ANNUAL INFORMATION FORM FOR THE FISCAL YEAR ENDED MAY 21, 2017

Transcription

1 ANNUAL INFORMATION FORM FOR THE FISCAL YEAR ENDED MAY 21, 2017 August 16, 2017

2 FORWARD-LOOKING STATEMENTS Certain statements contained in this annual information form constitute forward-looking statements. The use of any of the words anticipate, continue, estimate, expect, may, will, project, should, believe, and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The Company believes the expectations reflected in forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this annual information form should not be unduly relied upon. These statements speak only as of the date of this annual information form. In particular, this annual information form may contain forward-looking statements pertaining to distributions on the Class C Shares. The actual results could differ materially from those anticipated in these forward-looking statements. Utility Corp. does not undertake any obligation to publicly update or revise any forward-looking statements.

3 UTILITY CORP. ANNUAL INFORMATION FORM Table of Contents UTILITY CORP DESCRIPTION OF BUSINESS ACTIVITIES... 2 DESCRIPTION OF SHARE CAPITAL... 2 INVESTMENT CONSIDERATIONS AND RISK FACTORS... 5 COMPANY S FINANCIAL CONDITION AND OPERATING RESULTS... 6 RESPONSIBILITY FOR OPERATIONS... 6 DIRECTORS AND OFFICERS... 7 PRINCIPAL SHAREHOLDERS... 9 CONFLICTS OF INTEREST... 9 CORPORATE GOVERNANCE... 9 INVESTMENT RESTRICTIONS CANADIAN FEDERAL INCOME TAX CONSIDERATIONS MATERIAL CONTRACTS TRANSFER AGENT, REGISTRAR CUSTODIAN AND AUDITORS... 11

4 UTILITY CORP. Utility Corp. (the Company ), incorporated under the laws of Ontario on February 8, 1993 and amalgamated with Cherion Systems Group Limited on May 17, 1993 pursuant to Articles of Amalgamation (the Articles ). The Company is a mutual fund corporation whose principal undertaking is to provide investors with a stable monthly dividend stream and capital appreciation potential through investment in a diversified portfolio (the Portfolio ) of equity securities of selected publicly listed Canadian utility and telecommunication issuers. The Company has its registered offices at 40 King Street West, Scotia Plaza, 26 th Floor, P.O. Box 4085, Toronto, Ontario, M5W 2X6. Recent Developments On June 13, 2017, The Bank of Nova Scotia announced that Marquest Asset Management Inc. agreed to acquire all of the outstanding shares of Scotia Managed Companies Administration Inc. ( SMCAI ), the administrator of the Company (the Administrator ), subject to regulatory approvals and customary closing conditions. Offerings and Reorganizations In May 1993, the Company completed a $200 million initial public offering with the issuance of 8,000,000 class A shares (the Class A Shares ). In connection with a capital reorganization and extension of the term of the Company implemented in 1998, holders of Class A Shares desiring to continue their investment beyond the scheduled redemption date of May 18, 1998 exchanged their Class A Shares for class C shares (the Class C Shares ) on substantially the same terms and conditions as the Class A Shares pursuant to certain amendments to the Articles. The Class C Shares had a scheduled redemption date of May 18, 2003 and the Class A Shares were redeemed and delisted from the Toronto Stock Exchange (the TSX ) on May 19, A reorganization of the Company was completed in May, 2000 to allow the Company to retain the shares of Nortel Networks Corporation received as a result of its spin out from BCE Inc. The Articles of the Company were amended at this time to permit the holding of such shares and to authorize the Company to determine in the future whether to retain or sell securities distributed to the Company. A reorganization and extension of the Company was also completed in March, 2003, when shareholders approved certain amendments to the Articles to extend the redemption date of the Class C Shares for an additional five years. As part of the reorganization, a one time adjustment to the Portfolio was undertaken so that no issuer constituted more than 15% of the market value of the Portfolio. In September, 2006 shareholders approved further amendments to the Articles to change the investment mandate of the Company. These amendments allow the Company to hold securities issued by utility companies that convert to income trusts or which, as the result of corporate actions, become foreign entities. In April, 2008, the shareholders approved further amendments to the Articles to reorganize the Company and extend the redemption date of the Class C Shares to May 21, As part of such amendments, a one-time adjustment of the Portfolio was undertaken to comprise 14 selected issuers in the electrical, power and pipeline utilities and telecommunications sectors of the TSX each having an initial market capitalization exceeding $1.5 billion, held on an equal weight basis. Additionally, a subdivision of the Class C Shares was undertaken on a three for-one basis. On September 16, 2010, the Company issued 2,543,718 warrants to holders of Shares (the Shareholders ) on the basis of one warrant for each Share held (the Warrant Offering ). Each warrant entitled Shareholders to subscribe for one Share of the Company at an exercise price of $19.26 if exercised before the warrant expiry date of March 21, As at the expiry date, 100% of the Warrants were exercised representing gross proceeds to the Company of approximately $49.0 million. On April 5, 2013 the shareholders approved a capital reorganization extending the termination date of the Company to May 22, 2018 (the Redemption Date ). As part of the extension, a one-time adjustment of the Portfolio was undertaken so that it is in-line with the Portfolio criteria and better represents the universe of Canadian utility and telecommunication issuers. As a result of the rebalancing, the Portfolio was further diversified, reducing the level of - 1 -

