Cervus Equipment
Annual Report 2014

Plain-text annual report

The Cervus dealership difference. 2 014 an nual r e p ort Service. CORPORATE PROFILE Cervus Equipment Corporation (Cervus) acquires and manages authorized agricultural, commercial, industrial, and transportation equipment dealerships with interests in 75 dealerships located in Canada, New Zealand and Australia. The primary equipment brands represented by Cervus include John Deere agricultural equipment; Bobcat and JCB construction equipment; Clark, Sellick and Doosan material handling equipment; and Peterbilt transportation equipment. We are dedicated to ensuring the advancement of these brands within their dynamic industries, and as such, each of our three sectors—agriculture, transportation, and commercial/industrial— specialize in serving our customers and promoting our manufacturers’ products and services. Diversified and positioned for continued success, Cervus is committed to providing genuine customer value, each and every day. Our team of more than 1,700 people collaborates to ensure Cervus leads our industry, maintaining our place as a profitable and competitive organization backed by leading brands. The common shares of Cervus are listed on the Toronto Stock Exchange (TSX) and trade under the symbol “CVL”. People. Power. Service. t h e c e r v u s d e a l e r s h i p d i f f e r e n c e 3   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 OUR VISION Cervus will be the preferred provider of business-to-business equipment solutions in the international agricultural, commercial, and industrial markets it serves as measured by employee, customer, manufacturer, and shareholder satisfaction with $1 billion in revenues by 2018. OUR MISSION OUR VALUES To grow our business as a well-respected organization based on integrity, hard work, and the way we care for our people, customers, and partners. 1. Products and services that deliver value in the eyes of our customers 2. Personal, team, and corporate growth and achievement 3. A leadership culture that values honesty, integrity, taking measured risks, and making decisions as close to our customers as possible 4. Continuous improvement and innovation that drives operational excellence 5. Building strategic relationships with our dealer, manufacturer, and shareholder partners v i s i o n , m i s s i o n , v a l u e s 5   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 13.95 14.43 ‘13 • ‘14 • 11.91 12.12 ‘10 • ‘11 • 13.02 ‘12 • PRE-TAX EARNING PER SHARE ($ MILLIONS) COMPOUND ANNUAL GROWTH RATE* 2003 - 2014 10.7%* 2014 Financial Highlights p r o g r e s s p o w e r e d b y p e o p l e BOOK VALUE OF EQUITY PER DILUTED SHARE ($ MILLIONS) 23.9%* COMPOUND ANNUAL GROWTH RATE* 2003 - 2014 6.74 6.82 ‘08 • ‘09 • 6.29 ‘07 • 5.28 5.32 ‘05 • ‘06 • 1.36 ‘03 • 1.86 ‘04 • TOTAL SHAREHOLDER’S EQUITY ($ MILLIONS) COMPOUND ANNUAL GROWTH RATE* 2003 - 2014 41.3%* 47.6 ‘07 • 35.5 ‘06 • 24.4 ‘05 • 5.1 ‘03 • 7.3 ‘04 • PROFIT BEFORE INCOME TAX ($ MILLIONS) COMPOUND ANNUAL GROWTH RATE* 2003 - 2014 25.8%* 11.4 ‘07 • 8.4 ‘06 • 3.1 ‘04 • 4.5 ‘05 • 2.1 ‘03 • 89.2 ‘08 • 22.2 ‘08 • 98.2 ‘09 • 17.0 ‘09 • 229.5 218.4 ‘14 • ‘13 • 200.6 ‘12 • 182.5 ‘11 • 172.5 ‘10 • 32.3 25.9 ‘12 • 31.7 ‘13 • 26.2 ‘14 • 18.1 ‘11 • ‘10 • 1.55 ‘07 • 1.35 ‘06 • 1.78 ‘11 • 1.70 ‘08 • 1.21 ‘09 • 1.28 ‘10 • 1.08 ‘05 • 0.82 ‘04 • 0.57 ‘03 • 2.18 ‘12 • 2.12 ‘13 • 1.73 ‘14 • 669.3 ‘14 • TOTAL ASSETS ($ MILLIONS) COMPOUND ANNUAL GROWTH RATE* 2003 - 2014 34.3%* 88.6 ‘05 • 106.8 112.5 ‘06 • ‘07 • 143.5 ‘08 • 26.2 33.0 ‘03 • ‘04 • 399.8 426.2 259.7 280.3 ‘13 • ‘12 • ‘10 • ‘11 • 224.9 ‘09 • 979.6 ‘14 • 861.1 ‘13 • 702.4 ‘12 • 535.3 ‘11 • 451.0 ‘10 • REVENUE ($ MILLIONS) COMPOUND ANNUAL GROWTH RATE* 2003 - 2014 29.6%* 335.7 362.0 ‘08 • ‘09 • 257.3 293.4 ‘06 • ‘07 • 141.6 174.1 ‘05 • ‘04 • 56.4 ‘03 • the cervus dealership differencet h e c e r v u s d e a l e r s h i p d i f f e r e n c e 7   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Mapping our success. 6 14 6 1 1* By delivering on our service commitment with the strategies, brands, relationships and resources that are unique to Cervus, we have realized expansion opportunities and strengthened our market position. 1 26 18 2 6 13 9 5 2 11* DEALERSHIPS WESTERN & CENTRAL CANADA DEALERSHIPS AUSTRALIA DEALERSHIPS NEW ZEALAND Wholly-Owned & Managed Dealerships Investment Partnerships* agriculture construction forklift + material handling transportation 35 6 9 18 68 dealerships dealerships dealerships dealerships dealerships agriculture 7 dealerships 21% interest maple farm equipment partnership (6 Saskatchewan, 1 Manitoba) 7 dealerships M A K I N G C O N N E C T I O N S Cervus dealerships enjoy all the benefits of belonging to a united network of dealers, including administrative efficiencies, leadership training, and tools and technologies designed to enhance customer service. BRITISH COLUMBIA 1 dealership Cranbrook Cervus Equipment Agriculture .............................................................................•• ALBERTA 26 dealerships NORTHERN ALBERTA Edmonton Cervus Equipment Construction (2 dealerships) ........................................................•• Cervus Equipment Forklift & Material Handling .......................................••• Fort McMurray Cervus Equipment Construction ..................•• Grand Prairie Cervus Equipment Construction & Forklift & Material Handling (2 dealerships at 1 location) .....................•••• CENTRAL ALBERTA Coronation Cervus Equipment Agriculture ........................... • Drumheller Cervus Equipment Agriculture ........................... • Hanna Cervus Equipment Agriculture ........................... • SASKATCHEWAN 18 dealerships Olds Cervus Equipment Agriculture ........................... • Ponoka Cervus Equipment Agriculture ........................... • Calgary Cervus Equipment Agriculture ........................... • Cervus Equipment Construction ..................•• Cervus Equipment Forklift & Material Handling .......................................••• Red Deer Cervus Equipment Construction & Forklift & Material Handling (2 dealerships at 1 location) ................••••• Stettler Cervus Equipment Agriculture ........................... • Trochu Cervus Equipment Agriculture ........................... • SOUTHERN ALBERTA Claresholm Cervus Equipment Agriculture ........................... • High River Cervus Equipment Agriculture ........................... • Lethbridge Cervus Equipment Forklift & Material Handling .......................................••• Medicine Hat Cervus Equipment Forklift & Material Handling .......................................••• Bassano Cervus Equipment Agriculture ........................... • Pincher Creek Cervus Equipment Agriculture ........................... • Brooks Cervus Equipment Agriculture ........................... • Vulcan Cervus Equipment Agriculture ........................... • NORTHERN SASKATCHEWAN Rosthern Cervus Equipment Agriculture ........................... • SOUTHERN SASKATCHEWAN Lloydminster Cervus Equipment Transportation ................... • Melfort Cervus Equipment Agriculture ........................... • Prince Albert Cervus Equipment Agriculture ........................... • CENTRAL SASKATCHEWAN Foam Lake Maple Farm Equipment Partnership ............... • Preeceville Maple Farm Equipment Partnership ................ • Saskatoon Cervus Equipment Agriculture ........................... • Cervus Equipment Transportation (2 dealerships) .............................................................. • Cervus Equipment Forklift & Material Handling .......................................••• Watrous Cervus Equipment Agriculture ........................... • Wynyard Maple Farm Equipment Partnership ................ • Balcarres Maple Farm Equipment Partnership ................ • Estevan Cervus Equipment Transportation ................... • Moosomin Maple Farm Equipment Partnership ................ • Regina Cervus Equipment Transportation ................... • Cervus Equipment Forklift & Material Handling .......................................••• Yorkton Maple Farm Equipment Partnership ................ • 9   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Cervus Dealership Guide MANITOBA 2 dealerships Russell Maple Farm Equipment Partnership .......................................................• Winnipeg Cervus Equipment Forklift & Material Handling .................................•• ONTARIO 13 dealerships Ayr Cervus Equipment Transportation ........• Cardinal Cervus Equipment Transportation ........• Hagersville Cervus Equipment Transportation ........• London Cervus Equipment Transportation (2 dealerships) ...................................................• Mississauga Cervus Equipment Transportation ........• Norfolk Cervus Equipment Transportation ........• North Bay Cervus Equipment Transportation ........• Stoney Creek Cervus Equipment Transportation ........• Whitby Cervus Equipment Transportation ........• Windsor-Essex Cervus Equipment Transportation ........• Woodstock Cervus Equipment Transportation ........• Wroxeter Cervus Equipment Transportation ........• DEALERSHIP LEGEND Ownership & Partnership Wholly-Owned & Managed Dealerships 68 locations Investment Partnerships 21% Interest Maple Farm Equipment Partnership 7 locations BRANDS J O H N D E E R E B O B C A T J C B P E T E R B I L T D O O S A N S E L L I C K C L A R K AUSTRALIA 6 dealerships Ballarat Windmill AG Pty. Ltd..........................................• Maffra Windmill AG Pty. Ltd..........................................• Hamilton Windmill AG Pty. Ltd..........................................• Sunshine Windmill AG Pty. Ltd..........................................• Leongatha Windmill AG Pty. Ltd..........................................• Terang Windmill AG Pty. Ltd..........................................• NEW ZEALAND 9 dealerships Gisborne Cervus Equipment Agriculture ......................• Stratford Cervus Equipment Agriculture ......................• Hastings Cervus Equipment Agriculture ......................• Waipapa Cervus Equipment Agriculture ......................• New Plymouth Cervus Equipment Agriculture ......................• Waipukurau Cervus Equipment Agriculture ......................• Palmerston North Cervus Equipment Agriculture ......................• Whangarei Cervus Equipment Agriculture ......................• Rotorua Cervus Equipment Agriculture ......................• the cervus dealership difference1 1   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 cervus dealership differen ce : Every Cervus dealership has the opportunity to meet its highest potential— supported by experienced, dedicated people, and a winning business model. So how do we position Cervus as the dealer of choice in agricultural, commercial, industrial, and transportation equipment? » The best brands » Talented and trusted people » Personalized, solutions-based service at the local store level » We commit to doing our best to deliver for our customers on all of these fronts and more Business-to-business equipment sales and service is what we live and breathe every day. It’s who we are, what makes us different, and it’s what moves us forward. the cervus dealership differencecervus dealership differen ce : Creating opportunity. As a leading aggregator of business-to-business equipment dealerships, Cervus provides the capital, resources, economies of scale, training, and opportunity needed to position the next generation for profitability and growth. With a performance record that proves the viability of our business model and strategies, Cervus’ formula for success has changed little over the course of our history. Our core business is as it always has been—the solution to a growing need for viable succession strategies among first and second-generation equipment dealership owners. Simply put, the cost and complexity of owning and operating a dealership has increased considerably over time. This trend exists among all equipment dealership sectors, regardless of the type of equipment that is sold. With the full support of our manufacturer partners—John Deere, JCB Construction, Bobcat, Clark, Sellick, Doosan, and Peterbilt Motors—we are able to create new opportunities for our dealers that help them better serve customers, maximize return on investment, and plan for future succession—all the while realizing a secure future for a profitable dealer network. United by a shared desire t0 help our customers’ business grow, Cervus dealerships bring people, equipment, and systems together to achieve long-term success. the cervus dealership differencet h e c e r v u s d e a l e r s h i p d i f f e r e n c e 1 5   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 c ervu s dealership difference: Trusted partners. Strong alliances with class-leading manufacturers position Cervus as the go-to dealership for the world’s premier agriculture, commercial/industrial, and transportation equipment in the markets we serve. In 2014, Cervus was honoured to accept Peterbilt’s North American Dealer of the Year Award. The award is presented yearly to the North American Peterbilt dealer that best demonstrates growth in truck sales, combined with high levels of customer satisfaction. The fact that Peterbilt recognized our dealerships in Ontario and Saskatchewan for their excellence in market share performance, sales performance, and customer centre response time speaks volumes about the efforts of our people, and also about the confidence Peterbilt has in our team, and customer care commitment. Partnerships like the one we enjoy with Peterbilt, and with all of our manufacturer partners, are integral to Cervus’ difference. When our original manufacturers grow and thrive, we share in their success. With a legacy of innovation and a commitment to ongoing ingenuity, our manufacturer partners have, over generations, built exceptional brands and product lines. John Deere, Bobcat, Clark, Doosan, Sellick, JCB, and Peterbilt are all names that stand for quality and performance—and we’re proud to grow alongside these icons, as they craft the machinery that feeds people, supports local economies, and builds communities. Our manufacturer partners in turn select Cervus, confident that our strategies build dealership networks that are profitable as they grow in market share, thereby supporting the manufacturer’s own fiscal targets and growth strategies. It’s a mutually beneficial relationship that is founded on shared values of accountability and integrity, all focused on meeting the needs of our mutual customer. In 2014, Cervus was honoured to accept Peterbilt’s North American Dealer of the Year Award. 1 7   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 cervus dealersh ip d i ffe r en ce : A culture of leadership. The driving force behind the success of every Cervus dealership is our proven business strategies, and the people who bring them to life. With a focus on developing leaders company-wide, Cervus’ people are the foundation on which we pursue the goals and strategies that will see us realize our vision for 2018. Cervus’ leaders, many of whom have decades of experience managing equipment dealerships, offer the invaluable insight and experience needed to direct our planning and operations with the five key drivers of our success: Brands Relationships with our equipment manufacturers will ensure we remain powered by the world’s leading agricultural, construction/industrial, and transportation equipment brands. People The dedication, skill, and enthusiasm of our people will define our success. Customers Our caring service ethic, stability, and access to suppliers for quality products and support will ensure customers return to us again. Organizational Excellence Cervus’ performance record will continue to demonstrate the viability of our business model and strategies. Growth & Acquisitions Cervus will continue to extend our business and our brand offering further through prudent geographical and market diversification. With this solid foundation and an enduring commitment to attracting and developing the finest leaders and employees, we stay connected to our vision, mission, and values as we expand into new markets, cultivate new partnerships, and develop new growth opportunities. cervus dealership di f fer en ce : Building brand equity together. With dealerships across Canada, Australia, and New Zealand united under the Cervus Equipment brand, we are one team with one shared purpose. People. Power. Service. Under the Cervus Equipment brand, operations in our agriculture, commercial/ industrial, and transportation sectors move forward as one company with one name and one road to achieving our vision. While respecting the strategies, relationships, and resources that are unique to each of Cervus’ sectors, we linked our network of dealerships to leverage synergies that help us perform for our equipment manufacturers and customers. All Cervus dealerships and sectors today share the same five strategic drivers of success. With increased recognition in the marketplace, we aim for consistency of experience for every customer at every touch point—from the way they’re greeted at the door to our in-the- field training programs. By delivering an engaging and satisfying experience, we build lasting relationships and loyalty that turns our customers into ambassadors for the Cervus Equipment brand. Collaboration across all Cervus divisions starts with leaders working together toward a common vision. Ours is a bold vision, but as an organization comprised of committed people with one common goal, Cervus is poised to achieve it. the cervus dealership differencecervus dealersh ip di ff er e nce : Iconic brands. Our customers count on their local Cervus dealership to keep them moving forward, and we meet that challenge with class-leading brands and outstanding customer care. 2 1   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Powering Our Growth We sell the equipment brands our customers count on and are loyal to. In fact, our business is built on brand legacies created by visionary manufacturers with extraordinary histories. All leaders in their respective fields, our partners provide us with trusted product lines that have for decades, or even centuries, delivered the quality and innovation that customers demand. Brands like John Deere, Bobcat, Clark, Nissan, Doosan, Sellick, JCB and Peterbilt continue to innovate and evolve today. This, in turn, enables Cervus to deliver value for our customers—and ultimately, ongoing performance for shareholders. In 2014, our relationship with the John Deere brand continued to power our shared success. We were pleased to announce the acquisitions of: • Evergreen Equipment Ltd., with four John Deere dealerships located in Bassano, Brooks, Drumheller and Hanna, Alberta • Deer-Country Equipment (1996) Ltd., with two John Deere dealerships located in High River and Vulcan, Alberta These acquisitions demonstrate Cervus’ ability to continue to grow our agricultural business in Canada in partnership with John Deere, while also realizing the efficiencies of expanding our presence in areas adjacent to our established John Deere locations. We also acquired Peterbilt of Ontario Inc. in 2014, with thirteen dealerships locations operating in Ontario’s strong freight market. Cervus’ successful integration and operation of the transportation business, beginning with our original acquisition of five Saskatchewan- based Peterbilt dealerships in 2012, has demonstrated our expertise in running equipment dealerships—a strength that has proven to be leveraged across multiple product sectors in multiple geographies. As the newly acquired dealerships are welcomed under the Cervus Equipment name, they will enhance the strength of our brand at the dealership level, where we collaborate every day in meeting the growing needs of our customers and partners. the cervus dealership differencecervus dealership differen ce : 2 3   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Initially, our customers visit our dealerships for the world-class brands we represent. In the end, they return again and again for the people of Cervus. Friendly, skilled, local people who are part of their communities, who understand their customers’ needs, and who supply cutting-edge equipment and personalized after-market care— it is truly our people who define Cervus’ success. As the face of our company and the key link between Cervus’ customers and products, our people power our progress. In turn, we invest in our employees by inspiring an entrepreneurial approach to customer service, by providing training and career development opportunities at all levels, by sharing frequent feedback, and by rewarding performance. Training the Cervus Leaders of Tomorrow Cervus Leadership University (CLU) is an excellent example of our investment in growing Cervus employees’ capacity to lead. This unique, multi-year certification program empowers participants to build leadership and management skills over time. Currently over 96 employees are enrolled in various stages of the program—a testament to their commitment to thoroughly understanding and guiding others in working within Cervus’ core values. Employee Ownership Recruiting, developing, and retaining top talent is key to the success of our business model. With incentives like CLU and our Employee Stock Purchase Plan (ESPP), we achieve our goals and create opportunities for employees to grow as professionals, while also sharing in ownership of the company—a powerful way to connect their individual successes directly to Cervus’ success. The fact that more than 64 percent of our employees are enrolled in the Cervus employee stock purchase program speaks volumes about the depth of our team’s commitment and belief in our mission. Investing in our people through ownership programs, leadership and technical training not only contributes to the long-term personal growth of our employees, but also adds value for our manufacturer partners, our customers, and our shareholders. A proud and dedicated team. the cervus dealership difference2 5   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 We believe true success grows at the dealership level, so we employ a store-centric model that keeps us connected to our customers’ businesses as we grow. There’s something different about Cervus—it’s the sense of confidence and pride our people exude because they can respond directly to customer needs, ensuring their care for the customer can be put into action. We strive to be much more than an equipment supplier—we see ourselves as partners in our customers’ businesses and in the communities where we live and work. As such, our customer relationships don’t end when the sales transaction is complete—in fact, that’s just the beginning. We provide regular training and educational opportunities to ensure our customers’ businesses remain on the cutting-edge of innovation, plus the ongoing equipment service that keeps them operational. This service ethic, combined with our long-term stability, purchasing power and access to leading manufacturers, ensures customers return to Cervus to meet their equipment needs. With access to a diverse product range, competitive pricing and skilled personnel, we are positioned to provide the best possible value in the marketplace. cervus dealersh ip d i ffe r en ce : The store is the core. the cervus dealership difference2 7   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 cervus d ea le rshi p dif f er e nce : Supporting community. Giving back where we live and work builds healthy, sustainable communities and forges relationships that go far beyond the dealership or jobsite. For Cervus and our employees, thinking and acting locally is about more than helping our customers' businesses grow and thrive. To us, it means helping entire communities grow and thrive. Our local first philosophy empowers individual dealerships to support the local initiatives of their choosing—the people, charities, and causes that are close to their homes, and their hearts. Whether coaching a recreational hockey team, mentoring a local 4-H Club, organizing a food bank drive, or volunteering at a neighbourhood school, our stores' efforts support hundreds of causes every year by donating time, resources, and expertise. It's how we stay connected to our neighbours, and to the deeper meaning of the work we do. pictured in this spread: cervus is proud to support many meaningful causes, including the local arena in trochu, alberta, the harvest 4 kids world record setting harvest near saskatoon, saskatchewan, and peterbilt ontario’s “trucking for a cure” fundraiser in support of the canadian breast cancer foundation. cervus dealership di f fer en ce : Diversified for growth, and for stability. 2 9   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Cervus supports newly acquired equipment dealerships with expertise in organizational and leadership development, aiming to swiftly integrate every new dealership within our distinct brand, culture, and processes. For Cervus, measured and responsible growth relies on a variety of expansion strategies, including acquisition and diversification. In 2014, by capitalizing on our solid balance sheet, Cervus pursued exciting expansion opportunities. In addition to six John Deere dealerships in Alberta, Canada, we acquired Peterbilt of Ontario Inc., with thirteen dealerships locations operating in the heart of Canada’s manufacturing sector. Over the years, we have grown our business across Canada, into Australia and New Zealand, and today operate in the agricultural, commercial/industrial, and transportation sectors. This product and geographical diversification enables us to perform through changing cycles, with different sectors demonstrating their unique strengths as the economic climate ebbs and flows. Moving forward, we will continue to identify and execute expansion and acquisition opportunities throughout our sectors, but will do so only with a sustained investment in our people and facilities. This ensures the Cervus standard of excellence is consistent— regardless of geographic position. the cervus dealership difference3 1   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 In this technology-driven era, for our customers and manufacturer partners, a trusted Cervus dealership is more important than ever before. Never before has technology impacted our business, and that of our customers, more than it does today. Developments in automation, intelligent design, data collection, and analysis are driving change almost daily in our agriculture, commercial/industrial, and transportation sectors. Our manufacturer partners invest billions in advanced research and development. From John Deere’s FarmSight™ and Peterbilt’s Paccar MX-13 engine— and beyond—the need for qualified experts to install, train, and service new technologies is reinventing our role in customers’ business operations. Cervus not only brings these innovations to market in the communities we serve, but also ensures our technicians are fully trained and ready to service customers with precision and efficiency. Technological advancement means our dealerships are more than simply stores that sell and service equipment—they are connected business advisors. A K E Y PA R T N E R TO O U R M A N U FAC T U R E R S Cervus’ size and economies of scale afford us the rare opportunity to hire in-house technology specialists, whose availability to customers is a distinct competitive advantage that allows us to capture new revenue and profit streams from existing markets. Staying current in an increasingly technological world requires highly skilled people and a sustained investment. Cervus fulfills these requirements by leveraging in-house resources and aligning with innovative manufacturers. This not only helps our customers realize success, it positions Cervus as a long-term, trusted partner to our manufacturers. C E RV U S I N N OVAT E S Progressive technological resources empower our team to provide the class-leading support and service our customers expect. Like the innovation our manufacturer partners deliver through their products, Cervus invests in technological tools that help our customers maximize up-time and efficiency in their businesses. Our dealership-based support centres give customers convenient access to a team of experts. TechLink is a Cervus support resource that serves as a virtual consultant, connecting our John Deere stores and customers for optimized productivity. Conversely, with our PartsLink technology, Cervus staff can diagnose and address technical issues as they happen, saving customers valuable time and resources. In our transportation dealerships, Peterbilt’s Rapid Check is a diagnostics service that offers fast and accurate assessments in two hours or less—getting our customers back on the road as quickly as possible. Through these and many other advancements and initiatives currently underway, we stay engaged with our customers, helping to build their businesses—and ours. pictured left: john deere engineers continue to enhance the company’s sprayer product line with technological developments including precision application and intuitive controls – resulting in increased performance, productivity, and resource savings for customers. cervus dealership diff er e nce : Connecting customers and new technologies. the cervus dealership difference3 3   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Dear fellow shareholders, Without question, focusing on our core business is what positions Cervus for long-term success. That’s why “The Cervus Dealership Difference” theme serves as a meaningful reflection on 2014. It was a year spent building on the strategies that are at the heart of Cervus’ difference—from the way our people embody our values, to our “store is the core” philosophy, to the geographical and product diversification strategies that continue to fuel our growth. The result of our efforts included a 12 percent increase in revenue and the expansion of our operations in several key markets, including six new John Deere dealerships in Alberta and 13 Peterbilt dealerships in Ontario. 2014 also saw us acquire the remaining interest in five Australian John Deere dealerships, plus one new one in Melbourne, Australia. With the energy of these new acquisitions propelling us forward, we’re looking toward 2015 with optimism, as always focused on what we do best. We’ll continue to forge strong relationships with our manufacturer partners, who are the world’s premier brands in their respective industries. Through innovative programs and effective support, we’ll invest in our people and in the technology that helps our customers realize success. We’ll also build on the legacy of integrity and leadership that strengthens not only our business, but also the communities where we live and work. On behalf of all of us at Cervus, thank you to everyone who believes in our vision as much as we do—our employees, our board of directors, our customers, and our shareholders. We look forward to another year ahead of building on the Cervus dealership difference. Yours Sincerely, Graham Drake President & Chief Executive Officer Cervus Equipment Corporation the cervus dealership difference3 5   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Looking back on 2014, what do you consider to be the highlights of the year? Cervus announced several new acquisition in 2014. What prompted this expansion? Our commitment to sustainable, strategic growth was one of the defining themes of 2014—both in Canada and abroad. In Australia, we acquired the remaining interest in Windmill AG Pty Ltd., and also Western Farm Service Pty Ltd., a John Deere dealership located in Melbourne. Now, with six wholly-owned stores in Australia, Cervus is well-positioned to capitalize on efficiencies and growth opportunities in the region, as they arise. In Alberta, Canada, we demonstrated Cervus’ ability to continue to grow its agricultural business in partnership with John Deere, with the acquisition of Evergreen Equipment Ltd. (with four John Deere dealerships located in Bassano, Brooks, Drumheller and Hanna), and of Deer-Country Equipment (1996) Ltd., with two John Deere dealerships located in High River and Vulcan. With these dealerships adjacent to many of Cervus’ existing John Deere locations, we anticipate a smooth integration in 2015. Cervus also continued to diversify with the acquisition of 13 Peterbilt dealerships in Ontario, Canada. This acquisition extends our relationship with Peterbilt and expands our transportation business into the largest truck market in Canada. 