Scott s Real Estate Investment Trust

Transcription

1 This prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sell such securities. No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. These securities have not been, and will not be, registered under the United States Securities Act of 1933, as amended, and, subject to certain exceptions, may not be offered or sold in the United States or to U.S. persons. See Plan of Distribution. PROSPECTUS Initial Public Offering September 29, 2005 Scott s Real Estate Investment Trust $50,000,000 5,000,000 Units This prospectus qualifies the distribution (the Offering ) of 5,000,000 units (the Units ) of Scott s Real Estate Investment Trust ( Scott s REIT or the REIT ). Scott s REIT is an unincorporated open-ended real estate investment trust established under the laws of the Province of Ontario. Scott s REIT has been created to indirectly acquire and control Scott s Real Estate Limited Partnership ( Scott s LP, together with its general partner and subsidiaries, the Operator ). Scott s REIT, through the Operator, will acquire from Yum! Brands Canada Management LP and/or certain of its affiliates (collectively, Yum! ) and Scott s Restaurants Inc. and/or certain of its affiliates (collectively, SRI ), a portfolio of 190 retail properties (the Initial Properties ) located across Canada. KIT Limited Partnership ( KIT LP, together with its general partner and subsidiaries, KIT ) is a tenant at all but one of the Initial Properties, and operates KFC TM restaurants on these Initial Properties. KIT is owned, directly or indirectly, as to approximately 60.2% by Priszm Canadian Income Fund and as to approximately 39.8% by SRI. Scott s REIT also intends to acquire from SRI, from time to time, additional properties leased to KIT, and to actively seek additional opportunities to acquire real estate for the quick service restaurant ( QSR ) industry and for small box retailers in high traffic locations across Canada and the United States. Following completion of the acquisition of the Initial Properties, SRI will indirectly hold an approximate 31.1% interest in Scott s REIT through ownership of Class B LP Units of Scott s LP (which are economically equivalent to and exchangeable for Units), subject to the exercise of the Over-Allotment Option (as defined herein). See Retained Interest and Exchange Rights. Scott s REIT intends to make monthly cash distributions initially equal to, on an annualized basis, approximately 100% of Distributable Income (as defined herein), calculated as described under Distribution Policy. There is currently no market through which the Units may be sold and purchasers may not be able to resell Units purchased under this prospectus. An investment in the Units is subject to a number of risks that should be considered by a prospective purchaser. The ability of Scott s REIT to make cash distributions will be dependent upon, among other things, the operations and assets of Scott s LP and tenant risks relating to the tenants of the Operator s properties. As a result, cash distributions are not guaranteed. See Risk Factors. The objectives of Scott s REIT are: (i) to provide holders of Units ( Unitholders ) with stable monthly cash distributions that are, to the maximum extent possible, tax deferred, through the acquisition of a geographically diversified portfolio of income producing QSR and retail properties across Canada and the United States; (ii) to maximize cash flow and Unit value, while minimizing Unitholder risk; (iii) to expand the asset base of Scott s REIT through the acquisition of additional QSR and retail properties; and (iv) to increase its Distributable Income through on-going active management of the REIT s assets. See Objectives and Strategies of the REIT. Price: $10.00 Per Unit Net Proceeds to Price to the Public (1) Underwriters Fee Scott s REIT (2) Per Unit **************************************************** $10.00 $0.60 $9.40 Total Offering (3)(4) ******************************************** $50,000,000 $3,000,000 $47,000,000 Notes: (1) The price of the Units has been determined by negotiations between SRI, Scott s REIT and the Underwriters (as defined herein). (2) Before deducting expenses of the Offering estimated to be $2,626,932, which, together with the Underwriters fee, will be paid by Scott s LP from the proceeds of the Offering. (3) This prospectus also qualifies the grant by Scott s REIT of the Exchange Right (as defined herein). See Retained Interest and Exchange Rights. (4) Scott s REIT has granted to the Underwriters an option, exercisable for a period of 30 days from the closing of the Offering ( Closing ), to purchase up to a total of 364,953 additional Units (being 7.3% of the Units offered hereunder) on the same terms as set out above solely to cover over-allotments, if any, and for market stabilization purposes (the Over-Allotment Option ). If the Over-Allotment Option is exercised in full, the total Price to the Public, Underwriters Fee and Net Proceeds to Scott s REIT will be $53,649,530, $3,218,972 and $50,430,558, respectively. This prospectus also qualifies the grant of the Over-Allotment Option and the distribution of the Units issuable on the exercise of the Over-Allotment Option. If the Over-Allotment Option is exercised, the proceeds received by Scott s REIT will be used to increase the REIT s indirect interest in Scott s LP. Scott s LP will then use such proceeds to redeem a proportionate number of the Class B LP Units issued to SRI. See Retained Interest and Exchange Rights, Principal Unitholder, Plan of Distribution and Use of Proceeds. (continued on next page)

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4 Alberta 12 British Columbia 6 Manitoba 8 Ontario 73 Quebec 67 New Brunswick 9 Nova Scotia 15

5 (continued from cover) Scott s REIT is not a trust company and is not registered under applicable legislation governing trust companies as it does not carry on or intend to carry on the business of a trust company. The Units are not deposits within the meaning of the Canada Deposit Insurance Corporation Act (Canada) and are not insured under the provisions of that Act or any other legislation. A return on an investment in Scott s REIT is not comparable to the return on an investment in a fixed-income security. The recovery of an investor s initial investment is at risk, and the anticipated return on the investment is based on many performance assumptions. Although Scott s REIT intends to make distributions of its available cash to Unitholders, these cash distributions may be reduced or suspended. The actual amount distributed will depend on numerous factors including the business and financial condition of KIT, the principal tenant of the Initial Properties, and the ability of Scott s REIT to service its debt obligations. In addition, the market value of the Units may decline if Scott s REIT is unable to meet its cash distribution targets in the future, and that decline may be significant. It is important for an investor to consider the particular risk factors that may affect the industry in which they are investing, and therefore the stability of the distributions that the investor will receive. See Risk Factors Related to the Real Estate Industry under the section Risk Factors. This section also describes the REIT s assessment of those risk factors, as well as the potential consequences to the investor if a risk should materialize. The after-tax return from an investment in Units to Unitholders subject to Canadian income tax can be made up of both a return on and a return of capital. That composition may change over time, thus affecting a Unitholder s after-tax return. Returns on capital are generally taxed as ordinary income or as dividends in the hands of a Unitholder. Returns of capital are generally tax-deferred (and reduce the Unitholder s cost base in the Unit for tax purposes). Based on current assumptions and considerations set forth in this prospectus, management anticipates that approximately 32% of the 2006 cash distributions of Scott s REIT will be taxable to Unitholders as ordinary income for Canadian tax purposes, and that the remaining 68% of such cash distributions will be non-taxable returns of capital. See Certain Canadian Federal Income Tax Considerations. BMO Nesbitt Burns Inc., CIBC World Markets Inc., Genuity Capital Markets, RBC Dominion Securities Inc., Desjardins Securities Inc. and Canaccord Capital Corporation (the Underwriters ), as principals, conditionally offers the Units, subject to prior sale, if, as and when issued, sold and delivered by Scott s REIT and accepted by the Underwriters in accordance with the conditions contained in the Underwriting Agreement referred to under Plan of Distribution and subject to the approval of certain legal matters on behalf of Scott s REIT by Stikeman Elliott LLP and Borden Ladner Gervais LLP, special tax counsel to Scott s REIT, and on behalf of the Underwriters by McCarthy Tétrault LLP. Subscriptions will be received subject to rejection or allotment in whole or in part and the Underwriters reserve the right to close the subscription books at any time without notice. Book-entry only certificates representing the Units will be issued in registered form to The Canadian Depository for Securities Limited ( CDS ) or its nominee and will be deposited with CDS on the date of Closing, which is expected to occur on or about October 6, 2005, or such later date as SRI, Scott s REIT and the Underwriters may agree, but in any event not later than October 31, A purchaser of Units will receive only a customer confirmation from a registered dealer which is a CDS participant and from or through which the Units are purchased. See Scott s REIT Declaration of Trust and Description of Units Book-Based System.

6 TABLE OF CONTENTS FORWARD-LOOKING STATEMENTS ********************************************************* ii DISTRIBUTABLE INCOME ****************************************************************** ii ELIGIBILITY FOR INVESTMENT************************************************************* ii TRADEMARKS***************************************************************************** ii PROSPECTUS SUMMARY ******************************************************************* 1 BUSINESS OF SCOTT S REIT **************************************************************** 16 THE CANADIAN REAL ESTATE MARKET **************************************************** 16 THE CANADIAN QUICK SERVICE RESTAURANT INDUSTRY ********************************** 17 OBJECTIVES AND STRATEGIES OF SCOTT S REIT ******************************************** 18 INVESTMENT HIGHLIGHTS ***************************************************************** 20 INITIAL PROPERTIES*********************************************************************** 21 OVERVIEW OF THE BUSINESS OF KIT******************************************************* 24 DEBT STRATEGY ************************************************************************** 25 INDEPENDENT APPRAISALS AND REPORTS ************************************************* 25 ACQUISITION OF THE INITIAL PROPERTIES ************************************************* 27 RETAINED INTEREST AND EXCHANGE RIGHTS********************************************** 28 MANAGEMENT OF SCOTT S REIT *********************************************************** 30 ASSET AND PROPERTY MANAGEMENT ***************************************************** 34 INVESTMENT GUIDELINES AND OPERATING POLICIES*************************************** 37 FINANCIAL FORECAST ********************************************************************* 41 AUDITORS REPORT ON FINANCIAL FORECAST ********************************************* 42 SCOTT S REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF FORECASTED NET INCOME ******************************* 43 SCOTT S REAL ESTATE INVESTMENT TRUST NOTES TO CONSOLIDATED FINANCIAL FORECAST ****************************************** 44 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ************************************************************************* 47 DISTRIBUTION POLICY********************************************************************* 50 USE OF PROCEEDS************************************************************************* 52 CONSOLIDATED CAPITALIZATION OF SCOTT S REIT***************************************** 53 ORGANIZATIONAL CHART ***************************************************************** 54 SCOTT S REIT DECLARATION OF TRUST AND DESCRIPTION OF UNITS *********************** 55 THE TRUST******************************************************************************** 63 SCOTT S LP ******************************************************************************* 66 DETAILS OF THE OFFERING **************************************************************** 67 RISK FACTORS **************************************************************************** 68 PLAN OF DISTRIBUTION ******************************************************************* 74 CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS ***************************** 75 PRINCIPAL UNITHOLDER******************************************************************* 80 INTERESTS OF PROMOTER, MANAGEMENT AND OTHERS IN MATERIAL CONTRACTS********** 80 LEGAL PROCEEDINGS ********************************************************************* 80 EXPERTS ********************************************************************************** 80 AUDITORS, TRANSFER AGENT AND REGISTRAR********************************************* 80 MATERIAL CONTRACTS******************************************************************** 80 PURCHASERS STATUTORY RIGHTS ******************************************************** 80 GLOSSARY ******************************************************************************** 82 APPENDIX I INITIAL PROPERTIES ******************************************************** 86 INDEX TO FINANCIAL STATEMENTS******************************************************** F-1 CERTIFICATE OF THE REIT AND THE PROMOTER******************************************** C-1 CERTIFICATE OF THE UNDERWRITERS****************************************************** C-2 i

7 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that reflect the current expectations of management of Scott s REIT and the Operator about the future results, performance, achievements, prospects or opportunities for Scott s REIT, the Operator and the commercial real estate and QSR industries. Scott s REIT has tried to identify these forward-looking statements by using words such as may, will, expect, anticipate, believe, intend, plan, estimate, potentially and similar expressions. Such forward-looking statements necessarily involve known and unknown risks and uncertainties that may cause Scott s REIT, the Operator or the commercial real estate or QSR industry s actual results, performance, achievements, prospects and opportunities in future periods to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things: risks associated with real property ownership and illiquidity; competition; concentration of tenants; financing; conflicts of interest; reliance on key personnel; general uninsured losses; liability and insurance; acquisition and development; environmental matters; tenant risks; limits on activities of Scott s REIT; the ability to make distributions; financial forecast; potential volatility of Unit prices; tax related matters; potential future dilution; absence of a public market and determination of an offering price; and availability of cash flow. Scott s REIT relies primarily upon KIT, the principal tenant of the Initial Properties, for its revenue and, as such, is subject to certain additional risks, including: the potential for the REIT s cash flow to be negatively affected if KIT s business or financial condition is materially adversely affected; the competitive nature of the QSR industry; risks associated with government regulation; and potential litigation, class actions and other complaints. There can be no assurance that the expectations of management of Scott s REIT or the Operator will prove to be correct. These forward-looking statements are made as of the date of this prospectus and Scott s REIT assumes no obligation to update or revise them to reflect subsequent information, events, circumstances or otherwise. See Risk Factors. DISTRIBUTABLE INCOME Distributable Income is not a measure recognized under Canadian generally accepted accounting principles ( GAAP ) and does not have a standardized meaning prescribed by GAAP. Distributable Income is presented in this prospectus because management of Scott s REIT and the Operator believe this non-gaap measure is a relevant measure of the ability of the Operator and Scott s REIT to earn and distribute cash returns to Unitholders. Distributable Income as computed by the Operator and Scott s REIT may differ from similar computations as reported by other similar organizations and, accordingly, may not be comparable to distributable income as reported by such organizations. Distributable Income is defined as income before non-controlling interest of Scott s REIT on a consolidated basis as determined in accordance with GAAP, subject to certain adjustments as set out in the REIT s Declaration of Trust (the Declaration of Trust ). For a complete description of Distributable Income see Distribution Policy Computation of Distributable Income. ELIGIBILITY FOR INVESTMENT In the opinion of Borden Ladner Gervais LLP, special tax counsel to Scott s REIT, and McCarthy Tétrault LLP, counsel to the Underwriters, subject to the assumptions, restrictions and limitations described under Certain Canadian Federal Income Tax Considerations, on the date of Closing, provided Scott s REIT qualifies as a mutual fund trust for purposes of the Tax Act on such date, the Units will be qualified investments for trusts governed by registered retirement savings plans, registered retirement income funds, deferred profit sharing plans and registered education savings plans (collectively, the Plans ). The Budget Implementation Act, 2005, which received Royal Assent on June 29, 2005, eliminates the foreign property rules as initially announced in the February 23, 2005 federal budget. TRADEMARKS KIT has licensed the right to use certain trademarks, including KFC TM, Pizza Hut TM, Taco Bell TM, Long John Silver s TM and the Colonel TM in connection with its operation of KFC TM restaurants pursuant to the terms of its franchise agreements. KIT also has the right, pursuant to its franchise agreements, to use the other trademarks, service marks, trade names and other similar rights owned by the franchisor (or its affiliates) and designated by the franchisor from time to time for use in the operation of KIT s KFC TM restaurants. The other trademarks referred to in this prospectus are the property of their respective owners. ii

8 PROSPECTUS SUMMARY The following is a summary of the principal features of the offering under this prospectus and should be read together with, and is qualified in its entirety by, the more detailed information and the financial statements, including the notes thereto, contained elsewhere in this prospectus. Unless otherwise noted, the information in the prospectus does not give effect to the exercise of the Over-Allotment Option. Information contained in this prospectus with respect to the historical results or future plans of KIT is drawn from documents publicly filed with the Canadian securities regulators by Priszm Canadian Income Fund. Although management believes that this information is reliable, there can be no assurance as to the accuracy or completeness of the included information. Readers should refer to the Glossary for the meaning of all capitalized terms that are not defined in the text. References to the REIT or to Scott s REIT include the subsidiaries of Scott s REIT where the context requires. Investment Opportunity Scott s REIT is an unincorporated open-ended real estate investment trust established under the laws of the Province of Ontario. Scott s REIT has been created to indirectly acquire and control Scott s LP. Scott s LP will, in turn, acquire the Initial Properties from Yum! and SRI. Upon completion of the acquisition by Scott s REIT of the Initial Properties, SRI will indirectly hold an approximate 31.1% interest in Scott s REIT through ownership of Class B LP Units (which are economically equivalent to and exchangeable for Units). Scott s REIT also intends to acquire additional properties from SRI, from time to time, that are leased to KIT, and to actively seek additional opportunities to acquire real estate for the QSR industry and for small box retailers in high-traffic locations across Canada and the United States. Scott s REIT will also have a right of first refusal if from time to time SRI chooses to sell some of its other current or future properties. The Initial Properties make up a significant portion of the properties that Yum! and SRI currently own. See Overview of the Business of KIT. KIT is a tenant at all but one of the Initial Properties, and operates KFC TM restaurants (single or multibranded) on these Initial Properties. KIT is owned, directly or indirectly, as to approximately 60.2% by Priszm Canadian Income Fund, a publicly listed income trust, and as to approximately 39.8% by SRI. One of the Initial Properties is leased exclusively to Yum!, which operates a Pizza Hut TM restaurant on this property. In addition, three of the Initial Properties are multi-tenant sites that have tenants in addition to KIT. The lease payments from KIT represent over 99% of the total rental revenue derived from the Initial Properties. The Initial Properties consist of 190 retail properties located in seven provinces across Canada. A total of 111 of the Initial Properties will be indirectly acquired by the REIT from Yum!, and a total of 79 of the Initial Properties will be indirectly acquired by the REIT from SRI. Management believes that the geographic diversification of the Initial Properties will reduce the REIT s exposure to regional economic conditions that may affect a particular province or area. See Initial Properties. KIT leases, in whole or in part, all but one of the Initial Properties pursuant to a total of ten master lease agreements, of which eight are with SRI and two are with Yum!. The average remaining term of these leases is approximately 13 years (excluding the exercise of all extension options). The master lease agreements between Yum! and KIT, which collectively govern a total of 111 (approximately 58%) of the Initial Properties, provide for two extension options of five years each. Investment Highlights Scott s REIT offers Unitholders: ) Attractive, Stable Yield: Scott s REIT intends to make stable monthly cash distributions, which are expected to be approximately $ per Unit per month in the first year (approximately 100% of Distributable Income, on an annualized basis including distributions payable on the Class B LP Units), thereby providing an initial annualized yield of approximately 8.5%. ) High Occupancy Rate: Each of the Initial Properties has a tenant, and over 99% of the leasable area of the Initial Properties is currently leased. ) Geographically Diversified Portfolio: The Initial Properties are geographically diversified across Canada and in local markets. This diversification reduces the REIT s exposure to regional economic conditions that may affect a particular province or area. 1

9 ) Rent Escalation Clauses: Each of the master lease agreements with KIT provide for rent escalations every five years, which should continue to provide Scott s REIT with cash rental revenue growth during the term of such leases. The rent escalations provide Scott s REIT with a compounded annual growth rate ( CAGR ) of approximately 1% from 2005 to ) Triple-Net Leases: Each of the master lease agreements with KIT is triple-net and carefree to the landlord. As such, KIT pays for all taxes, utilities, and insurance premiums applicable to the premises leased by it, and is also responsible for all repairs to the leased premises, including those of a capital or structural nature. KIT is also responsible for normal day-to-day maintenance, including snow removal, outdoor maintenance and gardening, pest control, painting and decorating and maintenance of parking lots. ) Upside in Residual Real Estate Value: Management believes that the strength of the Initial Property locations provides Scott s REIT with upside potential upon maturity of the leases. ) Well-Maintained Portfolio: KIT recently announced that its board of directors has approved a five-year, $92 million capital growth plan to redevelop its existing asset portfolio over and above authorizing the satisfaction of maintenance obligations under the existing master lease agreements. KIT is also required to periodically upgrade and renovate its KFC TM restaurants pursuant to the terms of its related franchise agreements. ) Strong Tenant: KIT is a tenant at all but one of the Initial Properties, and operates KFC TM restaurants (single or multibranded) on these Initial Properties. KFC TM is one of the most recognized brands in the world. KIT s total revenues and net income for the fiscal year 2004 and the 12-month period ending June 12, 2005 are illustrated below: Revenues and Net Income (1) $500 $450 $474 $477 ($ millions) $400 $350 $300 $250 $200 $150 $100 Revenues Net Income $50 $0 $22.19 $ months ending June 12, 2005 Note: (1) Revenues and net income are for all KFC TM restaurants operated by KIT for the periods indicated, and do not reflect results solely at the Initial Properties. Objectives and Strategies of Scott s REIT The objectives of Scott s REIT are: (i) to provide Unitholders with stable monthly cash distributions that are, to the maximum extent possible, tax deferred, through the acquisition of a geographically diversified portfolio of income producing QSR and retail properties across Canada and the United States; (ii) to maximize cash flow and Unit value, while minimizing Unitholder risk; (iii) to expand the asset base of Scott s REIT through the acquisition of additional QSR and retail properties; and (iv) to increase its Distributable Income through on-going active management of the REIT s assets. See Objectives and Strategies of Scott s REIT. 2

10 Scott s REIT plans to achieve its objectives by employing the following strategies: ) Internal Growth: The 15-year master lease agreements with KIT (being comprised of two leases between Yum! and KIT and eight leases between SRI and KIT) have rent escalations every five years, with, in the case of the Initial Properties being acquired indirectly by Scott s REIT from Yum!, two five-year extension options, which should continue to provide Scott s REIT with cash rental revenue growth during the term of such leases. ) Growth Related to Relationship with KIT: SRI holds a significant interest in KIT and will, indirectly through its retained interest in Scott s LP, hold an approximate 31.1% interest in Scott s REIT (or 26.1% if the Over- Allotment Option is exercised in full). If SRI chooses to sell any of its other properties that do not form part of the Initial Properties, Scott s REIT has a right of first refusal to purchase such properties from SRI. Accordingly, as KIT s business grows there may be an opportunity for Scott s REIT to expand its asset base. ) Growth Through Acquisitions: Following the acquisition of the Initial Properties, Scott s REIT intends to expand the asset base of Scott s REIT and increase Distributable Income by pursuing an external growth strategy. This strategy will emphasize diversity of geographic location and will include diversification of tenants to include other branded, well-recognized QSR and retail operators. Scott s REIT will pursue investments in attractive markets across Canada and the United States and intends to acquire properties in both large and small rural and non-rural centres. Scott s REIT intends to identify potential property acquisitions using an investment criteria that focuses primarily on return on equity, security of cash flow, potential for capital appreciation and the potential to increase value by more efficient management of the assets being acquired, including accessing capital for expansion and development of those assets, which access might not otherwise be available to competitors and other property owners. See Objectives and Strategies of Scott s REIT. Risk Management Management believes that the REIT s ability to deliver stable and increasing cash distributions to Unitholders in the future will be enhanced by the following risk management strategies: ) Geographically Diversified Portfolio: In order to mitigate market risks, the portfolio of Initial Properties to be acquired by Scott s REIT will be geographically diversified across Canada and in local markets. In addition, the REIT s acquisition strategy includes diversification of tenants to include other branded, wellrecognized QSR and retail operators. Scott s REIT Total Leasable Area By Province (% of Total Square Footage of all Initial Properties) Scott s REIT Location of Initial Properties Quebec 38% Ontario 36% Nova Scotia 8% New Brunswick 4% Manitoba 5% British Columbia 2% Alberta 7% Alberta 12 British Columbia 6 Manitoba 8 Manitoba 8 Ontario 8273 Quebec 7367 NB 9 NS 15 ) Acquisition Procedures: For each property acquisition, Scott s REIT is required to obtain independent appraisal and environmental site assessment reports, and each acquisition is to be approved by the independent Governance, Compensation and Investment Committee. 3

11 ) Operating Standards and Systems: The experienced management team of JBM Properties Inc. ( JBM ), the REIT s property and asset manager, brings to Scott s REIT the standards and systems needed to operate and develop QSR and retail properties. Statistical, financial and administrative systems have been developed and are in place for monitoring, analyzing, planning and reporting on all aspects of operations. ) Total Debt Limits: Scott s REIT will be limited to total consolidated debt financing of 55% of Gross Book Value. At Closing, the total consolidated debt is expected to be approximately 50% of Gross Book Value. ) Governance: Following the Closing, there will be three Trustees, each of whom will be independent. The business of the Operator will be governed by Scott s GP, the general partner of Scott s LP. The trustee of Scott s GP, Trustee Corp., will be governed by a board consisting of five directors, of whom three will be independent (and who will initially be the same individuals as the independent Trustees). At Closing, all the members of the Audit Committee of Scott s REIT, a majority of the directors of Trustee Corp, and all of the members of the Governance, Compensation and Investment Committee of Trustee Corp., will be independent. ) Non-Dilution: Scott s REIT will not issue additional Units unless the Trustees consider such issuances not to be dilutive to ensuing monthly distributions of Distributable Income per Unit to existing Unitholders. The Canadian Commercial Real Estate Industry The commercial real estate industry in Canada has developed considerably over the last 10 years. During this time, investors have invested more capital in public real estate companies and real estate investment trusts as a vehicle to participate in the ownership of commercial real estate. Further, pension funds have become increasingly interested in investments in the real estate sector. These factors have driven a significant expansion of the real estate portfolios managed by large institutional entities. At the same time, the Canadian real estate development and construction industry has experienced a period of prolonged growth. Trends in the Real Estate Industry In addition to the factors cited above, other positive trends affecting the industry include: ) Concentration of Assets in Institutional Portfolios: Real estate portfolios are growing significantly, which has resulted in increased concentration of the ownership and management of real estate assets with larger, institutional portfolios. Management believes that this trend will continue as pension funds age and seek real estate assets to provide cash flow to meet liabilities coming due. ) Increasing Scarcity of Core Assets: Since a significant amount of real estate assets are now part of institutional holdings, quality assets that become available are subject to increased competition. ) Lower Interest Rates: Recent experience has indicated that governments and central banks have an increased capability to manage and perpetuate a continued low interest rate environment. Sustained low rates combined with less volatile fluctuations in those rates support real estate investment. ) Demographics The Aging Boomers: Statistics Canada estimates that the Canadian population over the age of 65 will increase more than 70% over the next 15 years. These investors often favour more stable, yieldoriented and asset-backed securities. ) Lower Cap Rates: Recent experience has shown that increasingly, real estate portfolio owners are using the cashflows from real estate to meet liabilities as they come due rather than investing for potential capital appreciation. As such, these institutional investors, such as pension funds, have relatively low acceptable levels of returns. See The Canadian Real Estate Market. 4

