 2017 $ 2016 $ (17,949) (15) (14,515) (3,559) (16,500) (3) (12,408) (2,753) (36,038) (31,664) 2,294 2,121 Cash interest paid during the year ended December 31, 2017 was $35,274 (2016 – $31,548). 14 Other gains Revaluation of redemption liabilities (Note 18) Revaluation of contingent consideration 2017 $ 2,869 416 3,285 2016 $ 765 5,020 5,785 AutoCanada Š 2017 Annual Report Š Page F19 15 Income taxes 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 blended rate of Canadian corporate tax of 26.8% (2016 – 27.2%) Effects of: Impact of non-deductible items Difference between future and current rate Adjustment in respect of prior years Other, net Total income tax expense 2017 $ 20,901 1,812 22,713 2016 $ 12,316 (3,741) 8,575 2017 $ 2016 $ 88,510 17,154 23,721 4,667 (90) 1,554 (2,333) (139) 22,713 4,553 (39) (556) (50) 8,575 The movements of deferred tax assets and liabilities are shown below: Deferred tax assets (liabilities) January 1, 2016 (Expense) benefit to consolidated statement of comprehensive income Acquisition of subsidiary (Note 16) Other December 31, 2016 (Expense) benefit to consolidated statement of comprehensive income Acquisition of subsidiary (Note 16) Held for sale (Note 23) December 31, 2017 Deferred income from partnerships $ Property and equipment $ Goodwill and intangible assets $ Lease receivables $ Other $ Total $ (1,205) 2,209 (26,625) (2,836) 2,619 (25,838) (473) (320) 4,837 317 (649) 3,712 – – – – (2,738) – – – – 181 (2,738) 181 (1,678) 1,889 (24,526) (2,519) 2,151 (24,683) 1,567 846 (4,707) 512 57 (1,725) – – (111) – (1,470) 1,265 (2,747) 3,192 (28,788) – 2,007 – (284) (2,747) 3,445 – 1,924 (25,710) Income tax expense is recognized based on management’s best estimate of the weighted average annual income tax rate expected for the full financial year. The impairment recovery recorded during the year resulted in $1,110 in deferred tax recovery for the year ended December 31, 2017. The estimated average annual blended rate used for the year ended December 31, 2017 was 26.8% (2016 – 27.2%). Changes in the deferred income tax components are adjusted through deferred tax expense. Of the above components of deferred income taxes, $413 (2016 – $2,703) of the deferred tax liabilities are expected to be recovered within 12 months. Page F20 Š AutoCanada Š 2017 Annual Report 16 Business acquisitions During the year ended December 31, 2017, the Company completed two business acquisitions comprising two automotive dealerships, representing two franchises. All acquisitions have been accounted for using the acquisition method. Acquisitions completed during the year are as follows: Mercedes-Benz Rive-Sud On May 1, 2017, the Company purchased all of the voting shares of 8421722 Canada Inc., which owns and operates a Mercedes-Benz dealership in Montreal, Quebec, along with all of the operating and fixed assets of 9343091 Canada Inc. which owns and operates the dealership’s collision centre (together “Mercedes-Benz Rive-Sud”), for total cash consideration of $16,133. The acquisition was funded by drawing on the Company’s revolving term facility. Planete Mazda On December 1, 2017, the Company, through a wholly owned subsidiary, AutoCanada M Holdings Inc., purchased 95% of the issued and outstanding participating shares; and 90% of the non-participating voting shares of 156023 Canada Inc. (“Planete Mazda”), which owns and operates a Mazda dealership in Montreal, Quebec, for total cash consideration of $5,779. The acquisition was funded by drawing on the Company’s revolving term facility. Recognition of redemption liabilities During the year $306 of redemption liabilities were recognized in connection with the business acquisitions completed. These liabilities relate to put options held by certain non-controlling interests. The business acquisitions completed during the year ended December 31, 2017 are summarized as follows: Mercedes-Benz Rive-Sud $ Planete Mazda $ Total $ Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Long term assets Property and equipment Other long-term assets Intangible assets Total assets Current liabilities Trade and other payables Revolving floorplan facilities Long-term liabilities Long-term indebtedness Deferred income tax Total liabilities Net assets acquired Goodwill Non-controlling interest Total net assets acquired Total consideration 520 5,150 16,530 140 22,340 2,750 – 11,549 431 216 951 5,366 6,982 23,512 257 117 7,746 30,086 500 13 3,250 13 4,128 15,677 36,639 12,387 49,026 1,345 18,038 19,383 2,071 2,140 23,594 13,045 3,088 – 16,133 16,133 742 2,087 5,234 23,272 5,976 25,359 – 607 2,071 2,747 6,583 30,177 5,804 18,849 3,367 (304) 279 (304) 5,779 21,912 5,779 21,912 AutoCanada Š 2017 Annual Report Š Page F21 Acquisitions completed during the year ended December 31, 2017 generated revenue and net earnings of $68,338 and $679, 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 $691 have been charged to administrative expenses in the consolidated statement of comprehensive income for the year ended December 31, 2017. 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. For asset purchases, the tax basis equals the price paid for the acquired assets and liabilities. Where the acquisition price exceeds the aggregate fair value of identifiable assets acquired and liabilities assumed, the excess is treated as goodwill for tax purposes. For share purchases, the tax base of the identifiable assets and liabilities of the acquired entity passes over to the Company at pre-acquisition amounts, and no new tax goodwill is created (Note 3). Prior year business acquisitions During the year ended December 31, 2016, the Company completed two business acquisitions comprising two automotive dealerships, representing two franchises. All acquisitions have been accounted for using the acquisition method. Acquisitions completed during the year are as follows: Wellington Motors Effective October 1, 2016, the Company purchased 100% of the voting shares of Wellington Motors Limited (“Wellington Motors”), which owns and operates a Chrysler Dodge Jeep RAM FIAT dealership in Guelph, Ontario, for total cash consideration of $23,880. On October 14, 2016, the Company also purchased the dealership land and facilities through a wholly-owned subsidiary, WMG Properties Inc., for $6,799. The acquisition was funded by drawing on the Company’s revolving term facility. Guelph Hyundai On December 19, 2016, the Company purchased substantially all of the operating and fixed assets of Guelph Imported Cars Ltd. (“Guelph Hyundai”), in Guelph, Ontario, for total cash consideration of $4,521. The Company also purchased the dealership land and facilities through a wholly-owned subsidiary, GHM Properties Inc., for $9,548. The acquisition was funded by drawing on the Company’s revolving term facility. Page F22 Š AutoCanada Š 2017 Annual Report The business acquisitions completed during the year ended December 31, 2016 are summarized as follows: Wellington Motors $ Guelph Hyundai $ Total $ Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Long term assets Property and equipment Other long-term assets Intangible assets Total assets Current liabilities Trade and other payables Revolving floorplan facilities Long term liabilities Long-term indebtedness Deferred income tax Total liabilities Net assets acquired Goodwill Total net assets acquired Total consideration 3,889 2,700 11,112 59 17,760 7,082 – 20,780 45,622 1,633 10,958 12,591 72 2,738 15,401 30,221 458 30,679 30,679 – 80 3,889 2,780 3,193 14,305 79 20 3,293 21,053 10,107 17,189 14 3,550 24,330 14 16,964 62,586 65 1,698 2,880 13,838 2,945 15,536 – – 72 2,738 2,945 18,346 14,019 44,240 508 50 14,069 44,748 14,069 44,748 AutoCanada Š 2017 Annual Report Š Page F23 17 Dealership divesture There was no dealership divesture during the year ended December 31, 2017. Prior year dealership divesture On February 25, 2016, the Company sold substantially all of the operating and fixed assets, including the land and facilities, of Newmarket Infiniti Nissan, located in Newmarket, Ontario for cash consideration. Net proceeds of $10,077 resulted in a pre-tax gain on divesture of $3,206 included in gain on disposal of assets in the Statement of Comprehensive Income. The break-down of the transaction was as follows: Trade and other receivables Inventories Property and equipment Intangible assets Total Assets Trade and other payables Revolving floorplan facilities Total Liabilities Net assets disposed of Net proceeds on divesture Net gain on divesture 18 Interests in subsidiaries $ 76 9,858 4,800 2,053 16,787 165 9,751 9,916 6,871 10,077 3,206 The Company owns 100% of most subsidiaries, but also has a controlling interest in certain subsidiaries that also have non-controlling interests (“NCI”) held by other parties. The interests in these subsidiaries are summarized as follows: Subsidiary Proportion of ownership interests held by non-controlling interests Proportion of voting rights held by non- controlling interests Dividends paid to non- controlling interests 2017 $ Dividends paid to non- controlling interests 2016 $ Principal place of business Dealer Holdings Ltd. Alberta Green Isle G Auto Holdings Inc. British Columbia Prairie Auto Holdings Ltd. Saskatchewan Waverley BG Holdings Inc. Manitoba LWD Holdings Ltd. Alberta NBFG Holdings Inc. Saskatchewan DFC Holdings Inc. British Columbia AutoCanada B Holdings Inc. Quebec Quebec AutoCanada M Holdings Inc. AutoCanada HCN Holdings Inc.1 Ontario GRV C Holdings LP1 Alberta 69% 20% 30% 20% 25% 20% 20% 15% 5% 0% 0% 100% 100% 100% 100% 100% 100% 100% 15% 10% 0% 0% 6,780 576 2,477 630 831 270 305 – – 6 425 12,300 3,854 40 1,137 286 922 132 185 – – – – 6,556 1 During the year ended December 31, 2017, the Company acquired the remaining NCI portion of these subsidiaries as described in Note 36. Page F24 Š AutoCanada Š 2017 Annual Report Dealer Holdings Ltd., Green Isle G Auto Holdings Inc., Prairie Auto Holdings Ltd., Waverley BG Holdings Inc., LWD Holdings Ltd., NBFG Holdings Inc., AutoCanada B Holdings Inc., and AutoCanada M 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 Consolidated Statement of Financial Position. The continuity of the redemption liabilities is summarized as follows: Balance, January 1, 2016 Decrease in fair value (Note 14) Balance, December 31, 2016 Decrease in fair value (Note 14) Recognition on business acquisition (Note 16) Derecognition on settlement (Note 36) Balance, December 31, 2017 Held for sale (Note 23) Carrying amount Redemption Liability $ 47,229 (765) 46,464 (2,869) 306 (1,197) 42,704 26,404 16,300 The change in fair value is recorded in other gains on the Consolidated Statement of Comprehensive Income (Note 14). The fair value is determined based on the dealership equity value of the related subsidiary (Note 39). Those options eligible to be executed in the next fiscal year are presented as current liabilities. The subsidiaries are holding companies which own automotive dealerships. For purposes of disclosure, 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 subsidiaries are similar in nature and risk based on assessment of the interest and industry classification. 19 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 Cash and cash equivalents and restricted cash December 31, 2017 $ December 31, 2016 $ 61,167 33,493 94,660 (136) 94,524 4,106 98,630 79,168 24,053 103,221 (226) 102,995 6,558 109,553 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 27 for further detail regarding cash balances held with Scotiabank. The remaining short-term deposits are term deposits that bear interest at 0.10% (2016 – 0.10%). Restricted cash is held in a trust account and earns interest at 0.95%-2.06% (2016 – 0.95%-2.06%). Interest earned on restricted cash during the year ended December 31, 2017 was $62 (2016 – $89). AutoCanada Š 2017 Annual Report Š Page F25 20 Trade and other receivables Trade receivables Less: Allowance for doubtful accounts Net trade receivables Other receivables Trade and other receivables December 31, 2017 $ December 31, 2016 $ 77,851 (2,545) 75,306 4,625 79,931 81,511 (2,810) 78,701 6,886 85,587 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 Less: Allowance for doubtful accounts Trade and other receivables 1 Includes $6,283 relating to a non-recurring settlement (Note 12). December 31, 2017 $ December 31, 2016 $ 56,056 10,655 4,019 1,522 10,2241 82,476 (2,545) 79,931 71,711 9,483 3,079 1,218 2,906 88,397 (2,810) 85,587 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. 