ANNUAL INFORMATION FORM FIRST PREMIUM INCOME TRUST

Transcription

1 ANNUAL INFORMATION FORM FIRST PREMIUM INCOME TRUST Units and Warrants March 30, 2010

2 Table of Contents THE FUND... 1 INVESTMENT OBJECTIVES AND STRATEGY... 1 STATUS OF THE FUND... 2 UNITS... 2 Distributions... 2 Distribution Reinvestment Plan... 3 Redemption of Units... 3 Resale of Units Tendered for Redemption... 4 Suspension of Redemptions... 4 Purchase for Cancellation... 4 Normal Course Issuer Bid... 5 Book-Entry Only System... 5 WARRANTS... 5 Exercise of Warrants and Warrant Agent... 5 Basic Subscription Privilege... 6 Additional Subscription Privilege... 7 Sale or Transfer of Warrants... 7 Warrant Considerations... 7 Anti-dilution Provisions... 8 Delivery Form and Denomination of Warrants... 8 UNITHOLDER MATTERS... 8 Acts Requiring Unitholder Approval... 8 Reporting to Unitholders INVESTMENT RESTRICTIONS Use of Other Derivative Instruments CALCULATION OF NET ASSET VALUE AND NET ASSET VALUE PER UNIT RESPONSIBILITY FOR OPERATIONS The Manager The Investment Manager Investment Management Agreement Independent Review Committee The Advisory Board Directors and Officers of the Manager CORPORATE GOVERNANCE Proxy Voting Policy... 17

3 BROKERAGE ARRANGEMENTS TRUSTEE AND CUSTODIAN REGISTRAR AND TRANSFER AGENT AUDITORS CANADIAN FEDERAL INCOME TAX CONSIDERATIONS Status of the Fund Taxation of the Fund Taxation of Holders Eligibility for Investment RISK FACTORS Recent Global Financial Developments Interest Rate Fluctuations Use of Options and Other Derivative Instruments Net Asset Value and Distributions Reliance on Investment Manager Significant Redemptions Dilution to Existing Unitholders Taxation of the Fund MATERIAL CONTRACTS ADDITIONAL INFORMATION ii

4 THE FUND First Premium Income Trust (the Fund ) is an investment trust established under the laws of the Province of Ontario pursuant to a trust agreement dated as of June 21, 1996, as amended from time to time (the Trust Agreement ), between Mulvihill Fund Services Inc. ( Mulvihill or the Manager ), as manager, and RBC Dexia Investor Services Trust (the Trustee ), as trustee. Mulvihill is a wholly owned subsidiary of Mulvihill Capital Management Inc. ( MCM or the Investment Manager ), the investment manager of the Fund. The Fund operates under the name Mulvihill Premium Canadian Fund. On June 28, 1996, the Fund completed its initial public offering of 6,000,000 units ( Units ) at a price of $25.00 per Unit. On July 19, 1996, the Fund completed an additional offering of 600,000 Units at a price of $25.00 per Unit pursuant to the exercise of an over-allotment option granted to the Fund s agents in connection with the Fund s initial public offering. The outstanding Units are listed on the Toronto Stock Exchange ( TSX ) under the symbol FPI.UN. On July 28, 1999, the Trust Agreement was amended to permit the Fund to write cash covered put options. The Trust Agreement was amended again on March 9, 2000 to eliminate the requirement that the dividend yields on the common shares in which the Fund was permitted to invest be paid at least semi-annually at a rate equal to 125% of the indicated annual dividend yield for the TSE 300 Composite Index. Finally, as a result of amendments to the Trust Agreement of December 2003, the termination date for the Fund was extended from January 1, 2004 to January 1, 2014 (the Termination Date ) and the Fund began to pay an annual service fee of 0.30% of net asset value ( NAV ) to sales representatives whose clients hold Units. On November 19, 2009, the Fund completed an offering (the Warrant Offering ) of warrants (the Warrants ) to holders of its Units ( Unitholders ). The Fund issued 1,883,543 Warrants to subscribe for and purchase an aggregate of approximately 1,883,543 Units. Each Unitholder received one transferable Warrant for each Unit held. The Warrants trade on the TSX under the ticker symbol FPI.WT. The principal offices of the Fund, of Mulvihill and of MCM are located at 121 King Street West, Standard Life Centre, Suite 2600, Toronto, Ontario, M5H 3T9. The phone numbers, website address and address of Mulvihill are (416) (toll-free at ), and hybrid@mulvihill.com, respectively. INVESTMENT OBJECTIVES AND STRATEGY The Fund s investment objectives are: (a) (b) to provide Unitholders with a stable stream of quarterly distributions of at least $0.50 per Unit ($2.00 per annum); and to return the original issue price of the Units ($25.00 per Unit) to Unitholders upon the Termination Date. The Fund seeks to achieve its investment objectives by investing in a diversified portfolio (the Portfolio ) consisting primarily of common shares (which may include voting common shares and fully participating nonvoting, restricted voting or subordinate voting equity shares) issued by major Canadian issuers that are in the top 200 of the S&P/TSX Composite Index by market capitalization. A majority of the securities comprising the Portfolio will be those issued by major financial institution, utilities and pipeline companies in Canada. The securities comprising the Portfolio may also include instalment receipts for common shares and securities convertible into or exchangeable for or which carry the right to purchase common shares. The Portfolio will be managed by MCM to enhance returns to the Fund. To generate additional returns above the dividend income earned on the Portfolio, the Fund will, from time to time, write covered call options in respect of all or part of the securities in the Portfolio. The Fund s covered called option writing will be managed by MCM in a manner consistent with the investment objectives of the Fund. The individual securities within the Portfolio which are subject to call options and the terms of such options will vary from time to time based on MCM s assessment of the market. From time to time, the Portfolio may include debt securities having

