Annual Information Form - AutoCanada Investor Relations · 2018. 11. 5. · For the year ended...

AutoCanada Inc.

For the year ended December 31, 2014

Annual Information Form

Annual Information Form

� Table of ContentsGENERAL DISCLOSURE MATTERS 1

Certain References and Glossary 1

Date of Information 1

Forward Looking Information 1

Non-GAAP Measures 3

CORPORATE STRUCTURE 5

OVERVIEW AND DEVELOPMENTOF OUR BUSINESS

7

Overview 7

History 8

Significant Acquisitions 10

Our Operations 10

Sources of Revenue and Gross Profit 10

Locations 15

Acquisitions, Divestitures, and Relocations 17

Competition 21

Our Competitive Strengths 21

Inventories 24

Automobile Dealership Franchise Agreements 25

Financing 28

Marketing 30

Management Information Systems 30

Employees 31

Our Intellectual Property and Proprietary Rights 31

Regulatory Matters and Policies 31

RISK FACTORS 34

Risks Related to Our Business and the Industry in

Which We Operate 34

CAPITAL STRUCTURE 45

CREDIT RATINGS 46

DIVIDENDS/DISTRIBUTIONS 47

Dividend Policy 47

Historical Distributions 47

MARKET FOR SECURITIES 48

Trading Price and Volume 48

DIRECTORS AND OFFICERS 49

Corporate Cease Trade Orders or Bankruptcies 51

Personal Bankruptcies 51

Conflicts of Interest 51

Charter of the Audit Committee 52

Composition of the Audit Committee 52

Relevant Education and Experience 52

External Auditor Service Fees (by category) 54

LEGAL PROCEEDINGS ANDREGULATORY ACTIONS

55

INTEREST OF MANAGEMENT ANDOTHERS IN MATERIAL TRANSACTIONS

55

TRANSFER AGENT AND REGISTRAR 55

MATERIAL CONTRACTS 56

INTEREST OF EXPERTS 56

ADDITIONAL INFORMATION 56

SCHEDULE A GLOSSARY OF TERMS 57

SCHEDULE B AUTOCANADA INC.AUDIT COMMITTEE CHARTER

59

General Disclosure Matters

Certain References andGlossaryIn this Annual Information Form (“AIF”), unless thecontext otherwise requires, references to“AutoCanada”, “ACI”, the “Company”, “we”, “us”,“our” or similar terms refer to AutoCanada Inc.together with its subsidiaries, the Dealer GPs andthe Dealer LPs and any other franchisedautomobile dealership owned by the foregoingparties.

The “Glossary of Terms” attached as Schedule Ato this AIF contains definitions of terms used inthis AIF.

Date of InformationThe information in this AIF is presented as ofMarch 19, 2015, unless otherwise indicated.

Forward LookingInformationCertain statements contained in this AIF areforward-looking information (collectively “forward-looking statements”), within the meaning of theapplicable Canadian securities legislation. Wehereby provide cautionary statements identifyingimportant factors that could cause our actualresults to differ materially from those projected inthese forward-looking statements. Any statementsthat express, or involve discussions as to,expectations, beliefs, plans, objectives,assumptions or future events or performance(often, but not always, through the use of words orphrases such as “will likely result”, “are expectedto”, “will continue”, “is anticipated”, “projection”,“vision”, “goals”, “objective”, “target”, “schedules”,“outlook”, “anticipate”, “expect”, “estimate”,“could”, “should”, “expect”, “plan”, “seek”, “may”,“intend”, “likely”, “will”, “believe” and similarexpressions are not historical facts and areforward-looking and may involve estimates andassumptions and are subject to risks, uncertaintiesand other factors some of which are beyond ourcontrol and difficult to predict. Accordingly, thesefactors could cause actual results or outcomes todiffer materially from those expressed in the

forward-looking statements. Therefore, any suchforward-looking statements are qualified in theirentirety by reference to the factors discussedthroughout this document.

In particular, material forward-looking statementsin this annual information form include:

Š our intentions for future growth and itseffect on financial operations;

Š our expectations regarding the future ofthe Canadian automotive retail industry;

Š management’s expected usage of GAAPand non-GAAP financial measures;

Š our expectation of reduced supply ofoff-lease vehicles in the future;

Š our belief that an extendedmanufacturer’s warranty will increase ourpotential to retain pre-owned vehiclepurchasers as future parts and servicecustomers;

Š our intention to improve our used vehicletrade-in valuation process;

Š our expectation to improve usedinventory turnover;

Š our belief that relocating certaindealerships may provide growth and thetiming and cost of relocations;

Š our intentions of our incentive andcompensation plans;

Š our intentions for future focus ofmarketing efforts;

Š our expectation of the effect of currentcredit conditions on our futureoperations;

Š our belief that a higher percentage of allrepair work will be performed atdealerships;

Š our goals of retaining long-termcustomers;

Š anticipation that lease options will beexercised for dealership land andbuildings;

Š our expectations regardingmacroeconomic factors including fuelprices

AutoCanada Š Annual Information Form Š Page 1

Š our belief that the trend of moreexpansive and stricter environmentallegislation and regulations is likely tocontinue.

Š statements that we do not anticipate thatany material environmental liabilities willbe incurred in the future.

Š expectation regarding seasonal variationsin revenues.

Š statements regarding S&P issuer creditrating.

Š our expectation to incur some additionaladministrative and legal costs as theCompany adds additional dealerships.

Š expectations that re-imaging will attractmore customers to its dealerships.

Š the impact of working capitalrequirements and its impact on futureliquidity.

Š our statements regarding the acquisitionof franchises in which we currently do nothave a relationship;

Š statements regarding the amount of timeit takes for acquisitions and Open Pointsto achieve normalized performance;

Š statements regarding our competitivestrengths and their effect on operationsin the future;

Š expectation that our supply of vehicleswill meet the demand in our markets;

Š statements regarding the timing, cost,and structure of dealership acquisitions;

Š expectations and future plans regardingour current and other potential GMacquisitions;

Š statements regarding the timing of OpenPoint franchises commencing operations,estimated construction costs, and salestargets;

Š the impact of and estimates related todealership real estate relocations andpurchases and its impact on liquidity,financial performance and the Company’scapital requirements;

Š guidance with respect to futureacquisition and Open Point opportunities;

Š targets for inventory turnover andinventory management;

Š potential future impact of provisions inour credit agreements;

Š our beliefs of the future impact of internetand e-commerce on the Company;

Š our anticipated compliance withgovernmental regulations andassumptions with respect to changes inregulations; and

Š statements we have made regardingfuture dividends of the Companyincluding the effect of acquisitions onearnings of the Company and thepayment of dividends.

Although we believe that the expectationsreflected by the forward-looking statementspresented in this AIF are reasonable, our forward-looking statements have been based onassumptions and factors concerning future eventsthat may prove to be inaccurate. Thoseassumptions and factors are based on informationcurrently available to us about ourselves and thebusinesses in which we operate. Information usedin developing forward-looking statements has beenacquired from various sources including third-partyconsultants, suppliers, regulators, and othersources. In some instances, material assumptionsare disclosed elsewhere in this AIF in respect offorward-looking statements. We caution the readerthat the following list of assumptions is notexhaustive. The material factors and assumptionsused to develop the forward-looking statementsinclude but are not limited to:

Š no significant adverse changes to theautomotive market, competitiveconditions, the supply and demand ofvehicles, parts and service, and financeand insurance products;

Š no significant construction delays thatmay adversely affect the timing ofdealership relocations and renovations;

Š no significant disruption of our operationssuch as may result from harsh weather,natural disaster, accident, civil unrest, orother calamitous event;

Page 2 Š AutoCanada Š Annual Information Form

Š no significant unexpected technologicalevent or commercial difficulties thatadversely affect our operations;

Š continuing availability of economicalcapital resources; demand for ourproducts and our cost of operations;

Š no significant adverse legislative andregulatory changes; and

Š stability of general domestic economic,market, and business conditions;

Š assumptions regarding other automobilemanufacturer agreements; and

Š assumptions regarding provincialgovernment regulations in jurisdictionsin which we do not operate.

Because actual results or outcomes could differmaterially from those expressed in any forward-looking statements, investors should not placeundue reliance on any such forward-lookingstatements. By their nature, forward-lookingstatements involve numerous assumptions,inherent risks and uncertainties, both general andspecific, which contribute to the possibility that thepredicted outcomes will not occur. The risks,uncertainties and other factors, many of which arebeyond our control, that could influence actualresults include, but are not limited to:

Š rapid appreciation or depreciation of theCanadian dollar relative to the U.S. dollar;

Š a sustained downturn in consumerdemand and economic conditions in keygeographic markets;

Š adverse conditions affecting one or moreof our automobile manufacturers;

Š the ability of consumers to accessautomotive loans and leases;

Š competitive actions of other companiesand generally within the automotiveindustry;

Š our dependence on sales of new vehiclesto achieve sustained profitability;

Š levels of unemployment in our marketsand other macroeconomic factors;

Š our suppliers ability to provide a desirablemix of popular new vehicles;

Š the ability to continue financing inventoryunder similar interest rates;

Š our suppliers ability to continue toprovide manufacturer incentive programs;

Š the loss of key personnel and limitedmanagement and personnel resources;

Š the ability to refinance credit agreementsin the future;

Š changes in applicable environmental,taxation and other laws and regulationsas well as how such laws and regulationsare interpreted and enforced;

Š risks inherent in the ability to generatesufficient cash flow from operations tomeet current and future obligations; and

Š the ability to obtain automotivemanufacturers’ approval for acquisitions.

Please refer to the section entitled “Risk Factors”for a complete listing. Further, any forward-lookingstatement speaks only as of the date on whichsuch statement is made, and, except as requiredby applicable law, we undertake no obligation toupdate any forward-looking statement to reflectevents or circumstances after the date on whichsuch statement is made or to reflect theoccurrence of unanticipated events. New factorsemerge from time to time, and it is not possible formanagement to predict all of such factors and toassess in advance the impact of each such factoron our business or the extent to which any factor,or combination of factors, may cause actual resultsto differ materially from those contained in anyforward-looking statement.

Non-GAAP MeasuresReferences to “EBITDA” are to earnings beforeinterest expense (other than interest expense onfloorplan financing and other interest), incometaxes, depreciation, amortization and assetimpairment charges. Management believes that,in addition to earnings or loss, EBITDA is a usefulsupplemental measure of both performance andcash available for distribution before debt service,changes in working capital, capital expendituresand income taxes.


We have used “Adjusted EBITDA” as the basis forthe analysis of our past financial performance.Adjusted EBITDA is an indicator of a company’soperating performance and ability to incur andservice debt prior to recognizing the portion ofshare-based compensation related to changes inthe share price and its impact on the Company’scash-settled portions of its share-basedcompensation programs. The Company considersthis expense to be non-cash in nature as wemaintain a share purchase trust in which wepurchase shares on the open market as these unitsare granted to reduce the cash flow risk associatedwith fluctuations in the share price. Share-basedcompensation, a component of employeeremuneration, can vary significantly with changesin the price of the Company’s common shares. TheCompany believes adjusted EBITDA providesimproved continuity with respect to thecomparison of our operating results over a periodof time.

References to “Free cash flow” are to cashprovided by (used in) operating activities(including the net change in non-cash workingcapital balances) less capital expenditures (notincluding acquisitions of dealerships and dealershipfacilities). Free cash flow is a measure used bymanagement to evaluate its performance. Whilethe closest GAAP measure is cash provided byoperating activities, Free cash flow is consideredrelevant because it provides an indication of howmuch cash generated by operations is availableafter capital expenditures. It shall be noted thatalthough we consider this measure to be Free cashflow, financial and non-financial covenants in ourcredit facilities and dealer agreements may restrictcash from being available for distributions, re-investment in ACI, potential acquisitions, or otherpurposes. Investors should be cautioned that Freecash flow may not actually be available for growthor distributions from ACI.

References to “Adjusted free cash flow” are to cashprovided by (used in) operating activities (beforechanges in non-cash working capital balances) lessnon-growth capital expenditures. Adjusted freecash flow is a measure used by management toevaluate its performance. Adjusted free cash flowis considered relevant because it provides anindication of how much cash generated byoperations, before changes in non-cash workingcapital, is available after deducting expendituresfor non-growth capital assets. It shall be noted thatalthough we consider this measure to be adjustedfree cash flow, financial and non-financialcovenants in our credit facilities and dealeragreements may restrict cash from being availablefor distributions, re-investment in the Company,potential acquisitions, or other purposes. Investorsshould be cautioned that Adjusted free cash flowmay not actually be available for dividends orgrowth of the Company.

Cautionary Note Regarding Non-GAAP Measures

EBITDA, Adjusted EBITDA, Free Cash Flow, andAdjusted Free Cash Flow are not earningsmeasures recognized by GAAP and do not havestandardized meanings prescribed by GAAP.Investors are cautioned that these non-GAAPmeasures should not replace net earnings or loss(as determined in accordance with GAAP) as anindicator of ACI’s performance, of its cash flowsfrom operating, investing and financing activities oras a measure of its liquidity and cash flows. ACI’smethods of calculating EBITDA, Adjusted EBITDA,Free Cash Flow, and Adjusted Free Cash Flow maydiffer from the methods used by other reportingissuers. Therefore, ACI’s EBITDA, Adjusted EBITDA,Free Cash Flow, and Adjusted Free Cash Flow maynot be comparable to similar measures presentedby other issuers.


Reader Advisory

This AIF typically refers to the operating results forthe year ended December 31, 2014 of the Companyand compares these to the operating results of theCompany for previous years. Until July 11, 2014, theCompany had investments in associates comprisedof six General Motors dealerships, and accountedfor the investments utilizing the equity method,whereby the operating results of these investmentswere included in one line item on the statement ofcomprehensive income known as Income frominvestments in associates. As a result, the Company

did not incorporate the consolidated results of itsinvestments in associates in its discussion andanalysis prior to and as at June 30, 2014. On July 11,2014, the Company completed a businesscombination under common control, resulting inthe accounting consolidation of the results of itsinvestments in associates using the predecessorvalues method. Additional information regardingthis business combination is contained in thefinancial statements as at and for the year endedDecember 31, 2014 and the accompanyingmanagement’s discussion and analyses which havebeen filed on SEDAR at www.sedar.com.

Corporate StructureAutoCanada Inc. was incorporated under theCanada Business Corporations Act (“CBCA”) onOctober 29, 2009. ACI amalgamated with itswholly-owned subsidiary, AutoCanada GP Inc., onJanuary 1, 2011 and continued under the nameAutoCanada Inc.

The principal and head office of ACI is located at200 – 15505 Yellowhead Trail, Edmonton, AlbertaT5V 1E5. The registered office of ACI is located at1900, 520 – 3rd Avenue S.W., Calgary, AlbertaT2P 0R3.

IntercorporateRelationshipsThe significant subsidiaries of ACI are AutoCanadaHoldings Inc., a wholly-owned subsidiaryincorporated under the CBCA, and each of theHolding LPs and Dealer LPs. Holdings wasincorporated under the CBCA on October 29, 2009.

Each of the Holding LPs and Dealer LPs is a limitedpartnership formed under the laws of the Provinceof Manitoba. Each Dealer LP had been formed toacquire the assets and undertaking relating to oneof the franchised automobile dealerships. Each ofthe Holdings GPs and the Dealer GPs wereincorporated under the CBCA.


The following chart illustrates our corporate structure at December 31, 2014:

Holding GPs(6)

100% common

shares

100%

common

shares

AutoCanadaHoldings Inc.

Other Holding Companies (13)

Limited Partnership

Interest (99.995%)

General Partner Interest

(0.005%)

AutoCanada Inc.

Shareholders

Shares

100%

common

shares

100% common

shares

DealerGPs(36)

General Partner Interest

(0.005%)

HoldingLPs(6)

Dealer LPs(36)

Limited Partnership

Interest (99.995%)

Own and Operate AutoCanada

franchised automobile

dealerships

Franchise or sales and

service agreementsAutomobileManufacturers

Owns 100% one VW

and one Audi

Dealerships

St James DealershipHolding Company

AutoCanada BHoldings Inc.

100%

common

shares

85% common

shares

Owns 100% of two BMW

Dealerships

100% common

shares

Owns non-voting

preferred share

investments in eight

General Motors

Dealeships

AutoCanada GHoldings Inc.

100%

common

shares

Own twenty dealership facilities

and six parcels of land

Real Estate HoldingCompanies (23)


Overview and Development of Our Business

OverviewAutoCanada is one of Canada’s largest multi-location automobile dealership groups, currentlyoperating 48 dealerships, including 56 franchises,in British Columbia, Alberta, Saskatchewan,Manitoba, Ontario, Quebec, New Brunswick andNova Scotia. In 2014, our dealerships soldapproximately 57,000 vehicles and processedapproximately 786,000 service and collision repairorders in our 822 service bays.

See the table in “Description of the AutoCanadaBusiness – Locations” for a list of the automobile

dealerships and franchises owned by us as atMarch 19, 2015 and the year such dealership wasopened or acquired by us or COAG.

We currently are authorized to sell through ourdealerships the following new vehicle brands:Chrysler, Dodge, Jeep, Ram, Fiat, Chevrolet, GMC,Buick, Cadillac, Hyundai, Kia, Nissan, Infiniti,Volkswagen, Audi, BMW, MINI, Mitsubishi andSubaru. In addition, we sell a broad range of usedvehicles. We also offer a full range of parts, serviceand collision repair services and facilitate the saleof third party finance and insurance products,extended warranties and replacement and after-market automotive products.

The following charts illustrate the Revenue and Adjusted EBITDA growth since the 2009 fiscal year.

Revenue(in millions of dollars)

Adjusted EBITDA(1)

(in millions of dollars)

2009 2010 2012 20142013

$776.9

$18.4

$869.2

$16.7

$1,103.9

$37.9

$2,214.8

$89.1

$1,409.0

$59.2

2011

$1,008.3

$29.1

Revenue

Adjusted EBITDA

$-

$500.00

$1,000.00

$1,500.00

$2,000.00

$2,500.00

$-

$20.00

$40.00

$60.00

$80.00

$100.00

(1)

Notes:(1) Adjusted EBITDA is not a recognized measure under GAAP and does not have a standardized meaning prescribed by

GAAP. Our Adjusted EBITDA may not be comparable to similar measures presented by other issuers. See “Non-GAAP Measures”.

The Canadian retail automotive industry is highlyfragmented with approximately 3,500 franchisedautomobile dealerships. Although we expect theCanadian automotive retail industry to continue toconsolidate as the average age of automobile

dealership owners continues to rise, the Company’sability to act as a consolidator is limited to thosebrands which have accepted public ownership orwhich are related to same (see “History” and“Recent Developments”).


HistoryOur founder and Executive Chairman, PatrickPriestner, has been directly involved in the retailautomotive industry since 1974. He was one of thefounders of a predecessor to COAG when, in 1993,it purchased a franchised automobile dealership inEdmonton, Alberta that had been in business since1952. In 2001, after growing the business to fivefranchised automobile dealerships, we began toimplement our strategy of becoming a nationalmulti-location automobile dealership group inCanada, a strategy that had been successfullyexecuted by that time by owners of severalfranchised automobile dealers in the United States.Between 2001 and 2011, we grew by acquiring andsuccessfully integrating the operations ofseventeen existing franchised automobiledealerships and establishing three “Open Point”dealerships, and we also sold the assets of one ofour dealerships.

Three Year History

The following is a three year history of theCompany’s acquisitions, dispositions, Open Points,and debt and equity offerings:

Š May 2012 – Acquired a 31% equity interestin Nicholson Chevrolet, now operating asSherwood Park Chevrolet (SherwoodPark, Alberta)

Š June 2012 – Acquired a 31% equityinterest in Petersen Buick GMC, nowoperating as Sherwood Buick GMC(Sherwood Park, Alberta)

Š January 2013 – Acquired substantially allof the assets of People’s Automotive, nowoperating as Grande Prairie Volkswagen,and its dealership facility (Grande Prairie,Alberta)

Š March 2013 – Acquired an 80% equityinterest in Peter Baljet Chevrolet BuickGMC (Duncan, British Columbia)

Š April 2013 – Acquired substantially all ofthe assets of the St. James Group ofCompanies, which included St. JamesVolkswagen, St. James Audi and therelated dealership facilities (Winnipeg,Manitoba)

Š May 2013 – ACI completed a publicoffering of common shares, whereby1,840,000 common shares were issuedfrom treasury at a price of $25.00 pershare

Š July 2013 – Acquired substantially all ofthe assets of Courtesy Chrysler Dodge(1987), now operating as CourtesyChrysler Jeep Dodge Ram (Calgary,Alberta)

Š September 2013 – Acquired substantiallyall of the assets of Eastern ChryslerPlymouth Inc., now operating as EasternChrysler Jeep Dodge Ram, which includedits dealership facility (Winnipeg,Manitoba)

Š December 2013 – Divested ThompsonChrysler Jeep Dodge (Thompson,Manitoba); purchased eleven dealershipreal estate properties from COAG, therelated party from whom the Companypreviously leased the properties

Š February 2014 – Awarded the right to aVolkswagen Open Point dealership inSherwood Park, Alberta

Š March 2014 – Acquired a 70% equityinterest in each of Saskatoon MotorProducts (Saskatoon, Saskatchewan) andMann-Northway Auto Source (PrinceAlbert, Saskatchewan)

Š April 2014 – Acquired an 80% equityinterest in McNaught Buick Cadillac GMC(Winnipeg, Manitoba)

Š May 2014 – ACI completed an offering, ona private placement basis, of $150.0million aggregate principal amount of5.625% senior unsecured notes dueMay 25, 2021

Š June 2014 – Acquired a 100% equityinterest in Automobile Canbec Inc.,operating as BMW Canbec and MINI MontRoyal (Montreal, Quebec), subsequentlyreduced to 85% in December 2014; andacquired the assets of Dodge City Auto1984 Ltd., operating as Dodge CityChrysler Jeep Dodge Ram (Saskatoon,Saskatchewan)


Š June/July 2014 – Acquired substantiallyall of the assets of Calgary Hyundai,Crowfoot Hyundai, Hyatt Mitsubishi,Northland Volkswagen, Fish Creek Nissan,and Hyatt Infiniti (Calgary, Alberta) andacquired the exclusive right to build andoperate a Nissan motor vehicle dealershipon a designated property in southeastCalgary, Alberta

Š July 2014 – Completed a public offeringof common shares, whereby 2,565,000ACI Shares were issued from treasury at aprice of $78.00 per ACI Share; completeda business combination under commoncontrol, resulting in the consolidation ofthe financial results of the Company’sinvestments in associates

Š August 2014 – Acquired substantially allof the assets of Tower Chrysler PlymouthLtd., operating as Tower Chrysler(Calgary, Alberta); opened NorthEdmonton Kia Open Point dealership(Edmonton, Alberta)

Š September 2014 – Acquired a 75% equityinterest in Lakewood Chevrolet(Edmonton, Alberta)

Š October 2014 – Acquired substantially allof the assets of Toronto Chrysler(Toronto, Ontario)

Š November 2014 – Acquired an 80% equityinterest in Bridges Chevrolet Buick GMCand a 100% equity interest in itsdealership land and facility (NorthBattleford, Saskatchewan)

Š December 2014 – Acquired an 85% equityinterest in Auto Boulevard St-Martin Inc.,operating as BMW MINI Laval, plus 100%of the dealership land and facility (Laval,Quebec), and concurrently divested a 15%equity interest in Automobile Canbec Inc.