5 single name exposure and increasing the Portfolio from 14 constituents to 19, The revised Portfolio consists of the securities of 19 selected issuers in the electrical, power and pipeline utilities and telecommunications sectors of the TSX each having an initial market capitalization exceeding $1.5 billion, invested initially on an equal weight basis such that each issuer represents approximately 5.26% of the Portfolio. The Portfolio will remain fixed and will not be rebalanced, consistent with the current passive investment strategy of the Company. Shareholders also approved a special resolution authorizing amendments to the Articles to permit the Company to implement a leverage strategy by allowing borrowing of up to 20% of the market value of the Portfolio. The Company intends to target a borrowing level equal to approximately 15% of total assets. The Company intends to maintain its policy of paying stable monthly dividends. The Class C Shares are listed on the TSX under the symbol UTC.C. DESCRIPTION OF BUSINESS ACTIVITIES It is the Company s policy to declare and pay equal monthly dividends on the outstanding Class C Shares based on the expected annual dividends received and interest income earned by the Portfolio less expected annual operating and interest expenses. The Company retains a portion of net investment income, representing an amount of investment income not yet received. Net investment income received above projections is declared and paid as a special dividend. The policy of the Company is to maintain a fixed Portfolio and not to engage in trading except in limited circumstances including to fund retractions of Class C Shares. As such, the Portfolio securities are not actively traded and the Company can be considered a passive investment vehicle. Given the nature of the Company, no policies or procedures relating to the monitoring, detection and deterrence of short-term trades of its securities by investors has been adopted. Authorized, Issued and Outstanding DESCRIPTION OF SHARE CAPITAL The Company s authorized share capital consists of ten class B shares (the Class B Shares ), an unlimited number of Class C Shares and an unlimited number of special non-voting shares ( Special Non-Voting Shares ), issuable in series. As at May 21, 2017, 10 Class B Shares, 1,688,898 Class C Shares and 100 Special Non-Voting Shares are issued and outstanding. The Class C Shares rank prior to the Class B Shares with respect to the payment of dividends and with respect to distributions, retractions and redemptions and on the dissolution, liquidation or winding-up of the Company. The Special Non-Voting Shares rank equal to Class C Shares with respect to the payment of dividends and the repayment of capital on the dissolution, liquidation or winding-up of the Company. Net Asset Value The net asset value per Class C Share on a particular date (the Net Asset Value ) will be equal to (i) cash on hand plus the Market Price (defined below) of the Portfolio securities and other investments of the Company, less the aggregate of (ii) liabilities of the Company, including declared but unpaid dividends on the Class C Shares and Special Non-Voting Shares, (iii) dividends received and interest income earned by the Company (net of expenses) which have not been declared as dividends on the Class C Shares, and (iv) the amount paid-up on the Class B Shares and the Special Non-Voting Shares, all as determined by the board of directors of the Company (the Board of Directors ), divided by the number of Class C Shares then outstanding. Net Asset Value is calculated daily and posted by the next business day on the Company s website located at The Net Asset Value information will also be provided to holders of Class C Shares on request by calling SMCAI, at (416) Notwithstanding the foregoing, the Board of Directors has determined that where the Market Price of the Class C Shares on the Valuation Date is greater than the subscription price per Class C Share for Class C Shares issuable - 2 -