2014’s growth reflects the confidence our manufacturer partners have in Cervus, and is the result of the hard work of our team as they commit to our values, together focused on delivering innovative equipment and service solutions for our customers. This year’s report highlights Cervus’ dealership model. In your opinion, what sets Cervus’ dealerships apart? Since the beginning, we have been very diligent in structuring the company so that every dealership is equipped to reach its highest potential with a proven formula for success: skilled and dedicated people; a focus on meeting the needs of customers at the local store level; strategic leadership; the world’s leading business-to-business equipment brands; and access to centralized administrative support and resources. Our approach fosters a strong sense of unity and collaboration throughout our dealership network. Although every dealership is empowered at the local level, organizationally it’s a ‘one team, one vision’ philosophy that supports us as we strive to be best-in-class in all our lines of business. Cervus is always seeking opportunities for measured and responsible growth. But as stated in the past, we do not grow purely for growth’s sake. We do so only when it’s the best decision for our stakeholders. The right acquisitions are the ones that fit the Cervus model, demonstrate a solid performance record, and present opportunities for future success. This strategy has served us well throughout our history and it’s one we’re confident will continue to create value for our shareholders, customers, employees, and manufacturer partners well into the future. Our recent John Deere acquisitions in Canada, New Zealand, and Australia validate our approach, and are another strong statement about the confidence our manufacturer partners have in Cervus’ business model, philosophies, and values. In our transportation sector, the success of our Peterbilt stores in Saskatchewan set the stage for future expansion. Prior to that venture, we believed the Cervus model would be a good fit for the transportation industry. With the benefit of a positive experience in Saskatchewan for both Cervus and Peterbilt, we were ready to expand. We began identifying and analyzing opportunities, and determined that Ontario held the greatest potential. Peterbilt was very supportive of the move, which underscores the importance of building and maintaining strong manufacturer relationships. What are the first priorities when it comes to integrating the newly acquired Peterbilt Ontario dealerships? Integration of new dealerships within the Cervus culture is an extensive process that requires the engagement of all levels of management, and of the team as a whole. We are actively working through that process now, with a focus on building upon Peterbilt of Ontario’s history of success to create a shared ‘Cervus of Tomorrow’ vision. This vision will set key goals and guide the team as they operate within Cervus’ values and strategies in 2015 and beyond. w i t h g r a h a m d r a k e President & Chief Executive Officer the cervus dealership differenceWith emerging technologies changing the equipment business every day, how does Cervus handle technological advancement? Anticipating market needs and capitalizing on growth opportunities is one of our strengths, company-wide. By collaborating with our manufacturer partners and customers, we ensure we’re at the forefront of technological change, delivering advanced equipment, solutions-based service and effective support. Sustained investment in training our people and building in-house parts and technology support networks are other examples of ways we add value for our customers, while also positioning Cervus as a long-term, trusted partner. How do you anticipate Cervus’ three sectors—agriculture, commercial, and industrial—will perform in 2015? Diversification has helped us not only take advantage of new opportunities, it has also enabled us to mitigate risk by weathering downturns in any one particular sector. While we expect continued success in some industries, we’re also prepared for turbulence in others. What’s most important in times of uncertainty is solid leadership, rational decision-making, and a strong balance sheet—three things Cervus has delivered on throughout our history. With the establishment of Cervus Equipment as one brand for the entire company more than one year ago, what are you seeing today as the result of this investment? Collaboration across all divisions starts with leaders working together toward a common vision. This attitude of teamwork and purpose spreads throughout the organization, right out on to the store floor and into the fields, warehouses, highways, and jobsites where our customers work everyday. As our people embrace this shared vision and culture, we are seeing the strength of our brand grow in the marketplace. It’s very gratifying to see the enthusiasm our people demonstrate as part of the Cervus team, whether as a new acquisition or an existing store. What are Cervus’ organizational priorities for the coming year? Over the years, we have seen significant growth both organically and through acquisitions. This year was a busy one for acquisitions—20 stores were added with more than 400 employees joining our team. Our focus in 2015 is on making sure we stay true to the basics that have defined our success: strengthening the foundation of good business and processes throughout all our stores; investing in the people who deliver solutions and help our customers succeed; maintaining mutually beneficial relationships with manufacturing partners; and identifying strategic growth opportunities. This is how we’ll reach our potential in 2015 and beyond. 3 7   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 MD+A c e r v u s m a n a g e m e n t ’ s d i s c u s s i o n a n d a n a l y s i s & c o n s o l i d a t e d Financial Statements the cervus dealership differenceManagement’s Discussion and Analysis For the period from January 1, 2014 to December 31, 2014 The following Management’s Discussion & Analysis (“MD&A”) was prepared as of March 10, 2015 and is provided to assist readers in understanding Cervus Equipment Corporation’s (“Cervus” or the “Company”) financial performance for the three and twelve month periods ended December 31, 2014 and significant trends that may affect future performance of Cervus. This MD&A should be read in conjunction with the accompanying consolidated financial statements for the period ended December 31, 2014 and notes contained therein. The accompanying consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) and Cervus’ functional and reporting currency is the Canadian dollar. Cervus’ common shares trade on the Toronto Stock Exchange under the symbol “CVL”. Additional information relating to Cervus, including Cervus’ current annual information form, is available on the System for Electronic Document Analysis and Retrieval (“SEDAR”) web site at www.sedar.com. This MD&A contains forward-looking statements. Please see the section “Note Regarding Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions relating to those statements. This MD&A also makes reference to certain non-IFRS financial measures to assist users in assessing Cervus’ performance. Non-IFRS financial measures do not have any standard meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. These measures are identified and described under the section “Non-IFRS Financial Measures.” Highlights of the Year • Revenues increased $118.5 million and gross profit dollars increased $23.4 million compared to 2013. • Income from operating activities on a same store basis increased $0.3 million to $34.7 million. • The Company incurred $1.6 million in acquisition and integration costs (“acquisition costs”). • Earnings before interest, taxes, depreciation, and amortization (“EBITDA”) increased $0.5 million to $52.4 million, excluding acquisition costs. • Profit attributable to shareholders decreased $4.7 million. • Cervus Equipment was awarded Peterbilt’s 2014 North American Dealer of the Year award, for the performance of our Peterbilt operations. • Cervus completed the acquisition of the assets of Peterbilt of Ontario Inc. (“POI”), adding 13 Peterbilt truck dealerships. • Cervus acquired four John Deere full service dealerships adjacent to the Company’s existing Alberta locations, through the acquisition of the shares of Evergreen Equipment Ltd.(“Evergreen”). • Cervus acquired two John Deere full service dealerships adjacent to the Company’s existing Alberta locations, through the acquisition of the assets of Deer Country Equipment (1996) Ltd. (“Deer Country”). • Cervus acquired the remaining 46.7% of Windmill AG Pty Ltd., bringing the Company’s ownership to 100% in Australia. • The Company entered into a committed, two year, $100 million syndicated credit facility ensuring continued strategic flexibility. • The Company was ranked #20 on Alberta Venture’s 2014 Fast Growth 50 List. 3 9   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Overview of Cervus Cervus is a diversified corporation and has historically operated in two separate business segments, an Agricultural equipment segment and a Commercial and Industrial equipment segment. During the fourth quarter of 2014, the Company realigned its operating segments as a result of changes to the governance and organizational structure resulting from the acquisition of 13 Ontario Peterbilt dealerships. The Company realigned the operating segments to be the following: Agricultural, Transportation, and Commercial and Industrial (“C&I”) segments comprised of dealerships based on the industry which they serve. While Cervus continues to operate all segments under a unified corporate strategy, the expansion of Peterbilt operations and the appointment of a vice-president dedicated to Transportation operations, caused changes in how management presents and reviews information for financial reporting and management decision making purposes. Each segment continues to operate under the same unified Cervus brand and values, but are managed separately, providing segment leaders latitude to make strategic decisions relevant to the markets they serve. All prior period disclosure has been updated to reflect changes in operating segments, and certain amounts have been reclassified to conform to the current year presentation. Revenue by Segment 16% 19% 19% 2014 13% 2013 • agriculture • transportation • c&i 65% 68% Revenue by Geography 14% 8% 2014 11% 2013 78% 89% • western canada • ontario • nz & aus. The Agricultural equipment segment consists of interests in 42 John Deere dealership locations with 14 in Alberta, 11 in Saskatchewan, 1 in British Columbia, 1 in Manitoba, 9 in New Zealand and 6 in Australia. Of the 42 John Deere Dealerships, 35 are wholly owned, and the Company holds a minority interest in 7. The Commercial and Industrial (“C&I”) equipment segment consists of 15 dealership locations with 12 Bobcat/ JCB, Clark, Sellick, and Doosan material handling and forklift equipment dealerships operating in Alberta, 2 Clark, Sellick, and Doosan material handling and forklift equipment dealerships operating in Saskatchewan and 1 in Manitoba. The Transportation segment consists of 18 dealership locations with 4 Peterbilt truck dealerships and 1 collision repair center operating in Saskatchewan, and 13 Peterbilt truck dealerships operating in Ontario. the cervus dealership differenceNote Regarding Forward-Looking Statements Annual Consolidated Results 4 1   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Certain statements contained in this MD&A constitute “forward-looking statements”. These forward-looking statements may include words such as “anticipate”, “believe”, “could”, “expect”, “may”, “objective”, “outlook”, “plan”, “should”, “target” and “will”. All statements, other than statements of historical fact, that address activities, events, or developments that Cervus or a third party expects or anticipates will or may occur in the future, including our future growth, results of operations, performance and business prospects and opportunities, and the assumptions underlying any of the foregoing, are forward-looking statements. These forward-looking statements reflect our current beliefs and are based on information currently available to us and on assumptions we believe are reasonable. Actual results and developments may differ materially from the results and developments discussed in the forward-looking statements as they are subject to a number of significant risks and uncertainties, including those discussed under “Business Risks and Uncertainties” and elsewhere in this MD&A. Certain of these risks and uncertainties are beyond our control. Consequently, all of the forward-looking statements made in this MD&A are qualified by these cautionary statements and other cautionary statements or factors contained herein, and there can be no assurance that the actual results or developments will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, Cervus. These forward-looking statements are made as of the date of this MD&A, and we assume no obligation to update or revise them to reflect subsequent information, events, or circumstances unless otherwise required by applicable securities legislation. The most recent quarterly dividend payment of $0.210 per share was made to the shareholders of record as of December 31, 2014 on January 15, 2015. See “Capital Resources - Cautionary note regarding dividends” for a cautionary note regarding future dividends. In addition, in this MD&A we make certain statements regarding the expected tax consequences of the plan of arrangement involving Cervus LP and Vasogen Inc. completed in October 2009, pursuant to which Cervus LP converted from a limited partnership structure to the current corporate structure of Cervus Equipment Corporation. See “Business Risks and Uncertainties - Other Risks” for a cautionary note regarding deferred income taxes recorded. Throughout this MD&A, same store results in the Agricultural segment exclude the 2014 results of six John Deere dealerships acquired during 2014 in the months of October and December. Further, same store results in the Agricultural segment exclude the results of our Australian operations for the five months ended May 30, 2014, and exclude the consolidated results of Deer Star Systems Inc. (“Deer Star”) for the three months ended December 31, 2014, as Cervus did not own a majority interest in these operations for the comparative period in 2013. For the Transportation segment, same store results exclude the 2014 results of thirteen Peterbilt dealerships acquired in August 2014. ($ thousands, except per share amounts) Revenue Cost of sales Gross profit Other income Selling, general and administrative expense Income from operating activities Finance income Finance costs Share of profit of equity accounted investees, net of income tax Profit before income tax expense Income tax expense Profit for the year Profit attributable to shareholders EBITDA1 EBITDA margin1 Ratios as a percentage of revenue: Gross profit margin Selling, general and administrative Earnings per share Basic Diluted 1 Refer to Non-IFRS measures herein. Operating Summary Total 2014 2014 Same Store % Change Compared to 2013 2014 Same Store1 % Change Compared to 2013 14% 14% 14% (4%) 19% (5%) (28%) 854,157 (687,075) 167,082 4,223 (136,633) 34,672 (1%) (2%) 2% 9% 3% 1% 221 (58%) 2013 861,138 (697,829) 163,309 3,885 (132,796) 34,398 532 14% (6,828) 1% (6,735) (80%) (18%) (9%) (21%) (20%) (2%) 712 (80%) (9%) (0%) (13%) (12%) (3%) 28,777 (8,387) 20,390 20,256 50,322 5.9% 19.6% 16.0% (21%) (22%) 1.34 1.27 (13%) (14%) 3,527 31,722 (8,396) 23,326 23,090 51,883 6.0% 19.0% 15.4% 1.54 1.48 2014 979,609 (792,936) 186,673 3,715 (157,678) 32,710 384 (7,656) 712 26,150 (7,654) 18,496 18,362 50,811 5.2% 19.1% 16.1% 1.21 1.15 Profit attributable to shareholders decreased $4.7 million, primarily due to $1.6 million of non-recurring acquisition costs in the year and a $2.8 million reduction on earnings from equity investments. Excluding the $1.6 million of acquisition costs, EBITDA increased $0.5 million in 2014. Same Store Highlights On a same store basis, profit attributable to shareholders decreased $2.8 million, primarily due to a $2.8 million decrease in equity income, partially offset by $0.3 million of additional income from operating activities. Operating income increased due to profit margin growth in the Agricultural segment and positive sales mix shifts in Transportation operations, which offset a 3% increase in SG&A dollars. Income from equity accounted investees decreased due to adverse weather events in the geography of one equity investee, and the exclusion of Deer Star from equity investments in the fourth quarter, as the Company acquired voting control. Acquisition Performance Acquisitions contributed $125.5 million of incremental revenue in the year, and generated combined margins commensurate with existing operations. Non-recurring acquisition costs totaled $1.6 million and are included within selling, general and administrative (“SG&A”) expense. Excluding acquisition costs, acquired operations generated a $0.3 million loss for the year due to initial results from Peterbilt of Ontario, primarily due to, targeted equipment inventory reductions and unrealized foreign exchange losses. the cervus dealership differenceAnnual Business Segment Results The Company has three reportable segments: Agricultural, Transportation, and Commercial and Industrial, each supported by a single shared resources function. The Company allocates the expenditures of shared resources to each individual segment according to specific identification and usage based metrics as outlined in Note 28 of the accompanying Consolidated Annual Financial Statements. Agricultural Segment Results ($ thousands, except per share amounts) Equipment New equipment Used equipment Total equipment revenue Parts Service Rental and other Total revenue Cost of sales Gross profit Other income Selling, general and administrative expense Income from operating activities EBITDA Ratios as a percentage of revenue: Gross profit margin Selling, general and administrative Operating Summary Total 2014 2014 Same Store % Change Compared to 2013 2014 2014 Same Store % Change Compared to 2013 343,473 182,745 526,218 66,341 34,444 4,670 631,673 (524,246) 107,427 3,609 (84,352) 26,684 34,095 17.0% 13.4% (2%) (5%) (3%) 7% 9% 11% (1%) (2%) 4% 46% 5% 5% (3%) 8% 0% 5% 17% 21% 18% 7% 6% 12% 50% 16% 6% 1% 312,169 172,500 484,669 60,703 30,943 4,397 580,712 (481,869) 98,843 3,514 (76,044) 26,313 32,878 17.0% 13.1% 2013 317,277 182,306 499,583 56,523 28,467 3,946 588,519 (493,024) 95,495 2,400 (72,754) 25,141 33,862 16.2% 12.4% 4 3   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Transportation Segment Results ($ thousands, except per share amounts) Equipment New equipment Used equipment Total equipment revenue Parts Service Rental and other Total revenue Cost of sales Gross profit Other income Selling, general and administrative expense Income from operating activities EBITDA Ratios as a percentage of revenue: Gross profit margin Selling, general and administrative Operating Summary Total 2014 2014 Same Store % Change Compared to 2013 2014 2014 Same Store % Change Compared to 2013 104,051 6,589 110,640 54,927 18,281 4,990 188,838 (153,223) 35,615 (664) 83% 2% 74% 74% 61% 143% 74% 81% 50% 59,953 5,554 65,507 34,333 12,757 1,750 114,347 (89,739) 24,608 5% (14%) 3% 8% 13% (15%) 5% 6% 4% 2013 56,981 6,436 63,417 31,652 11,337 2,054 108,460 (84,727) 23,733 (434%) (61) (131%) 199 (34,505) 64% (21,768) 3% (21,055) (84%) (16%) 446 4,574 18.9% 18.3% 2,779 5,302 21.5% 19.0% (3%) (3%) 2,877 5,457 21.9% 19.4% Income from operating activities decreased $2.4 million due to $1.2 million of non-recurring acquisition costs and reduced gross profit margin percentage on lower equipment profit margins in the Ontario market. On a same store basis, income from operating activities remained steady as increased gross profit margin offset increased SG&A. Excluding acquisition costs, EBITDA increased $0.3 million for the segment. Same Store Highlights Income from operating activities increased $1.5 million in 2014. New acquisitions contributed $0.4 million of incremental operating income while $1.2 million was contributed by same store operations, primarily due to profit margin growth. Excluding $0.4 million of acquisition costs, total income from Agricultural operating activities increased $1.9 million, and EBITDA increased $0.6 million. On a same store basis, income from operating activities decreased by 3%, due to lower margins on increased additional equipment sales to fleet customers. Additional gross profit of $0.9 million was offset by a $0.7 million increase in SG&A, and a decrease in other income of $0.3 million due to unrealized foreign exchange losses on inventory floor plans. Same Store Highlights Acquisition Performance Same store operating income increased $1.2 million primarily due to a $3.3 million increase in gross profit on sales mix changes, combined with a $1.1 million dollar increase in other income primarily due to manufacturer incentives, partially offset by $3.3 million of increased SG&A. Grain transportation constraints in the first half of 2014 impacted broad acreage farms, particularly in our Saskatchewan geography, while strong cattle prices buoyed the diversified farming which comprises a larger portion of our Alberta market. These factors shifted sales mix and increased profit margin, as reduced demand for harvest equipment in Saskatchewan was replaced by accelerated demand for two wheel drive tractors, parts, and haying equipment in Alberta. Additional other income of $1.1 million was primarily due to additional incentive programs from suppliers, while personnel costs contributed to the $3.3 million increase in SG&A. Acquisition Performance Acquisitions contributed $51.0 million of incremental revenue in the year, of which $20.6 million related to fourth quarter acquisitions, and $30.4 million from the inclusion of Australia for a full year. Overall gross profit percentage of acquired entities was consistent with our existing operations. Gross profit increased $8.6 million, partially offset by higher overall SG&A as a percent of revenue in the acquired entities, resulting in $0.4 million of incremental operating income generated from acquisitions in the year. The acquisition of POI generated a $2.3 million loss from operating activities in the period, due to new equipment profit margins and $1.2 million of non- recurring acquisition costs. Lower margin on equipment sales in Ontario was the primary factor which decreased overall gross profit percentage to 18.9%. Due to the significant transaction volume of large fleet customers in Ontario, competitive pressures result in lower equipment margins than the Saskatchewan average. This was compounded by the need to reduce inventory levels following acquisition. Acquisition SG&A expenses were lower as a percent of total revenue, resulting in an overall SG&A decrease to 18.3% as a percent of total revenue, including acquisition costs. The high transaction volume of the fleet market in Ontario positively impacts SG&A on a percent of revenue basis, as the Ontario operating costs as a factor of revenue are below that experienced in the smaller Saskatchewan market. The acquired operations generated $0.7 million of negative EBITDA, with the primary difference between EBITDA and the $2.3 million loss from operating activities relating to interest on additional floor plan and acquisition borrowing, along with depreciation of capital property and intangible assets identified on acquisition. the cervus dealership differenceCommercial and Industrial Segment Results ($ thousands, except per share amounts) Equipment New equipment Used equipment Total equipment revenue Parts Service Rental and other Total revenue Cost of sales Gross profit Other income Selling, general and administrative expense Income from operating activities EBITDA Ratios as a percentage of revenue: Gross profit margin Selling, general and administrative Operating Summary Total 2014 % Change Compared to 2013 2014 95,681 8,533 104,214 29,414 16,810 8,660 159,098 (115,467) 43,631 (4%) (16%) (5%) 1% 4% (2%) (3%) (4%) (1%) 770 (40%) (0%) (13%) (3%) (38,821) 5,580 12,142 27.4% 24.4% 2013 99,916 10,210 110,126 29,084 16,106 8,843 164,159 (120,078) 44,081 1,286 (38,987) 6,380 12,564 26.9% 23.7% Income from operating activities decreased $0.8 million in the Commercial and Industrial (C&I) segment, primarily due to timing differences of gains on rental equipment replacement and disposal. EBITDA decreased by $0.4 million. For the year ended December 31, 2014, revenue decreased by $5.1 million primarily due to the non-recurrence of a single $4.0 million mulcher order received in 2013. Excluding the impact of the one-time order, the segment maintained steady overall equipment sales. Parts and service revenue increased $1.0 million, generating increased gross profit margin percentage on sales mix shifts, while gross profit dollars were impacted by lower equipment sale revenue. In 2013, rental equipment was replaced according to its planned life cycle, and was sold for a gain which was included in other income in 2013. The rental fleet was not due for a substantial replacement in 2014, resulting in a $0.5 million reduction in gains on sale compared to 2013. Income from operating activities decreased $0.8 million compared to 2013, as gross profit margin growth partially offset reduced revenue, with the remaining variance due to the occurrence and timing of gains on sale of rental equipment. Cash and Cash Equivalents - Year Ended December 31, 2014 Cervus’ primary sources and uses of cash flow for the year ended December 31, 2014 are as follows: Operating Activities Net cash provided by operating activities was $69.1 million for the year ended December 31, 2014 when compared to $30.5 million for the same period of 2013, an increase of $38.6 million. The primary reason for this increase is $23.2 million of net cash received from working capital items, compared to $13.5 million used in 2013, primarily due to an $20.8 million increase in accounts payable compared to a $4.5 million decrease in 2013 and a $6.5 million decrease in accounts receivable compared to a $4.1 million increase in 2013. Investing Activities During the year ended December 31, 2014, the Company used $101.2 million of net cash from investing activities compared to a use of cash of $18.4 million for the same period in 2013, for a net use of $82.8 million. Primary drivers of the change when compared to the same period in 2013 were $84.4 million in business acquisitions in 2014 related to Agriculture and Transportation, compared to $1.4 million for the step acquisition of Australia Ag in 2013. In addition, there were fewer capital additions in 2014 ($3.1 million), largely due to construction of the Balzac facility in 2013 of $11.6 million. Financing Activities During the year ended December 31, 2014, the Company’s financing activities provided $36.1 million of cash, compared to a use of $6.1 million in 2013, for a net source of $42.2 million. The primary driver of the change when compared to the same period in 2013 is due to net proceeds from term debt of $50.9 million in 2014, compared to $6.9 million in 2013. In addition, to these 2014 cash inflows, there was also a $1.5 million source of cash from issuance of shares which did not occur in 2013. 