Š February 2015 – Announced TSX approvalfor the Company to complete thepurchase of up to 490,193 ACI Sharespursuant to a normal course issuer bid. Todate no purchases have been completed.

Please refer to “Description of the AutoCanada Business – Acquisitions, Divestitures, and Relocations” forfurther information on the above transactions.

Number of Dealerships Operated at Year End

2007 2009 2012 20142013

19 22 26 4831

2011

24

2008

22

2010

23

-

10

20

30

40

50


Significant AcquisitionsBetween the period of June 23, 2014 and July 1,2014, the Company purchased all of the operatingand fixed assets of 678938 Alberta Ltd. (“CalgaryHyundai”), 1446691 Alberta Ltd. (“CrowfootHyundai”), 998699 Alberta Ltd. (“HyattMitsubishi”), 588338 Alberta Ltd. (“NorthlandVolkswagen”), 969642 Alberta Ltd. (“Fish CreekNissan”), and 1791109 Alberta Ltd. (“Hyatt Infiniti”),(hereinafter collectively referred to as the “HyattGroup”), located in Calgary, Alberta, for total cashconsideration of $91.4 million. The initial purchaseprice of the Hyatt Group was financed by drawingon the Company’s revolving credit facility.In addition, the Company issued 18,753 ACI Sharesat a deemed price of $79.99 per share (for total

consideration of $1.5 million) on July 1, 2014 asconsideration for the purchase of the exclusiveright to build and operate a Nissan motor vehicledealership on a designated property in southeastCalgary (the “Nissan Open Point Dealership”).

The acquisition of the Hyatt Group constituted a“significant acquisition” for the Company.Accordingly, in accordance with the requirementsof National Instrument 51-102 ContinuousDisclosure Obligations (“NI 51-101”) the Companyfiled a business acquisition report (a “BAR”) onJuly 22, 2014 with respect to the acquisition of theHyatt Group and the Nissan Open Point Dealership,which is available for viewing under the Company’sprofile on SEDAR at www.sedar.com.

DESCRIPTION OF THE AUTOCANADA BUSINESS

Our OperationsOur current multi-location automobile dealershipmodel of 48 automobile dealerships (56 franchises)located in eight provinces enables us to serve adiversified geographic customer base and enjoybenefits not available to single location dealerships.In addition, by operating eight dealerships inCalgary, Alberta, seven dealerships in GreaterEdmonton, Alberta, six dealerships in GrandePrairie, Alberta, three dealerships in Prince George,British Columbia, four dealerships in the GreaterToronto Area, four dealerships in Winnipeg,Manitoba, as well as four dealerships in the FraserValley area of British Columbia, we are able to gainthe advantages associated with a “platform” ofdealerships in a single geographic area.

Our franchised automobile dealerships areoperated as distinct profit centres in which thedealer principals are given significant autonomywithin overall operating guidelines. This autonomy,combined with the dealer principals’ understandingof their local markets, enables the dealer principalsto effectively run day-to-day operations, market tocustomers, recruit new employees and gaugeacquisition opportunities in their local markets. Our

dealer principals are required to take an active,hands-on approach to operating their respectivedealerships. Each dealer principal is supported by acomplete management team that providesoversight and management over every facet of thebusiness. While each member of a dealership’smanagement team, other than the financialcontrollers, reports directly to the dealer principal,they also report to one or more members of ourhead office senior management team. The financialcontrollers report directly to the head officefinance group. Our reporting structure is designedto facilitate the sharing of ideas and marketintelligence in an efficient and effective manner.

Sources of Revenue andGross ProfitWe generate revenues and gross profit from fourinter-related business operations: new vehiclesales; used vehicle sales; parts, service and collisionrepair; and finance and insurance. The followingtwo charts show our revenues and gross profitfrom the four business operations over the past 6years.


Revenue by Business Operation(in millions of dollars)

2009 2010 2012 20142013

$415.8

$209.1

$514.7

$202.5

$683.0

$243.4

$1,342.3

$495.4

$882.9

$300.9

$-

$200.00

$600.00

$800.00

$1,000.00

$1,400.00

2011

$640.7

$206.0

$108.4 $108.8 $114.3 $255.7$142.3$110.5

$43.6 $43.2 $61.2 $121.4$83.0$51.1

New Vehicle

Used Vehicle

Parts/Service

F&I

$400.00

$1,200.00

Gross Profit by Business Operation(in millions of dollars)

2009 2010 2012 20142013

$30.0

$19.5

$38.1

$16.9

$57.8

$16.3

$106.0

$29.5

$75.8

$20.3

$-

$20.00

$60.00

$80.00

$100.00

$140.00

2011

$47.7

$17.4

$53.3 $55.9 $59.9 $128.6$73.7$57.7

$39.2 $39.1 $56.4 $109.1$76.2$46.4

$40.00

$120.00

New Vehicle

Used Vehicle

Parts/Service

F&I


New Vehicle Sales

Our retail new vehicle sales include new vehiclesales and other similar agreements, which aremade by our franchised automobile dealerships. Inaddition to the profit from the sale itself, a typicalnew vehicle sale or lease transaction creates keyprofit opportunities for our dealerships from theresale of any trade-in vehicle purchased by thedealer, sale of third party finance or leasetransactions and vehicle service and insurancecontracts in connection with the retail sale, andservice and repair of the vehicle during and afterthe warranty period.

New vehicle leases, which are provided by thirdparties, generally have shorter terms, resulting incustomers returning to a dealership morefrequently than in the case of financed purchases.

In addition, leases provide us with a source of late-model, off-lease vehicles for our used vehicleinventory. Generally, leased vehicles remain underfactory warranty for the term of the lease, allowingfranchised automobile dealers to provide repairsand service to the customer throughout the leaseterm. Over the past five years ACI has witnessed asignificant drop in new vehicle lease transactions.This has been a contributing factor to a decrease insupply of quality nearly-new used vehicles. Webelieve that our used vehicle sales and grossprofits have been negatively affected by thedecrease in supply of nearly-new used vehicles. Atthis time, we can provide no assurance that newvehicle lease transactions will return to historicallevels. Since we cannot assume that new vehiclelease transactions will return, Management hasfocused on sourcing quality used vehicles throughcustomer trade-ins and manufacturer auctions.

The chart below shows our historical retail new vehicle sales over the past six years:

Retail New Vehicle Sales by AutoCanada

2009 2012 20142013

11,117 16,226 30,34620,523

2011

14,499

2010

12,767

-

10,000

20,000

25,000

30,000

35,000

5,000

15,000

We acquire our new vehicle inventory fromautomobile manufacturers. Automobilemanufacturers allocate products among theirdealerships based primarily on historical salesvolume and planned future sales. We have a teamof new vehicle inventory analysts that monitordealership ordering process (including quantity bymodel and trim level), inventory stocking levels forin-transit and landed units, inventory turnover andprojected days’ supply. We believe that our newvehicle analysts provide a valued service to ourdealers to prevent ordering which may result in

excess supply of vehicles as a result of impropermodels and trim levels.

We finance our inventory purchases throughfloorplan financing provided by The Bank of NovaScotia (“Scotiabank”), Canadian Imperial Bank ofCommerce (“CIBC”), Royal Bank of Canada(“RBC”), VW Credit Canada Inc. (“VCCI”), andBMW Financial Services Canada (“BMW Financial”).Subject to floorplan limitations imposed by ourlenders and our internally imposed days of supplyguidelines, inventory selection and managementoccurs at the franchised automobile dealer level.


Used Vehicle Sales

Used vehicle sales typically generate higher grossmargins than new vehicle sales because of theirlimited comparability and the subjective nature oftheir evaluation, which is dependent, among otherthings, upon a vehicle’s age, warranty, mileage andcondition. Over the past two years, we have seen adecline in used vehicle margins due to lack ofsupply of quality used vehicles. Managementcannot predict whether used vehicle margins willreturn to historical levels. Used vehicle valuationsalso vary based upon supply and demand factors,the level of new vehicle incentives, the availabilityof retail financing, and general economicconditions.

Used vehicle sales give us an opportunity to furtherincrease our revenues by aggressively pursuingcustomer trade-in vehicles, increase servicecontract sales, provide parts and services requiredin the maintenance of the vehicle, performreconditioning work on trade-ins and providefinancing to used vehicle purchasers.

Profits from used vehicle sales depend primarily onthe ability of our franchised automobile dealers toobtain a high quality supply of used vehicles atreasonable prices and to effectively manage thatinventory. Our new vehicle operations provide ourused vehicle operations with a large supply of highquality trade-ins and some off-lease vehicles, which

we believe are the best sources of attractive usedvehicle inventory. Our dealers supplement theirused vehicle inventory with purchases at auctions,including manufacturer-sponsored auctionsavailable only to franchised dealers, and fromwholesalers. The decline in off-lease vehicles overthe past five years has resulted in a decrease insupply of high quality used inventory for ourdealerships over the past three years.

We actively manage the quality and age of ourused vehicle inventory and seek to increase theprofitability of our used vehicle operations byparticipating in automobile manufacturercertification programs where available. Variousmanufacturers provide franchised automobiledealers the opportunity to sell certified pre-ownedvehicles, which are often eligible for new vehiclebenefits such as preferred vehicle finance rates,better automobile warranties and an extension ofthe manufacturer’s warranty. Manufacturercertified pre-owned vehicles typically sell at apremium compared to other used vehicles and areavailable only at franchised automobile dealerships.Management believes that an extendedmanufacturer’s warranty increases our potential toretain the pre-owned vehicle purchaser as a futureparts and service customer since certified pre-owned warranty work can only be performed atfranchised automobile dealerships.

The chart below shows our historical retail used vehicle sales over the past six years:

Retail Used Vehicle Sales by AutoCanada

2009 2012 20142013

9,733 9,458 15,72510,375

2011

8,667

2010

8,755

-

4,000

8,000

10,000

12,000

16,000

2,000

6,000

14,000


Used vehicles are generally offered at ourdealerships for an average of approximately 45days. At the end of 90 days, vehicles which havenot been sold to a retail buyer are generally eithersold to an outside wholesaler or offered at auction.Certain used vehicles acquired by us as “trade-ins”may not be suitable for sale in our used vehiclebusiness because of their age, mileage or physicalcondition. Rather than reconditioning thesevehicles for resale by us, we typically sell thesevehicles immediately in the wholesale or auctionmarket. We do not regularly transfer used vehiclesamong our dealerships, except to provide balancedinventories of used vehicles at each of ourdealerships. We have a team of used inventoryanalysts that monitor our dealerships’ usedinventory appraisal values, reconditioning costs,pricing, online marketing, stocking levels, turnover,and return on investment. The used vehicleanalysts also monitor the amount of time it takesfrom purchasing the vehicle at auction or trade-inuntil the unit is marketed to the public. We believethat monitoring these various processes will resultin greater sales volumes, higher turnover, andultimately greater return on investment.

Parts, Service and Collision Repair

Historically, the automotive repair industry hasbeen highly fragmented, consisting of numeroussmall, independently owned, service and repairgarages, including service and repair facilities as apart of most gasoline service stations. However,management believes that the advancedtechnology used in vehicles has made it difficult forindependent repair shops to have the expertiserequired to perform higher margin repairs. Most ofthe service and repair facilities at gasoline servicestations have closed as the retail gasolineoperators have abandoned this business. We havemade investments in training qualified techniciansto work in our service and repair facilities.Additionally, automobile manufacturers generallyrequire warranty work to be performed at theirfranchised automobile dealerships. We believe thatan increasing percentage of all repair work will beperformed at dealerships that have thesophisticated equipment and skilled personnelnecessary to perform repairs and warranty work ontoday’s complex vehicles.

In addition to training initiatives, many of ourmarkets have been experiencing qualified labourshortages in the parts, service and collision repair

business. For the past two years, the Company hassourced technicians from foreign countries in orderto ensure maximum usage of our service bays. Thesourcing of foreign technicians has provided theCompany with the ability to increase its same storeservice revenues, despite a shortage of skilledlabour.

Our profitability in parts, service and collisionrepair can be attributed to our comprehensivemanagement system, including the use of variablerate pricing structures, cultivation of strongcustomer relationships through an emphasis onpreventive maintenance, and the efficientmanagement of parts inventory.

We use variable rate structures in both thecompensation paid to our service employees andthe rates charged to our customers that aredesigned to reflect the difficulty and sophisticationof different types of repairs. The percentage mark-ups on parts are also variably priced based onmarket conditions for different parts.

Our franchised automobile dealers’ partsdepartments support their sales and servicedepartments, selling factory-approved parts for thevehicle makes and models sold by a particularfranchised automobile dealer. Parts are either usedin repairs made in the service department, sold atretail to customers, or sold at wholesale toindependent repair shops and other dealerships.Certain of our dealerships have agreements withthe automobile manufacturers that provide pricingto support wholesale operations. Our dealersemploy parts managers who oversee partsinventories and sales. Our dealers also frequentlyshare parts with each other. We continuallymonitor our parts inventories and make necessaryadjustments frequently.

One of our major goals is to retain each vehiclepurchaser as a long-term customer of our parts,service and collision repair department. Asubstantial number of our customers return to ourdealerships for other services after the vehiclewarranty expires. Each dealership has systems inplace to track customer maintenance records andnotify owners of vehicles purchased at thedealerships when their vehicles are due for periodicservices. Parts, service and collision repair activitiesare an integral part of our overall approach tocustomer service.


Finance and Insurance

Each sale of a vehicle provides us with theopportunity to sell third party purchase and leasefinancing, extended warranty and insuranceproducts, service contracts and other products.

In return for arranging third party purchase andlease financing for our customers we receive a feefrom the third party lender upon completion of thefinancing. These third party lenders include theautomobile manufacturers’ captive financecompanies and warranty divisions, selectedcommercial banks and a variety of other third partylenders, including credit unions and regional autofinance lenders. We do not own a finance companyand do not retain substantial credit risk after acustomer has received financing. Under certaincircumstances we can become responsible for thecredit obligations of our customers. For example,this would occur where the loan documentationthat we have submitted does not meet the lender’srequirements as stipulated in their contract with us.If the customer defaults on their loan payments inthese cases the related vehicle is assigned to us assecurity for the loan and we are responsible toensure collection of the loan or, in the alternative,we can seize the vehicle which is security for theloan. Based on our historical results, this type ofdefault happens infrequently.

We arranged customer financing on a significantportion of the retail vehicles we sold in 2014. Inaddition to finance commissions, each vehicle salecreates opportunities to sell other profitableproducts, such as optional life, dismembermentand disability insurance and extended warrantiesand various other products for the consumer. Oursize and volume capabilities enable us to acquirethese products at reduced fees compared to theindustry average, which results in competitiveadvantages as well as acquisition related revenuesynergies. We also offer our customers a variety ofinsurance, vehicle warranty and extendedprotection products in connection with purchasesof new and used vehicles, including: servicecontracts; auto protection insurance; life, disabilityand dismemberment insurance, as well as lease“wear and tear insurance”; and theft protection.

The finance and insurance products ourdealerships currently offer are generallyunderwritten and administered by independentthird parties, including the automobilemanufacturers’ captive finance companies. Underour arrangements with the providers of theseproducts, we either sell these products on astraight commission basis or participate in futureprofits, if any, pursuant to a retrospectivecommission arrangement. We may be chargedback for unearned financing fees, insurance orservice contract fees in the event of earlytermination of these contracts by the customers.ACI calculates and accrues a provision for futurepotential chargebacks based on past experiencewith the level of chargebacks incurred.

Our historical revenues include revenues from thesale of life, dismemberment and disabilityinsurance contracts to customers when theypurchased a vehicle. These insurance policiesgenerally provide for repayment of the vehicle loanor lease if the customer dies or is seriously injuredbefore the loan is fully repaid, or provide for thepayment of the monthly loan obligations if thecustomer is disabled. We receive a fee on eachpolicy sold. In addition, we also participate in theunderwriting profits or losses from these insurancecontracts.

Locations

ACI reviews in the case of each location whether itwishes to own or lease the land and building. ACIpresently leases thirty-one of its dealershipproperties from third parties, leases two dealershipproperties from affiliates of COAG (a companywhich is a significant shareholder of ACI and iscontrolled by Mr. Patrick J. Priestner, the ExecutiveChairman of ACI) and owns the remainingdealership properties. The total rent expense inrespect of our facilities in our fiscal year endedDecember 31, 2014 was approximately $15.8 million,of which approximately $2.9 million was paid towholly owned subsidiaries of COAG.


The following table shows the location of our dealerships as at March 19, 2015.

Automobile Dealership Name and LocationFranchiseRepresented

YearEstablished

Year Acquiredby ACI

British ColumbiaAbbotsford Volkswagen, Abbotsford Volkswagen 1986 2011Chilliwack Volkswagen, Chilliwack Volkswagen 2002 2011Maple Ridge Chrysler Jeep Dodge Ram, Maple Ridge Fiat/Chrysler 1975 2005Maple Ridge Volkswagen, Maple Ridge Volkswagen 1999 2008Northland Chrysler Jeep Dodge Ram, Prince George Chrysler 1990 2002Northland Hyundai, Prince George Hyundai 1990 2005Northland Nissan, Prince George Nissan 2007 2007Okanagan Chrysler Jeep Dodge Ram Fiat, Kelowna Fiat/Chrysler 1985 2003Peter Baljet Chevrolet GMC Buick, Duncan(2) General Motors 1971 2013Victoria Hyundai, Victoria Hyundai 1999 2006AlbertaCalgary Hyundai, Calgary Hyundai 1990 2014Capital Chrysler Jeep Dodge Ram Fiat, Edmonton(1) Fiat/Chrysler 1978 2003Crowfoot Hyundai, Calgary Hyundai 2005 2014Courtesy Chrysler Dodge, Calgary Chrysler 1987 2013Crosstown Chrysler Jeep Dodge Ram Fiat, Edmonton(1) Fiat/Chrysler 1951 1994Fish Creek Nissan, Calgary Nissan 2014Grande Prairie Chrysler Jeep Dodge Ram Fiat, Grande Prairie Fiat/Chrysler 1986 1998Grande Prairie Hyundai, Grande Prairie Hyundai 2005 2005Grande Prairie Mitsubishi, Grande Prairie Mitsubishi 2007 2007Grande Prairie Nissan, Grande Prairie Nissan 1969 2007Grande Prairie Subaru, Grande Prairie Subaru 1995 1998Grande Prairie Volkswagen, Grande Prairie Volkswagen 1975 2013Hyatt Infiniti, Calgary Infiniti 2001 2014Hyatt Mitsubishi, Calgary Mitsubishi 2001 2014Lakewood Chevrolet, Edmonton(2) General Motors 1979 2014North Edmonton Kia, Edmonton Kia 2014 2014Northland Volkswagen, Calgary Volkswagen 1972 2014Ponoka Chrysler Jeep Dodge Ram, Ponoka Chrysler 1975 1998Sherwood Park Hyundai, Sherwood Park Hyundai 2006 2006Sherwood Buick GMC, Sherwood Park(2) General Motors 1983 2012Sherwood Park Chevrolet, Sherwood Park(2) General Motors 1977 2012Tower Chrysler Jeep Dodge Ram Chrysler 1976 2014SaskatchewanDodge City Chrysler Jeep Dodge Ram, Saskatoon Chrysler 1969 2014Mann-Northway Auto Source, Prince Albert(2) General Motors 1914 2014Bridges Chevrolet Buick GMC, North Battleford(2) General Motors 1976 2014Saskatoon Motor Products, Saskatoon(2) General Motors 1973 2014ManitobaEastern Chrysler Jeep Dodge, Winnipeg Chrysler 1946 2013McNaught Cadillac Buick GMC, Winnipeg(2) General Motors 1976 2014St. James Audi, Winnipeg Audi 1972 2013St. James Volkswagen, Winnipeg Volkswagen 1972 2013Ontario401/Dixie Hyundai, Mississauga Hyundai 1996 2010Cambridge Hyundai, Cambridge Hyundai 1996 2008Newmarket Nissan Infiniti, Newmarket Nissan and Infiniti 1977 2008Toronto Chrysler Jeep Dodge Ram, Toronto Chrysler 1986 2014QuebecBMW Canbec/MINI Mont Royal, Montreal BMW/MINI 1970 2014Laval BMW/MINI, Laval BMW/MINI 1973 2014New BrunswickMoncton Chrysler Jeep Dodge Ram, Moncton Chrysler 1986 2001Nova ScotiaDartmouth Chrysler Jeep Dodge Ram, Dartmouth Chrysler 1970 2006

Notes:(1) Property leased from affiliates of COAG.(2) Acquired an indirect equity interest.


Each of our leases from affiliates of COAG hasbeen independently reviewed by the independentmembers of the Company’s Board of Directors andprovide for market rent as of the date the leaseswere entered. For this purpose, “market rent” isdefined as the rental income that a property wouldreasonably command in the open market asindicated by current rents being paid forcomparable space. The initial terms for theseleases expire November 2029 and generally haverenewal options of 5 year periods. It is anticipatedthat all leases with COAG shall be extended byexercising the options.

We lease thirty-one of our dealership facilities fromarm’s length third parties. The leases for theselocations expire between January 2015 andDecember 2037. We hold options to renew twenty-four of these leases for terms ending in 2049.Management believes it has strong relationshipswith its landlords.

Acquisitions, Divestitures, and Relocations

The Company currently operates 48 franchisedautomotive dealerships. At the time ofAutoCanada’s initial public offering in May of 2006,AutoCanada owned 14 franchised automotivedealerships. Since that time the Company hasacquired, opened, or invested in 36 additionaldealerships and has sold two of its dealerships.

Saskatoon Motor Products and Mann-NorthwayAuto Source

On March 10, 2014, a subsidiary of the Companyacquired an 82.353% non-voting equity interest inPrairie Auto Holdings Ltd. (“PAH”). PAH is an entityowned by a subsidiary of AutoCanada andMr. Priestner. PAH was formed to acquire GeneralMotors of Canada (“GM Canada”) franchiseddealerships, whereby Mr. Priestner is required tomaintain voting control of the dealerships, inaccordance with an agreement with GM Canada.All shareholders participate equally in the equityand economic risks and rewards of PAH and itsinterests, based on the percentage of ownership.PAH’s principal place of business is Saskatchewan,Canada.