6 upon the exercise of any rights, warrants, options or other similar securities (each a Convertible Security ), the Net Asset Value per Class C Share (also referred to for this purpose as the diluted net asset value per Class C Share ) will be calculated by adding to the denominator the total number of Class C Shares issuable on the exercise of such Convertible Securities then outstanding and adding to the numerator the product of such total number of Class C Shares issuable on the exercise of such Convertible Securities and the amount equal to the subscription price per Class C Share less the fee, if any, payable by the Company on the exercise of such Convertible Securities. The Market Price of each security in the Portfolio for the purpose of calculating the Net Asset Value per Class C Share in connection with a retraction will be equal to the weighted average price (net of any sales commissions) per security realized upon the disposition by the Company of such Portfolio security sold to fund a retraction. Where the Board of Directors determines that it is not practicable to sell the proportionate interest in the Portfolio represented by the Class C Shares being retracted, the Market Price of any security in the Portfolio will be (i) the closing price for such security on the TSX on the trading day immediately preceding the relevant ninth day of each month (each a Valuation Date ); (ii) if no trading occurred on such day on the TSX, the trading price at which such security traded on such other exchange or market as SMCAI may select on such day; or (iii) if no trading prices are available from any exchange or market, the average of the bid and ask prices for such security at closing on the TSX on such day. For the purpose of reporting the Net Asset Value per Class C Share from time to time, the Net Asset Value per Class C Share on a particular day will be calculated using the Market Price of the Portfolio securities as at the close of trading on such day or, if it is not a trading day, the trading day immediately preceding such day. Class B Shares Holders of Class B Shares are not entitled to receive any dividends at any time when there are any Class C Shares outstanding. The Class B Shares rank subsequent to the Class C Shares as a class with respect of the payment of dividends and the repayment of capital on the dissolution, liquidation or winding up of the Company. In the event of the liquidation, dissolution or winding-up of the Company, the holders of the Class B Shares shall be entitled to receive from the assets of the Company $1.00 per Class B Share. The Class B Shares are redeemable and retractable at a price of $1.00 per Class B Share, being the stated capital thereof. The holders of Class B Shares are entitled to one vote per Class B Share. Except as required by law, holders of Class B Shares are not entitled to receive notice of, to attend or to vote at any meetings of shareholders of the Company other than the meetings of the holders of Class B Shares. Holders of Class B Shares are not entitled to vote any of the Portfolio securities held by the Company. In addition, the articles of the Company provide that the Company shall not, without the prior approval of the holders of the Class B Shares amend the rights, privileges, restrictions and conditions attached to the Class B Shares. Class C Shares Holders of Class C Shares are entitled to receive any dividends that the Board of Directors may declare, which may be paid in cash, in kind or, if permitted by applicable law and the Board of Directors so determine, in Class C Shares. The Board of Directors has indicated that its policy is to declare and pay equal monthly dividends on the Class C Shares equal to the expected annual dividends to be earned by the Portfolio less expected annual expenses. Any Class C Shares outstanding on the Redemption Date will be redeemed by the Company on such date, following the liquidation of the Portfolio. On such redemption, each holder will receive for every Class C Share so redeemed, payment in the amount equal to the Net Asset Value per Class C Share on the Redemption Date (the Class C Share Redemption Price ). The Class C Shares may be automatically redeemed by the Company at the discretion of the Board of Directors, the aggregate market value of the Company s Portfolio securities is $15 million or less on two - 3 -