5 a remaining term to maturity of less than one year issued or guaranteed by the government of Canada or a province, which may be utilized to provide cover in respect of the writing of cash covered put positions. STATUS OF THE FUND While the Fund is technically considered to be a mutual fund under the securities legislation of certain provinces of Canada, the Fund is not a conventional mutual fund and has obtained exemptions from certain requirements of Canadian securities laws relating to mutual funds. The Fund differs from conventional mutual funds in a number of respects, most notably as follows: (a) while the Units of the Fund may be surrendered at any time for redemption, the redemption price is payable monthly whereas the securities of most conventional mutual funds are redeemable daily; (b) the Units of the Fund have a stock exchange listing whereas the securities of most conventional mutual funds do not; and (c) unlike most conventional mutual funds, the Units are not offered on a continuous basis. UNITS The Fund is authorized to issue an unlimited number of transferable, redeemable trust units of one class, each of which represents an equal, undivided interest in the net assets of the Fund. All Units have equal rights and privileges. Each whole Unit is entitled to one vote at all meetings of Unitholders and is entitled to participate equally with respect to any and all distributions made by the Fund, including distributions of net income and net realized capital gains, and distributions upon the termination of the Fund. Units are issued only as fully paid and are non-assessable. Fractions of Units are proportionately entitled to all of these rights except voting rights. The provisions or rights attaching to the Units may only be modified, amended or varied with the consent of Unitholders given in accordance with provisions contained in the Trust Agreement as described herein under the heading Acts Requiring Unitholder Approval. On December 16, 2004, the Trust Beneficiaries Liability Act, 2004 (Ontario) came into force. This statute provides that holders of units of a trust are not, as beneficiaries, liable for any act, default, obligation or liability of the trust if, when the act or default occurs or the liability arises, (a) the trust is a reporting issuer under the Securities Act (Ontario), and (b) the trust is governed by the laws of Ontario. The Fund is a reporting issuer under the Securities Act (Ontario) and it is governed by the laws of Ontario by virtue of the provisions of the Trust Agreement. The Fund does not currently intend to issue additional Units, except on reinvestment of distributions, by way of a rights offering to existing Unitholders or with the approval of Unitholders. Distributions The Fund will endeavour to make quarterly distributions to Unitholders of at least $0.50 per Unit ($2.00 per annum) on the last day of each quarter in each year (a distribution date ). However, there can be no assurance that the Fund will be able to make distributions at such rate. The amount of distributions in any particular calendar quarter will be determined by Mulvihill, as manager, having regard to the investment objectives of the Fund, the net income and net realized capital gains of the Fund during the calendar quarter and in the year to date, the net income and net realized capital gains of the Fund anticipated in the balance of the year and distributions made in previous calendar quarters. If, in any year after such distributions, there would otherwise remain in the Fund additional net income or net realized capital gains, the Fund intends on December 31 of that year to make a special distribution of such portion of the remaining net income and net realized capital gains as is necessary to ensure that the Fund will not be liable for income tax thereon under the Income Tax Act (Canada) (the Tax Act ), except to the extent that any tax payable on net realized capital gains of the Fund for a year that are retained by the Fund would be recoverable by it in such year. 2