21 Inventories New vehicles Demonstrator vehicles Used vehicles Parts and accessories December 31, 2017 $ December 31, 2016 $ 513,237 47,873 70,544 27,939 659,593 471,610 50,757 69,009 28,342 619,718 During the year ended December 31, 2017, $2,544,968 of inventory (2016 – $2,370,492) was expensed as cost of sales which included net write-downs on used vehicles of $34 (2016 – $232). As at December 31, 2017, the Company had recorded reserves for inventory write downs of $7,445 (2016 – $5,136). During the year ended December 31, 2017, $8,415 of demonstrator expense (2016 – $5,842) was included in administrative costs and demonstrator reserves increased by $2,275 (2016 – decreased by $1,350). Page F26 Š AutoCanada Š 2017 Annual Report 22 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 leases: No later than 1 year Later than 1 year and no later than 5 years Later than 5 years December 31, 20171 $ December 31, 2016 $ 101 (12) 89 49 2 51 101 49 – 150 (10) 140 89 51 – 140 4,256 (459) 3,797 6,217 (470) 5,747 4,256 6,217 – 10,473 (929) 9,544 3,797 5,747 – 9,544 1 December 31, 2017 current and long-term finance lease receivables exclude $7,426 which have been classified as held for sale (Note 23). AutoCanada Š 2017 Annual Report Š Page F27 23 Assets and liabilities held for sale Land The Company has 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, 2017 (2016 – $1,556). No decommissioning liability has been recognized on the land. Efforts to sell the land have commenced and the sale is expected to be completed within the next year. Investees On October 27, 2017, the Company entered into an agreement to sell 100% of its non-voting equity interests in Dealer Holdings Ltd., DFC Holdings Inc. and LWD Holdings Ltd. The sale transaction was effective January 2, 2018 (Note 40). Net assets and liabilities held for sale are summarized as follows: Net cash and cash equivalents Trade and other receivables Inventories Net income tax recoverable Finance lease receivables Property and equipment Intangible assets Goodwill Other assets Net assets held for sale Trade and other payables Revolving floorplan facilities Redemption liabilities Indebtedness Deferred income tax Net liabilities held for sale Land $ – – – – – 1,556 – – – 1,556 – – – – – – Investees $ 6,672 21,198 82,431 226 7,426 2,818 36,292 4,827 196 162,086 11,537 84,414 26,404 6,883 3,445 132,683 December 31, 2017 Total $ 6,672 21,198 82,431 226 7,426 4,374 36,292 4,827 196 163,642 11,537 84,414 26,404 6,883 3,445 132,683 Page F28 Š AutoCanada Š 2017 Annual Report 24 Property and equipment Company & lease vehicles $ Leasehold improvements $ Machinery & equipment $ Land & buildings $ Furniture, fixtures & other $ Computer equipment $ Total $ Cost: January 1, 2016 Capital expenditures Acquisitions of dealership assets (Note 16) Acquisitions of real estate Disposals Transfer from asset held for sale Transfers to inventory, net December 31, 2016 Capital expenditures Acquisitions of dealership assets (Note 16) Acquisitions of real estate Disposals Transfers to assets held for sale Transfers in from inventory, net December 31, 2017 Accumulated depreciation: January 1, 2016 Depreciation Disposals Transfers to inventory, net December 31, 2016 Depreciation Disposals Transfers to assets held for sale Transfers to inventory, net December 31, 2017 Carrying amount: December 31, 2016 December 31, 2017 22,634 24 39 – – – (3,669) 19,028 27 25 – – (1,203) 1,402 19,279 (6,216) (3,760) – 3,604 (6,372) (3,378) – 455 4,187 (5,108) 12,656 14,171 29,400 7,687 45 – (2,274) – – 34,858 765 105 – (1,291) (1,085) – 33,352 (11,044) (2,842) 2,274 – (11,612) (2,798) 837 730 – (12,843) 28,693 236,762 – 1,711 446 – (795) – – 16,347 51,537 (145) 3,485 – 30,055 307,986 – 2,866 631 – (232) (3,184) – – 17,751 (2,624) – – 30,136 323,113 (17,493) (2,425) 717 – (19,201) (2,633) 196 2,273 – (19,365) (14,897) (7,556) 31 – (22,422) (8,398) 376 – – (30,444) 13,059 1,429 214 – (187) – – 14,515 2,217 2,468 – (176) (1,495) – 17,529 (7,054) (1,470) 171 – (8,353) (1,954) 161 1,154 – (8,992) 11,708 342,256 12,165 1,314 98 – (553) – – 17,189 51,537 (3,954) 3,485 (3,669) 12,567 419,009 7,080 1,205 21 – (785) (1,535) – 3,250 17,751 (5,108) (8,502) 1,402 11,473 434,882 390 – (7,167) (63,871) (1,504) (19,557) 3,583 3,604 (8,281) (76,241) (1,283) (20,444) 2,286 5,684 4,187 (7,776) (84,528) 716 1,072 – 23,246 20,509 10,854 285,564 10,771 292,669 6,162 8,537 4,286 342,768 3,697 350,354 AutoCanada Š 2017 Annual Report Š Page F29 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 Consolidated Statement of Comprehensive Income. Land and building additions are used for open point dealerships as well as dealership relocations, dealership re-imagings, and also includes the purchase of a previously leased dealership property. 25 Loans to associate PPH Holdings Ltd. On November 30, 2015, the Company loaned $8,421 to PPH, which is a company controlled, and formed, by Priestner. The loan was used by PPH to acquire Whitby Oshawa Honda (“Whitby”). On May 1, 2016, the Company loaned $3,120 to PPH to acquire Southview Acura (“Southview”). The Company has no participation in the equity of PPH, Whitby, or Southview. The loans are due on November 30, 2035 and May 1, 2036 and carry interest at a variable rate (2017 – 5%, 2016 – 5%). The interest rates on the loans are adjusted annually by way of mutual agreement and are intended to approximate market rates of interest available under arms-length agreements. The loan agreements also provide licensing fees to the Company benchmarked to approximate a total return to the Company equal to 80% of PPH’s net income. During the year ended December 31, 2017, additional advances of $373 were loaned to PPH due to adjustments in the initial purchase price of the dealerships. The carrying value approximates the fair value of the loans to associates at December 31, 2017 at $18,100 (2016 – $14,726). 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 essential technical information required for operations. 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. PPH’s principal place of business is Alberta, Canada. Refer to (Note 37) for disclosure over related parties. For the year ended December 31, 2017, transactions relating to the Company’s loans to PPH are as follows: Outstanding, beginning of year Issuance of loan Accrued interest income Accrued licensing fees Additional advances Outstanding, end of year December 31, 2017 $ December 31, 2016 $ 14,726 – 674 2,327 373 18,100 8,470 3,120 603 562 1,971 14,726 Page F30 Š AutoCanada Š 2017 Annual Report 26 Intangible assets and goodwill Intangible assets consist of rights under franchise agreements with automobile manufacturers (“dealer agreements”). Intangible assets and goodwill are tested for impairment annually as at December 31 or more frequently if events or changes in circumstances indicate that they may be impaired. The Company performed its annual test for impairment at December 31, 2017. As a result of the test performed, the Company recorded a net recovery of previous impairment in the amount of $816 for the year ended December 31, 2017 (2016 - Impairment of $54,096). The changes in the book value of intangible assets and goodwill for the year ended December 31, 2017 were as follows: Cost: January 1, 2016 Acquisitions (Note 16) December 31, 2016 Acquisitions (Note 16) Sale of open point asset Held for sale (Note 23) December 31, 2017 Accumulated impairment: January 1, 2016 Impairment December 31, 2016 Impairment (recovery) Held for sale (Note 23) December 31, 2017 Carrying amount: December 31, 2016 December 31, 2017 Intangible assets $ Goodwill $ Total $ 413,710 24,330 438,040 15,677 (100) (39,829) 413,788 14,062 44,996 59,058 (1,729) (3,537) 53,792 41,096 454,806 24,838 508 41,604 479,644 19,044 (100) (46,178) 3,367 – (6,349) 38,622 452,410 8,140 9,100 17,240 913 (1,522) 22,202 54,096 76,298 (816) (5,059) 16,631 70,423 378,982 359,996 24,364 403,346 21,991 381,987 AutoCanada Š 2017 Annual Report Š Page F31 Cash generating units (“CGUs”) 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 Intangible Goodwill Total Intangible Goodwill Total December 31, 2017 $ December 31, 2016 $ Y AV C AQ Q AC BH AK H F P B D BG BA W AW A BI AO AZ AA BC V AT I S G AG Other CGUs less than $5,000 Held for sale (Note 23) Carrying amount 27,807 24,494 21,881 18,044 21,687 20,181 17,724 14,659 16,148 14,801 14,791 11,549 14,273 12,496 13,148 8,602 9,263 9,626 9,431 8,507 8,497 5,273 7,395 6,591 6,532 5,799 5,251 4,283 3,541 34,014 6,135 506 – 3,724 – – – 1,514 – – – 3,088 – 941 – 3,441 950 – – – – 2,176 5 409 – 201 – – – 3,728 33,942 25,000 21,881 21,768 21,687 20,181 17,724 16,173 16,148 14,801 14,791 14,637 14,273 13,437 13,148 12,043 10,213 9,626 9,431 8,507 8,497 7,449 7,400 7,000 6,532 6,000 5,251 4,283 3,541 37,742 27,807 24,494 25,417 18,044 21,687 20,181 20,780 14,659 20,617 12,208 14,791 – 13,508 12,496 10,630 8,602 9,263 9,626 9,431 8,507 6,498 5,273 7,395 6,591 – 5,799 1,440 5,369 4,099 33,770 6,135 506 381 3,724 – – 458 1,514 – – – – – 941 – 3,441 950 – – – – 2,176 5 409 – 201 – – – 3,523 33,942 25,000 25,798 21,768 21,687 20,181 21,238 16,173 20,617 12,208 14,791 – 13,508 13,437 10,630 12,043 10,213 9,626 9,431 8,507 6,498 7,449 7,400 7,000 – 6,000 1,440 5,369 4,099 37,293 396,288 26,818 423,106 378,982 24,364 403,346 36,292 4,827 41,119 – – – 359,996 21,991 381,987 378,982 24,364 403,346 Page F32 Š AutoCanada Š 2017 Annual Report The following table shows the impairments (recoveries of impairment) of indefinite-lived identifiable intangible assets and goodwill by CGU: Cash Generating Unit Intangibles Goodwill Total Intangibles Goodwill Total December 31, 2017 $ December 31, 2016 $ C D F G H P R S AC AG AO AP AT AZ BA BH Net impairment (recovery) 3,537 (765) (2,593) 1,086 4,469 – (1,023) (3,811) – 558 – 187 (1,913) (1,999) (2,518) 3,056 (1,729) 382 – – – – – – – – – – 73 – – – 458 913 3,919 (765) (2,593) 1,086 4,469 – (1,023) (3,811) – 558 – 260 (1,913) (1,999) (2,518) 3,514 (816) – 4,688 10,594 – 1,192 2,507 2,809 4,388 204 5,154 6,571 – – 1,999 4,890 – 44,996 – 1,669 – 6,357 – 10,594 – – 1,620 428 5,164 2,657 2,845 36 4,388 – 1,195 991 5,538 384 9,270 2,699 – – – – 1,999 – 5,126 236 – – 9,100 54,096 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 D F G H K P R S T AC AG AH AO AP AT AZ BA BH December 31, 2017 $ December 31, 2016 $ 22,551 21,425 18,999 5,617 18,370 2,854 19,594 4,691 5,852 4,240 25,841 8,928 2,436 16,692 3,047 8,010 14,216 17,961 20,777 30,709 16,557 13,497 8,340 23,523 2,245 17,816 3,451 1,774 2,359 22,455 8,417 4,271 16,546 3,538 8,650 9,973 14,838 – AutoCanada Š 2017 Annual Report Š Page F33 Impairment test of indefinite life intangible assets The assumptions and sensitivities applied in the intangible assets impairment test are described as follows: Valuation Techniques The Company did not make any changes to the valuation methodology used to assess impairment in the current year. The recoverable amount of each CGU was based on the greater of fair value less cost to dispose and value in use. 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 3.6 to 8.1 times forecasted EBITDA (2016 – 5.3 to 10.9 times). 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 industry forecasts. Management applied a terminal growth rate in its projections of between 2.00% and 2.45%. 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. Management applied a discount rate between 11.36% and 12.86% in its projections (2016 – 11.02% and 12.97%). Page F34 Š AutoCanada Š 2017 Annual Report 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. 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. Sensitivity 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. 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 Q AC AH AO AV Change in Discount Rate Change in Growth Rate Recoverable amount Carrying amount 0.77% 0.08% 0.24% 0.05% 0.92% 2.25% 0.08% 0.34% 0.06% 0.93% 32,844 25,841 2,436 16,692 36,248 29,655 25,676 2,397 14,683 33,031 Recoverable amount exceeds carrying amount 3,189 165 39 2,009 3,217 CGUs, which use FVLCD 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 I AE Change in Multiple Recoverable amount Carrying amount Recoverable amount exceeds carrying amount 0.80 1.30 10,991 4,076 9,980 3,408 1,011 668 AutoCanada Š 2017 Annual Report Š Page F35 27 Financial instruments 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 recognized, 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 $154,125 (2016 – $151,313). 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 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 30). 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 +/- 200 Basis Point +/- 100 Basis Point 2017 $ 2016 $ 16,002 15,200 41 46 2017 $ 8,001 23 2016 $ 7,600 20 Page F36 Š AutoCanada Š 2017 Annual Report 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. 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 20. 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 accounts receivable are net of the allowance for doubtful accounts, details of which are disclosed in Note 20. Concentration of cash and cash equivalents exist due to the significant amount of cash held with Scotiabank (see Note 19 for further discussion of the Company’s concentration of cash held on deposit with Scotiabank). The syndicated revolving floorplan facility (see Note 30) 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, 2017 (2016 – 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. AutoCanada Š 2017 Annual Report Š Page F37 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. 