4 5   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Fourth Quarter Consolidated Results For the fourth quarter consolidated results, same store results in the Agricultural segment exclude the 2014 results of six John Deere dealerships and Deer Star Systems Inc. as these operations were acquired or gained a majority control during 2014 in the months of October and December. For the Transportation segment, same store results exclude the 2014 results of thirteen Peterbilt dealerships acquired in August 2014. Total 2014 2014 Same Store ($ thousands, except per share amounts) Revenue Cost of sales Gross profit Other income Selling, general and administrative expense Income from operating activities Finance income Finance costs Share of profit of equity accounted investees, net of income tax Profit before income tax expense Income tax expense Profit for the period Profit attributable to shareholders EBITDA EBITDA margin Ratios as a percentage of revenue: Gross profit margin Selling, general and administrative Earnings per share Basic Diluted Operating Summary 2014 289,040 (233,086) 55,954 406 (45,966) 10,394 181 (2,028) (91) 8,456 (2,528) 5,928 5,870 15,909 5.5% 19.4% 15.9% 0.38 0.37 % Change Compared to 2013 2014 Same Store % Change Compared to 2013 28% 28% 30% (81%) 23% 29% 85% 39% 211,949 (166,790) 45,159 1,028 (33,906) 12,281 73 (1,775) (6%) (9%) 5% (51%) (9%) 52% (26%) 22% (107%) (91) (107%) 30% 87% 14% 16% 22% 5% 48% (7%) (6%) 21% (10%) (8%) 10,488 (3,197) 7,291 7,233 16,055 7.6% 21.3% 16.0% 0.47 0.45 2013 225,813 (182,625) 43,188 2,097 (37,227) 8,058 98 (1,456) 1,386 8,086 (1,713) 6,373 6,250 13,120 5.8% 19.1% 16.5% 12% 13% 0.42 0.40 Overall profit available to shareholders decreased $0.4 million, and increased $0.3 million when acquisition costs are excluded. Income from operations increased $2.3 million on increased revenues and consistent gross profit margins, while SG&A expenses decreased as a percentage of revenue. Total EBITDA increased $2.8 million or 21% compared to 2013, and increased $3.5 million or 27% excluding acquisition costs in the quarter. Same Store Highlights On a same store basis, profit attributable to shareholders increased $1.0 million, primarily due to $4.2 million of incremental income from operating activities, partially offset by a $1.5 million decrease in earnings from equity investments and $1.5 million of additional tax expense related to timing differences between accounting income and taxable income. The $4.2 million increase in operating income resulted from growth in gross profit percentage due to sales mix shifts towards parts and service in all segments, combined with a $3.3 million decrease in SG&A expenses. A significant factor in decreased SG&A levels is the allocation of shared costs to the operations of acquired entities. A portion of incremental SG&A costs in recent periods was incurred in preparation for acquisition activity, and subsequent to acquisition the ongoing SG&A costs have been allocated to the segments to which they relate. Additionally, SG&A within the Commercial and Industrial segment decreased $2.3 million, primarily related to recoveries of bad debts and non-recurrence of 2013 branding expenses. Earnings from equity investments decreased due to adverse weather events impacting the geography where the Company holds a minority interest in seven Agriculture dealerships, combined with the results of Deer Star being excluded from equity investments due to Deer Star being consolidated upon acquisition in the fourth quarter of 2014. Income tax expense has increased due to current period timing differences between the taxation of income and deductions of expense between accounting and taxation basis. The Company continues to expect long term effective tax rates to approximate 26% to 28%. EBITDA increased $2.9 million or 22% during the period due to increases in operating income as discussed herein, and the exclusion of incremental additional income tax in the calculation of EBITDA. the cervus dealership differenceAcquisition Performance Transportation Segment Results 4 7   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Acquisitions contributed a $1.9 million loss from operating activities due to the factors outlined in the discussion of annual results. Excluding $0.7 million of acquisition expenses, Ontario generated an operating loss of $1.6 million while agriculture acquisitions generated $0.4 million of operating income. The $1.9 million operating loss from acquisitions was partially offset by reduced tax expense of $0.7 million, resulting in the net loss attributable to shareholders of $1.4 million. Excluding the impact of income taxes, depreciation of acquired intangibles, and incremental interest on additional floor planned inventory, EBITDA of the acquired operations was a $0.1 million loss. Fourth Quarter Segment Results Agricultural Segment Results ($ thousands, except per share amounts) Equipment New equipment Used equipment Total equipment revenue Parts Service Rental and other Total revenue Cost of sales Gross profit Other income Selling, general and administrative expense Income from operating activities Ratios as a percentage of revenue: Gross profit margin Selling, general and administrative Operating Summary Total 2014 2014 Same Store % Change Compared to 2013 2014 2014 Same Store % Change Compared to 2013 84,506 50,648 135,154 16,417 10,082 2,634 164,287 (132,869) 31,418 1,382 (23,232) 9,568 19.1% 14.1% 10% 1% 6% 16% 18% 68% 9% 5% 25% 73,291 44,858 118,149 14,530 8,648 2,404 143,731 (115,767) 27,964 (5%) (11%) (7%) 3% 1% 53% (5%) (8%) 11% (19%) 17% 39% 1,127 (34%) (19,644) 9,447 (1%) 37% 19.5% 13.7% 2013 76,783 50,321 127,104 14,144 8,549 1,570 151,367 (126,262) 25,105 1,700 (19,900) 6,905 16.6% 13.1% ($ thousands, except per share amounts) Equipment New equipment Used equipment Total equipment revenue Parts Service Rental and other Total revenue Cost of sales Gross profit Other income Selling, general and administrative expense Income (loss) from operating activities Ratios as a percentage of revenue: Gross profit margin Selling, general and administrative Operating Summary Total 2014 2014 Same Store % Change Compared to 2013 2014 2014 Same Store % Change Compared to 2013 50,007 1,954 51,961 21,634 6,715 2,627 82,937 (69,798) 13,139 186% 58% 177% 156% 144% 348% 172% 188% 111% 13,786 1,005 14,791 7,992 3,168 (21%) (19%) (21%) (5%) 15% 451 (23%) 26,402 (20,604) 5,798 (13%) (15%) (7%) (1,132) (2019%) (255) (532%) (13,508) 135% (5,036) (1,501) (383%) 507 (13%) (4%) 15.8% 16.3% 22.0% 19.1% 2013 17,489 1,238 18,727 8,436 2,753 587 30,503 (24,272) 6,231 59 (5,760) 530 20.4% 18.9% Total income from operating activities decreased $2.0 million, or $1.6 million excluding acquisition costs, due to initial losses in the Ontario operations. Same Store Highlights Income from operating activities remained consistent. The revenue weighting shifted towards parts and service primarily due to the timing of fleet sales within new equipment. The decrease in equipment sales reduced gross profit dollars, partially offset by stable margins within revenue streams and growth in parts and service revenues. SG&A expenses decreased, as incremental costs incurred in anticipation of acquisition are now prospectively allocated to the acquired entity. Income from operating activities in the fourth quarter of 2014 increased $2.7 million compared to Q4 2013, $0.1 million of which was contributed by the Alberta acquisitions, combined with a $2.5 million increase in same store results driven by gross profit margin growth. Acquisition Performance Same Store Highlights Income from operating activities increased $2.5 million primarily due to margin growth across all revenue streams. Gross profit margin percentage increased 2.9% primarily due to shifts in sales mix towards higher parts and service sales. The timing of rebates and incentives in 2014 were weighted towards the fourth quarter compared to being more evenly distributed through 2013, further bolstering margin in the quarter. Australia and NZ contributed $1.3 million of incremental equipment gross profit margin dollars due to accelerated demand and margin growth over the prior period. SG&A dollars were consistent, resulting in incremental margin dollars driving the 37% growth in income from operating activities. Acquisition Performance The acquired entities contributed $20.6 million of incremental revenue and $0.1 million of operating income in the period. The sales mix and gross profit margins of acquired operations were consistent with our existing operations, while SG&A as a percent of revenue was 17.5% for the period. Excluding acquisition costs of $0.3 million, the acquired operations contributed $0.4 million of incremental income from operations in the period. The acquired Ontario operations generated a $2.0 million loss from operating activities during the period, primarily due to lower profit margins due to the need to work through excess inventory levels, an unrealized foreign exchange related loss of $0.6 million included in other income, and $0.4 million of acquisition costs within SG&A. Excluding the impact of acquisition costs and foreign exchange, acquisitions generated a $0.7 million loss from operating activities in the period. As noted in the discussion of annual results, the concentration of fleet customers in Ontario resulted in a lower margin on equipment sales, which was not fully offset in the period by lower SG&A in the acquired entities. Foreign exchange losses primarily relate to unrealized losses on inventory floor planned in US dollars. These inventory units are priced to the customer at the US exchange rate at the date of sale, which has not historically resulted in material realized exchange gains or losses upon sale to the customer. the cervus dealership differenceCommercial and Industrial Segment Results Consolidated Financial Position 4 9   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 ($ thousands, except per share amounts) Equipment New equipment Used equipment Total equipment revenue Parts Service Rental and other Total revenue Cost of sales Gross profit Other income Selling, general and administrative expense Income from operating activities Ratios as a percentage of revenue: Gross profit margin Selling, general and administrative Operating Summary Total Q4 2014 % Change Compared to 2013 2014 (8%) 0% (7%) (2%) 3% 3% (5%) (5%) (4%) (54%) (20%) 274% 25,061 2,509 27,570 7,932 4,108 2,206 41,816 (30,419) 11,397 156 (9,226) 2,327 27.3% 22.1% 2013 27,195 2,499 29,694 8,104 4,000 2,145 43,943 (32,091) 11,852 338 (11,567) 623 27.0% 26.3% Income from operating activities increased $1.7 million in the C&I segment, primarily due to decreased SG&A on reduced branding costs and increased recoveries of bad debts in the quarter. For the quarter ended December 31, 2014, revenue decreased by $2.1 million, due to a decrease in mulcher sales of $1.2 million, however, parts and service sales were in line with the prior period. Gross profit margin percentage increased 0.3% due to product mix within new equipment sales, partially offset by shifts in sales mix. SG&A expenses decreased $2.3 million compared to the prior quarter, primarily due to a $1.1 million reduction in marketing expense as the 2013 branding initiative was non-recurring, and a $0.5 million recovery of bad debt allowance. Income from operating activities increased $1.7 million compared to the fourth quarter of 2013, largely tied to the non-recurrence of 2013 branding costs and recovery of bad debts expense which offset the impact of reduced revenues. Fourth Quarter Cash Flows Cervus’ primary sources and uses of cash flow for the three month period ended December 31, 2014 are as follows: Operating Activities Net cash provided in operating activities was $26.9 million, compared to cash provided of $10.0 million for the same period of 2013, an increase of $16.9 million. The primary reason for this increase is $10.8 million of net cash received from working capital items, compared to $0.3 million in 2013. The $10.5 million increase in cash from working capital items is primarily due to $23.5 million of cash provided by accounts receivable and prepaid expenses, a source of cash of $3.6 million from accounts payable and customer deposits, offset by a net use of cash for inventories and floor plan payables of $16.7 million. Investing Activities The Company used $56.2 million in net cash for investing activities. The most significant use of cash for investing activities was $49.8 million in business acquisitions for the purchase of Evergreen Equipment Ltd. and Deer-Country Equipment (1996) Ltd. In addition, the purchase of property and equipment used $3.6 million of cash, which primarily related to the construction of a replacement Agriculture Store in Ponoka, Alberta. Financing Activities Financing activities provided $39.6 million in cash flows in the period, primarily from $43.7 million advanced under the Company’s debt facilities, offset by the payment of dividends of $2.9 million. Liquidity ($ thousands, except ratio amounts) Current assets Total assets Current liabilities Long-term liabilities Shareholders’ equity Working capital (see “Non-IFRS Measures”) Working capital ratio (see “Non-IFRS Measures”) Working Capital 2014 410,214 669,303 290,838 148,974 229,491 119,376 1.41 2013 242,454 426,230 129,270 78,540 218,420 113,184 1.88 Cervus’ working capital increased by $6.2 million to $119.4 million at December 31, 2014 when compared to $113.2 million at December 31, 2013. As at the date of this report, the Company is in compliance with all of its covenants. Based on inventory levels at December 31, 2014, the Company had the ability to floor plan an additional $40.5 million of inventory, and $263.8 million of undrawn floor plan capacity. The Company’s ability to maintain sufficient liquidity is primarily driven by revenue, gross profit realization, and judicious allocation of resources. At this time, there are no known factors that management is aware of that would affect its short and long-term objectives of meeting the Company’s obligations as they come due. Working capital may fluctuate from time to time based primarily on the use of cash and cash equivalents to fund future business acquisitions, as well as due to the seasonal nature of our business. Cash resources can normally be restored by accessing floor plan monies from unencumbered equipment inventories or accessing undrawn credit facilities. Also, the seasonality of our business requires greater use of cash resources in the first and fourth quarter of each year to fund general operations caused by the seasonal nature of our sales activity. Further, if the Company is reassessed by the CRA as discussed in Business Risks and Uncertainties, the Company expects to appeal such reassessment. If the Company was reassessed up to and including its December 31, 2014 tax year, the amount due on appeal is expected to approximate $21.6 million. The Company anticipates making this deposit would not adversely impact its working capital position. Liquidity Risk The Company’s exposure to liquidity risk is dependent on the collection of accounts receivable and the ability to raise funds to meet purchase commitments, financial obligations, and to sustain operations. The Company controls its liquidity risk by managing its working capital, cash flows, and the availability of borrowing facilities. The Company’s contractual obligations at December 31, 2014 are described below. The Company has bank credit facilities available for its current use of $58.6 million as follows: Balance as at December 31, 2014 ($ thousands) Operating Flexible credit, New Zealand Australia operating Total Limit 100,000 2,715 569 103,284 Borrowings and pledged amounts 44,161 - 569 44,730 Available 55,839 2,715 - 58,554 The Company has guaranteed the net residual value of certain customer leases, for leases between customers and John Deere Financial (“JDF”) as set out in Note 29 to the consolidated financial statements. The Company regularly assesses the residual value of the JDF lease portfolio relative to wholesale values for comparable equipment. On the maturity of customer’s leases, the equipment is returned to the Company and sold as used equipment. Upon the return of equipment, JDF will provide the Company floor planning based on John Deere’s pricing guide. Of the lease portfolio at December 31, 2014, leases with a residual value of $7.5 million are scheduled to mature in 2015. the cervus dealership differenceContractual Obligations The Company has certain contractual obligations including payments under long-term debt agreements, finance and operating lease commitments. A summary of the Company’s principal contractual obligations are as follows: ($ thousands) Long-term debt Finance lease obligation Convertible debenture Operating leases Total Inventories Total carrying value Due 2015 Due 2016 through 2017 Due 2017 through 2018 Due thereafter 106,817 24,509 32,065 - 163,391 9,974 6,175 - 5,387 21,536 60,519 5,295 - 4,472 70,286 32,253 5,458 34,500 3,976 76,187 4,535 7,581 - 9,430 21,546 As at December 31, 2014, inventories had increased by $146.1 million to $324.6 million when compared to $178.5 million at December 31, 2013. Of the $146.1 million increase, $86.4 million relates to inventory from business acquisitions during the year. On a same store basis, inventory has increased by $59.7 million, comprised of a $45.6 million increase in new equipment, a $13.2 million increase in used equipment, and a $3.7 million increase in parts. In the Canadian agriculture sector, a later harvest in 2014 drove increased in season new sales, which generally come with used equipment taken on trade, increasing used inventory levels at December 31, 2014 compared to 2013. In Australia Ag, new inventory has increased to service higher demand year over year, as well as in preparation for a busy winter season. Further, our new construction inventory has increased to facilitate adequate product as construction OEM manufacturing lead times have increased. The nature of the business has a significant impact on the amount of equipment that is owned by our various dealerships. The majority of our Agricultural equipment sales come with a trade-in, a limited portion of our Transportation sales come with a trade-in, and our Commercial and Industrial equipment sales usually do not have trade-ins. This results in a higher amount of used agriculture equipment than used Transportation and Commercial and Industrial equipment. In addition, the majority of our new John Deere equipment is on consignment from John Deere, whereas we purchase the new equipment from our other manufacturers. These factors directly impact the amount of used and new equipment carried on our books. The majority of our product lines, in all segments, are manufactured in the US with pricing based in US dollars, but invoiced in Canadian dollars. As at December 31, 2014, the Company believes that its recoverable amounts on its used equipment inventories exceed their respective carrying values and no general impairment reserve is required or has been recorded. Accounts Receivable For the year ended December 31, 2014 the average time to collect the Company’s outstanding accounts receivable was approximately 18 days as compared to 16 days for the year ended December 31, 2013. At December 31, 2014 no single outstanding customer balance, excluding sales contract financing receivables, represented more than 10% of total accounts receivable. The Company closely monitors the amount and age of balances outstanding on an on-going basis and establishes provisions for bad debts based on account aging, combined with specific customers’ credit risk, historical trends, and other economic information. 5 1   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Capital Resources We use our capital to finance our current operations and growth strategies. Our capital consists of both debt and equity and we believe the best way to maximize our shareholder value is to use a combination of equity and debt financing to leverage our operations. A summary of the Company’s available credit facilities as at December 31, 2014 is as follows: ($ thousands) Operating and other bank credit facilities Floor plan facilities and rental equipment floor plan facilities Capital facilities Total Total Amount 103,284 507,927 64,169 675,380 Borrowings 42,174 195,596 44,546 282,316 Letters of Credit 2,556 Consigned Inventory 48,493 2,556 48,493 Amount Available 58,554 263,838 19,623 342,015 Operating and Other Bank Credit Facilities At December 31, 2014, the Company has a committed revolving credit facility with a syndicate of underwriters. The principal amount available under this facility as amended December 17, 2014 is $100.0 million, representing an increase from the principal amount previously available of $60.0 million. The facility is committed for a two year term, but may be extended on or before the anniversary date with the consent of the lenders. The facility contains an $80.0 million accordion which the Company may request as an increase to the total available facility, subject to lender approval. As at December 31, 2014 there was $41.6 million drawn on the facility and $2.4 million had been utilized for outstanding letters of credit to John Deere. Operating and other bank credit facilities include both the Canadian and New Zealand amounts. The New Zealand operating facility of NZ $1.5 million (CAD $1.3 million), represents the Company’s operating credit facility with its New Zealand bank. We believe that the credit facilities available to the Company outlined above are sufficient to meet our market share targets and working capital requirements for 2015. Floor Plan Facilities Floor plan payables consist of financing arrangements for the Company’s inventories and rental equipment financing with John Deere Canada ULC, GE Canada Equipment Financing G.P., General Electric Canada Equipment Financing G.P., GE Commercial Distribution Finance Canada, De Lage Landen Financial Services Canada Inc., PACCAR Financial Ltd., US Bank, and Canadian Imperial Bank of Commerce. At December 31, 2014, floor plan payables related to inventories was $175.0 million. Floor plan payables at December 31, 2014 and December 31, 2013 represented approximately 54.3% and 37.6% of our inventories, respectively. Floor plan payables fluctuate significantly from quarter to quarter based on the timing between the receipt of equipment inventories and their actual repayment so that the Company may take advantage of any programs made available to the Company by its key suppliers. In addition to cyclical industry factors, floor planned inventory has been intentionally increased through December 31, 2014 to reallocate the proceeds of the 2012 convertible debenture for acquisition purposes. Interest on floor plans at the contractual rate were largely offset by dealer rebates and interest free periods. Total Agricultural segment interest otherwise payable on John Deere floor plans approximates $1.9 million for the year ended December 31, 2014. This amount was offset by rebates applied during the year ended December 31, 2014 of $1.5 million. At December 31, 2014 approximately 71% of the C&I and Transportation segment’s outstanding floor plan balance was non-interest bearing due to various incentives and interest free periods in place. The Company’s allowance for doubtful collections has increased to $1.4 million (2013 - $0.7 million) at December 31, 2014, which represents 2.4% (2013 - 1.7%) of outstanding trade accounts receivable and 0.1% (2013 - 0.1%) of gross revenue on an annual basis. Bad debt expense for the year ended December 31, 2014 amounted to a $0.8 million (2013 - $0.2 million recovery). Outstanding Share Data As of the date of this MD&A, there are 15,435 thousand common shares, 57 thousand share options, and 716 thousand deferred shares outstanding. The Company also has convertible debentures with a face value of $34.5 million, convertible at the holder’s option, into common shares prior to the maturity date at a conversion price of $26.15 per common share see “Contractual Obligations”). As at December 31, 2014 and 2013, the Company had the following weighted average shares outstanding: (thousands) Basic weighted average number of shares outstanding Dilutive impact of deferred share plan Dilutive impact of share options Diluted weighted average number of shares outstanding 2014 15,147 745 11 15,903 2013 14,968 677 8 15,653 the cervus dealership differenceDividends Paid and Declared to Shareholders The Company, at the discretion of the board of directors, is entitled to make cash dividends to its shareholders. The following table summarizes our dividends paid for the year ended December 31, 2014: ($ thousands, except per share amounts) Record Date March 31, 2014 June 28, 2014 September 30, 2014 December 31, 2014 Total Dividend per Share Dividend Payable Dividends Reinvested Net Dividend Paid $ 0.2025 $ 0.2050 0.2075 0.2100 3,075 3,116 3,159 3,233 $ 250 265 272 288 $ 2,825 2,851 2,887 2,945 $ 0.8250 $ 12,583 $ 1,075 $ 11,508 As of the date of this MD&A, all dividends as described above were paid (see “Capital Resources - Cautionary note regarding dividends”). Dividend Reinvestment Plan (“DRIP”) The DRIP was implemented to allow shareholders to reinvest quarterly dividends and receive Cervus shares. Shareholders who elect to participate will see their periodic cash dividends automatically reinvested in Cervus shares at a price equal to 95% of the volume-weighted average price of all shares for the ten trading days preceding the applicable record date. Eligible shareholders can participate in the DRIP by directing their broker, dealer, or investment advisor holding their shares to notify the plan administrator, Computershare Trust Company of Canada Ltd., through the Clearing and Depository Services Inc. (“CDS”), or directly where they hold the certificates personally. During the year ended December 31, 2014, 52 thousand common shares were issued through the Company’s dividend reinvestment plan. Taxation Cervus’ dividends declared and paid to December 31, 2014 are considered to be eligible dividends for tax purposes on the date paid. Cautionary Note Regarding Dividends (see “Note Regarding Forward-Looking Statements”) The payment of future dividends is not assured and may be reduced or suspended. Our ability to continue to declare and pay dividends will depend on our financial performance, debt covenant obligations and our ability to meet our debt obligations and capital requirements. In addition, the market value of the Company’s common shares may decline if we are unable to meet our cash dividend targets in the future, and that decline may be significant. Under the terms of our credit facilities, we are restricted from declaring dividends or distributing cash if the Company is in breach of its debt covenants. As at the date of this report, the Company is not in violation of any of its covenants. 5 3   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Summary of Results Annual Results Summary ($ thousands, except per share amounts) Total Revenues Profit for the year Profit for the year attributable to shareholders Net earnings per share - basic Net earnings per share - diluted Cash provided by operating activities EBITDA Total assets Total long-term liabilities Total liabilities Shareholders' equity Net book value per share - diluted Dividends declared to shareholders Dividends declared per share Weighted average shares outstanding Basic Diluted Actual shares outstanding Quarterly Results Summary 2014 979,609 18,496 18,362 1.21 1.15 69,094 50,811 669,303 148,974 439,812 229,491 14.43 12,583 0.825 15,147 15,903 15,325 2013 861,138 23,326 23,090 1.54 1.48 30,480 51,883 426,230 78,540 207,810 218,420 13.95 11,759 0.785 14,968 15,653 15,012 2012 702,352 23,625 23,437 1.58 1.52 18,951 46,856 399,816 69,562 199,172 200,644 13.02 11,031 0.745 14,791 15,406 14,900 ($ thousands, except per share amounts) December 31, 2014 September 30, 2014 June 30, 2014 March 31, 2014 Revenues Profit attributable to the shareholders Gross profit dollars Gross margin percentage EBITDA Basic earnings per share Diluted earnings per share Weighted average shares outstanding - Basic - Fully diluted 289,040 5,870 55,954 19.4% 15,909 0.38 0.37 15,273 16,023 286,192 7,707 52,345 18.3% 17,599 0.51 0.49 15,148 15,884 237,488 5,618 45,253 19.1% 13,247 0.37 0.35 15,130 15,835 166,889 (833) 33,121 19.8% 4,053 (0.06) (0.05) 15,034 15,728 ($ thousands, except per share amounts) December 31, 2013 September 30, 2013 June 30, 2013 March 31, 2013 Revenues Profit attributable to the shareholders Gross profit dollars Gross margin percentage EBITDA Basic earnings per share Diluted earnings per share Weighted average shares outstanding - Basic - Fully diluted 225,813 6,250 43,188 19.1% 13,120 0.42 0.40 15,005 15,689 249,394 244,245 8,646 47,445 19.0% 17,242 0.58 0.55 14,989 15,650 8,318 45,001 18.4% 17,081 0.56 0.53 14,956 15,576 141,686 (122) 27,674 19.5% 4,441 (0.01) (0.01) 14,918 15,535 Sales activity for the Agricultural segment is normally highest between April and September during growing seasons in Canada and the impact on the growing seasons for New Zealand and Australia has not materially impacted the above results. The Transportation and Commercial and Industrial equipment sectors are not as volatile. Activity in the Transportation sector generally increases in winter months, while the Commercial and Industrial sector generally slows in the winter months. As a result, earnings or losses may not accrue uniformly from quarter to quarter. The primary reason for the change in net profit for the four quarters of 2014 when compared to 2013 is due to shifts in equipment demand within the Agricultural sector, driven by grain transportation constraints combined with softer commodity prices in the first and second quarter of 2014, compared to the same period in 2013. the cervus dealership differenceMarket Outlook (see “Note Regarding Forward-Looking Statements”) Off-Balance Sheet Arrangements 5 5   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 The Company’s three operational segments are subject to broad market forces in addition to the underlying economic factors specific to the industries they serve. Further, the geographical diversity of the Company’s operations may temper or accelerate broader market forces in their significance region to region. The following provides an overview of Management’s market outlook as it relates to the Company’s operations. Alberta & Saskatchewan Agriculture remains the driving variable in the Company’s western Canadian operations, and is in a positive position heading into the calendar 2015 crop year. Current strength in livestock prices are a boon for mixed farms which are dominant in Alberta, while a successful 2014 crop is positive for broad acre farmers who are concentrated in our Saskatchewan geography. Farm income is a leading indicator of equipment demand, and Agriculture and Agri-Food Canada (“AAFC”) is estimating Canadian farmer’s aggregate 2014 net cash farm income will be $14 billion. If achieved this is reflects a 10% increase above the previous record set in 2013.1 Of the total forecast 2014 farm income, Saskatchewan generated $4.3 billion (an 11% increase over prior year), followed by Alberta totalling $2.7 billion ( a 16% increase).2 Driving the increases were record cattle receipts, stable input costs, and record 2013 yield. Cumulative annual records in Canadian net cash farm income support the capital investment required of today’s farmers, and is a positive indicator for farmers in our geography. Further, AAFC is forecasting calendar 2015 seeded acres surpassing seeded acres in 2014, supporting both equipment demand and utilization into 2015. Our Commercial and Industrial operations are indirectly impacted by petroleum prices, linked through the impact resource prices have on residential and commercial construction in western Canada. As a result of the decline in oil prices in the fourth quarter of 2014, TD Economics is forecasting Alberta’s 2015 GDP growth to slow to 0.5%. Decreased capital outlays in the oil industry are expected to translate to weaker employment and wage growth, in turn driving a slower resale housing market and corresponding decrease in new residential construction activity. TD Economics notes Saskatchewan’s increased resource diversity, however a period of housing price correction, accompanied with reduced government spending is forecast.3 Outlook for mid-term oil prices remain uncertain, with TD Economics forecasting West Texas Intermediate climbing to the $60 range by 2016, and when combined with a lower Canadian dollar, may improve fundamentals from current levels. 