6 Distributions are payable to Unitholders of record at 5:00 p.m. (Toronto time) as of the fifteenth day of each month (or the next business day thereafter if the fifteenth day is not a business day). All distributions not reinvested pursuant to the Fund s distribution reinvestment plan are paid by cheque to Unitholders proportionately based on their respective holdings of Units and are mailed to Unitholders at their addresses listed in the register of Unitholders to be maintained by the Fund s registrar and transfer agent or paid in such other manner as may be agreed to by the Trustee. Each Unitholder is mailed annually, no later than March 31, information necessary to enable such Unitholder to complete an income tax return with respect to amounts paid or payable by the Fund in respect of the preceding taxation year of the Fund. Distribution Reinvestment Plan A Unitholder may elect to reinvest distributions received from the Fund in additional Units by notifying the Fund s transfer agent that the Unitholder wishes to participate in the Plan. All distributions will be automatically reinvested on behalf of those Unitholders electing to participate in the Plan. Distributions payable to participants in the Plan (the Participant ) will be paid to Computershare Trust Company of Canada in its capacity as agent under the Plan (the Plan Agent ) and applied to purchase Units. Such purchases will either be made from the Fund through the purchase of new Units or in the market. If the closing market price plus applicable commissions or brokerage charges (collectively, the Market Price ) of the Units on the distribution date is less than the NAV per Unit as at that date, the Plan Agent will apply the distribution to purchase Units in the market. If the Market Price of the Units on the applicable distribution date is greater than the NAV per Unit, the Plan Agent will apply the distribution to purchase Units from the Fund through the issue of new whole Units at a price per Unit equal to the greater of (a) NAV per Unit on the distribution date; and (b) 95% of the weighted average of the trading prices of the Units on the TSX for the five trading days preceding the distribution date. Purchases in the market will be made during the 15 business day period next following the distribution date at such times as the Market Price of the Units is less than the NAV per Unit as at the distribution date. Upon the expiration of such period, the unused part, if any, of the distribution attributable to the Plan Participants will be used to purchase Units from the Fund on the basis set forth above. The Units purchased in the market or from the Fund will be allocated to the Plan Participants in proportion to their share of the distribution. The Plan Agent will furnish to each Plan Participant a report of the Units purchased for the Participant s account in respect of each distribution and the cumulative total of all Units purchased for that account. The Plan Agent s charges for administering the Plan will be paid by the Fund. The reinvestment of distributions under the Plan will not relieve participants of any income tax applicable to such distributions. Plan Participants may terminate their participation in the Plan at any time by written notice to the Plan Agent and thereafter distributions payable to such Plan Participants will be made in cash. The Trustee may terminate the Plan, in its sole discretion, upon not less than thirty days notice to the Plan Participants. Redemption of Units Units may be surrendered at any time for redemption to Computershare Investor Services Inc., the Fund s registrar and transfer agent, but will be redeemed only on the monthly Valuation Date (as defined below). Units surrendered for redemption by a Unitholder at least five business days prior to the last day of a month (a Valuation Date ) will be redeemed on such Valuation Date and the Unitholder will receive payment on or before the fifth business day following such Valuation Date (the Redemption Payment Date ). If a Unitholder makes such surrender after 5:00 p.m. (Toronto time) on the fifth business day immediately preceding a Valuation Date, the Units will be redeemed on the Valuation Date in the following month and the Unitholder will receive payment for the Units on the Redemption Payment Date in respect of such Valuation Date. Unitholders whose Units are redeemed on the June Valuation Date in any year will be entitled to receive a redemption price per Unit (the Unit Redemption Price ) equal to the NAV per Unit determined as of such Valuation Date. Unitholders whose Units are redeemed on any other Valuation Date will be entitled to receive a redemption price per Unit equal to the NAV per Unit determined as of such other Valuation Date, less the lesser of (a) 4% of the NAV per Unit as of such other Valuation Date and (b) $1.00. Any unpaid distribution payable on or 3

7 before a Valuation Date in respect of Units tendered for redemption on such Valuation Date will also be paid on the Redemption Payment Date. The redemption right must be exercised by causing written notice to be given within the notice periods prescribed herein and in the manner described under Book-Entry Only System. Such surrender will be irrevocable upon the delivery of notice to CDS Clearing and Depository Services Inc. ( CDS ) through a participant in the CDS bookentry only system (a CDS Participant ), except with respect to those Units which are not redeemed by the Fund on the relevant Redemption Payment Date. Resale of Units Tendered for Redemption Where the holder of Units tendered for redemption has not withheld his consent thereto in the manner provided in the redemption notice delivered to CDS through a CDS Participant, the Fund may, but is not obligated to, require the Recirculation Agent (as defined below) to use its best efforts to find purchasers for any Units tendered for redemption prior to the relevant Redemption Payment Date pursuant to the Recirculation Agreement (as defined below). In such event, the amount to be paid to the Unitholder on the Redemption Payment Date will be an amount equal to the proceeds of the sale of the Units less any applicable commission. Such amount will not be less than the Unit Redemption Price described above. Unitholders are free to withhold their consent to such treatment and to require the Fund to redeem their Units in accordance with their terms. Subject to the Fund s right to require the Recirculation Agent to use its best efforts to find purchasers for any Units tendered for redemption prior to the relevant Valuation Date, any and all Units which have been surrendered to the Fund for redemption are deemed to be outstanding until (but not after) the close of business on the relevant Valuation Date, unless not redeemed thereon, in which event such Units will remain outstanding. The Fund has entered into an agreement (the Recirculation Agreement ) with RBC Dominion Securities Inc. (the Recirculation Agent ) whereby the Recirculation Agent has agreed to use its reasonable efforts to find purchasers for any Units tendered for redemption prior to the relevant Valuation Date, provided that the holder of the Units so tendered has not withheld consent thereto. The Fund is not obligated to require the Recirculation Agent to seek such purchasers but may elect to do so. In the event that a purchaser for such Units is found in this manner, the amount to be paid to the Unitholder on the relevant Redemption Payment Date will be an amount equal to the proceeds of the sale of the Unit less any applicable commission. Such amount will not be less than the applicable Unit Redemption Price described above. Suspension of Redemptions Mulvihill may direct the Trustee to suspend the redemption of Units or payment of redemption proceeds (a) during any period when normal trading is suspended on the TSX; or (b) with the prior permission of the Ontario Securities Commission, for any period not exceeding 120 days during which Mulvihill determines that conditions exist which render impractical the sale of assets of the Fund or which impair the ability of the Trustee to determine the value of the assets of the Fund. The suspension may apply to all requests for redemption received prior to the suspension but as to which payment has not been made, as well as to all requests received while the suspension is in effect. All holders of Units making such requests shall be advised by Mulvihill of the suspension and that the redemption will be effected at a price determined on the first Valuation Date following the termination of the suspension. All such Unitholders shall have and shall be advised that they have the right to withdraw their requests for redemption. The suspension shall terminate in any event on the first day on which the condition giving rise to the suspension has ceased to exist provided that no other condition under which a suspension is authorized then exists. To the extent not inconsistent with official rules and regulations promulgated by any government body having jurisdiction over the Fund, any declaration of suspension made by Mulvihill shall be conclusive. Purchase for Cancellation Subject to applicable law, the Fund may at any time or times purchase Units for cancellation at prices not exceeding the NAV per Unit on the Valuation Date immediately prior to such purchase. 4