2018 $ 2019 $ 2020 $ 2021 $ Thereafter $ Total $ December 31, 2017 Bank indebtedness Trade and other payables Revolving floorplan facilities Vehicle repurchase obligations Senior unsecured notes HSBC revolving term facility Lease financing – Scotiabank Demand term loan Servus mortgage VCCI mortgages BMW mortgage Other long-term debt Contractual interest payable December 31, 2016 Bank indebtedness Trade and other payables Revolving floorplan facilities Vehicle repurchase obligations Redemption liabilities Senior unsecured notes HSBC revolving term facility Lease financing – RBC Lease financing – Scotiabank Servus mortgage VCCI mortgages BMW mortgage Other long-term debt Contractual interest payable 136 63,295 634,655 6,511 – – 365 196 257 955 797 95 693 214 268 1,766 828 116 16,655 16,340 – – – – – – – – – – – 143,830 – 214 278 – – – – – – – 214 289 3,112 3,511 894 – 12,431 4,716 859 89 – – – – 149,739 – – 178 3,979 8,518 15,299 – 9,430 136 63,295 634,655 6,511 149,739 143,830 1,058 1,016 5,071 17,862 18,677 300 59,572 723,917 20,225 160,813 9,624 187,143 1,101,722 2017 $ 2018 $ 2019 $ 2020 $ Thereafter $ Total $ – 226 – 90,131 – 582,695 – 6,794 23,712 22,752 – – – 151,121 – 267 257 406 797 785 12,219 8,079 394 248 10,284 768 1,906 16,152 – – – – – – – – – 268 1,216 828 153 9,484 – – – – – – – – – 278 2,563 860 185 9,357 – – – – – 149,739 – – – 4,268 2,962 16,191 – 14,107 226 90,131 582,695 6,794 46,464 149,739 151,121 8,079 661 5,319 17,431 19,444 3,029 61,319 740,429 189,564 11,949 13,243 187,267 1,142,452 Page F38 Š AutoCanada Š 2017 Annual Report 28 Other long-term assets Prepaid rent Other assets 29 Trade and other payables Trade payables Accruals and provisions Sales tax payable Wages and withholding taxes payable The following table provides a continuity schedule of all recorded provisions: January 1, 2016 Provisions arising during the year Amounts expired or disbursed December 31, 2016 January 1, 2017 Provisions arising during the year Amounts expired or disbursed December 31, 2017 December 31, 2017 $ December 31, 2016 $ 4,934 95 5,029 5,386 1,724 7,110 December 31, 2017 $ December 31, 2016 $ 24,561 11,365 4,833 22,536 63,295 45,783 14,681 5,339 24,328 90,131 Finance and insurance1 $ 1,912 815 (1,299) 1,428 1,428 957 (754) 1,631 Other $ 539 826 (577) Total $ 2,451 1,641 (1,876) 788 2,216 788 216 (315) 2,216 1,173 (1,069) 689 2,320 1 Represents an estimated chargeback reserve provided by the Company’s third party underwriter of finance and insurance products. AutoCanada Š 2017 Annual Report Š Page F39 30 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 27. 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) Revolving floorplan facilities – Toronto Dominion Bank (vi) Revolving floorplan facilities – Mercedes-Benz Financial (vii) Held for sale (Note 23) Carrying value Indebtedness Senior unsecured notes (viii) Senior unsecured notes Embedded derivative Unamortized deferred financing costs HSBC revolving term facility (ix) HSBC revolving term facility Unamortized deferred financing costs Other debt: Lease financing – RBC (x) Lease financing – Scotiabank (xi) Servus mortgage (xii) VCCI mortgages (xiii) BMW mortgage (xiv) Other long-term debt Total indebtedness Held for sale (Note 23) Carrying value Current indebtedness Long-term indebtedness December 31, 2017 $ December 31, 2016 $ 420,629 39,302 62,386 124,422 43,372 11,580 17,378 719,069 84,414 634,655 149,739 (6) (1,834) 147,899 143,830 (598) 143,232 6,689 1,058 5,071 17,863 18,677 1,510 341,999 6,883 335,116 2,666 332,450 354,774 37,418 65,036 84,374 30,824 10,269 – 582,695 – 582,695 149,739 (21) (2,370) 147,348 151,121 (402) 150,719 8,079 661 5,319 17,431 19,444 3,029 352,030 – 352,030 21,679 330,351 Terms and conditions of outstanding loans are as follows: i Scotiabank and the Canadian Imperial Bank of Commerce (“CIBC”) provide the Company’s syndicated floorplan credit facility (the “Facility”). The availability of the Facility is $550,000 (2016 – $550,000) and it bears a rate of Bankers’ Acceptance plus 1.15% (2016 – 1.15%) per annum for a total of 2.59% at December 31, 2017 (2016 – 2.03%). The Facility has certain reporting requirements and financial covenants and is collateralized by each individual dealership’s inventories that are directly financed by the Facility, a general security agreement with each dealership financed, and a guarantee from AutoCanada Holdings Inc., a subsidiary of the Company. VW Credit Canada, Inc. (“VCCI”) provides floorplan financing for new, used and demonstrator vehicles for all of the Company’s Volkswagen and Audi dealerships (the “VCCI facilities”). The VCCI facilities bear interest at Royal Bank of Canada (“RBC”) prime rate plus 0.00% – 1.25% (2016 – 0.00% – 1.25%). The RBC prime rate was 3.20% at December 31, 2017 (2016 – 2.70%). The combined total interest rates were 3.20% – 4.45% at December 31, 2017 (2016 – 2.70% – 3.95%). The maximum amount of financing ii Page F40 Š AutoCanada Š 2017 Annual Report provided by the VCCI facilities is $77,480 (2016 – $52,845). The VCCI facilities have certain reporting requirements and financial covenants and are collateralized by all of the dealerships’ assets financed by VCCI and a general security agreement over the Volkswagen and Audi dealerships financed by VCCI. The individual notes payable of the VCCI facilities are due when the related vehicle is sold. iii BMW Financial Services Canada (“BMW Financial”), a division of BMW Canada Inc., provides floorplan financing for new, used and demonstrator vehicles for all of the Company’s BMW dealerships (the “BMW Facilities”). The BMW Facilities bear a variable interest rate of prime minus 0.40% (2016 – 0.40%) per 360 day annum for a total of 2.80% at December 31, 2017 (2016 – 2.30%). The BMW Facilities have a current advance limit of $94,461 (2016 – $93,550). The BMW Facilities have certain reporting requirements and financial covenants and are collateralized by the dealerships’ movable and immovable property. iv v vi The Royal Bank of Canada (“RBC”) provides floorplan financing for new, used and demonstrator vehicles for eight of the Company’s dealerships (the “RBC Facilities”). The RBC Facilities bear interest rates of RBC’s Cost of Funds Rate plus 0.25% – 0.75% (2016 – 0.40% – 0.75%). The RBC’s Cost of Funds Rate was 2.31% at December 31, 2017 (2016 – 1.78%). The combined total interest rates were 2.56% – 3.06% as at December 31, 2017 (2016 – 2.18% – 2.53%). The maximum amount of financing provided by the RBC facilities is $147,300 (2016 – $134,300). The RBC Facilities have certain reporting requirements and financial covenants and are collateralized by the new, used, and demonstrator 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 demonstrator vehicles for four of the Company’s dealerships (the “Scotiabank Facilities”). The Scotiabank Facilities bear interest rates of Scotia Fixed Flooring Rate plus 0.93% – 1.40% (2016 – 0.93%). The Scotia Fixed Flooring rate was 1.54% at December 31, 2017 (2016 – 0.97%). The combined total interest rate was 2.47% – 2.94% at December 31, 2017 (2016 – 1.90%). The maximum amount of financing provided by Scotiabank Facilities is $74,200 (2016 – $50,400). The Scotiabank Facilities have certain reporting requirements and financial covenants and are collateralized by the new, used, and demonstrator inventory financed by Scotiabank and a general security agreement from the Company’s four dealerships financed by Scotiabank. Toronto