4 At present, construction projects in progress are expected to continue, however a prolonged decline in oil prices would have a noticeable impact as the broader economy slows. Our Saskatchewan Transportation operations have also benefited from a strong resource extraction sector, as a number of customers provide transportation for the industry. However, the majority of our Transportation customers in Saskatchewan are consumer freight and agricultural driven. We expect a prolonged depression in oil prices would temper growth in Saskatchewan compared to recent years, however potential for continued transportation activity driven by other Saskatchewan industries remains. Ontario The same factors creating headwinds for some segments in western Canada, have generated tailwinds for the Ontario economy, including the transportation sector. TD Economics is forecasting Ontario to lead the Country in real GDP growth at 2.8%,5 with a lower Canadian dollar and interest rate reductions driving manufacturing activity and cross border trade. These macroeconomic factors are corroborated by trends in the transportation industries. TransCore’s Freight index reported record annual Canadian freight volumes in 2014, 33% above 2013 levels, and fourth quarter 2014 volumes 20% higher than Q4 2013. Further, TransCore reports US and Canada cross-border trade volumes averaged 70% of total volumes, while cross border loads leaving Canada increased 41% year over year.6 Ontario is ideally positioned to benefit, as Today’s Trucking reports that the balance of these cross border loads originate in Ontario.7 Accelerated transportation activity has driven increased demand for highway tractors. PACCAR reported 2014 US and Canada Class 8 truck sales of 250,000, the highest since 2006, while Today’s trucking reports a 14% increase in commercial trucks operating in North America in the first nine months of 2014 compared to the same period in 2013.8 Our Ontario transportation operations are well positioned within the emerging regional economic climate. New Zealand & Australia New Zealand (NZ) is the world’s largest dairy exporter, as a result, dairy prices are a significant economic driver for the country as a whole, and a bellwether for its Agricultural industry specifically. Dairy prices were at record levels in 2013 and the early part of 2014, however strong global supply combined with political events in a number of major dairy importing nations resulted in NZ dairy prices falling by half in late 2014. The ANZ New Zealand (“ANZ”) economics team is expecting a 30-40% increase in Global Dairy Trade auction prices by the end of 2015, indicating that a recovery is likely. However global demand and political factors add uncertainty, particularly with respect to farm cash flows. ANZ expects conservatism in farm capital and discretionary spending until price stability returns to the market.9 Under such circumstances, we expect farmers to be cautious with investments in equipment, although existing equipment population will continue to drive parts and service requirements. The outlook for our Australian operations is influenced by a number of factors, reflecting the mixed farming prevalent in the geography served by our dealerships. Pricing for farm outputs is positive, with livestock prices at or near five year highs, while grain and oilseed pricing approximate the five year average.10 Precipitation remains a key variable in our south-eastern geography, which received adequate but below average rainfall through the 2014 growing season. The Australian Bureau of Meteorology is forecasting slightly below average rainfall in our region for 2015. Our dealership activity in 2015 is contingent on the continuation of positive pricing trends and sufficient precipitation in our geography. footnotes 1 Agriculture and Agri-Food Canada 2015 Canadian Agricultural Outlook February, 12, 2015 2 FCC Express Domestic Ag Strength Forecasted February 20, 2015, retrieved from www.fcc-fac.ca/eng 3 TD Economics Provincial Economic Forecast Update, January26, 2015 4 TD Economics Economic Forecast Update, January 26,2015, www.td.com/economics 5 TD Economics Provincial Economic Forecast Update, January26, 2015 6 TransCore Link Logistics 2014 Canadian Freight Index, retrieved February 20, 2015, from: www.transcore.ca/news 7 Today’s Trucking, Truckers Had Second Busiest January on Record, retrieved February 20, 2015, from: www.todaystrucking.com 8 Today’s Trucking, New, Used Truck Registrations up Year-Over-Year, retrieved February 21, 2015, from: www.todaystrucking.com 9 ANZ New Zealand Economics, Our Key Downside Risk, Cameron Bagrie et. al., February 10, 2014, retrieved from www.interest.co.nz 10 NAB Economic Report: Rural Commodities Wrap - February 2014, Phin Ziebell http://business.nab.com/au In the normal course of business, we enter into agreements that include indemnities in favor of third parties, such as engagement letters with advisors and consultants, and service agreements. We have also agreed to indemnify our directors, officers, and employees and those of our subsidiaries, in accordance with our governing legislation, our constating documents and other agreements. Certain agreements do not contain any limits on our liability and, therefore, it is not possible to estimate our potential liability under these indemnities. In certain cases, we have recourse against third parties with respect to these indemnities. Further, we also maintain insurance policies that may provide coverage against certain claims under these indemnities. John Deere Credit Inc. (“Deere Credit”) provides financing to certain of the Company’s customers. A portion of this financing is with recourse to the Company if the amounts are uncollectible. At December 31, 2014, payments in arrears by such customers aggregated $304 thousand. In addition, the Company is responsible for assuming all lease obligations held by its customers with Deere Credit for the net residual value of the lease outstanding at the maturity of the contract. At December 31, 2014, the net residual value of such leases aggregated $166.7 million of which the Company believes all are recoverable. The Company is liable for a potential deficiency in the event that the customer defaults on their lease obligation or retail finance contract. Deere Credit retains 1% of the face amount of the finance or lease contract for amounts that the Company owes Deere Credit under this obligation. The deposits are capped at between 1% and 3% of the total dollar amount of the lease and finance contracts outstanding. The maximum liability that can arise related to these arrangements is limited to the deposits of $3.5 million at December 31, 2014. Deere Credit reviews the deposit account balances quarterly and if the balances exceed the minimum requirements, Deere Credit refunds the difference to the Company. The Company has issued irrevocable standby Letters of Credit to Deere Credit and another supplier in the aggregate amount of $2.4 million. The Letters of Credit were issued in accordance with the dealership arrangements with the suppliers that would allow the supplier to draw upon the letter of credit if the Company was in default of any of its obligations. Transactions with Related Parties Key Management Personnel Compensation In addition to their salaries, the Company also provides non-cash benefits to its directors and executive officers. The Company contributes to the deferred share plan on behalf of directors and executive officers, and to the employee share purchase plan on behalf of executive officers, if enrolled, in accordance with the terms of the plans. The Company has no retirement or post-employment benefits available to its directors and executive officers, aside from permitting unvested deferred share units earned during employment to continue vesting upon retirement. In addition, no directors or executive officers are part of the share option plan. Total remuneration of key management personnel and directors during the year ended December 31, 2014 and 2013 was: ($ thousands) Short-term benefits Share-based payments Total 2014 2,684 573 3,257 2013 2,028 517 2,545 Key Management Personnel and Director Transactions Key management and directors of the Company control approximately 28% of the common voting shares of the Company. Other Related Party Transactions Certain officers and dealer managers of the Company have provided guarantees to John Deere as required by John Deere aggregating $6.5 million. The guarantees are kept in place until released by John Deere. During the twelve month periods ended December 31, 2014 and 2013, the Company paid those individuals $184 thousand and $177 thousand, respectively, for providing these guarantees which represents a similar amount to guarantee fees otherwise paid to financial institutions. These transactions were recorded at the amount agreed to between the Company and the guarantors and are included in selling, general and administrative expenses. the cervus dealership differenceBusiness Risks and Uncertainties Reliance on Our Key Manufacturers and Dealership Arrangements Cervus’ primary source of income is from the sale of agricultural, transportation, and commercial and industrial equipment and products and services pursuant to agreements to act as an authorized dealer. The agreement with John Deere Limited (“JDL”) provides a framework under which JDL can terminate a John Deere dealership if such dealership fails to maintain certain performance and equity covenants. Each contract also provides a one-year remedy period whereby the Company has one year to restore any deficiencies. The Company also has dealership agreements in place with Peterbilt, Bobcat, JCB, CMI, Clark, Sellick, and Doosan. These agreements are one to three year agreements and are normally renewed annually, except for unusual situations such as bankruptcy or fraud. The success of our dealerships depend on the timely supply of equipment and parts from our manufacturers to ensure the timely delivery of products and services to our customers. We also depend on our suppliers to provide competitive prices and quality products. Currently all of our dealership contracts are in good standing with our suppliers. There can be no guarantee that: (i) circumstances will not arise which give these equipment manufacturers the right to terminate their dealership agreements or (ii) one or more of the equipment manufacturers will decide not to renew their dealership agreements with us upon expiry. Dependence on Industry Sectors Authorized John Deere agricultural dealerships sell John Deere agricultural, turf, and sport products and equipment. The majority of sales are derived from the Agricultural sector. Consequently, grain and livestock prices, weather conditions, Canadian vs. U.S. currency exchange rates, interest rates, disease, Canadian and U.S. government trade policies and customer confidence have an impact on demand for equipment, parts and service. The retail agricultural equipment industry is very competitive. The Company faces a number of competitors, including other “in-line” John Deere dealerships and other competitors including authorized Agco, Case, Kubota and New Holland dealerships that may be located in and around communities in which the Company’s dealerships are located. Deere & Company has a reputation for the manufacture and delivery of high quality, competitively priced products. John Deere has the largest market share of manufacturing and sales of farm equipment in North America. There can be no assurance that John Deere will continue to manufacture high quality, competitively priced products or maintain its market share in the future. We have mitigated these risks by geographical diversification in Western Canada, New Zealand and Australia within the agricultural sector and industry diversification into the transportation, and construction and industrial sector. The Commercial and Industrial segment sells light and medium construction equipment and is comprised of several lines of commercial equipment from major manufacturers, Bobcat and JCB. The major competitors are Caterpillar, Komatsu, CNH (Case), John Deere, Volvo, Hitachi and Liebherr. The light and medium commercial equipment market is very much dependent upon residential and commercial construction. The segment also sells industrial equipment from several manufacturers, Clark, Sellick, and Doosan being the major suppliers. Their major competitors are Toyota, Hyster, Crown, and Caterpillar. Industrial equipment is primarily sold to building supply companies, warehousing, food processors, oilfield supply companies, and the grocery industry. This customer diversity mitigates to some degree the risks inherent in any one of these customer segments. The Transportation equipment group primarily sells transport equipment through PACCAR, which manufacturers Peterbilt and Kenworth trucks. The major competitors to Peterbilt are Kenworth, International, Freightliner, Volvo, and Mack trucks. The segment is highly dependent on consumer and commercial transportation of goods, as well as service based industries including oil and gas in western Canada, and manufacturing in eastern Canada. This diverse customer base does mitigate the risks inherent in any one of those customer segments. Presently the majority of the Transportation, and Commercial and Industrial equipment segment revenues are derived from the sale of Peterbilt, Bobcat, JCB, Sellick, and Doosan equipment and products. All these equipment manufacturers have established themselves as industry leaders in our markets for the manufacture and delivery of Commercial, Industrial and Transportation equipment. There can be no assurance however that these suppliers will continue to manufacture high quality, competitively priced products or maintain its market share in the future. Market Risk Market risk is the risk that the fair value of financial instruments will fluctuate due to changes in market factors and is comprised of currency risk, interest rate risk and other price risks. The objective of market risk management is to manage and control market risk exposures within acceptable parameters while optimizing return. Foreign Currency Exposure The Company is exposed to foreign currency fluctuation related to translation adjustments upon consolidation of its Australian and New Zealand operations. Based on the Company’s results reported from its foreign subsidiaries, a strengthening or weakening of the Canadian dollar by 5% against the New Zealand dollar at December 31, 2014 would have increased (decreased) profit or loss by $54 thousand (2013 - $34 thousand). A strengthening or weakening of the Canadian dollar by 5% against the Australian dollar at December 31, 2014 would have increased (decreased) profit or loss by $20 thousand (2013 - $25 thousand). 5 7   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Other than the Company’s exposure on its translation of its foreign subsidiaries, the Company’s exposure to fluctuations in foreign currency is limited, as its sales and expenditures are primarily incurred in Canadian dollars. Many of our products, including equipment and parts, are based on a U.S. dollar price as they are supplied primarily by U.S. manufacturers but are settled in Canadian dollars as they are received. However, this may cause fluctuations in the sales values assigned to equipment and parts inventories as the Company’s price structure is to maintain consistent gross margins. Both sales revenues and gross profit margins may fluctuate based on the foreign exchange rate in effect at the time of purchase. Certain of the Company’s manufacturers also have programs in place to facilitate and/or reduce the effect of foreign currency fluctuations, primarily on new equipment inventory purchases. A portion of the Company’s owned inventory is floor planned in U.S. dollars. As such, a portion of the floor plan payable is exposed to fluctuations in the U.S. dollar exchange rate. As discussed above, this contributes to fluctuations in sales values based on the U.S. dollar exchange rate. The Company’s objective is to maintain consistent gross margins by pricing equipment carried in U.S. dollars according to the exchange rate at the sale date. If the Company was unable to capture fluctuations in the US/CAD dollar in the sales price, a $0.01 change in the U.S. exchange rate would have increased (decreased) profit or loss by $260 thousand based on the U.S. dollar floor plan balances at December 31, 2014. Interest Rate Risk The Company’s cash flow is exposed to changes in interest rates on its floor plan arrangements and certain term debt which bear interest at variable rates. The cash flows required to service these financial liabilities will fluctuate as a result of changes in market interest rates. The Company mitigates its exposure to interest rate risk by utilizing excess cash resources to buy-down or pay-off interest bearing contracts and by managing its floor plan payables by maximizing the interest-free periods. Based on the Company’s outstanding long-term debt at December 31, 2014, a one percent increase or decrease in market interest rates would impact the Company’s annual interest expense by approximately $2.0 million (2013 - $1.2 million). Operational Risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Company’s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Company’s operations. The Company’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Company’s reputation with overall cost effectiveness and to avoid control procedures that restrict innovation and creativity. The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Company standards for the management of operational risk in the following areas: • requirements for appropriate segregation of duties, including the independent authorization of transactions; • requirements for the reconciliation and monitoring of transactions; • compliance with regulatory and other legal requirements; • documentation of controls and procedures; • requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified; • requirements for the reporting of operational losses and proposed remedial action; • development of contingency plans; • training and professional development; • ethical and business standards; and • risk mitigation, including maintaining insurance coverage. Compliance with Company standards is supported by a program of periodic reviews in consultation with an internal audit firm. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management of the Company. Environmental Risks Our dealerships routinely handle hazardous and non-hazardous waste as part of their day-to-day operations and though the Company believes it is in full compliance with applicable laws, from time-to-time, the Company may be involved in, and subject to, incidents and conditions that render us in non- compliance with environmental laws and regulations. The Company has established safety programs to help reduce these risks. The Company is not aware of any material environmental liabilities at this time. the cervus dealership differenceCredit Risk By granting credit sales to customers, it is possible these customers may experience financial difficulty and be unable to fulfill their repayment obligations. The Company’s revenue is generated from customers in the farming, construction, industrial, and transportation industries, resulting in a concentration of credit risk from customers in these industries. The strength of our Agricultural segment is influenced by the prices of crop inputs, commodity prices, as well as local and global weather patterns in a growing season. Our Commercial and Industrial equipment sector is influenced by general economic and construction activity, and due to location, oil prices for Western Canadian crude oil. Our Transportation segment is influenced by regional, national, and North American economic activity, particularly factors impacting manufacturing and the demand for, and transportation of, consumer and industrial goods. A significant decline in economic conditions within these industries would increase the risk that customers will experience financial difficulty and be unable to fulfill their obligations to the Company. The Company’s exposure to credit risk arises from granting credit sales and is limited to the carrying value of accounts receivable, and deposits and guarantees with John Deere. The Company’s revenues are normally invoiced with payment terms of net, 30 days. The average time to collect the Company’s outstanding accounts receivable was approximately 18 days for the year ended December 31, 2014 (16 days for the year ended December 31, 2013) and no single outstanding customer balance, excluding sales contract financing receivables, represented more than 10% of total accounts receivable. The Company mitigates its credit risk by assessing the credit worthiness of its customers on an ongoing basis. The Company closely monitors the amount and age of balances outstanding on an on-going basis and establishes provisions for bad debts based on specific customers’ credit risk, historical trends, and other economic information. Capital Risk Management The Company’s objective when managing its capital is to safeguard its ability to continue as a going concern, so that it can continue to provide returns for Shareholders and benefits for other stakeholders and to provide an adequate return to Shareholders by pricing products and services commensurately with the level of risk. In the management of capital, the Company monitors its adjusted capital which comprises all components of equity (i.e. shares issued, accumulated earnings, shareholder distributions and dilutive instruments). The Company sets the amount of capital in proportion to risk. The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may issue shares/units to facilitate business combinations and or retire term debt or may adjust the amount of distributions paid to the Shareholders. The Company uses the following ratios in determining its appropriate capital levels; a) a debt to total capital ratio (total interest bearing debt divided by total interest bearing debt plus book value of equity); b) an adjusted debt to adjusted EBITDA ratio (adjusted debt divided by adjusted EBITDA); c) an adjusted debt to adjusted assets ratio (calculated as adjusted debt divided by adjusted assets); d) a fixed charge coverage ratio (calculated as adjusted EBITDA divided by contractual principal, interest, dividend, and operating lease payments); and e) an asset coverage ratio (tangible assets divided by specific drawn amounts under certain credit facilities). Adjusted assets comprise all components of assets other than other intangible assets and goodwill. Adjusted equity comprises of all components of shareholders’ equity and is reduced by other intangible assets and goodwill. Income Taxes The Canada Revenue Agency has previously requested information relating to the conversion transaction involving Cervus LP and Vasogen Inc. completed in October 2009 pursuant to which Cervus LP converted from a limited partnership structure to the current corporate structure of Cervus Equipment Corporation. On March 4, 2014 Cervus received a proposal letter from the Canada Revenue Agency (“CRA”) indicating that it intends to challenge Cervus’ tax filing position stemming from the conversion transaction. In its proposal letter, the CRA has informed the Company of their proposed position that non-capital tax losses of $138.6 million claimed or pending claim by the Company through to December 31, 2013 are ineligible for deduction against taxable income. Further, it is the CRA proposes that the Company’s 2014 non-capital carry forward balance of $82 million; capital loss carry forward balances of $146 million; scientific research and experimental development expenditure pool of $29 million and investment tax credits of $12 million, are not available for deduction against future taxable income. To date, Cervus has not yet received a formal reassessment of its previous income tax filings but expects to receive one in due course. Upon reassessment, Cervus is able to appeal. Cervus remains confident in the appropriateness of its tax-filing position and the expected tax consequences of the conversion transaction and intends to defend such position vigorously if a notice of reassessment is received from the Canada Revenue Agency. Cervus strongly believes that the acquisition of control and general anti-avoidance rules do not apply to the conversion transaction and intends to file its future tax returns on a basis consistent with its view of the outcome of the conversion transaction. In order to appeal, 50% of any reassessed amount is due. Based on Cervus’ taxation years since the conversion transaction and ending with the taxation year ended December 31, 2014, if Cervus is reassessed on the basis of the proposal letter, Cervus expects the 50% amount to approximate $21.6 million. Cervus would also be required to make a payment of 50% of the taxes the CRA claims are owed in any future tax year if the Canada Revenue Agency issues a similar notice of reassessment for such years and Cervus appeals it. While Cervus is confident in the appropriateness of its tax-filing position and the expected tax consequences of the conversion transaction, there remains a possibility that, if the Canada Revenue Agency elects to challenge Cervus tax filings and such challenge is successful, it will negatively affect the availability or quantum of the tax losses or other tax accounts of Cervus. If Cervus is ultimately successful in defending its position, such payments, plus applicable interest, will be refunded to Cervus. If the Canada Revenue Agency is successful, Cervus will be required to pay the balance of the taxes claimed plus applicable interest. Acquisition and Integration Risks Strategic acquisitions have been an important element of Cervus’ business strategy, and Cervus expects to continue to pursue such acquisitions in the future. Although Cervus engages in discussions with, and submits proposals to acquisition candidates, suitable acquisitions may not be available in the future on reasonable terms. If Cervus does identify an appropriate acquisition candidate, Cervus may not be able to successfully negotiate the terms of the acquisition, finance the acquisition or, if the acquisition occurs, effectively integrate the acquired business into Cervus’ existing business. In addition, the negotiation of a potential acquisition and the integration of an acquired business may require a disproportionate amount of management’s attention and resources. 5 9   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Cervus’ inability to successfully identify, execute, or effectively integrate future or previous acquisitions may negatively affect its results of operations. Even though Cervus performs a due diligence review of the businesses it acquires that it believes is consistent with industry practices, such reviews are inherently incomplete. Even an in-depth due diligence review of a business may not necessarily reveal existing or potential problems or permit Cervus to become familiar enough with the business to fully assess its deficiencies and potential. Even when problems are identified, Cervus may assume certain risks and liabilities in connection with the acquired business. Other Risks Although the Company has conducted investigations of, and engaged legal counsel to review, the corporate, legal, financial and business records of Vasogen Inc., with whom Cervus underwent its conversion from a limited partnership structure to that of a corporation in 2009, there may be liabilities and risks that the Company did not uncover in its due diligence investigation and that these liabilities and risks could have, individually or in the aggregate, a material adverse effect on the business, financial condition and results of operations of Cervus. Further, there is a risk that the tax consequences contemplated by Cervus may be materially different from the tax consequences anticipated by Cervus in undertaking the conversion transaction. The Canada Revenue Agency has requested information relating to the plan of arrangement involving Cervus LP and Vasogen Inc. completed in October 2009 pursuant to which Cervus LP converted from a limited partnership structure to the current corporate structure of Cervus Equipment Corporation. Critical Accounting Estimates and Judgements Preparation of unaudited and audited consolidated financial statements requires that we make assumptions regarding accounting estimates for certain amounts contained within the unaudited and audited consolidated financial statements. We believe that each of our assumptions and estimates is appropriate to the circumstances and represents the most likely future outcome. However, because of the uncertainties inherent in making assumptions and estimates regarding unknown future outcomes, future events may result in significant differences between estimates and actual results. Determination of Fair Values A number of the Company’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. Fair Value of Assets and Liabilities Acquired In Business Combinations The value of acquired assets and liabilities on the acquisition date require the use of estimates to determine the purchase price allocation. Estimates are made as to the valuations of property, plant, and equipment, intangible assets, and goodwill, among other items. These estimates have been discussed further below. Property, Plant and Equipment The fair value of property, plant and equipment recognised as a result of a business combination is the estimated amount for which a property could be exchanged on the date of acquisition between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably. The fair value of items of plant, equipment, fixtures and fittings is based on the market approach and cost approaches using quoted market prices for similar items when available and depreciated replacement cost when appropriate. Depreciated replacement cost reflects adjustments for physical deterioration as well as functional and economic obsolescence. Intangible Assets The fair value of dealership distribution agreements and trade names acquired in a business combination is based on the incremental discounted estimated cash flows enjoyed post acquisition, or expenditures avoided, as a result of owning the intangible assets. The fair value of customer lists acquired in a business combination is determined using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows. The fair value of other intangible assets including non-competition agreements is based on the discounted cash flows expected to be derived from the use and any residual value of the assets. Inventories The fair value of inventories acquired in a business combination is determined based on the estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories. Trade and Other Receivables The fair value of trade and other receivables is estimated at the present value of the future cash flows, discounted at the market rate of interest at the reporting date. The fair value is determined for disclosure purposes or when such assets are acquired in a business combination. Other Non-Derivative Financial Liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. In respect of the liability component of convertible debentures, the market rate of interest is determined by reference to similar liabilities that do not have a conversion option. the cervus dealership differenceDerivative Financial Instruments The fair value of foreign currency derivative financial instruments is calculated based on market comparison technique. The fair value is based on similar contracts in an active market and based on quotes using the prevailing foreign exchange translation rate from the Bank of Canada or similar sources. Effective January 1, 2016, the Company will be required to adopt amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible for clarification on acceptable methods of depreciation and amortization. The amendments are to be applied prospectively for the annual period commencing January 1, 2016. The Company does not expected the amendments to have a material impact on the Company’s financial statements. 