On March 10, 2014, PAH acquired an 85% interest inthe issued and outstanding common shares ofSaskatoon Motor Products Ltd. (“SMP”), a

Chevrolet dealership in Saskatoon, Saskatchewan,and 85% interest in the issued and outstandingshares of Mann-Northway Auto Source Ltd.(“MNAS”), a Chevrolet Buick GMC Cadillacdealership in Prince Albert, Saskatchewan. As partof the acquisition agreement, the non-controllinginterest holders have an option to put their sharesback to SMP and MNAS at any time following 36months from the acquisition date. To comply withGM Canada’s approval, Priestner is required tohave 100% voting control of PAH. The investmentin PAH, SMP and MNAS was reviewed andapproved by the independent members ofAutoCanada’s Board of Directors.

SMP and MNAS are subject to financial covenantsas part of borrowing arrangements that mayrestrict their ability to transfer funds to PAH if thepayment of such funds resulted in a breach ofcovenants. SMP and MNAS are also subject tominimum working capital requirements imposed byGM Canada, which may restrict the dealerships’ability to transfer funds to PAH if minimum workingcapital requirements are not met.

McNaught Buick Cadillac GMC

On April 1, 2014, a subsidiary of the Companyacquired an 80% participating, non-voting commonshare interest in Waverley BG Holdings Inc.(“WBG”). WBG is an entity owned by a subsidiaryof AutoCanada and Mr. Priestner. WBG was formedto acquire General Motors of Canada (“GMCanada”) franchised dealerships, wherebyMr. Priestner is required to maintain voting controlof the dealerships, in accordance with anagreement with GM Canada. All shareholdersparticipate equally in the equity and economic risksand rewards of WBG and its interests, based on thepercentage of ownership. WBG’s principal place ofbusiness is Manitoba, Canada.

On April 1, 2014, a subsidiary of WBG acquired100% of the operating assets of McNaught BuickCadillac GMC Ltd. (“McNaught”) in Winnipeg,Manitoba. The investment in WBG and McNaughtwas reviewed and approved by the independentmembers of AutoCanada’s Board of Directors.WBG’s principal place of business is Manitoba,Canada.

McNaught is subject to financial covenants as partof borrowing arrangements that may restrict itsability to transfer funds to WBG if the payment of


such funds resulted in a breach of covenants.McNaught is also subject to minimum workingcapital requirements imposed by GM Canada,which may restrict the dealership’s ability totransfer funds to WBG if minimum working capitalrequirements are not met.

BMW Canbec and MINI Mont Royal

On June 1, 2014, a subsidiary of the Companypurchased 100% of the shares of AutomobileCanbec Inc. (“BMW Canbec”), which owns andoperates a BMW dealership and a MINI dealership,both located in Montreal, Quebec. The purchase ofthis business was the Company’s first BMW/MINIfranchise and first dealership in Quebec.

Dodge City

On June 16, 2014, a subsidiary of the Companypurchased substantially all of the operating andfixed assets of Dodge City Auto 1984 Ltd. (“DodgeCity”), in Saskatoon, Saskatchewan. The purchaseof this business complemented the Company’sother Chrysler dealerships and further expanded itspresence in Saskatoon, Saskatchewan.

Hyatt Group of Dealerships

Between the period of June 23, 2014 and July 1,2014, the Company purchased all of the operatingand fixed assets of Calgary Hyundai, CrowfootHyundai, Hyatt Mitsubishi, Northland Volkswagen,Fish Creek Nissan, all located in Calgary, Alberta.As part of the transaction, the Company acquiredthe exclusive right to build and operate a NissanOpen Point Dealership in southeast Calgary. Thepurchase of the Hyatt Group complemented theCompany’s existing brands and expanded itspresence in Calgary, Alberta. Additionalinformation in the form of a Business AcquisitionReport, relating to the acquisition of the HyattGroup is available for viewing under the Company’sprofile on SEDAR at www.sedar.com.

Tower Chrysler

On August 18, 2014, the Company purchasedsubstantially all of the operating and fixed assets ofTower Chrysler Plymouth Ltd. (“Tower Chrysler”),in Calgary, Alberta. The purchase of this businesscomplemented the Company’s other Chryslerdealerships and further expanded its presence inCalgary, Alberta.

Lakewood Chevrolet

On September 2, 2014, a subsidiary of theCompany purchased a 75% non-voting equityinterest in the shares of Lakewood Chevrolet(“Lakewood”), a Chevrolet dealership located inEdmonton, Alberta.

In accordance with the terms of the ownershipstructure for GM dealerships approved by GMCanada, a subsidiary of the Company purchased a75% non-voting equity interest, with Mr. Priestner,being named Dealer Operator, purchasing 15%equity interest and retaining 100% voting control ofthe dealership. The remaining 10% equity interest isowned by Lakewood’s general manager. Thetransaction was reviewed and approved by theindependent members of AutoCanada’s Board ofDirectors. The purchase of this businesscomplemented the Company’s other GMdealerships and further expanded its presence inEdmonton, Alberta.

The Company also purchased the dealership landand facility through a wholly-owned subsidiary,Lakewood Properties Inc. Of the goodwillpurchased on the acquisition of the land andbuilding, 17% was purchased by Mr. Priestner.

Toronto Chrysler

On October 20, 2014, a subsidiary of the Companypurchased substantially all of the operating andfixed assets of Toronto Dodge Chrysler Ltd.(“Toronto Chrysler”), in Toronto, Ontario. Thepurchase of this business complemented theCompany’s other Chrysler dealerships and furtherexpanded its presence in the greater Toronto area.

Bridges Chevrolet

On November 24, 2014, a subsidiary of theCompany purchased an 80% non-voting equityinterest in the assets of Bridges Chevrolet BuickGMC Ltd. (“Bridges Chevrolet”), a Chevroletdealership located in North Battleford,Saskatchewan.

In accordance with the terms of the ownershipstructure for GM dealerships approved by GMCanada, a subsidiary of the Company purchased an80% non-voting equity interest, with Mr. Priestner,being named Dealer Operator, purchasing a 15%equity interest and 100% voting control of the


dealership. The remaining 5% equity interest is heldby minority shareholders. The transaction wasreviewed and approved by the independentmembers of the Company’s Board of Directors. Thepurchase of this business complemented theCompany’s other General Motors dealerships andfurther expanded its presence in Saskatchewan.

The Company also purchased the dealership landand facility through a wholly-owned subsidiary,NBFG Properties Inc. Of the goodwill purchased onthe acquisition of the land and building, 15% waspurchased by Mr. Priestner.

BMW Laval and MINI Laval

On December 15, 2014, a subsidiary of theCompany purchased an 85% interest in the assetsof Auto Boulevard St. Martin Inc. (“BMW Laval”)which owns and operates a BMW dealership and aMINI dealership, both located in Laval, Quebec. Thepurchase of this business complemented theCompany’s other BMW/MINI dealerships andfurther expanded its presence in Quebec.

As part of the transaction, the Company enteredinto an agreement with the former majority ownerof BMW Laval, pursuant to which they retained a15% interest in the BMW Laval and acquired a 15%ownership interest in BMW Canbec from theCompany.

In addition to the business, the Company alsopurchased the land and a building used forbusiness operations.

Dealership Open Points

The retail automotive industry is a mature industryand rights to open new franchised automobiledealerships are rarely awarded by the automobilemanufacturers. However, from time to timeautomobile manufacturers may seek to establishnew dealerships in attractive markets. The right toopen a new franchised automobile dealership in aspecific location granted by an automobilemanufacturer to a dealer is referred to in theindustry as an Open Point. Generally a newfranchised automobile dealership is fullyperforming within one to three years depending onthe manufacturer and location.

ACI will review on a case-by-case basis whether toown or lease a particular dealership facility. Ineither case, ACI would incur the costs of equippingand furnishing these facilities, including the costsrelating to the integration of our managementinformation systems into the new dealerships.These costs vary by dealership depending uponsize and location.

North Edmonton Kia – Edmonton, Alberta

In 2014, the Company opened its North EdmontonKia Open Point dealership. The dealership isperforming well, however the Company expects toincur operating losses over the first year ofoperations as the dealership builds its customerbase and, in particular, its service customer base.Management is very pleased to have opened itsfirst Kia dealership and expects the dealership tocontinue to drive higher volume in the future.

Volkswagen – Sherwood Park, Alberta

In February of 2014, the Company announced thatit had been awarded the right to a VolkswagenOpen Point dealership in Sherwood Park, Alberta.The Company intends to construct a facility inSherwood Park, designed to Volkswagen Canadaimage standards. The Open Point has a planningpotential of 800 new vehicles annually which theCompany anticipates achieving in two to threeyears of operation.

Nissan – Calgary, Alberta

On July 1, 2014, as part of the Company’s purchaseof the Hyatt Group, the Company acquired theexclusive right to build and operate the NissanOpen Point Dealership in southeast Calgary. Thepurchase price for this right was $1.5 million, whichwas satisfied by the issuance of 18,753 commonshares of AutoCanada at a deemed price of $79.99.Construction of the dealership will begin in 2015with anticipated opening in 2016. The dealershipwill be constructed by a third party andsubsequently leased by the Company.

North Winnipeg Kia – Winnipeg, Manitoba

On March 16, 2015 the Company announced that ithad signed a Letter of Intent with Kia Canada Inc.


(“Kia”) which, subject to the completion ofrequirements and conditions contained in theLetter of Intent, will award AutoCanada an OpenPoint Kia dealership in Winnipeg, Manitoba.AutoCanada intends to operate the dealership outof a new facility, designed to Kia image standards,with construction anticipated to commence in Q4,2015 or Q1, 2016.

Future Acquisition Opportunities

The Company is very pleased with the continuedexceptional performance of its manufacturerpartners. Management and the Company havestrong relationships with our current manufacturerpartners and believe that by continuing to performwell, we can build upon our current brandportfolios and may gain acceptance of other newmanufacturers over time.

The Company continues to experience a greaterthan usual number of expressions of interest inacquisitions than in the past as a result of anincrease in prospective sellers and our expandedbrand portfolio.

Management believes that the Company has astructure in place that is scalable to allow for theincrease in acquisition activity, however, theCompany does expect to incur some additionaladministrative and legal costs as the Companyadds additional dealerships.

Capital Plan

Dealership Relocations

Management estimates the total capitalrequirements of additional planned dealershiprelocations to be approximately $142.3 million bythe beginning of fiscal 2017. As noted above, theCompany expects dealership relocations toprovide long term earnings sustainability and resultin significant improvements in revenues and overallprofitability. Management continually updates itscapital plan and as such the estimates providedmay vary as delays occur or projects are added orremoved.

Current Dealership Expansion and ImagingRequirements

The Company has identified approximately$35.1 million in capital costs that it may incur in orderto expand or renovate various current locations andby the beginning of fiscal 2018. The Company isrequired by its Manufacturers to undertake periodicimaging upgrades to its facilities. Included aboveare the estimated costs and timing related to the re-imaging requirements by Hyundai Canada. TheCompany would expect re-imaging to attract morecustomers to its dealerships.

Open Point Opportunities

Management regularly reviews potential OpenPoint opportunities. If successful in being awardedthese opportunities, Management would thenestimate additional capital costs in order toconstruct suitable facilities for Open Points. TheCompany estimates approximately $29.4 million incapital costs may be incurred by the middle offiscal 2016 related to awarded Open Points. Ifawarded in the future, Management will provideadditional cost estimates and timing ofconstruction. In order to be successful in someopportunities, Management may be required tosecure appropriate land for the potential OpenPoints, in which case, additional land purchasecosts may be incurred in the future.

Equity Offering

On July 11, 2014, the Company completed a publicoffering by issuing 2,565,000 ACI Shares fromtreasury at a price of $78.00 per ACI Share to raisegross proceeds of $200.1 million. The equityoffering allowed the Company to reduce itsrevolving credit facility, which provided theCompany with further liquidity for the acquisitionof dealerships and general corporate and workingcapital purposes. Concurrently, COAG and itssubsidiaries sold, with the full exercise of an over-allotment option, an aggregate of 2,598,500 ACIShares at a price of $78.00 per share for grossproceeds of $203 million.

Organic Growth

We continue to focus on those areas of ourbusiness that enable us to increase the profitabilityof our operations. Key areas include increasing


same store gross profits by controlling expensesand expanding margins at our existing franchisedautomobile dealerships and those that areintegrated into our operations on acquisition.

Targeted Acquisitions

Automobile manufacturers have adopted policiesthat limit the number of their franchisedautomobile dealerships we are permitted to own atthe metropolitan, regional or national level. We arenear the limit imposed by Chrysler Canada on thenumber of their franchised automobile dealershipsthat we may own in some provinces andmetropolitan areas. See “Automobile DealershipFranchise Agreements – AutomobileManufacturers’ Limitations on Acquisitions”.

We regularly review acquisition opportunities forboth domestic and import brand dealerships invarious regions in Canada.

Competition

We operate in a highly competitive industry. Ineach of our markets, consumers have a number ofchoices in deciding where to purchase a new orused vehicle or where to have a vehicle serviced.According to various industry sources, there areapproximately 3,500 franchised automobiledealerships in the retail automotive industry inCanada. In addition, there are numerousindependent used vehicle dealers.

New Vehicles – In the new vehicle market, ourdealerships compete with other franchisedautomobile dealerships in their markets. Webelieve the principal competitive factors in theretail new vehicle business are consumer brandand model preferences, location, quality of facilityand service, and price. We are subject tocompetition from franchised automobile dealersthat sell the same brands of new vehicles and othernew vehicle brands. We do not have any costadvantage in purchasing new vehicles from theautomobile manufacturers.

Used Vehicles – In the used vehicle market, ourdealerships compete for the supply and resale ofused vehicles with other franchised automobiledealerships, local independent used vehicledealers, vehicle rental agencies and private sellers.We believe the principal competitive factors in the

retail used vehicle business are location, quality offacility and service, the suitability of a franchise tothe market in which it is located, price andselection. Improvements in online private saletechnologies have inherently increased thecompetition in the used vehicle market as privatesellers now have a more cost-effective medium tosell their vehicles. We believe that auto dealershipshave a distinct competitive advantage over privatesellers due to our ability to provide multiplesources of financing, the ability to offer extendedwarranty and our direct access to dealer auctionswhich offer competitive pricing and we intend tofocus our marketing efforts on these advantages.

Parts, Service and Collision Repair – In the parts,service and collision repair market, our dealershipscompete with other franchised automobiledealerships to perform warranty repairs and withfranchised and independent service centre chains,and independent repair shops for non-warrantyrepair and maintenance business. We believe theprincipal competitive factors in the parts, serviceand collision repair business are location, quality offacility and service, the use of factory-approvedreplacement parts, familiarity with an automobilemanufacturer’s brands and models, convenience,competence of technicians and price.

Finance and Insurance – In the finance andinsurance market, we face competition in arrangingfinancing for our customers’ vehicle purchasesfrom a broad range of financial institutions. Webelieve the principal competitive factors in thefinance and insurance business are convenience,interest rates and flexibility in contract length. Wealso face competition in the sale of third partywarranty, insurance and other vehicle maintenanceand protection products from independentbusinesses which sell similar products.

Acquisitions – We compete with owners of otherfranchised automobile dealerships and, in somecases, individual investors for acquisitions. Anacquisition of an existing franchised automobiledealership requires the approval of the automobilemanufacturer and the manufacturer may approveour competitors as a purchaser of the dealershiprather than us. As noted above, ACI is concernedthat brands with which the Company does notcurrently have a relationship, or who are related tosame, continue to be reluctant to entertain arelationship with a public multi-brand dealer group.


As a result, management offers no assurance thatany manufacturer with whom it does not have arelationship, or who are related to same, willapprove the Company as a franchisee.

Our Competitive Strengths

We believe our principal competitive strengthsinclude the following:

Our Multi-Location Automobile Dealership Model

Economies of Scale – Our size and consolidatedpurchasing power provide both cost and revenuesynergies. Cost synergies include achieving lowerprices for items such as insurance, advertising,benefit plans and information systems. Revenuesynergies include being a preferred provider forretail service and warranty contracts and earninghigher commissions on finance and insuranceactivities.

Decentralized Operations and CentralizedAdministrative and Strategic Functions – Ourorganizational structure allows us to providemarket specific responses to sales, service,marketing and inventory requirements whilebenefiting from the resources provided by anexperienced and knowledgeable head officeexecutive team.

Best Practices – Our model enables us tobenchmark the success of our dealershipoperations against each other and rapidlyimplement new and innovative ideas across ourdealership group.

Geographic Diversification – Our diversifiedlocations throughout Canada help to mitigate thepotential effect of adverse economic conditions inany one region of Canada.

Inventory Management – Operating a number offranchised automobile dealerships allows us toshare market information amongst our dealershipsselling the same brands and quickly identify anychanges in consumer buying patterns.

Ability to Attract and Retain Key Employees – Oursize, performance and policy permitting seniormanagement private investment of dealerships theCompany cannot purchase or which theindependent members of the Company’s Board of

Directors chooses not to purchase allow theCompany to attract and retain key employees bothat the dealership level and at our head office. TheCompany currently does not have manufacturerapproval to acquire Honda, Ford, Toyota, Lexus orMercedes dealerships.

Portfolio of Brands Suited to the Markets in whichWe Operate

We seek to supply new vehicles of the type and atthe price points that we believe are or will be indemand in our markets. We are limited to brandsoffered by manufacturers who have accepted apublic multi-brand dealer group model as afranchisee.

Higher Margin Sales

While new vehicle sales are our most significantsource of revenue, we place additional focus onour higher margin sources of revenue, which arethe sale of used vehicles, parts, service andcollision repair and finance and insurance sales.

We also derive substantial revenues and grossprofits from fees and commissions earned on thesale of finance and insurance products, whichproduce higher margins than sales of new andused vehicles. See “Description of the AutoCanadaBusiness – Sources of Revenue and Gross Profit –Finance and Insurance”.

Experienced and Incentivized Senior Managementwith a Significant Retained Interest

Our management team has extensive experienceand expertise in the retail automotive industry.Patrick Priestner, our Executive Chair, has over 40years of industry experience, including over 25years as an owner of franchised automobiledealerships. Tom Orysiuk joined us as ExecutiveVice-President and Chief Financial Officer inNovember 2005, was appointed President inJanuary 2011 and Chief Executive Officer effectiveJanuary 2015. Prior to joining AutoCanada,Mr. Orysiuk served as Chief Financial Officer ofLiquor Stores Income Fund and its predecessorentities. Prior thereto, Mr. Orysiuk held severalsenior executive and financial positions with over20 years of experience. Steve Rose joined us inJanuary 2007 as Vice-President of CorporateDevelopment, General Counsel and Secretary, was


appointed Executive Vice-President, CorporateServices in January 2011, Senior Vice-President,Sales, Marketing and Corporate Operations in 2013,and Chief Operating Officer effective January 2015.Prior to joining AutoCanada, Mr. Rose was withChrysler Canada for 14 years, most recently servingas Vice President, General Counsel and Secretary.Mr. Rose brings over 25 years’ experience servingin corporate counsel positions and advising oncorporate finance and mergers and acquisitions.See “Directors and Officers – ManagementProfiles”.

At the corporate level, Mr. Priestner, certainmembers of senior management and a number ofour dealer principals have a significant stake in ourperformance through their indirect ownership,through COAG, of an approximate 9.6% interest inour business as at March 19, 2015. As at March 19,2015, Mr. Priestner had a controlling interest inCOAG of 87.6% and our other senior managementteam had minority interests in the remaining 12.4%of COAG.

In conjunction with review by the Board ofDirectors in June 2011, the Company announcedthat, in view of the continued resistance of somemanufacturers to the public ownership model, theCompany could not presume that it would be ableto grow with any brands that it currently does notown. As same store future earnings are very muchdependent upon the performance of theCompany’s key employees, including its dealerprincipals and senior management, theindependent members of the Company’s Board ofDirectors, as previously disclosed, agreed toamend its previously announced policy regardingthe private purchase of dealerships byMr. Priestner, such that in the future, Mr. Priestnerand senior management would be permitted toprivately purchase dealerships which the Companyeither cannot purchase, or which it chose not topurchase, as a means to better ensure theretention of such employees and to allow for costsaving synergies where the same are available.Although the Company permits private purchases,Management continues to seek approval withOEMs that have not accepted public ownership.Since the adoption of this policy, dealershipspurchased privately have been limited tomanufacturers that have not accepted publicownership. There has been no change to this policysince first adopted in 2011.

The Company has established the ACI StockOption Plan under which options may be grantedto our directors, officers, employees andconsultants, in order to provide an opportunity forthese individuals to increase their proprietaryinterest in our long-term success. Options issuedunder the Plan vest at a rate of one third on thethree subsequent award date anniversaries. All theoptions must be exercised over specified periodsnot to exceed ten years from the dates granted. Nostock options have been granted under the Plan.

To ensure the Company’s compensation programsare competitive to the market and its peer group,the Company engaged an external consulting firm,Mercer, to provide information in support of theannual executive compensation review. Mercerprovides data on the total compensation offeredfor similar positions in companies of similar sizeand scope to the Company. During 2014 the Boardapproved a revised executive compensationprogram which was effective April 1, 2014. Thecomponents of the Company’s new compensationpackage for executives are outlined below:

Base Salary Compensates executivesfor the leadership andspecific skills needed tofulfill their responsibilities.

Hybrid Incentive Plan Rewards executives fortheir contribution to theachievement of annualfinancial and non-financialgoals by providingperformance-based cashbonuses and links thelong term interests ofexecutives andshareholders byrewarding executives forachieving the goals of theCompany by awardinglong-term equity-basedincentives.

The annual incentive plan aims to enhance the linkbetween pay and performance by aligning thefinancial and operational interest and motivationsof the Company’s management team with theannual financial returns of the Company. It isdesigned to motivate management to work towardcommon annual performance objectives while


acknowledging and rewarding individual goalachievement. The plan provides total cashcompensation to the senior leadership team that isgreater than the median of the companies ofsimilar size and scope where exceptionalperformance in excess of target objectives isattained. The plan also provides total cashcompensation to the senior leadership team that isbelow the market median in cases whereperformance objectives are not attained.

The equity-based incentive compensation plan isdesigned to recognize and reward the impact oflonger-term strategic actions undertaken bymanagement and align the interests of theCompany’s senior leadership team and itsshareholders. The program is designed to focusmanagement on successfully implementing thecontinuing strategic plan of the Company, improveretention of key members of the managementteam and attract talented individuals to theCompany.

In 2011, the Company formalized an appropriateequity-based incentive compensation plan referredto as Share Unit Plan for Employees of AutoCanadaInc. or the “Share Unit Plan”. The Share Unit Planallows for the Compensation Committee ofAutoCanada to grant performance-based shareunits (“PSUs”) or restricted share units (“RSUs”) toemployees of AutoCanada.

Dealer principals are compensated, to a significantextent, on the basis of the financial performance ofthe franchised automobile dealership for whichthey are responsible. Our dealer principalsparticipate in an incentive plan that provides forthe payment to them of a percentage of theEBITDA of the dealer principal’s franchisedautomobile dealership. The compensation ofdepartment managers and salespeople is similarlybased upon departmental profitability andindividual performance, respectively.

