No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise.

Transcription

1 No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. PROSPECTUS New Issue February 18, 2011 S P L I T 14OCT C O R P. I I $47,435,841 2,175,956 Class B Preferred Shares, Series 1 Price: $21.80 per Class B Preferred Share, Series 1 This prospectus qualifies the distribution (the Offering ) of 2,175,956 Class B Preferred Shares, Series 1 ( Series 1 Preferred Shares ) of Allbanc Split Corp. II (the Company ), a closed end mutual fund corporation. The Series 1 Preferred Shares of the Company offered hereby have been designed to provide their holders with fixed cumulative preferential distributions derived primarily from the dividends received in the ordinary course on the Company s portfolio (the Portfolio ) of common shares of Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank (the Portfolio Shares ). See Investment Objectives and Restrictions. Holders of Series 1 Preferred Shares will be entitled to receive quarterly fixed cumulative preferential distributions equal to $ per Series 1 Preferred Share. On an annualized basis, this would represent a yield on the offering price of the Series 1 Preferred Shares of approximately 4.25%. Based on the expected closing date of February 28, 2011, the initial dividend will be approximately $ per Series 1 Preferred Share and is expected to be payable on or about May 31, See Attributes of the Series 1 Preferred Shares Description of the Series 1 Preferred Shares. The Series 1 Preferred Shares may be surrendered for retraction at any time and will be redeemed by the Company on February 28, 2016 (the Redemption Date ). In addition, the Series 1 Preferred Shares may otherwise be redeemed by the Company prior to the Redemption Date in certain limited circumstances including on February 28 th in each year or, where such day is not a business day, on the preceding business day, if there are any unmatched retractions of Class A Capital Shares. See Description of the Company s Share Capital Certain Provisions of the Class A Capital Shares. The Toronto Stock Exchange ( TSX ) has conditionally approved the listing of the Series 1 Preferred Shares subject to the fulfillment by the Company of the requirements of the TSX by April 14, Net Proceeds to Price to the Public (1) Agents Fees the Company (2) Per Series 1 Preferred Share... $21.80 $ $ Total... $47,435,841 $1,423,075 $46,012,766 (1) The Offering price was established through negotiation between the Company and the Agents (as defined below). (2) Before deducting the expenses of the Offering payable on closing, estimated at $364,000 which, together with the Agents fees, will be paid by the Company out of the proceeds of this Offering. In the opinion of Osler, Hoskin & Harcourt LLP, the Series 1 Preferred Shares, if and when listed on a designated stock exchange within the meaning of the Income Tax Act (Canada) ( Tax Act ), will be qualified investments under the Tax Act for trusts governed by registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered disability savings plans, registered education savings plans and tax-free savings accounts. See Eligibility for Investment. The Company is considered to be a mutual fund but has obtained an exemption from certain of the protections provided by the policies of the Canadian securities regulators applicable to conventional mutual funds. See Risk Factors for a discussion of certain factors that should be considered by prospective purchasers of Series 1 Preferred Shares. Prospective investors should consult their own tax advisors for advice with respect to the income tax consequences of investing in Series 1 Preferred Shares having regard to their own particular circumstances. There is currently no market through which the Series 1 Preferred Shares may be sold and purchasers may not be able to resell securities purchased under this prospectus. This may affect the pricing of the securities in the secondary market, the

2 transparency and availability of trading prices, the liquidity of the securities and the extent of issuer regulation. See Risk Factors. The Agents may over-allot or effect transactions as described under Plan of Distribution. Scotia Capital Inc. ( Scotia Capital ) is an Agent of the Company. The Company is a connected issuer of Scotia Capital under applicable securities legislation by virtue of Scotia Capital s relationship with the Company. Scotia Capital will, as agent on behalf of the Company, sell Portfolio Shares as required to fund retractions or redemptions of Series 1 Preferred Shares for which Scotia Capital will be entitled to receive commissions. Scotia Capital, in certain circumstances, may sell, as principal, Portfolio Shares to the Company and may purchase, as principal, Portfolio Shares when such Portfolio Shares are sold by the Company. No commissions are payable in connection with such principal trades. Scotia Managed Companies Administration Inc., a wholly-owned subsidiary of Scotia Capital, is the promoter of the Company. In addition, Scotia Managed Companies Administration Inc. administers the operations of the Company pursuant to the Administration Agreement and receives fees therefor. Certain of the directors and officers of the Company and Scotia Managed Companies Administration Inc. are currently employees of Scotia Capital. See Interests of Management and Others in Material Transactions. Scotia Capital, TD Securities Inc., BMO Nesbitt Burns Inc., CIBC World Markets Inc. and National Bank Financial Inc. (the Agents ), as agents, conditionally offer the Series 1 Preferred Shares subject to prior sale on a best efforts basis, if, as and when issued by the Company and accepted by the Agents in accordance with the conditions contained in the Agency Agreement referred to under Plan of Distribution and subject to the approval of certain legal matters by Osler, Hoskin & Harcourt LLP on behalf of the Company and the Agents. Subscriptions will be received for the Series 1 Preferred Shares offered hereby, subject to rejection or allotment in whole or in part, and the right is reserved to close the subscription books at any time. Closing of this Offering is expected to occur on or about February 28, 2011 but no later than March 31, Registrations and transfers of Series 1 Preferred Shares will be effected only through CDS Clearing and Depository Services Inc. Beneficial owners of Series 1 Preferred Shares will not have the right to receive physical certificates evidencing their ownership of such shares.