8 Normal Course Issuer Bid Under the terms of a normal course issuer bid that expired on May 8, 2009, the Fund could purchase up to a maximum of 283,144 Units. No Units were purchased by the Fund pursuant to the bid. Book-Entry Only System Registration of interests in and transfers of the Units are made only through the book-entry only system administered by CDS (the book-entry only system ). Units must be purchased, transferred and surrendered for redemption through a CDS Participant. All rights of an owner of Units must be exercised through, and all payments or other property to which such owner is entitled will be made or delivered by, CDS or the CDS Participant through which the owner holds such Units. Upon purchase of any Units, the owner will receive only the customary confirmation. References in this annual information form to a holder of Units means, unless the context otherwise requires, the owner of the beneficial interest in such Units. The ability of a beneficial owner of Units to pledge such Units or otherwise take action with respect to such owner s interest in such Units (other than through a CDS Participant) may be limited due to the lack of a physical certificate. An owner of Units who desires to exercise redemption privileges thereunder must do so by causing a CDS Participant to deliver to CDS (at its office in the City of Toronto) on behalf of the owner a written notice of the owner s intention to redeem Units, no later than 5:00 p.m. (Toronto time) on the relevant notice date. An owner who desires to redeem Units should ensure that the CDS Participant is provided with notice (the Redemption Notice ) of his intention to exercise his redemption privilege sufficiently in advance of the relevant notice date so as to permit the CDS Participant to deliver notice to CDS by the required time. The Redemption Notice will be available from a CDS Participant or Computershare Investor Services Inc., the Fund s registrar and transfer agent. Any expense associated with the preparation and delivery of Redemption Notices will be for the account of the owner exercising the redemption privilege. By causing a CDS Participant to deliver to CDS a notice of the owner s intention to redeem Units, an owner shall be deemed to have irrevocably surrendered his Units for redemption and appointed such CDS Participant to act as his exclusive settlement agent with respect to the exercise of the redemption privilege and the receipt of payment in connection with the settlement of obligations arising from such exercise. Any Redemption Notice which CDS determines to be incomplete, not in proper form or not duly executed shall for all purposes be void and of no effect and the redemption privilege to which it relates shall be considered for all purposes not to have been exercised thereby. A failure by a CDS Participant to exercise redemption privileges or to give effect to the settlement thereof in accordance with the owner s instructions will not give rise to any obligations or liability on the part of the Fund to the CDS Participant or to the owner. The Fund has the option to terminate registration of the Units through the book-entry only system in which case certificates for Units in fully registered form would be issued to beneficial owners of such Units or to their nominees. WARRANTS Each Warrant entitles the holder thereof (a Warrantholder ) to acquire one Unit upon payment of $11.30 (the Subscription Price ) prior to 5:00 p.m. (Toronto time) on March 31, 2010 (the Expiry Date ). Exercise of Warrants and Warrant Agent Warrants may be exercised at any time during the period (the Exercise Period ) commencing at market open (Toronto time) on December 1, 2009 and ending at 5:00 p.m. (Toronto time) on the Expiry Date. WARRANTS NOT EXERCISED PRIOR TO 5:00 P.M. (TORONTO TIME) ON THE EXPIRY DATE WILL BE VOID AND OF NO VALUE. If a Unitholder does not exercise, or sells, the Warrants, then the value of the Unitholder s investment may be diluted as a result of the exercise of Warrants by others. See Warrant Considerations. 5