7 consecutive Valuation Dates (defined below). Except as described below, the Class C Shares may be surrendered at any time for retraction by the holders. Holders of Class C Shares who tender their Class C Shares for retraction on one or more Valuation Dates will receive payment on the seventh business day following such Valuation Date (the Retraction Payment Date ). If a Class C Shareholder surrenders 10,000 or more Class C Shares for retraction in any month other than in the month of May, such holder may elect to receive (and if such election is accepted by the Company) 95% of its pro rata share of the Portfolio securities rounded down to the nearest Class C Share plus (minus) a number of Portfolio securities, as selected by SCI, valued at the closing price on the Valuation Date, that would represent 95% of the pro rata share of the amount by which the value of the other assets of the Company exceed (is less than) the liabilities (including dividends received and interest income earned by the Company (net of expenses) which have not been declared as dividends on the Class A Shares, Class C Shares or Special Non-Voting Shares) of the Company on the applicable retraction date less $1.00 per Class C Share retracted. Holders of Class C Shares not requesting an in specie distribution as described in this paragraph will receive a cash retraction price per Class C Share equal to 95% of the Net Asset Value per Class C Share less $1.00 per Class C Share retracted. If a Class C Shareholder surrenders 10,000 or more Class C Shares for retraction in the month of May, such holder of Class C Shares may elect to receive (and if such election is accepted by the Company will receive) their pro rata share of the Portfolio securities rounded down to the nearest Class C Share plus (minus) a number of portfolio securities, as selected by the Administrator, valued at the closing price on the Valuation Date, that would represent the pro rata share of the amount by which the value of the other assets of the Company exceed (are less than) the liabilities (including dividends received and interest income earned by the Company (net of expenses) which have not been declared as dividends on the Class C Shares) of the Company on the retraction date. Holders of Class C Shares not requesting an in specie distribution as described in this paragraph will receive a cash retraction price equal to 100% of the Net Asset Value per Class C Share. All of the above retractions constitute a taxable disposition of the Company s Class C Shares at the time of retraction whether the retraction is received in the form of cash or Portfolio securities. A holder who surrenders a Class C Share under an annual retraction in the month of May will receive on the Retraction Payment Date the amount equal to 100% of the Class C Share Redemption Price, provided the Class C Shares have been surrendered for retraction one or more business days prior to the Valuation Date. The Company may suspend the retraction of Class C Shares if the trading of Portfolio securities is restricted (including due to the cessation or suspension of trading of one or more of the Portfolio securities on any stock exchange) or where the retraction would be contrary to applicable law. Class C Shares may be surrendered for retraction by delivering a written notice (the Retraction Notice ) to CDS Clearing and Depository Services Inc. ( CDS ) through a CDS Participant. In each of the cases described above, if the Net Asset Value per Class C Share (calculated on the Valuation Date as though no Convertible Securities are outstanding) is greater than the subscription price per Class C Share in respect of Class C Shares issuable upon the exercise of any Convertible Security, the calculation of a Shareholder s pro rata share of the Portfolio securities represented by the Class C Shares surrendered for retraction will be made on the assumption that all such Convertible Securities (for greater certainty only those Convertible Securities whose subscription price per Unit is less than the Net Asset Value per Unit) are exercised and the net proceeds are used to purchase additional Portfolio securities in the same proportion as the then Portfolio and at the same Market Price as at Valuation Date and that the total number of Class C Shares outstanding will be increased by the number of Class C Shares that would have been issued on the exercise of such Convertible Securities (the Diluted Pro Rata Share ). Except as required by law, holders of Class C Shares are not entitled to receive notice of, to attend or to vote at any meetings of shareholders of the Company other than the meetings of the holders of Class C Shares, except that the holders of the Class C Shares are entitled to notice of any meeting of shareholders called for the purpose of authorizing the dissolution of the Company. Holders of Class C Shares are not entitled to vote any of the Portfolio securities held by the Company