3 TABLE OF CONTENTS Page PROSPECTUS SUMMARY... 1 Conflicts of Interest SUMMARY OF FEES AND EXPENSES... 6 Independent Review Committee ANNUAL RETURNS AND Custodian MANAGEMENT EXPENSE RATIO... 6 Auditor REGISTRATION THROUGH CDS... 6 Transfer Agent and Registrar OVERVIEW OF THE LEGAL Promoter STRUCTURE OF THE COMPANY... 7 CALCULATION OF UNIT VALUE Capital Reorganization... 7 Valuation Policies and Procedures INVESTMENT OBJECTIVES AND Reporting of Unit Value RESTRICTIONS... 7 ATTRIBUTES OF THE SERIES 1 INVESTMENT STRATEGIES AND PREFERRED SHARES OVERVIEW OF WHAT THE COMPANY INVESTS IN... 8 Description of the Series 1 Preferred Shares 28 Portfolio Holdings... 8 Reporting to Series 1 Preferred Historical Capital Share Price Performance. 8 Shareholders Dividend History of the Portfolio Shares... 9 Registration of Interests Operating Expenses and Administration... 9 USE OF PROCEEDS Securities Lending... 9 PLAN OF DISTRIBUTION Voting Rights of the Portfolio Shares RELATIONSHIP BETWEEN COMPANY Changes Affecting the Portfolio Shares AND SCOTIA CAPITAL FEES AND EXPENSES PRINCIPAL SHAREHOLDERS OF THE COMPANY ANNUAL RETURNS AND MANAGEMENT EXPENSE RATIO INTERESTS OF MANAGEMENT AND RISK FACTORS OTHERS IN MATERIAL TRANSACTIONS DISTRIBUTION POLICY MATERIAL CONTRACTS RETRACTION AND REDEMPTION OF SERIES 1 PREFERRED SHARES EXPERTS DESCRIPTION OF THE COMPANY S EXEMPTIONS AND APPROVALS SHARE CAPITAL PURCHASERS STATUTORY RIGHT OF Class J Shares WITHDRAWAL AND RESCISSION Class S Shares INTERIM MANAGEMENT REPORT OF Certain Provisions of the Class A Capital FUND PERFORMANCE Shares ANNUAL MANAGEMENT REPORT OF CONSOLIDATED CAPITALIZATION FUND PERFORMANCE ELIGIBILITY FOR INVESTMENT AUDITORS CONSENT INCOME TAX CONSIDERATIONS AUDITORS REPORT Status of the Company STATEMENTS OF NET ASSETS Taxation of the Company STATEMENTS OF INVESTMENT Taxation of Holders of Series 1 Preferred OPERATIONS AND RETAINED Shares EARNINGS (DEFICIT) Tax Exempt Purchasers STATEMENTS OF CHANGES IN NET ORGANIZATION AND MANAGEMENT ASSETS DETAILS OF THE COMPANY STATEMENTS OF CASH FLOWS Directors and Officers of the Company STATEMENTS OF INVESTMENTS Remuneration of Directors and Officers NOTES TO FINANCIAL STATEMENTS The Administrator CERTIFICATE OF THE COMPANY, THE Duties and Services to be Provided by the ADMINISTRATOR AND THE Administrator and Details of the PROMOTER... C-1 Administration Agreement CERTIFICATE OF THE AGENTS... C-2 Directors and Officers of the Administrator 25 EXHIBIT A RETRACTION NOTICE... E-1 Page i

4 PROSPECTUS SUMMARY The following is a summary of the principal features of this distribution and should be read together with the more detailed information and financial data and statements contained elsewhere in this prospectus. Allbanc Split Corp. II Issuer: Allbanc Split Corp. II (the Company ) is a closed end mutual fund incorporated under the laws of the Province of Ontario on December 7, Offering: $47,435,841 (2,175,956 Class B Preferred Shares, Series 1 ( Series 1 Preferred Shares ) of the Company). Price: $21.80 per Series 1 Preferred Share. Unit and Unit Value: Investment Objectives: Use of Proceeds: Distributions: On the closing of this Offering, a Unit will be considered to consist of two class A capital shares ( Class A Capital Share ) and one Series 1 Preferred Share. Unit Value will generally be equal to the net amount received by the Company on the disposition of that number of Portfolio Shares (defined herein) represented by the Unit s pro rata share of the Portfolio Shares or, if it is determined that it is not practicable to sell Portfolio Shares, Unit Value will be determined with reference to the closing prices for the Portfolio Shares on the fifth business day before the 15 th day of the month in which the relevant Retraction Payment Date (as defined herein) falls (a Valuation Date ) plus (minus), in each case, the Unit s pro rata share of the Residual Amount (as defined herein). See Calculation of Unit Value. The Company holds a portfolio (the Portfolio ) of common shares of Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, The Bank of Nova Scotia and The Toronto- Dominion Bank (the Portfolio Shares ) in order to generate dividend income for the holders of Series 1 Preferred Shares and to enable the holders of the Class A Capital Shares to participate in any capital appreciation in the Portfolio Shares and to benefit from any increase on the dividends payable on the Portfolio Shares. See Investment Objectives and Restrictions. The net proceeds of the Offering of the Series 1 Preferred Shares (after deducting the Agents fees and expenses of the issue) are estimated to be $45,648,766 and will be used by the Company (together with the sale of a portion of the Portfolio Shares as required) to fund the redemption of all of the issued and outstanding class A preferred shares (the Class A Preferred Shares ) of the Company on February 28, 2011 as well as those Class A Capital Shares being redeemed pursuant to the Special Retraction Right. See Overview of the Legal Structure of the Company Capital Reorganization and Use of Proceeds. Holders of the Series 1 Preferred Shares will be entitled to receive quarterly fixed cumulative preferential distributions equal to $ per Series 1 Preferred Share. On an annualized basis, this would represent a yield on the Series 1 Preferred Share offering price of approximately 4.25%. Such distributions are expected to consist of ordinary dividends but may include non-taxable returns of capital and capital gains dividends. Such quarterly distributions are expected to be paid by the Company on or before the last day of May, August, November and February in each year. Based on the expected closing date of February 28, 2011, the initial distribution will be 1