Inventories

Effective management of our inventory levels iscritical to our business. Careful monitoring ofinventories of new and used vehicles and parts bydays of supply, both in units and dollar amountleads to increased profitability by minimizinginterest expense incurred from financing ourinventory, while maximizing our free cash flow

through prudent management of our workingcapital requirements.

New Vehicles

Automobile manufacturers allocate their budgetedproduction among franchised automobiledealerships largely based on historical sellingpatterns of the given dealership. Automobilemanufacturers also take into account the dynamicsof each marketplace and look to the number ofnew vehicle registrations by type to assess theautomobile manufacturers’ expected market sharefor each of their product offerings. Through theirown analysis, automobile manufacturers determinea “minimum sales responsibility” for each of theirdealers which is effectively a minimum sellingvolume.

Although automobile manufacturers determine atargeted volume of product that each dealer isexpected to sell, the decision to purchaseinventory is the dealer’s, subject to meeting theminimum inventory levels required by the franchiseor sales and service agreements with theautomobile manufacturers. Our dealers prepare anannual plan at the start of each year, which is thenrevised and updated throughout the year with thefiling of monthly plans.

In general, lead times for delivery of new vehiclesare expected to be six to eight weeks from thetime of placing our order. We generally expect tomanage our new vehicle inventory toapproximately 75 days’ supply (which generallyincludes approximately 30 days of “in transit” time)although variations are common due to in-transittimes to ship vehicles from factories in NorthAmerica and Asia to our various locations acrossCanada. During certain times of the year certainplants operated by our OEM’s are shut down formaintenance due to declines in market demand orscheduled maintenance. As we become aware ofplant closures we occasionally increase inventoryof the effected product lines.

We finance our inventory purchases (known in theindustry as floorplan financing) through revolvingfloorplan facilities which we have arranged througha various floorplan lenders, including Scotiabank,CIBC, RBC, VCCI, and BMW Financial. See“Financing–Floorplan Financing”. The variousfloorplan lenders establish credit limits for each of


our dealerships based on individual dealershipneeds.

We are able to mitigate interest expense fromfloorplan financing by effectively managing newvehicle inventories and turning our inventoryregularly through continuing sales and smaller butmore frequent orders, while complying with theminimum inventory requirements in ouragreements with the automobile manufacturers.

Used Vehicles

Used vehicle inventory is typically acquired eitherthrough trade-ins on new or used vehicle sales,lease returns or auctions. In order to facilitate anew vehicle sale, we often take a customer’spreviously owned vehicle as partial consideration.If the used vehicle fits our criteria for used vehicleinventory, we recondition the vehicle in our servicedepartment before returning the vehicle to oursales lot in less than one week. In evaluating usedvehicles for our inventory we consider age, brand,mileage and general fit within the respectivemarketplace. If a trade-in vehicle does not meetour criteria, we typically sell the vehicle to awholesaler, a used vehicle dealership or throughauction.

We acquire a significant amount of our usedvehicle inventory through trade-ins and useauctions to supplement this inventory. Mostautomobile manufacturers regularly conductclosed auctions exclusively for its franchisedautomobile dealers to purchase off-lease and fleetvehicles. These vehicles typically meet ourinventory criteria.

We also acquire vehicles through several otherauto auctions. Some of these auctions are limitedto franchised automobile dealers, while others areopen to all interested parties. The used vehicleinventory at each of our dealerships is monitoredat both the dealership and at head office. Ourtarget is to turn our used vehicle inventory everysix weeks.

If vehicles are not receiving interest from potentialcustomers our dealers either reduce the suggestedprice or sell the vehicle to a wholesaler.

Our used vehicle inventory is financed by acombination of working capital and our revolvingfloorplan facilities.

Parts Inventory

Each of our franchised automobile dealerships hasa parts manager who is responsible for theprocurement and management of our partsinventories. We manage our parts inventories to atarget of 1.7 months’ supply on hand in order to beresponsive to our customers’ needs whilemanaging our working capital. Each of ourdealerships’ parts managers monitors inventoriesfor stale parts. Certain automobile manufacturersallow us to return up to six percent of ourpurchases each year for full refund. The effectiveidentification of stale parts inventory allows us toreduce our working capital requirements. Inaddition, our parts managers monitor lost salesresulting from not having a customer’s requestedpart in our inventory. Measuring these lost salesenables us to change our stocking patterns andminimize future lost sales while at the same timeimproving customer service. Our parts inventory isfinanced by our working capital.

Automobile Dealership Franchise Agreements

Each of our franchised automobile dealerships isoperated by one of our subsidiaries pursuant toautomobile dealership franchise or sales andservice agreements between the applicableautomobile manufacturer and the subsidiary. Thetypical dealership franchise or sales and serviceagreement specifies the location at which thesubsidiary has both the right and obligation to sellthe automobile manufacturer’s vehicles and relatedparts and products and to perform certainapproved services. The agreement grants thesubsidiary the non-exclusive right to use anddisplay the automobile manufacturer’s trademarks,service marks and designs in the form and mannerapproved by the automobile manufacturer. Thedealer principal must be an active participant in thebusiness of the subsidiary and its dealership, andmust be approved by the automobile manufacturerunder the franchise or sales and service agreementfor that dealership. The Hyundai FrameworkAgreement requires us to obtain its approval of theindividuals appointed as directors of the generalpartners of the Dealer LPs operating underdealership agreements with it.


The allocation of new vehicles among franchisedautomobile dealers is subject to the discretion ofthe automobile manufacturer, which generally doesnot guarantee dealers exclusivity within a giventerritory. A franchise agreement (see MaterialContracts) may impose requirements on thefranchised automobile dealer concerning suchmatters as the showrooms, the facilities andequipment for servicing vehicles, the maintenanceof minimum levels of vehicles and parts inventories,the maintenance of minimum net working capital,the achievement of certain sales targets, minimumcustomer service and satisfaction standards andthe training of personnel. Compliance with theserequirements is closely monitored by theautomobile manufacturer. In addition, mostautomobile manufacturers require each franchisedautomobile dealer to submit monthly and annualfinancial statements.

We are subject to additional provisions containedin supplemental agreements, frameworkagreements or franchise addenda. Theseagreements impose requirements similar to thosediscussed above, as well as limitations on changesin our ownership or management and limitationson our market share of total vehicles sold by aparticular automobile manufacturer.

Termination or Non-renewal of FranchiseAgreements

Our dealership franchise or sales and serviceagreements are for indefinite terms or specifiedterms (which may be one year) with automaticrenewals for successive terms unless either partyelects not to renew the term of the agreement.Generally, our dealership franchise or sales andservice agreements provide for termination by theautomobile manufacturer under certaincircumstances, including insolvency or bankruptcyof the franchised automobile dealer, failure toadequately operate the franchised automobiledealership, failure to maintain any license, permit orauthorization required for the conduct of business,or material breach of other provisions of theagreement.

Provisions Affecting a Change of Control orOwnership

The Chrysler Approval Agreement was restated,effective December 31, 2009, and prohibits a

change of control of ACI without the prior approvalof Chrysler Canada unless ACI thereafter disposesof the Chrysler Dealer LPs within certaintimelines. It also prohibits: (i) a change in control ofthe Chrysler Holding LP; (ii) the acquisition of morethan 10% of ACI Shares by an OEM, or (iii) the saleof all or substantially all of the assets of ChryslerHolding LP or of the shares of any of the generalpartners of the Chrysler Dealer LPs, except to anaffiliate. In addition, COAG has agreed withChrysler Canada that, without the prior writtenconsent of Chrysler Canada, COAG will not transferor give control over any ACI Shares that results inCOAG holding less than a 5% equity or votinginterest in ACI, on a fully-diluted basis, and COAGwill not permit a change of control ofCOAG. Acquisition of ACI Shares by ACIshareholders in violation of these ownershiprestrictions or actions by COAG under thisagreement with Chrysler Canada are generallyoutside of AutoCanada’s control and may result inthe termination of one or more franchises, whichmay have a material and adverse effect on ACI.

Under a supplemental agreement with NissanCanada (the Nissan Framework Agreement), if anyperson or entity acquires more than 20% of ACI, ora group of persons or entities acquire more than50% of ACI, and, in either case, Nissan Canada,acting reasonably, determines that such persons orentities do not have interests compatible withthose of Nissan Canada, or are otherwise notqualified to have an ownership interest in a Nissanor Infiniti dealership, then Nissan Canada shall beentitled to require ACI to divest its ownershipinterest in those Nissan and Infiniti dealershipsowned by ACI.

We may be required to enter into similaragreements with the other automobilemanufacturers, or those related to same, withwhom we deal or wish to deal.

Our dealership franchise or sales and serviceagreements require the approval of the applicableautomobile manufacturer to any change in theownership of the franchised automobile dealership.

Actions by our Shareholders or prospectiveShareholders that would violate certain of theabove restrictions are generally outside of ourcontrol. For example, we cannot control a changeof control of ACI or the acquisition by another


automobile manufacturer of more than 10% of ouroutstanding ACI Shares. In addition, theserestrictions may also limit our ability to financefuture acquisitions through the issue of additionalACI Shares or other equity securities. If we areunable to renegotiate these restrictions, we may beinhibited in our ability to acquire additionalfranchised automobile dealerships. Theserestrictions also may impede our ability to raiserequired capital or to issue ACI Shares, or securitiesexchangeable into ACI Shares, as consideration forfuture acquisitions.

Although our franchise or sales and serviceagreements may not be renewed and may beterminated by the automobile manufacturer incertain circumstances, automobile manufacturershave rarely chosen to take such action in the caseof well managed and well capitalized dealerships–See “Risk Factors”. If any of our franchise or salesand service agreements are terminated, or ifcertain automobile manufacturers’ rights undertheir agreements with us are triggered, ouroperations could be significantly compromised.

Indemnities and other Agreements

The Chrysler Approval Agreement and HyundaiFramework Agreement also contain provisionswhich require us to indemnify the respectiveautomobile manufacturer for breaches of theapplicable agreement, for claims made against theautomobile manufacturer arising out of thecreation of ACI or in respect of the IPO and, in thecase of Hyundai, from any acts or omissions underany applicable securities laws, including any claimarising from any misrepresentation or public oralstatement made by us.

In addition, the Hyundai Framework Agreementrequires us to obtain Hyundai approval of theindividuals appointed as directors of each generalpartner of the Dealer LPs operating under dealeragreements with it or to issue a 15% interest in theDealer LP directly or indirectly to the dealerprincipal of that Dealer LP on terms determined byits general partner. We are also required tomaintain directors’ and officers’ and certain othertypes of insurance.

Automobile Manufacturers’ Limitations onAcquisitions

We are required to obtain the consent of theapplicable automobile manufacturer before we canacquire any additional franchised automobiledealerships that can sell the vehicles produced bythat automobile manufacturer. Our automobilemanufacturers impose limits on the number offranchised automobile dealerships we arepermitted to own at the national, regional andmetropolitan levels. These limits vary according tothe agreements we have with each of theautomobile manufacturers but are generally basedon fixed numerical limits or on a fixed percentageof the aggregate sales of the automobilemanufacturer.

The Chrysler Multi-Dealer Group Policy, which isapplicable to all Chrysler dealers, currently limitsthe number of additional Chrysler Canadafranchised automobile dealerships which can beacquired if it would result in the 36 month averagesales of new Chrysler Canada vehicles from ourdealerships exceeds the following percentages of36 month average sales of new Chrysler Canadavehicles: 8% of sales in Canada (increased byChrysler Canada from the original mandate of 5%);15% of sales in any province; and 30% of sales in amajor metropolitan market (as defined in the Multi-Dealer Group Policy), except as approved byChrysler Canada. At December 31, 2014, our annualaverage sales of new Chrysler Canada vehiclesover the preceding 36 months comprised 8.24% ofnational sales, 16.89% of sales in Alberta, 20.49% ofsales in British Columbia and 44.34% of sales in themajor metropolitan market of Edmonton, Alberta(the provinces and major metropolitan area inwhich we have the highest concentration ofChrysler Canada franchised automobiledealerships).

Subject to Nissan’s consent otherwise, the NissanMultiple Market Ownership Agreement limits ACI’sownership, to that number of Nissan or Infinitidealerships, which aggregated, do not have salesgreater than:

(i) 5% of Nissan’s national sales and Infiniti’snational sales, respectively;

(ii) 5% of Nissan’s total sales within a Region;and


(iii) 5% of all Nissan dealerships or 10% of allInfiniti dealerships.

In addition, ACI shall not own or manage more than1 Nissan or Infiniti dealership in a metropolitanmarket comprised of 2-3 dealerships of the samebrand; more than 2 Nissan or Infiniti dealerships ina metropolitan market comprised of between 4-10dealerships of the same brand; or more than 3Nissan or Infiniti dealerships in a metropolitanmarket comprised of 11 or more dealerships of thesame brand, except as approved Nissan Canada.

Management believes that all other automobilemanufacturers have similar requirements. Unlesswe renegotiate these agreements or receive theconsent of the automobile manufacturers, we maybe prevented from making further acquisitionsupon reaching the limits provided for in theseagreements. We near or in excess of the salesvolume limits imposed by Chrysler Canada whichmay limit the acquisition of additional Chyrslerdealerships in certain provinces and metropolitanareas. The sales volume limits imposed by ChyrslerCanada are continuously under review and aresubject to amendment. During the previous fiscalyear we were approved to acquire additionalChrysler dealerships despite being in excess of thelimits of the Multi-Dealer Group Policy.

Financing

Floorplan Financing

Franchised automobile dealerships finance theirnew vehicle inventory (and in some instances aportion of their used vehicle inventory) by way offloorplan financing, which is offered by theautomobile manufacturers’ captive financecompanies, banks and specialty lenders. Althoughthe structures used in floorplan financing vary, afloorplan lender typically finances 100% of thepurchase price of a new vehicle from the time ofpurchase by the dealership (which occurs whenproduction of the new vehicle is completed).

On April 23, 2014, the Company announced that ithad increased its existing syndicated floorplanfacility (the “Syndicated Floorplan Facility”) withScotiabank and CIBC by $200.0 million, bringingtotal availability to $550.0 million. All significantterms and conditions of the previous facility remainunchanged. The Syndicated Floorplan Facility

bears a rate of Bankers’ Acceptance plus 1.15%(2.63% as at December 31, 2014).

The Syndicated Floorplan Facility has beenprovided to 34 of the 48 dealerships in whichAutoCanada operates. The terms and conditions ofthe facility apply only to the collective group of 34dealerships which are to be funded (the“Borrowers”). With respect to financial covenants,the Borrowers are required to maintain thefollowing covenants:

(i) The ratio of Senior Secured Leverage shallnot exceed 2.25;

(ii) The ratio of Adjusted Total Leverage shallnot exceed 4.75;

(iii) The ratio of Fixed Charge Coverage shallnot be less than 1.20; and

(iv) The Current Ratio shall not be less than1.05.

VW Credit Canada Inc. provides revolving floorplanfacilities (“VCCI facilities”) to finance new and usedvehicles for the Company’s Volkswagen and Audidealerships. The VCCI facilities bear interest at theRoyal Bank of Canada (“RBC”) prime rate for newvehicles and RBC prime rate plus 0.25-1.00% forused vehicles (RBC prime rate was 3.00% atDecember 31, 2014). The maximum amount offinancing provided by the VCCI facilities is $45.0million. The VCCI facilities are collateralized by allof the dealerships’ assets financed by VCCI and allcash and other collateral in the possession of VCCIand general security agreements from theCompany’s Volkswagen and Audi dealerships. Theindividual notes payable of the VCCI facilities aredue when the related vehicle is sold, as outlined inthe agreements with VCCI. The VCCI facilitiesrequire maintenance of financial covenants thatrequire all dealerships to maintain minimum cashand equity balances.

BMW Financial, a division of BMW Canada Inc.,provides floorplan financing for new and usedvehicles for the Company’s BMW and MINIdealerships (the “BMW facilities”). The BMWfacilities have a current advance limit of $100.9million. The BMW facilities bear a variable interestrate of prime minus 0.40% per 360-day annum(2.60% at December 31, 2014). The BMW facilitiesare collateralized by the dealerships’ movable andimmovable property. The agreement requires the


Company to maintain a certain working capitalratio.

RBC provides floorplan financing for new, used anddemo vehicles for six of the Company’s GeneralMotors dealerships (the “RBC facilities”). The RBCfacilities bear interest rates of RBC’s Cost of FundsRate (1.920% as at December 31, 2014) plus 0.0-1.35% and provide a maximum amount of financingof $109.4 million. The RBC facilities arecollateralized by the new, used, and demoinventory financed by RBC and a general securityagreement from the General Motors dealershipsfinanced by RBC.

Our ability to finance our new, used anddemonstrator inventory is a significant factor in theCompany’s liquidity management. The Company isgenerally able to increase or decrease the numberof vehicles it finances, subject to limits imposed byfloorplan lenders, as part of its treasurymanagement function. If floorplan limits arereduced, the Company may not be able to maintainits current level of inventories, which maynegatively impact our future results. AtDecember 31, 2014 all financial covenants relatingto all floorplan financing agreements had beenmet.

Copies of significant floorplan financingagreements are available for viewing under theCompany’s profile on SEDAR at www.sedar.com.

Credit Facilities

On May 22, 2014, the Company amended theexisting Credit Agreement with HSBC Bank Canada(“HSBC”) Alberta Treasury Branches (“ATB”), andRBC, with HSBC acting as administrative agent tothe Credit Agreement. The revised CreditAgreement provides the Company with a $200.0million revolving operating facility that may beused for general corporate purposes, includingrepayment of existing indebtedness, fundingworking capital requirements, capital expendituresand financing acquisitions.

Fees and interest on borrowings under the CreditAgreement are subject to a pricing grid wherebythe pricing level is determined by the leverageratio. As at December 31, 2014, the Company is inthe second of five tiers of the pricing grid, with thesecond tier providing interest rates of HSBC’s

prime rate plus 1.50% (4.50% at December 31,2014). Amounts drawn under the CreditAgreement as at December 31, 2014 are dueMay 22, 2018 and may be extended annually for anadditional 365 days at the request of the Companyand upon approval by the lenders. The CreditAgreement is collateralized by all of the presentand future assets of Holdings and all of itssubsidiaries. As part of a priority agreement signedby HSBC, Scotiabank, VCCI, BMW Financial, andthe Company, the collateral for the CreditAgreement excludes all new, used and demoinventory financed with Scotiabank, CIBC, VCCI,RBC and BMW Financial revolving floorplanfacilities.

Additional information relating to the CreditAgreement including a copy of the agreement canbe obtained from SEDAR at www.sedar.com.

VCCI provides the Company with a mortgage (the“VCCI Mortgage”), which bears a floating rate ofinterest per annum equal to RBC’s prime rate plus0.50% (3.50% at December 31, 2014). The VCCIMortgage is repayable with fifty-nine equalblended monthly payments of $0.08 millionamortized over a twenty year period with termexpiring in April 2019. The VCCI Mortgage hascertain reporting requirements and financialcovenants and is collateralized by a generalsecurity agreement consisting of a first fixedcharge over the property. At December 31, 2014,the carrying amount of the property was $1.8million.

BMW Financial provides the Company with amortgage (the “BMW Mortgage”), which bears afixed rate of interest per annum of 3.80%. TheBMW Mortgage is repayable with sixty equalblended monthly payments of $124, amortized overa twenty year period with term expiring onDecember 31, 2019. The BMW Mortgage has certainreporting requirements and is collateralized by theproperty and any other present and futureproperty, rights and assets, movable or immovable,and a general security agreement consisting of afirst fixed charge over the property. AtDecember 31, 2014, the carrying amount of theproperty was $31.2 million.

In 2012, the Company arranged a mortgageagreement with Servus Credit Union (“Servus”),whereby Servus would provide the Company a


$6.25 million commercial mortgage (the “ServusMortgage”) to facilitate the purchase of land andbuilding to be used for the operations of the KiaOpen Point dealership. The mortgage bears anannual interest rate of 3.90%, fixed, payable andcalculated monthly in arrears, originally amortizedover a 20 year period with term expiring 5 yearsafter the fund date. The Servus Mortgage requirescertain reporting requirements and is collateralizedby general security agreement consisting of a firstfixed charge over the land and building. Withrespect to financial covenants, a subsidiary of theCompany is required to maintain a minimum annualDebt Service Coverage ratio of 1.25:1.

RBC provides financing for the lease vehicles oftwo of the Company’s GM dealerships (the “RBClease financing”). The RBC lease financing bearsinterest at a rate of RBC’s CF Rate (1.92% atDecember 31, 2014) and provide a maximumamount of financing of $11.0 million, repayable overthe terms of the contract in varying amounts ofprincipal. The RBC lease financing is collateralizedby the lease vehicles under the related leaseagreements.

Marketing

Our advertising and marketing efforts are focusedat the local market level, with the aim of buildingour business with a broad base of repeat, referraland new customers. Our most prevalentadvertising mediums are local newspapers, radio,direct mail, and the internet.

Print and Media Advertising

The retail automotive industry has traditionallyused locally produced, largely non-professionalmaterials, often developed under the direction ofeach franchised automobile dealership’s dealerprincipal. We have created common marketingmaterials for our brand names at some of ourdealerships using our own expertise andprofessional advertising agencies.

Internet and e-Commerce

We believe that the Internet and e-commercerepresents a substantial opportunity to build ourfranchised automobile dealerships’ brands andexpand the geographic borders of their markets.We use the scope and size of our operations to

expand the use of the Internet in our sales of newand used vehicles, as we believe our customers areincreasingly using the Internet as a key part of theirproduct research.

Each of our franchised automobile dealerships hasestablished a website that incorporates aprofessional design to reinforce the dealership’sunique brand and advanced functionalities toensure that the website can hold the attention ofcustomers and perform the informational andinteractive functions for which the internet isuniquely suited. Automobile manufacturer websitelinks provide our dealerships with key sources ofreferrals. Many of our dealerships use the internetto communicate with customers both prior tovehicle purchase and after purchase to coordinateand market maintenance and repair services.

ACI has made significant investments in newtechnology and improving our websites to betteraccommodate our customers and improve ourmarketing and communication with potentialcustomers. Our centralized marketing departmenthas a number of initiatives underway to increasetraffic to these sites and improve the functionalityof the websites and user friendliness. Ourcentralized marketing department will continue tobe a driving force in lead generation activities andsearch engine optimization, among other things,for our dealerships.

ACI has also been working with our dealershipteams to improve our internet sales processes andensuring that phone, email and internet leads arebeing appropriately handled. Our executive teamand dealers recognize the importance of our onlinepresence and believe the virtual showroom will bea major contributor to sales in the future. Internetmarketing represents a significant opportunity forour dealerships to improve customer relationshipsand increase sales in all areas of the business.