12 The Canadian Quick Service Restaurant Industry The QSR market is the second largest segment of the Canadian commercial foodservice sector with sales of approximately $14.0 billion in 2004, representing 38.3% of total sector sales. According to the Canadian Restaurant and Foodservices Association, sales in the QSR segment grew at a CAGR of 4.8% between 1999 and See The Canadian Quick Service Restaurant Industry. Trends in the QSR Industry Positive trends affecting the QSR industry include: ) Lifestyle Trends: The increasing number of both dual-income and single parent households has reduced the amount of time available for families to prepare meals. As a result, families are replacing meals prepared at home with meals purchased from restaurants. QSRs typically offer customers the convenience of a familiar menu, multiple restaurant locations and fast service. The Canadian commercial foodservice sector s share of the total dollars spent on food has increased over the past 19 years at the expense of grocery stores. Management believes that this trend results from the increased propensity of consumers to dine out. ) Increased Convenience: QSRs have enhanced consumer convenience and have increased the frequency of customer visits by expanding their menus, opening more drive-thrus and new points of distribution and offering more coupons and bundled meal deals. ) Multi-Branding: Multi-branding refers to the practice of combining two or more brand concepts in one restaurant. Multi-branding provides customers with greater selection and convenience and enables QSR operators to combine several brand offerings at the same location to take advantage of synergies such as shared real estate, reduced construction costs as a result of the use of a single building for two concepts instead of two buildings and higher sales volumes. These synergies allow QSR operators to develop profitable locations within smaller trade zones, while further developing multiple brands and enabling emerging brands to capitalize on established brand equity. ) Brand Equity: The top 50 foodservice chains in Canada generated sales of $17.8 billion in 2004, representing approximately 54% of total Canadian restaurant sales. Historically, growth in revenues of chain restaurants has been driven by increased personal income, favourable demographics and increased market share as a result of the brand strength that many of the chain restaurants have developed through their use of marketing programs and product innovations. 5

13 Overview of Initial Properties The Initial Properties consist of 190 properties located in seven provinces across Canada. The rental revenue is derived from 17 separate leases, of which 10 are with KIT, and seven different tenants. KIT is a tenant at all but one of the Initial Properties and operates KFC TM restaurants (single or multibranded) on these Initial Properties. One of the Initial Properties is leased exclusively to Yum!, which operates a Pizza Hut TM restaurant on this property. In addition, three of the Initial Properties are multi-tenant sites that have tenants in addition to KIT. The lease payments from KIT represent over 99% of the total rental revenue derived from the Initial Properties. The Initial Properties are geographically diversified across Canada and in local markets. Management believes that the geographic diversification of the Initial Properties will reduce the REIT s exposure to regional economic conditions that may affect a particular province or area. Fifty-eight percent (58%) of the leases in respect of the Initial Properties have two extension options of five years each. The average remaining term of the leases is approximately 13 years (excluding the exercise of all extension options). Summary of Initial Properties The following table depicts, by province, the number of properties, average building size, average 2004 sales and average annual rent per property in respect of each of the Initial Properties to be acquired by Scott s REIT upon Closing: Scott s REIT Initial Portfolio Summary Number Average Average Average of Building Size 2004 Sales Annual Rent Properties (sq. ft.) ($) (1) ($) Alberta ********************************************* 12 2,320 1,212,851 58,138 British Columbia ************************************* 6 1,740 1,066,581 51,633 Manitoba******************************************** 8 2,572 1,232,919 63,718 New Brunswick ************************************** 9 1,844 1,026,882 54,697 Nova Scotia ***************************************** 15 2, ,737 43,061 Ontario ********************************************* 73 2,118 1,034,273 61,603 Québec ********************************************* 67 2,427 1,018,138 53,395 Portfolio Average ************************************ 2,237 1,038,039 56,265 Total*********************************************** 190 Notes: (1) KIT sales only. Please refer to Appendix I of this prospectus for a complete listing of the Initial Properties. 6

14 The following chart depicts, by province, the percentage of total annual minimum rent contributed by the Initial Properties: Scott s REIT Annual Minimum Rent by Province (% of Total Annual Minimum Rent) Quebec 33% Ontario 41% Nova Scotia 6% New Brunswick 5% Manitoba 5% Alberta 7% British Columbia 3% Highlights of the Initial Property Leases ) Term: Substantially all of the Initial Properties are leased for 15 years, with the term of such leases being staggered and ending between May 6, 2016 and November 9, In addition, each of the master lease agreements between KIT and Yum! provide for two extension options of five years each. ) Rent Escalation Clauses: Each of the master lease agreements with KIT provide for rent escalations every five years, which should continue to provide Scott s REIT with cash rental revenue growth during the term of such leases. The rent escalations provide Scott s REIT with a CAGR of approximately 1% from 2005 to ) Option to Extend: With respect to the Initial Properties being acquired indirectly by Scott s REIT from Yum!, KIT has the right to extend the related master lease agreements for two further five year periods at prevailing market rates on six months notice prior to the expiration of the initial 15-year term or the first extension, following which there will be no further rights of extension. Should the parties be unable to agree on minimum rent for any extension term, then such rent shall be determined by arbitration. ) Triple-Net Leases: Each master lease agreement with KIT is triple-net and carefree to the landlord. As such, the tenant pays for all taxes, utilities, and insurance premiums applicable to the leased premises and is also responsible for all repairs to the leased premises, including those of a capital or structural nature. The tenant is also responsible for normal day-to-day maintenance, including snow removal, outdoor maintenance and gardening, pest control, painting and decorating and maintenance of parking lots. ) No Assignment: KIT is not permitted to assign, sublet or transfer its interest in any of the master leases without the landlord s consent, which may not be unreasonably withheld, except in respect of 43 of the Initial Properties being acquired indirectly by Scott s REIT from SRI. The master lease agreements for these properties permit the tenant to assign the lease or sublet without the consent of the landlord to (i) an affiliate of the tenant, SRI or Yum!, (ii) a company with which it merges or amalgamates, (iii) a purchaser of the majority of the tenant s business in Ontario, or (iv) a franchisee, licencee or concessionaire carrying on the same business, provided in each case that KIT remains liable for its covenants under the lease. ) Loss or Damage Indemnity: KIT must, during the term of each master lease agreement, indemnify the landlord from any and all liabilities and costs associated with any breach or non-performance, any damage to property or any injury to persons, unless caused by the landlord s negligence. See Initial Properties. Asset and Property Management JBM is the Asset Manager and the Property Manager for Scott s REIT. JBM is controlled by John I. Bitove, Chairman and Chief Executive Officer of SRI and KIT Inc., the general partner of KIT LP. JBM is an affiliate of SRI, which indirectly owns an approximate 39.8% partnership interest in KIT LP. JBM is led by John Bitove, Lilly Di Massimo and Michael Washinushi, each of whom has significant experience in all aspects of real estate asset and property management including: leasing and tenant relations; property acquisitions 7

15 and dispositions; real estate and corporate financing; and development, re-development and construction. John Bitove, Lilly Di Massimo and Michael Washinushi are each directors and/or officers of Trustee Corp. See Management of Scott s REIT Trustees and Conflicts of Interest. Asset Manager Under the terms of the Asset Management Agreement, the Asset Manager is required to provide advisory, development, asset management and administrative services to Scott s REIT and the Operator subject to the overriding supervision and direction of the Trustees and the directors of Trustee Corp. The Asset Manager will implement the risk management and strategic growth strategies of Scott s REIT. In doing so it will seek to achieve and maintain geographic asset diversification, appropriate financial leverage and strong tenant covenants. The REIT s external growth strategy will be driven by acquisitions of QSR and other retail properties, and will include diversification of tenants to include other branded, well-recognized QSR and retail operators. Duties The duties under the Asset Management Agreement include: providing and operating the REIT s head office; managing day-to-day operations of Scott s REIT; preparing or overseeing the preparation of annual budgets and business plans for presentation to the Trustees for approval and monitoring the REIT s financial performance; maintaining the books and financial records of Scott s REIT and the Operator and preparing reports and other disclosure documents for Trustees and Unitholders; advising the Trustees on strategic matters relating to the REIT s properties, potential acquisitions, dispositions and development and Unit value maximization; identifying, structuring and negotiating acquisition, disposition, financing and other transactions and managing due diligence in connection therewith; providing advice and assistance in connection with the REIT s and the Operator s borrowings, raising of capital and issuance of securities, including representing Scott s REIT and the Operator in their dealings with banks and other lenders, investment dealers, institutions and investors; and managing the REIT s investor relations and regulatory compliance activities. Fees Scott s LP will pay the following fees to the Asset Manager: (a) (b) a base fee equal to 0.25% per annum of the Gross Book Value, calculated and payable quarterly; and an incentive fee for each fiscal year of Scott s REIT equal to 15% of the REIT s Distributable Income per Unit in excess of $0.85 per Unit, multiplied by the number of Units outstanding. With respect to development projects, a development fee will be payable to the Asset Manager equal to 4% of gross costs of the applicable development project, or as otherwise agreed by the independent directors of Trustee Corp. and the Asset Manager. If an incentive fee is payable to the Asset Manager, the payment of this incentive fee will effectively reduce the percentage of Distributable Income that is available for distribution to Unitholders. Term and Termination The appointment of JBM as Asset Manager is, unless terminated in accordance with the terms of the Asset Management Agreement, for a term of three years. The Asset Management Agreement will automatically renew every three years for successive three year terms, unless terminated in accordance with its terms. Scott s REIT and the Operator have the right to terminate the Asset Management Agreement for cause, and may also terminate the Asset Management Agreement without cause upon payment to JBM of an amount equal to the forecasted base fee, the development fee and the incentive fee for a period of 36 months, based on the then current three-year strategic plan of the REIT approved by the Trustees. The Asset Management Agreement will be deemed to have been terminated without cause in the event of a change of control, as defined in the Asset Management Agreement, of Scott s REIT or the Operator. In addition, JBM shall also be entitled to terminate the Asset Management Agreement for cause. If JBM terminates the Asset Management Agreement for cause, or the Asset Management Agreement is not renewed by the REIT, then JBM is entitled to be paid an amount equal to the forecasted base fee, the development fee and the incentive fee for a period of 36 months. 8

16 Payments by Asset Manager Pursuant to the Asset Management Agreement, the Asset Manager is responsible for all employment expenses of its personnel, rent and other office expenses and miscellaneous administrative expenses relating to its functions under the Asset Management Agreement. See Asset and Property Management. Property Manager In its capacity as Property Manager, JBM will administer the day-to-day property and leasing operations of the REIT s properties. The Property Manager will provide finance/accounting, marketing, information systems, human resources and operational support of its property management responsibilities. Duties The duties of the Property Manager under the Property Management Agreement will include: management of the REIT s properties, including inspection of the properties, negotiating contracts, ensuring reasonable security, handling tenant requests and negotiations, arranging for such improvements and repairs as may be required by Scott s REIT or the Operator and the purchase of all materials and services in connection therewith at the cost of the Operator (to the extent these costs are not recovered from the tenant), and incurring such operating expenses as the Property Manager deems necessary in connection therewith, all in accordance with an approved budget; the collection of all rents and other charges and payments of costs and expenses related to the management of the properties; preparing leasing plans; and the supervision and conduct of all leasing operations, including negotiating and executing leases in accordance with an approved leasing plan. Fees The Property Management Agreement provides for payment of an annual property management fee to the Property Manager in an amount equal to 2.5% of the rental revenue of the properties under management, which will be calculated and payable monthly. Term and Termination The appointment of JBM as Property Manager is, unless terminated in accordance with the terms of the Property Management Agreement, for a term of three years. The Property Management Agreement will automatically renew every three years for successive three year terms, unless terminated in accordance with its terms. Scott s REIT and the Operator have the right to terminate the Property Management Agreement for cause, and may also terminate the Property Management Agreement without cause upon payment to JBM of an amount equal to the forecasted property management fee for a period of 36 months, based on the then current three-year strategic plan of the REIT approved by the Trustees. The Property Management Agreement will be deemed to have been terminated without cause in the event of a change of control, as defined in the Property Management Agreement, of Scott s REIT or the Operator. In addition, JBM shall also be entitled to terminate the Property Management Agreement for cause. If JBM terminates the Property Management Agreement for cause, or the Property Management Agreement is not renewed by the REIT, then JBM is entitled to be paid an amount equal to the property management fee for a period of 36 months. Payments by Property Manager Pursuant to the Property Management Agreement, the Property Manager is responsible for all employment expenses of its personnel, rent and other office expenses and miscellaneous administrative expenses relating to its functions under the Property Management Agreement. See Asset and Property Management. The REIT s Debt Strategy Scott s REIT will, on a consolidated basis, seek to maintain debt maturities that are appropriate for the overall debt level of its portfolio, taking into account availability of financing and market conditions and the financial characteristics of each property. Under the Declaration of Trust, Scott s REIT may not incur or assume any indebtedness, or allow its subsidiaries to incur or assume any indebtedness, if, after giving effect to the incurring or assumption of such indebtedness, the total consolidated indebtedness of Scott s REIT would be more than 55% of the Gross Book Value of its consolidated assets. 9

17 Immediately following completion of the acquisition of the Initial Properties, the total consolidated indebtedness of Scott s REIT will be approximately 50% of Gross Book Value. Scott s REIT currently intends to maintain its overall consolidated indebtedness in the range of 50% to 55% of Gross Book Value, depending upon future acquisition and financing opportunities. Interest rates and debt maturities will be reviewed regularly by the Trustees to ensure that appropriate debt management strategies are implemented. Scott s LP intends to enter into a mortgage loan (the Mortgage ) with Computershare Trust Company of Canada (the Lender ) in connection with the acquisition of the Initial Properties. The Mortgage will consist of a loan in the principal amount of $65 million, and will be secured by the assets of Scott s LP, including a first priority freehold mortgage on the Initial Properties. The term of the Mortgage will be five years, and interest only will be payable monthly. The full principal amount of the Mortgage will be due on the maturity date. The Mortgage will bear interest at a blended fixed rate, which will be equal to a 130 basis points spread over the Government of Canada benchmark bond that most closely approximates the five-year term of the Mortgage, as determined by the Lender and as fixed prior to the advancement of the Mortgage. See Debt Strategy. In connection with the purchase of the SRI Initial Properties, Scott s LP will issue to SRI an unsecured promissory note in the amount of $578,085 (the SRI Promissory Note ). Interest will accrue on amounts outstanding under the SRI Promissory Note at the rate of 4.90% per annum. The principal and cumulative accrued interest under the SRI Promissory Note can be repaid at any time but become due and payable on the date that is five years after the Closing Date. Scott s LP will not pay accrued interest on the SRI Promissory Note for any year prior to maturity unless distributions totaling at least $0.85 per Unit for such year have been paid. Summary of Independent Appraisals and Environmental Reports Independent Appraisals Scott s REIT retained Altus Helyar, a division of Altus Group Limited, an independent multidisciplinary provider of real estate consulting and advisory services and experts in the appraisal of retail real estate, to provide independent appraisals (the Appraisals ) of the market value of the Initial Properties to be acquired by the Operator. The Appraisals were prepared in conformity with the Canadian Uniform Standards of the Appraisal Institute of Canada. The Initial Properties have been appraised by Altus Helyar to have an aggregate market value of $130,730,000 which implies a capitalization rate of 8.2% before allowance for a 2.5% management fee (or 8.0% after allowance for a 2.5% management fee on forecasted rental revenue received for the twelve-month period ending August 31, 2006). The Initial Properties are being purchased by Scott s LP for a total price of $130,730,000. Management estimates that the rates on the existing property leases approximate current market rates, and that the extent to which certain leases are slightly above market is offset by those which are slightly below market. Further analysis of each appraisal is required by management to ensure that they have fully identified all situations where the actual rents differ from the market rent and that those differences are not due to factors unrelated to changes in market conditions from the dates when the leases were signed. Management intends to complete this analysis in the period immediately following the Closing. Environmental Reports Each of the Initial Properties has been the subject of a Phase I environmental site assessment report ( Phase I ESA Report ) conducted by Jacques Whitford Limited ( JWL ), Golder Associates Ltd. ( Golder ) or SEACOR Environmental Inc. ( SEACOR ). JWL, Golder and SEACOR are professional consulting engineering firms with extensive experience in environmental services. The objective in performing a Phase I environmental site assessment is to characterize the types and locations of potential or actual environmental concerns at the property in question. The assessments were carried out in general accordance with the current Canadian Standards Association standard for Phase I environmental site assessments. Intrusive sampling (soil, air, groundwater and building materials) and analysis were not part of these assessments. JWL conducted Phase I environmental site assessments at 99 of the Initial Properties, Golder at 12 and SEACOR at 79. Based on the assessments, JWL, Golder or SEACOR, as applicable, concluded that of the 190 Initial Properties on which such Phase I assessments were performed, 111 such properties did not have environmental concerns which warranted a Phase II environmental site assessment. Based on the Phase I ESA Reports, Phase II environmental site assessments involving intrusive soil and/or groundwater sampling were recommended at 79 of the Initial Properties. These Phase II assessments are designed to 10

18 further investigate and characterize, through sampling and chemical testing of soil and/or groundwater, the issues of potential or actual environmental concern identified in the Phase I ESA Reports. Such Phase II environmental site assessments have been completed by Golder, SEACOR and another professional consulting firm with extensive experience in environmental services, XCG Consultants Ltd. ( XCG ). A Phase II environmental site assessment report ( Phase II ESA Report ) has been prepared for each of such 79 Initial Properties. Fifty-five of the Phase II environmental site assessments were conducted by Golder, 18 were conducted by SEACOR and 6 were conducted by XCG. Based on the results of the soil and/or groundwater sampling, as set out in the Phase II ESA Reports, XCG, Golder, or SEACOR, as applicable, have not identified soil or groundwater contamination that would require remediation, or warrant additional investigation, relative to applied standards/criteria at 75 of the 79 Initial Properties. Of the 79 Initial Properties at which Phase II environmental site assessments were conducted, the Phase II ESA Reports for four of these Initial Properties identified localized on-site petroleum hydrocarbon contamination in the soil that would require remediation, or warrant additional investigation, relative to applied standards/criteria. Management, after consultation with SEACOR and XCG, as applicable, has estimated that the aggregate cost to remediate the on-site petroleum hydrocarbon contamination at these four Initial Properties will be approximately $500,000. Under the terms of the SRI Purchase Agreement, SRI has agreed that it will, at its cost and expense, remediate these four Initial Properties, and that it will complete this remediation no later than 24 months following the date of Closing. Scott s LP will retain a holdback of $500,000 from the purchase price payable to SRI for these four Initial Properties in connection with such remediation obligations. Scott s LP will also receive an indemnity from SRI in respect of any losses suffered by Scott s LP or the REIT relating to certain environmental matters, including the on-site petroleum hydrocarbon contamination at these four Initial Properties. Retained Interest Following the completion of the purchase of the Initial Properties, SRI will indirectly hold an approximate 31.1% interest in Scott s REIT through the ownership of Class B LP Units. Each Class B LP Unit will be indirectly exchangeable at the option of the holder for one Unit of Scott s REIT, will be accompanied by one Special Voting Unit of Scott s REIT (which provides for the same voting rights in Scott s REIT as a Unit) and will be entitled to distributions of cash from Scott s LP equal to the distributions that will be paid by Scott s REIT on each Unit. The proceeds received by Scott s REIT on the exercise of the Over-Allotment Option, if exercised, will be used to increase the REIT s indirect interest in Scott s LP. Scott s LP will then use such proceeds to redeem a proportionate number of the Class B LP Units issued to SRI. Exercise of the Over-Allotment Option in full will reduce SRI s retained interest to 26.1%. Tax Deferral Management of Scott s REIT estimates that a portion of the monthly cash distributions to be made by Scott s REIT to Unitholders in 2006 will be characterized as non-taxable amounts by reason of Scott s LP s ability to claim capital cost allowance and certain other deductions. Based on current assumptions and considerations set forth in this prospectus, management anticipates that approximately 32% of the 2006 cash distributions of Scott s REIT will be taxable to Unitholders as ordinary income for Canadian tax purposes, and that the remaining 68% of such cash distributions will be non-taxable returns of capital. The adjusted cost base of Units held by a Unitholder will generally be reduced by such non-taxable portion of distributions made to the Unitholder (other than the non-taxable portion of capital gains). A Unitholder will be considered to realize a capital gain to the extent that the adjusted cost base of the Unitholder s Units would otherwise be a negative amount, even though the Unitholder has not sold any Units. 11

19 Financial Forecast The financial forecast information set forth below is excerpted from the Financial Forecast prepared by JBM, the Asset Manager and Property Manager, on behalf of Scott s REIT and reported upon by PricewaterhouseCoopers LLP, Chartered Accountants, using assumptions with an effective date of September 1, These assumptions reflect JBM s intended course of action for Scott s REIT, given JBM s judgment as to the most probable set of economic conditions. The assumptions used in the preparation of the forecast, although considered reasonable by JBM at the time of preparation, may prove to be incorrect. The actual results achieved for the Forecast Period will vary from the forecast results and the variations may be material. There is no representation by Scott s REIT that actual results achieved during the Forecast Period will be the same in whole or in part as those forecast. Important factors that could cause actual results to vary materially from the consolidated forecast are disclosed under Risk Factors. The financial forecast information should be read in conjunction with the Financial Forecast set out in this prospectus, as well as in conjunction with the audited opening balance sheet of Scott s REIT, the audited financial statements of the Initial Properties and the unaudited pro forma consolidated financial statements of Scott s REIT contained elsewhere in this prospectus. See Index to Financial Statements. Statement of Distributable Income (1)(2) Twelve-month period ending August 31, 2006 Rental revenue Rental revenue received********************************************************* $10,690,390 Straight-line revenue accrual***************************************************** 627,257 $11,317,647 Expenses Amortization****************************************************************** $ 4,892,869 Operating expenses ************************************************************ 404,243 Interest expense *************************************************************** 3,213,326 General and Administrative****************************************************** 934,474 $ 9,444,912 Income before non-controlling interest********************************************* $ 1,872,735 Add: Amortization****************************************************************** $ 4,892,869 Interest on SRI Promissory Note (2) ************************************************ 28,326 Less: Straight-line revenue accrual***************************************************** $ (627,257) Distributable Income (3) ********************************************************** $ 6,166,673 Distributable Income per Unit (4) ************************************************** $ 0.85 Notes: (1) See Financial Forecast for detailed assumptions. (2) Interest on the SRI Promissory Note will accrue at the rate of 4.90% per annum. The principal and cumulative interest can be repaid at any time but become due and payable on the date that is five years after the Closing Date. Scott s LP will not pay accrued interest on the SRI Promissory Note for any year prior to maturity unless distributions totalling at least $0.85 per Unit for such year have been paid. (3) Distributable Income is not a measure recognized under GAAP and does not have a standardized meaning prescribed by GAAP. Distributable Income is presented in this prospectus because management of Scott s REIT and the Operator believe this non-gaap measure is a relevant measure of the ability of the Operator and Scott s REIT to earn and distribute cash returns to Unitholders. Distributable Income as computed by the Operator and Scott s REIT may differ from similar computations as reported by other similar organizations and, accordingly, may not be comparable to distributable income as reported by such organizations. Distributable Income is defined as income before non-controlling interest of Scott s REIT on a consolidated basis as determined in accordance with GAAP, subject to certain adjustments as set out in the Declaration of Trust. For a complete description of Distributable Income see Distribution Policy Computation of Distributable Income. (4) Assumes the conversion of all Class B LP Units into Units on a one-for-one basis. 12

20 THE OFFERING Issue: 5,000,000 Units. Amount: $50,000,000. Price: $10.00 per Unit. Unit Attributes: Each Unit represents an equal undivided beneficial interest in Scott s REIT and in any distributions from Scott s REIT. Each Unit is transferable and carries the right to one vote at meetings of Unitholders. See Scott s REIT Declaration of Trust and Description of Units. Yield: Scott s REIT intends to make stable monthly cash distributions, which are expected to be approximately $ per Unit per month in the first year, (approximately 100% of Distributable Income, on an annualized basis including distributions payable on the Class B LP Units) thereby providing an initial annualized yield of approximately 8.5%. Over-Allotment Option: Scott s REIT has granted to the Underwriters an option, exercisable for a period of 30 days from Closing, to purchase up to a total of 364,953 additional Units (being 7.3% of the Units offered hereunder) at the offering price to cover over-allotments, if any, and for market stabilization purposes. The proceeds received by Scott s REIT on the exercise of the Over-Allotment Option, if exercised, will be used to increase the REIT s indirect interest in Scott s LP. Scott s LP will then use such proceeds to redeem a proportionate number of the Class B LP Units issued to SRI. Exercise of the Over-Allotment Option in full will reduce SRI s retained interest in Scott s REIT to 26.1%. See Retained Interest and Exchange Rights, Principal Unitholder, Plan of Distribution and Use of Proceeds. Use of Proceeds: The estimated net proceeds of the Offering, after deducting the Underwriters fee and the expenses of the Offering, estimated to be $5,626,932, will be $44,373,068 ($47,803,626 if the Over-Allotment Option is exercised in full). Scott s REIT will use the proceeds of the Offering to indirectly invest in Scott s LP, which will in turn use the proceeds, together with the net amount of $64,197,500 drawn under the Mortgage, the issuance of the SRI Promissory Note and the issuance of Class B LP Units, to pay the expenses of the Offering and to acquire the Initial Properties. See Use of Proceeds. Distribution Policy: Scott s REIT intends to make stable monthly cash distributions, which are expected to be approximately $ per Unit per month in the first year, (approximately 100% of Distributable Income, on an annualized basis including distributions payable on the Class B LP Units) calculated as described under Distribution Policy. If in the future an incentive fee becomes payable to the Asset Manager in accordance with the provisions of the Asset Management Agreement, or if interest is paid under the SRI Promissory Note, the payment of these amounts will effectively reduce the percentage of Distributable Income that is available for distribution to Unitholders. Cash distributions will be declared payable on a monthly basis to Unitholders of record on the last Business Day of each month, and will be paid within 15 days following each month end. See Distribution Policy. The initial cash distribution for the period from Closing to November 30, 2005 will be paid on December 15, 2005, and is estimated to be approximately $ per Unit. Retained Interest: Following the completion of the purchase of the Initial Properties, SRI will indirectly hold an approximate 31.1% interest in Scott s REIT through the 13