5 Rating: Retraction: Redemption: approximately $ per Series 1 Preferred Share and is expected to be payable on or before May 31, Series 1 Preferred Share distributions will be funded from the dividends received on the Portfolio Shares. If necessary, any shortfall in the distributions on the Series 1 Preferred Shares will be funded by proceeds from the sale of, or, if determined appropriate by the Board of Directors, premiums earned from writing covered call options on, the Portfolio Shares. Based on the current dividends paid on the Portfolio Shares, it is not expected that the Company would have to sell any Portfolio Shares to fund the Series 1 Preferred Share distributions. See Attributes of the Series 1 Preferred Shares Description of the Series 1 Preferred Shares. Any portion of Series 1 Preferred Share distributions which is derived from the proceeds of the sale of Portfolio Shares (including upon the exercise of covered call options written by the Company) will, for tax purposes, consist of a non-taxable return of capital or a combination of a capital gains dividend and a non-taxable return of capital. Any portion of the Series 1 Preferred Share distributions which is derived from option premiums received in a year (other than in respect of options outstanding at year end) would be distributed as a capital gains dividend in the year on the Series 1 Preferred Shares. See Distribution Policy. The Series 1 Preferred Shares have been provisionally rated Pfd-2 (low) by DBRS Limited. The Series 1 Preferred Shares may be surrendered for retraction at any time. Provided the Series 1 Preferred Shares have been surrendered for retraction at least five business days before the 15 th day of a month, such shares will be retracted on the 15 th day of such month (the Valuation Date ). Payment for such shares will be made on the last day of such month or, where such day is not a business day, on the preceding business day (a Retraction Payment Date ). A holder retracting Series 1 Preferred Shares will receive a cash price per Series 1 Preferred Share retracted equal to the amount, if any, by which 95% of the Unit Value exceeds the aggregate of: (i) the average cost to the Company, including commissions, of purchasing two Class A Capital Shares in the market; and (ii) $1.00. See Retraction and Redemption of Series 1 Preferred Shares. Any outstanding Series 1 Preferred Shares will be redeemed by the Company on February 28, 2016 (the Redemption Date ) at a price per share (the Series 1 Preferred Share Redemption Price ) equal to the lesser of $21.80 and Unit Value. The Company may also redeem Series 1 Preferred Shares on February 28 th of any year commencing in 2012 or, where such day is not a business day, on the preceding business day, at a price per share equal to the Series 1 Preferred Share Redemption Price, to the extent that unmatched Class A Capital Shares have been tendered for retraction under a Special Annual Retraction (defined herein). See Retraction and Redemption of Series 1 Preferred Shares. In addition, the Board of Directors of the Company has the right to redeem the Series 1 Preferred Shares then outstanding at the next Annual Retraction 2

6 Priority: Payment Date (defined herein), if the market value of the Portfolio Shares held by the Company is less than $15 million for two consecutive Valuation Dates. See Retraction and Redemption of Series 1 Preferred Shares. The Series 1 Preferred Shares will rank prior to the Class A Capital Shares, the Class J Shares and the Class S Shares with respect to payment of dividends, distributions upon a redemption, retraction or return of capital and distributions upon a dissolution, liquidation or winding-up of the Company. See Attributes of the Series 1 Preferred Shares Description of the Series 1 Preferred Shares. Risk Factors An investment in Series 1 Preferred Shares is subject to certain risk factors which prospective investors should consider before purchasing such shares, including: (i) the market price of the Series 1 Preferred Shares will be sensitive to interest rate fluctuations; (ii) current economic conditions; (iii) the financial performance of the Portfolio; (iv) holders of Series 1 Preferred Shares will not own the Portfolio Shares held by the Company or have any voting rights in respect of the Portfolio Shares; (v) counterparty risks associated with securities lending; (vi) early redemption; (vii) if a significant number of shares are redeemed, the trading liquidity of shares could be significantly reduced; (viii) although the Company is considered to be a mutual fund as defined under Canadian securities laws, the Company does not generally operate in accordance with, and has obtained an exemption from, certain of the protections provided by the policies of the Canadian Securities Administrators applicable to conventional mutual funds; and (ix) changes to tax rules. See Risk Factors. Income Tax Considerations The following summary is subject in its entirety to the qualifications and assumptions found under Income Tax Considerations. Taxation of the Company: The Company currently qualifies, and intends to continue to qualify at all times, as a mutual fund corporation under the Income Tax Act (Canada) ( Tax Act ). As a mutual fund corporation, the Company will be entitled to capital gains refunds in respect of: (i) capital gains dividends paid by it; and (ii) its capital gains redemptions. As a result thereof and of the deduction of expenses in computing its taxable income, the Company should not be subject to any material net income tax liability. Taxation of Shareholders Distributions Resident in Canada: Dividends, other than capital gains dividends, received by individuals on the Series 1 Preferred Shares ( Ordinary Dividends ) will be subject to the usual gross-up and dividend tax credit rules applicable to taxable dividends (including eligible dividends) received on shares of a taxable Canadian corporation. Ordinary Dividends received by corporations, other than a specified financial institution (as defined in the Tax Act), on the Series 1 Preferred Shares will generally be deductible in computing taxable income. Ordinary Dividends received by specified financial institutions on the Series 1 Preferred Shares will be deductible in computing taxable income, provided that certain conditions applicable to term preferred shares under the Tax Act are met, such as the 10% ownership restriction. Ordinary Dividends received by private corporations (and certain other corporations) on the Series 1 Preferred Shares will be subject to a refundable tax under Part IV of the Tax Act, generally at the rate of %. 3