6 1   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Taxation Matters Income tax provisions, including current and future income tax assets and liabilities, require estimates and interpretations of federal and provincial income tax rules and regulations, and judgments as to their interpretation and application to our specific situation. Estimates are also made as to the availability of future taxable profit against which carryforward tax losses can be used. Although there are tax matters that have not yet been confirmed by taxation authorities, we believe that the provision for the Company’s income taxes is adequate (see “Business Risks and Uncertainties - Other Risks”). Lease Arrangements In determining classification of leases as an operating or finance lease, the Company applies judgement to determine whether substantially all of the significant risks and rewards of ownership are transferred to the customer or remain with the Company; or where the Company is the lessee, whether substantially all the significant risks and rewards of ownership are transferred to the Company or remain with the lessor. These judgements can be significant as to how the Company classifies amounts related to the arrangements as rental equipment, net investment in finance lease, or lease obligation of these arrangements. Net Realizable Value of Inventories Inventories are recorded at the lower of cost and net realizable value. The most significant area of accounting estimate involves our evaluation of used equipment inventory net realizable value. We perform ongoing quarterly reviews of our used equipment inventories based upon local market conditions and the changes in the U.S. currency exchange rates to determine whether any adjustments are required to our carrying cost of inventory balances to ensure they are properly stated. Asset Impairment We assess the carrying value of long-lived assets, which include property, plant, and equipment and intangible assets, for indications of impairment when events or circumstances indicate that the carrying amounts may not be recoverable from estimated cash flows. Estimating future cash flows requires assumptions about future business conditions and technological developments. Significant, unanticipated changes to these assumptions could require a provision for impairment in the future. Goodwill is assessed for impairment at least annually. This assessment includes a comparison of the carrying value of the Cash Generating Unit (“CGU”) to its estimated recoverable amount to ensure that the recoverable amount is greater than the carrying value. The recoverable amount of an asset or cash- generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. These valuation methods employ a variety of assumptions, including future revenue growth, expected profit, and profit multiples. Estimating the recoverable amount of a CGU is a subjective process and requires the use of our best estimates. If our estimates or assumptions change from those used in our current valuation, we may be required to recognize an impairment loss in future periods. Future Accounting Standards Effective January 1, 2017, the Company will be required to adopt IFRS 15 related to revenue from contracts with customers. Revenue from Contracts with Customers, was issued in May 2014 and replaces IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programs, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue - Barter Transactions Involving Advertising Services. The new standard requires revenue to be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration expected to be received in exchange for those goods or services. The principles are to be applied in the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The extent of the impact of adoption has not yet been determined. The impact on the financial statements has yet to be determined. The IASB has released updates to IFRS 9, related to the accounting and presentation of financial instruments and applies a principal-based approach to the classification and measurement of financial assets and financial liabilities, including an expected credit loss model for calculating impairment, and includes new requirements for hedge accounting. The mandatory effective date is January 1, 2018; however, early adoption is permitted. The Company does not intend to adopt IFRS 9 (2009), IFRS 9 (2010), or IFRS 9 (2013) in its financial statements in this annual period beginning on January 1, 2015. The impact on the financial statements has yet to be determined. Responsibility of Management and Board Disclosure Controls The CEO and the CFO are also responsible for establishing and maintaining adequate disclosure controls and procedures (“DC&P”). Disclosure controls and procedures are controls and other procedures designed to provide reasonable assurance that information required to be disclosed in documents filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation and includes controls and procedures designed to ensure that information required to be disclosed in documents filed or submitted under securities legislation is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. The CEO and the CFO evaluated, or caused to be evaluated under their supervision, the effectiveness of our disclosure controls and procedures and based on this evaluation, the CEO and the CFO concluded that, as of December 31, 2014, Cervus’ disclosure controls and procedures are effective. Internal Controls Over Financial Reporting The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) of Cervus are responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”). Internal control over financial reporting is a process designed by, or under the supervision of, the CEO and the CFO and effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The CEO and the CFO evaluated, or caused to be evaluated under their supervision, the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2014, based on the criteria set forth in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), (2013). Based on this assessment, the CEO and the CFO concluded that, as of December 31, 2014, Cervus’ internal control over financial reporting are effective. Effective January 1, 2014, the Company adopted amendments to IFRS 10, IFRS 12 and IAS 27, related to the consolidation and presentation of investment entities. The adoption of these amendments had no significant change to our existing accounting policies and had no impact on the amounts recorded in the financial statements. It should be noted a control system, including the Company’s DC&P and ICFR, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objective of the control system will be met, and it should not be expected that DC&P and ICFR will prevent all errors or fraud. Effective January 1, 2014, the Company adopted amendments to IAS 32, primarily related to the accounting and presentation of offsetting financial assets and liabilities. The adoption of these amendments had no significant change to our existing accounting policies and had no impact on the amounts recorded in the financial statements. New Standards Not Yet Adopted Certain new or amended standards or interpretations have been issued by the IASB or IFRIC that are required to be adopted in the current or future periods. New and amended standards effective for annual periods beginning on or after January 1, 2015 that have not been applied in preparing these consolidated financial statements are set out below: Effective January 1, 2014, the Company was required to adopt IFRIC 21 Levies which provides guidance on when to recognize a financial liability imposed by a government, if the levy is accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, or where the timing and amount of the levy is certain. The amendment did not have a material impact on the Company’s financial statements. Exclusion of Acquired Entities: Internal Controls Over Financial Reporting and Disclosure Controls Section 3.3(1)(b) of NI 52-109 allows an issuer to limit the scope of its design of DC&P and ICFR to exclude controls, policies and procedures of a business that the issuer acquired not more than 365 days before the end of the financial period that the issuer is reporting on. Accordingly, Management has limited the scope of the design of DC&P and ICFR to exclude controls, policies and procedures of the POI business that was acquired on August 11, 2014, the Evergreen business that was acquired on October 16, 2014 and the Deer Country business that was acquired on December 10, 2014. the cervus dealership differenceFinancial information of the businesses acquired and excluded from DC&P and ICFR from the date of acquisition to December 31, 2014, (excluding allocation of shared resource expenditures) is summarized below: EBITDA Margin 6 3   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 ($ thousands) Selected balance sheet information Current assets Long term assets Current liabilities Long term liabilities ($ thousands) Selected balance sheet information Revenue Costs of sales Profit (loss) POI 66,994 28,373 77,531 18,334 POI 74,490 (63,483) (498) Evergreen Deer Country 21,575 2,032 2,446 410 9,639 827 6,190 - Evergreen Deer Country 12,508 (10,093) 913 69 (31) (20) Total 98,208 31,232 86,167 18,744 Total 87,067 (73,607) 395 EBITDA margin is calculated as EBITDA divided by gross revenue. Same Store Same store illustrates the current period results for stores that were included in the comparable period for the prior year. Excluded from same store are the incremental results for newly acquired stores for the period they were not owned in the prior year, including any current year acquisition related costs and amortization of intangibles. Price Earnings Ratio Price earnings ratio is calculated by dividing the Company’s market capitalization by its total annual profit. Working Capital Working capital is calculated as current assets less current liabilities. Working capital ratio is calculated as current assets divided by current liabilities. Non-IFRS Financial Measures Market Capitalization Market capitalization is calculated as current common shares outstanding at a particular time multiplied by the market value of those respective shares at that time. Net Book Value Per Share - Diluted Net book value per share - diluted is calculated as shareholders’ equity divided by the weighted average number of shares outstanding on a diluted basis. This MD&A contains certain financial measures that do not have any standardized meaning prescribed by IFRS. Therefore, these financial measures may not be comparable to similar measures presented by other issuers. Investors are cautioned that these measures should not be construed as an alternative to profit or to cash flow from operating, investing, and financing activities determined in accordance with IFRS as indicators of our performance. These measures are provided to assist investors in determining our ability to generate profit and cash flow from operations and to provide additional information on how these cash resources are used. These financial measures are identified and defined below: EBITDA Throughout the MD&A, reference is made to EBITDA, which Cervus’ management defines as earnings before interest, income taxes and depreciation and amortization. Management believes that EBITDA is a key performance measure in evaluating the Company’s operations and is important in enhancing investors’ understanding of the Company’s operating performance. As EBITDA does not have a standardized meaning prescribed by IFRS, it may not be comparable to similar measures presented by other companies. As a result, we have reconciled profit as determined in accordance with IFRS, to EBITDA, as follows: ($ thousands) EBITDA - Year ended December 31, 2014 Net profit Add: Interest Income taxes Depreciation and Amortization EBITDA ($ thousands) EBITDA - Year ended December 31, 2013 Net profit Add: Interest Income taxes Depreciation and Amortization EBITDA Total 18,362 8,352 7,654 16,443 50,811 Total 23,090 7,089 8,396 13,308 51,883 Agricultural Transportation Commercial & Industrial 16,061 4,980 6,703 6,351 34,095 (876) 1,927 (362) 3,885 4,574 3,177 1,445 1,313 6,207 12,142 Agricultural Transportation Commercial & Industrial 17,834 4,536 6,505 4,987 33,862 1,450 1,202 521 2,284 5,457 3,806 1,351 1,370 6,037 12,564 EBITDA is defined as profit before interest, taxes, depreciation, and amortization. We believe, in addition to profit, EBITDA is a useful supplemental profit measure as it provides an indication of the financial results generated by our principal business activities prior to consideration of how these activities are financed or how the results are taxed in various jurisdictions and before non-cash amortization expense. the cervus dealership difference6 5   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Consolidated Statements of Financial Position As at December 31, 2014 and 2013 ( $ thousands) Assets Current assets Cash and cash equivalents Trade and other accounts receivable Inventories Current portion finance lease receivables Derivative financial asset Assets held for sale Total current assets Non-current assets Long-term receivables Long-term finance lease receivables Investments in associates, at equity Deposits with manufacturers Property and equipment Deferred tax asset Intangible assets Goodwill Total non-current assets Total assets Liabilities Current liabilities Trade and other accrued liabilities Customer deposits Floor plan payables Dividends payable Current portion of term debt Derivative financial liability Current portion of finance lease obligation Total current liabilities Note 2014 2013 6 7 8 9 18 9 10 11 12 13 14 15 16 17 17 18 9 $ 18,787 58,462 324,625 1,600 6,559 181 410,214 1,702 1,433 5,268 3,479 148,948 24,518 54,009 19,732 259,089 $ 14,678 45,584 178,511 - - 3,681 242,454 2,103 - 7,786 1,977 101,896 37,009 26,139 6,866 183,776 $ 669,303 $ 426,230 $ 81,237 8,594 175,035 3,233 9,974 6,590 6,175 $ 48,821 4,081 67,198 3,002 6,168 - - $ 290,838 $ 129,270 Consolidated Financial Statements of Cervus Equipment Corporation For the years ended December 31, 2014 and 2013 Independent Auditors’ Report To the Shareholders of Cervus Equipment Corporation We have audited the accompanying consolidated financial statements of Cervus Equipment Corporation, which comprise the consolidated statements of financial position as at December 31, 2014 and December 31, 2013, the consolidated statements of comprehensive income, changes in equity and cash flows for the years then ended, and notes, comprising 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. Auditors’ 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 our 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, we consider 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 consolidated financial position of Cervus Equipment Corporation as at December 31, 2014 and December 31, 2013, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Accountants March 10, 2015 Calgary, Canada the cervus dealership differenceConsolidated Statements of Financial Position (continued) As at December 31, 2014 and 2013 Consolidated Statements of Comprehensive Income For the year ended December 31, 2014 and 2013 6 7   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 ($ thousands) Non-current liabilities Term debt Finance lease obligation Notes payable Debenture payable Deferred income tax liability Total non-current liabilities Total liabilities Equity Shareholders’ capital Deferred share plan Other reserves Accumulated other comprehensive income Retained earnings Total equity attributable to equity holders of the Company Non-controlling interest Total equity Total liabilities and equity The accompanying notes are an integral part of these consolidated financial statements. Note 2014 2013 17 9 17 13 19 20 19 $ 96,843 18,334 533 32,065 1,199 148,974 $ 46,002 - - 31,265 1,273 78,540 $ 439,812 $ 207,810 83,814 7,559 6,433 192 130,036 228,034 1,457 229,491 78,126 6,426 5,176 139 124,982 214,849 3,571 218,420 $ 669,303 $ 426,230 Approved by the Board: “Peter Lacey” Director “Angela Lekatsas” Director ($ thousands) Revenue Equipment sales Parts Service Rentals Total revenue Cost of sales Gross profit Other income Selling, general and administrative expense Income from operating activities Finance income Finance costs Net finance costs Share of profit of equity accounted investees, net of income tax Profit before income tax expense Income tax expense Profit for the year Other comprehensive income Foreign currency translation differences for foreign operations (net of tax) Total comprehensive income for the year Profit attributable to: Shareholders of the Company Non-controlling interest Profit for the year Total comprehensive income attributable to: Shareholders of the Company Non-controlling interest Total comprehensive income for the year Net income per share attributable to shareholders of the Company: Basic Diluted The accompanying notes are an integral part of these consolidated financial statements. Note 2014 2013 $ 741,072 $ 673,123 150,682 69,535 18,320 979,609 (792,936) 186,673 3,715 (157,678) 32,710 384 (7,656) (7,272) 712 26,150 (7,654) 18,496 53 18,549 18,362 134 18,496 18,415 134 18,549 1.21 1.15 $ $ $ $ $ $ $ 117,261 55,911 14,843 861,138 (697,829) 163,309 3,885 (132,796) 34,398 532 (6,735) (6,203) 3,527 31,722 (8,396) 23,326 (82) 23,244 23,090 236 23,326 23,008 236 23,244 1.54 1.48 $ $ $ $ $ $ $ 21, 23 22 23 24 10 13 25 25 the cervus dealership difference4 4 6 , 0 0 2 $ - $ 4 4 6 , 0 0 2 $ 1 5 6 , 3 1 1 $ 1 2 2 $ 6 3 1 , 5 $ 3 3 1 , 5 $ 3 0 5 , 6 7 $ l a t o T y t i u q E - n o N t s e r e t n I g n i l l o r t n o C l a t o T d e n i a t e R s g n i n r a E t n u o c c A e v i t a l u m u C n o i t a l s n a r T r e h t O s e v r e s e R d e r r e f e D n a l P e r a h S e r a h S l a t i p a C e t o N 6 2 3 , 3 2 ) 2 8 ( 4 4 2 , 3 2 ) 9 5 7 , 1 1 ( ) 0 7 ( 7 9 0 , 1 - 3 4 2 6 1 6 , 1 5 0 4 , 3 ) 3 7 8 , 8 ( 0 2 4 , 8 1 2 $ 6 9 4 , 8 1 3 5 9 4 5 , 8 1 ) 3 8 5 , 2 1 ( ) 4 4 ( 0 3 5 , 1 0 4 0 , 1 - 2 5 0 5 7 , 1 0 9 6 , 2 6 1 0 , 1 ) 8 2 3 , 4 ( ) 7 7 8 , 8 ( 9 9 3 , 1 1 9 4 , 9 2 2 $ 6 3 2 - 6 3 2 - ) 0 7 ( - - - - ) 0 7 ( 5 0 4 , 3 1 7 5 , 3 4 3 1 - 4 3 1 - ) 4 4 ( - - - - - - - ) 3 0 6 , 3 ( ) 7 4 6 , 3 ( 9 9 3 , 1 7 5 4 , 1 0 9 0 , 3 2 0 9 0 , 3 2 - ) 2 8 ( 8 0 0 , 3 2 - 0 9 0 , 3 2 ) 2 8 ( ) 2 8 ( ) 9 5 7 , 1 1 ( ) 9 5 7 , 1 1 ( - 7 9 0 , 1 - 3 4 2 6 1 6 , 1 - - - - - - - ) 3 0 8 , 8 ( ) 9 5 7 , 1 1 ( - - - - - - - - - - - - - - - 3 4 1 0 4 - ) 3 0 1 ( - - - - - - ) 0 8 1 ( - 3 7 4 , 1 3 9 2 , 1 - - - - - - 7 9 0 , 1 0 8 1 6 4 3 - - 3 2 6 , 1 $ 9 4 8 , 4 1 2 $ 2 8 9 , 4 2 1 $ 9 3 1 $ 6 7 1 , 5 $ 6 2 4 , 6 $ 6 2 1 , 8 7 $ 2 6 3 , 8 1 2 6 3 , 8 1 3 5 5 1 4 , 8 1 - 2 6 3 , 8 1 ) 3 8 5 , 2 1 ( ) 3 8 5 , 2 1 ( - 0 3 5 , 1 0 4 0 , 1 - 2 5 0 5 7 , 1 0 9 6 , 2 6 1 0 , 1 ) 5 2 7 ( - ) 0 3 2 , 5 ( - - - - - - - - - ) 5 2 7 ( ) 8 0 3 , 3 1 ( - 3 5 3 5 - - - - - - - - - - - - - - - - - - - - ) 7 1 ( 8 5 2 - 6 1 0 , 1 - 7 5 2 , 1 - - - - - - - - ) 9 5 3 ( - 2 9 4 , 1 - - - - 3 3 1 , 1 - - - - - 0 3 5 , 1 0 4 0 , 1 9 5 3 - 9 6 0 9 6 , 2 - - - 8 8 6 , 5 9 1 9 1 9 1 9 1 9 1 5 5 5 $ 4 3 0 , 8 2 2 $ 6 3 0 , 0 3 1 $ 2 9 1 $ 3 3 4 , 6 $ 9 5 5 , 7 $ 4 1 8 , 3 8 $ y t i u q e n i y l t c e r i d d e d r o c e r , s r e n w o h t i w s n o i t c a s n a r T s t s e r e t n i g n i l l o r t n o c - n o n o t s n o i t u b i r t s i D P I R D h g u o r h t d e u s s i s e r a h S l n a p e r a h s d e r r e f e d h g u o r h t d e u s s i s e r a h S s r e d l o h y t i u q e o t s d n e d i i v D l n a p n o i t p o h g u o r h t d e u s s i s e r a h S s n o i t c a s n a r t t n e m y a p d e s a b - e r a h S s r e n w o h t i w s n o i t c a s n a r T n o i t i s i u q c a n o d e fi i t n e d i t s e r e t n i g n i l l o r t n o c - n o N r a e y e h t r o f e m o c n i e v i s n e h e r p m o C 3 1 0 2 , 1 3 r e b m e c e D e c n a l a B t fi o r P s t n e m j t s u d a n o i t a l s n a r t y c n e r r u c n g i e r o F r a e y e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T e m o c n i e v i s n e h e r p m o c r e h t O y t i u q e n i y l t c e r i d d e d r o c e r , s r e n w o h t i w s n o i t c a s n a r T s t n e m j t s u d a n o i t a l s n a r t y c n e r r u c n g i e r o F r a e y e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T e m o c n i e v i s n e h e r p m o c r e h t O r a e y e h t r o f e m o c n i e v i s n e h e r p m o C t fi o r P 3 1 0 2 , 1 y r a u n a J e c n a l a B ) s d n a s u o h t $ ( s t s e r e t n i g n i l l o r t n o c - n o n o t s n o i t u b i r t s i D s r e d l o h y t i u q e o t s d n e d i i v D s e r a h s n o m m o c f o e c n a u s s I P I R D h g u o r h t d e u s s i s e r a h S l n a p e r a h s d e r r e f e d h g u o r h t d e u s s i s e r a h S s n o i t i s i u q c a s s e n i s u b r o f d e u s s i s e r a h S l n a p n o i t p o h g u o r h t d e u s s i s e r a h S s n o i t c a s n a r t t n e m y a p d e s a b - e r a h S e v r e s e r n i d e u s s i s e r a h S . s t n e m e t a t s l a i c n a n fi d e t a d i l o s n o c e s e h t f o t r a p l a r g e t n i n a e r a s e t o n g n i y n a p m o c c a e h T l o r t n o c n i e g n a h c a t u o h t i w s t s e r e t n i g n i l l o r t n o c - n o n f o n o i t i s i u q c A n o i t i s i u q c a n o d e fi i t n e d i t s e r e t n i g n i l l o r t n o c - n o N 4 1 0 2 , 1 3 r e b m e c e D e c n a l a B s r e n w o h t i w s n o i t c a s n a r T y t i u q E n i s e g n a h C f o s t n e m e t a t S d e t a d i l o s n o C 3 1 0 2 d n a 4 1 0 2 , 1 3 r e b m e c e D d e d n e r a e y e h t r o F y n a p m o C e h t f o s r e d l o h y t i u q e o t e l b a t u b i r t t A 6 9   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Consolidated Statements of Cash Flows For the years ended December 31, 2014 and 2013 ($ thousands) Cash flows from operating activities Profit for the year Depreciation Amortization of intangibles Equity-settled share-based payment transactions Net finance costs Unrealized foreign exchange loss Gain on sale of property and equipment Impairment loss on long term receivables Share of profit of equity accounted investees, net of tax Loss on revaluation of equity investment Income tax expense Proceeds from investments, at equity, net of purchases Change in non-cash working capital Cash taxes paid Interest paid Net cash from operating activities Cash flows from investing activities Interest received Business acquisitions (net of cash acquired) Payments for intangible assets Purchase of property and equipment Proceeds from disposal of property and equipment Proceeds from asset held for sale Net cash used in investing activities Cash flows from financing activities Net proceeds from term debt Proceeds from issue of share capital Proceeds from exercise of share options Acquisition of non-controlling interests Cash dividends paid Payment of finance lease liabilities Increase in deposits with John Deere Increase in notes payable Net cash used in financing activities Net increase in cash and cash equivalents Effect of foreign currency translation on cash Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year The accompanying notes are an integral part of these consolidated financial statements. Note $ 12 14 20 24 22 10 13 10 24 5 14 12 19 19 6 $ 2014 18,496 10,610 5,833 1,526 7,968 952 (1,337) 472 (712) - 7,654 2,063 23,202 76,727 (88) (7,545) 69,094 384 (84,379) (882) (24,777) 4,688 3,775 (101,191) 50,910 1,530 52 (3,354) (11,358) (1,363) (639) 282 36,060 3,963 146 14,678 18,787 2013 $ 23,326 8,483 4,825 1,428 6,556 - (2,073) - (3,527) 598 8,396 2,187 (13,477) 36,722 (122) (6,120) 30,480 532 (1,352) - (27,919) 5,400 4,931 (18,408) 6,904 - 243 - (10,561) - 148 (2,838) (6,104) 5,968 554 8,156 14,678 $ the cervus dealership difference Consolidated Financial Statements For the years ended December 31, 2014 and 2013 1. Reporting Entity Cervus Equipment Corporation (“Cervus” or the “Company”) is an incorporated entity under the Canada Business Corporations Act and is domiciled in Canada. The registered office of the Company is situated at 5201 - 333, 96th Avenue N.E., Calgary, Alberta, Canada, T3K 0S3. The consolidated financial statements of the Company as at and for the year ended December 31, 2014 comprise of the Company and its subsidiaries (“the Group”). The Company is primarily involved in the sale, after-sale service and maintenance of agricultural, transportation, construction, and industrial equipment. The Company also provides equipment rental, primarily in the construction and industrial equipment segment. The Company wholly owns and operates 68 John Deere agricultural equipment, Bobcat and JCB construction equipment and Clark, Sellick, Doosan material handling equipment and Peterbilt truck dealerships in 40 locations in Western Canada, 13 locations in Ontario, 9 locations on the north island of New Zealand and 6 locations in Victoria, Australia. The Company also holds a 21.4% investment in seven John Deere agricultural equipment dealerships operating in Western Canada. The Company’s shares are listed on the Toronto Stock Exchange (“TSX”) and trade under the symbol “CVL”. 2. Basis of Preparation Statement of Compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as issued by the International Accounting Standards Board (“IASB”). The Board of Directors authorized the issue of these consolidated financial statements on March 10, 2015. Basis of Measurement The consolidated financial statements have been prepared under a going concern assumption on a historical cost basis, with the exception of items that IFRS requires to be measured at fair value. Functional Currency These consolidated financial statements are presented in Canadian dollars which is the Company’s functional currency. All financial information has been rounded to the nearest thousand except for per share amounts. Basis of Consolidation These consolidated financial statements include the accounts of the parent company Cervus Equipment Corporation and its wholly-owned subsidiaries. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate. Non-controlling interests in subsidiaries are identified separately from the Company’s equity therein. The interests of non-controlling shareholders may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquirees’ identifiable net assets. The choice of measurement basis is made on an acquisition-by-acquisition basis. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non- controlling interests’ share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance. 7 1   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Details of the Company’s subsidiaries at December 31, 2014 and December 31, 2013 are as follows: Proportion of ownership interest and voting power held Cervus AG Equipment LP Cervus AG Equipment Ltd Cervus Collision Center LP Cervus Contractors Equipment LP Cervus Contractors Equipment Ltd Cervus Equipment NZ Ltd. Cervus Rental & Leasing NZ Ltd., a wholly-owned subsidiary of Cervus NZ Equipment Ltd. DeerStar Systems Inc. (Note 5 & 10) 101169185 Saskatchewan Ltd 520781 Alberta Ltd Cervus Equipment Holdings Australia Pty Ltd. PPJ Investments Pty, a wholly owned subsidiary of Cervus Equipment Australia Pty Ltd. Cervus Equipment Australia Pty Ltd., a wholly-owned subsidiary of Cervus Equipment Holdings Australia Pty Ltd. 2014 100% 100% 100% 100% 100% 100% 100% 57.4% 100% 100% 100% 100% 100% 2013 100% 100% 100% 100% 100% 100% 100% 35.7% 100% 100% 100% 45% 53% Use of Judgements and Estimates In preparing these consolidated financial statements, management has made judgements, estimates and assumptions that affect the application of the Company’s accounting policies and the reported amounts of assets, liabilities, revenues and expenses. By their very nature, estimates may differ from actual future results and the impact of such changes could be material. Estimates and underlying assumptions are reviewed on an ongoing basis, with revisions to accounting estimates recognized prospectively. judgements Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognized in these consolidated financial statements are included in the following notes: • Determination of fair value of assets acquired and liabilities assumed in business combinations. The Company uses various valuation techniques including income based approaches, which involves estimating the future net cash flows and applying the appropriate discount rate to those future cash flows to determine the fair value of the identifiable intangible assets acquired. (Note 5). • Expectation that the Company will be successful in an appeal of any reassessment by the Canada Revenue Agency related to deductibility of tax losses in past and future periods (Note 29). • Classification of a lease arrangement as an operating or finance lease; judgement is required to determine whether substantially all of the significant risks and rewards of ownership are transferred to the customer or remain with the Company; or where the Company is the lessee, whether substantially all the significant risks and rewards of ownership are transferred to the Company or remain with the lessor. (Note 9 & 26) • Impairment tests; judgement is used in identifying the cash generating unit or group of cash generating units at which goodwill, intangible assets, and property and equipment are monitored for internal management purposes and identifying an appropriate discount rate for these calculations. assumptions and estimation uncertainties Information about assumptions and estimation uncertainties which could have a significant effect on the carrying amounts of assets and liabilities within the next fiscal year are included in the following notes: • Recoverability of inventories and key assumptions in the net realizable value of inventory (Note 8) • Impairment tests (including intangible assets and goodwill); estimates on key assumptions related to the future operating results and cash generating ability of the assets. (Notes 14 & 15); • Recognition of deferred tax assets: availability of future taxable profit against which carryforward tax losses can be used (Note 13) Determination of Fair Values A number of the groups accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. the cervus dealership differenceproperty, plant and equipment The fair value of property, plant and equipment recognised as a result of a business combination is the estimated amount for which a property could be exchanged on the date of acquisition between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably. The fair value of items of plant, equipment, fixtures and fittings is based on the market approach and cost approaches using quoted market prices for similar items when available and depreciated replacement cost when appropriate. Depreciated replacement cost reflects adjustments for physical deterioration as well as functional and economic obsolescence. intangible assets The fair value of dealership distribution agreements and trade names acquired in a business combination is based on the incremental discounted estimated cash flows enjoyed post acquisition, or expenditures avoided, as a result of owning the intangible assets. The fair value of customer lists acquired in a business combination is determined using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows. The fair value of other intangible assets including non-competition agreements is based on the discounted cash flows expected to be derived from the use and any residual value of the assets. inventories The fair value of inventories acquired in a business combination is determined based on the estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories. trade and other receivables The fair value of trade and other receivables is estimated at the present value of the future cash flows, discounted at the market rate of interest at the reporting date. The fair value is determined for disclosure purposes or when such assets are acquired in a business combination. other non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. In respect of the liability component of convertible debentures, the market rate of interest is determined by reference to similar liabilities that do not have a conversion option. derivative financial instruments The fair value of foreign currency derivative financial instruments is calculated based on market comparison technique. The fair value is based on similar contracts in an active market and based on quotes using the prevailing foreign exchange translation rate from the Bank of Canada or similar sources. 3. Significant Accounting Policies The accounting policies set out below have been applied consistently by all the Group’s entities and to all years presented in these consolidated financial statements, except for as described in Note 4. Business Segments The Company has historically operated two distinct business segments, an Agricultural equipment segment and a Commercial and Industrial equipment segment. In 2014, the Company has realigned its operating segments as a result of changes to the organization and governance structure driven by the acquisition of 13 Peterbilt dealerships located in Ontario. During the fourth quarter of 2014, the Company realigned the operating segments to be the following: agricultural, transportation, and commercial and industrial segments comprised of branches based on the industry which they serve. Such realignment gave rise to changes in how management presents and reviews information for financial reporting and management decision making purposes. These segments are managed separately and strategic decisions are made on the basis of their respective operating results. All prior period disclosure has been updated to reflect changes in operating segments, and certain amounts have been reclassified to conform to the current year presentation. The Agricultural equipment segment consists primarily of John Deere dealership locations in Alberta, Saskatchewan, British Columbia, New Zealand, and Australia. The Transportation equipment segment consists primarily of Peterbilt dealership locations in Saskatchewan and Ontario. The Commercial and Industrial equipment segment consists primarily of Bobcat, JCB, Clark, Sellick, and Doosan, dealership locations in Alberta, Saskatchewan, and Manitoba. Each of these business segment operations are supported by a corporate head office. Certain corporate head office expenses are allocated to the business segments according to both specific identification and a usage based approach. The corporate head office also incurs certain costs which are not considered directly related to store level operations, such as interest cost on general corporate borrowings, corporate personnel costs, and public company costs. These corporate costs are allocated to the segments based on respective gross profit dollars of the Canadian operations. Business Combinations Acquisitions of subsidiaries are accounted for using the acquisition method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities and contingent liabilities incurred or assumed, and equity instruments issued by the Company in exchange for control of the acquiree. Transaction costs are expensed as incurred. The fair value of identifiable assets acquired, if any, are determined using various valuation techniques including income based approaches. The valuation technique involves estimating the future net cash flows and applying the appropriate discount rate to those future cash flows to determine the fair value of the identifiable intangible assets acquired. Goodwill arising on acquisition is recognized as an asset and initially measured at cost, being the excess of the cost of the business combination over the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized. Where a business combination is achieved in stages, previously held interests in the acquired entity are remeasured to fair value immediately prior to the date of acquisition. If any resulting gain or loss should arise from the remeasurement, it is recognized in net income during the period. 