9 Pursuant to the terms of a master warrant indenture (the Warrant Indenture ) dated as of November 6, 2009 between Mulvihill, in its capacity as manager of the Fund and Computershare Trust Company of Canada (the Warrant Agent ), as warrant agent, the Warrant Agent has been appointed the warrant agent of the Fund to receive subscriptions and payments from Warrantholders, to act as registrar and transfer agent for the Warrants and to perform certain services relating to the exercise and transfer of Warrants. The Fund will pay for the services of the Warrant Agent. The Warrant Agent may resign upon at least 90 days notice to the Fund. The Fund may remove the Warrant Agent and appoint a new warrant agent on at least 90 days notice to the Warrant Agent. Warrantholders desiring to exercise Warrants and purchase Units should ensure that subscriptions and payment in full of the Subscription Price are received by the Warrant Agent prior to 5:00 p.m. (Toronto time) on the Expiry Date. The Units purchased pursuant to the Warrants so exercised shall be deemed to have been issued and the person or persons in whose name or names such Units are to be registered shall be deemed to have become the holder or holders of record of such Units on the date on which such Units are entered into the register maintained by the Fund s transfer agent for such Units. Units will only be issued pursuant to the Additional Subscription Privilege after all necessary calculations have been made following the Expiry Date as described under Additional Subscription Privilege. Basic Subscription Privilege A Warrantholder may subscribe for the resulting whole number of Units or any lesser whole number of Units by instructing the CDS Participant holding the subscriber s Warrants to exercise all or a specified number of such Warrants and forwarding the Subscription Price for each Unit subscribed for in accordance with the terms of the Warrant Offering and the Warrant Indenture to the CDS Participant that holds the subscriber s Warrants. The Subscription Price is payable in Canadian funds by certified cheque, bank draft or money order drawn to the order of a CDS Participant, by direct debit from the subscriber s brokerage account or by electronic funds transfer or other similar payment mechanism. All payments must be forwarded to the appropriate office of the CDS Participant. The entire Subscription Price for Units subscribed for must be paid at the time of subscription and must be received by the Warrant Agent prior to 5:00 p.m. (Toronto time) on the Expiry Date. If mail is used for delivery of subscription funds, for the protection of the subscriber, certified mail return receipt requested should be used and sufficient time should be allowed to avoid the risk of late delivery. A subscriber subscribing through a CDS Participant must deliver its payment and instructions sufficiently in advance of the Expiry Date to allow the CDS Participant to properly exercise the Warrants on such subscriber s behalf. Warrantholders are encouraged to contact their broker or other CDS Participant as each CDS Participant may have a different cut-off time. CDS Participants that hold Warrants for more than one beneficial holder may, upon providing evidence satisfactory to the Fund and the Warrant Agent during the Exercise Period, exercise Warrants on behalf of their accounts on the same basis as if the beneficial owners of such Warrants were the holders of record. Notwithstanding anything to the contrary herein, the Warrants may be exercised only by a Warrantholder who represents at the time of exercise that the Warrantholder is not located in the United States, did not acquire the Warrants while in the United States, is not a U.S. person (as defined in Regulation S under the U.S. Securities Act of 1933, as may be amended from time to time) and is not exercising the Warrants for resale to or for the account or benefit of a U.S. person or a person in the United States. Payment of the Subscription Price will constitute a representation to the CDS Participant that the subscriber is not located in the United States, did not acquire Warrants while in the United States, is not a U.S. person and is not exercising the Warrants for resale to or for the account or benefit of a U.S. person or a person in the United States. Subscriptions for Units made in connection with the Warrant Offering through a CDS Participant will be irrevocable and subscribers will be unable to withdraw their subscriptions for Units once submitted. 6

10 Warrantholders who wish to exercise their Warrants and receive Units are reminded that because Warrants must be exercised through a CDS Participant, a significant amount of time may elapse from the date of exercise and the date the Units issuable upon the exercise thereof are issued to the subscriber. Additional Subscription Privilege Each Warrantholder that subscribes for all of the Units to which such holder is entitled pursuant to the Basic Subscription Privilege may, at any time during the Exercise Period, subscribe for additional Units ( Additional Units ) pursuant to the Additional Subscription Privilege, if applicable, at a price equal to the Subscription Price for each Additional Unit. Warrantholders must exercise all of their Warrants under the Basic Subscription Privilege to be eligible for the Additional Subscription Privilege. The aggregate number of Additional Units available under the Additional Subscription Privilege for all additional subscriptions will be the difference, if any, between the total number of Units issuable upon exercise of the Warrants and the total number of Units subscribed and paid for prior to 5:00 p.m. (Toronto time) on the Expiry Date. Subscriptions for Additional Units will be received subject to allotment only and the number of Additional Units, if any, which may be allotted to each subscriber will be equal to the lesser of: (a) the number of Additional Units which that subscriber has subscribed for under the Additional Subscription Privilege, and (b) the product (disregarding fractions) obtained by multiplying the number of available Additional Units by a fraction, the numerator of which is the number of Warrants exercised by that subscriber under the Basic Subscription Privilege and the denominator of which is the aggregate number of Warrants exercised under the Basic Subscription Privilege by Warrantholders that have subscribed for Additional Units pursuant to the Additional Subscription Privilege. If any Warrantholder has subscribed for fewer Additional Units than such holder s pro rata allotment of Additional Units, the excess Additional Units will be allotted in a similar manner among the holders who were allotted fewer Additional Units than they subscribed for. To apply for Additional Units under the Additional Subscription Privilege, a beneficial Warrantholder must forward the holder s request to a CDS Participant prior to 5:00 p.m. (Toronto time) on the Expiry Date. Payment for Additional Units, in the same manner as for Units, must accompany the request when it is delivered to the CDS Participant. Any excess funds will be returned by mail or credited to a subscriber s account with its CDS Participant without interest or deduction. Payment in full of the Subscription Price must be received by the Warrant Agent prior to 5:00 p.m. (Toronto time) on the Expiry Date, failing which the subscriber s entitlement to such Units will terminate. Accordingly, the subscriber must deliver payment and instructions sufficiently in advance of the Expiry Date to allow the CDS Participant to properly apply for Additional Units under the Additional Subscription Privilege. Units issued pursuant to the Additional Subscription Privilege will only be issued after all necessary calculations have been made following the Expiry Date. Sale or Transfer of Warrants Warrantholders in Canada may, instead of exercising their Warrants to subscribe for Units, sell or transfer their Warrants. Holders of Warrants through CDS Participants who wish to sell or transfer their Warrants must do so in the same manner as they sell or transfer Units, namely, by providing instructions to the CDS Participant holding their Warrants in accordance with the policies and procedures of the CDS Participant. Warrant Considerations The value of a Unit will be reduced if the NAV per Unit exceeds $11.11 and one or more Warrants is exercised. If the NAV per Unit exceeds $11.11, then a Unitholder will face dilution of its investment to the extent Warrantholders exercise their Warrants and acquire Units. If a Unitholder does not exercise Warrants in such circumstances, such Unitholder s pro rata interest in the assets of the Fund will be diluted. Due to the dilutive effect on the value of the Units when Warrants are exercised, Unitholders should carefully consider the exercise of the Warrants or the sale of the Warrants prior to the Expiry Time. The failure to take either such action in the circumstances described above will result in the loss of value to the investor. To maintain the Unitholder s pro rata interest in the assets of the Fund, the Unitholder will be required to pay in connection with the exercise of a Warrant an additional amount equal to the Subscription Price. While a Unitholder may sell the Unitholder s Warrants, no assurance can be given that the proceeds of such sale will compensate the Unitholder for 7