7 Eligibility for Investment: Ordinary Dividends received by certain corporations other than private corporations on the Series 1 Preferred Shares will be subject to a 10% tax under Part IV.1 of the Tax Act. Return of capital payments to a holder of Series 1 Preferred Shares will not be subject to tax but will reduce the adjusted cost base of the Series 1 Preferred Shares to the holder. To the extent that such adjusted cost base would otherwise be a negative amount, the holder will be deemed to have realized a capital gain at that time and the adjusted cost base will be increased by the amount of such deemed capital gain. The amount of any capital gains dividend received by a holder of Series 1 Preferred Shares will be considered to be a capital gain of the holder from the disposition of capital property in the taxation year of the holder in which the capital gains dividend is received. Dispositions A disposition of a Series 1 Preferred Share held as capital property, whether to the Company or otherwise, may result in a capital gain or a capital loss to the holder thereof. A redemption or retraction of Series 1 Preferred Shares is considered a disposition for these purposes. For a detailed explanation of certain Canadian federal income tax considerations, see Income Tax Considerations. The Series 1 Preferred Shares, if and when listed on a designated stock exchange within the meaning of the Tax Act, will be qualified investments for trusts governed by a registered retirement savings plan, a deferred profit sharing plan, a registered retirement income fund, a registered disability savings plan, a registered education savings plan or a tax-free savings account. See Eligibility for Investment. Administrator: Promoter: Custodian: Registrar and Transfer Agent: Organization and Administration of the Company Scotia Managed Companies Administration Inc. (the Administrator ), a wholly-owned subsidiary of Scotia Capital Inc., is the administrator of the Company and administers the ongoing operations of the Company. See Organization and Management Details of the Company The Administrator. The Administrator may be considered to be a promoter of the Company within the meaning of the securities legislation of certain provinces of Canada. See Organization and Management Details of the Company Promoter. State Street Trust Company Canada, at its principal office in Toronto, Ontario is the custodian of the assets of the Company pursuant to a custodian agreement. See Organization and Management Details of the Company Custodian. Computershare Investor Services Inc., at its principal offices in Toronto, Ontario is the registrar and transfer agent for the Series 1 Preferred Shares. See Organization and Management Details of the Company Transfer Agent and Registrar. 4

8 Auditor: Agents: Deloitte & Touche LLP, at its principal offices in Toronto, Ontario is the auditor of the Company. See Organization and Management Details of the Company Auditor. Scotia Capital, TD Securities Inc., BMO Nesbitt Burns Inc., CIBC World Markets Inc. and National Bank Financial Inc. (the Agents ) conditionally offer the Series 1 Preferred Shares on a best efforts basis, subject to prior sale, if, as and when issued by the Company and accepted by the Agents in accordance with the conditions contained in the Agency Agreement (as hereinafter defined), and subject to the approval of certain legal matters on behalf of the Company, the Administrator and the Agents by Osler, Hoskin & Harcourt LLP. See Plan of Distribution. 5