7 3   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 The Company’s preliminary estimates of expected future cash flows are based on significant management judgments and as in a business combination, it generally takes time to obtain the information necessary to measure the fair values of assets acquired and liabilities assumed and the resulting goodwill, if any. Changes to the provisional measurements of assets and liabilities acquired and resulting goodwill may be retrospectively adjusted when new information is obtained until the final measurements are determined. Foreign Currency Translation subsidiaries and associates The individual financial statements of each company are stated in the currency of the primary economic environment in which it operates (its functional currency). Transactions in currencies other than companies’ functional currency are recorded at the rate of exchange at the date of the transaction. At the balance sheet date, monetary assets and liabilities denominated in a currency other than subsidiaries’ functional currency, are translated into the subsidiaries’ functional currency at the rates of exchange prevailing at that date. Any resulting gains and losses are included in net profit or loss for the year. foreign currency on consolidation For the purpose of presenting consolidated financial statements, the results of entities and equity components denominated in currencies other than Canadian dollars are translated at the rate of exchange at the date of the transactions and their assets and liabilities at the rates ruling at the balance sheet date. Exchange differences arising on retranslation at the closing rate of the opening net assets and results of entities denominated in currencies other than Canadian dollars are recognized in other comprehensive income in the cumulative translation account. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, balances with banks, and short-term deposits with original maturities of three months or less. Inventories Inventories are stated at the lower of cost and net realizable value. Cost is determined using the specific identification method for new and used equipment, average cost for parts and a specific job basis for work-in-progress. Net realizable value approximates the estimated selling price less all estimated cost of completion and necessary cost to complete the sale. Previous write-downs of inventory are reversed when economic changes support an increased value. The amount of the write-down is reversed, and the reversal is limited to the amount of the original write-down, so that the new carrying amount is the lower of the cost and the revised net realisable value. Property and Equipment Buildings, equipment, automotive and trucks, furniture and fixtures, computers, and parts and shop equipment are recorded at cost, less any accumulated depreciation and accumulated impairment losses. Land is measured at cost less any accumulated impairment. Properties under construction are measured at cost less any accumulated impairment. Depreciation is provided for using both the declining balance and straight-line methods at annual rates intended to depreciate the cost of each significant component of an asset, less its residual values over its estimated useful lives. The estimated useful lives, residual values and depreciation method are reviewed at each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss. Assets under finance leases are depreciated on the same basis as owned assets, or where shorter, the term of the lease. The following methods and rates are used in the calculation of depreciation: Assets Buildings Leasehold improvements Short-term rental equipment Automotive and trucks and computers Furniture and fixtures, parts and shop equipment Intangible Assets Method Straight-line Straight-line Straight-line Declining balance Declining balance Estimated useful life 15 to 40 years Over period of lease 5 to 10 years 30% 20% intangible assets Intangible assets includes software development, dealership distribution agreements, trade names, customer lists and non-competition agreements and are recorded at cost less accumulated amortisation and any accumulated impairment losses. Dealership distribution agreements and non-competition agreements are amortized on a straight-line basis over the expected term of the agreements. Customer lists and computer software are amortized on a straight-line basis over the estimated useful lives of the lists and software. Software costs under development are measured at cost less any accumulated impairment. the cervus dealership differenceThe estimated useful life and amortization method are reviewed at the end of each period, with the effect of any changes in estimate being accounted for on a prospective basis. At each year end, the Company reviews the carrying amounts of the intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exits, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). The following are the typical useful lives that are used in the calculation of amortization for each intangible asset. Dealership distribution agreements Customer lists and non-competition agreements Software 20 years 5 years 5 years goodwill Goodwill is the excess of the cost of a business combination over the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized. Goodwill is measured at cost less accumulated impairment. Investments in Associates An associate is an entity over which the Company has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated statements of financial position at cost as adjusted for post-acquisition changes in the Company’s share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Company’s interest in that associate (which includes any long-term interests that, in substance, form part of the Company’s net investment in the associate) are recognized only to the extent that the Company has incurred legal or constructive obligations or made payments on behalf of the associate. Any excess of the cost of acquisition over the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognized at the date of acquisition is recognized as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of that investment. Any excess of the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognized immediately in profit or loss. When the Company transacts with an associate of the Company, profit and losses are eliminated to the extent of the Company’s interest on the relevant associate. Assets Held for Sale Non-current assets are classified as held for sale when it is highly probable that an asset in its present condition will be recovered principally through sale instead of its continued use. Assets held for sale are measured at the lower of the carrying amount and fair value less costs to sell. Lease Arrangements At the inception of an arrangement, the Company considers whether the arrangement, is or contains, a lease. The Company must determine whether the fulfillment of the arrangement is dependent on the use of a specific asset and if the arrangement conveys the right to use the asset. Where it is determined that the arrangement contains a lease, the Company classifies the lease as either an operating or finance lease dependent on whether substantially or all of the risks or rewards of ownership of the asset have been transferred. a) the company as the lessee Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. At the inception of a finance lease, the asset and finance lease liability is recorded at the lower of its fair value and the present value of minimum lease payments. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense 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) the company as the lessor An operating lease effectively establishes that the lessor shall retain the rewards and associated risks of ownership of that asset for a period of time or use. Where the Company’s equipment rentals and leases to customers are classified as operating leases, the payments received are included in revenue on a straight-line basis over the term of the lease. Finance income related to lease arrangements accounted for as finance leases are recognized using an approach for a constant rate of return on the net investment in the lease. The net investment in the finance lease is the aggregate of net minimum lease payments and unearned finance income discounted at the interest rate implicit in the lease. Unearned finance income is deferred and recognized in net income over the lease term. 7 5   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Impairment financial assets (including receivables) A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Company on terms that the Company would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, or the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. The Company considers evidence of impairment for receivables and held-to-maturity investment securities at both a specific asset and collective level. All individually significant receivables and held-to-maturity investment securities found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables and held-to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together receivables and held-to-maturity investment securities with similar risk characteristics. In assessing collective impairment the Company uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognized through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. non-financial assets The amounts for property and equipment and intangible assets with finite useful lives are reviewed at each reporting period to identify if there are indicators of impairment. The carrying values of intangible assets and goodwill with indefinite lives are periodically tested for impairment, and must be tested annually, at a minimum. We have selected December as our annual test date, although impairment tests are conducted more frequently if indicators of impairment are present at dates other than December. When it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash generating unit (CGU) to which the asset belongs. The CGU corresponds to the smallest identifiable group of assets whose continuing use generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The Company has determined that its CGUs comprise stores or groups of stores which provide the same or similar product within a geographic market. goodwill and intangible assets Goodwill acquired in a business combination is allocated to groups of CGUs according to the level at which management monitors that goodwill. Intangible assets with indefinite useful lives and assets held at the parent level are allocated to the CGU to which they relate. Any impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other assets of the CGU pro-rata based on the carrying amount of each asset in the CGU. An impairment loss is recognized when the carrying amount of an asset, or of the CGU to which it belongs, exceeds the recoverable amount. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units in the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro-rata basis. reversals of previously recognized impairments An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Income Tax Income tax expense represents the sum of the tax currently payable and deferred tax. Current income taxes are recorded based on the estimated income taxes payable on taxable income for the year and any adjustment to tax payable in respect of previous years. The Company’s liability for current tax is calculated using tax rates that have been substantively enacted by the end of the reporting period. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognized if it is more likely than not to be realized. The effect of a change in tax rates on future income tax assets and liabilities is recorded in the period in which the change occurs. the cervus dealership differenceProvisions Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and measured reliably. Financial Instruments A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument to another entity. Financial assets and financial liabilities, including derivatives, are recognized on the consolidated statement of financial position at the time the Company becomes a party to the contractual provisions. Upon initial recognition, financial instruments are measured at fair value and for the purpose of subsequent measurement; they are allocated into one of the following five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale or other financial liabilities. Derivative instruments are categorized as held for trading unless they are designated as hedges. The Company’s financial assets and liabilities consist primarily of cash and cash equivalents, trade and other accounts receivable, trade and other accrued liabilities, dividends payable, floor plan payables, and term debt and notes payable. The designated financial instruments are recognized and measured as follows: • Financial assets at fair value through profit or loss, or held-for-trading instruments, are financial assets and liabilities typically acquired with the intention of generating revenues in the short-term. However, an entity is allowed to designate any financial instrument as held-for-trading on initial recognition even if it would otherwise not satisfy the definition. Financial assets and financial liabilities required to be classified or designated as held for-trading are measured at fair value, with gains and losses recorded in net earnings for the period in which the change occurs. Upon initial recognition, attributable transaction costs are recognized in profit or loss as incurred. • Held-to-maturity financial assets are initially recognized at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortized cost. • Loans and receivables are measured at amortized cost using the effective interest method. Loans and receivables include trade and other accounts receivable, deposits. • Available-for-sale financial assets are non-derivative assets that are designated as available-for sale or that are not classified as loans and receivables, held-to-maturity investments or held for-trading. Available-for-sale financial assets are initially recognized at fair value plus any directly attributable transaction costs, and are carried at fair value with unrealized gains and losses included in other comprehensive income (OCI) until such gains or losses are realized or an other than temporary impairment is determined to have occurred. Available-for-sale assets are measured at fair value, except for assets that do not have a readily determinable fair value which are recorded at cost and assessed for impairment when indicators for impairment exist. • Other financial liabilities are measured at amortized cost using the effective interest method. The Company’s other financial liabilities include trade and other accrued liabilities, dividends payable, floor plan payables, term debt, debenture payable, finance lease obligation and notes payable. Derivative financial instruments are used to manage the Company’s foreign currency exposure, utilizing forward currency contracts to lock the margin on certain customer orders where the customer has agreed to a price in Canadian dollars, and the Company will be invoiced in U.S Dollars. Derivatives are initially recognized at fair value, any directly attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition derivatives are measured at fair value and changes therein are generally recognized in profit or loss. Revenue Recognition Revenue is recognized when it is probable that future economic benefits will flow to the Company, and the amount of revenue can be reliably measured. Revenue is recorded based on the fair value of the consideration received or receivable. Revenue is not recognized before there is persuasive evidence that an arrangement exists, such as, delivery has occurred, the rate is fixed and determinable, and the collection of outstanding amounts is considered probable. The Company considers persuasive evidence to exist when a formal contract or purchase order is signed and required deposits have been received. Sales terms do not include provision for post service obligations. Parts revenue is recognized when the part is delivered to the customer. Service revenue is recognized at the time the service is provided. For long-term service and maintenance contracts, revenue is recognized on a basis proportionate to the work performed. Rentals and operating lease revenue are recorded at the time the service is provided, recognized evenly over the term of the rental or lease agreement with the customer. Finance Income and Finance Costs Finance income comprises interest income on funds invested (including available-for-sale financial assets), gains on the disposal of available-for-sale financial assets and changes in the fair value of financial assets at fair value through profit or loss. Finance costs comprise interest expense on borrowings, changes in the fair value of financial assets at fair value through profit or loss and impairment losses recognized on financial assets. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss as incurred. 7 7   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 Earnings Per Share Basic earnings per share are computed by dividing earnings by the weighted average number of shares outstanding for the period. Diluted earnings per share are calculated giving effect to the potential dilution that would occur if share options or other dilutive instruments were exercised or converted to shares. The treasury stock method is used to determine the dilutive effect of share options, convertible preferred shares and other dilutive instruments. This method assumes that any proceeds upon the exercise or conversion of dilutive instruments, for which market prices exceed exercise price, would be used to purchase shares at the average market price of the shares during the period. Short-Term Employee Benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. Share-Based Payment Transactions The grant date fair value as determined by the black-scholes model for share-based payment awards granted to employees is recognized as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no adjustment for differences between expected and actual outcomes. Amounts for share- based payment transactions are recognized in contributed surplus as they vest, which is captured in other reserves. Also included in other reserves are amounts for expired private placement warrants and conversion feature for convertible debenture. 4. Changes in Accounting Policies Effective January 1, 2014, the Company adopted amendments to IFRS 10, IFRS 12 and IAS 27, related to the consolidation and presentation of investment entities. The adoption of these amendments had no significant change to our existing accounting policies and had no impact on the amounts recorded in the financial statements. Effective January 1, 2014, the Company adopted amendments to IAS 32, primarily related to the accounting and presentation of offsetting financial assets and liabilities. The adoption of these amendments had no significant change to our existing accounting policies and had no impact on the amounts recorded in the financial statements. New Standards Not Yet Adopted Certain new or amended standards or interpretations have been issued by the IASB or IFRIC that are required to be adopted in the current or future periods. The new standards, amendments to existing standards effective for annual periods beginning on or after January 1, 2015 and have not been applied in preparing these consolidated financial statements are set out below. Effective January 1, 2014, the Company was required to adopt IFRIC 21 Levies which provides guidance on when to recognize a financial liability imposed by a government, if the levy is accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, or where the timing and amount of the levy is certain. The amendments did not have a material impact on the Company’s financial statements. Effective January 1, 2016, the Company will be required to adopt amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible for clarification on acceptable methods of depreciation and amortization. The amendments are to be applied prospectively for the annual period commencing January 1, 2016. The Company does not expected the amendments to have a material impact on the Company’s financial statements. Effective January 1, 2017, the Company will be required to adopt IFRS 15 related to revenue from contracts with customers. Revenue from Contracts with Customers, was issued in May 2014 and replaces IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programs, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue - Barter Transactions Involving Advertising Services. The new standard requires revenue to be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration expected to be received in exchange for those goods or services. The principles are to be applied in the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The extent of the impact of adoption has not yet been determined. The impact on the financial statements has yet to be determined. The IASB has released updates to IFRS 9, related to the accounting and presentation of financial instruments and applies a principal-based approach to the classification and measurement of financial assets and financial liabilities, including an expected credit loss model for calculating impairment, and includes new requirements for hedge accounting. The mandatory effective date is January 1, 2018; however, early adoption is permitted. The Company does not intend to adopt IFRS 9 (2009), IFRS 9 (2010), or IFRS 9 (2013) in its financial statements in this annual period beginning on January 1, 2015. The impact on the financial statements has yet to be determined. the cervus dealership difference5. Business Combinations a) Deer-Country Equipment (1996) Ltd. Effective December 10, 2014, the Company acquired certain business assets and assumed certain business liabilities of Deer-Country Equipment (1996) Ltd. (“Deer-Country”) for consideration of $9,711 thousand. The consideration paid on closing was $9,711 thousand, paid in $8,997 thousand of cash drawn from the Company’s existing credit facilities and $714 thousand of the Company’s common shares issued at $18.94 per share. Deer-Country owns and operates two John Deere dealerships located in southern Alberta which sell new and used John Deere agricultural equipment and offer equipment parts and servicing. The addition of two Deer-Country locations represents a strategic opportunity to expand in geography adjacent to existing Cervus locations in Western Canada. The following table summarizes the preliminary purchase price paid for the net assets of Deer-Country: ($ thousands) Recognized amounts of acquired assets and liabilities: Inventory Property and equipment Identifiable intangible assets Goodwill Deposits with manufacturers Accounts payable and accrued liabilities Deferred tax liability Purchase Price Financed by: Cash Common shares issued at $18.94 a share $ $ $ $ 8,037 1,651 3,350 1,081 377 (4,568) (217) 9,711 8,997 714 9,711 Included in these consolidated financial statements are revenues of $69 thousand and a net loss of $20 thousand related to Deer-Country since acquisition, prior to allocation of corporate expenditures and income tax expense. The goodwill relates to intangible assets which do not qualify for separate recognition. The goodwill acquired is not deductible for tax purpose. The Company incurred acquisition-related costs of $72 thousand in the year ended December 31, 2014, which have been recorded as selling, general and administrative expense. Had the Company purchased the additional interest and acquired control of Deer-Country on January 1, 2014, revenue for the year ended December 31, 2014, would have been $17,410 thousand higher and profit before tax for the period would have been $2,859 thousand higher. The Company’s preliminary estimates of expected future cash flows are based on significant management judgements and as in a business combination, it generally takes time to obtain the information necessary to measure the fair values of assets acquired and liabilities assumed and the resulting goodwill, if any. Changes to the provisional measurements of assets and liabilities acquired and resulting goodwill may be retrospectively adjusted when new information is obtained until the final measurements are determined. b) Evergreen Equipment Ltd. Effective October 15, 2014, the Company acquired 100% of the issued and outstanding shares of Evergreen Equipment Ltd. (“Evergreen”) for consideration of $29,400 thousand with additional payments for excess net assets of $13,330 thousand, including the land and building for one of Evergreen’s locations. The consideration paid on closing was $35,706 thousand, paid in $33,730 thousand (net of $1,470 thousand of holdback) of cash drawn from the Company’s existing credit facilities, and $1,976 thousand of the Company’s common shares issued at $17.92 per share. The additional payment for excess net assets on closing was accrued at year end as $6,047 thousand and will be paid via cash drawn from the Company’s current credit facilities. Evergreen operates four dealerships in southern Alberta, which sell and service the full line of John Deere agricultural equipment. The addition of Evergreen will expand the Company’s service area in geography adjacent to existing Cervus locations, and continue the Company’s relationship with John Deere. The following table summarizes the purchase price paid for the net assets of Evergreen: 7 9   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 ($ thousands) Recognized amounts of acquired assets and liabilities: Accounts receivable Inventory Property and equipment Investments in Deer Star Systems Inc (Note 5c) Identifiable intangible assets Goodwill Accounts payable and accrued liabilities Deferred tax liability Purchase Price Financed by: Cash on closing - operations value net of holdback Common shares issued at $17.92 a share - operations value net of holdback Holdback - payable 180 days after closing Price paid for operations Cash on closing - preliminary working capital adjustment Cash due, final working capital payment ($6,047 thousand, net of $493 thousand cash acquired) $ $ $ $ 8,081 15,918 2,912 701 16,620 9,081 (5,849) (4,734) 42,730 25,730 1,976 1,470 29,176 8,000 5,554 42,730 Included in accounts receivable are trade receivables with a fair value of $8,081 thousand, which we believe are collectible. The gross contractual amounts of the trade and other receivables is $8,132 thousand. Included in these consolidated financial statements are revenues of $12,508 thousand and net profit before tax of $913 thousand related to Evergreen since acquisition, prior to allocation of corporate expenditures and income tax expense. The Company incurred acquisition costs related to Evergreen of $259 thousand in the year ended December 31, 2014, which have been recorded as selling, general and administrative expense. Had the Company acquired control of Evergreen on January 1, 2014, revenue for the year ended December 31, 2014, would have been $84,101 thousand higher and net profit before tax for the period would have been $7,694 thousand higher. The Company used various valuation techniques including income based approaches, which involves estimating the future net cash flows and applying the appropriate discount rate to those future cash flows to determine the fair value of the identifiable intangible assets acquired. The goodwill relates to intangible assets which do not qualify for separate recognition. The goodwill assets acquired are not deductible for tax purposes. c) Deer Star Systems Inc. Upon the acquisition of Evergreen, the Company acquired an additional 21.4% interest in Deer Star Systems Inc. (“Deer Star”) bringing its total interest in Deer Star from 35.7% to 57.1%. Deer Star is a John Deere commercial application dealer with seventeen established John Deere dealer partner locations. This increase in ownership interest has resulted in the acquisition of control of Deer Star, and the transaction has been accounted for as a business combination achieved in stages. The fair values of identifiable assets and liabilities and the determination of goodwill acquired is as follows: ($ thousands) Recognized amounts of acquired assets and liabilities: Accounts receivable Inventory Property and equipment Deposits with manufacturers Accounts payable and accrued liabilities Floor plan payable Term debt Purchase Price Financed by: Cash ($701 thousand paid, net of $181 thousand cash acquired) Fair value of existing equity investment Non-controlling interest $ $ $ $ 1,140 12,077 122 480 (1,943) (8,071) (716) 3,089 520 1,170 1,399 3,089 the cervus dealership differenceThe fair value of the non-controlling interest was determined based on the estimated fair values at date of acquisition. No gain or loss was recognized as a result of measuring to fair value the existing equity interest the Company held in Deer Star immediately prior to the transaction. Included in these consolidated financial statements are revenues of $7,979 thousand and net profit of $218 thousand related to Deer Star since acquisition of control, prior to allocation of corporate expenditures and income tax expense. Had the Company purchased additional interest an acquired control of Deer Star on January 1, 2014, revenue for the year ended December 31, 2014 would have been $25,689 thousand higher and profit before tax for the period would have been $131 thousand higher. The Company’s preliminary estimates of expected future cash flows are based on significant management judgments and as in a business combination, it generally takes time to obtain the information necessary to measure the fair values of assets acquired and liabilities assumed and the resulting goodwill, if any. Changes to the provisional measurements of assets and liabilities acquired and resulting goodwill may be retrospectively adjusted when new information is obtained until the final measurements are determined. d) Peterbilt of Ontario Inc. Effective August 11, 2014, the Company acquired certain business assets and assumed certain business liabilities of Peterbilt of Ontario Inc. (“POI”) for cash consideration of $25,500 thousand, and net working capital adjustments of $5,648 thousand. POI operates 13 dealerships in Ontario, which sell and service the full line of Peterbilt Trucks. The consideration paid was $31,148 thousand from available cash. The addition of POI is anticipated to enable the Company to strategically expand its transportation business into Ontario and to extend the Company’s relationship with Peterbilt. The following table summarizes the preliminary purchase price paid for the net assets of POI: ($ thousands) Recognized amounts of acquired assets and liabilities: Accounts receivable Finance lease receivables Inventory Property and equipment Identifiable intangible assets Goodwill Accounts payable and accrued liabilities Floor plan payables Lease liability Purchase Price Financed by: Cash - operations value Cash - closing working capital adjustment $ $ $ $ 10,080 3,169 38,173 26,335 10,860 2,546 (10,114) (25,209) (24,692) 31,148 25,500 5,648 31,148 The consideration transferred has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. Included in accounts receivable and finance lease receivables are receivables with a fair value of $13,249 thousand, which we believe are collectible. The gross contractual amounts of the trade and other receivables is $13,417 thousand. Included in these consolidated financial statements are revenues of $74,490 thousand and net loss of $498 thousand related to POI since acquisition, prior to allocation of corporate expenditures and income tax expense. The Company incurred acquisition-related costs of $1,104 thousand in the year ended December 31, 2014, which have been recorded as selling, general and administrative expense. Had the Company purchased the additional interest and acquired control of POI on January 1, 2014, revenue for the year ended December 31, 2014, would have been $106,389 thousand higher and profit before tax for the period would have been $1,921 thousand higher. The Company used various valuation techniques including income based approaches, which involves estimating the future net cash flows and applying the appropriate discount rate to those future cash flows to determine the fair value of the identifiable intangible assets acquired. The goodwill relates to intangible assets which do not qualify for separate recognition. The goodwill assets acquired are deductible for tax purposes. The Company’s preliminary estimates of expected future cash flows are based on significant management judgments and as in a business combination, it generally takes time to obtain the information necessary to measure the fair values of assets acquired and liabilities assumed and the resulting goodwill, if any. Changes to the provisional measurements of assets and liabilities acquired and resulting goodwill may be retrospectively adjusted when new information is obtained until the final measurements are determined. 