21 Governance of Scott s REIT: Risk Factors: ownership of Class B LP Units. Each Class B LP Unit will be indirectly exchangeable at the option of the holder for one Unit of Scott s REIT, will be accompanied by one Special Voting Unit of Scott s REIT (which provides for the same voting rights in Scott s REIT as a Unit) and will be entitled to distributions of cash equal to the distributions on each Unit. Exercise of the Over-Allotment Option in full will reduce SRI s retained interest in Scott s REIT to 26.1%. The Trustees will be directly responsible for developing the REIT s approach to governance issues. The Trustees will also be responsible for adopting and periodically reviewing and updating the REIT s written disclosure policy. See Management of Scott s REIT Governance of Scott s REIT. An investment in Units is subject to a number of risk factors that potential investors should carefully consider, including, among other things: risks associated with real property ownership and illiquidity; competition; concentration of tenants; financing; conflicts of interest; reliance on key personnel; general uninsured losses; liability and insurance; acquisition and development; environmental matters; tenant risks; limits on activities of Scott s REIT; the ability to make distributions; financial forecast; potential volatility of Unit prices; tax related factors; dilution; absence of a public market and determination of an offering price; and availability of cash flow. Scott s REIT relies principally upon KIT for its revenue and, as such, is subject to certain additional risks, including: the potential for the REIT s cash flow to be negatively affected if KIT s business or financial condition is materially adversely affected; the competitive nature of the QSR industry; risks associated with government regulation; and potential litigation, class actions and other complaints. See Risk Factors. 14

22 ORGANIZATIONAL CHART The following chart sets out the organizational structure of Scott s REIT that will exist at Closing. Public Units Scott s REIT (Ontario) Special Voting Units 100% of Trust Units and Series 1 Notes Scott s Restaurants Inc. SR Operating Trust (Ontario) 100% Ontario Inc. (Ontario) JBM Properties Inc. (Asset and Property Manager) Class B Scott s LP Units (1) (31.1% Retained Interest) 100% Class A LP Units (68.9% Interest) Scott s Real Estate Limited Partnership (Manitoba) General Partner 0.001% 100% Scott s GP Trust (Ontario) 100% Beneficial Interest Sole Trustee 100% Scott s Trustee Corp. (Ontario) CRI Realty (No. 3) Inc. (Ontario) Property Portfolio Colonel s Realty Inc. (Ontario) Note: (1) Indirectly exchangeable for Units of Scott s REIT on a one-for-one basis and accompanied by Special Voting Units. 15

23 BUSINESS OF SCOTT S REIT Overview of Scott s REIT Scott s REIT is an unincorporated open-ended real estate investment trust established under the laws of the Province of Ontario. Scott s REIT has been created to indirectly acquire and control Scott s LP. Scott s LP will, in turn, acquire the Initial Properties from Yum! and SRI. Upon completion of the acquisition by Scott s REIT of the Initial Properties, SRI will indirectly hold an approximate 31.1% interest in Scott s REIT through ownership of Class B LP Units (which are economically equivalent to and exchangeable for Units). Scott s REIT also intends to acquire additional properties from SRI, from time to time, that are leased to KIT LP, and to actively seek additional opportunities to acquire real estate for the QSR industry and for small box retailers in high traffic locations across Canada and the United States. Scott s REIT will also have a right of first refusal if from time to time SRI chooses to sell some of its other current or future properties. The Initial Properties make up a significant portion of the properties that Yum! and SRI currently own. KIT is a tenant at all but one of the Initial Properties, and operates KFC TM restaurants (single or multibranded) on these Initial Properties. As one of the most recognized brands in the world, KFC TM is the world s largest chicken-onthe-bone QSR chain by number of restaurants. KIT has more than 9,000 employees and serves, on average, approximately 1.5 million customers a week through a network of 481 restaurants that KIT owns and operates in seven provinces across Canada. KIT is owned, directly or indirectly, as to approximately 60.2% by Priszm Canadian Income Fund, a publicly listed income trust, and as to approximately 39.8% by SRI. The Initial Properties consist of 190 retail properties located in seven provinces across Canada. A total of 111 of the Initial Properties will be indirectly acquired by the REIT from Yum!, and a total of 79 of the Initial Properties will be indirectly acquired by the REIT from SRI. Management believes that the geographic diversification of the Initial Properties will reduce the REIT s exposure to regional economic conditions that may affect a particular province or area. KIT leases, in whole or in part, all but one of the Initial Properties pursuant to a total of ten master lease agreements, of which eight are with SRI and two are with Yum!. The average remaining term of the leases is approximately 13 years (excluding the exercise of all extension options). The master lease agreements between Yum! and KIT, which collectively govern a total of 111 (approximately 58%) of the Initial Properties, provide for two extension options of five years each. THE CANADIAN REAL ESTATE MARKET The Canadian Commercial Real Estate Industry The commercial real estate industry in Canada has developed considerably over the last 10 years. During this time, investors have invested more capital in public real estate companies and real estate investment trusts as a vehicle to participate in the ownership of commercial real estate. Further, pension funds have become increasingly interested in investments in the real estate sector. These factors have driven a significant expansion of the real estate portfolios managed by large institutional entities. At the same time, the Canadian real estate development and construction industry has experienced a period of prolonged growth. Trends in the Real Estate Industry In addition to the factors cited above, other positive trends affecting the industry include: ) Concentration of Assets in Institutional Portfolios: Real estate portfolios are growing significantly, which has resulted in increased concentration of the ownership and management of real estate assets with larger, institutional portfolios. Management believes that this trend will continue as pension funds age and seek real estate assets to provide cash flow to meet liabilities coming due. ) Increasing Scarcity of Core Assets: Since a significant amount of real estate assets are now part of institutional holdings, quality assets that become available are subject to increased competition. ) Lower Interest Rates: Recent experience has indicated that governments and central banks have an increased capability to manage and perpetuate a continued low interest rate environment. Sustained low rates combined with less volatile fluctuations in those rates support real estate investment. 16

24 ) Demographics The Aging Boomers: Statistics Canada estimates that the Canadian population over the age of 65 will increase more than 70% over the next 15 years. These investors often favour more stable, yieldoriented and asset-backed securities. ) Lower Cap Rates: Recent experience has shown that increasingly, real estate portfolio owners are using the cashflows from real estate to meet liabilities as they come due rather than investing for potential capital appreciation. As such, these institutional investors, such as pension funds, have relatively low acceptable levels of returns. These lower cap rates are one of the factors driving increased real estate valuations. The following chart demonstrates the downward trend in the mean overall capitalization rate in the Toronto market since % Mean Overall Capitalization Rate Toronto 10.5% Mean Capitalization Rate (%) 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% Tier I Regional Malls Community Malls Neighbourhood Centres / Food Anchored Retail Strips Power Centres 6.0% Source: Lincoln North - PricewaterhouseCoopers Survey up to Q and InSite-Altus Investment Trends Survey from Q to present. THE CANADIAN QUICK SERVICE RESTAURANT INDUSTRY The Canadian commercial foodservice sector is comprised of four major segments based on the type of foodservice provider: full-service restaurants (which includes casual dining, family-midscale dining and fine restaurants), quick service restaurants or QSRs, social and contract caterers, and pubs, taverns and night-clubs. The QSR market is the second largest segment of the Canadian commercial foodservice sector with sales of approximately $14.0 billion in 2004, representing 38.3% of total sector sales. According to the Canadian Restaurant and Foodservices Association, sales in the QSR segment grew at a CAGR of 4.8% between 1999 and QSRs target time and value conscious consumers who want convenient grab and go meals. QSRs are distinguished by the following characteristics: ) Convenience: QSRs offer high speed of service and customer use and generally offer a high level of convenience. It is estimated that a typical customer of a QSR will spend approximately five minutes in the QSR (in the case of a take-out order) and twenty minutes in the QSR (in the case of dining in) from the time of ordering to departure. QSRs are typically located in places that are easy to access and convenient to customers homes, places of work and commuter routes. ) Bundled meals and service: The menus at most QSRs include a number of bundled or combo meals that expedite customer choice and service and enhance individual sale value. ) Value prices: At a QSR, the average customer expenditure for an individual meal is significantly less than the average customer expenditure for a casual dining restaurant. 17

25 Trends in the QSR Industry Positive trends affecting the QSR industry include: ) Lifestyle Trends: The increasing number of both dual-income and single parent households has reduced the amount of time available for families to prepare meals. As a result, families are replacing meals prepared at home with meals purchased from restaurants. QSRs typically offer customers the convenience of a familiar menu, multiple restaurant locations and fast service. The Canadian commercial foodservice sector s share of the total dollars spent on food has increased over the past 19 years at the expense of grocery stores. Management believes that this trend results from the increased propensity of consumers to dine out. ) Increased Convenience: QSRs have enhanced consumer convenience and have increased the frequency of customer visits by expanding their menus, opening more drive-thrus and new points of distribution and offering more coupons and bundled meal deals. According to the Consumer Reports Eating Share Trends ( CREST ) report, prepared by the NPD Foodservice Information Group, which is the foodservice industry standard for the determination of market size, segment patterns and brand share trends, off-premise dining has increased over the last five years as compared to on-premise dining. Also, according to CREST, QSR traffic has outpaced that of casual dining, family-midscale dining and fine dining establishments. In the twelve months ending February 2005, QSRs represented 64% of all consumer eating out occasions, an increase from a 59% share of meal occasions in QSRs have also experienced a similar trend in the share of consumer expenditures. In both cases, QSRs have benefited at the expense of casual dining and familymidscale dining restaurants. ) Multi-Branding: Multi-branding refers to the practice of combining two or more brand concepts in one restaurant. Multi-branding provides customers with greater selection and convenience and enables QSR operators to combine several brand offerings at the same location to take advantage of synergies such as shared real estate, reduced construction costs as a result of the use of a single building for two concepts instead of two buildings and higher sales volumes. These synergies allow QSR operators to develop profitable locations within smaller trade zones, while further developing multiple brands and enabling emerging brands to capitalize on established brand equity. ) Brand Equity: The top 50 foodservice chains in Canada generated sales of $17.8 billion in 2004 representing approximately 54% of total Canadian restaurant sales. Historically, growth in revenues of chain restaurants has been driven by increased personal income, favourable demographics and increased market share as a result of the brand strength that many of the chain restaurants have developed through their use of marketing programs and product innovations. OBJECTIVES AND STRATEGIES OF SCOTT S REIT The objectives of Scott s REIT are: (i) to provide Unitholders with stable monthly cash distributions that are, to the maximum extent possible, tax deferred, through the acquisition of a geographically diversified portfolio of income producing QSR and retail properties across Canada and the United States; (ii) to maximize cash flow and Unit value, while minimizing Unitholder risk; (iii) to expand the asset base of Scott s REIT through the acquisition of additional QSR and retail properties; and (iv) to increase its Distributable Income through on-going active management of the REIT s assets. Scott s REIT plans to achieve its objectives by employing the following strategies: ) Internal Growth: The 15-year master lease agreements with KIT (being comprised of two leases between Yum! and KIT and eight leases between SRI and KIT) have rent escalations every five years, with, in the case of the Initial Properties being acquired indirectly by Scott s REIT from Yum!, two five-year extension options, which should continue to provide Scott s REIT with cash rental revenue growth during the term of such leases. ) Growth Related to Relationship with KIT: SRI holds a significant interest in KIT and will, indirectly through its retained interest in Scott s LP, hold an approximate 31.1% interest in Scott s REIT (or 26.1% if the Over- Allotment Option is exercised in full). If SRI chooses to sell any of its other properties that do not form part of the Initial Properties, Scott s REIT has a right of first refusal to purchase such properties from SRI. Accordingly, as KIT s business grows there may be an opportunity for Scott s REIT to expand its asset base. 18

26 ) Growth Through Acquisitions: Following the acquisition of the Initial Properties, Scott s REIT intends to expand the asset base of Scott s REIT and increase Distributable Income by pursuing an external growth strategy. This strategy will emphasize diversity of geographic location and will include diversification of tenants to include other branded, well-recognized QSR and retail operators. Scott s REIT will pursue investments in attractive markets across Canada and the United States and intends to acquire properties in both large and small rural and non-rural centres. Management of Scott s REIT believes that an important part of the REIT s growth will also be achieved through: ) the acquisition/development of properties or vacant land which can be leased out; ) the acquisition of existing land or properties from established QSR franchisees; and ) developing relationships with other QSR franchisors. Scott s REIT intends to identify potential property acquisitions using an investment criteria that focuses primarily on return on equity, security of cash flow, potential for capital appreciation and the potential to increase value by more efficient management of the assets being acquired, including accessing capital for expansion and development of those assets, which access might not otherwise be available to competitors and other property owners. Financing of Acquisitions Scott s REIT intends to finance any future acquisitions of QSR properties from SRI or third parties by means of: (i) issuing additional Units or Class B LP Units to SRI or third parties, as the case may be, as consideration for properties acquired; (ii) providing SRI or third parties, as the case may be, with vendor take-back mortgages; (iii) utilizing cash held in the REIT s reserves; (iv) additional equity offerings; or (v) a combination of one or more of the above. Risk Management Management believes that the REIT s ability to deliver stable and increasing cash distributions to Unitholders in the future will be enhanced by the following risk management strategies: ) Geographically Diversified Portfolio: In order to mitigate market risks, the portfolio of Initial Properties to be acquired by Scott s REIT will be geographically diversified across Canada and in local markets. In addition, the REIT s acquisition strategy includes diversification of tenants to include other branded, wellrecognized QSR and retail operators. ) Acquisition Procedures: For each property acquisition, Scott s REIT is required to obtain independent appraisal and environmental site assessment reports, and each acquisition is to be approved by the independent Governance, Compensation and Investment Committee. ) Operating Standards and Systems: The experienced management team of JBM brings to Scott s REIT the standards and systems needed to operate and develop QSR properties. Statistical, financial and administrative systems have been developed and are in place for monitoring, analyzing, planning and reporting on all aspects of operations. ) Total Debt Limits: Scott s REIT will be limited to total consolidated debt financing of 55% of Gross Book Value. At Closing, the total consolidated debt is expected to be approximately 50% of Gross Book Value. ) Governance: Following the Closing, there will be three Trustees, each of whom will be independent. The business of the Operator will be governed by Scott s GP, the general partner of Scott s LP. The trustee of Scott s GP, Trustee Corp., will be governed by a board consisting of five directors, of whom three will be independent (and who will initially be the same individuals as the independent Trustees). At Closing, all the members of the Audit Committee of Scott s REIT, a majority of the directors of Trustee Corp, and all of the members of the Governance, Compensation and Investment Committee of Trustee Corp., will be independent. ) Non-Dilution: Scott s REIT will not issue additional Units unless the Trustees consider such issuances not to be dilutive to ensuing monthly distributions of Distributable Income per Unit to existing Unitholders. 19

27 INVESTMENT HIGHLIGHTS Scott s REIT offers Unitholders: ) Attractive, Stable Yield: Scott s REIT intends to make stable monthly cash distributions, which are expected to be approximately $ per Unit per month in the first year (approximately 100% of Distributable Income, on an annualized basis including distributions payable on the Class B LP Units), thereby providing an initial annualized yield of approximately 8.5% (see Financial Forecast and Distribution Policy ). ) High Occupancy Rate: Each of the Initial Properties has a tenant, and over 99% of the leasable area of the Initial Properties is currently leased. ) Geographically Diversified Portfolio: The Initial Properties are geographically diversified across Canada and in local markets. This diversification reduces the REIT s exposure to regional economic conditions that may affect a particular province or area. ) Rent Escalation Clauses: Each of the master lease agreements with KIT provide for rent escalations every five years, which should continue to provide Scott s REIT with cash rental revenue growth during the term of such leases. The rent escalations provide Scott s REIT with a CAGR of approximately 1% from 2005 to ) Triple-Net Leases: Each of the master lease agreements with KIT is triple-net and carefree to the landlord. As such, KIT pays for all taxes, utilities, and insurance premiums applicable to the premises leased by it, and is also responsible for all repairs to the leased premises, including those of a capital or structural nature. KIT is also responsible for normal day-to-day maintenance, including snow removal, outdoor maintenance and gardening, pest control, painting and decorating and maintenance of parking lots. ) Upside in Residual Real Estate Value: Management believes that the strength of the Initial Property locations provides Scott s REIT with upside potential upon maturity of the leases. ) Well-Maintained Portfolio: KIT recently announced that its board of directors has approved a five-year, $92 million capital growth plan to redevelop its existing asset portfolio over and above authorizing the satisfaction of maintenance obligations under the existing master lease agreements. KIT is also required to periodically upgrade and renovate its KFC TM restaurants pursuant to the terms of its related franchise agreements. ) Strong Tenant: KIT is a tenant at all but one of the Initial Properties, and operates KFC TM restaurants (single or multibranded) on these Initial Properties. KFC TM is one of the most recognized brands in the world. Key competitive advantages of the KFC TM concept include proprietary recipes and the Colonel TM, who ranks as one of the best-known commercial icons of all time. KIT s large scale operations over a broad geographic area in Canada give it a significant advantage over other smaller franchise concepts, including (i) significant cash flow, (ii) access to capital, (iii) protection against regional economic downturns, and (iv) the ability to spread its costs over a larger system. KIT s total revenues and net income for the fiscal year 2004 and the 12-month period ending June 12, 2005 are illustrated below: Revenues and Net Income (1) $500 $450 $474 $477 ($ millions) $400 $350 $300 $250 $200 $150 $100 Revenues Net Income $50 $0 $22.19 $ months ending June 12,

28 Note: (1) Revenues and net income are for all KFC TM restaurants operated by KIT for the periods indicated, and do not reflect results solely at the Initial Properties. INITIAL PROPERTIES Description of Initial Properties The Initial Properties consist of 190 properties located in seven provinces across Canada. The rental revenue is derived from 17 separate leases, of which 10 are with KIT, and seven different tenants. KIT is a tenant at all but one of the Initial Properties, and operates KFC TM restaurants (single or multibranded) on these Initial Properties. One of the Initial Properties is leased exclusively to Yum!, which operates a Pizza Hut TM restaurant on this property. In addition, three of the Initial Properties are multi-tenant sites that have tenants in addition to KIT. The lease payments from KIT represent over 99% of the total rental revenue derived from the Initial Properties. The Initial Properties are geographically diversified across Canada and in local markets. Management believes that the geographic diversification of the Initial Properties will reduce the REIT s exposure to regional economic conditions that may affect a particular province or area. Two of the master leases in respect of the Initial Properties (covering 111, or approximately 58%, of the Initial Properties) have two extension options of five years each. The average remaining term of the leases is approximately 13 years (excluding the exercise of all extension options). Summary of the Initial Properties The following table depicts, by province, the number of properties, average building size, average 2004 sales and average annual rent per property in respect of each of the Initial Properties to be acquired by Scott s REIT upon Closing: Scott s REIT Initial Portfolio Summary Number Average Average Average of Building Size 2004 Sales Annual Rent Properties (sq. ft.) ($) (1) ($) Alberta ********************************************* 12 2,320 1,212,851 58,138 British Columbia ************************************* 6 1,740 1,066,581 51,633 Manitoba******************************************** 8 2,572 1,232,919 63,718 New Brunswick ************************************** 9 1,844 1,026,882 54,697 Nova Scotia ***************************************** 15 2, ,737 43,061 Ontario ********************************************* 73 2,118 1,034,273 61,603 Québec ********************************************* 67 2,427 1,018,138 53,395 Portfolio Average ************************************ 2,237 1,038,039 56,265 Total*********************************************** 190 Note: (1) KIT sales only. Please refer to Appendix I of this prospectus for a complete listing of the Initial Properties. Highlights of the Initial Property Leases ) Term: Substantially all of the Initial Properties are leased for 15 years, with the term of such leases being staggered and ending between May 6, 2016 and November 9, In addition, each of the master lease agreements between KIT and Yum! provide for two extension options of five years each. ) Rent Escalation Clauses: Each of the master lease agreements with KIT provide for rent escalations every five years, which should continue to provide Scott s REIT with cash rental revenue growth during the term of such leases. The rent escalations provide Scott s REIT with a CAGR of approximately 1% from 2005 to ) Option to Extend: With respect to the Initial Properties being acquired indirectly by Scott s REIT from Yum!, KIT has the right to extend the related master lease agreements for two further five year periods at 21

29 prevailing market rates on six months notice prior to the expiration of the initial 15-year term or the first extension, following which there will be no further rights of extension. Should the parties be unable to agree on minimum rent for any extension term, then such rent shall be determined by arbitration. ) Option to Purchase: With respect to 36 of the Initial Properties being acquired indirectly by Scott s REIT from SRI, the related master lease agreement with KIT provide that the tenant has the option to purchase the properties at the end of the term of the leases for their fair market value. ) Triple-Net Leases: Each master lease agreement with KIT is triple-net and carefree to the landlord. As such, the tenant pays for all taxes, utilities, and insurance premiums applicable to the leased premises. The tenant is responsible for all repairs to the leased premises, including those of a capital or structural nature. The tenant is also responsible for normal day-to-day maintenance, including snow removal, outdoor maintenance and gardening, pest control, painting and decorating and maintenance of parking lots. The tenant must obtain the landlord s prior written consent for any repairs, alterations, replacements or improvements to the structure, sprinkler system, HVAC, plumbing, electrical or mechanical equipment. If the landlord must undertake any required repairs, a 15% overhead supervision fee allowance is added to the costs. ) Continuous Operation: Each master lease agreement with KIT provides that so long as the tenant is KIT and the use of the leased premises remains unchanged from the commencement date of the lease, the tenant is not required to continuously operate its business on the leased premises, provided that the tenant remains bound by all other terms and conditions under the lease. ) No Assignment: KIT is not permitted to assign, sublet or transfer its interest in any of the master leases without the landlord s consent, which may not be unreasonably withheld, except in respect of 43 of the Initial Properties being acquired indirectly by Scott s REIT from SRI. The master lease agreements for these properties permit the tenant to assign the lease or sublet without the consent of the landlord to (i) an affiliate of the tenant, SRI or Yum!, (ii) a company with which it merges or amalgamates, (iii) a purchaser of the majority of the tenant s business in Ontario, or (iv) a franchisee, licencee or concessionaire carrying on the same business, provided in each case that KIT remains liable for its covenants under the lease. ) Loss or Damage Indemnity: KIT must, during the term of each master lease agreement, indemnify the landlord from any and all liabilities and costs associated with any breach or non-performance, any damage to property or any injury to persons, unless caused by the landlord s negligence. 22

30 Geographic Distribution of Initial Properties The following charts show, on a percentage basis, the total leasable area and annual minimum rent by province for the Initial Properties: Scott s REIT Scott s REIT Total Leasable Area Annual Minimum Rent By Province By Province (% of Total Square Footage of all Initial Properties) (% of Total Annual Minimum Rent) Quebec 38% Ontario 36% Quebec 33% Ontario 41% Nova Scotia 8% New Brunswick 4% Manitoba 5% British Columbia 2% Alberta 7% Nova Scotia 6% New Brunswick 5% Manitoba 5% British Columbia 3% Alberta 7% The following chart shows, on a percentage basis, the distribution of the Initial Properties by urban and non-urban location: Scott s REIT Property Distribution Urban (>100k pop.) 40% Non-urban (<100k pop.) 60% The following map indicates the location of the Initial Properties across Canada: Scott s REIT Location of Initial Properties British Columbia 6 Alberta 12 Manitoba 8 Manitoba 8 Ontario 8273 Quebec 7367 NB 9 Nova Scotia 15 New Brunswick 9 23