Management Information Systems

We consolidate financial, accounting andoperational data received from our franchisedautomobile dealerships nationwide through anexclusive private communications network.

Our financial information, operational andaccounting data and other related statisticalinformation are consolidated, processed and


maintained at our headquarters in Edmonton,Alberta and Maple Ridge, British Columbia on anetwork of server computers and work stations.There is also an off-site storage maintained byADP. The flexible nature of our installed networkallows for accumulation, processing anddistribution of information using ADP and Reynoldsand Reynolds computing programs. These twocompanies provide software for many companiesin Canada, including franchised automobiledealerships. All sales and expense information, andother data related to the operations of each of ourdealerships are entered at each location. Thissystem allows our senior management to accessdetailed information on a “real time” basis from allof our dealerships regarding, for example, themakes and models of vehicles in our inventory, themix of new and used vehicle sales, the number ofvehicles being sold or leased, the percentage ofvehicles for which we arranged financing or soldancillary products and services, the profit marginsachieved on sales and the relative performances ofour dealerships to each other. This information isalso available to each of our dealer principals.Reports can be generated that set forth andcompare revenue and expense data by departmentand by dealership, allowing our management toquickly analyze the results of operations, identifytrends in the business and focus on areas thatrequire attention or improvement.

We believe that our management informationsystem is a key factor in successfully incorporatingnewly acquired businesses. Following eachacquisition, we install our management informationsystem at the dealership location as soon aspossible for the dealership, thereby quickly makingfinancial, accounting and other operational data forthat dealership easily accessible to our seniormanagement. With access to this data, we canmore efficiently incorporate our operating strategyat the newly acquired dealership. Because ourmanagement information system is scalable, wecan integrate new acquisitions without significantlyincreasing the cost of operating the system.

Employees

As of December 31, 2014 we employedapproximately 3,400 full time equivalentemployees. Management believes that ouremployee relations are excellent and a strongcontributing factor to our success.

Our employees in parts, service and collision repairand sales activities at Moncton Chrysler JeepDodge and Maple Ridge Chrysler Jeep Dodge FIATare represented by labour unions. The collectivebargaining agreement with the union at MonctonChrysler Jeep Dodge was successfullyrenegotiated in 2012 and will expire onDecember 31, 2015. The collective bargainingagreement with the union at Maple Ridge ChryslerJeep Dodge FIAT was successfully renegotiated in2013 and will expire on May 31, 2016. We havenever experienced a strike, lock-out or other labourdisturbance.

In March 2014, service employees at Peter BaljetChevrolet GMC Buick voted in favour of forming alabour union. A collective bargaining agreementwith the union was accepted on February 26, 2015and expires on December 31, 2016.

Our Intellectual Property and Proprietary Rights

Registration of the trademark “AutoCanada” andthe corresponding logo have been applied for inCanada by ACI. We also own other trademarks,trade names and various domain names, includingautocan.ca, autocanada.net and autocanada.biz.

Regulatory Matters and Policies

National Automobile Dealer Arbitration Program(“NADAP”)

In addition to our dealership franchise or sales andservice agreements, our relationships withautomobile manufacturers are governed byNADAP. NADAP is a program organized by theCanadian Vehicle Manufacturers’ Association, theAssociation of International AutomobileManufacturers of Canada and CADA that providesrules for dispute resolution between the automobilemanufacturers and the franchised automobiledealers in the Canadian automobile industry.

The NADAP Rules provide for the mediation andarbitration of disputes between an automobilemanufacturer and its franchised automobile dealersinvolving: the interpretation or application of thedealership agreement; the renewal or terminationof the dealership agreement; the length of a cureperiod provided by the automobile manufacturer inlight of any franchised automobile dealerdeficiencies to be cured; the sale or transfer of the


franchised automobile dealership; whether a dealerowes money to an automobile manufacturer (orvice versa); and the decision of an automobilemanufacturer to appoint or relocate a dealershipinto the market of an existing dealer. The NADAPRules provide that an existing franchisedautomobile dealer can challenge an automobilemanufacturer’s proposal to create a new dealershipor relocate a dealership, with identical brands, in alocation that is within eight kilometres (inmetropolitan areas) of the existing dealership’slocation (20 kilometres if relocated more than twokilometres closer to the existing dealership in non-metropolitan areas). Some of our agreements withthe automobile manufacturers contain waivers byus of certain NADAP Rules.

NADAP was established in 1997 and was extendedin 2012 for a five year term to expire in January of2017.

Dealership Code of Conduct

We have developed and implemented a code ofconduct that reflects our commitment toconducting our business in accordance with thehighest ethical standards. Our code of conduct isintended to provide guidance on recognizing anddealing with ethical issues, provide mechanisms toreport unethical conduct, and help foster a cultureof honesty, integrity and accountability. The codedeals with, among other things, advertisingstandards, clarity of pricing, sales techniques andstandards, customer relationships and othermatters. The code of conduct applies to all of ourdirectors, officers and employees and sets policiesand standards that go beyond mere compliancewith the minimum legal standards. A copy of thecode of conduct may be obtained from ourwebsite at www.autocan.ca or from SEDAR atwww.sedar.com.

Governmental Regulations

A number of federal, provincial and localregulations affect our marketing, selling, financingand servicing of vehicles.

Each of the jurisdictions in which we operateregulates the licensing of franchised automobiledealers. Our dealers and salespeople must belicensed, and must comply with ongoing provincialregulations in order to maintain their licensed

status. Dealerships are also generally prohibitedunder provincial laws from employing individuals incertain automobile repair positions unless theindividuals are appropriately certified. In addition,our dealerships are subject to various consumerprotection laws which regulate sales transactionsand advertising. Dealerships that offer financingproducts must also comply with regulationsconcerning matters such as credit agreementprovisions, cost of borrowing disclosure andadvertising regarding the terms of credit. Otherprovinces into which we may expand ouroperations in the future are likely to have similarrequirements.

The Provinces of Alberta, British Columbia andOntario have established self-regulatory bodieswhich are responsible for licensing automobiledealers and their sales and management personnel,as well as overseeing consumer protectionlegislation applicable to motor dealers, includingstandard setting and enforcement, compliancewith advertising restrictions, complaint resolutionand public industry education. Operating underdelegated authority from their respectiveprovincial governments, these bodies administerand enforce compliance with many of theprovincial laws which affect the day-to-dayoperations of automobile dealers.

The sale of third party financing products to ourcustomers is subject to federal and provincial truth-in-lending, consumer leasing, financing regulations,instalment finance laws and insurance laws.

We believe that we comply substantially with alllaws and regulations affecting our business and donot have any material liabilities under such lawsand regulations and that compliance with all suchlaws and regulations do not, individually or in theaggregate, have a material adverse effect on ourcapital expenditures, earnings or competitiveposition and we do not anticipate that suchcompliance will have a material effect on us in thefuture.

Environmental Matters

We are subject to a wide range of environmentallaws and regulations, including those governingdischarges into the air and water, the storage ofpetroleum substances and chemicals, the handlingand disposal of wastes and the remediation of


contamination. As with dealerships generally, andservice and parts and collision repair centreoperations in particular, our business involves thegeneration, use, handling and disposal ofhazardous or toxic substances and wastes.Pursuant to these laws, provincial environmentalagencies have established approved methods forthe handling, storage, treatment, transportationand disposal of regulated substances and wasteswith which we must comply.

Our business also involves the use of above groundand underground storage tanks. Under applicablelaws and regulations, we are responsible for theproper use, maintenance and abandonment of ourregulated storage tanks and for remediation ofsubsurface soils and groundwater impacted byreleases from existing or abandoned storage tanks.In addition to these regulated tanks, we own,operate, or have otherwise closed in-place otherunderground and above ground devices orcontainers (such as automotive lifts and servicepits) that may not be classified as regulated whichcould or may have released stored materials intothe environment, thereby potentially obligating usto clean up any contaminated soils or groundwaterresulting from such releases.

We are also subject to laws and regulationsgoverning remediation of contamination at or fromour facilities or to which we send hazardous ortoxic substances or wastes for treatment, recyclingor disposal.

All dealership locations are subject to the obtainingof Phase I environmental assessments fromindependent environmental consultants prior topurchase.

Environmental laws and regulations are verycomplex and it has become difficult for businessesthat routinely handle hazardous and non-hazardous wastes to achieve and maintain fullcompliance with all applicable environmental laws.Like any business involved in the repair andservicing of vehicles, from time to time weexperience incidents and encounter conditions thatare not in compliance with environmental laws andregulations. However, none of our dealerships havebeen subject to any material environmentalliabilities in the past and we do not anticipate thatany material environmental liabilities will beincurred in the future.

Environmental laws and regulations and theirinterpretation and enforcement are changedfrequently and we believe that the trend of moreexpansive and stricter environmental legislationand regulations is likely to continue. Hence, therecan be no assurance that compliance withenvironmental laws or regulations or the futurediscovery of unknown environmental conditionswill not require additional expenditures by us, orthat such expenditures would not be material. See“Risk Factors – Risks Related to Our Business –Governmental Regulations and EnvironmentalRegulation Compliance Costs”.


Risk Factors

The risks and uncertainties described below are notthe only risks and uncertainties we face. Additionalrisks and uncertainties not currently known to us orthat we currently deem immaterial also may impairour business operations. If any of the following risksactually occur, our business, results of operationsand financial condition, and the amount of cashavailable for distribution to our Shareholders, couldsuffer.

Risks Related to Our Business and the Industry inWhich We Operate

Risks Related to the Retail Automotive Industry

Capital Markets

Uncertainty in the capital markets may causegreater difficulty to access capital, as well aspossible higher interest rates and less favourableterms.

Economic Conditions

Unfavourable economic conditions may negativelyimpact ACI’s financial viability. A decline ineconomic conditions could also increase ACI’sfinancing costs, decrease net earnings, limit accessto capital markets and negatively impact theavailability of credit facilities to ACI.

Currency Fluctuations

Rapid appreciation or depreciation of the Canadiandollar relative to the U.S. dollar impacts the relativeprice of used and new vehicles, as well as vehicleparts in Canada relative to the U.S., making thesame either more attractive, in the case of adepreciation, or less attractive, in the case ofappreciation, thus posing risks to some of ACI’soperations.

Macroeconomic Factors including Fuel Prices

The current economic environment in Canada,especially with regards to the level of consumer

debt, continues to be of concern to the Company,particularly in regard to sales of new and usedautomobiles. As well, fuel prices have been volatilein the past few months. Continued decline in theprice of oil could have a negative impact on theCompany as a result of weak economic conditionsin the Western Provinces leading to lower vehiclesales. Conversely, increases in gasoline prices couldcause a reduction in automobile purchases and/ora shift in buying patterns from light trucks andsport utility vehicles (which typically providehigher margins) to smaller, more economicalvehicles (which typically have lower profitmargins). In addition, many of our dealershipsdepend on sales of light trucks and sport utilityvehicles for their level of profitability. A continuedshift in preferences by consumers for smaller, moreeconomic vehicles may have an adverse effect onour revenues and results of operations.

Overall Consumer Demand

ACI’s business is heavily dependent on consumerdemand and preferences. ACI’s revenues will bematerially and adversely affected if there is asevere or sustained downturn in overall levels ofconsumer spending. Retail vehicle sales are cyclicaland historically have experienced periodicdownturns characterized by oversupply and weakdemand. These cycles are often dependent ongeneral economic conditions and consumerconfidence, as well as the level of discretionarypersonal income and credit availability.

Availability of Consumer Credit

In the event lenders tighten their credit standardsor there is a decline in the availability of credit inthe lending market (including but not limited to asa result of broader economic conditions), theability of consumers to purchase vehicles could belimited, which could have a material adverse effecton our business, results of operations, financialcondition and cash flows.


Substantial Competition in Vehicle Sales andServices

The retail automotive industry is highlycompetitive. Depending on the geographic market,ACI is in competition with: franchised automobiledealerships in markets that sell the same or similarmakes of new and used vehicles offered, in somecases at lower prices than ACI, private marketbuyers and sellers of used vehicles, service centrechain stores, independent service and repair shops,and other providers of financing and insurancecontracts.

ACI is also in competition with regional andnational vehicle rental companies that sell theirused rental vehicles. ACI may face significantcompetition while striving to gain market share.Some of ACI’s competitors may have greaterfinancial, marketing and personnel resources andlower overhead and sales costs. ACI does not haveany cost advantage in purchasing new vehiclesfrom OEMs and may typically rely on advertising,merchandising, sales expertise, service reputationand dealership location in order to sell newvehicles. AutoCanada’s OEM Agreements do notgrant AutoCanada the exclusive right to sell amanufacturer’s product within a given geographicarea. ACI’s revenues and profitability may bematerially and adversely affected if competingdealerships expand their market share or areawarded additional franchises by manufacturersthat supply ACI’s dealerships.

In addition to competition for vehicle sales, ACI’sfranchised automobile dealerships compete withother franchised automobile dealerships toperform warranty repairs and with other franchisedautomobile dealerships, franchised andindependent service centre chains andindependent garages for non-warranty repair androutine maintenance business. ACI’s franchisedautomobile dealerships compete with otherfranchised automobile dealerships, service storesand automobile parts retailers in their partsoperations. ACI believes that the principalcompetitive factors in service and parts sales arethe quality of customer service, the use of factory-approved replacement parts, familiarity with anOEM’s brands and models, convenience, thecompetence of technicians, location, and price. Anumber of regional or national chains offerselected parts and services at prices that may belower than ACI’s franchised automobile

dealerships’ prices. ACI is also in competition witha broad range of financial institutions in arrangingfinancing for customers’ vehicle purchases.

Expanded use of the Internet in Sales

The internet has become a significant part of thesales process in our industry. Customers are usingthe Internet for vehicle price comparisons andrelated finance and insurance services, which mayfurther reduce margins for new and used vehiclesand profits related to the finance and insuranceservices and products that we provide. If Internetnew vehicle sales are allowed to be conductedwithout the involvement of franchised dealers, ourbusiness could be materially adversely impacted.In addition, other franchise groups have alignedthemselves with services offered on the Internet orare heavily invested in the development of theirown Internet capabilities, which could materiallyadversely affect our business, results of operations,financial position and cash flows.

Dependence upon Vehicle Sales

The success of ACI’s franchised automobiledealerships will depend in large part on the level ofvehicle sales generally, and the level of demand forand sales of the brands of vehicles ACI sells. Newvehicle sales will generate the majority of ACI’stotal revenue and lead to sales of higher-marginproducts, including the sales of used vehicles,parts, service and collision repair operations andfinance products. If one or more of the brands thatseparately or collectively account for a significantpercentage of ACI’s new vehicle sales suffer fromdecreasing consumer demand, or are no longeroffered for sale by the manufacturers, ACI’s newvehicle sales and related revenues may bematerially reduced.

Mix of New Vehicles

ACI depends on OEMs to provide a desirable mixof popular new vehicles. OEMs generally allocatetheir vehicles among their franchised automobiledealerships based on the sales history of eachfranchised automobile dealership. If ACI’sfranchised automobile dealerships experienceprolonged sales slumps, OEMs may cut back theirallotments of popular vehicles to ACI’s franchisedautomobile dealerships and new vehicle sales andprofits may decline.


Interest Rates

ACI currently finances purchases of new and, to alesser extent, used vehicle inventory under afloorplan borrowing arrangement under which ACIis charged interest at floating rates. ACI may obtaincapital for acquisitions and for some workingcapital purposes under a similar arrangement. As aresult, ACI’s debt service expenses may rise withincreases in interest rates. Rising interest rates mayalso have the effect of depressing demand in theinterest rate sensitive aspects of ACI’s business,particularly new and used vehicle sales, becausemany customers finance their vehicle purchases.As a result, rising interest rates may have the effectof simultaneously increasing costs and reducingrevenues.

OEM Incentive Programs

ACI’s franchised automobile dealerships depend onOEMs for certain sales incentives, warranties andother programs that are intended to promote andsupport new vehicle sales. Some key incentiveprograms will include customer rebates on newvehicles, franchised automobile dealershipincentives on new vehicles, special financing orleasing terms, warranties on new and used vehiclesand sponsorship of used vehicle sales byauthorized new vehicle franchised automobiledealerships.

A reduction or discontinuation of key OEMs’incentive programs may reduce ACI’s new vehiclesales volume resulting in decreased vehicle salesand related revenues.

Our OEM partners regularly audit our dealershipsto ensure we are in compliance with incentiveprograms. If our dealerships are found not to becompliant with specific requirements such asdocumentation and other requirements, ourdealerships can be charged back for the amountsclaimed under incentive programs. Futurechargebacks relating to incentive program claimsmay have an adverse effect on our future earnings.

Seasonality

The retail automotive industry is subject toseasonal variations in revenues. Demand forvehicles is generally lower during the first andfourth quarters of each year. Accordingly, ACI’s

revenues and operating results will generally belower in the first and fourth quarters than in thesecond and third quarters. Therefore, if conditionssurface during the second or third quarters thatadversely affect vehicle sales, such as depressedeconomic conditions or similar adverse conditions,revenues for the year will be disproportionatelyadversely affected.

Import Product Restrictions and Foreign TradeRisks

A significant portion of ACI’s new vehicle businessinvolve the sale of vehicles, parts or vehiclescontaining parts that are manufactured outsideCanada. As a result, ACI’s operations are subject tocustomary risks of importing merchandise,including fluctuations in the relative values ofcurrencies, import duties, exchange controls, traderestrictions, work stoppages and general politicaland socio-economic conditions in foreigncountries. Canada, or the countries from whichACI’s products are imported may, from time totime, impose new quotas, duties, tariffs or otherrestrictions, or adjust presently prevailing quotas,duties or tariffs, which may affect operations andthe ability to purchase imported vehicles and/orparts at reasonable prices.

Risks Related to Our Business

The Loss of Key Personnel and LimitedManagement and Personnel Resources

ACI’s success depends to a significant degree uponthe continued contributions of the ACImanagement team, particularly the seniormanagement and service and sales personnel.Additionally, OEM franchise agreements mayrequire the prior approval of the applicable OEMbefore any change is made in franchisedautomobile dealership general managers.Consequently, the loss of the services of one ormore of these key employees may materiallyimpair the efficiency and productivity ofoperations.

In addition, ACI may need to hire additionalmanagers during expansionary periods. The marketfor qualified employees in the industry and in theregions in which ACI operates particularly forgeneral managers and sales and service personnel,is highly competitive and may lead to increased


labour costs during periods of low unemployment.The loss of the services of key employees or theinability to attract additional qualified managersmay adversely affect the ability of ACI’s franchisedautomobile dealerships to conduct their operationsin accordance with the standards set by the headoffice management.

Failure of Our Information Technology Systems

Our information technology systems are importantto operating our business efficiently. We employsystems and websites that allow for the securestorage and transmission of customers’ proprietaryinformation. The failure of our informationtechnology systems to perform as we anticipatecould disrupt our business and could expose us toa risk of loss or misuse of this information, litigationand potential liability.

Our information technology systems may bevulnerable to data protection breaches and cyber-attacks beyond our control and we may not havethe resources or technical sophistication toanticipate or prevent rapidly evolving types ofcyber-attacks. We invest in security technology toprotect our data and business processes againstthese risks. We also purchase insurance to mitigatethe potential financial impact of these risks.Despite these precautions, we cannot assure that abreach will not occur and any breach or successfulattack could have a negative impact on ouroperations or business reputation.

Unfavourable Conditions in Key Geographic Markets

ACI’s performance is subject to local economic,competitive and other conditions prevailing in theparticular geographic areas of ACI’s franchisedautomobile dealerships. Because the majority ofACI’s dealerships are located in Alberta and BritishColumbia, their performance may be subject tolocal economic, competitive and other conditionsprevailing in one or both of those provinces.

Ability to Refinance Credit Agreements in theFuture

The Credit Agreement provides for total creditavailability of $200.0 million. At the time the CreditAgreement will become due for repayment, if notextended by the lenders, ACI will be obliged torepay the outstanding amount or seek refinancing

which may not be available on favourable terms. Ifagreement on a new facility is not reached, it mayhave negative consequences such as:

Š We may be required to dedicate asubstantial amount of our cash flow fromoperations to required payments onindebtedness, thereby reducing theavailability of cash flow for workingcapital, capital expenditures, acquisitions,dividends, and other general activities;

Š Covenants relating to new creditagreements may limit our ability to obtainfinancing for working capital, capitalexpenditures, acquisitions, dividends andother general activities; and

Š Covenants relating to new creditagreements may limit our flexibility inplanning for, or reacting to, changes inour business and the industry in which weoperate.

ACI also has credit facilities with other Canadianchartered banks and other lenders with respect tothe properties it owns. We are subject to liquidityrisk if these loans are not refinanced at the end oftheir respective terms or if the loans cannot berefinanced under favourable terms.

Credit Agreements

The degree to which the ACI and its subsidiariesare currently leveraged or may be leveraged in thefuture could have important consequences to theACI shareholders including:

Š ACI’s ability to obtain additional financingfor working capital, capital expenditures oracquisitions in the future may be limited;

Š a significant portion of ACI’s cash flowfrom operations could become dedicatedto the payment of the principal of andinterest on its indebtedness, therebyreducing funds available for futureoperations;

Š certain borrowings are at variable rates ofinterest, which exposes ACI to the risk ofincreased interest rates; and

Š ACI may be more vulnerable to economicdownturns and be limited in its ability towithstand competitor pressures.


These factors may increase the sensitivity of thecash available for use on capital expenditures oracquisitions to interest rate variations and couldhave a negative impact on the ability to makedividend payments to the ACI shareholders.

The Credit Agreement contains numerousrestrictive covenants that will limit the discretion ofACI’s management with respect to certain businessmatters. These covenants place significantrestrictions on, among other things:

Š the incurrence of additional debt andguarantees of any debt, except purchasemoney debt to a maximum aggregateamount;

Š capital expenditures;

Š the creation of liens;

Š the payment of dividends;

Š the ability to make investments andfinance acquisitions;

Š the sale of any of AutoCanada’s assetsexcept in the normal course of theoperation of the business; and

Š the merger or consolidation with anotherentity.

These restrictions could limit ACI’s financialflexibility, prohibit or limit strategic initiatives andlimit the ability to grow and respond tocompetitive changes. ACI may also be preventedfrom taking advantage of business opportunitiesthat arise because of the restrictions contained inthe Credit Agreement. In addition, the CreditAgreement contains a number of financialcovenants that require AutoCanada to meetcertain financial ratios and financial conditions theeffect of which could require ACI to take certainaction to reduce ACI’s debt or take some otheraction should ACI not satisfy these financial ratiosor tests. These restrictions, and the factors referredto above, may also inhibit ACI from refinancing theCredit Agreement at all or on terms that arefavourable to ACI, and could have a negativeimpact on the ability to make dividend paymentsto the Shareholders.