11 such dilution. The factors that would be expected to influence the price of a Warrant include the difference between the Subscription Price and the NAV per Unit calculated on a diluted basis, price volatility, distributions payable on the Units and the remaining time to expiry of the Warrant. Anti-dilution Provisions The Warrant Indenture contains anti-dilution provisions such that the subscription rights in effect under the Warrants for Units issuable upon the exercise of the Warrants will be subject to adjustment from time to time if, prior to the expiry time (5 p.m. Toronto time) on the Expiry Date, the Fund: (a) (b) (c) (d) (e) subdivides, re-divides or changes its outstanding Units into a greater number of units; reduces, combines or consolidates its outstanding Units into a smaller number of units; distributes to holders of all or substantially all of the outstanding Units any securities of the Fund including rights, options or warrants to acquire Units or securities convertible into or exchangeable for Units or property or assets, including evidence of indebtedness (other than in connection with the distribution and exercise of the Warrants); reclassifies the Units or otherwise reorganizes the capital of the Fund; or consolidates, amalgamates or merges the Fund with or into any other investment fund or other entity, or sells or conveys the property and assets of the Fund as an entirety or substantially as an entirety (other than in connection with the redemption of Units). Delivery Form and Denomination of Warrants All Warrantholders hold their Warrants through a CDS Participant, except where the issuance of physical certificates evidencing ownership in such securities is necessary to facilitate Warrant exercises. The Fund expects that each Unitholder will receive a confirmation of the number of Warrants issued to it under the Warrant Offering from its CDS Participant in accordance with the practices and procedures of that CDS Participant. CDS will be responsible for establishing and maintaining book-based accounts for its participants holding Warrants. None of the Fund, the Manager or the Warrant Agent will have any liability for: (a) the records maintained by CDS or CDS Participants relating to the Warrants or the book-based accounts maintained by them; (b) maintaining, supervising or reviewing any records relating to such Warrants; or (c) any advice or representations made or given by CDS or CDS Participants with respect to the rules and regulations of CDS or any action to be taken by CDS or its participants. The ability of a person having an interest in Warrants held through a CDS Participant to pledge such interest or otherwise take action with respect to such interest (other than through a CDS Participant) may be limited due to the lack of a physical certificate. Warrantholders must arrange purchases and transfers of, and for the issuance of Warrant certificates for the purpose of exercises of, Warrants through CDS Participants. UNITHOLDER MATTERS Acts Requiring Unitholder Approval The following matters require the approval of Unitholders by a two-thirds majority vote (other than items (c), (f), (g), (h) and (i) which require approval by a simple majority vote) at a meeting called and held for such purpose: (a) (b) a change in the fundamental investment objectives and strategy of the Fund as described under Investment Objectives and Strategy ; a change in the investment restrictions of the Fund as described under Investment Restrictions ; 8