9 SUMMARY OF FEES AND EXPENSES The following table contains a summary of the fees, charges and expenses payable by the Company. For further particulars, see Fees and Expenses. Type of Fee Amount and Description Fee paid to the Agents for selling Series 1 Preferred Shares: Expenses (including expenses of the Offering) incurred by Scotia Capital on behalf of the Company prior to the closing of this Offering: Fee paid to the Administrator for administration of the ongoing operations of the Company: Operating expenses of the Company: $ per Series 1 Preferred Share. Scotia Capital will be reimbursed for expenses related to the Offering of Series 1 Preferred Shares hereunder. From and after February 28, 2011, a quarterly fee of 1 4 of 0.25% of the market value of the Portfolio Shares. In addition to the administration fee referred to above, the Company will be responsible for all ordinary expenses incurred in connection with the operation and administration of the Company. ANNUAL RETURNS AND MANAGEMENT EXPENSE RATIO For the Six Months Ended For The Years Ended February 28 August 31, Class A Capital Share Annual Return (1) % 1,607.9% 91.8% 27.8% 24.3% 3.1% Class A Preferred Share Annual Return (2) % 4.3% 4.3% 4.3% 4.6% 0.0% Management Expense Ratio (3)(4) % 7.5% 9.4% 4.8% 5.3% 15.7% (1) The annual return of the Class A Capital Shares is based on net asset values at each period end and assumes reinvestment of distributions at net asset value. Annual return information is for the Class A Capital Shares and does not reflect any return information for Series 1 Preferred Shares offered hereby. (2) Annual return information is for the Class A Preferred Shares. (3) Management expense ratio ( MER ) is based on the requirements of National Instrument Investment Fund Continuous Disclosure and includes total expenses, including Class A Preferred Share distributions and issuance costs, but excludes trading commissions, and is expressed as an annualized percentage of the average net asset value of the Class A Capital Shares over the period/year. The MER should not be interpreted as the return required for the Class A Capital Shares to cover operating expenses of the Company. This calculation is based on a portion of the Company s assets whereas the Company uses its entire assets to generate investment returns in funding expenses and distributions. As long as the net asset value per Unit is greater than $25.00 (the issue price per Class A Preferred Share or $21.80 after February 28, 2011 being the issue price of a Series 1 Preferred Share), then the income and expenses are borne by the Class A Capital Shares. If the net asset value per Unit falls to or below $25.00 or to or below $21.80 after February 28, 2011, then the income and expenses of the Company are borne by the preferred shares until such time as the net asset value per Unit returns to greater than $25.00 per Unit or greater than $21.80 per Unit after February 28, In February 2006, the Company realized one-time costs in connection with its issuance of 13,460,000 Class A Capital Shares and 6,730,000 Class A Preferred Shares. Without these costs, the MER would have been 5.1%. (4) The following expense ratio is presented to reflect total operating expenses of the Company (excluding Preferred Share distributions and issue costs) divided by the average total assets, which includes the outstanding Class A Preferred Shares. The Administrator believes that this expense ratio is a more representative measure of the Company s operating efficiencies and is more useful in making comparisons to the expense ratio of single unit investment funds. For The Years Ended February Expense Ratio % 0.33% 0.29% 0.29% 0.22% REGISTRATION THROUGH CDS Registration of interests in and transfers of the Series 1 Preferred Shares will be made only through CDS Clearing and Depository Services Inc. ( CDS ). Series 1 Preferred Shares must be purchased, transferred and surrendered for retraction or redemption through a participant in CDS. Beneficial owners of Series 1 Preferred Shares will not have the right to receive physical certificates evidencing their ownership of such shares. See Attributes of the Series 1 Preferred Shares Registration of Interests. 6

10 OVERVIEW OF THE LEGAL STRUCTURE OF THE COMPANY Allbanc Split Corp. II (the Company ) was incorporated under the laws of the Province of Ontario on December 7, The Company has its registered offices at 40 King Street West, Scotia Plaza, 26 th Floor, P.O. Box 4085, Toronto, Ontario, M5W 2X6. Although the Company is considered to be a mutual fund, it does not generally operate in accordance with the policies of the Canadian securities regulators applicable to conventional mutual funds. On February 9, 2006, the Company raised net proceeds of $306,827,736 through the issuance of 13,460,000 class A capital shares ( Class A Capital Shares ) and 6,730,000 class A preferred shares ( Class A Preferred Shares ). The net proceeds of this initial public offering were used to fund the purchase of Portfolio Shares. Capital Reorganization On December 7, 2010, the holders of the Class A Capital Shares approved a share capital reorganization (the Reorganization ) which permits holders of Class A Capital Shares to extend their investment in the Company beyond the redemption date of February 28, 2011 for an additional 5 years. The Reorganization also provides holders of Class A Capital Shares who choose to exit with a special right of retraction (the Special Retraction Right ) to replace the originally scheduled final redemption. Such holders of Class A Capital Shares will have their shares redeemed on February 28, As of the date hereof, there are 6,667,576 Class A Capital Shares, 3,333,788 Class A Preferred Shares, 150 Class J Shares and 100 Class S Shares issued and outstanding. All of the Class A Preferred Shares will be redeemed by the Company on February 28, 2011 in accordance with their terms. In addition, holders of 2,315,664 Class A Capital Shares elected to redeem their shares pursuant to the Special Retraction Right. As a result, after giving effect to the redemptions and this Offering, there will be 4,351,912 Class A Capital Shares and 2,175,956 Series 1 Preferred Shares (defined below) outstanding. The Class B preferred shares, series 1 (the Series 1 Preferred Shares ) are being offered in order to maintain the leveraged split share structure of the Company such that there will be twice the number of Class A Capital Shares than Series 1 Preferred Shares outstanding after the Offering. After the Offering, the Company expects that the Series 1 Preferred Shares will provide leverage of approximately 1.8 times on the Class A Capital Shares. The Class A Capital Shares are listed and posted for trading on the Toronto Stock Exchange. INVESTMENT OBJECTIVES AND RESTRICTIONS The Company holds the Portfolio Shares in order to generate fixed cumulative preferred distributions for the holders of Series 1 Preferred Shares and to enable the holders of the Class A Capital Shares to participate in any capital appreciation in the Portfolio Shares, as well as any increase in the dividends paid on the Portfolio Shares and to receive dividends as and when declared by the Board of Directors of the Company. The policy of the Company is to invest in Portfolio Shares and not engage in trading except in limited circumstances, including to fund retractions or redemptions of Class A Capital Shares and Series 1 Preferred Shares. The Company will sell or purchase Portfolio Shares on a pro rata basis based on the weightings of Portfolio Shares at the time of the purchase or sale. 7