Dominion Bank (“TD”) provides floorplan financing for new, used and demonstrator vehicles for one of the Company’s dealerships (the “TD Facilities”). The TD Facilities bear interest rates of TD prime rate minus 0.75% (2016 – 0.75%) per annum and provide a maximum amount of financing of $23,500. The TD prime rate was 3.20% at December 31, 2017 (2016 – 2.70%). The combined total interest rate was 2.45% at December 31, 2017 (2016 – 1.95%). The TD Facilities have certain reporting requirements and financial covenants and are collateralized by the new, used and demonstrator inventory financed by TD and a general security agreement from the Company’s dealership financed by TD. vii Mercedes-Benz Financial provides floorplan financing for new, used and demonstrator vehicles for one of the Company’s dealerships (the “Mercedes-Benz Facilities”). The Mercedes-Benz Facilities bear interest rates of Canadian Dollar Offered Rate (“CDOR”) plus 1.80% per annum for a total of 3.24% at December 31, 2017 and provide a maximum amount of financing of $23,500. The Mercedes-Benz Facilities have certain reporting requirements and financial covenants and are collateralized by the new, used, and demonstrator inventory financed by Mercedes-Benz Financial and a general security agreement from the Company’s dealership financed by Mercedes-Benz Financial. viii The Company has $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 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 an 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 reinvested 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 this compound financial instrument is measured at fair value at each reporting date with gains or losses in fair value recognized through profit or loss. AutoCanada Š 2017 Annual Report Š Page F41 ix On March 16, 2017, 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 0.50% to HSBC’s prime rate plus 1.75%. As at December 31, 2017, the Company is in the second of four tiers of the pricing grid, with the second tier providing interest rates of HSBC’s prime rate plus 1.25% for a total of 4.45% at December 31, 2017 (2016 – 4.70%). Amounts drawn under the Credit Agreement as at December 31, 2017 are due May 22, 2020 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 has certain reporting requirements and financial covenants and 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, TD, and the Company, the collateral for the Credit Agreement excludes all new, used and demonstrator inventory financed with Scotiabank, VCCI, BMW Financial, RBC and TD revolving floorplan facilities. x RBC provides financing for the lease vehicles of two of the Company’s GM dealerships (the “RBC lease financing”). The RBC lease financing bears interest rates of RBC’s Costs of Funds Rate plus 0.90% (2016 – 0.90%). The RBC’s Cost of Funds Rate was 2.31% at December 31, 2017 (2016 – 1.78%). The combined total interest rate was 3.21% at December 31, 2017 (2016 – 2.68%). The maximum amount of financing provided by RBC lease financing is $17,331 (2016 – $16,000) repayable over the terms of the contract in varying amounts of principal. The RBC lease financing has certain reporting requirements and financial covenants and is collateralized by the lease vehicles under the related lease agreements. The RBC lease financing is due on demand. xi Scotiabank provides financing for the lease vehicles of two of the Company’s dealerships (the “Scotiabank lease financing”). The Scotiabank lease financing bears interest rates of Scotiabank’s Cost of Funds Rate plus 1.25% (2016 – 1.25%) for a total of 5.35% at December 31, 2017 (2016 – 3.47%). The maximum amount of financing provided by the Scotia lease financing is $2,500 (2016 – $2,500) repayable over the terms of the contract in varying amounts of principal. The Scotiabank lease financing has certain reporting requirements and financial covenants and is collateralized by the lease vehicles under the related lease agreement. The Scotiabank lease financing is due on demand. xii Servus Credit Union provides the Company with a mortgage (the “Servus Mortgage”). The Servus Mortgage bears a fixed annual rate of 3.80% (2016 – 3.90%) and is repayable with monthly blended installments of $37 (2016 – $38), originally amortized over a 20 year period with term expiring September 30, 2018. 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, 2017, the carrying amount of the property was $8,455 (2016 – $8,829). xiii 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% (2016 – 0.15% – 0.50%). The RBC prime rate was 3.20% at December 31, 2017 (2016 – 2.70%). The combined total interest rate was 2.85% – 3.70% at December 31, 2017 (2016 – 2.85% – 3.20%). The VCCI Mortgages are repayable with blended monthly payments of $120 amortized over a 20 year period with terms expiring in between April 2019 and May 2022. 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, 2017, the carrying amount of the properties was $48,268 (2016 – $34,334). xiv BMW Financial provides the Company with a mortgage (the “BMW Mortgage”), which bears a fixed rate of interest per annum of 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 financial covenants 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, 2017, the carrying amount of the property was $29,756 (2016 – $30,390). Page F42 Š AutoCanada Š 2017 Annual Report The following table shows the movement of indebtedness during the year ended December 31, 2017: Balance – January 1, 2017 Revaluation of embedded derivative Amortization of deferred finance charges Draws and additions Repayments Reclassification to held for sale Balance – December 31, 2017 31 Vehicle repurchase obligations Indebtedness $ 352,030 15 989 123,439 (134,474) (6,883) 335,116 The Company operates service loaner programs and provides vehicles to a third party vehicle rental company with individual terms not to exceed twelve months, at which time the Company has an obligation to repurchase each vehicle at a predetermined amount. As a result, the Company has recorded the contractual repurchase amounts as outstanding vehicle repurchase obligations and has classified the liability as current due to the short term nature of the obligation. 32 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 third parties. The future aggregate minimum lease payments under non-cancelable operating leases are as follows: 2018 2019 2020 2021 2022 Thereafter December 31, 2017 $ 18,892 16,429 14,430 14,199 13,731 130,759 208,440 Lawsuits and legal claims 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 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. Note 29 includes provisions to account for information known to the Company and based on estimates of probable resolutions. 