8 In addition, the Articles provide that, among other things, the Company shall not, without the prior approval of the holders of the Class C Shares, (i) amend any of the rights, privileges, restrictions and conditions attaching to the Class C Shares, (ii) change any contract or enter into any new contract as a result of which the basis of the calculation of the fees and other expenses that are charged to the Company could result in an increase as a result of such changes, except where the contract is with a party that is at arm s length with the manager of the Company, (iii) amend the provisions in the Articles relating to the restrictions on the business that the Company may carry on or (iv) change the Company s auditors. Special Non-Voting Shares Holders of Special Non-Voting Shares are entitled to receive any dividends that the Board of Directors may declare. It is the Company s policy to declare from time to time dividends on the Special Non-Voting Shares in an amount equal to the administration fee payable to SMCAI and the operating expenses paid by SMCAI on behalf of the Company. The Special Non-Voting Shares are redeemable and retractable at any time at a price per share equal to $1.00 per Special Non-Voting Share (the Special Non-Voting Redemption Price ). The Special Non-Voting Shares rank equal to the Class C Shares with respect to the payment of dividends and the repayment of capital on the dissolution, liquidation or winding-up of the Company. Holders may surrender their Special Non-Voting Shares for retraction by delivering a Retraction Notice to the Company at its registered office. A holder who surrenders a Special Non-Voting Share under a regular retraction will receive on the Retraction Date payment in the amount of the Special Non-Voting Share Redemption Price, provided the Special Non-Voting Shares have been surrendered for retraction no later than 15 days from the date of the Retraction Notice. All of the issued and outstanding Special Non-Voting Shares are held by SCI the parent Company of SMCAI. Except as required by law, holders of Special Non-Voting Shares are not entitled to receive notice of, to attend or to vote at any meetings of shareholders of the Company other than the meetings of the holders of Special Non-Voting Shares. In addition, the articles of the Company provide that the Company shall not, without the prior approval of the holders of the Special Non-Voting Shares amend the rights, privileges, restrictions and conditions attached to the Special Non-Voting Shares. INVESTMENT CONSIDERATIONS AND RISK FACTORS The following are certain considerations relating to an investment in the Class C Shares. Market Fluctuations The value of the Class C Shares varies according to the value of the Portfolio securities. The value of the Portfolio securities is influenced by factors which are not within the control of the Company including the financial performance of the Canadian utility and telecommunication companies included in the Portfolio, interest rates and other financial market conditions. Accordingly, the value of the Class C Shares varies from time to time. No Ownership Interest An investment in Class C Shares does not constitute an investment in the Portfolio securities. Holders of Class C Shares do not own the Portfolio securities held by the Company or have any voting rights in respect of the Portfolio securities. Discount to Net Asset Value Class C Shares may trade in the market at a premium or discount to the net asset value per Class C Share and there can be no assurance that Class C Shares will trade at a price equal to the net asset value per Class C Share

9 Mutual Fund Policies The Company is considered to be a mutual fund but does not generally operate in accordance with, and has been granted exemption from, certain of the protections provided by the policies of Canadian securities regulators applicable to conventional mutual funds. Leverage The Company will utilize leverage in order to increase its monthly distributions to Shareholders. The use of leverage may result in capital losses incurred by the Company or a decrease in distributions received by the Company to a greater extent than if leverage is not employed. The interest expense and banking fees incurred in respect of a loan facility may exceed the incremental capital gains/losses and income generated by the incremental investment of the Portfolio Securities. There can be no assurance that a borrowing strategy employed by the Company will enhance returns. In addition, a loan facility may impose additional restrictions on the Company. Finally, certain leverage facilities involve a posting of collateral. Increases in the amount of margin or similar payments could result in the need for trading at times or prices that are disadvantageous to the Portfolio and which could result in a loss to the Company. Significant Redemptions Class C Shares are retractable annually and monthly as described under Description of Share Capital. The purpose of the special annual retraction right is to prevent the Class C Shares from trading at a substantial discount to the Net Asset Value and to provide holders of Class C Shares with the right to realize their investment once annually without any trading discount to the value of a Class C Share. However, Class C Shares may trade in the market at a premium or discount of the Net Asset Value per Class C Share and there can be no assurance that Class C Shares will trade at a price equal to the Net Asset Value per Class C Share. Additionally, if a significant number of Class C Shares are retracted the trading liquidity of the shares could be significantly reduced and the expenses of the Company would be spread among fewer shares resulting in a higher management expense ratio and a lower Net Asset Value. Global Financial Developments Geopolitical Developments such as wars, adverse political developments and systemic credit events may have an adverse effect on the price, volatility, prospects and liquidity of the Portfolio Securities. COMPANY S FINANCIAL CONDITION AND OPERATING RESULTS A discussion of the Company s financial condition and operating results for the year ended May 21, 2017 may be found in the Company s 2017 Annual Report in the section entitled Financial Performance. The Company s Portfolio is carried at fair value. The fair value is computed using the closing market prices on the TSX. Other assets and liabilities therein are recorded in accordance International Financial Reporting Standards ( IFRS ) including dividend income recorded on the ex-dividend date and interest income and expenses recorded on an accrual basis. RESPONSIBILITY FOR OPERATIONS On August 16, 2010, the Company transferred the administration role from SCI to its wholly owned subsidiary SMCAI, to administer all of the ongoing operations of the Company under substantially the same terms and conditions as prescribed in an administration agreement (the Administration Agreement ). Under the Administration Agreement, SMCAI is responsible for certain day to day operations of the Company including arranging for the payment of dividends on the Class C Shares and processing the retraction or redemption of the Class C Shares. The Administration Agreement has a term expiring upon the redemption or retraction of all Class C Shares. SMCAI has its registered office at 40 King Street West, Scotia Plaza, 26 th Floor, P.O. Box 4085, Toronto, Ontario, M5W 2X6, phone number (416) , and maintains an address at mc.utility@scotiabank.com and website address at