ACI may not enter into a reorganization,amalgamation, merger or other similar

arrangement with any other person, as defined inthe Credit Agreement, as this is an event of default,entitling the lenders to require immediaterepayment of the Credit Agreement.

A failure by ACI to comply with the obligations inthe Credit Agreement could result in a defaultwhich, if not cured or waived, could result in atermination of distributions and permitacceleration of the relevant indebtedness. If theindebtedness under the Credit Agreement were tobe accelerated, there can be no assurance that theassets of ACI would be sufficient to repay in fullthat indebtedness. There can be no assurance thatfuture borrowings or equity financing will beavailable to ACI or available on acceptable terms,in an amount sufficient to repay this indebtednessor to meet ACI’s needs.

ACI’s wholesale floorplan financing is provided byScotiabank, CIBC, RBC, VCCI, and BMW Financial.The floorplan lenders provide inventory financingfor new and used vehicles through these creditfacilities. As standard with all wholesale financingarrangements, our agreement is a discretionary lineof credit and may be modified, suspended, orterminated at any time, at our floorplan lenders’sole discretion. Any material modification,suspension or termination of our wholesalefloorplan financing may have a material adverseeffect on the Company’s financial condition.

Liquidity

If we are unable to generate sufficient operatingcash flow, we may need to enter into certainextraordinary transactions in order to generatesufficient cash to sustain our operations, whichmay include, but not be limited to selling certain ofour dealerships or other assets and borrowingunder our existing credit facilities. There can be noassurance that, if necessary, we will be able toenter into any such transactions in a timely manneror on reasonable terms, if at all. Furthermore, in theevent we are required to sell dealership assets toenhance our liquidity, the sale of any materialportion of such assets could have an adverse effecton our revenue stream, the size of our operationsand certain corporate efficiencies. If we are unableto generate sufficient cash flow or enter into anysuch transactions in a timely manner, our liquiditymay be materially adversely affected.


Governmental Regulations and EnvironmentalRegulation Compliance Costs

ACI is subject to a wide range of federal, provincialand municipal laws and regulations, such as locallicensing requirements, consumer protection lawsand environmental requirements governing, amongother things, discharges into the air and water,above ground and underground storage ofpetroleum substances and chemicals, handling anddisposal of wastes and remediation ofcontamination arising from spills and releases. ACIis also subject to the rules imposed by self-regulatory authorities in various jurisdictions. If ACIviolates these laws and regulations, ACI may besubject to civil and criminal penalties, or a ceaseand desist order may be issued against theoperations that are not or are alleged not to be incompliance. ACI’s future acquisitions may also besubject to governmental regulation, includingantitrust reviews. ACI believes that all of thefranchised automobile dealerships comply in allmaterial respects with all applicable laws andregulations relating to ACI’s business, but futurelaws and regulations may be more stringent andrequire ACI to incur significant additional costs.See “Description of the AutoCanada Business–Regulatory Matters and Policies” for moreinformation.

Intangible Assets

Intangible assets consist of rights under franchiseagreements with automobile manufacturers andare subject to impairment assessments at leastannually (or more frequently when events orcircumstances indicate that an impairment mayhave occurred) by applying a fair-value based test.ACI may be required to incur impairment chargesin the future which may have a material effect onour results from operations and financial position.

Insurance Coverage

ACI maintains insurance coverage in respect ofvarious potential liabilities, including propertylosses, business interruption, public liability,automobile liability and crime, in amounts and onsuch terms as considered appropriate. The aim isto achieve a balanced program of riskmanagement combining both internal risk retentionand insurance to protect the company’s assets.

Physical assets are insured to their replacementcost in most cases. A substantial Blanket Propertylimit addresses underinsurance or potential co-insurance penalty risks. Third party liability limitsare reviewed annually and limits of insurance arepurchased in proportion with Canadian exposuresin these areas. For these areas of insurance, ACIemploys a prudent retention program peroccurrence which results in reliable insuranceprotection married with economics of cost. Overthe past few years, the insurance market has facedsignificant losses as a result of hail storms(resulting in insurance claims by dealerships). Thishas forced many insurers and reinsurers toabandon hail coverage in some of ACI’s markets.Facing questionable future availability of coverageand potential exposure to significant losses, ACIhas instituted a self-insurance program, a first inCanada. This self-insurance program is combinedwith excess insurance placement to manage its hailrisk (for catastrophic events). ACI has entered intoa long-term commitment with a world rankedinsurer to achieve stability in managing our hailexposure going forward.

Notwithstanding well thought out riskmanagement techniques, not all losses areinsurable and not all claims are paid. Even “AllRisks” policies carry conditions and exclusions.However, ACI has chosen a professional brokeragefirm on whose expertise we rely in assessing ourexposures. This brokerage, unlike other firms inCanada, does not limit its liability to redress unpaidclaims due to human error. We are confident in thisfirm’s ability to advise us, to represent usknowledgably to our insurers, and to stand behindtheir products.

Furthermore, the impact of certain weather andother natural disasters, including but not limited tohail storms, floods, tornadoes, hurricanes,earthquakes, may negatively impact the businessoperations of our dealerships. These events maynot be insurable, wholly, or in part, and the impactto the Company could be financially significant.

Governmental Laws and Regulations

The automotive retailing industry is subject to awide range of laws and regulations. With respectto motor vehicle sales, leasing, and the sale offinance, insurance, and other products at ACI


stores, ACI will be subject to various laws andregulations, the violation of which could subjectACI to lawsuits or government investigations andadverse publicity. The violation of laws andregulations may also jeopardize relationships withvarious stakeholders, which could result in inabilityto operate under the present conditions and wouldadversely affect operations.

Advertising Regulations

Advertising in our business is subject to numerousfederal, provincial and local laws and regulations.These laws and regulations address unfair,deceptive and/or fraudulent trade practices.Claims arising out of actual or alleged violations oflaw may be asserted against us or any of ourdealers by individuals, either individually orthrough class actions, or by governmental entitiesin civil or criminal investigations and proceedings.Such actions may expose us to substantialmonetary damages and legal defense costs,injunctive relief and criminal and civil fines andpenalties.

Risks Related to Our Acquisition Strategy

Restrictions Imposed by OEMs on Acquisitions

ACI is required to obtain the consent of theapplicable OEM before acquiring any additionalfranchised automobile dealerships. The Companywill consider acquisition opportunities if afavourable opportunity presents itself and if theacquisition would provide incremental value to theCompany. Brands with which the Company doesnot currently have a relationship, or who arerelated to same, continue to be reluctant toentertain a relationship with a public multi-branddealer group. As a result, management offers noassurance that any manufacturer with whom itdoes not have a relationship, or who are related tosame, will approve the Company as a franchisee.Obtaining OEM consent for acquisitions may alsotake a significant amount of time, which maynegatively affect the ability to acquire an attractivetarget. In addition, under an applicable franchiseagreement, an OEM may have a right of first refusalto acquire a franchised automobile dealership thatACI seeks to acquire. Many OEMs place limits onthe total number of franchises, or the market shareof its vehicles, that any group of affiliatedfranchised automobile dealerships may obtain. The

OEMs have also placed generic limits on thenumber of franchises or share of total franchises orvehicle sales maintained by an affiliated franchisedautomobile dealership group on a national, regionalor local basis. OEMs may also tailor these types ofrestrictions to particular franchised automobiledealership groups. ACI may have difficulty inobtaining additional franchises from OEMs oncefranchise limits have been reached.

As a condition to granting their consent toacquisitions, OEMs may impose additionalrestrictions. OEMs’ restrictions typically prohibitchanges of control or extraordinary corporatetransactions such as mergers, sales of a substantialamount of assets or the removal of a dealerprincipal without the consent of the OEM and theuse of franchised automobile dealership facilities tosell or service new vehicles of other OEMs. OEMsmay direct ACI to apply resources to capitalprojects that ACI may not otherwise have chosento participate in. OEMs may direct ACI toimplement costly capital improvements tofranchised automobile dealerships as a conditionfor maintaining existing franchise agreements withthem. OEMs also typically require that theirfranchises meet specific standards of appearance.These factors, either alone or in combination, couldcause ACI to divert financial resources to capitalprojects from uses that management believes maybe of higher long-term value.

Integration of Acquisitions

ACI’s growth depends in large part on the ability toacquire additional franchised automobiledealerships, manage expansion, control costs inoperations and integrate acquired franchisedautomobile dealerships. In pursuing this strategy ofacquiring other franchised automobile dealerships,ACI faces risks commonly encountered withgrowth through acquisition strategies. These risksinclude, but are not limited to, incurringsignificantly higher capital expenditures andoperating expenses, failing to integrate theoperations and personnel of the acquiredfranchised automobile dealerships, entering newmarkets with which ACI is unfamiliar, incurringundiscovered liabilities at acquired franchisedautomobile dealerships, disrupting ongoingbusiness, diverting management resources, failingto maintain uniform standards, controls andpolicies, impairing relationships with employees,


OEMs and customers as a result of changes inmanagement, causing increased expenses foraccounting and computer systems, failing to obtainOEMs’ consents to acquisitions of additionalfranchises, and incorrectly valuing acquiredentities.

ACI may not adequately anticipate all the demandsthat growth will impose on personnel, proceduresand structures, including financial and reportingcontrol systems, data processing systems andmanagement structure. Moreover, failure to retainqualified management personnel at any acquiredfranchised automobile dealership may increase therisk associated with integrating the acquiredfranchised automobile dealership. If ACI cannotadequately anticipate and respond to thesedemands, ACI may fail to realize acquisitionsynergies and resources will be focused onincorporating new operations into ACI’s structurerather than on areas that may be more profitable.In addition, although ACI will conduct a prudentlevel of investigation regarding the operatingcondition of the businesses purchased, in light ofthe circumstances of each transaction, there is anunavoidable level of risk that remains regarding theactual operating condition of these businesses.Until ACI assumes operating control of suchbusiness assets, ACI may not be able to ascertainthe actual value of the acquired entity.

Financing Constraints and Limitations on CapitalResources

There is substantial indebtedness represented bythe floorplan financing used to finance new andused vehicle inventories. This debt is repayable ondemand and in the event that repayment isdemanded, ACI cannot provide assurances thatACI could find an alternative floorplan provider.

We have financed our past acquisitions from acombination of the cash flow from our operationsand borrowings under our credit arrangements. Ifthe financing of acquisitions through the use ofcash flow from operations or borrowings is notavailable due to constraints, the Company may alsofinance through the issuance of common shares,preferred shares, convertible debt or private debtofferings. The use of any of these sources offinancing could have the effect of reducingearnings per share. We may not be able to obtainfinancing in the future due to the market price of

our common shares and overall market conditions.Furthermore, using cash to complete acquisitionscould substantially limit our operating or financialflexibility. Substantially all of the assets of ourdealerships are pledged to secure theindebtedness under our Credit Agreement and ourfloorplan financing indebtedness. These pledgesmay limit our ability to borrow from other sourcesin order to fund our acquisitions.

Management cannot determine the costs of equityat a future point in time and if new equity cannotbe issued at a favourable cost, ACI may not be ableto continue to grow through acquisitions orthrough opening new dealerships.

Competition with Other Franchised AutomobileDealerships

ACI believes that the Canadian retail automotivemarket is fragmented and offers many potentialacquisition candidates that meet acquisition targetcriteria. However, ACI will compete with otherfranchised automobile dealerships, some of whichmay have greater financial and other resources. Inaddition, ACI will compete with other franchisedautomobile dealerships and private investors toacquire other franchised automobile dealerships,and this competition for attractive acquisitiontargets may result in fewer acquisitionopportunities and increased acquisition costs. ACIwill have to forego acquisition opportunities to theextent that acquisitions cannot be negotiated onacceptable terms.

Executive Chairman’s Continued Investment inDealerships and the Company

GM Canada requires Mr. Pat Priestner, ExecutiveChairman of the Company, to purchase a 15%equity interest, and have 100% voting control ofGM dealerships. Chrysler Canada imposes minimumshareholdings requirements of Mr. Priestner. As aresult, under the Company’s current sharestructure, whereby Mr. Priestner and seniormanagement control less than 51% of the votingsecurities of the Company, the success and abilityof the Company to grow with GM brands andpossibly other brands is dependent upon theefforts, abilities, and continued willingness of seniormanagement, and, in particular, Mr. Priestner, toinvest personally in such brands. In addition toMr. Priestner’s continued willingness to invest


personally in such brands, the retention ofMr. Priestner in the Company is critical to ourcurrent ability to invest in future GM dealershipsand is, in general, another risk factor that couldmaterially impact our results and ability to grow.

Risks Related to Our Dependence on AutomobileManufacturers

Adverse Conditions Affecting One or More OEMs

The success of ACI’s franchised automobiledealerships depends to a great extent on OEMs’financial condition, marketing efforts, vehicledesign, production capabilities, reputation,management, and labour relations. Adverseconditions affecting these and other importantaspects of OEMs’ operations and public relationsmay adversely affect the ability to market vehiclesto the public and, as a result, significantly anddetrimentally affect profitability. Similarly, the latedelivery of vehicles from OEMs, which sometimesoccurs during periods of new productintroductions, can lead to reduced sales duringthose periods. ACI has no control over labourdisturbances at any OEMs, and labour disturbancesat OEMs may restrict the supply of new vehicles,and therefore have an adverse effect uponoperations.

Certain of our manufacturers have extensive globalsales operations and from time to time may, in thecase of certain models, face situations whereglobal demand exceeds global supply therebyconstraining the ability of the Canadian arm of themanufacturer from securing adequate supply ofpopular vehicles which may adversely impact ourfinancial performance.

Governmental Regulations Related to FuelEconomy Standards and Greenhouse Gases

Federal regulations in the United States aroundfuel economy standards and “greenhouse gas”emissions have continued to increase. Newrequirements may adversely affect anymanufacturer’s ability to profitably design, market,produce and distribute vehicles that comply withsuch regulations. We could be adversely impactedin our ability to market and sell these vehicles ataffordable prices and in our ability to finance theseinventories. These regulations could have amaterial adverse effect on our business, results ofoperations, financial condition and cash flows.

Ability of Automotive Manufacturers to DeliverHigh Quality, Defect-Free Vehicles

We depend on our manufacturers to deliver high-quality, defect-free vehicles. If manufacturersexperience future quality issues, our financialperformance may be adversely impacted. Inaddition, the discontinuance of a particular brandcould negatively impact our revenues andprofitability.

AutoCanada Automobile Dealership FranchiseAgreements

Each of AutoCanada’s franchised automobiledealerships operates under the terms of an OEMAgreement with the OEM of each vehicle brand itcarries. AutoCanada’s franchised automobiledealerships may obtain new vehicles from OEMs,sell new vehicles and display OEMs’ trademarksonly to the extent permitted under theseagreements. As a result of AutoCanada’sdependence on the rights under these agreements,OEMs exercise a great deal of control over the day-to-day operations and the terms of an OEMAgreement implicate key aspects of operations,acquisition strategy and capital spending. Each ofthe OEM Agreements provides the OEM with theright to terminate the agreement under specifiedcircumstances and, in certain agreements, to electnot to renew the agreement on an annual basis.The OEM Agreements include provisions thatpermit the OEM to terminate the agreement ordirect AutoCanada to divest the subject franchisedautomobile dealerships if the franchisedautomobile dealership undergoes a change ofcontrol or if the dealer principal named in theagreement changes without the approval of theOEM. However, historically in the franchisedautomobile dealership industry, in the case of wellmanaged and well capitalized dealerships, the OEMAgreements are rarely terminated involuntarily ornot renewed by the manufacturer.

In the event that a breach of the provisions in OEMAgreement, ACI may be required to sell franchisedautomobile dealerships operating underagreements with the OEMs to purchasersapproved by the OEMs, or the agreement may beterminated by the manufacturer. The OEMAgreement also provides the OEM with the right topurchase from AutoCanada any franchise thatAutoCanada seeks to sell. Provisions such as thesemay provide OEMs with superior bargaining


positions in the event that they seek to terminatefranchise agreements or renegotiate theagreements on terms that are disadvantageous toACI. ACI’s results of operations may be materiallyand adversely affected to the extent that franchiserights become compromised or operationsrestricted due to the terms of an OEM Agreementor if ACI loses substantial franchises.

Relationships with Automobile Manufacturers

We depend on the manufacturers to provide uswith a desirable mix of new vehicles. The mostpopular vehicles usually produce the highest profitmargins and are frequently in short supply. If arelationship with a manufacturer deteriorates wemay not be able to obtain sufficient quantities ofpopular models, therefore our profitability could bematerially affected.

Manufacturers exert significant control over ourstores through the terms and conditions of theirfranchise agreements. Such agreements containprovisions for termination or non-renewal for avariety of causes, including customer satisfactionscores and sales and financial performance. Wecannot assure that our stores will be able to fullycomply with these provisions in the future;therefore it is possible that manufacturers couldterminate or fail to renew franchise agreements forone or more of our stores. Any such action,although we have not experienced this action inthe past, could result in a material adverse effecton our business, results of operations, financialcondition and cash flows.

Restrictions on Ownership Thresholds and the Saleof AutoCanada’s Business

ACI has entered into the Chrysler ApprovalAgreement, the Hyundai Framework Agreementand the Nissan Ownership Agreement. SeeDescription of the AutoCanada Business –Automotive Dealership Franchise Agreements –Provisions Affecting a Change of Control orOwnership for a full description of the ChryslerApproval Agreement and its related risks to theCompany.

The Hyundai Framework Agreement requiresAutoCanada to obtain its approval of theindividuals appointed as directors of the generalpartners of the Dealer LPs operating under

dealership agreements with it. These restrictionsmay affect the marketability of ACI’s business as agoing concern, or the ability to introduce otherinvestors into parts of the business.

Under the Nissan Ownership Agreement, if anyperson or entity acquires more than 20% ofAutoCanada, or a group of persons or entitiesacquire more than 50% of AutoCanada, and, ineither case, Nissan Canada, acting reasonably,determines that such persons or entities do nothave interests compatible with those of NissanCanada, or are otherwise not qualified to have anownership interest in a Nissan or Infiniti dealership,then Nissan Canada shall be entitled to requireAutoCanada to divest its ownership interest inthose Nissan and Infiniti dealerships owned byAutoCanada. Moreover, if AutoCanada is unable toobtain the requisite approval to a change ofcontrol or sale of the business in a timely mannerAutoCanada may not be able to take advantage ofa market opportunity. These restrictions may alsoprevent or deter prospective acquirers fromacquiring control of ACI and, therefore, maymaterially and adversely impact the value of ACIShares.

ACI expects that other OEMs may require similaragreements.

Maintenance of Minimum Working Capital

The OEM Agreements require AutoCanada tomaintain a specified minimum amount of workingcapital at each of AutoCanada’s franchisedautomobile dealerships, and prohibit anydistribution by a franchised automobile dealershipif these minimum working capital requirements arenot maintained. Compliance with these minimumworking capital requirements may affect theamount of cash available to pay dividends on theACI Shares.

Risks Related to ACI’s Shares

Payment of Dividends

As a corporation, ACI’s dividend policy is at thediscretion of the Board of Directors. Futuredividends will depend on results of operations,cash requirements, financial condition, contractualrestrictions, business opportunities, provisions ofapplicable law and other factors that the board of


directors may deem relevant. Accordingly, thepayment of dividends by ACI and the level thereofwill be uncertain.

The ability of the Dealer LPs and other subsidiariesto make advances and distributions to ACI toenable ACI to make dividend payments toShareholders is subject to applicable laws andcontractual restrictions contained in variousagreements.

Unpredictability and Volatility of ACI Shares

The market price of ACI Shares could be subject tosignificant fluctuations in response to variations inquarterly operating results, dividends, and otherfactors. In addition, industry specific fluctuations inthe stock market may adversely affect the marketprice of the ACI Shares regardless of operatingperformance. There can be no assurance that theprice of the ACI Shares will remain at currentlevels. In addition, the securities markets haveexperienced significant price and volumefluctuations from time to time in recent years thatoften have been unrelated or disproportionate tothe operating performance of particular issuers.These broad fluctuations may adversely affect themarket price of the ACI Shares.

Dilution

ACI is authorized to issue an unlimited number ofACI Shares and an unlimited number of preferredshares issuable in series for consideration and onterms and conditions as established by the boardof directors of ACI without the approval of itsshareholders. The Shareholders have no pre-emptive rights in connection with such furtherissues.

Substantial Interest of COAG

COAG owns 9.6% of the total issued andoutstanding ACI Shares on a fully-diluted basis. Asa result, COAG has a substantial influence overAutoCanada’s affairs and business.

This concentration of ownership, as well as variousprovisions contained in the OEM Agreements,could have the effect of discouraging, delaying orpreventing a change in control of ACI orunsolicited acquisition proposals that an ACIshareholder might consider favourable. Theseprovisions include ownership requirements andlimits and approval rights with respect to thecomposition of the board of directors of thegeneral partners of certain of the Dealer LPs alongwith the board of directors of other subsidiaries.Thus, the concentration of ownership and suchprovisions may materially and adversely impact thevalue of the ACI Shares.


Capital Structure

AutoCanada Inc.

The authorized capital of ACI consists of anunlimited number of common shares and anunlimited number of preferred shares.

Common Shares

Holders of ACI Shares are entitled to receive noticeof and to attend and vote at all meetings ofshareholders, except meetings at which onlyholders of a specified class of shares are entitled tovote. Holders of ACI Shares are also entitled toreceive any dividend declared by the Board ofDirectors of ACI on the common shares and,subject to the rights of any other class of shares ofACI, to receive the remaining property of ACI upondissolution in equal rank with the holders of allother ACI Shares.

Senior Unsecured Notes

On May 22, 2014, the Company completed aprivate placement of $150 million aggregateprincipal amount of Senior Unsecured Notes. TheSenior Unsecured Notes bear interest at 5.625%per annum, payable semi-annually on May 25 andNovember 25 of each year, and mature on May 25,2021.

At any time prior to May 25, 2017, the Companymay redeem the Senior Unsecured Notes, in wholeor in part, at a redemption price equal to 100% ofthe principal amount of the Senior UnsecuredNotes being redeemed plus accrued but unpaidinterest, if any, to, but not including, theredemption date plus the Applicable Premium.“Applicable Premium” means, with respect to aSenior Note at any Redemption Date, the greaterof (i) 1.0% of the principal amount of such SeniorNote and (ii) the excess of (A) the present value atsuch Redemption Date of (i) the redemption priceof the Senior Note at May 25, 2017 plus (ii) allrequired interest payments due on the Senior Notethrough May 25, 2017 (excluding accrued butunpaid interest to the Redemption Date),computed using a discount rate equal toGovernment of Canada Rate (determined on thesecond Business Day immediately preceding theRedemption Date) as of such Redemption Dateplus 50 basis points; over (B) the then outstandingprincipal amount of the Senior Note.

The Company may also, at any time prior toMay 25, 2017, on one or more occasions, redeemup to 35% of the aggregate principal amount of theSenior Unsecured Notes with the net cashproceeds from certain equity offerings at aredemption price equal to 105.625% of theprincipal amount of the Senior Unsecured Notesbeing redeemed, plus accrued and unpaid interest,if any, to the applicable redemption date.