12 (c) (d) (e) (f) (g) (h) the entering into by the Fund of transactions involving derivatives other than the writing of covered call options or cash covered put options, the purchase of call options or put options and the entering into of trades by the Fund to close out positions in such derivatives or the purchase of put options to protect the Fund from declines in the market prices of individual securities in the Portfolio or in the value of the Portfolio as a whole; any change in the basis of calculating fees or other expenses that are charged to the Fund which could result in an increase in charges to the Fund; a change of the manager of the Fund, other than a change resulting in an affiliate of such person assuming such position or, except as described herein, a change in the investment manager or trustee of the Fund, other than a change resulting in an affiliate of such person assuming such position; a decrease in the frequency of calculating the NAV per Unit or of redeeming Units; a change of the auditors of the Fund; a reorganization with, or transfer of assets to, another mutual fund, if: (i) (ii) the Fund ceases to continue after the reorganization or transfer of assets; and the transaction results in Unitholders becoming securityholders in the other mutual fund; (i) a reorganization with, or acquisition of assets of, another mutual fund, if: (i) (ii) (iii) the Fund continues after the reorganization or acquisition of assets; the transaction results in the securityholders of the other mutual fund becoming Unitholders of the Fund; and the transaction would be a material change to the Fund; (j) (k) (l) a termination of the Investment Management Agreement (except as described under Investment Management Agreement ); a termination of the Fund prior to the Termination Date or an extension of the Fund beyond the Termination Date; and an amendment, modification or variation in the provisions or rights attaching to the Units. Mulvihill and the Trustee may, without the approval of or notice to Unitholders, amend the Trust Agreement for certain limited purposes specified therein, including to: (a) (b) remove any conflicts or other inconsistencies which may exist between any terms of the Trust Agreement and any provisions of any law or regulation applicable to or affecting the Fund; make any change or correction in the Trust Agreement which is of a typographical nature or is required to cure or correct any ambiguity or defective or inconsistent provision, clerical omission, mistake or manifest error contained therein; (c) bring the Trust Agreement into conformity with National Instrument Mutual Funds ( NI ) or other applicable laws, rules and policies of Canadian securities regulators or with current practice within the securities industry, provided that any such amendment does not adversely affect the pecuniary value of the interest of any Unitholder; 9

13 (d) (e) maintain the status of the Fund as a mutual fund trust for the purposes of the Tax Act; or provide added protection to Unitholders. Except for changes to the Trust Agreement which require the approval of Unitholders or changes described above which do not require approval or prior notice to Unitholders, the Trust Agreement may be amended from time to time by Mulvihill and the Trustee upon not less than 30 days prior written notice to Unitholders. Reporting to Unitholders The Fund will furnish annual and semi-annual financial statements of the Fund to Unitholders in accordance with applicable laws. INVESTMENT RESTRICTIONS The Fund is subject to certain investment criteria that, among other things, limit the common shares and other securities the Fund may acquire to comprise the Portfolio. The Fund s investment criteria may not be changed without the approval of Unitholders by a two-thirds majority vote at a meeting called for such purpose. The Fund s investment criteria provide that the Fund may not: (a) except as provided in paragraphs (b) and (g), purchase securities of an issuer unless: (i) such securities are common shares or are convertible into or exchangeable for or carry the right to purchase common shares of the issuer; and (ii) the common shares of the issuer rank, or are reasonably expected by MCM to rank within 12 months of the date of purchase in the top 200 of the S&P/TSX Composite Index on the basis of capitalization; (b) (c) (d) (e) (f) purchase debt securities unless such securities are cash equivalents; write a call option in respect of any security unless such security is actually held by the Fund at the time the option is written; dispose of any security included in the Portfolio that is subject to a call option written by the Fund unless such option has either terminated or expired; write put options in respect of any security unless (i) the Fund is permitted to invest in such securities and (ii) so long as the options are exercisable, the Fund continues to hold cash equivalents sufficient to acquire the securities underlying the options at the aggregate strike price of such options; reduce the total amount of cash equivalents held by the Fund to an amount less than the aggregate strike price of all outstanding put options written by the Fund; (g) purchase call options or put options except as specifically permitted under NI ; (h) (i) until such time as the Fund has met all of the requirements under the Tax Act to qualify as a mutual fund trust within the meaning of the Tax Act, and at any time thereafter when the Fund does not meet all of such requirements, hold any property that is not a qualified investment for a trust governed by a registered retirement savings plan, deferred profit sharing plan or registered retirement income fund under the Tax Act; or make or retain investments which render the Units foreign property under Part XI of the Tax Act or, if the Fund is a registered investment within the meaning of the Tax Act, which render it liable to tax under Part XI of the Tax Act. 10