8 1   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 e) Acquisition of Non-Controlling Interest (NCI) - Windmill Ag Pty Ltd. On March 25th, 2014, the Company completed the acquisition of the remaining 46.7% interest in Windmill Ag Pty Ltd. (“Windmill”), increasing its ownership from 53.3% to 100%. The purchase price of $4,370 thousand was paid via the issuance of 44,989 common shares in reserve of Cervus at a deemed price of $22.59 per share, the assumption and payment of a shareholder loan to Windmill in the amount of $3,224 thousand, and $130 thousand in cash to the vendor. The reserved common shares are recognized in Other Reserves at the deemed value and will be transferred to the vendor on the first and second anniversaries of the closing date at which time they will be recognized into Share Capital. Changes in the Company’s interest in a subsidiary that do not result in a change of control are accounted for as equity transactions. The Company recognized a decrease in NCI of $3,603 thousand and a decrease in retained earnings of $725 thousand. The following summarizes the changes in the Company’s ownership interest in Windmill: ($ thousands) Company's ownership interest at January 1, 2014 Effect of increase in Company's ownership interest Share of comprehensive income Company's ownership interest at date of acquiring 100% ownership $ $ 4,336 3,603 113 8,052 As part of the purchase agreement, 22,494 common shares will be transferred contingent on the vendors continued employment with Cervus at March 25, 2017, and will be amortized into income as SG&A expense evenly over the three year period. In addition, the vendor is eligible for certain performance based management fees of up to $1,000 thousand on account of future employment, should Windmill achieve specific financial and operating targets by March 25, 2017. The Company has not recognized this contingent liability as the outflow is not yet probable. Additionally, in March 2014, the Company exercised an option to purchase 100% of PPJ Investments Pty Ltd. (“PPJ”) for $1. PPJ holds land and buildings in use by Windmill. The total fair value of PPJ’s land and building assets acquired of $3,306 thousand were equally offset by the fair value of liabilities assumed. At the time of purchase the Company recognized a loss of $472 thousand on the impairment of receivables related to amounts due from PPJ Investments. This loss has been recorded in other income. During the year ended December 31, 2014, there were other immaterial business combinations for total cash consideration of $3,661 thousand. 6. Cash and Cash Equivalents ($ thousands) Bank and cash balances Money market funds 7. Trade and Other Accounts Receivable ($ thousands) Trade receivables Contracts in transit Current portion of long-term finance contracts Volume bonus Allowance for doubtful debts Prepaid expenses 2014 18,518 269 18,787 2014 42,391 10,777 789 352 54,309 (1,386) 52,923 5,539 58,462 $ $ $ $ 2013 10,421 4,257 14,678 2013 27,226 12,576 983 75 40,860 (681) 40,179 5,405 45,584 $ $ $ $ Movement in allowance for doubtful debts during the year have been recorded in selling, general and administrative expense, the details of which are disclosed in Note 27. the cervus dealership difference8. Inventories ($ thousands) New equipment Used equipment Parts and accessories Work-in-progress 2014 $ 163,815 $ 111,505 47,047 2,258 $ 324,625 $ 2013 78,060 73,011 26,209 1,231 178,511 During the year ended December 31, 2014, included in costs of sales are amounts related to inventories of $767,379 thousand (2013 - $727,773 thousand). The total inventory write-downs recorded during the years ended December 31, 2014 and included in cost of goods sold was $1,828 thousand (2013 - $3,428 thousand). 9. Finance Leases a) As Lessor - Finance Lease Receivables The Company has entered into fixed term contractual arrangements to allow customers to have dedicated use of certain heavy trucks and equipment owned by the Company, where substantially all the risks and rewards of ownership are held by the customer. These arrangements are accounted for as finance leases. The Company’s net investment in finance lease receivables as at December 31, 2014 are as follows: Gross Investment in Finance Lease Receivables Future Finance Income Present Value of Minimum Lease Payments Receivable ($ thousands) Less than one year Between one and five years More than five years $ $ 2014 1,686 1,676 237 Total $ 3,599 $ 2013 - - - - $ $ 2014 (86) (369) (111) $ (566) $ 2013 2014 2013 - - - - $ 1,600 $ 1,307 126 $ 3,033 $ - - - - b) As Lessee - Finance Lease Liabilities Finance lease liabilities reflect the total future payments on leases for heavy trucks and equipment, including final payments or buyouts. Based on the effective interest rate implicit in each lease these future payments are discounted to determine the net scheduled lease payments on each lease. The leases have terms typically between 1 and 7 years. On the maturity of the lease, the Company will sell the equipment. The difference between the Company’s proceeds and the residual value per the lease agreement remains with the Company. Finance lease liabilities as at December 31, 2014 are payable as follows: ($ thousands) Less than one year Between one and five years More than five years Future Minimum Lease Payments Interest 2014 2013 2014 2013 $ 6,398 $ 20,844 1,401 - - - - $ (223) $ (3,501) (410) $ (4,134) $ - - - - Present Value of Minimum Lease Payments $ $ 2014 6,175 17,343 991 $ 24,509 $ 2013 - - - - Total $ 28,643 $ 8 3   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 10. Equity Accounted Associates ($ thousands) Prairie Precision Network Inc. JD Integrated Solutions Inc. (formerly 1595672 Alberta Ltd.) (a) Deer Star Systems Inc. (b) Maple Farm Equipment Partnership (c) PPJ Investments Pty Ltd. (b) Ownership % 22.2% 18.2% 57.4% 21.4% 100.0% 2014 29 550 - 4,689 - 5,268 $ $ 2013 29 550 2,322 4,884 1 7,786 $ $ The Company’s share of profit in its equity accounted investees for the year ended December 31, 2014 was $712 thousand (2013 - $3,527 thousand). All of the Company’s investments in associates are measured under the equity method. During the year ended December 31, 2014, the Company received $2,063 thousand (2013 - $2,187 thousand) of repayments from its investees. a The Company has determined it has significant influence with respect to JD Integrated Solutions Inc. (“JDIS”) as the Company holds a seat on JDIS’s board of directors. b During 2014, the Company acquired additional interests in Deer Star Systems Inc. and PPJ Investments Pty Ltd., as disclosed in Note 5, as a result, the results of these entities are no longer treated as equity accounted investees and are consolidated from the date that control was achieved. c Maple Farm Equipment Partnership (“Maple”) holds investments in seven John Deere agricultural dealerships headquartered in Yorkton, Saskatchewan, and operates in similar markets and geography as the Company’s Agricultural segment. Summary financial information for the Company’s equity accounted investees, had the Company owned 100% of investees, is as follows: ($ thousands) Current Assets Long-term assets Current liabilities Long-term liabilities Revenue and other income Expenses 11. Deposits With Manufacturers $ 2014 57,932 31,248 34,910 5,386 203,048 196,466 $ 2013 66,048 14,566 34,983 8,211 247,445 231,757 John Deere Credit Inc. (“Deere Credit”) provides and administers financing for retail purchases and leases of new and used equipment. Under the financing and lease plans, Deere Credit retains the security interest in the financed equipment. The Company is liable for a portion of the deficiency in the event that the customer defaults on their lease obligation. Deere Credit retains 1% to 2% of the face amount of the finance or lease contract for amounts that the Company may have to pay Deere Credit under this arrangement. The deposits are capped at 3% of the total dollar amount of the lease finance contracts outstanding. The maximum liability that may arise related to these arrangements is limited to the deposits of $3,479 thousand (December 31, 2013 - $1,977 thousand). Deere Credit reviews the deposit account balances quarterly and if the balances exceed the minimum requirements, Deere Credit refunds the difference to the Company. the cervus dealership difference8 5   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 13. Income Taxes tax expense ($ thousands) Current income tax Deferred tax expense Total tax expense relating to continuing operations 2014 113 7,541 7,654 2013 279 8,117 8,396 $ $ $ $ The expense for the year can be reconciled to the accounting profit (loss) based on using federal and provincial statutory rates of 25.9% (2013 - 25.8%) as follows: ($ thousands) Profit before income tax expense Expected income tax expense Non-deductible costs and temporary differences between tax and accounting basis Income tax recovery recognized in profit or loss 2014 26,150 6,774 880 7,654 $ $ 2013 31,722 8,184 212 8,396 $ $ deferred tax assets and liabilities The Company has recognized deferred tax assets to the extent it is probable that future taxable profit will be available against which the Company can utilize the benefits of the tax loss carry forwards and investment tax credits. The Company’s investment tax credits will commence expiring in 2019 and non-capital losses commence expiring in 2027. The availability of deferred tax assets is subject to the risks and uncertainties as disclosed in Note 29 herein. ($ thousands) 2014 Carrying value over the tax value of tangible assets $ (8,995) $ Carrying value over the tax value of convertible debenture liability Carrying value over the tax value of intangible assets Carrying value over the tax value of finance lease obligation Federal investment tax credits Non-capital losses Deferred tax asset (479) (6,635) 6,349 12,841 21,437 24,518 $ $ 2013 (1,487) (582) (2,022) - 12,841 28,259 37,009 12. Property and Equipment Cost Balance at January 1, 2013 Additions Additions through business acquisition Disposals Assets held for sale Transfers Effect of movements in exchange rates Additions Additions for finance lease asset Additions through business acquisition Disposals Transfers Effect of movements in exchange rates Land and Buildings Short-term Rental Equipment Automotive and Trucks Furniture and Fixtures Parts and Shop Equipment Computers and Software Leasehold improvements Total 67,874 13,482 684 (4,153) (3,260) - 37 21,788 9,073 - 10,442 3,437 1,197 3,564 381 207 4,626 943 377 3,349 376 - 1,156 $  112,799 227 42 27,919 2,507 (7,168) (1,183) (52) (289) (370) (101) (13,316) - (998) 295 - - (57) 13,836 4,205 - 8,515 - 9,219 1,181 5,963 21,975 1,876 - - (210) (5,853) 483 44 (795) (21) 280 - - 7 4,107 982 - 279 (12) - 2 - - 33 5,690 726 - 2,729 (63) - (268) - - 98 3,453 621 - 640 (74) - 15 - - 3 1,327 509 - (3,260) (998) 416 126,067 24,777 1,181 1,418 34,880 (1) (6,798) - 3 462 (134) Balance at December 31, 2013 74,664 22,990 Balance at December 31, 2014 88,932 50,039 19,381 5,358 8,814 4,655 3,256 $  180,435 Accumulated depreciation and impairment Balance at January 1, 2013 Depreciation expense Disposals Assets held for sale Transfers Effects of movements in exchange rates Balance at December 31, 2013 Depreciation expense Disposals Transfers Effects of movements in exchange rates Land and Buildings Short-term Rental Equipment Automotive and Trucks Furniture and Fixtures Parts and Shop Equipment Computers and Software 1,261 1,731 - (165) - - 2,827 1,969 - - (6) 7,038 2,855 (3,894) - 11 78 6,088 3,545 (2,604) (128) 25 4,833 2,075 (680) - - 48 6,276 2,787 (428) - (52) 2,101 387 (12) - - 10 2,486 538 (26) - 2 2,690 643 (100) - - 26 3,259 872 (20) - 1 1,932 674 (283) - - 29 2,352 676 (65) - 10 Leasehold improvements Total 853 $  20,708 118 (89) - - 1 883 223 (29) - 26 8,483 (5,058) (165) 11 192 24,171 10,610 (3,172) (128) 6 Balance at December 31, 2014 4,790 6,926 8,583 3,000 4,112 2,973 1,103 $  31,487 Carrying value Land and Buildings Short-term Rental Equipment Automotive and Trucks Furniture and Fixtures Parts and Shop Equipment Computers and Software Leasehold improvements Total Balance at December 31, 2013 71,837 Balance at December 31, 2014 84,142 16,902 43,113 7,560 10,798 1,621 2,358 2,431 4,702 1,101 1,682 444 $  101,896 2,153 $  148,948 Depreciation expense has been recorded in cost of sales in the amount of $3,509 thousand (2013 - $2,883 thousand) and selling, general and administrative expenses of $7,101 thousand (2013 - $5,600 thousand). Included in total additions were amounts for short-term rental equipment relating to additions for lease arrangements classified as finance lease of $1,181 thousand (2013 - nil). At December 31, 2014, land and buildings included construction in progress costs of $7,864 thousand for the construction of a new John Deere dealership in Ponoka, Alberta. the cervus dealership difference The Company’s deferred tax liabilities are primarily a result of allocation of purchase price to intangible assets on acquisition which have no corresponding tax basis. ($ thousands) Carrying values over tax values of intangible assets Carrying values over tax values of tangible assets Deferred tax liability Continuity of the Company’s tax balances in during the year are as follows: 2014 (1,150) (49) (1,199) $ $ $ $ ($ thousands) Recognized in Profit or Loss Recognized in Other Comprehensive Income Acquired in Business Combinations 2013 2013 (1,226) (47) (1,273) 2014 Tax values over carrying value of tangible assets $ (1,487) (1,558) - (5,950) $ (8,995) Carrying value over the tax value of convertible debenture liability Carrying value over the tax value of intangible assets Carrying value over the tax value of finance lease obligation Federal investment tax credits Non-capital losses Deferred tax asset Accounting values over tax values of intangible assets Accounting values over tax values of tangible assets Deferred tax liability Net (582) (2,022) - 12,841 28,259 37,009 (1,226) (47) (1,273) 103 785 (49) - (6,822) (7,541) 74 (2) 72 - - - - - - 2 - 2 - (479) (5,398) (6,635) 6,398 6,349 - - (4,950) - - - 12,841 21,437 24,518 (1,150) (49) (1,199) $ 35,736 (7,469) 2 (4,950) $ 23,319 The Company has not recognized the benefits associated with capital losses of $74,025 thousand (2013 - $74,283 thousand) and non-capital losses of $943 thousand (2013 - $946 thousand). 8 7   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 14. Intangible assets Intangible assets are comprised of the following: Cost Balance at January 1, 2013 Additions Impact of translation of intangibles held in foreign currencies Balance at December 31, 2013 Additions through business acquisition (Note 5) Additions Impact of translation of intangibles held in foreign currencies Dealership Distribution Agreements 22,580 4,070 (203) 26,447 25,601 - (106) Trade Name 4,715 - - 4,715 - - - Customer Lists Non- Competition Agreements Software Costs 9,829 200 (10) 10,019 5,944 - (39) 1,891 200 (10) 2,081 1,420 - 1 - - - - - 882 - Total $ 39,015 4,470 (223) 43,262 32,965 882 (144) Balance at December 31, 2014 51,942 4,715 15,924 3,502 882 $ 76,965 Accumulated Depreciation and Impairment Balance at January 1, 2013 Amortization expense Balance at December 31, 2013 Amortization expense Balance at December 31, 2014 Carrying Value Balance at December 31, 2013 Balance at December 31, 2014 Dealership Distribution Agreements 4,433 1,243 5,676 1,717 7,393 Dealership Distribution Agreements 20,771 44,549 Trade Name 529 1,827 2,356 2,241 Customer Lists Non- Competition Agreements Software Costs 5,513 1,630 7,143 1,791 1,823 125 1,948 84 - - - - Total $ 12,298 4,825 17,123 5,833 4,597 8,934 2,032 - $ 22,956 Trade Name 2,359 118 Customer Lists 2,876 6,990 Non- Competition Agreements 133 1,470 Software Costs - 882 $ $ Total 26,139 54,009 Amortization expense of $5,833 thousand (2013 - $4,825 thousand) has been recorded in selling, general and administrative expense. As of December 2014, the Corporation performed impairment tests, based on value in use of intangible assets. 15. Goodwill The aggregate carrying amounts of goodwill allocated to each CGU are as follows: ($ thousands) Agricultural equipment segment Agricultural equipment - Alberta Agricultural equipment - Saskatchewan Agricultural equipment - New Zealand Agricultural equipment - Australia Commercial and industrial equipment segment Commercial equipment Industrial equipment Transportation segment Transportation equipment - Ontario 2014 11,509 327 1,946 1,210 1,527 666 2,547 19,732 $ $ $ $ 2013 1,346 327 1,946 1,054 1,527 666 - 6,866 the cervus dealership difference The continuity of the Company`s goodwill is as follows: ($ thousands) Opening balance, January 1 Additions through business acquisition (Note 5) Impairment Impact of translation of goodwill held in foreign currencies $ $ 2014 6,866 12,876 - (10) Ending balance, December 31 $ 19,732 $ 2013 5,812 1,110 - (56) 6,866 The Company conducted the annual impairment test of goodwill in December 2014. The recoverable amount of the cash generating units’ (CGU’s) was calculated based on value in use. Value in use was determined by discounting the future cash flows anticipated to be generated from the CGU or groups of CGU’s. Future cash flow estimates are based on historical performance of the CGU`s adjusted for prospective changes in the business and economic climate as reflected in our approved financial budgets. Cash flows were projected for a 5-year period for the CGU, excluded any assumptions regarding revenue growth during the forecast period, and resulted in all CGU`s supporting the carrying value of their respective net assets utilizing an after tax discount rates not less than 15%. This discount rate is equivalent to a pre-tax discount rate of 20%. As at December 31, 2014, the Company considers a 15% after tax or less discount rate, to adequately reflect any risk premia applicable to its CGU’s in excess of the overall corporate WACC. As such, the Company concludes that no impairment of goodwill or intangible assets is present at December 31, 2014. Sensitivity testing was performed as part of 2014 annual impairment test, concluding that by increasing the after tax discount rate applied to 16%, an impairment of $6 thousand would exist based on zero growth in income from 2014 levels. 8 9   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 term debt ($ thousands) Revolving credit facility, lenders prime rate plus the Applicable Margin (currently 0.50%). Applicable Margin can range from 0.25% to 0.75% and is based on a liabilities to income ratio Year of Maturity 2014 2016 $ 41,605 $ 2013 - Farm Credit Corporation, mortgage funding on land and buildings under construction, repayable, interest only until completion at a rate of lenders prime plus 1% per annum 2019 4,962 9,756 Farm Credit Corporation, mortgages payable in monthly installments ranging from $39 thousand to $95 thousand including interest at a rate of lenders prime plus 1% per annum 2017 25,415 17,419 Affinity Credit Union, mortgages payable in monthly installments ranging from $8 thousand to $17 thousand, including interest at lenders prime plus 1% per annum 2016 10,266 10,524 ANZ National Bank Ltd., New Zealand, mortgage payable, interest only at the rate of 6.9% per annum HSBC Bank Canada, central lease loan, repayable in monthly installments ranging from $2 thousand to $12 thousand including interest at rates ranging from 4.98% to 5.03%, secured by short-term rental equipment 2015 2019 1,168 453 1,174 375 The impairment calculations require the use of estimates related to the future operating results and cash generating ability of the assets. Judgment is also used in identifying the cash generating unit or group of cash generating units at which goodwill, intangible assets and property and equipment are monitored for internal management purposes and identifying an appropriate discount rate for these calculations. Finance contracts, payable in monthly interest installments ranging up to $4 thousand including interest of 90 day bankers acceptance plus 3.7%, secured by short-term rental equipment Various 3,909 1,335 16. Trade and Other Payables ($ thousands) Trade and other payables Non-trade payables and accrued expenses 17. Loans and Borrowings 2014 48,990 32,247 81,237 $ $ 2013 27,842 20,979 48,821 $ $ bank indebtedness At December 31, 2014, the Company has a revolving credit facility with a syndicate of underwriters. The principal amount available under this facility as amended December 17, 2014 is $100,000 thousand, representing an increase from the principal amount previously available of $60,000 thousand. The facility is committed for a two year term, but may be extended on or before the anniversary date with the consent of the lenders. The facility contains a $80,000 thousand accordion which the Company may request as an increase to the total available facility, subject to lender approval. As at December 31, 2014 there was $41,605 thousand drawn on the facility and $2,400 thousand had been utilized for outstanding letters of credit to John Deere. The Company’s credit facility bears interest at the lender’s prime rate plus the Applicable Margin (currently 0.50%). Applicable Margin can range from 0.25% to 0.75% and is based on a liabilities to income ratio. The Canadian facility is secured by a general security agreement, a priority agreement; trade accounts receivable, unencumbered inventories, assignment of fire insurance and guarantees from the Company’s subsidiaries and the general partner. As terms under the Canadian credit facility, the Company must maintain certain leverage, income coverage, and asset coverage ratios, which the Company has complied with throughout 2014. Costs of $464 thousand directly attributable to the completion of the Syndicated Facility have been deferred and will be amortized over the two year term. In addition, New Zealand has a $1,500 thousand credit facility agreement which is secured by a general security agreement covering all property. John Deere finance contracts, payable in monthly installments ranging up to $6 thousand including interest at a rate of 3.652% to 4.75%, secured by related equipment 2018 - 2019 6,766 5,869 John Deere finance contracts, New Zealand, payable in monthly installments including interest at the rate of 5.5% per annum, secured by related equipment Various 7,429 3,635 National Australia Bank, Australia, mortgage, payable monthly payments of $25K and a floating interest rate (December 31, 2014 - 6.44%) 2017 3,303 Hire purchase contracts, Australia, finance contracts payable in monthly installments ranging up to AU$5 thousand including interest at a rate of 5.85% to 9.75%, secured by related equipment Various 1,279 Finance contracts, New Zealand, various, repayable in monthly installments ranging per month including interest from 9.11%, secured by related equipment Various 726 Less current portion Less deferred debt issuance costs 107,281 (9,974) (464) 570 700 813 52,170 (6,168) - floor plan payables The Company utilizes floor plan financing arrangements with various suppliers for inventory purchases. The terms of these arrangements may include an interest-free period followed by a term during which interest is charged at rates ranging from 2.75% to 9.20% at December 31, 2014. Settlement of the floor plan liability occurs at the earlier of sale of the inventory, in accordance with terms of the financing arrangement, or based on management’s assessment. Floor plan payables are secured by specific new and used equipment inventories. $ 96,843 $ 46,002 ($ thousands) John Deere Financial, Canada GE Capital Vendor Finance John Deere Financial, New Zealand and Australia PACCAR Financial CIBC Floor plan facility Other floor plan facilities Total floor plan $ Interest Rate 4.25% $ 3.00% - 5.19% 7.10 - 9.20% 2.904% - 4.03% 2.75% 3.00% - 6.44% 2014 69,895 34,895 9,124 47,557 8,742 4,822 $ 175,035 $ 2013 34,879 13,570 7,302 6,873 - 4,574 67,198 the cervus dealership differenceconvertible debenture On July 24, 2012, the Company issued $34,500 thousand of convertible unsecured subordinated debentures with a face value of $1,000 per debenture that mature on July 31, 2017 and bear interest at 6.0% per annum paid semi-annually on January 31 and July 31 of each year. The debentures are convertible at the option of the holder into shares of the Company at any time prior to the maturity date at a rate of $26.15 (the “conversion price”) per share. The Company may redeem the debentures at its option after July 31, 2015 if the current market price of the shares on the date of the notice of redemption exceeds 125% of the conversion price. The convertible debentures are considered a compound financial instrument as they can be converted to a fixed number of common shares at the option of the holder. The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option, and subsequently accounted for under the effective interest rate method. The equity component is recognized initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Aggregate interest and accretion and amortization expense recorded in finance costs to December 31, 2014 was $2,870 thousand (2013 - $2,849 thousand). Changes in the debenture liability are as follows: ($ thousands) Face value of convertible debenture Discount to face value at issuance under effective interest method Cumulative amortization of discount through December 31 $ 2014 34,500 (4,251) 1,816 Carrying value of debenture payable at December 31 $ 32,065 2013 34,500 (4,251) 1,016 31,265 $ $ For these credit facilities, the amount available under which are limited to the lesser of pre-approved credit limits or the available unencumbered assets. A summary of the Company’s maximum pre-approved credit limits on available credit facilities as at December 31, 2014 are as follows: (in $ thousands) Total Limits Borrowings Total Limits Borrowings 2014 2013 Operating and other bank credit facilities $ 103,284 $ Capital facilities and rental equipment term loan financing Floor plan facilities Total borrowing 64,169 507,927 $ 675,380 $ Total current portion long term debt Total inventory floor plan facilities Deferred debt issuance costs Total long term debt 18. Financial Instruments $ 675,380 $ 42,174 44,546 195,596 282,316 (9,974) (175,035) (464) 96,843 $ $ 50,633 69,943 297,697 418,273 $ $ 1,883 42,707 74,778 119,368 (6,168) (67,198) - $ 418,273 $ 46,002 Fair values are approximate amounts at which financial instruments could be exchanged between willing parties based on current markets for instruments with similar characteristics, such as risk, principal and remaining maturities. Financial instruments recorded at fair value on the balance sheet are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: Level 1 - reflects valuation based on quoted prices observed in active markets for identical assets or liabilities; 9 1   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured a fair value if the carrying amount is a reasonable approximation of fair value. ($ thousands) December 31, 2014 Financial Assets Carrying Amount Fair Value Category Carrying value Level 1 Level 2 Level 3 Total Cash and cash equivalents (a) Loans and receivable $ Trade and other accounts receivable (a) Loans and receivable Derivative financial instruments Held-for-trading Long term receivables (a) Loans and receivable Finance lease receivables Loans and receivable Deposits with manufacturers (a) Loans and receivable Financial Liabilities Trade and other accrued liabilities (a) Customer deposits (a) Floor plan payables (a) Dividends payable (a) Term debt (b) Derivative financial liability Finance lease obligation Notes payable (b) Debenture payable (c) ($ thousands) December 31, 2013 Financial Assets Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities 18,787 58,462 6,559 1,702 3,033 3,479 81,237 8,594 175,035 3,233 106,817 6,590 24,509 533 32,065 35,297 6,559 3,033 6,590 24,881 Carrying Amount Fair Value Category Carrying value Level 1 Level 2 Level 3 Total Cash and cash equivalents (a) Loans and receivable $ Trade and other accounts receivable (a) Loans and receivable Long term receivables (a) Loans and receivable Deposits with manufacturers (a) Loans and receivable Financial Liabilities Trade and other accrued liabilities (a) Customer deposits (a) Floor plan payables (a) Dividends payable (a) Term debt (b) Debenture payable (c) Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities 14,678 45,584 2,103 1,977 48,821 4,081 67,198 3,002 52,170 31,265 36,915 Level 2 - reflects valuation techniques based on inputs other than quoted prices included in level 1 that are observable either directly or indirectly; value hierarchy due to the immediate or short-term maturity. a The carrying value approximates fair value for cash and cash equivalents, trade and other accounts receivable, trade and other accrued liabilities, floor plan payables, and dividends payable in the fair Level 3 - reflects valuation techniques with significant unobservable market inputs. b The carrying values of the current and long-term portions of term debt and notes payable approximate fair value because the applicable interest rates on these liabilities are fixed at rates similar to prevailing market rates. c Debenture payable is measured at amortized cost using the effective interest method. The fair value of debenture payable at December 31, 2014 is the quoted market trading price for the debentures as at December 30, 2014, as the debentures did not trade on December 31, 2014. For other financial liabilities where the carrying value does not approximate the fair value a discounted cash flows approach was used to determine the fair value. the cervus dealership difference19. Capital and Other Components of Equity The Company has unlimited authorized share capital without par value for all common shares. All issued common shares have been fully paid. common shares Shareholders are entitled to: (i) dividends if, as and when declared by the Board of Directors of the Company; (ii) to one vote per share at meetings of the holders of Common Shares; and (iii) upon liquidation, dissolution or winding up of Cervus to receive pro-rata the remaining property and assets of the Company, subject to the rights of shares having priority over the Common Shares. share capital ($ thousands) Balance January 1, 2013 Issued under the DRIP plan Issued under the deferred share plan Issued under the share option plan Balance December 31, 2013 Issued under the DRIP plan Issued under the deferred share plan Issued under the share option plan Issued for business acquisitions Issued common shares Balance December 31, 2014 Number of Common Shares Total Carrying Amount 14,900 $ 59 22 31 15,012 $ 52 38 8 148 67 15,325 $ 76,503 1,097 180 346 78,126 1,040 359 69 2,690 1,530 83,814 issuance of common shares During the year ended December 31, 2014, the Company issued 148 thousand (2013 - nil) common shares for business acquisitions (Note 5), 67 thousand (2013 - nil) common shares issued for cash, 52 thousand (2013 - 59 thousand) common shares to shareholders participating in the Company’s dividend reinvestment plan (“DRIP”), 38 thousand (2013 - 22 thousand) common shares as a result of redemptions of vested shares from the deferred share plan, and 8 thousand (2013 - 31 thousand) common shares as a result of share options exercised. accumulated and other comprehensive income Accumulated and Other Comprehensive Income is comprised of a cumulative translation account that comprises all foreign currency differences that arise on the translation of the financial statements of the Company’s investment in its foreign operations, Cervus New Zealand Equipment Ltd., and Cervus Equipment Australia Pty Ltd. 9 3   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 other reserves Other reserves consists of contributed surplus of accumulated stock option expense less the fair value of the options at the grant data that have been exercised and reclassified to share capital. Also included in other reserves are amounts for shares held in reserve issued for business acquisitions (Note 5), expired private placement warrants, and conversion feature for convertible debenture. Changes in other reservers were as follows: ($ thousands) Balance January 1 Share-based compensation Exercise of stock options Shares issued in reserve Balance December 31 20. Share Based Payments Included in share based payments are the following: ($ thousands) Deferred share plan Share options $ $ $ $ 2014 5,176 258 (17) 1,016 6,433 2014 1,267 259 1,526 $ $ $ $ 2013 5,136 143 (103) - 5,176 2013 1,285 143 1,428 deferred share plan The Company has a deferred share plan available to officers, directors and employees whereby, if elected, certain payments to these individuals can be deferred, ranging in amounts up to $50 thousand per individual, where the Company also matches the deferred portion. The deferred shares are granted as approved by the board of directors based on 95% of the 10-day average share price prior to the date of grant. The matched component of the plan vests over a period of 5 years (50% after 3 years, 25% after 4 years and 25% after 5 years) and is recorded as selling, general and administrative expense as it vests. The Company has 1,181 thousand shares reserved for issuance under this plan. As at December 31, 2014, 745 thousand (2013 - 677 thousand) deferred shares have been issued under the deferred share plan and remain outstanding. The total deferred share plan balance as at December 31, 2014, was $7,559 thousand (2013 - $6,426 thousand). As at December 31, 2014, the matching component of the plan aggregated $4,224 thousand (2013 - $3,640 thousand) of which $3,067 thousand (2013 - $1,997 thousand) has been amortized into selling, general and administrative expense. Of the outstanding deferred shares, 609 thousand (2013 - 538 thousand) can be converted to common shares. 