At any time on or after May 25, 2017, the Companymay redeem the Senior Unsecured Notes, in wholeor in part, at the following redemption prices, ineach case plus accrued and unpaid interest, if any,to the applicable redemption date, if redeemedduring the twelve month period beginning onMay 25 of each of the following years: 2017 –104.219%; 2018 – 102.813%; 2019 – 101.406%; and2020 and thereafter – 100.000%.

If the Company undergoes certain changes ofcontrol, each holder of the Senior Unsecured Noteshas the right to require the Company to offer torepurchase the Senior Unsecured Notes from suchholders at a purchase price equal to 101% of theaggregate principal amount of the SeniorUnsecured Notes so repurchased plus accrued andunpaid interest to, but not including, the date ofrepurchase.

The Senior Unsecured Notes are senior unsecuredobligations of the Company and are guaranteed,jointly and severally, on a senior unsecured basisby the Company’s current and future materialsubsidiaries that are or become guarantors underthe Credit Agreement (the “Guarantors”).

The Senior Unsecured Notes rank (i) equally inright of payment with all existing and future seniorindebtedness of the Company and the Guarantorsthat is not expressly subordinated in right ofpayment to the Senior Unsecured Notes and(ii) senior in right of payment to all existing andfuture indebtedness of the Company that isexpressly subordinated in right of payment to theSenior Unsecured Notes. The Senior UnsecuredNotes are effectively subordinated to any secureddebt and other secured obligations of theCompany and the Guarantors, including under theCredit Agreement and Syndicated FloorplanFacility, to the extent of the value of the assetssecuring such secured debt or other obligations.The Senior Unsecured Notes


are structurally subordinated to all existing andfuture obligations, including indebtedness andtrade payables, of any of the Company’ssubsidiaries that are not Guarantors.

The Senior Unsecured Notes were issued pursuantto an indenture (the “Indenture”) dated May 22,2014 between the Company, Valiant TrustCompany, as trustee, and the Guarantors. Subjectto certain exceptions and qualifications set forth inthe Indenture, the Senior Unsecured Notes limit theability of the Company and certain of itssubsidiaries that are considered to be “restrictedsubsidiaries” to, among other things (i) makerestricted payments; (ii) incur additionalindebtedness and issue disqualified or preferredstock; (iv) create or permit to exist liens; (v) createor permit to exist restrictions on the ability of therestricted subsidiaries to make certain paymentsand distributions; (vi) make certain dispositionsand transfers of assets; (vii) engage inamalgamations, mergers or consolidations; and(viii) engage in certain transactions with affiliates.

Capitalized terms not otherwise defined in thissection have the meaning given in the Indenture, acopy of which is available on SEDAR atwww.sedar.com.

Preferred Shares

The preferred shares may from time to time beissued in one or more series, and the Board ofDirectors may fix from time to time before suchissue the number of preferred shares which is tocomprise each series and the designation, rights,privileges, restrictions and conditions attached toeach series of preferred shares including, withoutlimiting the generality of the foregoing, any votingrights, the rate or amount of dividends or themethod of calculating dividends, the dates ofpayment thereof, the terms and conditions ofredemption, purchase and conversion if any, andany sinking fund or other provision. With respect tothe payment of dividends and distribution of assetsin the event of liquidation, dissolution or winding-up of ACI, whether voluntary or involuntary, thepreferred shares are entitled to preference overthe ACI Shares and any other shares ranking juniorto the preferred shares from time to time and mayalso be given such other preferences over the ACIShares and any other shares ranking junior to thepreferred shares as may be determined at the timeof creation of such series. There are currently nopreferred shares issued.

Credit Ratings

The following information relating to theCompany’s credit ratings is provided as it relates tothe Company’s financing costs, liquidity andoperations. Specifically, credit ratings affect theCompany’s ability to obtain short-term and long-term financing and the cost of such financing. Areduction in the current rating on the Company’sdebt by its rating agencies, particularly adowngrade below current ratings, or a negativechange in the Company’s ratings outlook couldadversely affect the Company’s cost of financingand its access to sources of liquidity and capital.

The Company has been evaluated and assigned anoverall issuer credit rating of “BB-” with a stableoutlook and the Senior Unsecured Notes have beenassigned a “B” rating, both issued by Standard &Poor’s Ratings Services, a division of The McGraw-Hill Companies (Canada) Corporation (“S&P”).

An S&P issuer credit rating is a forward-lookingopinion about an obligor’s overall creditworthinessin order to pay its financial obligations. S&P’sopinion focuses on the obligor’s capacity andwillingness to meet its financial commitments asthey come due. It does not apply to any specificfinancial obligation, as it does not take into accountthe nature of and provisions of the obligation, itsstanding in bankruptcy or liquidation, statutorypreferences, or the legality and enforceability ofthe obligation. A BB rating is the fifth highest often major rating categories used by S&P in its long-term issuer credit rating scale. Generally, thesemajor rating categories may be modified by theaddition of a “+” or “-” to show relative standingwithin the category, while the absence of either a“+” or “-” designation indicates the rating is in themiddle of the category. Obligors rated BB, B, CCC,and CC are regarded as having significant


speculative characteristics. BB indicates the leastdegree of speculation and CC the highest. Whilesuch obligors will likely have some quality andprotective characteristics, these may beoutweighed by large uncertainties or majorexposures to adverse conditions. An obligor ratedBB is less vulnerable in the near term than otherlower-rated obligors, however, it faces majorongoing uncertainties and exposure to adversebusiness, financial, or economic conditions whichcould lead to the obligor’s inadequate capacity tomeet its financial commitments. The Company’slong-term issuer credit rating has been assigned astable outlook by S&P. An S&P rating outlookassesses the potential direction of a long-termcredit rating over the intermediate term (typicallysix months to two years). In determining a ratingoutlook, consideration is given to any changes inthe economic and/or fundamental businessconditions. A stable outlook means that a rating isnot likely to change.

S&P rates long-term debt instruments by ratingcategories ranging from a high of “AAA” to a lowof “D”. Generally, these major rating categoriesmay be modified by the addition of a “+” or “-” toshow relative standing within the category, whilethe absence of either a “+” or “-” designationindicates the rating is in the middle of thecategory. According to S&P, an obligation rated

“B” is more vulnerable to non-payment thanhigher-rated obligations, but the issuer currentlyhas the capacity to meet its financial commitmenton the obligation. However, exposure to adversebusiness, financial, or economic conditions, willlikely impair the issuer’s capacity or willingness tomeet its financial commitments on the obligation.

Credit ratings are intended to provide investorswith an independent measure of the credit qualityof an issuer of securities. The credit ratingsaccorded to the Senior Unsecured Notes are notrecommendations to purchase, hold or sell suchsecurities and are not a comment upon the marketprice of the Company’s securities or their suitabilityfor a particular investor. There is no assurance thatany rating will remain in effect for any given periodof time or that any rating will not be revised orwithdrawn entirely by a rating agency in the futureif, in its judgment, circumstances so warrant. Arevision or withdrawal of a credit rating could havea material adverse effect on the pricing or liquidityof the Senior Unsecured Notes or the ACI Shares inany secondary markets. The Company does notundertake any obligation to maintain the ratings orto advise holders of the Senior Unsecured Notes orthe common shares of any change in ratings.

The Company has made payments in the ordinarycourse to S&P in connection with the assignment ofthe rating on the Senior Unsecured Notes.

Dividends/DistributionsDividend Policy

Management reviews ACI’s financial results on amonthly basis. The Board of Directors of ACIreviews the financial results on a quarterly basis, oras requested by Management, and determinewhether a dividend shall be declared and paidbased on a number of factors.

On February 17, 2015, the Board declared aquarterly eligible dividend of $0.25 on each issuedand outstanding ACI Share representing an annualdividend rate of $1.00 per ACI Share. The dividendwas eligible to shareholders of record onFebruary 28, 2015 and was paid on March 16, 2015.

Regarding dividends, the Board of Directors remaincommitted to providing investors with anattractive dividend which it continues to review ona regular basis in the context of a number offactors, including acquisition opportunities.

Our ability to pay dividends and the actual amountof such dividends will be dependent upon, amongother things, our financial performance, our debtcovenants and obligations, our ability to refinanceour debt obligations on similar terms and at similarinterest rates, our working capital requirements,our future tax obligations, our future capitalrequirements, and the Company’s growthprospects.


Market for Securities

As per the terms of the Credit Agreement, we are restricted from declaring dividends if we are in breach ofour financial covenants or our available margin and facility limits or if such dividend would result in abreach of our covenants or our available margin and facility limits.

Historical Distributions

The following table summarizes the dividends declared by ACI from January 1, 2012 to December 31, 2014on ACI Shares.

(In thousands of dollars)

Record date Payment datePer share

$Total

$

February 29, 2012 March 15, 2012 0.14 2,783May 31, 2012 June 15, 2012 0.15 2,982August 31, 2012 September 17, 2012 0.16 3,181November 30, 2012 December 17, 2012 0.17 3,380



Trading Price and Volume

AutoCanada’s shares are listed and posted for trading on the Toronto Stock Exchange under the symbol“ACQ”. The following table sets forth certain trading information for the ACI Shares on the TSX for themost recently completed financial year based on information from the Historical Data Access section ofthe TSX website, believed to be reliable by ACI:

MonthHigh

($)Low

($)Close

($)Volume(shares)

2014 January 46.15 37.10 39.40 2,193,334February 45.33 38.10 44.03 1,218,271March 62.30 43.13 61.50 2,185,075April 70.42 59.52 70.00 2,540,379May 80.88 64.00 80.84 3,202,629June 91.72 78.45 79.03 4,541,811July 80.94 71.07 72.48 2,434,166August 78.00 60.42 67.75 3,477,615September 71.25 52.71 54.45 3,332,198October 63.80 48.36 62.60 3,960,380November 69.69 51.77 52.82 3,291,661December 53.07 39.45 44.50 4,701,381

Prior Sales

On May 22, 2014, the Company completed the offering of the Senior Unsecured Notes which were issuedat par. The Senior Unsecured Notes are not listed or quoted on a marketplace.


Directors and Officers

The following table sets forth the name, place of residence, positions for each of the directors and officersof ACI, together with their principal occupations during the last five years. The directors of ACI shall holdoffice until the next annual meeting of shareholders or until their respective successors have been dulyelected or appointed.

Name and Province or State,and Country of Residence Position Principal Occupation

Gordon R. Barefoot, FCA(1)

British Columbia, CanadaLead Director of the Board sinceDecember 31, 2009; (FormerTrustee of the Fund and Trustfrom 2006 to 2009)

Š President, Cabgor ManagementInc., (a management consultingcompany)

Š Board Director & Interim ChiefExecutive Officer, CorixInfrastructure Inc.

Michael H. Ross,CMA, ICD.D(1)(2)

Alberta, Canada

Director since December 31,2009; (Former Director ofAutoCanada GP Inc. from 2007 –2009)

Š President, M. H. Ross ManagementLtd. (a management consultingcompany); prior thereto ChiefExecutive Officer, Conroy RossPartners (business advisory andexecutive search firm)

Š Lead Director, Camex EquipmentSales & Rentals Inc.; BoardDirector, Fountain Tire; BoardDirector, FYi Doctors; BoardDirector, Norseman Group Ltd.;Board Director, Systems IntegrityManagement Solutions, Inc., BoardGovernor, University of Alberta.

Dennis S. DesRosiers(2)

Ontario, CanadaDirector since December 31,2009 (Former Trustee of theFund and Trust from May 9,2007 to December 31, 2009)

Š President, DesRosiers AutomotiveConsultants Inc. (an automobilemanufacturer consultant)

Š Board Governor, Universityof Windsor

Christopher D. Cumming(1)(2)

British Columbia, CanadaDirector since May 13, 2011 Š President, Evident Capital Corp;

Director, Highland TherapeuticsInc.

Barry L. James,FCA, ICD.D(1)

Alberta, Canada

Director since November 6, 2014 Š President, Barry L James AdvisoryServices Ltd. (a private consultingcompany); prior thereto Partner,PricewaterhouseCoopers LLP

Š Board Director, CorusEntertainment; Board Director,ATB Financial

Š Board Governor, University ofAlberta; Senator, University ofAlberta

Notes:(1) Member of the audit committee of ACI.(2) Member of the governance and compensation committee of ACI.


Name and Province or State,and Country of Residence Position Principal Occupation

Patrick J. PriestnerAlberta, Canada

Director, since December 31,2009; (Former Chair of theBoard of Directors ofAutoCanada GP Inc. from 2006to 2009). Executive Chair sinceJanuary 1, 2015

Š Chief Executive Officer from May2006 to December 2014; Prior toNovember 2005, President andDealer Principal at COAG since1993

Š Board Director, Rocky MountainDealerships Inc.

Thomas L. Orysiuk, CAAlberta, Canada

Chief Executive Officer sinceJanuary 1, 2015. Director sinceMay 13, 2011. President sinceJanuary 13, 2011

Š Prior thereto Executive Vice-President and Chief FinancialOfficer since November 2005

Steve R. E. RoseAlberta, Canada

Chief Operating Officer sinceJanuary 1, 2015

Š Prior thereto Senior Vice President,Sales, Marketing and CorporateOperations since 2013; ExecutiveVice President, Corporate Servicessince 2011; Vice President,Corporate Development; GeneralCounsel and Secretary from 2007to 2011

Christopher T. J. Burrows,CA, CPA, ICD.DAlberta, Canada

Vice President and ChiefFinancial Officer sinceSeptember 1, 2014

Š Prior thereto Vice President & ChiefFinancial Officer, K-Bro LinenSystems from 2010 to 2014

Erin D. OorAlberta, Canada

Vice President, CorporateDevelopment and Administrationsince January 1, 2015

Š Prior thereto Vice President,Administration & General Counselsince June 2, 2014; GeneralCounsel and General Manager atUnified Alloys (Ontario) Ltd. From2012 to 2014; Vice President andGeneral Counsel at Voodoovox Inc.from 2007 to 2012

Š Member of Law Society of Alberta;Member of Law Society of UpperCanada

Jeffery J. S. Christie, CAAlberta, Canada

Vice President, Operations sinceSeptember 1, 2014

Š Prior thereto Vice President,Finance from 2011 to 2014;Manager, Financial Reporting from2008 to 2011


As of March 19, 2015, directors and executiveofficers of ACI, as a group, beneficially own orcontrol or direct, directly or indirectly (includingindirect ownership through COAG), an aggregateof 3,766,153 ACI Shares, representingapproximately 15.4% of the issued and outstandingACI Shares.

Corporate Cease TradeOrders or BankruptciesTo the knowledge of the Company no director orexecutive officer of the Company is, or within theten years prior to the date hereof, has been, atrustee, director, chief executive officer or chieffinancial officer of any company that, while thatperson was acting in that capacity: (i) was thesubject of a cease trade order or similar order, oran order that denied the relevant company accessto any exemption under securities legislation, for aperiod of more than 30 consecutive days; or(ii) was subject to a cease trade or similar order oran order that denied the relevant company accessto any exemption under securities legislation, for aperiod of more than 30 consecutive days that wasissued after such person ceased to be a trustee,director, chief executive officer or chief financialofficer and which resulted from an event thatoccurred while such person was acting in thecapacity of a trustee, director, chief executiveofficer or chief financial officer.

To the knowledge of the Company, other than asdisclosed herein, no director or executive officer ofthe Company, or a Shareholder holding a sufficientnumber of ACI shares to affect materially thecontrol of the Company, is, or within the ten yearsprior to the date hereof, has been, a trustee,director or executive officer of any company that,while that person was acting in that capacity orwithin a year of that person ceasing to act in thatcapacity, became bankrupt, made a proposal underany legislation relating to bankruptcy or insolvencyor was subject to or instituted any proceedings,arrangement or compromise with creditors or hada receiver, receiver manager or trustee appointedto hold its assets.

Mr. Barefoot was a Director of EarthFirst CanadaInc. until mid-November 2009. EarthFirst CanadaInc. sought creditor protection in November 2008

and through a court approved process successfullysettled with creditors in November 2009. EffectiveMarch 2, 2010, EarthFirst Canada Inc. amalgamatedwith Maxim Power Corp. In addition, Mr. Barefootwas previously a Director of ISE Limited andresigned from this position in February 2011. ISELimited was a Cayman Island corporation with anoperating company in San Diego, United States. In2010, ISE Limited was delisted as it sought creditorprotection under Chapter 11. The assets of ISELimited have since been sold and ISE Limited is inthe process of being wound-up.

Penalties or Sanctions

To the knowledge of the Company, no director orexecutive officer of the Company or a Shareholderholding a sufficient number of ACI shares to affectmaterially the control of ACI has been subject toany penalties or sanctions imposed by a courtrelating to securities legislation or by a securitiesregulatory authority or has entered into asettlement agreement with a securities authority,or any other penalties or sanctions imposed by acourt or regulatory body that would likely beconsidered important to a reasonable investor inmaking an investment decision.

Personal BankruptciesTo the knowledge of the Company, no director orexecutive officer of the Company or a Shareholderholding a sufficient number of ACI shares to affectmaterially the control of ACI has, within the tenyears prior to the date hereof, become bankrupt,made a proposal under any legislation relating tobankruptcy or insolvency, or became subject to orinstituted any proceedings, arrangement orcompromise with creditors, or had a receiver,receiver manager or trustee appointed to holdsuch person’s assets.

Conflicts of InterestThe officers and directors of ACI may also becomeofficers and/or directors of other companiesengaged in the automotive industry generally andwhich may own interests in automotive dealershipsin which ACI holds or may in the future, hold aninterest. As a result, situations may arise where theinterests of such directors and officers conflict withtheir interests as directors and officers of other


companies. In the case of the directors, theresolution of such conflicts is governed byapplicable corporate laws which require thatdirectors act honestly, in good faith and with aview to the best interests of ACI and, in respect of

the Canada Business Corporations Act, ACI’sgoverning statute, that directors declare, andrefrain from voting on, any matter in which adirector may have a conflict of interest.

AUDIT COMMITTEE INFORMATIONCharter of the AuditCommitteeThe audit committee charter of ACI is attached asSchedule B to this AIF.

Composition of the AuditCommitteeThe audit committee of ACI consists of Gordon R.Barefoot, Michael Ross and Barry James.

Each member of the audit committee of ACI isindependent and financially literate; as such termsare defined in National Instrument 52-110 – AuditCommittees (“NI 52-110”).

Relevant Education andExperienceThe education and experience of each auditcommittee member of ACI that is relevant to theperformance of his responsibilities as an auditcommittee member is described below:

Gordon R. Barefoot – Mr. Barefoot is a CharteredAccountant. Mr. Barefoot was, until November,2005, the Senior Vice President, Finance & ChiefFinancial Officer of Terasen Inc. where he served invarious senior executive positions since July 1998.Mr. Barefoot is currently a member of the auditcommittee of two other private entities.Mr. Barefoot also served on the board of directorsof Nventa Biopharmaceuticals Corporation untilJune 2008 and the board of directors of ISELimited until February 2010, both reporting issuers.Prior to joining Terasen, Mr. Barefoot was a partnerof Ernst & Young, where, during a 20 year career,he worked with a variety of clients in a broad rangeof industries. Each of the foregoing positions

required Mr. Barefoot to have an understanding of,and assess, accounting principles, including in thecontext of estimates, accruals and reserves, as wellas have an understanding of internal controls andprocedures for financial reporting. The positionsalso required Mr. Barefoot to prepare, analyze andevaluate financial statements and supervise otherswho prepared analyzed and evaluated financialstatements. Mr. Barefoot also participates inaccounting seminars and programs to helpmaintain the skill and knowledge necessary toperform his duties as the chair of the auditcommittee.

Michael Ross – Mr. Ross was a founding partner ofConroy Ross Partners. Mr. Ross served asManaging Partner and Chief Executive Officer ofConroy Ross Partners until his retirement in2012. Throughout his years at Conroy RossPartners, Mr. Ross worked diligently advisingboards of directors and senior executives in theareas of business strategy, organizational andbusiness design, merger and acquisition integrationservices, succession planning and executiverecruitment. Prior to 2002, Mr. Ross was VicePresident of Cap Gemini Ernst & Young and priorto that a Partner with Ernst & Young and ultimatelybecame National Managing Partner forEntrepreneurial and Middle Market Consulting inCanada. Mr. Ross graduated from the University ofAlberta in Commerce and Business Administrationand the Queen’s University Executive Program. Alifelong learner, Mr. Ross is also a CertifiedManagement Accountant, a Certified ManagementConsultant and a Certified Human ResourcesProfessional. He is a graduate of the Institute ofCorporate Directors and holds the ICD.Ddesignation. Mr. Ross currently sits on fiveadditional private (for profit) boards and was amember of the National Association of CorporateDirectors, based in Washington, DC and holds theirDirector Education Certificate. Mr. Ross hasextensive experience in a broad range of businessenvironments and has a significant amount offinancial and business consulting expertise. His


past experience has required him to regularlyanalyze and evaluate financial statements and hasa broad understanding of accounting principlesand internal controls and procedures for financingreporting.

Barry James – Mr. James is currently the ChiefCorporate Development Officer at Lloyd SaddInsurance Brokers Ltd. Mr. James was previouslyManaging Partner of the Edmonton office ofPricewaterhouseCoopers LLP, a position he heldfor ten years. Barry received a Bachelor ofCommerce (with Distinction) degree from theUniversity of Alberta in 1980, qualified as aChartered Accountant in 1983 and became aFellow of the Chartered Accountants in 2007. Hejoined PwC in 1977 and was admitted to thepartnership in 1989. He was the Managing Partnerof the Edmonton office from July 2001 to June2011. In the community, Mr. James is currently aMinister-appointed member of the University ofAlberta Board, the University of Alberta Senate andthe Audit Committee of the Province of Alberta, amember of the University of Alberta HospitalFoundation Board and the Alberta Chapter of theWorld Presidents’ Organization. He also sits on theBoard of Corus Entertainment and ATB Financial.He has served as Chair of the Stollery Children’sHospital Foundation and on the Board of Directorsof the Edmonton Convention Centre Authority, theForest Industry Suppliers’ Association of Alberta,the Edmonton Space and Science Foundation(TELUS World of Science) and the SupportNetwork Foundation. Mr. James’s education andexperience provide him with the necessaryknowledge and ability to fulfill the requirements ofa member of the audit committee.

Reliance on Exemptions

At no time since the commencement of theCompany’s most recently completed financial yearhas the Company relied upon an exemption, inwhole or in part, from NI 52-110 other than theexemption in Section 2.4 (De-Minimus Non-auditServices) of NI 52-110.