14 In addition, but subject to these investment restrictions, the Fund has adopted the standard investment restrictions and practices set forth in NI A copy of such standard investment restrictions and practices will be provided by the Manager to any person on request. The Fund obtained an exemption from certain of the provisions of National Policy Statement No. 39, including section 11.05, to permit the Fund to calculate its NAV monthly. As discussed below in Calculation of Net Asset Value and Net Asset Value per Unit, the Fund now calculates its NAV weekly. Use of Other Derivative Instruments In addition to writing covered call options and cash covered put options, and to the extent permitted by Canadian securities regulators, from time to time, the Fund may purchase call options and put options with the effect of closing out existing call options and put options written by the Fund. The Fund may also purchase put options in order to protect the Fund from declines in the market prices of the individual securities in the Portfolio or in the value of the Portfolio as a whole. The Fund may enter into trades to close out positions in such permitted derivatives. CALCULATION OF NET ASSET VALUE AND NET ASSET VALUE PER UNIT The NAV of the Fund on a particular date will be equal to the difference between the aggregate value of the assets of the Fund and the aggregate value of the liabilities of the Fund, including any income, net realized capital gains and other amounts payable to Unitholders on or before such date. The NAV per Unit on any day is obtained by dividing the NAV of the Fund on such day by the number of Units outstanding on such day. The NAV per Unit will be calculated at the close of business on each Valuation Date. Such information will be provided by Mulvihill to Unitholders on request. Valuation Policies and Procedures In determining the NAV of the Fund at any time: (a) (b) (c) (d) (e) the value of any security, index futures or index options thereon that is listed on any recognized exchange shall be determined by the closing sale price at the valuation time or, if there is no closing sale price, the average between the closing bid and the closing asked price on the day on which the NAV is being determined, all as reported by any report in common use or authorized as official by a recognized stock exchange; provided that if such stock exchange is not open for trading on that date, then on the last previous date on which such stock exchange was open for trading; where a covered clearing corporation option, option on futures or over-the-counter option is written, the premium received by the Fund shall be reflected as a deferred credit that shall be valued at an amount equal to the current market value of the clearing corporation option, option on futures or over-the-counter option that would have the effect of closing the position. Any difference resulting from revaluation of such options shall be treated as an unrealized gain or loss on investment. The deferred credit shall be deducted in arriving at the NAV. The securities, if any, which are the subject of a written clearing corporation option, or over-the-counter option shall be valued at their then current market value; purchased or written clearing corporation options, options on futures, over-the-counter options, debt-like securities and listed warrants shall be valued at the current market value thereof; the value of any cash on hand, on deposit or on call, prepaid expenses, cash dividends declared and interest accrued and not yet received, shall be deemed to be the face amount thereof, unless the Fund determines that any such deposit or call loan is not worth the face amount thereof, in which event the value thereof shall be deemed to be such value as the Fund determines to be the reasonable value thereof; the value of a futures contract or a forward contract shall be the gain or loss with respect thereto that would be realized if, at the valuation time, the position in the futures contract or the forward contract were to be 11

15 closed out unless daily limits are in effect in which case fair value shall be based on the current market value of the underlying interest; (f) (g) (h) (i) (j) (k) (l) margin paid or deposited in respect of futures contracts and forward contracts shall be reflected as an account receivable and margin consisting of assets other than cash shall be noted as held as margin; the value of any bonds, debentures, and other debt obligations shall be valued by taking the average of the bid and ask prices on the valuation date at such times as the Fund, in its discretion, deems appropriate. Short-term investments including notes and money market instruments shall be valued at cost plus accrued interest; the value of any security, the resale of which is restricted or limited, shall be the lesser of the value thereof based on reported quotations in common use and that percentage of the market value of securities of the same class, the trading of which is not restricted or limited by reason of any representation, undertaking or agreement or by law, equal to the percentage that the Fund s acquisition cost was of the market value of such securities at the time of acquisition; provided that a gradual taking into account of the actual value of the securities may be made where the date on which the restriction will be lifted is known; securities of any unlisted underlying fund held by the Fund will be valued at the net asset value of such securities as provided by such fund from time to time; all Fund property valued in a foreign currency and all liabilities and obligations of the Fund payable by the Fund in foreign currency shall be converted into Canadian dollars by applying the rate of exchange obtained from the best available sources to the Fund, including, but not limited to, the Fund or any of its affiliates; all expenses or liabilities (including fees payable to the Fund) of the Fund shall be calculated on an accrual basis; and the value of any security or property to which, in the opinion of the Fund, the above valuation principles cannot be applied shall be the fair value thereof determined in such manner as the Fund from time to time provides. The above principles are used to calculate NAV for all purposes other than financial statement reporting. With respect to financial reporting, the Canadian Institute of Chartered Accountants Handbook (the CICA Handbook ) requires that portfolio securities in an active market be valued using the latest available bid price. The primary differences between the valuation policy of the Fund and the approach in the CICA Handbook is that the Fund will generally determine the fair value of its equity securities traded on a stock exchange by using the closing price on the exchange. For bonds, debentures and other debt obligations (excluding money-market instruments), the Fund will generally use the average of the bid and ask prices to determine the fair value. RESPONSIBILITY FOR OPERATIONS The Manager Pursuant to the Trust Agreement, Mulvihill is the manager of the Fund and, as such, is responsible for providing or arranging for required administrative services to the Fund including, without limitation: authorizing the payment of operating expenses incurred on behalf of the Fund; preparing financial statements and financial and accounting information as required by the Fund; ensuring that Unitholders are provided with financial statements (including interim and annual financial statements) and other reports as are required by applicable law from time to time; ensuring that the Fund complies with regulatory requirements and applicable stock exchange listing requirements; preparing the Fund s reports to Unitholders and the Canadian securities regulatory authorities; providing the Trustee with information and reports necessary for it to fulfil its fiduciary responsibilities; determining the amount of distributions to be made by the Fund; and negotiating contractual agreements with third-party providers of services, including registrars, transfer agents, auditors and printers. 12