21. Cost of Sales The following amounts have been included in cost of sales for the years ended December 31, 2014 and 2013: dividends ($ thousands) $0.825 per qualifying common share 2014 12,583 12,583 $ $ 2013 11,759 11,759 $ $ ($ thousands) Depreciation of rental equipment Interest paid on rental equipment financing Total dividends paid in cash during the year were $11,358 thousand (2013 - $10,561 thousand). dividend reinvestment plan The Company has a Dividend Reinvestment Plan (“DRIP”) entitling shareholders to reinvest cash dividends in additional common shares. The DRIP allows shareholders to reinvest dividends into new shares at 95 percent of the average share price of the previous 10 trading days prior to distribution. The company has 117 thousand shares reserved for issuance under this plan. 22. Other Income Other income for the years ended December 31, 2014 and 2013 are comprised of the following: ($ thousands) Net gain on sale of property and equipment Net loss on acquiring controlling interest of subsidiary (note 5) Extended warranty commission Realized foreign exchange loss Unrealized foreign exchange loss (a) Financial compensation and consignment commissions Other income $ $ $ $ 2014 3,509 696 4,205 2014 1,337 (472) 397 (16) (952) 2,022 1,399 3,715 $ $ $ 2013 2,883 353 3,236 2013 2,073 (598) 236 (82) - 1,125 1,131 $ 3,885 a Unrealized foreign exchange loss is due to changes in fair value of our derivative financial asset and from period close translation of floor plan payables denominated in US dollars. the cervus dealership difference23. Wages and Benefits ($ thousands) Included in cost of sales: Short-term wages and benefits Included in selling, general and administrative expenses: Short-term wages and benefits Share-based payments 9 5   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 2014 2013 diluted earnings per share The calculation of diluted earnings per share at December 31, 2014 and 2013 was based on the profit attributable to common shareholders and the weighted average number of common shares outstanding after adjustment for the effects of dilutive potential common shares which consist of the following: $ 32,858 $ 27,739 (thousands of shares) 92,766 1,526 94,292 127,150 77,842 1,428 79,270 $ 107,009 $ Weighted average number of common shares (basic) Effect of dilutive securities: Deferred share plan Share options Weighted average number of shares (diluted) at December 31 26. Operating Leases 2014 15,147 745 11 15,903 2013 14,968 677 8 15,653 employee share purchase plan The Company has an employee share purchase plan available to all employees on a voluntary basis. Under the plan, employees are able to contribute 2% to 4% of their annual salaries, based on years of service. The Company contributes between 15% and 150% on a matching basis to a maximum of $5,000 per year, per employee. The shares are purchased on the open market through a trustee; therefore, there is no dilutive effect to existing shareholders. Included in selling, general and administrative expenses are $1,393 thousand (2013 - $1,225 thousand) of expenses incurred by the Company to match the employee contributions. 24. Finance Income and Finance Costs ($ thousands) Finance income Interest expense on convertible debenture Interest expense on mortgage and term debt obligations Interest expense on note payable Interest expense on vendor take back financing Interest expense on financial liabilities Finance costs Net finance costs recognized separately Net finance costs recognized in cost of sales Total net finance costs 25. Earnings Per Share 2014 384 (2,870) (1,750) - - (3,036) (7,656) (7,272) (696) (7,968) $ $ 2013 532 (2,849) (1,075) (186) (276) (2,349) (6,735) (6,203) (353) (6,556) $ $ per share amounts Both basic and diluted earnings per share have been calculated using the net earnings attributable to the shareholders of the Company as the numerator. No adjustments to net earnings were necessary for the years ended December 31, 2014 and 2013. The weighted average number of shares for the purposes of diluted earnings per share can be reconciled to the weighted average number of basic shares as follows: (thousands of shares) Issued common shares January 1 Effect of shares issued under the DRIP plan Effect of shares issued for the business acquisitions Effect of shares issued under the deferred share plan Effect of shares issued under the share option plan Effect of shares issued through common shares issuance 2014 15,012 29 25 22 7 52 2013 14,900 33 - 17 18 - Weighted average number of common shares at December 31 15,147 14,968 a) As Lessee The Company leases a number of lands and building facilities, office equipment and vehicles. The leases typically run for a period of between 3 and 10 years with options to renew the leases on the lands and buildings after that date. The land and building leases do not include any provisions for transfer of title, nor does the Company participate in the residual value of the land and buildings. Therefore, it was determined that substantially all the risks and rewards of ownership of the land and buildings remains with the landlord. As such, the Company has determined that the leases are operating leases. The Company is committed to the following minimum payments under operating leases for land and buildings, equipment and vehicles: ($ thousands) Less than 1 year Between 1 and 5 years More than 5 years $ $ 5,387 14,771 3,107 23,265 b) As Lessor The Company has entered into fixed term contractual arrangements to allow customers to have dedicated use of certain heavy trucks and equipment owned by the Company. These leases are classified as operating leases where the lessor retains the rewards and associated risks of ownership of that asset for a period of time. Where the Company’s equipment rentals and leases to customers are classified as operating leases the payments received are included in revenue on a straight-line basis over the term of the lease. The minimum payments for the non-cancellable operating leases for rental fleet is as follows: ($ thousands) Less than 1 year Between 1 and 5 years More than 5 years 27. Financial Risk Management $ $ 3,592 12,297 287 16,176 Overview The Company has exposure to the following risks from its use of financial instruments: credit risk; liquidity risk; market risk; and operational risk. This note presents information about the Company’s exposure to each of the above risks, the Company’s objectives, policies and processes for measuring and managing risk, and the Company’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. Risk Management Framework The Board of Directors (“Board”) has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Board, together with the Audit Committee are responsible for developing and monitoring the Company’s risk management policies. The Company’s risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Company, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. the cervus dealership differenceThe Company’s Audit Committee oversees how management monitors compliance with the Company’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Company. The Company’s Audit Committee is assisted in its oversight role by an internal audit firm. The audit firm undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. credit risk Trade and Other Receivables By granting credit sales to customers, it is possible these entities, to which the Company provides services, may experience financial difficulty and be unable to fulfill their obligations. A substantial amount of the Company’s revenue is generated from customers in the farming and construction and industrial equipment industries. This results in a concentration of credit risk from customers in these industries. A significant decline in economic conditions within these industries would increase the risk customers will experience financial difficulty and be unable to fulfill their obligations to the Company. The Company’s exposure to credit risk arises from granting credit sales and is limited to the carrying value of accounts receivable, long-term receivables and deposits with manufacturers (see Note 7). Goods are sold subject to retention of title clauses so that in the event of non-payment, the Company may have a secured claim. The Company will also register liens in respect to trade and other long-term receivables as deemed necessary and dependent on the value of the receivable. The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting dates was: ($ thousands) Trade and other accounts receivables Long term receivables Long term lease receivables Derivative financial asset Deposits with manufacturers The maximum exposure to credit risk at the reporting date by geographic region was: ($ thousands) Domestic New Zealand Australia The aging of loans and receivables at the reporting date was: ($ thousands) Current - 60 days Past due - 61-90 days Past due - 91 to 120 days Past due more than 120 days The Company recorded the following activity in its allowance for impairment of loans and receivables: ($ thousands) Balance at January 1 Additional allowance recorded (recovery) Amounts written-off as uncollectible Balance at December 31 $ $ 2014 54,309 1,702 3,033 6,559 3,479 $ 69,082 $ $ $ $ 2014 48,467 2,963 2,879 54,309 2014 45,871 3,043 2,808 2,587 $ $ $ 2013 40,860 2,103 - - 1,977 44,940 2013 36,386 2,151 2,323 40,860 2013 36,151 1,992 1,503 1,214 $ 54,309 $ 40,860 $ $ 2014 681 821 (116) 1,386 $ $ 2013 916 118 (353) 681 In our industries, customers typically pay invoices within 30 to 60 days. The average time to collect Company’s outstanding accounts receivable was approximately 19 days for the year ended December 31, 2014 (2013 - 16 days). No single outstanding customer balance represented more than 10% of total accounts receivable. 9 7   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 The Company mitigates its credit risk by assessing the credit worthiness of its customers on an ongoing basis. The Company closely monitors the amount and age of balances outstanding and establishes a provision for bad debts based on specific customers’ credit risk, historical trends, and other economic information. For the year ended December 31, 2014 and 2013 all customer balances provided as bad debts were calculated based on 25% of accounts between 90 to 120 days outstanding and 85% on amounts over 120 days outstanding unless allowance for certain specified accounts requires a greater amount to be allowed for. Guarantees The Company has irrevocable standby letters of credit to John Deere in the amount of $2,400 thousand (2013 - $2,400). The letter of credit agreements allow for John Deere to draw upon it in whole or in part in the event of any default by the Company of any or all obligations. Liquidity Risk The Company’s exposure to liquidity risk is dependent on the collection of accounts receivable and the ability to raise funds to meet purchase commitments and financial obligations and to sustain operations. The Company controls its liquidity risk by managing its working capital, cash flows, and the availability of borrowing facilities. As described in Note 17, the Company has available for its current use, $100,000 thousand and NZ$1,500 thousand of operating credit facilities less $2,400 thousand for irrevocable letters of credit issued to John Deere. The Company believes that it has sufficient operating funds available as described above to meet expected operational expenses, including the services of financial obligations. The following are the contractual maturities of financial liabilities existing as at December 31, 2014. ($ thousands) Carrying Amount Contractual Maturities 6 Months or Less 7-12 Months 1-2 Years 2-5 Years Trade and other accrued liabilities $ 81,237 $ 81,237 $ 81,237 $ Floor plans payable Dividends payable Term debt payable Derivative financial liability Finance lease obligation Debenture payable 175,035 3,233 106,817 6,590 24,509 32,065 175,035 3,233 107,281 6,590 24,509 34,500 175,035 3,233 4,733 6,590 3,034 - $ - - - $ - - - - - - 5,241 60,519 36,788 3,141 - 5,295 - 12,048 34,500 $ 429,486 $ 432,385 $ 273,862 $ 8,382 $ 65,814 $ 83,336 Market Risk Market risk is the risk that changes in the market place such as foreign exchange rates, interest rates and commodity prices that will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters while optimizing return. Currency Risk The Company is exposed to foreign currency fluctuation related to translation adjustments upon consolidation of its Australian and New Zealand operations. A strengthening or weakening of the Canadian dollar by 5% against the New Zealand dollar at December 31, 2014 would have increased (decreased) equity by $105 thousand (2013 - $142 thousand) and profit or loss by $54 thousand (2013 - $34 thousand). A strengthening or weakening of the Canadian dollar by 5% against the Australian dollar at December 31, 2014 would have increased (decreased) equity by $204 thousand (2013 - $394 thousand) and profit or loss by $20 thousand (2013 - $25 thousand). This analysis is based on foreign currency exchange rate the Company considered to be reasonably possible at the end of the reporting period and assumes that all other variables, including interest rates, remain constant. All North American sales and expenditures are incurred in Canadian dollars. However, many of our products, including equipment and parts are based on a U.S. dollar price as they are supplied primarily by U.S. manufacturers. This may cause fluctuations in the sales values assigned to equipment and parts inventories as the Company’s price structure is to maintain consistent gross margins. Both sales revenues and gross margins may fluctuate based on the foreign exchange rate in effect at the time of purchase. Certain of the Company’s manufacturers also have programs in place to facilitate and/or reduce the effect of foreign currency fluctuations, primarily on new equipment inventory purchases. A portion of the Company’s owned inventory is floor planned in U.S. dollars. As such, a portion of the floor plan payable is exposed to fluctuations in the U.S. dollar exchange rate. As discussed above, this contributes to fluctuations in sales values based on the U.S. dollar exchange rate as the Company’s objective is to maintain consistent gross margins. Based on the U.S. dollar floor plan balances at December 31, 2014, a $0.01 change in the U.S. exchange rate would have increased (decreased) profit or loss by $260 thousand. the cervus dealership differenceInterest Rate Risk The Company’s cash flow is exposed to changes in interest rates on its floor plan arrangements and certain term debt which bear interest at variable rates. The cash flows required to service these financial liabilities will fluctuate as a result of changes in market interest rates. The Company mitigates its exposure to interest rate risk by utilizing excess cash resources to buy-down or pay-off interest bearing contracts and by managing its floor plan payables by maximizing the interest-free periods. At the reporting dates, the interest bearing financial instruments were: ($ thousands) Floor plan payables (a) Term debt Finance lease obligation Debenture payable $ 2014 145,947 107,281 24,509 32,065 $ $ 309,802 $ 2013 54,237 52,170 - 31,265 137,672 a Various floor plan facilities include an interest free period, further certain incentives and rebates may be available to reduce interest expense otherwise due on interest bearing portions of floor plans. The Company does not account for any fixed rate financial assets and liabilities at fair value through profit or loss. A change in 100 basis points in interest rates would have increased or decreased equity for the year ended December 31, 2014 by approximately $2,027 thousand (2013 -$1,176 thousand). Operational Risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Company’s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Company’s operations. The Company’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Company’s reputation with overall cost effectiveness and to avoid control procedures that restrict innovation and creativity. The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Company standards for the management of operational risk in the following areas: • requirements for appropriate segregation of duties, including the independent authorization of transactions; • requirements for the reconciliation and monitoring of transactions; • compliance with regulatory and other legal requirements; • documentation of controls and procedures; • requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified; • requirements for the reporting of operational losses and proposed remedial action; • development of contingency plans; • training and professional development; • ethical and business standards; and • risk mitigation, including maintaining insurance coverage. Compliance with Company standards is supported by a program of periodic reviews in consultation with an internal audit firm. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management of the Company. Capital Risk Management The Company’s objective when managing its capital is to safeguard its ability to continue as a going concern, so that it can continue to provide returns for Shareholders and benefits for other stakeholders and to provide an adequate return to Shareholders by pricing products and services commensurately with the level of risk. In the management of capital, the Company monitors its adjusted capital which comprises all components of equity (i.e. shares issued, accumulated earnings, shareholder distributions and dilutive instruments). The Company sets the amount of capital in proportion to risk. The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may issue shares/units to facilitate business combinations and or retire term debt or may adjust the amount of distributions paid to the Shareholders. 9 9   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 The Company uses the following ratios in determining its appropriate capital levels; a) a debt to total capital ratio (total interest bearing debt divided by total interest bearing debt plus book value of equity); b) an adjusted debt to adjusted earnings ratio (adjusted debt divided by adjusted earnings); c) an adjusted debt to adjusted assets ratio (calculated as adjusted debt divided by adjusted assets); d) a fixed charge coverage ratio (calculated as adjusted earnings divided by contractual principle, interest, dividend, and operating lease payments); and e) an asset coverage ratio (tangible assets divided by specific drawn amounts under certain credit facilities). Adjusted assets comprise all components of assets other than other intangible assets and goodwill. Adjusted equity comprises of all components of shareholders’ equity and is reduced by other intangible assets and goodwill. The Company must meet certain financial covenants as part of its current Canadian credit facility, all of which the Company was in compliance as at December 31, 2014. The relating three core covenants are summarized as: • Maintaining “total liabilities to tangible net worth ratio” not exceeding 4.0:1.0 calculated from adjusted total liabilities over adjusted equity. • Maintaining “fixed charge coverage ratio” greater to or equal to 1.2:1.0, calculated as adjusted EBITDA net of any Canadian debt or equity financing utilized over the sum of interest expense, scheduled principal payments, operating lease payments, and distributions paid to shareholders in the twelve months prior to the calculation date. • Maintaining “asset coverage ratio” greater than 3.0:1.0, calculated as North American adjusted net tangible total assets less consolidated debt excluding floor plan liabilities, plus debt due under the Canadian credit facility, divided by the amount due under the Canadian credit facility. • There were no changes in the Company’s approach to capital management in the period. Neither the Company, nor any of its other subsidiaries are subject to externally imposed capital requirements, other than as identified in Note 17. 28. Segment Information During the fourth quarter of 2014, the addition of Peterbilt of Ontario combined with the addition of a Vice President, Transportation resulted in the Company operating under three segments: Agriculture, Construction and Industrial, and Transportation. These segments are managed separately, and strategic decisions are made on the basis of their respective operating results. Prior to October 1, 2014 the Company operated under two separate segments. The realignment gave rise to changes in how management presents and reviews information for financial reporting and management decision making purposes. All prior period disclosure has been updated to reflect the change in operating segments, and certain amounts have been reclassified to conform to the current year presentation. Each of these business segment operations are supported by a single shared corporate head office. Certain corporate head office expenses are allocated to the business segments under either specific identification approach or a usage based metric. The corporate head office also incurs certain costs which are considered as public company costs, which are allocated to the segments based on the gross margin of the Canadian operations. Total corporate related expenditures, excluding income taxes, that have been allocated for the year ended December 31, 2014 are $6,424 thousand (2013 - $5,373 thousand). These three business segments are described in Note 3 and are considered to be the Company’s three strategic business units. The three business segments offer different products and services and are managed separately as they operate in different markets and require separate strategies. For each of the strategic business units, the Company’s key decision makers review internal management reports on a monthly basis. The following is a summary of financial information for each of the reportable segments. December 31, 2014 Segmented income figures: Agricultural Equipment Transportation Equipment Commercial and Industrial Equipment Total Revenue $ 631,673 $ 188,838 $ 159,098 $ 979,609 Profit for the year attributable to shareholders Share of profit of equity accounted investees Depreciation and amortization Finance income Finance expense including amounts in costs of sales Capital additions Segmented assets: Reportable segment assets Reportable segment liabilities Investment in associates Intangible assets Goodwill 16,061 712 6,351 218 (4,980) 21,046 386,260 231,500 5,268 29,665 14,992 (876) - 3,885 151 (1,927) 2,204 169,848 139,009 - 16,640 2,547 3,177 - 6,207 15 (1,445) 2,708 113,195 69,303 - 7,704 2,193 18,362 712 16,443 384 (8,352) 25,958 669,303 439,812 5,268 54,009 19,732 the cervus dealership difference1 0 1   |   c e r v u s a n n u a l r e p o r t 2 0 1 4 30. Related Party Transactions Key Management Personnel Compensation In addition to their salaries, the Company also provides non-cash benefits to directors and executive officers, and contributes to the deferred share plan and the employee share purchase plan, if enrolled, in accordance with the terms of the plans. The Company has no retirement or post-employment benefits available to its directors and executive officers. In addition, no directors or executive officers are part of the share option plan. The remuneration of key management personnel and directors during the year ended December 31 was: ($ thousands) Short-term benefits Share-based payments $ $ 2014 2,684 573 3,257 $ $ 2013 2,028 517 2,545 Key Management Personnel and Director Transactions Key management and directors of the Company control approximately 28% of the common voting shares of the Company. Other Related Party Transactions Certain officers and dealer managers of the Company have provided guarantees to John Deere aggregating $6,500 thousand. During the year ended December 31, 2014 and 2013, the Company paid those individuals $184 thousand (2013 - $177 thousand) for providing these guarantees. These transactions were recorded at the amount agreed to between the Company and the guarantors, are included in selling, general and administrative expense and have been fully paid during the year. December 31, 2013 Segmented income figures: Agricultural Equipment Transportation Equipment Commercial and Industrial Equipment Revenue $ 588,519 $ 108,460 $ Profit for the year attributable to shareholders Share of profit of equity accounted investees Depreciation and amortization Finance income Finance expense including amounts in costs of sales Capital additions Segmented assets: Reportable segment assets Reportable segment liabilities Investment in associates Intangible assets Goodwill 17,834 3,527 4,987 282 (4,536) 17,804 260,795 137,919 7,786 7,769 4,673 1,450 - 2,284 224 (1,202) 527 59,961 29,262 - 7,727 - 164,159 3,806 - 6,037 26 (1,351) 9,588 105,474 40,629 - 10,643 2,193 $ Total 861,138 23,090 3,527 13,308 532 (7,089) 27,919 426,230 207,810 7,786 26,139 6,866 The Company primarily operates in Canada but includes subsidiaries in Australia (Cervus Australia PTY Ltd.) and, in New Zealand (Cervus NZ Equipment Ltd.) which operate 15 agricultural equipment dealerships. Gross revenue and non-current assets for the geographic territories of New Zealand and Australia were $139,487 thousand (2013 - $89,758 thousand) and $26,577 thousand (2013 - $17,454 thousand) respectively. 29. Commitments and Contingencies Financing Arrangements John Deere Credit Inc. (“Deere Credit”) and other financing companies provide financing to certain of the Company’s customers. A portion of this financing is with recourse to the Company if the amounts are uncollectible. At December 31, 2014 payments in arrears by such customers aggregated $304 thousand (2013 - $64 thousand). In addition, the Company is responsible for assuming all lease obligations held by its customers with Deere Credit and other financing companies through recourse arrangements for the net residual value of the lease outstanding at the maturity of the contract. At December 31, 2014, the net residual value of such leases aggregated $166,703 thousand (2013 - $123,862 thousand). Management believes that the potential liability in relation to the amounts outstanding is negligible and consequently, no accrual has been made in these financial statements in relation to any potential loss on assumed lease obligations. Deferred Tax Asset As previously disclosed, the Corporation received a proposal letter from the Canada Revenue Agency on March 4, 2014, regarding the October 2009 transaction involving Cervus LP and Vasogen Inc. At the date of these financials, the Corporation has not received a formal reassessment of its previous income tax filings. Cervus remains confident in the appropriateness of its tax-filing positions and the expected tax consequences of the conversion transaction and intends to defend such position vigorously through appeal if a notice of reassessment is received from the Canada Revenue Agency. As of the date of these financial statements, no amount has been accrued. In order to appeal any reassessment, 50% of any reassessed amount is due. Based on the CRA’s March 4, 2014 proposal letter, any reassessment received in the near term would be of the Company’s taxation years ending November 30, 2009, January 3, 2010, December 31, 2010 and December 31, 2011. Based on these figures, the Company expects $10.6 million would be required on appeal, should the CRA reassess the Company’s tax filings through to December 31, 2011. If the CRA proceeds with reassessment of tax filings through December 31, 2011, we believe that the CRA will also proceed with reassessment of the December 31, 2012, 2013, and 2014 tax filings under the same basis. Should the tax filings of the Company’s tax be reassessed for the November 30, 2009 through to the December 31, 2014 inclusive, the Company expects approximately $21.6 million would be required to appeal. the cervus dealership differenceN O T E S PETER LAC EY Executive Chairman PR INCIPAL BANK TD Canada Trust G RAHAM DRAKE President & Chief Executive Officer AUDITORS KPMG LLP RANDALL MU TH Chief Financial Officer JO HN HIGG INS Vice President Operations, Transportation CAL JO HNSON Vice President Operations, Agriculture FRED HNATIW Vice President Operations, Commercial & Industrial STEL L A COSBY Vice President, People DO N BELL Director LARRY BENKE Director STEVEN COLLICU TT Director G ARY HARRIS Director ANG ELA LEKATSAS Director L EGAL COUNSEL Shea, Nerland, Calnan Calgary, Alberta TRANSFER AGENT Computershare Trust Company of Canada TRADING SYMBOL “CVL” Toronto Stock Exchange (TSX) Annual Special Meeting APRIL 23, 2015 @ 4:30 PM Cervus Ponoka 3600 Hwy 2A, South Ponoka, Alberta, Canada T4J 1J8 cervus corpor ate office harvest hills business park 5201, 333 – 96th avenue ne calgary, alberta canada t3k 0s3 t. 403.567.0339 f. 403.567.0392 “cvl” toronto stock exchange cervuscorp.com 

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