11 INVESTMENT STRATEGIES AND OVERVIEW OF WHAT THE COMPANY INVESTS IN Portfolio Holdings As at February 17, 2011, the Portfolio consisted of the companies listed below (each a Portfolio Company ): Number of Shares Currently Market Current Current Company Held Value Weighting Yield Bank of Montreal ,145 $ 26,188, % 4.57% Canadian Imperial Bank of Commerce ,821 $ 30,000, % 4.52% National Bank of Canada ,495 $ 9,187, % 3.52% Royal Bank of Canada ,070 $ 36,220, % 3.54% The Bank of Nova Scotia ,585 $ 37,605, % 3.21% The Toronto-Dominion Bank ,528 $ 38,032, % 3.02% Total / Weighted Average... $177,234, % 3.62% Historical Capital Share Price Performance The Class A Capital Shares and Class A Preferred Shares are both listed on The Toronto Stock Exchange (the TSX ) and trade under the stock symbols ALB and ALB.PR.A respectively. The following chart compares the historical total return performance (price return plus the reinvestment of distributions) of the Class A Capital Shares relative to the S&P/TSX Financials Index, and the S&P/TSX Composite Index set at 100 on February 8, 2006 and continuing to February 17, $160 Value of $100 invested at inception (February 8, 2006) $140 $120 $100 $80 $60 $40 $ % % % $0 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Allbanc Split Corp. II Capital Shares S&P/TSX Financials Index S&P/TSX Composite Index 18FEB

12 Dividend History of the Portfolio Shares The following table sets forth the annual dividend history for the periods indicated below in respect of the Portfolio Shares: For the years ended February Bank of Montreal... $2.80 $2.80 $2.76 $2.42 $1.90 Canadian Imperial Bank of Commerce... $3.48 $3.48 $3.28 $2.78 $2.69 National Bank of Canada... $2.48 $2.48 $2.36 $2.02 $1.78 Royal Bank of Canada... $2.00 $2.00 $1.92 $1.52 $1.22 The Bank of Nova Scotia... $1.96 $1.94 $1.79 $1.56 $1.36 The Toronto-Dominion Bank... $2.44 $2.40 $2.20 $1.84 $1.64 The information contained in the above section, extracted from Bloomberg, is historical and is not intended to be, nor should it be construed to be, an indication as to the future dividend levels on the Portfolio Shares. The Portfolio Shares are held by State Street Trust Company Canada (the Custodian ) pursuant to the provisions of the Custodian Agreement described under Organization and Management Details of the Company Custodian. Through the Custodian, the Company will hold and dispose of such shares and the Company will pay distributions as described herein. Operating Expenses and Administration The Company is responsible for all of its operating expenses. The operating expenses of the Company for the year of operations ending February 28, 2010 (including the fee payable under the Administration Agreement referred to below) were $543,000, resulting in an Expense Ratio of 0.31%. The Expense Ratio is equal to the operating expenses of the Company, not including preferred share dividends, divided by the Company s total assets. Scotia Managed Companies Administration Inc., a wholly-owned subsidiary of Scotia Capital is the administrator of the Company (the Administrator ) and provides services to the Company pursuant to the provisions of an administration agreement (the Administration Agreement ). Under the Administration Agreement, a quarterly fee of 1 4 of 0.25% of the market value of the Portfolio Shares will be charged from and after February 28, Portfolio Shares may be sold to fund the retraction or redemption of any Class A Capital Shares or Series 1 Preferred Shares, to fund the Series 1 Preferred Share distributions, if necessary, or to meet obligations of the Company in respect of extraordinary liabilities. Some or all of the Portfolio Shares being sold to fund the redemption or retraction of any Class A Capital Shares or Series 1 Preferred Shares may be purchased by Scotia Capital, as principal. Any Portfolio Shares sold by the Company to Scotia Capital, as principal, will be sold in accordance with the rules of the applicable stock exchange and the price paid (inclusive of all transaction costs, if any) by Scotia Capital will not be less than the price which would have been paid (inclusive of all transaction costs, if any) if the sale had been made through the facilities of the principal stock exchange on which the Portfolio Shares are listed and posted for trading, at the time of sale to Scotia Capital. All such principal transactions will be approved by all of the independent directors of the Company and no commissions will be paid to Scotia Capital in respect of any such principal transactions. Securities Lending The Company may engage in securities lending transactions from time to time in order to generate additional returns. The Company has not engaged in any securities lending to date. Under such transactions, the Company will lend Portfolio Shares owned by it to securities borrowers acceptable to the Company pursuant to the terms of a securities lending agreement between the Company and any such borrower (a Securities Lending Agreement ). Under a Securities Lending Agreement: (i) the borrower will pay to the Company a negotiated securities lending fee and will make compensation payments to the Company equal to any distributions received 9