Prior Approval of Policies and Procedures

The audit committee of ACI must pre-approve allnon-audit services to be provided to ACI or itssubsidiaries by ACI’s external auditor, other thannon-audit services where:

(a) the aggregate amount of all such non-audit services that were not pre-approvedis reasonably expected to constitute nomore than five per cent of the totalamount of fees paid by ACI and itssubsidiaries to ACI’s external auditorduring the fiscal year in which the servicesare provided;

(b) ACI or its subsidiaries, as the case may be,did not recognize the services as non-audit services at the time of theengagement; and

(c) the services are promptly brought to theattention of the audit committee of ACIand approved, prior to the completion ofthe audit, by the audit committee of ACIor by one or more of its members towhom authority to grant such approvalshad been delegated by the auditcommittee of ACI.

Audit Committee Oversight

At no time since the beginning of the Company’smost recently completed financial year has arecommendation of the audit committee of ACI tonominate or compensate an external auditor notbeen adopted by the board of directors.


External Auditor ServiceFees (by category)The following table sets forth, by category, the feesbilled by PricewaterhouseCoopers LLP, ACI’sauditors, for the years ended December 31:

Fee category 2014 2013

Audit fees $ 469,900 $380,036Audit-related fees $ 265,027 $130,729Tax fees $ 163,290 $104,922All other fees $ 762,962 $223,606

Total $1,661,179 $839,293

“Audit fees” include all fees paid toPricewaterhouseCoopers LLP for the audit of theannual consolidated financial statements.

“Audit-related fees” include all fees paid toPricewaterhouseCoopers LLP for the review of theinterim financial statements and other services inconnection with regulatory filings.

“Tax fees” consist of all fees paid toPricewaterhouseCoopers LLP for tax compliancematters.

“All other fees” consist of all fees paid toPricewaterhouseCoopers LLP for securitiesofferings and other assurance reviewengagements.


Legal Proceedings and Regulatory Actions

From time to time, we are named in claimsinvolving the manufacture of vehicles, contractualdisputes and other matters arising in the ordinarycourse of our business. Currently, no legalproceedings are pending against us that, inmanagement’s opinion, could be expected to havea material adverse effect on our business, financialcondition or results of operations.

In addition, we are not aware of any penalties orsanctions imposed against us by a court relating tosecurities legislation or by a securities regulatoryauthority during our financial year endedDecember 31, 2014 or any other penalties orsanctions imposed by a court or regulatory bodyagainst us that would likely be consideredimportant to a reasonable investor in making an

investment decision, and we have not entered intoany settlement agreements with a court relating tosecurities legislation or with a securities regulatoryauthority during our financial year endedDecember 31, 2014.

Because of their vehicle inventory and the natureof their business, franchised automobiledealerships generally require significant levels ofinsurance covering a broad variety of risks. Ourinsurance program includes three umbrella policieswith a total per occurrence and aggregate limit of$15 million. We also have insurance on our leasedproperty, comprehensive coverage for our vehicleinventory, garage liability and general liabilityinsurance, employee dishonesty insurance anderrors and omissions insurance in connection withour vehicle sales and financing activities.

Interest of Management and Others inMaterial Transactions

Other than as described in this AIF under theheadings “Description of the AutoCanadaBusiness – Acquisitions and Relocations” and“Description of the AutoCanada Business –Locations”, none of the Company’s directors,executive officers or persons or companies thatbeneficially own or control or direct, directly orindirectly or a combination of both, more than 10%

of ACI’s common shares, or their associates andaffiliates, had any material interest, direct orindirect, in any transaction with the Companywithin the three most recently completed financialyears or during the current financial year that hasmaterially affected or would reasonably beexpected to materially affect the Company.

Transfer Agent and Registrar

The transfer agent and registrar for the ACI Sharesis Valiant Trust Company at its principal offices inEdmonton and Calgary, Alberta and Toronto,Ontario.


The only material contracts entered into by theCompany and within the most recently completedfinancial year, or before the most recentlycompleted financial year, and which remain ineffect, are as follows:

1. Chrysler Standard Dealer Sales andService Agreement and Additional Termshas been signed by each dealership andsets out the terms under which eachdealership may sell new Chrysler, Dodgeand Jeep vehicles

2. the Credit Agreement described under“Financing – Credit Facilities”;

3. the Chrysler Approval Agreement;

4. the Hyundai Framework Agreement;

5. the Nissan Framework Agreement;

6. the Floorplan Lender Facilities;

7. the VCCI Facilities; and

8. the Indenture relating to the SeniorUnsecured Notes.

The contracts listed above are filed on SEDAR atwww.sedar.com.

Interest of Experts

There is no person or company whose professionor business gives authority to a statement made bysuch person or company and who is named ashaving prepared or certified a statement, report orvaluation described or included in a filing, orreferred to in a filing, made under NI 51-102 by ACIduring, or related to, its most recently completed

financial year other than PricewaterhouseCoopersLLP, the external auditors of ACI.

PricewaterhouseCoopers LLP has advised thatthey are independent within the meaning of theRules of Professional Conduct of the Institute ofCharted Accountants (Alberta).

Additional Information

Additional information relating to us may be foundon SEDAR at www.sedar.com. Additionalinformation, including directors’ and officers’remuneration and indebtedness, principal holdersof our securities and securities authorized forissuance under equity compensation plans, asapplicable, will be contained in our information

circular for the annual meeting of Shareholders tobe held on May 8, 2015. Additional financialinformation is provided in our audited consolidatedfinancial statements and management’s discussionand analysis for our most recently completedfinancial year.


Material Contracts

Schedule A – Glossary of Terms

“ACI” or the “Company” means AutoCanada Inc., acorporation incorporated under the CBCA;

“ACI Share” means a common share in the capitalof ACI;

“ACI Stock Option Plan” or the “Plan” means thestock option plan of ACI;

“ADP” means ADP Dealer Services Ltd.;

“affiliate” has the meaning provided for in theCBCA;

“AIF” means this annual information form of theCompany for the year ended December 31, 2014;

“Floorplan Lender Facilities” means the agreementbetween AutoCanada and a syndicate of Canadianchartered banks;

“AutoCanada” means the AutoCanada Inc. and itsinterests in its subsidiaries, the Holding LPs, theDealer LPs and any other franchised automobiledealership owned or operated by the foregoingparties;

“AutoCanada GP” means AutoCanada GP Inc., acorporation incorporated under the CBCA;

“CADA” means Canadian Automobile DealersAssociation;

“COAG” means Canada One Auto Group Ltd., acompany controlled by Mr. Patrick Priestner, theExecutive Chairman of AutoCanada;

“CBCA” means the Canada Business CorporationsAct and the regulations thereto, as amended;

“Chrysler Canada” means Chrysler Canada Inc.,formerly known as DaimlerChrysler Canada Inc.;

“Credit Agreement” means the credit facilityagreement between AutoCanada and a syndicateof Canadian chartered banks, as amended;

“Dealer GPs” means a corporation incorporatedunder the CBCA to operate as a general partner ofeach Dealer LP;

“Dealer LPs” means the limited partnershipsestablished under the laws of the Province ofManitoba to carry on the business of owning andoperating one of AutoCanada LP’s franchisedautomobile dealerships, as well as activitiesancillary thereto;

“Dealer principal” means an individual, approvedby the automobile manufacturer, who isresponsible for the day to day management andoperations of a franchised automobile dealership;

“floorplan financing” is a type of asset-basedfinancing used by franchised automobiledealerships to finance their new (and in someinstances used) vehicle inventories. See“Financing – Floorplan Financing”;

“Floorplan Lender Facilities” means the agreementbetween AutoCanada and a syndicate of Canadianchartered banks;

“fully-diluted” in respect to the number ofsecurities of any person to be issued andoutstanding at such time means the number ofsuch securities of such person that would be issuedand outstanding at such time if all rights to acquireor be issued such securities under all issued andoutstanding rights of conversion, exchange, issueor purchase had been exercised at such time;

“Fund” means the former AutoCanada IncomeFund, an unincorporated, open-ended trustestablished under the laws of the Province ofAlberta;

“GAAP” means generally accepted accountingprinciples in Canada;

“Holding GPs” means the corporationsincorporated under the CBCA to operate as ageneral partner of each Holding LP;

“Holding LPs” means the limited partnershipsestablished under the laws of the Province ofManitoba to carry on certain franchised automobiledealerships of AutoCanada, as well as activitiesancillary thereto, following the Arrangement;

“Holdings” means AutoCanada Holdings Inc., acorporation incorporated under the CBCA;


“Hyundai” means Hyundai Auto Canada, a divisionof Hyundai Motor America, a California corporation;

“Hyundai Framework Agreement” means theframework agreement dated April 28, 2006, asamended on April 2, 2007, among Hyundai AutoCanada Corp. (by way of assignment from HyundaiAuto Canada), the Company, COAG and certainDealer LP’s;

“IPO” means the initial public offering of trust unitsissued and sold by the former Fund (including theover-allotment option);

“Management” mean the executive officers of ACI;

“Mitsubishi” means Mitsubishi Motor Sales ofCanada, Inc.;

“NADAP Rules” means the rules adopted by theCanadian Vehicle Manufacturer’s Association, theAssociation of International AutomobileManufacturers of Canada and CADA that providefor dispute resolution between the automobilemanufacturers and the franchised automobiledealerships in the Canadian automobile industry;

“NI 51-102” means National Instrument 51-102 –Continuous Disclosure Obligations issued by theCanadian Securities Administrators;

“Nissan Framework Agreement” means themultiple market ownership agreement datedMarch 20, 2008, between Nissan Canada Inc. andACI;

“OEM” means original equipment manufacturers;

“OEM Agreements” means the dealership franchiseor sales and service agreements entered into byeach of the Dealer LPs with the applicable OEM;

“Open Point” means a new franchised automobiledealership opened, or to be opened, pursuant tothe right to open a new franchised automobiledealership in a specific location granted to a dealerby an automobile manufacturer;

“Reynolds and Reynolds” means the Reynolds andReynolds Company;

“Senior Unsecured Notes” means the $150.0million aggregate principal amount of 5.625%senior unsecured notes sold by the Company anddue May 25, 2021;

“Shareholders” mean the holders of commonshares of ACI;

“Subaru” means Subaru Canada Inc.;

“Subsidiary” has the meaning provided for in theCBCA, read as if the word “body corporate”includes a trust, partnership, limited liabilitycompany or other form of business organization;

“Trust” means the former AutoCanada OperatingTrust, an unincorporated, open-ended trustestablished under the laws of the Province ofAlberta;

“TSX” means the Toronto Stock Exchange;

“VCCI Facilities” means the agreement datedNovember 9, 2011, between AutoCanada and VWCredit Canada Inc.; and

“VW Canada” means Volkswagen Canada Inc.


Schedule B – AutoCanada Inc. Audit Committee Charter

The term “ACI” refers to AutoCanada Inc., the term“Board” refers to the board of directors of ACI. Theterm “Governance Agreements” refers to thecorporate bylaws of ACI.

PURPOSE

The Audit Committee (the “Committee”) is astanding committee appointed by the Board toassist the Board in fulfilling its oversightresponsibilities with respect to ACI’s financialreporting including responsibility to:

oversee the integrity of ACI’sconsolidated financial statements andfinancial reporting process, including theaudit process and ACI’s internalaccounting controls and procedures andcompliance with related legal andregulatory requirements;

oversee the qualifications andindependence of ACI’s external auditors;

oversee the work of ACI’s financialmanagement and external auditors inthese areas; and

provide an open avenue ofcommunication between the externalauditors, the Board, and the officers(collectively, “Management”) of ACI.

In addition, the Committee will review and/orapprove any other matter specifically delegated tothe Committee by the Board.

COMPOSITION AND PROCEDURES

In addition to the procedures and powers set out inany resolution of the Board, the Committee willhave the following composition and procedures:

1. Composition

The Committee shall consist of no fewer than threemembers. None of the members of the Committeeshall be an officer or employee of ACI or any oftheir respective subsidiaries and each member ofthe Committee shall be an “independent director”(in accordance with the definition of “independentdirector” from time to time under the requirementsor guidelines for audit committee service under

applicable securities laws and the rules of anystock exchange on which ACI’s shares are listed fortrading).

2. Appointment and Replacement of CommitteeMembers

Any member of the Committee may be removed orreplaced at any time by the Board and shallautomatically cease to be a member of theCommittee upon ceasing to be a director. TheBoard may fill vacancies on the Committee byelection from among its members. The Board shallfill any vacancy if the membership of theCommittee is less than three directors. If andwhenever a vacancy shall exist on the Committee,the remaining members may exercise all its powerso long as a quorum remains in office. Subject tothe foregoing, the members of the Committee shallbe elected by the Board annually and eachmember of the Committee shall hold office as suchuntil the next annual meeting of shareholders afterhis or her election or until his or her successor shallbe duly elected and qualified.

3. Financial literacy

All members of the Committee must be “financiallyliterate” (as that term is interpreted by the Board inits reasonable judgment or as may be defined fromtime to time under the requirements or guidelinesfor audit committee service under securities lawsand the rules of any stock exchange on which ACI’sshares are listed for trading) or must becomefinancially literate within a reasonable period oftime after his or her appointment to theCommittee.

4. Separate Executive Meetings

The Committee will endeavour to meet at leastonce every quarter, and more often as warranted,with the Chief Financial Officer of ACI and theexternal auditors in separate executive sessions todiscuss any matters that the Committee or each ofthese groups believes should be discussedprivately.

5. Professional Assistance

The Committee may retain special legal,accounting, financial or other consultants to advisethe Committee at ACI’s expense.


6. Reliance

Absent actual knowledge to the contrary (whichwill be promptly reported to the Board), eachmember of the Committee shall be entitled to relyon (i) the integrity of those persons ororganizations within and outside ACI from which itreceives information, (ii) the accuracy of thefinancial and other information provided to theCommittee by such persons or organizations and(iii) representations made by ACI or its seniormanagement and the external auditors, as to anyinformation, technology, internal audit and othernon-audit services provided by the externalauditors to ACI and its subsidiaries.

7. Review of Charter

The Committee will periodically review andreassess the adequacy of this Charter as it deemsappropriate and recommend changes to the Board.The Committee will evaluate its performance withreference to this Charter. The Committee willapprove the form of disclosure of this Charter,where required by applicable securities laws orregulatory requirements, in the annual proxycircular or annual report of ACI.

8. Delegation

The Committee may delegate from time to time toany person or committee of persons any of theCommittee’s responsibilities that lawfully may bedelegated.

9. Reporting to the Board

The Committee will report through the CommitteeChair to the Board following meetings of theCommittee on matters considered by theCommittee, its activities and compliance with thisCharter.

SPECIFIC MANDATES OF THE COMMITTEE

The Committee will:

A. In Respect of ACI’s External Auditors

(1) review the performance of theexternal auditors of ACI who areaccountable to the Committee andthe Board as the representatives ofthe shareholders of ACI, including thelead partner of the independent

auditor team and makerecommendations to the Board as tothe reappointment or appointment ofthe external auditors of ACI to beproposed in ACI’s proxy circular forshareholder approval and shall haveauthority to terminate the externalauditors;

(2) review the reasons for any proposedchange in the external auditors of ACIwhich is not initiated by theCommittee or Board and any othersignificant issues related to thechange, including the response of theincumbent auditors, and enquire as tothe qualifications of the proposedreplacement auditors before makingits recommendation to the Board;

(3) approve the terms of engagementand the compensation to be paid byACI to ACI’s external auditors;

(4) review the independence of ACI’sexternal auditors, including a writtenreport from the external auditorsrespecting their independence andconsideration of applicable auditorindependence standards;

(5) approve in advance all permitted non-audit services to be provided to ACIor any of its affiliates by the externalauditors or any of their affiliates,subject to any de minimus exceptionallowed by applicable law; theCommittee may delegate to one ormore designated members of theCommittee the authority to grant pre-approvals required by this subsection;

(6) review the disclosure with respect toits pre-approval of audit and non-audit services provided by ACI’sexternal auditors;

(7) approve any hiring by ACI or itssubsidiaries of employees or formeremployees of ACI’s external auditors;

(8) review a written or oral reportdescribing:

a) critical accounting policies andpractices to be used in ACI’sannual audit,


b) alternative treatments of financialinformation within generallyaccepted accounting principlesthat have been discussed withmanagement and that aresignificant to ACI’s consolidatedfinancial statements, ramificationsof the use of such alternativedisclosures and treatments, andthe treatment preferred by theexternal auditors, and

c) other material writtencommunication between ACI’sexternal auditors andmanagement, such as anymanagement letter or schedule ofunadjusted differences;

(9) review with the external auditors andmanagement the general auditapproach and scope of proposedaudit of the consolidated financialstatements of ACI, the objectives,staffing, locations, co-ordination andreliance upon management in theaudit, the overall audit plans, the auditprocedures to be used and the timingand estimated budgets of the audits;

(10) if a review engagement report isrequested of the external auditors,review such report before the releaseof ACI’s interim consolidated financialstatements; and

(11) discuss with the external auditors anydifficulties or disputes that arose withmanagement during the course of theaudit, any restrictions on the scope ofactivities or access to requestedinformation and the adequacy ofmanagement’s responses incorrecting audit-related deficiencies.

B. In Respect of ACI’s Financial Disclosure

(1) review with the external auditors andManagement:

a) ACI’s audited consolidatedfinancial statements and the notesand Managements’ Discussion andAnalysis relating to suchconsolidated financial statements,

the annual report, the annualinformation form, the financialinformation of ACI contained inany prospectus or informationcircular or other disclosuredocuments or regulatory filings ofACI, the recommendations forapproval of each of the foregoingfrom each of the Chairman of theBoard, EXECUTIVE CHAIRMANand CFO and based on suchrecommendations provide, whereapplicable, its ownrecommendations to the Boardfor their approval and release ofeach of the foregoing to thepublic;

b) ACI’s interim consolidatedfinancial statements and the notesand Managements’ Discussion andAnalysis relating to suchconsolidated financial statements,the recommendations forapproval of each of the foregoingfrom each of the Chairman of theBoard, EXECUTIVE CHAIRMANand CFO and based on suchrecommendations provide, whereapplicable, its ownrecommendations to the Boardfor their approval and release ofeach of the foregoing to thepublic;

c) the quality, appropriateness andacceptability of ACI’s accountingprinciples and practices used in itsfinancial reporting, changes inACI’s accounting principles orpractices and the application ofparticular accounting principlesand disclosure practices byManagement to new transactionsor events;

d) all significant financial reportingissues and judgments made inconnection with the preparationof ACI’s consolidated financialstatements, including the effectsof alternative methods in respectof any matter consideredsignificant by the external auditor


within generally acceptedaccounting principles on theconsolidated financial statementsand any “second opinions” soughtby Management from anindependent or other audit firm oradvisor with respect to theaccounting treatment of aparticular item;

e) the effect of regulatory andaccounting initiatives on ACI’sconsolidated financial statementsand other financial disclosures;

f) any reserves, accruals, provisionsor estimates that may have asignificant effect upon theconsolidated financial statementsof ACI;

g) the use of special purpose entitiesand the business purpose andeconomic effect of off balancesheet transactions, arrangements,obligations, guarantees and otherrelationships of ACI and theirimpact on the reported financialresults of ACI;

h) any legal matter, claim orcontingency that could have asignificant impact on theconsolidated financial statements,ACI’s compliance policies and anymaterial reports, inquiries or othercorrespondence received fromregulators or governmentalagencies and the manner in whichany such legal matter, claim orcontingency has been disclosed inACI’s consolidated financialstatements;

i) review the treatment for financialreporting purposes of anysignificant transactions that arenot a normal part of ACI’soperations; and

j) the use of any “pro forma” or“adjusted” information not inaccordance with generallyaccepted accounting principles.

(2) review and resolve disagreementsbetween Management and ACI’sexternal auditors regarding financialreporting or the application of anyaccounting principles or practices;

(3) review earnings press releases, as wellas financial information and earningsguidance provided to analysts andratings agencies, it being understoodthat such discussions may, in thediscretion of the Committee, be donegenerally (i.e., by discussing the typesof information to be disclosed and thetype of presentation to be made) andthat the Committee need not discussin advance each earnings release oreach instance in which ACI givesearning guidance;

(4) establish and monitor procedures forthe receipt and treatment ofcomplaints received by ACI regardingaccounting, internal accountingcontrols or audit matters and theanonymous submission by employeesof concerns regarding questionableaccounting or auditing matters andreview periodically with theManagement these procedures andany significant complaints received;

(5) receive from the Executive Chairmanand the Chief Financial Officer acertificate certifying in respect ofeach annual and interim report thematters such officers are required tocertify in connection with the filing ofsuch reports under applicablesecurities laws; and

(6) review and discuss ACI’s majorfinancial risk exposures and the stepstaken to monitor and control suchexposures, including the use of anyfinancial derivatives and hedgingactivities.

C. In Respect of Insurance

(1) review periodically insuranceprograms relating to ACI and itsinvestments.


D. In Respect of Internal Controls

(1) review the adequacy andeffectiveness of ACI’s internalaccounting and financial controlsbased on recommendations fromManagement and the externalauditors for the improvement ofaccounting practices and internalcontrols; and

(2) oversee compliance with internalcontrols and the Joint Code ofBusiness Conduct.

E. In respect of Other Items

(1) on an annual basis review and assesscommittee member attendance andperformance and report thereon tothe Board and review this Charterand, if required implementamendments to this Charter;

(2) on a quarterly basis reviewcompliance with GovernanceAgreements with respect to mattersthat relate to the financial statementsof ACI;

(3) on a quarterly basis review the priorquarter distributions;

(4) on a quarterly basis reviewcompliance with the Joint DisclosurePolicy of ACI.

OVERSIGHT FUNCTION

While the Committee has the responsibilities andpowers set forth in this Charter, it is not the duty ofthe Committee to plan or conduct audits or todetermine that ACI’s consolidated financialstatements are complete and accurate or are inaccordance with GAAP and applicable rules andregulations. These are the responsibilities ofManagement and ACI’s external auditors. TheCommittee, its Chair and any Committee membersidentified as having accounting or related financialexpertise are members of the Board, appointed tothe Committee to provide broad oversight of thefinancial, risk and control related activities of ACI,and are specifically not accountable or responsiblefor the day-to-day operation or performance ofsuch activities. Although the designation of aCommittee member as having accounting orrelated financial expertise for disclosure purposesor otherwise is based on that individual’s educationand experience, which that individual will bring tobear in carrying out his or her duties on theCommittee, such designation does not impose onsuch person any duties, obligations or liability thatare greater than the duties, obligations and liabilityimposed on such person as a member of theCommittee and Board in the absence of suchdesignation. Rather, the role of a Committeemember who is identified as having accounting orrelated financial expertise, like the role of allCommittee members, is to oversee the process,not to certify or guarantee the internal or externalaudit of ACI’s financial information or publicdisclosure.


AutoCanada Inc.

200 - 15505 Yellowhead Trail NW Edmonton, AB T5V 1E5

autocan.ca

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Annual Information Form - AutoCanada Investor Relations · 2018. 11. 5. · For the year ended...

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