10 The Board is responsible for reviewing, approving and monitoring compliance of the Company s proxy voting policies and procedures. With respect to the voting of the portfolio shares at an annual general meeting ( AGM ) of an issuer, the standard practice is to vote as recommended by management of the applicable underlying company wherein only standard business/proposals are on the agenda. Ordinarily, standard business/proposals would include the following: receiving annual financial statements together with the auditors report thereon electing directors appointing auditors and authorizing the Board to fix their remuneration amending any employee compensation plan including options, warrants and rights approving an amendment increasing the number of shares of the company reserved for issuance under a compensation plan or for future acquisitions transacting such other shareholder proposals as may properly be brought before the meeting Where there are extraordinary proposals and/or arrangements to be considered and passed at an AGM or a special meeting, the standard practice is also to vote as recommended by management of the applicable underlying company. Examples of extraordinary proposals would include: approval of a shareholder rights plan plan of arrangement to sell assets or a business line, merge with another company or agreement to sell the company outright With respect to any meeting, the Administrator has discretion to seek additional guidance from the Board. Finally, any time Scotia Capital is acting as an advisor to a company holding a vote, the Administrator will send all relevant materials and information to the Board and the independent directors will decide how to vote a company s shares to eliminate any possibility of a conflict of interest. In consideration for the services provided by SMCAI, the Company pays SMCAI a quarterly fee in advance equal to ¼ of 0.25% of the assets of the Company. Furthermore, if the Company elects to receive stock dividends or participate in a dividend reinvestment plan, the amount by which the proceeds received on such disposition of such Portfolio securities, net of any costs of disposition and taxes which are not currently refundable, exceed such amount of cash dividends which would otherwise be received by the Company, will be paid to SMCAI. For the year ended May 21, 2017 the total administrative fees paid to SMCAI were $138,159 (2016 $135,065). The Administration Agreement will expire when all of the Shares have been retracted or redeemed, which is expected to be on or about May 22, The Portfolio securities are held by State Street Trust Company Canada as custodian pursuant to a custodian agreement (the Custodian Agreement ) dated as of June 14, The following are the directors and officers of the Company: DIRECTORS AND OFFICERS Name and Municipality of Residence Office(s) Held Principal Occupation Director Since Class C Shares Held* % Of Class C Shares Donald W. Paterson Toronto, Ontario Director and Chairman of the Board Corporate Director Robert C. Williams Toronto, Ontario Director Chief Executive Officer, Headwater Investments Ltd

11 Name and Municipality of Residence Office(s) Held Principal Occupation Director Since Class C Shares Held* % Of Class C Shares Michael K. Warman Georgetown, Ontario Director Corporate Director Stephen D. Pearce Toronto, Ontario Director, Chief Financial Officer and Secretary Director, Scotia Capital Inc E. Stuart Griffith Toronto, Ontario Director Corporate Director and Consultant Brian D. McChesney Unionville, Ontario Director, President and Chief Executive Officer Corporate Director John B. Newman Toronto, Ontario Director Chairman, Multibanc Financial Holdings Limited Robert Hall Toronto, Ontario Director Managing Director Scotia Capital Inc * Includes Class C Shares held directly, indirectly, or over which direction is exercised. Holdings are as at August 16, During the past five years, all the directors and officers have held the principal occupations noted opposite their respective names, or other similar occupations with their current employer or a predecessor company with the exceptions of Mr. Williams tendered his resignation as President and Chief Executive Officer on March 13, 2014 but remained a member of the board. Mr. McChesney retired from The Bank of Nova Scotia on March 31, 2014 and with the Board s approval, continued in his role as Chief Executive Officer, President and Director of the Corporation at annual stipend of $15,000. From January 1 to March 31, 2014, E. Stuart Griffith was Special Projects Advisor to Ericsson Canada Inc. and prior to that Chief Financial Officer, and General Counsel of ConceptWave Software Inc. Under applicable corporate legislation, the Company is required to have an Audit Committee. The Audit Committee is composed of Messrs. Newman (Chairman), Paterson and Griffith. The Company does not have an Executive Committee. Messrs. Paterson, Griffith and Newman, the independent directors of the Company, have been appointed to the Company s independent review committee (the IRC ). Remuneration of Directors and Officers The directors and officers of the Company who are employees of SMCAI do not receive any remuneration from the Company in connection therewith. Each of the directors who are not employed by SMCAI or one of its affiliates (Messrs. Paterson, Griffith, Newman, Warman and Williams) is paid an annual fee of $7,500 plus $500 per meeting attended. Mr. McChesney, in his role as Chief Executive Officer and President, is paid an annual stipend of $15,000. Audit Committee members who are not employed by SMCAI or one of its affiliates (Messrs. Newman, Griffith and Paterson) are paid an additional fee of $400 per Audit Committee meeting and $600 for the meeting at which the annual financial statements are considered. The aggregate compensation paid by the Company to the directors for the year ended May 21, 2017 was $72,500. The aggregate amount of expenses reimbursed to the directors in the year was nil