13 by the borrower on the securities borrowed; (ii) the securities loans must qualify as securities lending arrangements for the purpose of the Income Tax Act (Canada) (the Tax Act ); and (iii) the Company will receive prescribed collateral security. Any securities lending activities are conducted in accordance with National Instrument Mutual Funds ( NI ). The Company s custodian is responsible for the ongoing administration of securities loans, including the obligation to mark-to-market the collateral on a daily basis. Voting Rights of the Portfolio Shares Holders of Series 1 Preferred Shares will not be entitled to vote any of the Portfolio Shares held by the Company. The Board of Directors of the Company will determine the manner in which the Portfolio Shares, other than the common shares of The Bank of Nova Scotia (the BNS Shares ), will be voted at any meeting of shareholders of a Portfolio Company and the independent directors of the Company will determine the manner in which the BNS Shares will be voted at any meeting of shareholders of The Bank of Nova Scotia. Changes Affecting the Portfolio Shares If any Portfolio Company from time to time makes a special distribution to its securityholders, is a party to or affected by any reorganization, amalgamation, plan of arrangement, securities exchange take-over bid, merger or sale of material assets or any other business combination (a business combination ) or a cash take-over bid is made for the securities of a Portfolio Company, the Board of Directors of the Company may take such action as it considers to be in the best interests of the Company. In taking such action, the Board of Directors shall consider the guidelines outlined below, provided that such guidelines shall not limit the general discretion conferred upon the Board of Directors with respect to any Portfolio Shares. Upon any subdivision, consolidation, reclassification or other similar change to any of the Portfolio Shares held by the Company (a reclassification ), the securities received in respect of the Portfolio Shares as a result of such reclassification will, together with any residual, be treated as Portfolio Shares for all purposes relating to the Class A Capital Shares and the Series 1 Preferred Shares, including the prices payable on redemptions and retractions of Class A Capital Shares and Series 1 Preferred Shares. Upon any distribution (an extraordinary distribution ) by a Portfolio Company in respect of Portfolio Shares, other than a cash dividend or a stock dividend paid in the ordinary course by a Portfolio Company, any similar Portfolio Shares received will, together with the Portfolio Shares in respect of which the distribution was made, be treated in the same manner as securities received upon any reclassification. Any other securities or property received upon an extraordinary distribution will either be sold, in which case the Company shall use the net proceeds to acquire additional Portfolio Shares as determined by the Board of Directors, or may be held by the Company. Upon the implementation of any business combination affecting a Portfolio Company, or to which a Portfolio Company is a party, the securities of a Portfolio Company or any successor thereto received in respect of Portfolio Shares will, together with any residual, be treated in the same manner as securities received as the result of a reclassification and any other securities, property or cash received in respect of Portfolio Shares will be treated in the same manner as securities, property or cash received upon any extraordinary distribution by a Portfolio Company in respect of Portfolio Shares. 10

14 Any transferable rights issued to the Company pursuant to a rights offering by a Portfolio Company may be sold and the net proceeds of such sale (net of any tax payable) will be used to purchase additional Portfolio Shares as determined by the Board of Directors which will, together with the Portfolio Shares in respect of which such rights were received, be treated in the same manner as securities received as the result of a reclassification. In the event of a cash take-over bid for any of the Portfolio Shares, the Board of Directors of the Company will, if it determines that such bid is in the best interests of holders of the Class A Capital Shares, tender such Portfolio Shares to such bid. FEES AND EXPENSES The expenses of the Offering of Series 1 Preferred Shares (including the costs of preparing and printing this prospectus, legal expenses, marketing expenses and other out-of-pocket expenses of the Company) are estimated to be $364,000 and, together with the Agents fee, will be paid by the Company. The Agents will receive a fee equal to $ per Series 1 Preferred Share sold. The Administrator will be paid a quarterly fee of 1 4 of 0.25% of the market value of the Portfolio Shares from and after February 28, In addition to the administration fee referred to above, the Company will be responsible for all ordinary expenses incurred in connection with the operation and administration of the Company. Ordinary expenses include printing costs, ongoing listing fees, fees of the custodian, transfer agent and registrar and legal and audit fees. ANNUAL RETURNS AND MANAGEMENT EXPENSE RATIO For the Six Months Ended For The Years Ended February 28 August 31, Class A Capital Share Annual Return (1) % 1,607.9% 91.8% 27.8% 24.3% 3.1% Class A Preferred Share Annual Return (2) % 4.3% 4.3% 4.3% 4.6% 0.0% Management Expense Ratio (3)(4) % 7.5% 9.4% 4.8% 5.3% 15.7% (1) The annual return of the Class A Capital Shares is based on net asset values at each period end and assumes reinvestment of distributions at net asset value. Annual return information is for the Class A Capital Shares and does not reflect any return information for Series 1 Preferred Shares offered hereby. (2) Annual return information is for the Class A Preferred Shares. (3) Management expense ratio ( MER ) is based on the requirements of National Instrument Investment Fund Continuous Disclosure and includes total expenses, including Class A Preferred Share distributions and issuance costs, but excludes trading commissions, and is expressed as an annualized percentage of the average net asset value of the Class A Capital Shares over the period/year. The MER should not be interpreted as the return required for the Class A Capital Shares to cover operating expenses of the Company. This calculation is based on a portion of the Company s assets whereas the Company uses its entire assets to generate investment returns in funding expenses and distributions. As long as the net asset value per Unit is greater than $25.00 (the issue price per Class A Preferred Share or $21.80 after February 28, 2011 being the issue price of a Series 1 Preferred Share), then the income and expenses are borne by the Class A Capital Shares. If the net asset value per Unit falls to or below $25.00 or to or below $21.80 after February 28, 2011, then the income and expenses of the Company are borne by the preferred shares until such time as the net asset value per Unit returns to greater than $25.00 per Unit or greater than $21.80 per Unit after February 28, In February 2006, the Company realized one-time costs in connection with its issuance of 13,460,000 Class A Capital Shares and 6,730,000 Class A Preferred Shares. Without these costs, the MER would have been 5.1%. (4) The following expense ratio is presented to reflect total operating expenses of the Company (excluding Preferred Share distributions and issue costs) divided by the average total assets, which includes the outstanding Class A Preferred Shares. The Administrator 11