31 OVERVIEW OF THE BUSINESS OF KIT KIT is the most significant tenant of Scott s REIT, and therefore to the extent that KIT s business is materially adversely affected, the business and cash flow of Scott s REIT may in turn be negatively affected. KIT is one of the largest franchisees of KFC TM in the world by number of restaurants and the largest operator of the KFC TM concept in Canada, with sales that account for approximately 70% of all KFC TM product sales in Canada. The KFC TM brand was introduced in Canada in the 1950 s when it became the country s first QSR franchise chain. As one of the most recognized brands in the world, KFC TM is the world s largest chicken-on-the-bone QSR chain by number of restaurants. KIT has more than 9,000 employees and serves, on average, approximately 1.5 million customers a week through a network of 481 restaurants that it owns and operates in seven provinces across Canada. A total of 419 of KIT s restaurants are single-brand, KFC TM restaurants. The remaining 62 restaurants are multibrand locations that combine a KFC TM host restaurant with one or more of the Pizza Hut TM, Taco Bell TM or Long John Silver s TM concepts. KFC TM was founded in Corbin, Kentucky by Colonel Harland D. Sanders, an early developer of the QSR business and a pioneer of the restaurant franchise concept. The Colonel perfected his secret blend of 11 herbs and spices for Kentucky Fried Chicken in 1939 and signed up his first franchisee in KFC TM is based in Louisville, Kentucky. As of fiscal year-end 2004, KFC TM was the leader in the Canadian QSR segment among restaurants serving chicken. KFC TM operates approximately 12,300 restaurants in 88 countries and territories. The ownership distribution of the properties leased by KIT as at May 31, 2005 was as follows: Property Ownership KIT Restaurants May 31, 2005 Yum 136 Third Parties 259 SRI 86 Strategy KIT has publicly disclosed that it focuses on the following strategies: ) Same Restaurant Sales and Profit Growth KIT s strategy to increase same restaurant sales growth and profitability includes a combination of focused advertising, new product introductions, continued training and improved execution through its proprietary customer training and standards program and operating efficiencies. ) Multi-branding Multi-branding refers to the practice of combining two or more brand concepts in one restaurant. KIT has 62 locations where a host KFC TM restaurant is combined with one or more of the Pizza Hut TM, Taco Bell TM or Long John Silver s TM concepts, and continues to pursue opportunities to multi-brand additional KFC TM restaurants. ) Additional Restaurants KIT may have the opportunity to expand its franchise network by acquiring restaurants from other Canadian franchisees of the KFC TM brand, and building new KFC TM restaurants in select markets in Canada. ) Additional Capital Expenditures KIT recently approved a five-year, $92-million capital growth plan. 24

32 DEBT STRATEGY Scott s REIT will, on a consolidated basis, seek to maintain debt maturities that are appropriate for the overall debt level of its portfolio, taking into account availability of financing and market conditions and the financial characteristics of each property. Under the Declaration of Trust, Scott s REIT may not incur or assume any indebtedness, or allow its subsidiaries to incur or assume any indebtedness, if, after giving effect to the incurring or assumption of such indebtedness, the total consolidated indebtedness of Scott s REIT would be more than 55% of the Gross Book Value of its consolidated assets. Immediately following completion of the acquisition of the Initial Properties, the total consolidated indebtedness of Scott s REIT will be approximately 50% of Gross Book Value. Scott s REIT currently intends to maintain its overall consolidated indebtedness in the range of 50% to 55% of Gross Book Value, depending upon future acquisition and financing opportunities. Interest rates and debt maturities will be reviewed regularly by the Trustees to ensure that appropriate debt management strategies are implemented. Mortgages Scott s LP intends to enter into the Mortgage with the Lender in connection with the acquisition of the Initial Properties. The Mortgage will consist of a loan in the principal amount of $65 million, and will be secured by the assets of Scott s LP, including a first priority freehold mortgage on the Initial Properties. The security for the Mortgage will not extend, however, to any subsequently acquired assets or properties of Scott s LP. The term of the Mortgage will be five years, and interest only will be payable monthly. The full principal amount of the Mortgage will be due on the maturity date. The Mortgage will bear interest at a blended fixed rate, which will be equal to a 130 bps spread over the Government of Canada benchmark bond that most closely approximates the five-year term of the Mortgage, as determined by the Lender and as fixed prior to the advancement of the Mortgage. The Mortgage is not, by its terms, renewable, and the inability to refinance the Mortgage upon its becoming due and payable would negatively affect the ability of Scott s REIT to distribute cash to Unitholders. Scott s LP anticipates that the Mortgage documents will contain covenants customary for this type of transaction, which could restrict the ability of Scott s REIT to distribute cash in certain circumstances or upon the occurrence of certain events. The obligations outstanding under the Mortgage will be guaranteed by each of Scott s REIT and the Trust, although these guarantees will not be secured. In addition, Scott s GP Trust, as general partner of Scott s LP, will provide a secured guarantee of the obligations of Scott s LP under the Mortgage. SRI Promissory Note In connection with the purchase of the SRI Initial Properties, Scott s LP will issue to SRI an unsecured promissory note in the amount of $578,085. Interest will accrue on amounts outstanding under the SRI Promissory Note at the rate of 4.90% per annum. The principal and cumulative accrued interest under the SRI Promissory Note can be repaid at any time but become due and payable on the date that is five years after the Closing Date. Scott s LP will not pay accrued interest on the SRI Promissory Note for any year prior to maturity unless distributions totaling at least $0.85 per Unit for such year have been paid. INDEPENDENT APPRAISALS AND REPORTS Independent Appraisals Scott s REIT retained Altus Helyar, a division of Altus Group Limited (the Appraisers ), an independent multidisciplinary provider of real estate consulting and advisory services and experts in the appraisal of retail real estate, to provide independent appraisals (the Appraisals ) of the market value of the Initial Properties to be acquired by the Operator. The Appraisals were prepared in conformity with the Canadian Uniform Standards of the Appraisal Institute of Canada. The Appraisal Institute of Canada defines market value as the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Whenever the definition of market value is employed, or its precise wording is used, the following conditions are always assumed: (i) the buyer and seller are typically motivated; (ii) both parties are well informed or well advised, and acting in what they consider 25

33 their best interests; (iii) a reasonable time is allowed for exposure in the open market; (iv) payment is made in terms of cash in Canadian dollars or financial arrangements comparable thereto; and (v) the sale price paid represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. The Initial Properties have been appraised by the Appraisers to have an aggregate market value of $130,730,000 which implies a capitalization rate of 8.2% before allowance for a 2.5% management fee (or 8.0% after allowance for a 2.5% management fee on forecasted rental revenue received for the twelve-month period ended August 31, 2006). The Initial Properties are being purchased by Scott s LP for a total price of $130,730,000. Management estimates that the rates on the existing property leases approximate current market rates, and that the extent to which certain leases are slightly above market is offset by those which are slightly below market. Further analysis of each appraisal is required by management to ensure that they have fully identified all situations where the actual rents differ from the market rent and that those differences are not due to factors unrelated to changes in market conditions from the dates when the leases were signed. Management intends to complete this analysis in the period immediately following the Closing. The estimated value of each of the properties appraised was determined using the income approach, specifically a direct capitalization method in which the value was estimated by capitalizing the net rental income that the properties can reasonably be expected to produce over their remaining economic life, and was supported by the discounted cash flow method. In determining the approximate market value of the properties appraised, the Appraisers relied on operating and financial data provided by or on behalf of Scott s REIT, which data included current and historic financial information. The Appraisers compared the operation of each property in the portfolio with other comparable restaurant facilities in their respective markets, focussing upon rental rates, capital expenditures and operating expenses. The property management fee for each property was adjusted to reflect an appropriate allowance for a portfolio of this size. A range in overall capitalization rates was applied to each property based on the merits of its location, physical features and investment characteristics in order to estimate a value range for each property. In performing the Appraisals, the Appraisers assumed that the title to the properties appraised was good and marketable, that there were no encumbrances or mortgages other than those, if any, reflected in their report that would affect the value of such properties, that the use of such properties by the existing owners could be continued by a purchaser and that rights of way and other covenants are legally enforceable. In addition, the Appraisers assumed that the existing improvements are structurally sound, that all mechanical systems are properly sized, suited to the improvements and in good working order and that no extraordinary capital improvements are required to the properties. Caution should be exercised in the review and use of these appraisal results. An appraisal is an estimate of market value. It is not a precise measure of value but is based on a subjective comparison of related activity taking place in the real estate market. The Appraisals are partly based upon various assumptions of future expectations and, while the Appraisers forecasts are considered to be reasonable at a particular point in time, some of the assumptions may not materialize or may differ materially from actual experience in the future. The units of a publicly traded real estate investment trust will not necessarily trade at values determined solely by reference to the underlying value of its real estate assets, business operations and other intangible assets. For example, the liquidity offered by public markets and the utilization and nature of debt financing in the capital structure of the entity and its subsidiaries may affect the value at which units of an entity trade. Accordingly, the Units may trade at a premium or a discount to the values implied by the Appraisals. Copies of the Appraisals may be examined during normal business hours at the office of Scott s REIT at 161 Bay Street, Suite 2300, Toronto, Ontario, M5J 2S1. Environmental Reports Each of the Initial Properties has been the subject of a Phase I ESA Report conducted by JWL, Golder or SEACOR. JWL, Golder and SEACOR are professional consulting engineering firms with extensive experience in environmental services. The objective in performing a Phase I environmental site assessment is to characterize the types and locations of potential or actual environmental concerns at the property in question. The assessments were carried out in general accordance with the current Canadian Standards Association standard for Phase I environmental site assessments. Intrusive sampling (soil, air, groundwater and building materials) and analysis were not part of these 26

34 assessments. JWL conducted Phase I environmental site assessments at 99 of the Initial Properties, Golder at 12 and SEACOR at 79. Based on the assessments, JWL, Golder or SEACOR, as applicable, concluded that of the 190 Initial Properties on which such Phase I assessments were performed, 111 such properties did not have environmental concerns which warranted a Phase II environmental site assessment. Based on the Phase I ESA Reports, Phase II environmental site assessments involving intrusive soil and/or groundwater sampling were recommended at 79 of the Initial Properties. These Phase II assessments are designed to further investigate and characterize, through sampling and chemical testing of soil and/or groundwater, the issues of potential or actual environmental concern identified in the Phase I ESA Reports. Such Phase II environmental site assessments have been completed by Golder, SEACOR and another professional consulting firm with extensive experience in environmental services, XCG. A Phase II ESA Report has been prepared for each of such 79 Initial Properties. Fifty-five of the Phase II environmental site assessments were conducted by Golder, 18 were conducted by SEACOR and 6 were conducted by XCG. Based on the results of the soil and/or groundwater sampling, as set out in the Phase II ESA Reports, XCG, Golder or SEACOR, as applicable, have not identified soil or groundwater contamination that would require remediation, or warrant additional investigation, relative to applied standards/criteria at 75 of the 79 Initial Properties. Of the 79 Initial Properties at which Phase II environmental site assessments were conducted, the Phase II ESA Reports for four of these Initial Properties identified localized on-site petroleum hydrocarbon contamination in the soil that would require remediation, or warrant additional investigation, relative to applied standards/criteria. Management, after consultation with SEACOR and XCG, as applicable, has estimated that the aggregate cost to remediate the on-site petroleum hydrocarbon contamination at these four Initial Properties will be approximately $500,000. Under the terms of the SRI Purchase Agreement, SRI has agreed that it will, at its cost and expense, remediate these four Initial Properties, and that it will complete this remediation no later than 24 months following the date of Closing. Scott s LP will retain a holdback of $500,000 from the purchase price payable to SRI for these four Initial Properties in connection with such remediation obligations. Scott s LP will also receive an indemnity from SRI in respect of any losses suffered by Scott s LP or the REIT relating to certain environmental matters including the on-site petroleum hydrocarbon contamination at these four Initial Properties. Copies of the Environmental Reports may be examined during normal business hours at the office of Scott s REIT at 161 Bay Street, Suite 2300, Toronto, Ontario, M5J 2S1. ACQUISITION OF THE INITIAL PROPERTIES On Closing, Scott s LP will use the proceeds of the Offering, together with the net amount of $64,197,500 drawn down under the Mortgage, the issuance of 2,254,909 Class B LP Units and the issuance of the SRI Promissory Note, to pay the expenses of the Offering and to acquire the Initial Properties. Scott s LP will directly and indirectly acquire 79 properties from SRI for an aggregate purchase price of $64,790,000 (subject to usual closing adjustments) pursuant to the terms of the SRI Purchase Agreement. The purchase price for these properties will be satisfied by the payment of $41,662,825 in cash, net of the $500,000 remediation holdback described below, the issuance of the SRI Promissory Note in the amount of $578,085 and the issuance of 2,254,909 Class B LP Units to SRI. Scott s LP will also directly and indirectly acquire 111 properties from Yum! for an aggregate purchase price of $65,940,000 (subject to usual closing adjustments) pursuant to the terms of the Yum! Purchase Agreement. The purchase price for these properties will be satisfied by the payment of $65,940,000 in cash. Each of SRI and Yum! holds legal title to the Initial Properties located in the Province of Quebec through a mandatary. Colonel s Realty Inc., which is a wholly-owned subsidiary of Yum! Brands Canada Management LP, acts as mandatary for Yum!, and holds the legal title to Yum! s Quebec properties for the benefit of Yum!. Similarly, CRI Realty (No. 3) Inc., a wholly-owned subsidiary of SRI Realty (No. 3) Inc., which is in turn a wholly-owned subsidiary of SRI, holds the legal title to SRI s Quebec properties for the benefit of SRI Realty (No. 3) Inc. In connection with the acquisition of the Initial Properties, each of Yum! and SRI will transfer their beneficial interest in the applicable Quebec Initial Properties to Scott s LP. Scott s LP will also acquire all of the outstanding shares of each of Colonel s Realty Inc. and CRI Realty (No. 3) Inc., each of which will then act as mandatary for Scott s LP. Scott s REIT has conducted due diligence on the Initial Properties to be acquired from SRI and Yum!. In particular, each of the Initial Properties has been the subject of a Phase I ESA Report. Based on the Phase I ESA Reports, Phase II environmental site assessments were recommended and completed at 79 of the Initial Properties. Of 27

35 the 79 Initial Properties at which Phase II environmental site assessments were conducted, the Phase II ESA Reports for four of these Initial Properties identified localized on-site petroleum hydrocarbon contamination in the soil. Management has estimated that the aggregate cost to remediate the on-site petroleum hydrocarbon contamination at these four Initial Properties will be approximately $500,000. Under the terms of the SRI Purchase Agreement, SRI has agreed that it will, at its cost and expense, remediate these four Initial Properties, and that it will complete this remediation no later than 24 months following the date of Closing. Scott s LP will retain a holdback of $500,000 from the purchase price payable to SRI for these four Initial Properties in connection with such remediation obligations. Scott s LP will also receive an indemnity from SRI in respect of any losses suffered by Scott s LP or the REIT relating to certain environmental matters including the on-site petroleum hydrocarbon contamination at these four Initial Properties. The SRI Purchase Agreement and the Yum! Purchase Agreement each contain certain customary representations and warranties, and related indemnities, from SRI and Yum!, respectively, with respect to the properties to be acquired by Scott s LP. In addition, on Closing, title insurance will be obtained in respect of the Initial Properties. In particular, each of the SRI Purchase Agreement and the Yum! Purchase Agreement contain representations and warranties (in certain cases to the knowledge of the party making the representation and warranty), and related indemnities, regarding corporate matters, taxes, litigation, ownership of the properties, compliance with laws, permits, conduct of the business, the status of the leases with KIT, environmental insurance and environmental matters, among other things. The SRI Purchase Agreement will also include a representation and warranty from SRI that this prospectus contains full, true and plain disclosure of all material facts relating to the REIT and the Units and does not contain any misrepresentation. The representations and warranties of SRI and Yum! set forth in the SRI Purchase Agreement and the Yum! Purchase Agreement, respectively, are qualified by information set out in schedules to the SRI Purchase Agreement and the Yum! Purchase Agreement, respectively. Accordingly, an investor should not rely on the representations and warranties as characterizations of the actual state of facts, without reviewing the accompanying schedules. Generally, the representations and warranties set out in the SRI Purchase Agreement and the Yum! Purchase Agreement will survive for a period of two years from Closing, except for (i) tax representations and warranties, which will survive until the expiration of the statutory limitation period under applicable tax legislation, (ii) in connection with the SRI Purchase Agreement, the representation and warranty as to the prospectus disclosure, which will survive the Closing for a period of three years and (iii) certain limited representations and warranties as to existence, authority, due execution and binding obligation, ownership of the properties and environmental matters, which will survive indefinitely. Each of SRI and Yum! will indemnify Scott s LP in respect of breaches of their representations and warranties in the SRI Purchase Agreement and the Yum! Purchase Agreement, respectively. The maximum liability of each of SRI and Yum! under their respective indemnities in the SRI Purchase Agreement and the Yum! Purchase Agreement will be limited to the cash portion of the purchase price paid by Scott s LP in respect of the purchase from SRI and Yum!, respectively, of the SRI Initial Properties and the Yum! Initial Properties. Any amount paid by SRI in respect of its indemnity to the Underwriters under the Underwriting Agreement will operate to reduce the maximum liability of SRI to Scott s LP in respect of its indemnity under the SRI Purchase Agreement. In connection with the closing of the transactions contemplated by the SRI Purchase Agreement, SRI and Trustee Corp. will enter into the Governance Agreement, which will provide for various matters relating to Trustee Corp., including composition of the board of directors. Pursuant to the provisions of the Governance Agreement, so long as SRI owns at least a 15% interest in Scott s REIT, whether directly or indirectly through the ownership of Class B LP Units, the board of directors of Trustee Corp. shall consist of five individuals, two of whom may be appointed by SRI. If SRI owns less than a 15% interest in Scott s REIT, but more than a 5% interest, then the board of directors of Trustee Corp. shall consist of five individuals, one of whom may be appointed by SRI. SRI s right to appoint directors will cease when SRI has a direct and/or indirect ownership interest in Scott s REIT of 5% or less. RETAINED INTEREST AND EXCHANGE RIGHTS Retained Interest As partial consideration for the transfer of a portion of the Initial Properties, SRI will acquire a 31.1% interest in Scott s LP, consisting of 2,254,909 Class B LP Units. Assuming the exchange of all Class B LP Units for Units, SRI would, on Closing, own approximately 31.1% of the issued and outstanding Units (approximately 26.1% if the Over- 28

36 Allotment Option is exercised in full). The Class B LP Units are exchangeable for Units on a one-for-one basis at the option of the holder thereof, subject to customary anti-dilution protections and provided that the exchange will not jeopardize the REIT s status as a mutual fund trust under the Tax Act. Exchange Rights Under the Exchange Agreement, Scott s REIT will grant the holders of Class B LP Units the right to require Scott s REIT to indirectly exchange each Class B LP Unit for Units on a one-for-one basis, subject to customary antidilution protections and provided that the exchange will not jeopardize the REIT s status as a mutual fund trust under the Tax Act. Under the Scott s LP Agreement, Scott s LP will also have the right in certain circumstances to exchange Class B LP Units for Units on a one-for-one basis, subject to customary anti-dilution protections and provided that the exchange will not jeopardize the REIT s status as a mutual fund trust under the Tax Act. Under the Exchange Agreement, Scott s REIT will grant Scott s LP the right to indirectly exchange Class B LP Units for Units in the event that Scott s LP exercises its exchange rights under the Scott s LP Agreement. Collectively, the exchange rights granted by Scott s REIT are referred to as the Exchange Right. The exchange procedure may be initiated at any time by the holder of a Class B LP Unit delivering to Scott s REIT an exchange notice together with a unit certificate in respect of the Class B LP Units to be exchanged, duly endorsed in blank for transfer. Scott s REIT will give notice of the proposed exchange to SR Operating Trust (the Trust ), and the Trust will acquire from Scott s REIT the number of Units required to complete the exchange in consideration for the issuance of additional Trust Units and Series 1 Notes. The Trust will deliver to Scott s GP the requisite number of Units in return for additional Class A LP Units. Scott s GP will then effect the exchange procedure by causing the Class B LP Units so tendered for exchange to be cancelled, and delivering to the previous holder of the Class B LP Units a certificate for that number of Units required to be issued on the exchange. Such certificate may be registered in the name of CDS or its nominee, if required by the book-based system administered by CDS. See Scott s REIT Declaration of Trust and Description of Units Book-Based System. Dilution Rights and Economic Equivalence The Exchange Agreement and the Scott s LP Agreement will provide that if there is a change in the number of Units outstanding as a result of a subdivision, consolidation, reclassification, capital reorganization or similar change in the Units (other than a consolidation of Units immediately following a distribution of Units in lieu of a cash distribution), the exchange ratio of Class B LP Units for Units will be proportionately adjusted. The Exchange Agreement will also provide that Scott s REIT will not issue or distribute Units to the holders of all or substantially all of the then outstanding Units (other than a distribution of Units in lieu of a cash distribution), issue or distribute rights, options or warrants to the holders of all or substantially all of the then outstanding Units or issue or distribute property of Scott s REIT to the holders of all or substantially all of the then outstanding Units unless, in each case, the economic equivalent thereof (as determined by the Trustees) is issued or distributed simultaneously to the holders of Class B LP Units. Reclassification of Units If, at any time while any Class B LP Unit is outstanding, there is any consolidation, amalgamation, arrangement, merger or other form of business combination of Scott s REIT with or into any other entity resulting in a reclassification of the outstanding Units, the Exchange Right will be adjusted in a manner approved by the Trustees, acting reasonably, so that holders of Class B LP Units will be entitled to receive, in lieu of the number of Units to which they would otherwise have been entitled, the kind and number or amount of securities that they would have been entitled to receive as a result of such event if, on the effective date thereof, they had been the registered holders of the number of Units which they would have held had they exercised the Exchange Right immediately before the effective date of any such transaction. Registration Rights SRI has been granted customary demand and piggy-back registration rights by Scott s REIT in respect of the Units that it may acquire pursuant to the exercise of the Exchange Right, subject to usual restrictions, including restrictions relating to the number of demands that may be made, the size of any offering and the timing of any such exercise. 29

37 MANAGEMENT OF SCOTT S REIT The governance, investment policies and operations of Scott s REIT are subject to the control and direction of the Trustees, a majority of whom must be resident Canadians within the meaning of the Tax Act and each of whom must be and remain independent of management of the Operator. The Asset Manager provides advisory, asset management, and administrative services to Scott s REIT pursuant to the Asset Management Agreement. The Property Manager administers the day-to-day operations of the portfolio of properties in which Scott s REIT has or will have an interest, including the Initial Properties. Trustees The initial Trustees are John G. Jakolev, Douglas L. Fowles and Lewis S. Allen. The initial trustee of the Trust is Ontario Inc. ( ), a wholly-owned subsidiary of Scott s REIT, the directors of which are John G. Jakolev, Douglas L. Fowles and Lewis S. Allen. The trustee of Scott s GP is Trustee Corp., a wholly-owned subsidiary of Scott s REIT. Each of the Trustees is also a director of Trustee Corp. In addition, John Bitove and Michael Washinushi are also directors of Trustee Corp. The following table sets forth the names, municipality of residence, position held and the current principal occupation of each of the Trustees and each of the directors and officers of Trustee Corp. The term of office for each of the Trustees and each of the directors of and Trustee Corp. will commence on Closing and will expire at the first annual meeting of Unitholders and Special Voting Unitholders (collectively, Voting Unitholders ). Name and Units and/or Class B Municipality of Residence Positions Held Current Principal Occupation LP Units (1) Held John G. Jakolev REIT Trustee, President of Jet Capital Services Toronto, Ontario Director of Scott s Limited Trustee Corp. Douglas L. Fowles REIT Trustee, President and Chief Executive 5,000 Mississauga, Ontario Director of Scott s Officer of Ochiltree Trustee Corp. Management Inc. Lewis S. Allen REIT Trustee, Principal of All-Mor Group Ltd. Toronto, Ontario Director of Scott s Trustee Corp. John I. Bitove Director of Scott s Chief Executive Officer of JBM 2,305,509 Toronto, Ontario Trustee Corp., Properties Inc., Chairman and Chief Executive Officer of Chief Executive Officer of each Scott s Trustee Corp. of SRI, KIT and Canadian Satellite Radio Inc. Michael Washinushi Director of Scott s Executive Vice President of Toronto, Ontario Trustee Corp., JBM Properties Inc. and Vice Executive Vice-President and President of Finance for Secretary of Scott s Canadian Satellite Radio Inc. Trustee Corp. Lilly Di Massimo Chief Financial Officer of Chief Financial Officer of JBM 6,200 Woodbridge, Ontario Scott s Trustee Corp. Properties Inc. and Chief Financial Officer of SRI (1) Indirectly exchangeable for Units of Scott s REIT on a one-for-one basis and accompanied by Special Voting Units. The following is a brief profile of each of the individuals noted in the table above: John G. Jakolev. Mr. Jakolev is the co-founder and President of Jet Capital Services Limited (a boutique advisory firm that focuses on the leasing and structured finance market). From October 2002 to January 2005, Mr. Jakolev was also a tax partner (non-lawyer) at Goodman and Carr LLP (a Toronto business law firm). Prior to that, from February 2000 to May 2002, Mr. Jakolev was a senior partner at Ernst & Young LLP where he held various positions over an 18 year period. He is a director and treasurer of the University of Toronto Schools as well as a 30