12 Remuneration of Members of the IRC IRC members are paid an annual fee of $2,000 plus $500 per meeting attended. The aggregate compensation paid by the Company to the members for the year ended May 21, 2017 was $7,500. PRINCIPAL SHAREHOLDERS Ontario Inc., which, in turn, is held by Messrs. Newman, Paterson and Griffith, owns all of the ten issued and outstanding Class B Shares and SCI owns all of the 100 issued and outstanding Special Non-Voting Shares. The Special Non-Voting Shares allow the Company, at its option, to pay dividends to reimburse SMCAI for the payment of the Company s operating expenses and to pay SMCAI the administration fee in order to reduce the likelihood that the Company will be liable to pay non-currently refundable tax under Part IV of the Tax Act. For the fiscal year 2017, administrative and operating expenses of $336,409 ( ,460) were paid and satisfied by way of dividends on the Company s Special Non-Voting Shares. As of August 16, 2017, to the knowledge of the directors and officers, no person owns of record more than 10% of the outstanding Class C Shares. None of the directors and officers of the Company beneficially own, or exercise control or direction over, any Class C Shares. CONFLICTS OF INTEREST Certain of the officers and directors of the Company are currently employees of SCI, the parent company of SMCAI. In consideration for the services as administrator, SMCAI currently receives a quarterly fee of ¼ of 0.25% of the assets of the Company. SCI, as agent, sells Portfolio securities in connection with the special annual retraction and certain other transactions and subject to compliance with regulatory approvals received may purchase, as principal, such Portfolio securities for the Company. The amount of the fees received by SCI in this capacity is disclosed in the Company s financial statements. CORPORATE GOVERNANCE The Board of Directors of the Company has oversight responsibility for the overall stewardship of the Company s business and affairs. The Company is a mutual fund corporation created to acquire and hold its investment portfolio and only trades its Portfolio securities in limited circumstances as described in the Company s original prospectus and the management information circular dated March 15, As such, the Portfolio is not actively traded and the Company can be considered to be a passive investment vehicle. The Company s administrator, SMCAI, administers many functions associated with the operations of the Company pursuant to the Administration Agreement discussed previously under the heading Responsibility for Operations. The Board consists of eight directors four of whom are independent and four of whom are senior officers or former senior officers of SMCAI and/or SCI. The Board believes that this number of directors is appropriate for the Company. The Chairman of the Board is not the Chief Executive Officer of the Company and is an independent director. All directors except for senior officers of the Administrator are compensated by the Company and such compensation is considered appropriate given the risk and responsibilities placed on each director and the only standing committee of the Board is the Audit Committee. The Audit Committee consists of three members, all of whom are independent directors. The Audit Committee has responsibility to review the Company s financial statements and reports and makes recommendations in respect thereof to the Board before their approval by the Board. The Board is responsible for developing the Company s approach to governance issues and for proposing new nominees to the Board (should the need arise) and has not assigned these responsibilities to a committee. An - 9 -