15 believes that this expense ratio is a more representative measure of the Company s operating efficiencies and is more useful in making comparisons to the expense ratio of single unit investment funds. For The Years Ended February Expense Ratio % 0.33% 0.29% 0.29% 0.22% RISK FACTORS Certain risk factors relating to the Company and the Series 1 Preferred Shares are described below. Additional risks and uncertainties not currently known to the Company, or that are currently considered immaterial, may also impair the operations of the Company. If any such risk, material or otherwise, actually occurs, the business, financial condition, liquidity, results of operations, Unit Value or price performance of the Company, and the ability of the Company to make distributions could be materially adversely affected. Interest Rate Fluctuations It is anticipated that the market value of the Series 1 Preferred Shares will, at any given time, be affected by the level of interest rates prevailing at such time. A rise in interest rates may have a negative effect on the value of the Series 1 Preferred Shares. Recent Global Financial Developments Global financial markets experienced a sharp increase in volatility in late 2008 and early This contributed to a reduction in liquidity among financial institutions and has reduced the availability of credit to those institutions and to the issuers who borrow from them. While central banks as well as global governments are attempting to restore much needed liquidity to the global economies, no assurance can be given that the combined impact of the significant revaluations and constraints on the availability of credit will not materially and adversely affect economies around the world in the near to medium term. Some of these economies may experience significantly diminished growth and some may suffer a recession. There is a possibility of similarly adverse market conditions and unexpected volatility or illiquidity in financial markets may adversely affect the prospects of the Company and the value of the Portfolio Shares. A substantial drop in North American equities markets could have a negative effect on the Company. Market and Economic Risk The value of the Series 1 Preferred Shares may vary with the value of the Portfolio Shares. The value of the Portfolio Shares will be influenced by factors which are not within the control of the Company, including the financial performance of issuers of the Portfolio Shares, interest rates and other financial market conditions. Accordingly, the value of the Series 1 Preferred Shares will vary from time to time. No Ownership Interest An investment in Series 1 Preferred Shares does not constitute an investment in the Portfolio Shares. Holders of Series 1 Preferred Shares will not own the Portfolio Shares held by the Company or have any voting rights in respect of the Portfolio Shares. Securities Lending The Company may engage in securities lending. Although the Company will receive collateral for the loans and such collateral will be marked-to-market, the Company will be exposed to the risk of loss should the borrower default on its obligation to return the borrowed securities and the collateral be insufficient to reconstitute the portfolio of loaned securities. 12

16 Early Redemption As a result of the Special Annual Retraction right (as described herein) that the holders of Class A Capital Shares have, to the extent that there are unmatched numbers of Class A Capital Shares and Series 1 Preferred Shares tendered for retraction, the Series 1 Preferred Shares will be called by the Company for redemption on a pro rata basis or in such manner as is approved by the Board of Directors. The number of retractions by holders of Class A Capital Shares may be influenced by the performance of the Company, the management expense ratio, and the trading discount to Unit Value, among other things. Significant Redemptions If a significant number of Class A Capital Shares are retracted or redeemed, the trading liquidity of such shares could be significantly reduced and the expenses of the Company would be spread among fewer holders of Class A Capital Shares, resulting in a higher management expense ratio and potentially lower Unit Value. Some investment funds with redemption rights similar to those of the Company have experienced significant redemptions on annual redemption dates in the past. Mutual Fund Policies The Company is considered to be a mutual fund but does not generally operate in accordance with, and has obtained an exemption from certain of the protections provided by, the policies of Canadian Securities Administrators applicable to conventional mutual funds. Tax Changes There can be no assurance that changes will not be made to the tax rules affecting the taxation of the Company or the Company s investments, or that such tax rules will not be administered in a way that is less advantageous to the Company or its shareholders. The Province of Ontario has harmonized its existing provincial sales tax with the federal goods and services tax ( GST ) effective July 1, As a result, investment funds that are subject to the new Ontario harmonized sales tax ( HST ) are required to pay HST of 13% on fees such as administration and management fees, rather than the previously imposed 5% GST, which has increased costs borne by the Company. On October 31, 2003 the Department of Finance (Canada) announced a proposed amendment relating to the deductibility of losses under the Tax Act. Under this proposed amendment, a taxpayer will be considered to have a loss from a business or property for a taxation year only if, in that year, it is reasonable to assume that the taxpayer will realize a cumulative profit from the business or property during the time that the taxpayer has carried on, or can reasonably be expected to carry on, the business or has held, or can reasonably be expected to hold, the property. Profit, for this purpose, does not include capital gains or capital losses. If such proposed amendment were to apply to the Company, deductions that would otherwise reduce the Company s taxable income could effectively be denied, with after-tax returns to shareholders reduced as a result. On February 23, 2005, the Minister of Finance (Canada) announced that an alternative proposal to replace the aforementioned proposed amendment would be released for comment. This alternative proposal has not been released as of the date hereof. There can be no assurance that such alternative proposal will not adversely affect the Company. Prospective purchasers may wish to consult their own investment advisors for advice with respect to the merits of an investment in the Series 1 Preferred Shares. DISTRIBUTION POLICY Holders of the Series 1 Preferred Shares will be entitled to receive quarterly fixed cumulative preferential distributions in an amount equal to $ per Series 1 Preferred Share. Quarterly distributions on the Series 1 Preferred Shares are expected to be paid by the Company on or before the last day of May, August, November and February in each year. Series 1 Preferred Share distributions will be funded from the dividends received on the Portfolio Shares. If necessary, any shortfall in the distributions on the Series 1 Preferred Shares will be funded by proceeds from the 13