38 director of Contact Diamond Corporation, a TSX listed company. Mr. Jakolev received his designation as a Chartered Accountant from the Ontario Institute of Chartered Accountants in 1979 and also holds a Bachelor of Arts degree from Wilfred Laurier University. Douglas L. Fowles. Mr. Fowles is the President and Chief Executive Officer of Ochiltree Management Inc. (a company which focuses on all aspects of real estate development, consulting and property management). Prior to joining Ochiltree in 2004, Mr. Fowles served as the President and Chief Executive Officer of Henge Developments Inc. (a company which focuses on real estate development and consulting) from 1988 to Mr. Fowles has been involved in all aspects of the real estate industry including development financing and project management for more than 35 years. He is a board member of the Mississauga Living Arts Centre. Lewis S. Allen. Mr. Allen is a principal of All-Mor Group Ltd. (a general contractor), a position he has held since Prior to that Mr. Allen was the President and Chief Executive Officer of Shopsy s Hospitality Inc. (a chain of restaurants focused on quality delicatessen meats), a position which he held since Mr. Allen has over 30 years experience in the foodservice industry. Mr. Allen holds a degree in mathematics from York University. John I. Bitove. Mr. Bitove is one of Canada s leading entrepreneurs with a distinguished record of accomplishments in business and community service. He is the Chairman and Chief Executive Officer of each of SRI, KIT and Canadian Satellite Radio Inc., and has worked in the food service and hospitality industry in many capacities for over 20 years. He is also a director of Loon Energy Inc. Mr. Bitove was the volunteer President and Chief Executive Officer of Toronto s 2008 Olympic Bid Corporation. He founded the Toronto Raptors basketball team and created the Air Canada Centre. He also serves the community on several volunteer boards. Mr. Bitove earned a Bachelor of Laws degree from the University of Windsor in 1984 and an undergraduate degree in marketing from Indiana University in Michael Washinushi. Mr. Washinushi is the Vice President of Finance of Canadian Satellite Radio Inc. Prior to joining Canadian Satellite Radio Inc. in 2005, Mr. Washinushi served as the Director of Development and Acquisitions for KIT where he was responsible for managing the existing real estate portfolio and identifying new real estate opportunities. Mr. Washinushi holds a Bachelor of Arts degree from York University. Lilly Di Massimo. Ms. Di Massimo has 16 years of experience in the financial accounting and analysis of KFC TM restaurants with SRI. She has been the Chief Financial Officer of SRI since 1999 and is a current director of KIT. She has a Bachelor of Commerce degree from the University of Toronto and is a Certified General Accountant. Governance of Scott s REIT The Trustees will be directly responsible for developing the REIT s approach to governance issues and periodically reviewing the composition and effectiveness of the individual Trustees. The Trustees will also be responsible for adopting and periodically reviewing and updating the REIT s written disclosure policy. This policy will, among other things: ) articulate the legal obligations of Scott s REIT, its affiliates and their respective trustees, directors, officers and employees with respect to confidential corporate information; ) identify spokespersons of Scott s REIT who are the only persons authorized to communicate with third parties such as analysts, media and investors; ) provide guidelines on the disclosure of forward-looking information; ) require advance review by the Trustees of any disclosure of financial information to ensure the information is not material, and ensure that selective disclosure of material information is not permitted, and that when it occurs, a news release is issued immediately; and ) establish black-out periods immediately prior to and following the disclosure of quarterly and annual financial results and immediately prior to the disclosure of certain material changes during which Scott s REIT, its affiliates and their respective trustees, directors, officers, employees and consultants may not purchase or sell Units. Audit Committee The Trustees will appoint an audit committee consisting of not less than three Trustees, each of whom must be independent and financially literate within the meaning of applicable securities laws. The written charter of the Audit 31

39 Committee will, among other things, include the following responsibilities: nominate and be responsible for overseeing the work of the external auditors; pre-approve all non-audit services to be provided by the external auditors; review the REIT s financial disclosure; establish procedures for dealing with complaints and employee submissions regarding accounting, internal accounting controls or auditing matters; review and approve the Operator s hiring policies regarding employees and former employees of the REIT s external auditors. Governance of Scott s LP Scott s LP will carry on the business of owning a portfolio of retail properties operated as QSRs and other retail properties, including the Initial Properties. Scott s GP, as general partner of Scott s LP, will have exclusive authority to manage the business and affairs of Scott s LP, subject to the terms and conditions of the Scott s LP Agreement. The directors of Trustee Corp., as trustee of Scott s GP, will manage and supervise Scott s GP in its conduct of the business of Scott s LP. Scott s REIT will be the sole shareholder of Trustee Corp. Each of the Trustees will also be a director of Trustee Corp. In connection with the closing of the transactions contemplated by the SRI Purchase Agreement, SRI and Trustee Corp. will enter into the Governance Agreement, which will provide for various matters relating to Trustee Corp., including composition of the board of directors. Pursuant to the provisions of the Governance Agreement, so long as SRI owns at least a 15% interest in Scott s REIT, whether directly or indirectly through the ownership of Class B LP Units, the board of directors of Trustee Corp. shall consist of five individuals, two of whom may be appointed by SRI. If SRI owns less than a 15% interest in Scott s REIT, but more than a 5% interest, then the board of directors of Trustee Corp. shall consist of five individuals, one of whom may be appointed by SRI. SRI s right to appoint directors will cease when SRI has a direct and/or indirect ownership interest in Scott s REIT of 5% or less. Governance, Compensation and Investment Committee The directors of Trustee Corp. will, following Closing, establish a Governance, Compensation and Investment Committee, the members of which will be required to be independent within the meaning of applicable securities laws. The Governance, Compensation and Investment Committee will recommend to the directors of Trustee Corp., as trustee of Scott s GP, whether to approve or reject proposed transactions, including proposed acquisitions and dispositions of properties and borrowings (including the assumption or granting of any mortgage) by Scott s REIT. The Governance, Compensation and Investment Committee also will be responsible for recommending the adoption of an environmental management program for the Operator and for supervising compliance with and implementation of the environmental management program. In addition to reviewing the REIT s approach to corporate governance and generally having responsibility for the REIT s corporate governance, human resources and compensation policies, the Governance, Compensation and Investment Committee will have primary responsibility for, among other things: (i) assessing the effectiveness of the Trustees and each of their committees; (ii) considering questions of management succession; (iii) participating in the recruitment and selection of candidates as Trustees; (iv) considering and approving proposals by the Trustees to engage outside advisers on behalf of the Trustees as a whole or on behalf of the independent Trustees; (v) assessing the performance of the Chief Executive Officer and the Chief Financial Officer of Trustee Corp.; (vi) reviewing and approving the compensation of senior management and consultants of the Operator; and (vii) reviewing and making recommendations to the Trustees concerning the level and nature of the compensation payable to Trustees. Conflicts of Interest The Declaration of Trust contains conflict of interest provisions that serve to protect the interests of Unitholders without creating undue limitations on Scott s REIT. These provisions are similar to those contained in the Canada Business Corporations Act ( CBCA ), and require each Trustee and officer of the REIT to disclose to Scott s REIT any interest in a material contract or transaction or proposed material contract or transaction with Scott s REIT (including a contract or transaction involving the making or disposition of any investment in real property or a joint venture agreement) or the fact that such person is a director or officer of or otherwise has a material interest in any person who is a party to a material contract or transaction or proposed material contract or transaction with Scott s REIT. Such disclosure is required to be made at the first meeting at which a proposed contract or transaction is considered. If a material contract or transaction or proposed material contract or transaction is one that in the ordinary 32

40 course would not require approval by the Trustees, a Trustee or officer of the REIT is required to disclose in writing to Scott s REIT, or request to have entered into the minutes of meetings of the Trustees, the nature and extent of his or her interest forthwith after the Trustee or officer becomes aware of the contract or transaction or proposed contract or transaction. In each case, a Trustee who has made disclosure to the foregoing effect is not entitled to vote on any resolution to approve the contract or transaction unless the contract or transaction is one relating to his remuneration or for indemnity under the provisions of the applicable declaration of trust or liability insurance. The following matters require the approval of a majority of the independent directors of Trustee Corp., as trustee of Scott s GP, the general partner of Scott s LP, to become effective: ) the entering into of any material transaction with SRI, KIT or any of their affiliates, including any lease renewal or lease extension; ) any material amendment to the Asset Management Agreement or the Property Management Agreement; ) the entering into, waiver of or exercise of any rights or remedies under any agreement entered into by the Operator with any director who is not independent or any of his or her related parties; ) the refinancing or renewal of any indebtedness owing to any director who is not independent or any of his or her related parties; ) the making, directly or indirectly, of any co-investment with any director who is not independent or any of his or her related parties; ) a change in the trustee of Scott s GP; ) subject to the board nomination rights of SRI as set out in the Governance Agreement, a change in the number of directors of Trustee Corp. and the appointment of individuals to fill any such vacancies; and ) any other material related party or non-arm s length transaction. Compensation Initial compensation for each independent Trustee will be $25,000 per year and $1,000 per meeting for attending meetings of the Trustees and any committee meetings if attending in person, or $500 per meeting if attending by conference call. Independent Trustees will also be reimbursed for out-of-pocket expenses for attending meetings of the Trustees and committee meetings being held on separate occasions. Trustees will also participate in the insurance and indemnification arrangements described below. The directors of Trustee Corp. will not be paid any compensation for acting as directors of Trustee Corp. Trustees, Directors and Officers Liability Insurance and Indemnification Scott s REIT intends to carry trustees, directors and officers liability insurance. Under this insurance coverage, Scott s REIT, the Trust, Trustee Corp. and Scott s GP will be reimbursed for payments made under indemnity provisions on behalf of their respective trustees, directors and officers contained in their respective constating documents, subject to a deductible for each loss. Individual trustees, directors and officers will also be reimbursed for losses arising during the performance of their duties for which they are not indemnified by Scott s REIT, the Trust, Trustee Corp. or Scott s GP, subject to a deductible that will be paid by Scott s REIT, the Trust, Trustee Corp. or Scott s GP. The Declaration of Trust, the Trust Declaration of Trust, the Scott s GP Declaration of Trust and the Scott s LP Agreement also provide for the indemnification in certain circumstances of trustees, directors and officers from and against liability and costs in respect of any action or suit against them in respect of the execution of their duties of office. The Trustees and the directors and officers of Trustee Corp. may also enter into contractual indemnities with regard to the above indemnification obligations. 33

41 ASSET AND PROPERTY MANAGEMENT JBM is the Asset Manager and the Property Manager for Scott s REIT. JBM is controlled by John I. Bitove, Chairman and Chief Executive Officer of SRI and KIT Inc., the general partner of KIT LP. JBM is an affiliate of SRI, which owns an approximate 39.8% partnership interest in KIT LP through its ownership of subordinated limited partnership units of KIT LP and exchangeable limited partnership units of KIT LP. On Closing, SRI will hold an indirect 31.1% interest in Scott s REIT (26.1% if the Over-Allotment Option is exercised in full) through the ownership of Class B LP Units, which are economically equivalent to and exchangeable for Units. JBM is led by John Bitove, Lilly Di Massimo and Michael Washinushi, each of whom has significant experience in all aspects of real estate asset and property management including: leasing and tenant relations; property acquisitions and dispositions; real estate and corporate financing; and development, re-development and construction. John Bitove, Lilly Di Massimo and Michael Washinushi are each directors or officers of Trustee Corp. See Management of Scott s REIT Trustees and Conflicts of Interest. Asset Manager Under the terms of the Asset Management Agreement, the Asset Manager is required to provide advisory, development, asset management and administrative services to Scott s REIT and the Operator subject to the overriding supervision and direction of the Trustees and the directors of Trustee Corp. The Asset Manager will implement the risk management and strategic growth strategies of Scott s REIT. In doing so it will seek to achieve and maintain geographic asset diversification, appropriate financial leverage and strong tenant covenants. The REIT s external growth strategy will be driven by acquisitions of QSR and other retail properties, and will include diversification of tenants to include other branded, well-recognized QSR and retail operators. Scott s REIT will use the Asset Manager s expertise in identifying opportunities that arise when owners choose to divest of properties for strategic or other reasons. Acquisitions will be subject to specific investment guidelines and will require both the recommendation of the Governance, Compensation and Investment Committee and the approval of the directors of Trustee Corp., as trustee of Scott s GP, the general partner of Scott s LP. Duties The duties under the Asset Management Agreement include: providing and operating the REIT s head office; managing day-to-day operations of Scott s REIT; preparing or overseeing the preparation of annual budgets and business plans for presentation to the Trustees for approval and monitoring the REIT s financial performance; maintaining the books and financial records of Scott s REIT and the Operator and preparing reports and other disclosure documents for the Trustees and Unitholders; advising the Trustees on strategic matters relating to the REIT s properties, potential acquisitions, dispositions and development and Unit value maximization; identifying, structuring and negotiating acquisition, disposition, financing and other transactions and managing due diligence in connection therewith; providing advice and assistance in connection with the REIT s and the Operator s borrowings, raising of capital and issuance of securities, including representing Scott s REIT and the Operator in their dealings with banks and other lenders, investment dealers, institutions and investors; and managing the REIT s investor relations and regulatory compliance activities. Where the Asset Manager does not provide a service, the Asset Manager may retain third parties, including investment dealers, brokers, consultants, accountants, lawyers, insurers, appraisers and other advisors, to provide customary services to Scott s REIT at the REIT s expense. Scott s REIT is also responsible for payment of certain costs, such as trustee fees, annual report costs, transfer fees and insurance costs. Fees Scott s LP will pay the following fees to the Asset Manager: (a) a base fee equal to 0.25% per annum of the Gross Book Value, calculated and payable quarterly; and (b) an incentive fee for each fiscal year of Scott s REIT equal to 15% of the REIT s Distributable Income per Unit in excess of $0.85 per Unit, multiplied by the number of Units outstanding. The base fee and, if applicable, the incentive fee set out above is to be payable in cash (in arrears in the case of the base fee) or, at the Asset Manager s election, subject to receipt of all necessary regulatory approvals and compliance with the Declaration of Trust, in Units, based on the weighted average trading price on the Toronto Stock Exchange for 34

42 the five trading days prior to the end of the period to which the fee relates. The maximum number of Units issuable to the Asset Manager under the terms of the Asset Management Agreement is, however, limited to 725,491 Units. If an incentive fee is payable to the Asset Manager, the payment of this incentive fee will effectively reduce the percentage of Distributable Income that is available for distribution to Unitholders. With respect to development projects, a development fee will be payable to the Asset Manager equal to 4% of gross costs of the applicable development project, or as otherwise agreed by the independent directors of Trustee Corp. and the Asset Manager. Term and Termination The appointment of JBM as Asset Manager is, unless terminated in accordance with the terms of the Asset Management Agreement, for a term of three years. The Asset Management Agreement will automatically renew every three years for successive three year terms, unless terminated in accordance with its terms. Scott s REIT and the Operator have the right to terminate the Asset Management Agreement for cause, and may also terminate the Asset Management Agreement without cause upon payment to JBM of an amount equal to the forecasted base fee, the development fee and the incentive fee for a period of 36 months, based on the then current three-year strategic plan of the REIT approved by the Trustees. The Asset Management Agreement will be deemed to have been terminated without cause in the event of a change of control, as defined in the Asset Management Agreement, of Scott s REIT or the Operator. In addition, JBM shall also be entitled to terminate the Asset Management Agreement for cause. If JBM terminates the Asset Management Agreement for cause, or the Asset Management Agreement is not renewed by the REIT, then it is entitled to be paid an amount equal to the forecasted base fee, the development fee and the incentive fee for a period of 36 months. Payments by Asset Manager Pursuant to the Asset Management Agreement, the Asset Manager is responsible for all employment expenses of its personnel, rent and other office expenses and miscellaneous administrative expenses relating to its functions under the Asset Management Agreement. Property Manager In its capacity as Property Manager, JBM will administer the day-to-day property and leasing operations of the REIT s properties. The Property Manager will provide finance/accounting, marketing, information systems, human resources and operational support of its property management responsibilities. Duties The duties of the Property Manager under the Property Management Agreement will include: management of the REIT s properties, including inspection of the properties, negotiating contracts, ensuring reasonable security, handling tenant requests and negotiations, arranging for such improvements and repairs as may be required by Scott s REIT or the Operator and the purchase of all materials and services in connection therewith at the cost of the Operator (to the extent these costs are not recovered from the tenant), and incurring such operating expenses as the Property Manager deems necessary in connection therewith, all in accordance with an approved budget; the collection of all rents and other charges and payments of costs and expenses related to the management of the properties; preparing leasing plans; and the supervision and conduct of all leasing operations, including negotiating and executing leases in accordance with an approved leasing plan. Fees The Property Management Agreement provides for payment of an annual property management fee to the Property Manager in an amount equal to 2.5% of the rental revenue of the properties under management (defined to include the gross amount received or receivable from such properties including minimum and percentage rents, commissions, royalties, and all other items payable as additional rents by all tenants), which will be calculated and payable monthly. Term and Termination The appointment of JBM as Property Manager is, unless terminated in accordance with the terms of the Property Management Agreement, for a term of three years. The Property Management Agreement will automatically renew 35

43 every three years for successive three year terms, unless terminated in accordance with its terms. Scott s REIT and the Operator have the right to terminate the Property Management Agreement for cause, and may also terminate the Property Management Agreement without cause upon payment to JBM of an amount equal to the forecasted property management fee for a period of 36 months, based on the then current three-year strategic plan of the REIT approved by the Trustees. The Property Management Agreement will be deemed to have been terminated without cause in the event of a change of control, as defined in the Property Management Agreement, of Scott s REIT or the Operator. In addition, JBM shall also be entitled to terminate the Property Management Agreement for cause. If JBM terminates the Property Management Agreement for cause, or the Property Management Agreement is not renewed by the REIT, then it is entitled to be paid an amount equal to the property management fee for a period of 36 months. In addition, if there is a disposition of any property of Scott s REIT that the Property Manager manages, then such property will be deleted from the Property Management Agreement and the Property Management Agreement will continue in respect of all other properties of Scott s REIT then managed by the Property Manager. Similarly, if the REIT acquires any additional properties, then such additional properties shall be added to the Property Management Agreement and JBM shall act as Property Manager in respect of such additional properties. Payments by Property Manager Pursuant to the Property Management Agreement, the Property Manager is responsible for all employment expenses of its personnel, rent and other office expenses, and miscellaneous administrative expenses relating to its functions under the Property Management Agreement. Executive Compensation of JBM The executive officers of Trustee Corp. are not currently being compensated for acting in such capacity. The executive officers of JBM have not historically been compensated by JBM for acting in such capacity. Following Closing, JBM will pay each of John Bitove, Lilly Di Massimo and Michael Washinushi an annual salary of $50,000 as compensation for acting as Chief Executive Officer, Chief Financial Officer and Executive Vice-President, respectively, of JBM. These salaries will be obligations of JBM, and will not be obligations of Trustee Corp. or the REIT. No other direct or indirect benefits will be received by the executive officers of Trustee Corp. for acting as executive officers. If Closing had occurred on September 1, 2005, then JBM would be expected to receive property and asset management fees under the Property Management Agreement and the Asset Management Agreement for the twelvemonth period from September 1, 2005 to August 31, 2006 of approximately $267,260 and $329,244, respectively. JBM currently expects that these fees will largely be used to satisfy its obligations and responsibilities under the Property Management Agreement and the Asset Management Agreement, including meeting general and administrative expenses and paying senior officers, employees or contractors of JBM in respect of services provided by such individuals to JBM in its capacity as Property Manager and as Asset Manager. JBM may also use such fees for a number of other purposes, including general corporate and working capital purposes, capital investments, funding property acquisitions and property development expenses and yields to its shareholders. JBM does not currently expect to distribute any amounts to its shareholders. JBM is an affiliate of SRI, as they are each indirectly 100% owned by John Bitove, the Chief Executive Officer of Trustee Corp. and the Chief Executive Officer of JBM. SRI owns an approximate 39.8% partnership interest in KIT LP through its ownership of subordinated limited partnership units of KIT LP and exchangeable limited partnership units of KIT LP. SRI will, as consideration for the sale of the SRI Initial Properties, receive a total of $41,162,825, net of a $500,000 remediation holdback, in cash, as well as 2,254,909 Class B LP Units of Scott s LP and the SRI Promissory Note in the amount of $578,085. See Acquisition of the Initial Properties. SRI intends to use all of the cash proceeds that it will receive from the sale of the SRI Initial Properties to repay certain amounts outstanding to GE Canada Equipment Finance G.P. in respect of mortgages currently registered against the SRI Initial Properties. On Closing, SRI will hold an indirect 31.1% interest in Scott s REIT (26.1% if the Over-Allotment Option is exercised in full) through the ownership of Class B LP Units, which are economically equivalent to and exchangeable for Units. Interest will accrue on amounts outstanding under the SRI Promissory Note at the rate of 4.90% per annum. The principal and cumulative accrued interest can be repaid at any time but become due and payable on the date that is five years after the Closing Date. Scott s LP will not pay accrued interest on the SRI Promissory Note for any year prior to maturity unless distributions totaling at least $0.85 per Unit for such year have been paid. 36

44 INVESTMENT GUIDELINES AND OPERATING POLICIES Investment Guidelines The Declaration of Trust provides for certain restrictions on investments which may be made directly or indirectly by Scott s REIT. The assets of Scott s REIT after Closing may be invested directly or indirectly only in accordance with the following guidelines: a) Scott s REIT shall focus its acquisition activities on existing income-producing QSR and small-box retail locations located in Canada and the United States; b) Scott s REIT shall not acquire any interest in a single real property if, after giving effect to the proposed acquisition, the cost to Scott s REIT of such acquisition (net of the amount of debt incurred in connection with the acquisition) will exceed 20% of the REIT s Gross Book Value; c) notwithstanding anything else contained in the Declaration of Trust, Scott s REIT shall not make any investment, take any action or omit to take any action that would result in Units not being units of a mutual fund trust within the meaning of the Tax Act or that would result in Units being disqualified for investment by Plans; d) Scott s REIT may, directly or indirectly, invest in a joint venture arrangement only if: i) the arrangement is one pursuant to which Scott s REIT holds an interest in a retail location jointly or in common with others ( joint venturers ) either directly or through the ownership of securities of a corporation or other entity (a joint venture entity ); ii) the REIT s interest in the joint venture arrangement is not subject to any restriction on transfer other than a right of first refusal or a right of first offer, if any, in favour of the joint venturers; iii) Scott s REIT has a right of first refusal or a right of first offer to buy the interests of the other joint venturers; iv) the joint venture arrangement provides an appropriate liquidity mechanism to enable Scott s REIT to purchase the other joint venturers interests or to sell its interest; and v) the joint venture arrangement requires Scott s REIT or its designee to participate fully in the management thereof; e) except for temporary investments held in cash, deposits with a Canadian chartered bank or trust company registered under the laws of Canada or a province of Canada, short-term government debt securities or money market instruments of, or guaranteed by, a Canadian bank listed on Schedule I to the Bank Act (Canada) maturing prior to one year from the date of issue, and except for securities of the Scott s Entities and their affiliates, Scott s REIT may not hold securities other than securities of a joint venture entity or an entity wholly-owned or controlled by Scott s REIT formed and operated solely for the purpose of directly or indirectly holding a particular real property or real properties, or an interest therein, and provided further that, subject to paragraph (c) above, notwithstanding anything contained in the Declaration of Trust to the contrary, Scott s REIT may acquire securities of other Canadian real estate investment trusts; f) Scott s REIT shall not invest in rights to or interests in mineral or other natural resources, including oil or gas, except as incidental to an investment in real property; g) Scott s REIT must not invest, directly or indirectly, in operating businesses unless such investment is an indirect investment and is incidental to a transaction: (A) where revenue will be derived, directly or indirectly, principally from real property; or (B) which principally involves the ownership, maintenance, improvement, leasing or management, directly or indirectly, of real property (in each case determined by the independent Trustees). h) Scott s REIT may invest in raw land for development and ownership or for other development projects for the purpose of (i) renovating or expanding existing properties or facilities on adjacent properties, or (ii) developing new properties which will, upon completion, be income producing provided that the aggregate value of the investments of Scott s REIT in raw land, after giving effect to the proposed investment, will not exceed 5% of the Gross Book Value; 37

45 i) Scott s REIT may invest in mortgages and mortgage bonds (including participating or convertible mortgages) where: i) the real property which is security therefor is an income-producing QSR or retail property which otherwise meets the general investment guidelines of Scott s REIT adopted from time to time in accordance with the Declaration of Trust and the restrictions set out therein; ii) the amount of the mortgage loan is not in excess of 75% of the market value of the property securing the mortgage and the mortgage has at least 1.2 X debt service coverage; iii) the mortgage is a first ranking mortgage registered on title to the real property which is security therefor; and iv) the aggregate value of the investments of Scott s REIT in these mortgages, after giving effect to the proposed investment, will not exceed 20% of the Gross Book Value calculated at the time of such investment; j) Scott s REIT may invest in mortgages which are not first ranking mortgages, including mezzanine financings, if the sole intention is to use the acquisition of the mortgages as a method of acquiring control of real property that is income-producing or is being developed for that purpose which would otherwise meet the investment guidelines of Scott s REIT and provided that the aggregate value of the investments of Scott s REIT in these mortgages, after giving effect to the proposed investment, will not exceed 20% of the Gross Book Value (including the investments described in paragraph (i) above); and k) Scott s REIT may invest an amount (which, in the case of an amount invested to acquire real property, is the purchase price to Scott s REIT of such property) up to 15% of the Gross Book Value of Scott s REIT in investments or transactions which do not comply with paragraph (e) above. Operating Policies The Declaration of Trust provides that the operations and affairs of Scott s REIT and its affiliates after Closing shall be conducted in accordance with the following policies: a) Scott s REIT shall not purchase, sell, market or trade in currency or interest rate futures contracts otherwise than for hedging purposes where, for the purposes hereof, the term hedging shall have the meaning ascribed thereto by National Instrument adopted by the Canadian Securities Administrators, as amended from time to time; b) (i) any written instrument creating an obligation which is or includes the granting by Scott s REIT of a mortgage, and (ii) to the extent the Trustees determine to be practicable and consistent with their fiduciary duty to act in the best interests of the Unitholders, any written instrument which is, in the judgment of the Trustees, a material obligation shall contain a provision or be subject to an acknowledgement to the effect that the obligation being created is not personally binding upon, and that resort shall not be had to, nor shall recourse or satisfaction be sought from, by way of lawsuit or otherwise, the private property of any of the Trustees, Voting Unitholders, annuitants or beneficiaries under a plan of which a Voting Unitholder acts as a trustee or carrier, or officers, employees or agents of Scott s REIT, but that only property held in trust by the Trustees pursuant to the Declaration of Trust, or a specific portion thereof, shall be bound; Scott s REIT, however, is not required, but shall use all reasonable efforts, to comply with this requirement in respect of obligations assumed by Scott s REIT upon the acquisition of real property; c) except for renovation or expansion of existing restaurant facilities and the development of new restaurant facilities on property adjacent to existing properties of Scott s REIT as permitted under paragraph (h) under the heading Investment Guidelines, Scott s REIT shall not engage in construction or development of real property except as necessary to maintain its real properties in good repair or to enhance the incomeproducing ability of capital properties in which Scott s REIT has an interest; d) title to each real property shall be held by and registered in the name of Scott s REIT, the Trustees, a Scott s Entity or another person or company either directly or indirectly wholly-owned or controlled by Scott s REIT or directly or indirectly jointly-owned by Scott s REIT with joint venturers; e) Scott s REIT shall not incur or assume any indebtedness if, after giving effect to the incurring or assumption of the indebtedness, the total indebtedness of Scott s REIT would be more than 55% of the Gross Book 38