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 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 AutoCanada Š 2017 Annual Report Š Page F43 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. Letters of guarantee The Company has outstanding letters of guarantee totaling $935 as at December 31, 2017 (2016 – $1,223) 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 At December 31, 2017, the Company is committed to capital expenditure obligations in the amount of $4,225 (2016 – $15,856) related to dealership relocations, dealership re-imagings, and dealership open points with expected completion of these commitments in 2018. 33 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 share-based payments. The plans are as follows: Restricted Share Units (RSUs) 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 Forfeited units Dividends reinvested Impact of movements in share price Outstanding, end of the year Deferred Share Units (DSUs) 2017 Number of RSUs 33,676 (27,075) (18,050) 31,044 – 437 – 2017 Amount $ 2016 Number of RSUs 2016 Amount $ 779 (643) (428) 738 – 6 2 64,835 (40,019) (26,679) 45,586 (11,539) 1,492 – 1,566 (784) (522) 875 (235) 29 (150) 779 20,032 454 33,676 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 granted. 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 Page F44 Š AutoCanada Š 2017 Annual Report 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 for the years ended: Outstanding, beginning of the year Settled Granted Dividends reinvested Impact of movements in share price Outstanding, end of the year Stock Option Plan 2017 Number of DSUs 2017 Amount $ 2016 Number of DSUs 2016 Amount $ 34,731 – 14,168 817 – 49,716 825 – 316 17 (32) 25,659 (6,362) 14,519 915 – 1,126 34,731 620 (152) 293 19 45 825 The Stock Option Plan (the “Plan”) is designed to provide long-term incentives to designated management to deliver long-term shareholder returns. Under the Plan, participants are granted options which only vest if certain service conditions are met. The terms of the Plan specify that following retirement an employee may exercise vested options with the rights to exercise continuing for 120 days following the retirement date. Options are granted under the Plan for no consideration and carry no dividend or voting rights. When exercisable, each option is convertible into one ordinary share. The exercise price of options is determined by the Board and shall not be lower than the closing price of the AutoCanada shares on the Toronto Stock Exchange immediately preceding the date of grant. The following table shows the change in the number of stock options for the year ended December 31, 2017: Outstanding, beginning of the year Forfeited Exercised Outstanding, end of the year Vested and exercisable at end of the year Average exercise price per share option $ 18.68 18.68 18.68 18.68 18.68 Share options # 520,000 (90,000) (10,000) 420,000 106,666 During the year ended December 31, 2017, no options expired. The following table shows the expiry date and exercise prices for stock options outstanding for the year ended December 31, 2017: Grant date April 1, 2016 Weighted average remaining contractual life of options outstanding at end of the year Exercise price $ Share options December 31, 2017 # Expiry date March 31, 2026 18.68 420,000 8.25 years AutoCanada Š 2017 Annual Report Š Page F45 The assessed fair value at grant date of options granted on April 1, 2016 was $6.03 per option. The fair value at grant date is determined using an adjusted form of the Black Scholes Model that takes into account the exercise price, the expected life of the option, the share price at grant date, the expected price volatility of the underlying share, the expected dividend yield of the underlying share, and the risk free interest rate for the term of the option. The model inputs for options granted include: a) Options are granted for no consideration and vest based on varying terms over a four year period. Vested options are exercisable for a period of ten years after grant date. b) Exercise price: $18.68 c) Grant date: April 1, 2016 d) Expected life of option: five years e) Share price at grant date: $18.18 f) Expected price volatility of the Company’s shares: 45.52% g) Expected dividend yield: 2.20% h) Risk-free interest rate: 1.50% Expected price volatility was determined at the time of grant using the AutoCanada share price on a historical basis. It reflects the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome. During the year ended December 31, 2017, total expenses of $848 (2016 – $1,306) and recoveries of $249 (2016 – $nil) arose as a result of options issued under the Plan. 34 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. Restricted Share Unit Trust Shares are held in trust to mitigate the risk of future share price increases from the time the RSUs and DSUs (see Note 33) are granted to when they are fully vested and can be exercised. The beneficiaries 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, 2017 on the shares held in trust of $31 (2016 – $57) are reinvested to purchase additional shares. The shares held in trust are accounted for as treasury shares and have been deducted from the Company’s consolidated equity as at December 31, 2017. The following table shows the change in share capital for the years ended: 2017 Number of shares 2017 Amount $ 2016 Number of shares 2016 Amount $ Outstanding, beginning of the year Treasury shares acquired Dividends reinvested Treasury shares settled Outstanding, end of the year Page F46 Š AutoCanada Š 2017 Annual Report 27,356,439 507,886 27,388,750 508,237 (1,244) (57) 950 (60,824) (2,832) 31,345 – (1,431) 33,892 – (31) 913 27,388,900 508,768 27,356,439 507,886 As at December 31, 2017, 70,783 (2016 – 103,244) common shares were held in trust for the Restricted Share Unit Plan, resulting in a total of 27,459,683 (2016 – 27,459,683) 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, 2017, eligible dividends totaling $0.40 (2016 – $0.55) per common share were declared and paid, resulting in total payments of $10,952 (2016 – $15,046). 