13 independent director may engage outside advisors at the Company s expense subject to the approval of the other independent directors. SMCAI, as administrator, must refer all conflict of interest matters to the IRC for review or approval as required by National Instrument Independent Review Committee for Investment Funds ( NI ). SMCAI has established written policies and procedures for dealing with conflict of interest matters in accordance with NI The IRC consists of three members, each of whom is independent of the Company, SMCAI and any entity related to SMCAI. The Company, through SMCAI, maintains a telephone line and web site to respond to inquiries from shareholders. INVESTMENT RESTRICTIONS The Company is considered to be a mutual fund subject to certain restrictions and practices contained in securities legislation, including National Instrument Mutual Funds ( NI ) but applied for and obtained an exemption from certain of its provisions applicable to continuously offered non-listed mutual funds. The Company is managed in accordance with the applicable restrictions and practices. The Company was granted an exemption from Section 2.17 of NI to permit the Company to enter into securities lending, repurchase or reverse repurchase transactions. CANADIAN FEDERAL INCOME TAX CONSIDERATIONS This summary is based upon the current provisions of the Tax Act, the Regulations thereunder (the Regulations ), the specific proposals for amendments to the Tax Act and the Regulations which have been publicly announced by the Minister of Finance prior to the date hereof (the Proposed Amendments ) and current published administrative practices of the Canada Revenue Agency. The summary is not exhaustive of all possible Canadian federal income tax consequences and does not take into account or anticipate any changes in law, whether by legislative, governmental or judicial action, nor does it take into account provincial, territorial or foreign income tax legislation or considerations. This summary assumes that the Company qualifies as a mutual fund corporation under the Tax Act at all relevant times and is subject to tax under Part I of the Tax Act in respect of its net realized capital gains. The Company will be entitled to refunds in accordance with the provisions of the Tax Act of substantially all tax paid with respect to net taxable capital gains upon payment of sufficient capital gains dividends or in respect of sufficient redemptions of Class C Shares. Also, the Company is subject to a tax of 38 1 / 3 % under Part IV of the Tax Act on taxable dividends received in the year. This tax is fully refundable upon payment of sufficient dividends. As a result, the Company does not anticipate that it will be subject to any material net Canadian income tax liability. Dividends other than capital gains dividends received by individuals on the Class C Shares will be subject to the normal gross-up and dividend tax credit rules applicable to dividends received on shares of a taxable Canadian corporation including the an enhanced gross-up and dividend tax credit applicable to eligible dividends received from the Company. The amount of any capital gains dividend received by a holder of Class C 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. Class C Shares received by a holder of Class C Shares as payment of a capital gains dividend will be deemed to have been acquired by such holder at a cost equal to the amount of such dividend. A disposition of a Class C 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 Class C Shares is considered a disposition for these purposes

14 The Class C Shares continue to be qualified investments under the Tax Act for trusts governed by registered retirement savings plans, registered retirement income funds, registered disability savings plans, tax-free savings accounts, deferred profit sharing plans and registered education savings plans. MATERIAL CONTRACTS Contracts material to shareholders that have been entered into by the Company are: (1) the Administration Agreement described previously under the heading Responsibility for Operations ; and (2) the Custodian Agreement described previously under the heading Responsibility for Operations. Copies of these agreements may be inspected during business hours at the head office of the Company. TRANSFER AGENT, REGISTRAR CUSTODIAN AND AUDITORS The transfer agent and registrar for the Class C Shares is Computershare Investor Services Inc. at is principal office at 100 University Avenue, 9 th Floor, Toronto, Ontario M5J 2Y1. The register of securities is kept in Toronto, Ontario. The custodian of the Company s Portfolio securities is State Street Trust Company Canada, 30 Adelaide Street East, Suite 1400, Toronto, Ontario M5C 3G6. The auditors of the Company are PricewaterhouseCoopers LLP, PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario M5J 0B

15 ADDITIONAL INFORMATION Administrator: Scotia Managed Companies Administration Inc. 40 King Street West, Scotia Plaza 26 th Floor, P.O. Box 4085, Station A Toronto, Ontario M5W 2X6 (416) Additional information about the Company is available in the Company s financial statements and the management reports of fund performance. The Company will provide a copy of these documents at no cost to any person or company, upon request to the Company located at 40 King Street West, 26th Floor, Scotia Plaza, Toronto, Ontario M5W 2X6 or the investor relations line at (416) Copies of these documents may also be obtained at no cost direct from your dealer, or by at mc_utility@scotiacapital.com. Copies of these documents and other information about the Company, such as information circulars and material contracts, are also available on the Company s website at or at