46 Value, unless a majority of the independent Trustees, in their discretion, determine that the maximum amount of indebtedness shall be based on the appraised value of the real properties of Scott s REIT; f) at no time will Scott s REIT incur indebtedness aggregating more than 15% of its Gross Book Value, determined as of the date on which such indebtedness is or would be incurred, and excluding trade account payables, accrued liabilities arising in the ordinary course of business, debt with an original maturity of one year or more falling due in the next 12 months, variable rate debt for which Scott s REIT has entered into interest rate swap agreements to fix the interest rate for a one year period or more and distributions payable to Unitholders, at floating interest rates or having maturities of less than one year; g) Scott s REIT will not incur any new indebtedness (otherwise than by the assumption of existing indebtedness) or renew or refinance any indebtedness under a mortgage on any of the real property of the REIT where (i) in the case of an individual property, the total amount of indebtedness secured by mortgages on such property exceeds 75% of the market value of such individual property; or (ii) in the case of more than one property or a pool or portfolio of properties, the total amount of indebtedness secured by mortgages on such property exceeds 75% of the market value of such properties on an aggregate basis; h) no acquisition may be made nor any development undertaken unless and until the officers of Trustee Corp. have prepared and presented to the Governance, Compensation and Investment Committee or the Trustees a written report containing their recommendation that Scott s REIT make the investment together with a financial analysis of the estimated cost and projected return from the investment and such supplementary information and data (including, without limitation, underlying assumptions, proposed financial arrangements, leasing and economic and market data) as is reasonably necessary to the investment decision; i) Scott s REIT may only provide a guarantee in respect of the indebtedness of another person if the Trustees have approved such guarantee and determined that the provision by Scott s REIT of such guarantee will not cause Scott s REIT to cease to qualify as a mutual fund trust for the purposes of the Tax Act; j) Scott s REIT shall obtain an independent appraisal with respect to each property that it intends to directly or indirectly acquire; k) Scott s REIT or its affiliates and subsidiaries shall obtain and maintain at all times insurance coverage in respect of potential liabilities of Scott s REIT and its affiliates and subsidiaries and the accidental loss of value of the assets of Scott s REIT from risks, in amounts, with such insurers, and on such terms as the Trustees consider appropriate, taking into account all relevant factors including the practices of owners of comparable properties; l) Scott s REIT shall have conducted a Phase I environmental site assessment of each property to be directly or indirectly acquired by it and, if the Phase I environmental site assessment recommends that further environmental site assessments be conducted, Scott s REIT shall have conducted such further environmental site assessments, in each case by an independent professional consulting firm with experience in environmental services; and m) Scott s REIT shall not issue additional Units unless Scott s REIT Trustees consider such issuances not to be dilutive to ensuing monthly distributions of Distributable Income per Unit to existing Unitholders. For the purposes of the foregoing guidelines and policies, the assets, liabilities and transactions of a corporation, partnership or other entity wholly or partially owned by Scott s REIT will be deemed to be those of Scott s REIT on a proportionate, consolidated basis. In addition, any references in the foregoing investment guidelines and operating policies to investment in real property will be deemed to include an investment in a joint venture arrangement. In addition, the term indebtedness means (without duplication) on a consolidated basis: i) any obligation of Scott s REIT for borrowed money; ii) any obligation of Scott s REIT incurred in connection with the acquisition of property, assets or business other than the amount of future income tax liability arising out of indirect acquisitions; iii) any obligation of Scott s REIT issued or assumed as the deferred purchase price of property; iv) any capital lease obligation of Scott s REIT; and v) any obligation of the type referred to in clauses (i) through (iv) of another person, the payment of which Scott s REIT has guaranteed or for which Scott s REIT is responsible or liable; 39

47 provided that (A) for the purposes of (i) through (iv), an obligation will constitute indebtedness only to the extent that it would appear as a liability on the consolidated balance sheet of Scott s REIT in accordance with GAAP; and (B) obligations referred to in clauses (i) through (iii) exclude trade accounts payable, distributions payable to Unitholders and accrued liabilities arising in the ordinary course of business. Amendments to Investment Guidelines and Operating Policies Pursuant to the Declaration of Trust, all of the investment guidelines set out under the heading Investment Guidelines and the operating policies contained in subparagraphs (a), (b), (c), (e), (f), (g), (h), (i), (j), (k), (l) and (m) under the heading Operating Policies may be amended only by Special Resolution. The remaining operating policies may be amended with the approval of a majority of the votes cast by Voting Unitholders of Scott s REIT at a meeting of Voting Unitholders called for such purpose. 40

48 FINANCIAL FORECAST The following Financial Forecast was prepared by JBM, the Asset Manager and Property Manager, on behalf of Scott s REIT and reported upon by PricewaterhouseCoopers LLP, Chartered Accountants, using assumptions with an effective date of September 1, 2005, and was approved by the Trustees on August 31, The Financial Forecast assumes that Closing will be on September 1, These assumptions reflect JBM s intended course of action for Scott s REIT, given JBM s judgment as to the most probable set of economic conditions. Pursuant to applicable securities policies, Scott s REIT is required to update the forecast during the Forecast Period by identifying any material changes from the forecast resulting from events that have occurred since it was issued and by comparing such forecast with annual audited actual results and interim unaudited actual results for the periods covered. The results of this comparison will accompany the annual or interim financial statements of Scott s REIT for the relevant periods. The forecast has been prepared in accordance with generally accepted accounting principles relating to measurement, presentation and disclosure of financial forecasts established by The Canadian Institute of Chartered Accountants. The forecast has been prepared after giving effect to the Offering and the other transactions contemplated in this prospectus to be completed on or before Closing. The assumptions used in the preparation of the Financial Forecast, although considered reasonable by JBM at the time of preparation, may prove to be incorrect. The actual results achieved for the Forecast Period will vary from the forecast results and the variations may be material. There is no representation by Scott s REIT that actual results achieved during the Forecast Period will be the same in whole or in part as those forecast. Important factors that could cause actual results to vary materially from the Financial Forecast are disclosed under Risk Factors. The Financial Forecast should be read in conjunction with the audited opening balance sheet of Scott s REIT, audited financial statements of the Initial Properties and the unaudited pro forma consolidated financial statements of Scott s REIT contained elsewhere in this prospectus. See Index to Financial Statements. 41

49 AUDITORS REPORT ON FINANCIAL FORECAST September 29, 2005 Report on Consolidated Financial Forecast To the Trustees of Scott s Real Estate Investment Trust The accompanying consolidated financial forecast of Scott s Real Estate Investment Trust, consisting of the consolidated statement of forecasted net income for the twelve-month period ending August 31, 2006, has been prepared by JBM Properties Inc., the Asset Manager and the Property Manager of Scott s Real Estate Investment Trust, using assumptions with an effective date of September 1, We have examined the support provided by management for the assumptions, and the preparation and presentation of this financial forecast. Our examination was made in accordance with the applicable Assurance and Related Services Guideline issued by The Canadian Institute of Chartered Accountants. We have no responsibility to update this report for events and circumstances occurring after the date of our report. In our opinion: a) as of the date of this report, the assumptions developed by management are suitably supported and consistent with the plan of Scott s Real Estate Investment Trust, and provide a reasonable basis for the financial forecast; b) this financial forecast reflects such assumptions; and c) the financial forecast complies with the presentation and disclosure standards for financial forecasts established by The Canadian Institute of Chartered Accountants. Since this consolidated financial forecast is based on assumptions regarding future events, actual results will vary from the information presented and the variations may be material. Accordingly, we express no opinion as to whether this financial forecast will be achieved. (signed) PRICEWATERHOUSECOOPERS LLP Chartered Accountants Toronto, Ontario 42

50 SCOTT S REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENT OF FORECASTED NET INCOME For the twelve-month period ending August 31, 2006 $ Rental revenue Rental revenue received ***************************************************************** 10,690,390 Straight-line revenue accrual ************************************************************* 627,257 11,317,647 Expenses Amortization ************************************************************************** 4,892,869 Operating expenses********************************************************************* 404,243 Interest on mortgage******************************************************************** 3,213,326 General and administrative ************************************************************** 934,474 9,444,912 Income before non-controlling interest *************************************************** 1,872,735 Non-controlling interest ***************************************************************** (582,046) Net income for the period *************************************************************** 1,290,689 See accompanying notes to financial forecast. 43

51 SCOTT S REAL ESTATE INVESTMENT TRUST NOTES TO CONSOLIDATED FINANCIAL FORECAST For the twelve-month period ending August 31, Purpose of the financial forecast This financial forecast has been prepared by JBM Properties Inc. (JBM), the Asset Manager and Property Manager, on behalf of Scott s Real Estate Investment Trust (Scott s REIT) for use by prospective investors in their evaluation of potential investments in Scott s REIT and may not be appropriate for any other purpose. 2 Basis of presentation of the financial forecast The financial forecast consists of the consolidated statement of forecasted net income of Scott s REIT for the twelve-month period ending August 31, The financial forecast has been prepared by JBM using assumptions with an effective date of September 1, The financial forecast reflects the assumptions described in note 4. The financial forecast has been prepared using assumptions that reflect JBM s intended course of action for the period presented, given JBM s judgment as to the most probable set of economic conditions. The financial forecast will be compared with the reported results for the financial forecast period and any significant differences will be disclosed. The actual results achieved during the financial forecast period will vary from the forecasted results, and these variations could be material. The accounting policies used in the preparation of the financial forecast are in accordance with those used in the preparation of the audited financial statements of SRI Initial Properties and Yum! Initial Properties. 3 Summary of significant accounting policies The financial forecast has been prepared in accordance with Canadian generally accepted accounting principles and reflects the following policies: Revenue recognition Revenue from income-producing properties includes rents earned from tenants under lease agreements. All the leases provide for fixed rent increases during the term of the lease. Effective from the commencement of the lease, minimum rental income is recorded for the fixed term of each lease on a straight-line basis. Amortization Amortization of buildings is provided using the straight-line method in annual amounts, which is designed to fully amortize the cost of the buildings over their estimated useful lives of up to 20 years. Intangible lease assets are amortized over the lease term. Deferred financing costs Costs associated with the arrangement of long-term financing are deferred and amortized on a straight-line basis over the term of the related financing provided that there is no intention to replace the financing facility in which case the costs are immediately charged to operations. Income and capital taxes Capital tax, current income tax and future tax expenses have been excluded from the consolidated statement of forecasted net income. Scott s REIT is taxed as a mutual fund trust for income tax purposes. Pursuant to the Declaration of Trust, the Trustees intend to distribute or designate all taxable income directly earned by the Trust to unitholders of the Trust, and to deduct such distributions and designations for income tax purposes. Therefore, no provision for income taxes is required for direct investments. 4 Significant assumptions a) Initial transactions The financial forecast assumes that Scott s REIT will raise gross proceeds of approximately $50,000,000 pursuant to an initial public offering (the Offering) through the issuance of 5,000,000 units at $10 per unit (excluding any over-allotment option). Costs relating to the Offering, including underwriters fees, are estimated to be approximately $5,626,932 and are charged directly to unitholders equity. Scott s LP has arranged a fixed rate mortgage on the Initial Properties in the amount of $65,000,000 for a term of five years, bearing interest at an estimated blended fixed rate of 4.90%, based on 130 basis points over five-year Government of Canada bonds. Debt placement fees associated with issuance of debt are estimated to be $802,500. Upon completion of the Offering, Scott s REIT will use the proceeds of the Offering to subscribe, indirectly, for 5,000,000 Class A LP Units. Scott s LP will use the proceeds of the subscription, together with the net amount of $64,197,500 drawn down under the new borrowing facility, the issuance of a promissory note in the amount of $578,085 and the issuance of 2,254,909 Class B Scott s LP Units, to pay the expenses of the Offering and to acquire the Initial Properties. Scott s LP will acquire 79 properties from SRI for an estimated aggregate purchase price of $64,790,000 (subject to usual closing adjustments). The purchase price for these properties will be satisfied by the payment of $41,662,825 in cash (of which $500,000 will be withheld for environmental remediation), the issuance of a promissory note in the amount of $578,085 and the issuance of 2,254,909 Class B LP Units to SRI. Scott s LP will also acquire 111 properties from Yum! for an estimated aggregate purchase price of $65,940,000 (subject to usual closing adjustments). The purchase price of these properties will be satisfied by the payment of $65,940,000 in cash. 44

52 The acquisition of the Initial Properties has been accounted for using the purchase method of accounting based on preliminary allocations, as follows: $ Fair value of the consideration SRI promissory note*********************************************************************** 578,085 Cash (i) ********************************************************************************** 107,602,825 Class B LP Units (non-controlling interest) **************************************************** 22,549, ,730,000 Net assets acquired (ii) SRI Initial Properties and Yum! Initial Properties (iii)(iv) ******************************************* 127,797,300 Intangible assets (iii)(iv) ********************************************************************** 2,932,700 Net purchase price of income-producing properties************************************************ 130,730,000 (i) Consistent with the requirement to remediate certain conditions on four of the properties, Scott s REIT has withheld $500,000 from the cash portion of the purchase price, the estimated cost of that remediation, and accrued a liability for the remittance of the withheld funds to SRI to be paid as a reimbursement of the costs once the work is completed. (ii) In addition to the net assets acquired, an amount of $967,744 has been included for the land transfer tax as a pro forma adjustment. (iii) The allocation of the purchase price will be based on the fair value of the assets and liabilities purchased at the effective date of the acquisition and other information including internal and/or independent asset valuations. For purposes of these unaudited pro forma consolidated financial statements, management has made estimates of the fair value to be allocated to the assets and liabilities acquired, as indicated below. The actual amounts of each of the assets and liabilities will vary from the pro forma amounts and the variations could be material. For the purposes of these unaudited pro forma consolidated financial statements, management has ascribed $11,556,081 of additional value to income-producing properties based on individual property valuations performed by an independent appraiser. In estimating the preliminary value for the intangible assets, consideration has been given to the fair value of in place leases and customer relationships. An initial estimate of $2,932,700 has been made for the value of in place leases representing the estimated present value of leasing costs and foregone rents during the estimated lease up period. Based on the information provided in the independent appraisals of the properties, it would appear that, overall, the rates on the existing property leases approximate current market value. Management believes that the extent to which certain leases are slightly above market is approximately offset by those which are slightly below market. No value has been initially attributed to the customer relationship with the Priszm Canadian Income Fund given the 13 year average remaining term of the leases and the estimate of a very short lease up period (less than 3 months) at the end of the lease term if the Priszm Canadian Income Fund does not renew their leases. (iv) The net assets acquired have been reduced on a pro-rata basis to reflect the fact that the net purchase price is less than the fair value of the income producing properties. b) Rental revenue Forecast revenue from income-producing properties is based on rents from existing leases. The overall occupancy for the combined 190 income-producing properties during the forecast period is assumed to be 100%. Revenue from income-producing properties includes the minimum rent receivable under the existing leases, adjusted to straight-line the impact of rent escalations in future periods. In preparing the financial forecast, it is assumed that the existing tenant will fulfill its current contractual lease obligations and remain in occupancy and pay rent for the term of the forecast period. c) Operating costs Pursuant to a Property Management Agreement to be entered into on Closing, Scott s REIT will retain JBM, a company controlled by the principal shareholder of SRI, to administer the day-to-day property and leasing operations of the REIT s real estate properties. Fees payable under the Property Management Agreement amounting to 2.5% of the REIT s rental revenue received from income-producing properties have been included in the consolidated statement of forecasted net income. d) Trust expenses Estimated trust expenses have been included in the consolidated statement of forecasted net income as follows: $ Asset management fee ***************************************************************************** 329,244 Other trust expenses ******************************************************************************* 605, ,474 Pursuant to the Asset Management Agreement to be entered into on Closing, Scott s REIT will retain JBM, a company controlled by the principal shareholder of SRI, as an advisor to provide advisory, asset management and administrative services, subject to the overriding supervision and direction of the Trustees of Scott s REIT. Fees payable under the Asset Management Agreement amounting to 0.25% of the Gross Book Value of the income-producing properties have been included in the consolidated statement of forecasted net income. An 45

53 additional incentive fee amounting to 15% of the REIT s distributable income per unit in excess of $0.85 per unit is payable to JBM; however, for purposes of the consolidated statement of forecasted net income, no such amounts are currently estimable. Other trust expenses include estimated direct administrative costs of Scott s REIT, including legal and audit fees, trustee fees, insurance costs and various other regulatory and public company listing costs. e) Acquisitions and dispositions of income-producing properties This financial forecast does not reflect any potential sales or acquisitions of income-producing properties other than the acquisitions discussed in note 4(a). However, it is possible that Scott s REIT will make purchases and sales of income-producing properties during the forecast period, which will only be undertaken on a basis considered by management to be advantageous to Scott s REIT and as approved by the Trustees of Scott s REIT. f) Other matters No significant changes in economic conditions and government legislation with respect to taxes, including realty taxes, other than announced changes, are anticipated during the forecast period. 46

54 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management discussion and analysis of financial condition and results of operations of the Initial Properties should be read in conjunction with the audited historical financial statements of the Initial Properties, and the notes thereto, as included elsewhere in the prospectus. The Initial Properties are not legal entities and are used only as a method of presenting the historical financial information relating to the Initial Properties. For information concerning each Initial Property, see Initial Properties. Yum! acquired the Yum! Initial Properties on November 10, 2003, at which date it entered into a master lease agreement with KIT in respect of the Yum! Initial Properties. The Yum! Initial Properties were not leased to a third party at the time of their acquisition by Yum!. SRI acquired all but three of the SRI Initial Properties over the course of three separate transactions from May 2001 to April These SRI Initial Properties were not leased to a third party at the time of their acquisition by SRI. Historical results discussed for the period from November 10, 2003 to December 31, 2003, the year ended December 31, 2004 and the six-months ended June 30, 2005 represent the combined results of operation of the SRI Initial Properties and the Yum! Initial Properties for these respective periods. Background Scott s REIT is an unincorporated open-ended real estate investment trust established under the laws of the Province of Ontario. Scott s REIT has been created to indirectly acquire and control Scott s LP. Scott s LP will, in turn, acquire the Initial Properties from Yum! and SRI. All but one of the Initial Properties are currently leased, in whole or in part, to KIT and operated by KIT as KFC TM restaurants (single or multibranded). KIT is owned, directly or indirectly, as to approximately 60.2% by Priszm Canadian Income Fund, a publicly listed income trust, and as to approximately 39.8% by SRI. The Initial Properties consist of 190 retail properties located in seven provinces across Canada. The rental revenue on the Initial Properties is derived from 17 separate leases and seven different tenants, with one tenant leasing all or a portion of 189 of the 190 Initial Properties. The leases have commencement dates that range from May 2001 to November 2003 and termination dates that range from May 6, 2016 to November 9, Two of the leases, which represent collectively a total of 111, or 58%, of the Initial Properties, have two, five-year extension options. Following the transactions contemplated by this prospectus, Scott s LP s business will depend principally on: (a) the leases of the Initial Properties, which generate rental revenue; (b) the Mortgage, which carries a fixed interest rate and requires a repayment of principal on the maturity of the Mortgage; and (c) the Property Management Agreement and Asset Management Agreement to be entered into by Scott s LP in connection with the acquisition of the Initial Properties, which will determine operating, management and development expenses. Significant External Factors The results of operations, business prospects and financial condition of Scott s LP are subject to a number of risks and uncertainties, and are affected by a number of factors outside of the control of management. In addition to the factors discussed below, see Risk Factors for a complete discussion of the risks affecting Scott s LP s business. Reliance on KIT KIT is a tenant of all but one of the Initial Properties, and operates KFC TM restaurants (single or multibranded) at these Initial Properties. As a result, the cash flow of Scott s REIT may be negatively affected if KIT s business or financial condition is materially adversely affected. Real Property Ownership Real property equity investments are relatively illiquid. This illiquidity will tend to limit the ability of Scott s REIT to respond to changing economic or investment conditions. By specializing in a particular type of real estate, Scott s REIT is exposed to adverse effects on that segment of the real estate market and does not benefit from a diversification of its portfolio by property type. All real property investments are subject to elements of risk. Such investments are affected by general economic conditions, local real estate markets, changing demographics, supply and demand for leased premises, competition from other available premises and various other factors. 47

55 Reliance on Key Personnel The management of Scott s REIT depends on the services of certain key personnel, including John Bitove, Lilly Di Massimo and Michael Washinushi. The loss of the services of any key personnel could have an adverse effect on Scott s REIT. The management of Scott s REIT is also dependent upon JBM with respect to the administration of Scott s REIT and the asset management of the properties of Scott s REIT as well as with respect to the property management of the properties of Scott s REIT. There is no assurance that JBM will continue to be the Asset Manager and Property Manager for Scott s REIT. Selected Financial Information The following table sets forth information regarding the SRI Initial Properties and the Yum! Initial Properties derived from the audited historical financial statements included elsewhere in this prospectus, and should be read in conjunction with such audited historical financial statements and the related notes thereto. Six Month November 10, 2003 Period Ended Year Ended to June 30, 2005 December 31, 2004 December 31, 2003 Rental Revenue Rental revenue received ******************* $5,335,023 $10,670,045 $1,520,116 Straight-line revenue accrual**************** 271, ,380 77,413 5,606,713 11,213,425 1,597,529 Expenses Amortization***************************** 1,875,944 3,797, ,255 Operating expenses *********************** 88, ,908 25,207 1,964,413 3,973, ,462 Income before non-controlling interest******** $3,642,300 $ 7,239,456 $1,027,067 As at June 30, As at December 31, As at December 31, Balance Sheet Data Total assets ***************************** $117,453,091 $119,057,345 $122,311,026 Rental Revenue During each of the six months ended June 30, 2005, the year ended December 31, 2004 and the period from November 10, 2003 to December 31, 2003, combined rental revenues were in accordance with the provisions of the underlying leases. No portion of rental revenue is based on tenant sales. There were also no escalations in the rents during these periods, as none were required under the terms of the various property leases for the Initial Properties. In accordance with GAAP, however, straight-line adjustments were made to anticipate the escalations of rent under the terms of the various property leases in future periods. Amortization Combined amortization for each of the six months ended June 30, 2005, the year ended December 31, 2004 and the period from November 10, 2003 to December 31, 2003 related to the costs of the buildings owned by Yum! and SRI, respectively, on the Initial Properties. No additions or dispositions of these buildings occurred during these periods. 48

56 Operating Expenses The combined operating expenses related to insurance costs incurred for the entire portfolio of Initial Properties. The operating expenses also include carrying costs at multi-tenant sites that have small vacant units adjacent to leased units. These costs relate mostly to property taxes and utilities. As at June 30, 2005, there were two such vacant units. Liquidity and Capital Resources There were no capital additions or changes to financing activities in respect of the Initial Properties during the periods presented. Outlook Management believes that following the transactions contemplated by this prospectus, Scott s LP s ongoing cash flow from operations will be sufficient to allow it to meet ongoing requirements for working capital and distributions. Scott s LP s future needs may, however, change, and in such event Scott s LP s ability to satisfy its obligations will be dependent upon its future financial performance, which in turn will be subject to a number of risks and uncertainties, including elements beyond Scott s LP s or the REIT s control. See Risk Factors. 49

57 DISTRIBUTION POLICY The following outlines the distribution policy of Scott s REIT as contained in the Declaration of Trust, the Trust Declaration of Trust and the Scott s LP Agreement. General Scott s REIT intends to make stable monthly cash distributions, which are expected to be approximately $ per Unit per month in the first year (approximately 100% of Distributable Income, on an annualized basis including distributions payable on the Class B LP Units), thereby providing an initial annualized yield of approximately 8.5%. If in the future an incentive fee becomes payable to the Asset Manager in accordance with the provisions of the Asset Management Agreement, or if interest is paid under the SRI Promissory Note, the payment of these amounts will effectively reduce the percentage of Distributable Income that is available for distribution to Unitholders. The Operator will be the primary source of cash flow to fund distributions of Scott s REIT. The Operator will adopt a policy to make monthly cash distributions. Distributions will be made on the Class A LP Units within 15 days of the end of each month, and are intended to be received by the Trust prior to its related distributions to Scott s REIT. Distributions on the Class B LP Units will also be made within 15 days of the end of each month. Distributions will be payable to holders of Scott s LP Units of record on the last day of the period in respect of which the distribution is to be paid. The Operator may, in addition, make a distribution at any other time. Distributions by the Operator will generally represent all of the Operator s cash, after: (i) satisfaction of its debt service obligations (principal and interest) under credit facilities or other agreements with third parties, including amounts payable under the Mortgage; (ii) satisfaction of its other liabilities and expense obligations; (iii) amounts that Scott s GP may reasonably consider to be necessary to provide for the payment of any costs or expenses that have been or are reasonably expected to be incurred in the activities and operations of the Operator (to the extent that such costs or expenses have not otherwise been taken into account); and (iv) amounts that Scott s GP may reasonably consider to be necessary to provide for reasonable reserves. The Trust will use the distributions it receives from the Operator, less amounts which are paid or payable in connection with: (i) administrative expenses and other obligations of the Trust, (ii) amounts that may be paid by the Trust in connection with any cash redemptions or repurchases of the Trust Units or repayments of the Notes; (iii) satisfaction of its debt service obligations (principal and interest) on indebtedness, if any, including the Notes; and (iv) any amount that the trustee of the Trust may reasonably consider to be necessary to provide for the payment of any costs or expenses, including any tax liabilities of the Trust, that have been or are reasonably expected to be incurred in the activities and operations of the Trust (to the extent that such costs or expenses have not otherwise been taken into account in the calculation of the available distributable cash of the Trust), to pay distributions to Scott s REIT on its Trust Units. Scott s REIT intends to make monthly distributions of the amounts received by it from the Trust, less: (i) administrative expenses and other obligations of Scott s REIT, (ii) amounts that may be paid by Scott s REIT in connection with any cash redemptions or repurchases of Units; (iii) satisfaction of its debt service obligations (principal and interest) on indebtedness, if any; and (iv) any amount that the Trustees may reasonably consider to be necessary to provide for the payment of any costs or expenses, including any tax liabilities of Scott s REIT, that have been or are reasonably expected to be incurred in the activities and operations of Scott s REIT (to the extent that such costs or expenses have not otherwise been taken into account in the calculation of the available distributable cash of Scott s REIT) and for reasonable reserves. In connection with the purchase of the SRI Initial Properties, Scott s LP will issue to SRI an unsecured promissory note in the amount of $578,085. Interest will accrue on amounts outstanding under the SRI Promissory Note at the rate of 4.90% per annum. The principal and cumulative accrued interest under the SRI Promissory Note can be repaid at any time but become due and payable on the date that is five years after the Closing Date. Scott s LP will not pay accrued interest on the SRI Promissory Note for any year prior to maturity unless distributions totalling at least $0.85 per Unit for such year have been paid. Scott s REIT may make additional distributions in excess of the above mentioned monthly distributions during the year, as the Trustees may determine. The distribution declared in respect of the month ending December 31 in each year will include such amount in respect of the taxable income and net realized capital gains, if any, of Scott s REIT for 50