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 and stock options to calculate the diluted earnings per share. Earnings attributable to common shares 2017 $ 2016 $ 57,844 2,596 The following table shows the weighted-average number of shares outstanding for the years ended: Basic Effect of dilution from RSUs Effect of dilution from stock options Diluted 35 Capital disclosures 2017 2016 27,379,193 27,350,555 50,334 54,797 22,526 72,276 27,473,995 27,455,686 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 30) Equity December 31, 2017 $ December 31, 2016 $ 332,450 537,607 870,057 330,351 497,592 827,943 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 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, 2017. AutoCanada Š 2017 Annual Report Š Page F47 36 Transactions with non-controlling interests On August 1, 2017, the Company acquired the remaining 10% of the issued shares of AutoCanada HCN Holdings Inc. for cash consideration of $1,700 and the extinguishment of loans of $700, for total consideration of $2,400. Immediately prior to the purchase, the carrying amount of the existing 10% non-controlling interest in AutoCanada HCN Holdings Inc. was $1,970. The group recognized a decrease in non-controlling interest of $1,970 and a decrease in equity attributable to owners of the Company of $430. On December 31, 2017, the Company acquired the remaining 10% of the issued shares of GRV C Holdings LP for cash consideration of $2,284. Immediately prior to the purchase, the carrying amount of the existing 10% non-controlling interest in GRV C Holdings LP was $2,163. The group recognized a decrease in non-controlling interest of $2,163 and a decrease in equity attributable to owners of the Company of $121. The effect on the equity attributable to the owners of AutoCanada during the year is summarized as follows: Carrying amount of non-controlling interests acquired Total consideration paid to non-controlling interests Contingent settlement on sale of property Excess of consideration paid recognized in the transactions with non-controlling interests within equity AutoCanada HCN Holdings Inc. GRV C Holdings LP 1,970 (2,400) (89) 2,163 (2,284) – Total 4,133 (4,684) (89) (519) (121) (640) As a result of the above transaction, redemption liabilities in the amount of $1,197 were derecognized during the year. 37 Related party transactions Transactions with Companies Controlled by the Former Chair of AutoCanada On May 5, 2017 Priestner retired from his position as Board Chair. As a result of this change, the Company has assessed its relationship with Priestner as a related party and determined that Priestner is no longer a related party. As Priestner was a related party prior to his retirement, transactions with companies controlled by Priestner prior to May 5, 2017 are included for disclosure. During the period from January 1 to May 5, 2017, the company had financial transactions with entities controlled by Priestner. Priestner is the controlling shareholder of Canada One Auto Group (“COAG”) and its subsidiaries, which beneficially own approximately 8.6% (2016 – 8.6%) of the Company’s shares. 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 were approved by the Company’s independent members of the Board of Directors. a. Rent paid to companies with common directors During the period ended May 5, 2017, total rent paid to companies controlled by Priestner amounted to $979 (12 months ended December 31, 2016 – $2,882). 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 period ended May 5, 2017, total administrative support fees received from companies controlled by Priestner amount to $428 (year ended December 31, 2016 – $1,384). Page F48 Š AutoCanada Š 2017 Annual Report c. Loans to associate During the year ended December 31, 2017, interest only, additional advances of $373 were made to a company controlled by Priestner (Note 25). Total interest charged relating to the loans were $674 (2016 – $603) and the total licensing fees were $2,327 (2016 – $562). As at December 31, 2017 there were $1,312 (2016 – $638) interest receivable and $2,904 (2016 – $576) of licensing fees receivable related to the loans (Note 25). 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 compensation 2017 $ 2016 $ 7,606 5,636 455 1,079 1,887 222 8,907 7,978 38 Net change in non-cash working capital 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 Revolving floorplan facilities Vehicle repurchase obligations December 31, 2017 $ December 31, 2016 $ (10,176) (104,383) 1,978 2,418 (18,496) 113,102 (283) (15,840) 8,031 (8,765) 1,014 150 2,670 20,535 4,948 28,583 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. 39 Fair value of financial instruments The Company’s financial instruments at December 31, 2017 are represented by cash and cash equivalents, trade and other receivables, loans to associate, finance lease receivables, trade and other payables, revolving floorplan facilities, vehicle repurchase obligations, long-term indebtedness, restricted cash, bank indebtedness, contingent consideration, 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 27. AutoCanada Š 2017 Annual Report Š Page F49 Embedded derivatives (Level 2), contingent consideration (Level 2), and redemption liabilities (Level 3) are remeasured at fair value each reporting period with the gain or loss being recognized through profit or loss. 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). There were no transfers between the levels of the fair value hierarchy during the year. The following table summarizes the remeasurements at fair value with the gain or loss being recognized through profit or loss for the years ended: Opening balance, January 1, 2016 Gain recognized in net income (Note 14) Settlement of contingent consideration Closing balance, December 31, 2016 Acquisitions Gain recognized in net income (Note 14) Settlement of redemption liabilities Settlement of contingent consideration Closing balance, December 31, 2017 40 Subsequent events Investees transaction (47,229) 765 – (46,464) (306) 2,869 1,197 – (42,704) Redemption liabilities $ Contingent consideration $ Total $ (55,569) 5,785 1,500 (48,284) (306) 3,285 1,197 1,500 (8,340) 5,020 1,500 (1,820) – 416 – 1,500 96 (42,608) On January 2, 2018 the Company reorganized its ownership interest in its investees. As part of the transactions, the Company sold 100% of its non-voting equity interests in Dealer Holdings Ltd., DFC Holdings Inc. and LWD Holdings Ltd. The company purchased Priestner’s interest in Green Isle G Auto Holdings Inc., Prairie Auto Holdings Ltd., Waverley BG Holdings Inc. and NBFG Holdings Inc. AutoCanada will receive a one-time net payment of approximately $24,000 as part of the transaction. Redemption liabilities totaling approximately $26,000 will be retired and reclassified to retained earnings as a result of the transaction. Dividends On February 23, 2018, the Board of Directors of the Company declared a quarterly eligible dividend of $0.10 per common share on the Company’s outstanding Class A common shares, payable on March 15, 2018 to shareholders of record at the close of business on March 1, 2018. Page F50 Š AutoCanada Š 2017 Annual Report AutoCanada Inc. 200 - 15511 123 Avenue NW Edmonton, AB • T5V 0C3 www.autocan.ca