58 such year as is necessary to ensure that Scott s REIT will not be liable for ordinary income taxes under the Tax Act in such year. Any income of Scott s REIT that is unavailable for cash distribution will, to the extent necessary to ensure that Scott s REIT does not have any income tax liability under Part I of the Tax Act, be distributed to Unitholders in the form of additional Units. Such additional Units will be issued pursuant to applicable exemptions under applicable securities laws, discretionary exemptions granted by applicable securities regulatory authorities or a prospectus or similar filing. The Declaration of Trust provides that immediately after any pro rata distribution of Units to all Unitholders in satisfaction of any non-cash distribution, the number of outstanding Units will be consolidated such that each Unitholder will hold after the consolidation the same number of Units as the Unitholder held before the non-cash distribution (except where tax was required to be withheld in respect of the Unitholder s share of the distribution as described below). In this case, the number of Units held by a Unitholder prior to the non-cash distribution will be the same as the number of Units held by the Unitholder after the non-cash distribution and the consolidation. Where amounts so distributed represent income, non-resident Unitholders will be subject to withholding tax and the consolidation will not result in such non-resident Unitholders holding the same number of Units. Scott s REIT intends to make monthly cash distributions to Unitholders of record on the last Business Day of each month, and the distributions will be paid within 15 days following each month end. The initial cash distribution for the period from Closing (assuming Closing occurs on October 6, 2005) to November 30, 2005 is estimated to be approximately $ per Unit and is expected to be paid on or before December 15, Unitholders who are non-residents of Canada will be required to pay all withholding taxes payable in respect of any distributions of income by Scott s REIT, whether such distributions are in the form of cash or additional Units. Scott s REIT will withhold from monthly distributions all amounts required to be withheld by law. Non-residents should consult their own tax advisors regarding the tax consequences of investing in the Units. Computation of Distributable Income Distributable Income is defined as income before non-controlling interest of Scott s REIT on a consolidated basis, as determined in accordance with GAAP, subject to certain adjustments, including: (i) adding back the following items: depreciation, amortization, future income tax expense, non-cash interest expense on the SRI Promissory Note, losses on dispositions of assets and amortization of any net discount on long-term debt assumed from vendors of properties at rates of interest less than fair value, (ii) deducting the following items: future income tax credits, amounts paid as interest on the SRI Promissory Note to the extent not already included in income before non-controlling interest of the REIT, gains on dispositions of assets and amortization of any net premium on long-term debt assumed from vendors of properties at rates of interest greater than fair value, and (iii) adjusting for the straight line recognition of revenues. For greater certainty, amortization of deferred financing costs will be added to income before non-controlling interest in the computation of Distributable Income. Other adjustments may be made to Distributable Income as determined by the Trustees in their discretion, acting reasonably. Distributable Income may be estimated whenever the actual amount has not been fully determined. Tax Deferral on Distributions Management of the Operator estimates that of the monthly cash distributions to be made by Scott s REIT to Unitholders in 2006, a portion will be characterized as non-taxable amounts by reason of Scott s LP s ability to claim capital cost allowance and certain other deductions. Based on current assumptions and considerations set forth in this prospectus, management anticipates that approximately 32% of the 2006 cash distributions of Scott s REIT will be taxable to Unitholders as ordinary income for Canadian tax purposes, and that the remaining 68% of such cash distributions will be non-taxable returns of capital. The adjusted cost base of Units held by a Unitholder will generally be reduced by such non-taxable portion of distributions made to the Unitholder (other than the non-taxable portion of capital gains). A Unitholder will be considered to realize a capital gain to the extent that the adjusted cost base of the Unitholder s Units would otherwise be a negative amount, notwithstanding that the Unitholder has not sold any Units. See Certain Canadian Federal Income Tax Considerations. 51

59 USE OF PROCEEDS The estimated net proceeds of the Offering, after deducting the Underwriters fees and the expenses of the Offering, estimated to be $5,626,932, will be $44,373,068. Scott s REIT will use the proceeds of the Offering to indirectly invest in Scott s LP, which will in turn use the proceeds, together with the net amount of $64,197,500 drawn under the Mortgage, the issuance of Class B LP Units and the issuance of the SRI Promissory Note, to pay the expenses of the Offering and to acquire the Initial Properties. The proceeds received by Scott s REIT on the exercise of the Over-Allotment Option, if exercised, will be used to increase the REIT s indirect interest in Scott s LP. Scott s LP will then use such proceeds to redeem a proportionate number of the Class B LP Units issued to SRI. See Retained Interest and Exchange Rights, Principal Unitholder and Plan of Distribution. 52

60 CONSOLIDATED CAPITALIZATION OF SCOTT S REIT The following table sets forth the consolidated capitalization of Scott s REIT as at August 23, 2005, both before and after giving effect to the Offering and the related transactions. As at As at August 23, 2005 August 23, 2005 After giving effect to Authorized Before the Offering the Offering Long-Term Debt ***************************** $65,578,085 Units (1)(2) ************************************ Unlimited $ $72,549,090 (10 Units) (7,254,909 Units) Notes: (1) Scott s REIT was initially settled on August 23, 2005 with $ (2) Sufficient Units will be reserved for issuance to satisfy the REIT s obligations in connection with the Exchange Right granted under the Exchange Agreement. See Retained Interest and Exchange Rights Exchange Rights. 53

61 ORGANIZATIONAL CHART The following chart illustrates the organizational structure of Scott s REIT that will exist at Closing. Public Units Scott s REIT (Ontario) Special Voting Units 100% of Trust Units and Series 1 Notes Scott s Restaurants Inc. SR Operating Trust (Ontario) 100% Ontario Inc. (Ontario) JBM Properties Inc. (Asset and Property Manager) Class B Scott s LP Units (1) (31.1% Retained Interest) 100% Class A LP Units (68.9% Interest) Scott s Real Estate Limited Partnership (Manitoba) General Partner 0.001% 100% Scott s GP Trust (Ontario) 100% Beneficial Interest Sole Trustee 100% Scott s Trustee Corp. (Ontario) CRI Realty (No. 3) Inc. (Ontario) Property Portfolio Colonel s Realty Inc. (Ontario) Note: (1) Indirectly exchangeable for Units of Scott s REIT on a one-for-one basis and accompanied by Special Voting Units. 54

62 SCOTT S REIT DECLARATION OF TRUST AND DESCRIPTION OF UNITS General Scott s REIT is an unincorporated open-ended limited purpose trust established under the laws of the Province of Ontario pursuant to the Declaration of Trust. It is intended that Scott s REIT will qualify as a unit trust and a mutual fund trust for the purposes of the Tax Act, although Scott s REIT will not be a mutual fund under applicable securities laws. The following is a summary of the material attributes and characteristics of the Units and certain provisions of the Declaration of Trust, which does not purport to be complete. Reference is made to the Declaration of Trust for a complete description of the Units and the full text of its provisions. Rights of Unitholders The rights of the Unitholders are established by the Declaration of Trust. Although the Declaration of Trust confers upon a Unitholder many of the same protections, rights and remedies an investor would have as a shareholder of a corporation governed by the CBCA, significant differences exist, some of which are described below. Many CBCA requirements relating to the governance and management of a corporation have been incorporated in the Declaration of Trust. For example, Unitholders are entitled to exercise voting rights in respect of their holdings of Units in a manner comparable to shareholders of a CBCA corporation and to elect the Trustees and appoint the auditors of Scott s REIT. The Declaration of Trust also includes provisions comparable to those of the CBCA dealing with the calling and holding of meetings of Voting Unitholders and Trustees, the quorum for and procedures at such meetings and the right of Voting Unitholders to participate in the decision-making process when certain fundamental actions are proposed. The matters in respect of which Voting Unitholder approval is required under the Declaration of Trust are generally less extensive than the rights conferred on shareholders of a CBCA corporation. Such Voting Unitholder approval rights are supplemented by securities laws that are generally applicable to issuers (whether corporations, trusts or other entities) that are reporting issuers or the equivalent or listed on the TSX. The Declaration of Trust contains conflicts of interest provisions similar to those contained in the CBCA that serve to protect Unitholders without creating undue limitations on Scott s REIT. See Management of Scott s REIT Conflicts of Interest. Unitholders do not have recourse to dissent rights under which shareholders of a CBCA corporation are entitled to receive the fair value of their shares if certain fundamental changes affecting the corporation are undertaken (such as an amalgamation, a continuance under the laws of another jurisdiction, the sale of all or substantially all of its property, a going private transaction or the addition, change or removal of provisions restricting (i) the business that the corporation can carry on, or (ii) the issue, transfer or ownership of shares). As an alternative, Unitholders seeking to terminate their investment in Scott s REIT are entitled to receive, subject to certain conditions and limitations, their pro rata share of the REIT s net assets through the exercise of the redemption rights provided by the Declaration of Trust as described under Redemption Right below. Unitholders similarly do not have recourse to the statutory oppression remedy available to shareholders of a CBCA corporation where a corporation s actions are oppressive, unfairly prejudicial or disregard the interests of securityholders and certain other parties. Shareholders of a CBCA corporation may also apply to a court to order the liquidation and dissolution of the corporation in such circumstances, whereas Unitholders may rely only on the general provisions of the Declaration of Trust, which permit the dissolution of Scott s REIT pursuant to a Special Resolution. Shareholders of a CBCA corporation may also apply to a court for the appointment of an inspector to investigate the manner in which the business of the corporation and its affiliates is carried on where there is reason to believe that fraudulent, dishonest or oppressive conduct has occurred. The Declaration of Trust allows Unitholders to pass resolutions appointing an inspector to investigate the Trustees performance of their responsibilities and duties, but this process would not be subject to court oversight or assure the other investigative procedures, rights and remedies available under the CBCA. The CBCA also permits shareholders to bring or intervene in derivative actions in the name of the corporation or any of its subsidiaries, with the leave of a court. The Declaration of Trust does not include a comparable right of the Unitholders to commence or participate in legal proceedings with respect to Scott s REIT. Units and Special Voting Units The beneficial interests in Scott s REIT will be divided into interests of two classes, described and designated as Units and Special Voting Units, respectively. An unlimited number of Units and Special Voting Units will be issuable pursuant to the Declaration of Trust. Each Unit will be transferable and will represent an equal undivided 55

63 beneficial interest in any distributions from Scott s REIT whether of net income, net realized capital gains or other amounts and in the net assets of Scott s REIT in the event of a termination or winding-up of Scott s REIT. The Units issued pursuant to the Offering will not be subject to future calls or assessments and will entitle the holder thereof to one vote for each whole Unit held at all meetings of Voting Unitholders. Except as set out under Redemption Right below, the Units have no conversion, retraction, redemption or pre-emptive rights. Special Voting Units may only be issued in connection with or in relation to Class B LP Units and, if the Trustees so determine, other securities exchangeable, directly or indirectly, for Units ( Exchangeable Securities ), in each case for the purpose of providing voting rights with respect to Scott s REIT to the holders of such securities. Special Voting Units will be issued in conjunction with, and will be attached to, the Class B LP Units (or other Exchangeable Securities) to which they relate, and will be evidenced only by the certificates representing such Class B LP Units or other Exchangeable Securities. Special Voting Units will not be transferable separately from the Class B LP Units (or other Exchangeable Securities) to which they are attached. Each Special Voting Unit will entitle the holder thereof to that number of votes at any meeting of Voting Unitholders that is equal to the number of Units that may be obtained upon the exchange (direct or indirect) of the Class B LP Unit or other Exchangeable Security to which it is attached. Upon the exchange or conversion of a Class B LP Unit (or other Exchangeable Security) for Units, the Special Voting Unit that is attached to such Class B LP Unit (or other Exchangeable Security) will immediately be cancelled without any further action of the Trustees, and the former holder of such Special Voting Unit will cease to have any rights with respect thereto. Issued and outstanding Units and Special Voting Units may be subdivided or consolidated from time to time by the Trustees without the approval of Voting Unitholders. This prospectus qualifies the distribution of the Special Voting Units to be issued to the holders of Class B LP Units in connection with the acquisition of the Initial Properties. Fractional Units will not entitle the holders thereof to vote. The Units are not deposits within the meaning of the Canada Deposit Insurance Corporation Act (Canada) and are not insured under the provisions of such act or any other legislation. Furthermore, Scott s REIT is not a trust company and, accordingly, is not registered under any trust and loan company legislation as it does not carry on or intend to carry on the business of a trust company. Trustees Scott s REIT shall have a minimum of three and a maximum of seven trustees and shall initially have three trustees, a majority of whom must be independent and must be resident in Canada for purposes of the Tax Act. The initial Trustees are John G. Jakolev, Douglas L. Fowles and Lewis S. Allen, all of whom are independent. See Management of Scott s REIT Trustees for information about the initial Trustees. Trustees will be appointed at each annual meeting of Voting Unitholders to hold office for a term expiring at the close of the next annual meeting. A quorum of Trustees, being the greater of two Trustees or a majority of the Trustees then holding office (provided that the majority of Trustees present are resident in Canada), may fill a vacancy in the Trustees, except a vacancy resulting from an increase in the number of Trustees (other than as noted below) or from a failure of the Voting Unitholders to elect the required number of Trustees at a meeting of Voting Unitholders called for such purpose. In the absence of a quorum of Trustees, or if the vacancy has arisen from a failure of the Voting Unitholders to elect the required number of Trustees at a meeting of Voting Unitholders called for such purpose, the Trustees will promptly call a special meeting of Voting Unitholders to fill the vacancy. If the Trustees fail to call that meeting or if there are not Trustees then in office, any Voting Unitholder may call the meeting. The Trustees may, prior to the first annual meeting of Voting Unitholders or between annual meetings of Unitholders, appoint one or more additional Trustees to serve until the next annual meeting of Voting Unitholders, but the number of additional Trustees so appointed may not exceed one-third of the number of Trustees who held office at the later of Closing and the expiration of the immediately preceding annual meeting of Voting Unitholders. A Trustee may resign upon written notice to Scott s REIT and may be removed by a resolution passed by a majority of the Voting Unitholders. A vacancy created by the removal of a Trustee may be filled at the same meeting of Voting Unitholders, failing which it may be filled by the remaining Trustees. The Declaration of Trust provides that, subject to its terms and conditions, the Trustees will have full, absolute and exclusive power, control and authority over the assets of Scott s REIT and over the affairs of Scott s REIT to the same 56

64 extent as if the Trustees were the sole and absolute legal and beneficial owners of the assets of Scott s REIT and may, in respect of the assets of Scott s REIT, exercise any and all rights, powers and privileges that could be exercised by a legal and beneficial owner thereof. Subject to such terms and conditions, the Trustees are responsible for, among other things: (i) supervising the activities and managing the investments and the affairs of Scott s REIT; (ii) maintaining records and providing reports to Voting Unitholders; (iii) effecting payments of distributable cash from Scott s REIT to Unitholders; (iv) acting for, voting on behalf of, and representing Scott s REIT as a holder of Trust Units and a holder of the Notes; and (v) causing the Trustees to be elected as directors of Trustee Corp. and as the directors of , the trustee of the Trust. The Declaration of Trust provides that the Trustees must act honestly and in good faith with a view to the best interests of Scott s REIT and the Unitholders and in connection therewith must exercise the degree of care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The Declaration of Trust provides that each Trustee, as well as former Trustees, and their respective heirs and legal representatives, will be entitled to indemnification from Scott s REIT in respect of the exercise of that person s powers, and the discharge of that person s duties, provided that the person acted honestly and in good faith with a view to the best interests of Scott s REIT and the Unitholders and, in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, where the person had reasonable grounds for believing that his or her conduct was lawful. Meetings of Voting Unitholders The Declaration of Trust provides that meetings of Voting Unitholders will be required to be called and held annually, commencing in 2006, for the purpose of (a) electing Trustees; (b) appointing auditors of Scott s REIT for the ensuing year; (c) generally, any other matter which requires a resolution of Voting Unitholders; and (d) transacting such other business as the Trustees may determine or as may be properly brought before the meeting. All meetings of Voting Unitholders shall be held in Canada. A meeting of Voting Unitholders may be convened at any time and for any purpose by the Trustees and must be convened, except in certain circumstances, if requisitioned in writing by the Voting Unitholders representing not less than 10% of the votes attached to all outstanding Voting Units. A requisition must state in reasonable detail the business proposed to be transacted at the meeting. Voting Unitholders may attend and vote at all meetings of the Voting Unitholders either in person or by proxy and a proxyholder need not be a Voting Unitholder. Two persons present in person or represented by proxy and representing in the aggregate at least 20% of the votes attached to all outstanding Voting Units shall constitute a quorum for the transaction of business at all such meetings. At any meeting at which a quorum is not present within one-half hour after the time fixed for the holding of such meeting, the meeting, if convened upon the request of the Voting Unitholders, shall be dissolved, but in any other case, the meeting will stand adjourned to a day not less than seven days later and to a place and time as chosen by the chair of the meeting, and if at such adjourned meeting a quorum is not present, the Voting Unitholders present either in person or by proxy shall be deemed to constitute a quorum. The Declaration of Trust provides that without approval by Special Resolution at a meeting of Voting Unitholders called for such purpose, the Trustees shall not, among other things: (i) authorize any combination, merger, amalgamation or arrangement of Scott s REIT or any of its subsidiaries, other than in conjunction with an internal reorganization, (ii) dispose of all or substantially all of the assets of Scott s REIT or any of its subsidiaries, other than in conjunction with an internal reorganization, or (iii) authorize the liquidation or dissolution of the Operator, except in conjunction with an internal reorganization. Purchases of Units Scott s REIT may from time to time purchase Units for cancellation in accordance with applicable securities legislation and the rules prescribed under applicable stock exchange or regulatory policies. 57

65 Redemption Right Units are redeemable at any time on demand by the holders thereof upon delivery to Scott s REIT of a duly completed and properly executed notice requesting redemption in a form approved by the Trustees specifying the number of Units to be redeemed. As the Units will be issued in book-entry form, a Unitholder who wishes to exercise the redemption right will be required to obtain a redemption notice form from the Unitholder s investment dealer, who will be required to deliver the completed redemption notice form to Scott s REIT at its head office and to CDS. As of the close of business on the date the Units are surrendered for redemption, all rights to and under the Units tendered for redemption shall (subject to the following) be surrendered and the holder thereof shall be entitled to receive a price per Unit (the Redemption Price ) equal to the lesser of: (a) 90% of the Market Price of the Units on the principal stock exchange on which the Units are listed (or, if the Units are not listed on any stock exchange, on the principal market on which the Units are quoted for trading) during the period of the last 10 trading days on such stock exchange or market ending immediately prior to the date on which the Units were tendered for redemption; and (b) the Closing Market Price of the Units on the date on which the Units were tendered for redemption on the principal stock exchange on which Units are listed (or, if Units are not listed on any stock exchange, on the principal market on which the Units are quoted for trading). For the purposes of determining the Redemption Price, Market Price will be the amount equal to the weighted average of the trading prices of the Units on the applicable market or exchange for each of the trading days on which there was a trade during the specified trading day period; provided that if there was trading on the applicable exchange or market for fewer than five of the trading days during the specified trading day period, Market Price will be the average of the following prices established for each of the trading days during the specified trading day period: the average of the last bid and ask prices for each trading day on which there was no trading and the weighted average trading prices of the Units for each trading day on which there was trading. For the purposes of determining the Redemption Price, Closing Market Price will be: (i) an amount equal to the closing price of the Units on the applicable market or exchange if there was a trade on the specified date and the applicable market or exchange provides a closing price; (ii) an amount equal to the average of the highest and lowest prices of Units on the applicable market or exchange if there was trading on the specified date and the applicable market or exchange provides only the highest and lowest trading prices of Units traded on a particular day; or (iii) the average of the last bid and ask prices on the applicable market or exchange if there was no trading on the specified date. The aggregate Redemption Price payable by Scott s REIT in respect of any Units surrendered for redemption during any calendar month will be satisfied by way of a cash payment by Scott s REIT no later than the last day of the calendar month following the calendar month in which the Units were tendered for redemption, provided that the entitlement of the Unitholders to receive cash upon the redemption of their Units is subject to the limitations that: (a) the total amount payable in cash by Scott s REIT in respect of such Units and all other Units tendered for redemption in the same calendar month may not exceed $50,000 (the Monthly Limit ), provided that the Trustees may, in their sole discretion, waive such limitation in respect of all Units tendered for redemption in any calendar month; (b) on the date such Units are tendered for redemption, the outstanding Units must be listed for trading on a stock exchange or traded or quoted on another market that, in the sole discretion of the Trustees, provides a representative fair market value price for the Units; and (c) the normal trading of Units must not be suspended or halted on any stock exchange on which the Units are listed (or, if not listed on a stock exchange, on any market on which the Units are quoted for trading) on the date that the Units are tendered for redemption or for more than five trading days during the ten trading day period prior to the date on which the Units are tendered for redemption. If a Unitholder is not entitled to receive cash upon the redemption of Units as a result of the Monthly Limit, then the Redemption Price for each Unit tendered for redemption will, subject to any applicable regulatory approvals, be paid and satisfied by way of a payment, on a proportionate basis, of cash up to the Monthly Limit, and an in specie distribution of the assets of Scott s REIT. If a Unitholder is not entitled to receive cash upon the redemption of Units as a result of the other specified limitations, then each redeeming Unitholder will be entitled to receive a price per Unit (the In Specie Redemption Price ) equal to the fair market value thereof as determined by the Trustees, which may be satisfied by way of a distribution in specie of the assets of Scott s REIT. In each such case, a proportionate amount 58

66 of the Trust Units and Series 1 Notes held by Scott s REIT having an aggregate value equal to the non-cash portion of the Redemption Price (or, as applicable, the In Specie Redemption Price) will be redeemed in consideration of the issuance to Scott s REIT of Series 2 Notes and Series 3 Notes, respectively. The Series 2 Notes and Series 3 Notes will then be distributed to the redeeming Unitholder in full satisfaction of the non-cash portion of the Redemption Price (or, as applicable, the In Specie Redemption Price). Series 2 Notes and Series 3 Notes will be issued only in integral multiples of $100. Where the principal amount of Series 2 Notes or Series 3 Notes to be received by a Unitholder includes a multiple of less than $100, that number will be rounded to the next lowest integral multiple of $100. Scott s REIT will be entitled to all interest paid on the Notes and distributions paid on the Trust Units on or before the date of the distribution in specie. Where Scott s REIT makes a distribution in specie of securities on the redemption of Units, Scott s REIT currently intends to allocate to the redeeming Unitholder any capital gain or income realized by Scott s REIT as a result of the redemption of the Trust Units and Series 1 Notes and the distribution of securities to the Unitholder on the redemption of such Units. See Certain Canadian Federal Income Tax Considerations. It is anticipated that the redemption right described above will not be the primary mechanism for Unitholders to dispose of their Units. The assets of Scott s REIT that may be distributed in specie to Unitholders in connection with a redemption (including the Series 2 Notes and Series 3 Notes) will not be listed on any stock exchange, no market is expected to develop in such securities and such securities may be subject to an indefinite hold period or other resale restrictions under applicable securities laws. Take-Over Bids The Declaration of Trust and the Scott s LP Agreement contain provisions to the effect that if a take-over bid is made for the Units and not less than 90% of the Units on a fully-diluted basis (including the Units issuable upon the exchange of all Class B LP Units and any other Exchangeable Securities, but not including any Units, Class B LP Units or Exchangeable Securities held at the date of the take-over bid by or on behalf of the Offeror or associates or affiliates of the Offeror) are taken up and paid for by the Offeror, the Offeror will be entitled to acquire the Units, Class B LP Units and other Exchangeable Securities held by holders who did not accept the take-over bid, on the same terms on which the Offeror acquired Units pursuant to the take-over bid. The Declaration of Trust and the Exchange Agreement include provisions to facilitate the exchange of Class B LP Units for Units so that a holder of Class B LP Units can exercise its rights to exchange all or a portion of such holdings for Units, including conditionally, in order to tender to a take-over bid. Issuance of Units Subject to the investment guidelines and operating policies of Scott s REIT, Scott s REIT may issue new Units and other securities of Scott s REIT (including Special Voting Units issued in conjunction with the issuance of Class B LP Units or securities convertible into or exchangeable for Units or other securities of Scott s REIT or warrants, options or other rights to acquire Units or other securities of Scott s REIT) (the Other Issuable Securities ) from time to time, in such manner, for such consideration and to such person, persons or class of persons as the Trustees shall determine. Unitholders do not have any pre-emptive rights whereby additional Units or Other Issuable Securities proposed to be issued are first offered to existing Unitholders. Any income of Scott s REIT that is unavailable for cash distribution will, to the extent necessary to ensure that Scott s REIT does not have any income tax liability under Part I of the Tax Act, be distributed to Unitholders in the form of additional Units. Such additional Units will be issued pursuant to exemptions under applicable securities laws, discretionary exemptions granted by applicable securities regulatory authorities or a prospectus or similar filing. The Declaration of Trust provides that immediately after any pro rata distribution of Units to all Unitholders in satisfaction of any non-cash distribution, the number of outstanding Units will be consolidated such that each Unitholder will hold after the consolidation the same number of Units as the Unitholder held before the non-cash distribution (except where tax was required to be withheld in respect of the Unitholder s share of the distribution as described below). In this case, the number of Units held by a Unitholder prior to the non-cash distribution will be deemed to represent the same number of Units held by the Unitholder after the non-cash distribution and the consolidation. Where amounts so distributed represent income, non-resident Unitholders will be subject to withholding tax and the consolidation will not result in such non-resident Unitholders holding the same number of Units. 59

67 Limitation on Ownership In order for Scott s REIT to maintain its status as a mutual fund trust under the Tax Act, Scott s REIT must not be established or maintained primarily for the benefit of non-residents of Canada within the meaning of the Tax Act. Accordingly, at no time may non-residents of Canada (within the meaning of the Tax Act) be the beneficial owners of more than 49% of the Units and the Trustees shall inform the transfer agent and registrar of this restriction. The Trustees may require declarations as to the jurisdictions in which beneficial owners of Units are resident. If the Trustees become aware, as a result of requiring such declarations as to beneficial ownership or otherwise, that the beneficial owners of 49% of the Units then outstanding are, or may be, non-residents or that such a situation is imminent, the Trustees may make a public announcement thereof and shall not accept a subscription for Units from, or issue or register a transfer of Units to, a person unless the person provides a declaration that the person is not a nonresident. If, notwithstanding the foregoing, the Trustees determine that more than 49% of the Units are held by nonresidents, the Trustees may send a notice to non-resident holders of Units, chosen in inverse order to the order of acquisition or registration or in such manner as the Trustees may consider equitable and practicable, requiring them to sell their Units or a portion thereof within a specified period of not less than 60 days. If the Unitholders receiving such notice have not sold the specified number of Units or have not provided the Trustees with satisfactory evidence that they are not non-residents within such period, the Trustees may, on behalf of such Unitholders sell such Units and, in the interim, shall suspend the voting and distribution rights attached to such Units, if any. Upon such sale the affected holders shall cease to be holders of Units and their rights shall be limited to receiving the net proceeds of sale. Information and Reports Scott s REIT will furnish to Voting Unitholders such financial statements (including quarterly and annual financial statements) and other reports as are from time to time required by applicable law, including prescribed forms needed for the completion of Voting Unitholders tax returns under the Tax Act and equivalent provincial legislation. Prior to each annual or special meeting of Voting Unitholders, the Trustees will provide the Voting Unitholders (along with notice of such meeting) information similar to that required to be provided to shareholders of a public corporation governed by the CBCA. In preparing its management s discussion and analysis of financial condition and results of operations, Scott s REIT will provide comparative financial information for the Initial Properties, including for the periods prior to the REIT s indirect acquisition of the Initial Properties. Scott s REIT has undertaken to the various Canadian securities regulators that in complying with its obligations as a reporting issuer Scott s REIT will treat Scott s LP as a subsidiary of Scott s REIT. If, however, GAAP prohibits the consolidation of financial information of Scott s LP and Scott s REIT, and for so long as Scott s LP (including any of its significant business interests) represents a significant asset of Scott s REIT, Scott s REIT will provide Unitholders who are required to receive financial statements of Scott s REIT with separate financial statements for Scott s LP (including information about its significant business interests). Scott s REIT has also undertaken to the various Canadian securities regulators that for so long as Scott s REIT is a reporting issuer, Scott s REIT will take the appropriate measures to require the Property Manager, the Asset Manager, their respective insiders and each person who would be an insider of Scott s LP if Scott s LP were a reporting issuer to: (i) file insider reports about trades in Units (including securities that are exchangeable into Units); and (ii) comply with the relevant statutory prohibitions against insider trading. Amendments to Declaration of Trust The Declaration of Trust may be amended or altered from time to time. Certain amendments require approval by Special Resolution at a meeting of the Voting Unitholders called for such purpose. Other amendments to the Declaration of Trust require approval by a majority of the votes cast in respect of the amendment at a meeting of the Voting Unitholders called for such purpose. The following amendments, among others, require approval by Special Resolution: a) an exchange, reclassification or cancellation of all or part of the Voting Units; b) the addition, change or removal of the rights, privileges, restrictions or conditions attached to the Voting Units; 60

68 c) the constraint on the issue, transfer or ownership of the Voting Units or the change or removal of such constraint; d) the termination of Scott s REIT; and e) except as described herein, the amendment of the Investment Guidelines and Operating Policies of Scott s REIT. Upon the recommendation of a majority of the independent Trustees, the Trustees may, without the approval of the Voting Unitholders, make certain amendments to the Declaration of Trust, including amendments: a) aimed at ensuring continuing compliance with applicable laws, regulations, requirements or policies of any governmental authority having jurisdiction over (i) the Trustees or Scott s REIT, (ii) the status of Scott s REIT as a mutual fund trust under the Tax Act or (iii) the distribution of Voting Units; b) which, in the opinion of the Trustees, provide additional protection for the Voting Unitholders; c) to remove any conflicts or inconsistencies in the Declaration of Trust or to make minor corrections which are, in the opinion of the Trustees, necessary or desirable and not prejudicial to the Voting Unitholders; d) which, in the opinion of the Trustees, are necessary or desirable to remove conflicts or inconsistencies between the disclosure in this prospectus and the Declaration of Trust; e) which, in the opinion of the Trustees, are necessary or desirable as a result of changes in generally accepted accounting principles (including accounting guidelines) or taxation or other laws; or f) for any purpose (except one in respect of which a vote is specifically otherwise required) which, in the opinion of the Trustees, is not prejudicial to Voting Unitholders and is necessary or desirable. Book-Based System Except as otherwise provided below, the Units will be represented in the form of one or more fully registered global unit certificates (the Global Unit Certificates ) held by, or on behalf of, CDS, as depository for the participants of CDS, registered in the name of CDS or its nominee, and registration of ownership and transfers of the Units will be effected only through the book-based system administered by CDS. On Closing of this Offering, CDS will credit interests in the Global Unit Certificates representing the Units to the accounts of its participants as directed by the Underwriters. Except as described below, no purchaser of a Unit will be entitled to a certificate or other instrument from Scott s REIT evidencing that purchaser s ownership thereof, and no holder of a beneficial interest in a Unit (a Beneficial Owner ) will be shown on the records maintained by CDS except through book-entry accounts of a participant of CDS acting on behalf of the Beneficial Owners. CDS will be responsible for establishing and maintaining book-entry accounts for its participants having interests in the Global Unit Certificates. Sales of interests in the Global Unit Certificates can only be completed through participants in the depository services of CDS. Scott s REIT has the option to terminate registration of the Units through the CDS book-entry only system, in which case certificates for the Units in fully registered form would be issued to beneficial owners of those Units or their nominees. Term of Scott s REIT Scott s REIT has been established for a term ending 21 years after the date of death of the last surviving issue of Her Majesty, Queen Elizabeth II, alive on August 23, On a date selected by the Trustees that is not more than two years prior to the expiry of the term of Scott s REIT, the Trustees are obligated to commence to wind-up the affairs of Scott s REIT so that it will terminate on the expiration of the term. In addition, at any time prior to the expiry of the term of Scott s REIT, the Voting Unitholders may by a Special Resolution require the Trustees to commence the termination, liquidation or wind-up of the affairs of Scott s REIT. The Declaration of Trust provides that, upon being required to commence the termination, liquidation or windingup of the affairs of Scott s REIT, the Trustees will give notice thereof to the Voting Unitholders, which notice shall designate the time or times at which Unitholders may surrender their Units for cancellation and the date at which the register of Units will be closed. After the date the register is closed, the Trustees will proceed to wind up the affairs of Scott s REIT as soon as may be reasonably practicable and for such purpose will, subject to any direction to the contrary in respect of a termination authorized by a resolution of the Voting Unitholders, sell and convert into money 61

69 the Trust Units, the Notes and all other assets comprising Scott s REIT in one transaction or in a series of transactions at public or private sales and do all other acts appropriate to liquidate Scott s REIT. After paying, retiring, discharging or making provision for payment, retirement or discharge of all known liabilities and obligations of Scott s REIT and providing for indemnity against any other outstanding liabilities and obligations, the Trustees will distribute the remaining part of the proceeds of the sale of the Trust Units, the Notes and other assets comprising Scott s REIT together with any cash forming part of the assets of Scott s REIT among the Unitholders in accordance with their pro rata interests. If the Trustees are unable to sell all or any of the Trust Units, the Notes or other assets which comprise part of Scott s REIT by the date set for termination, the Trustees may distribute the remaining Trust Units, Notes or other assets in specie directly to the Unitholders in accordance with their pro rata interests subject to obtaining all required regulatory approvals. Transfer and Exchange of Units Transfers of beneficial ownership of Units represented by Global Unit Certificates will be effected through records maintained by the Depository for such Global Unit Certificates or its nominees (with respect to interests of participants) and on the records of participants (with respect to interests of persons other than participants). Unless Scott s REIT elects, in its sole discretion, to prepare and deliver definitive Unit certificates, Beneficial Owners who are not participants in the Depository s book-entry system, but who desire to purchase, sell or otherwise transfer ownership of or other interest in Global Unit Certificates, may do so only through participants in the Depository s book-entry system. The ability of a Beneficial Owner of an interest in a Unit represented by a Global Unit Certificate to pledge the Unit or otherwise take action with respect to such owner s interest in the Unit represented by a Global Unit Certificate (other than through a participant) may be limited due to the lack of a physical certificate. Exchange Agreement On Closing, Scott s REIT, the Trust and Scott s LP on the one hand, and certain vendors of properties acquired by Scott s REIT (collectively, the Class B LP Unitholders ) will enter into the Exchange Agreement. The Exchange Agreement will grant each Class B LP Unitholder the right to require Scott s REIT, the Trust and Scott s LP to indirectly exchange Class B LP Units into Units of Scott s REIT on a one-for-one basis, subject to adjustment in the exchange ratio in certain circumstances. 62

70 THE TRUST The Trust Declaration of Trust contains provisions substantially similar to those of the Declaration of Trust relating to Scott s REIT. The principal differences between the Trust Declaration of Trust and the Declaration of Trust for Scott s REIT are those described below. The description below is a summary only and is qualified in its entirety by reference to the text of the Trust Declaration of the Trust and the Declaration of Trust and the description below relating to the Series 1 Notes, the Series 2 Notes and Series 3 Notes is qualified in its entirety by reference to the text of the Note Indenture. General The Trust is an unincorporated open-ended trust established under the laws of the Province of Ontario pursuant to the Trust Declaration of Trust. It is a limited purpose trust and its activities are restricted to, among other things, (i) holding and investing in real properties, directly or indirectly through its ownership of entities holding interests in real property and through lending, financing and other activities (including mezzanine loans) and transactions ancillary to the ownership of real property; (ii) investing in debt and equity securities, including those issued by Scott s LP or any other Scott s Entity; (iii) issuing or redeeming Trust Units; (iv) issuing debt securities, including the Series 1 Notes, the Series 2 Notes and the Series 3 Notes; (v) guaranteeing the obligations of Scott s REIT, Scott s LP or any affiliate of the Trust or Scott s LP and pledging securities held by the Trust in Scott s LP or any such affiliate, as security for such guarantee; and (vii) satisfying the obligations, liabilities or indebtedness of the Trust. The Trust Trustee The trustee of the Trust is to supervise the activities and manage the affairs of the Trust. The initial trustee of the Trust is , the directors of which are the Trustees is a wholly-owned subsidiary of Scott s REIT. Scott s REIT will be the sole holder of Trust Units. Scott s REIT will vote its shares in to ensure that at all times the same individuals who serve from time to time as Trustees are also appointed as directors of The Trust Declaration of Trust will provide that, subject to its terms and conditions, the trustee of the Trust may, in respect of the assets of the Trust, exercise any and all rights, powers and privileges that could be exercised by a legal and beneficial owner thereof and will supervise the investments and conduct the affairs of the Trust. The trustee of the Trust will be responsible for, among other things: ) supervising the activities and managing the affairs of the Trust; ) effecting payments of available cash from the Trust to the holders of Trust Units; ) effecting interest and principal payments when required in respect of the Notes; ) acting for, voting on behalf of and representing the Trust as a limited partner of Scott s LP; and ) maintaining records and providing reports to holders of Trust Units. Restrictions The Trust Declaration of Trust provides that the trustee of the Trust may not, without approval by ordinary resolution of Trust Unitholders, take any action upon any matter which under applicable law (including policies of the applicable Canadian securities commissions) or applicable stock exchange rules would require approval by ordinary resolution had the Trust been a reporting issuer (or the equivalent) in the jurisdictions in which Scott s REIT is a reporting issuer (or the equivalent) and had the Trust Units been listed for trading on the stock exchanges where the Units are listed for trading, respectively. Furthermore, the Trust Declaration of Trust states that the trustee of the Trust may not, without approval by 66 2 /3% of the votes cast by Trust Unitholders at a meeting: (i) take any action upon any matter which under applicable law (including policies of the applicable Canadian securities commissions) or applicable stock exchange rules would require approval by special resolution or super-majority (as defined or described therein) had the Trust been a reporting issuer (or the equivalent) in the jurisdictions in which Scott s REIT is a reporting issuer (or the equivalent) and had the Trust Units been listed for trading on the stock exchanges where the Units are listed for trading, respectively; (ii) amend the Trust Declaration of Trust except in certain limited circumstances similar to those under which the REIT s Declaration of Trust may be amended without consent of Unitholders; (iii) materially amend the Note Indenture other than in contemplation of a further issuance of Series 1 Notes, Series 2 Notes or Series 3 Notes; (iv) sell, lease or exchange all or substantially all of the property of the Trust other than in the ordinary course of business or in connection with an internal reorganization; (v) authorize the termination, liquidation or winding-up of 63

71 the Trust, other than at the end of the term of the Trust; or (vi) authorize the combination, merger or similar transaction of the Trust with any other person, other than in connection with an internal reorganization. Redemption Right The Trust Units will be redeemable at any time on demand by the holders thereof upon delivery to the Trust of a duly completed and properly executed notice requiring the Trust to redeem Trust Units, in a form reasonably acceptable to the trustees of the Trust, together with the certificates for Trust Units representing the Trust Units to be redeemed and written instructions as to the number of Trust Units to be redeemed. Upon tender of Trust Units by a holder thereof for redemption, the holder of Trust Units tendered for redemption will no longer have any rights with respect to such Trust Units other than the right to receive the redemption price for such Trust Units. The redemption price for each Trust Unit tendered for redemption shall be equal to: (A B) C D Where: A = the cash redemption price per Unit calculated as of the close of business on the date the Trust Units were so tendered for redemption by a holder of Trust Units; B = the aggregate number of Units outstanding as of the close of business on the date the Trust Units were so tendered for redemption by the holder thereof; C = the aggregate unpaid principal amount and accrued interest thereon, if any, of the Series 1 Notes and any other indebtedness of the Trust owed to Scott s REIT and the fair market value of any other assets or investments held by Scott s REIT (other than Trust Units) as of the close of business on the date the Trust Units were so tendered for redemption by a holder thereof; and D = the aggregate number of Trust Units outstanding held by Scott s REIT as of the close of business on the date the Trust Units were so tendered for redemption by the holder thereof. The aggregate redemption price payable by the Trust in respect of any Trust Unit tendered for redemption by the holders thereof during any month will be satisfied by the issuance of such aggregate principal amount of Series 2 Notes as is equal to the aggregate redemption price payable, rounded down to the nearest $100 (with the balance of any such aggregate redemption price not paid in Series 2 Notes paid in cash) if so elected by Scott s REIT, or if no such election is made by Scott s REIT, at the direction of the Trust (i) in cash, (ii) by the issuance of such aggregate principal amount of Series 2 Notes as is equal to the aggregate redemption price payable rounded down to the nearest $100 (with the balance of any such aggregate redemption price not paid in Series 2 Notes paid in cash) or (iii) by any combination of cash and Series 2 Notes as the trustee of the Trust shall determine, in its discretion, in each such case payable or issuable on the last day of the calendar month following the calendar month in which the Trust Units were so tendered for redemption. A holder of Trust Units whose Trust Units are tendered for redemption may elect, at any time prior to the payment of the redemption price, to receive Series 2 Notes pursuant to (ii) above in the place of all or part of the funds otherwise payable, the principal amount of such Series 2 Notes payable to be equal to the funds otherwise payable, rounded down to the nearest $100. Trust Unit Certificates As Trust Units are not intended to be issued or held by any person other than Scott s REIT, registration of interests in, and transfers of, the Trust Units will not be made through the Book-Entry System administered by CDS. Rather, holders of Trust Units will be entitled to receive certificates therefor. The Notes The following is a summary of the material attributes and characteristics of the Notes that will be issuable by the Trust under the Note Indenture. This summary is qualified in its entirety by reference to the provisions of the Note Indenture, which contains a complete statement of such attributes and characteristics. Three series of Notes will initially be authorized for issuance under the Note Indenture. At Closing, only Series 1 Notes will be issued and outstanding, all of which will be held by Scott s REIT. Series 2 Notes will be reserved by the Trust to be issued exclusively to holders of Trust Units as full or partial payment of the redemption price for 64

72 Trust Units, as the trustee of the Trust decides. Series 3 Notes will be reserved by the Trust to be issued exclusively as full or partial payment of the redemption price for Series 1 Notes. Interest and Maturity The Series 1 Notes to be issued at Closing will be payable on demand, will mature on the 15th anniversary of the date of issuance and will bear interest at a rate of 4% per annum, payable in arrears on or before the 15th day of each calendar month that such Series 1 Note is outstanding. Each Series 2 Note will mature on a date which is no later than the first anniversary of the date of issuance thereof and will bear interest at a market rate to be determined by the trustees of the Trust at the time of issuance thereof, payable in arrears on or before the 15th day of each calendar month that such Series 2 Note is outstanding. Each Series 3 Note will mature on the same date as the Series 1 Notes and will bear interest at a market rate to be determined by the trustees at the time of issuance thereof, payable in arrears on or before the 15th day of each calendar month that such Series 3 Note is outstanding. Payment upon Maturity On maturity, the Trust will repay the Notes by paying to CIBC Mellon Trust Company, as note trustee (the Note Trustee ), in cash, an amount equal to the principal amount of the outstanding Notes that have then matured, together with accrued and unpaid interest thereon. Redemption The Notes will be redeemable (at a redemption price equal to the principal amount thereof), payable in cash or, in the case of a redemption of Series 1 Notes on an in specie payment of the Redemption Price for Units, in Series 3 Notes at the option of the Trust (and, in the case of the Series 1 notes, at the option of the holder) prior to maturity. Subordination/Security Payment of the principal amount and interest on the Notes will be subordinated in right of payment to the prior payment in full of the principal of and accrued and unpaid interest on, and all other amounts owing in respect of, all senior indebtedness of the Trust, which will be defined as all indebtedness, liabilities and obligations of or guaranteed by the Trust which, by the terms of the instrument creating or evidencing the same, will be expressed to rank in right of payment in priority to the indebtedness evidenced by the Note Indenture. The Trust may also designate in writing from time to time any other obligations or liabilities or class thereof, as senior indebtedness. The Note Indenture provides that upon any distribution of the assets of the Trust in the event of any dissolution, liquidation, reorganization or other similar proceedings relative to the Trust, the holders of all such senior indebtedness will be entitled to receive payment in full before the holders of the Notes are entitled to receive any payment. Default The Notes will be unsecured debt obligations of the Trust. The Note Indenture provides that any of the following shall constitute an Event of Default (as defined in the Note Indenture): (i) default in repayment of the principal amount of any of the Notes when the same becomes due and payable and the continuation of such default for a period of 30 business days, (ii) subject to the terms of any senior indebtedness, the failure to pay the interest obligations under any of the Notes, if and when issued, and continuation of such default for a period of 90 days, (iii) certain events of dissolution, liquidation, bankruptcy, insolvency or other similar proceedings relative to the Trust or its affiliates, or (iv) default in the observance or performance of any other covenant or condition of the Note Indenture and the continuance of such default for a period of 30 days after notice in writing has been given by the Note Trustee to the Trust specifying such default and requiring the Trust to rectify the same. 65

73 SCOTT S LP General Scott s LP is a limited partnership created under the laws of the Province of Manitoba pursuant to the Scott s LP Agreement to carry on the business of owning QSR and retail properties and other ancillary matters and, in connection with such business, to own, operate and lease assets and property, to manage and make investments and hold direct or indirect rights in companies or other entities involved in the QSR and retail real estate business and to engage in all activities ancillary and incidental thereto. General Partner The general partner of Scott s LP is Scott s GP, a trust established under the laws of Ontario. Scott s GP s trustee is Trustee Corp. Scott s GP s sole beneficiary is Ontario Inc., a corporation formed under the laws of Ontario and a wholly-owned subsidiary of the Trust. Scott s REIT will vote its shares in Trustee Corp. to ensure that at all times the same individuals who serve from time to time as Trustees are also appointed as directors of Trustee Corp. In its capacity as general partner of Scott s LP, Scott s GP will have exclusive authority to manage the business and affairs of Scott s LP, to make all decisions regarding the business of Scott s LP and to bind Scott s LP in respect of any such decisions. Scott s GP will be required to exercise its powers and discharge its duties honestly, in good faith and in the best interests of Scott s LP and to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances. The authority and power vested in Scott s GP to manage the business and affairs of Scott s LP includes all authority necessary or incidental to carry out the objects, purposes and business of Scott s LP, including, without limitation, the ability to engage agents to assist Scott s GP to carry out its management obligations and administrative functions in respect of Scott s LP and its business. Partnership Units Scott s LP will be entitled to issue various classes of partnership interests. Following Closing, Scott s LP will have outstanding general partnership units, all of which will be held by Scott s GP, Class A LP Units, all of which will be held by the Trust, and Class B LP Units, which will be issued on Closing to SRI as partial consideration for the acquisition of the Initial Properties owned by SRI. Following Closing, the Class A LP Units will represent approximately 68.9% of the total Scott s LP Units outstanding and the Class B LP Units will represent approximately 31.1% of the total Scott s LP Units outstanding. The Class B LP Units will, in all material respects, be economically equivalent to the Units on a per unit basis. Under the Exchange Agreement, the Class B LP Units will be indirectly exchangeable on a one-for-one basis for Units at any time at the option of the holder, unless the exchange would jeopardize the REIT s status as a mutual fund trust under the Tax Act. In addition, Scott s LP will be entitled to require the redemption of the Class B LP Units in certain specified circumstances. Allocation of Net Income and Losses The income or loss of Scott s LP for each fiscal year will be allocated to Scott s GP, as the general partner, and to the limited partners, as to 0.001% and %, respectively. The income for tax purposes of Scott s LP for a particular fiscal year will be allocated to each limited partner by multiplying the total income allocated to the limited partners by a fraction, the numerator of which is the total sum of the cash distributions received by that limited partner with respect to that fiscal year and the denominator of which is the total amount of the cash distributions made by Scott s LP to all limited partners with respect to that fiscal year. The amount of income allocated to a limited partner may exceed or be less than the amount of cash distributed by Scott s LP to that limited partner. Income and loss of Scott s LP for accounting purposes will be allocated to each partner in the same proportion as income or loss that is allocated for tax purposes. If, with respect to a given fiscal year, no cash distribution is made by Scott s LP to its partners, or Scott s LP has a loss for tax purposes, one-twelfth of the income or loss, as the case may be, for tax purposes of Scott s LP for that fiscal year will be allocated to Scott s GP and the limited partners (on a pro rata basis in accordance with the percentage of Scott s LP Units held) at the end of each month ending in that fiscal year, as to 0.001% and %, respectively. The fiscal year end of Scott s LP will be December

74 Reimbursement of the General Partner Scott s LP will reimburse Scott s GP for all direct costs and expenses incurred by Scott s GP in the performance of its duties as general partner of Scott s LP. Limited Liability Scott s LP will operate in a manner to ensure, to the greatest extent possible, the limited liability of the Trust as a limited partner. Limited partners may lose their limited liability in certain circumstances. If the limited liability of the Trust, as a limited partner of Scott s LP, is lost by reason of the negligence of Scott s GP in performing its duties and obligations under the Scott s LP Agreement, Scott s GP has agreed to indemnify any limited partner of Scott s LP against all claims arising from assertions that its liabilities are not limited as intended by the Scott s LP Agreement. Scott s GP has no significant assets or financial resources, however, and so this indemnity may have nominal value. Transfer of Partnership Units Scott s LP Units will be fully transferable; provided, however, that Scott s LP Units may not be transferred to a person who is not a resident of Canada for purposes of the Tax Act or to a partnership, other than a Canadian partnership as defined in the Tax Act. A Scott s LP Unit will not be transferable in part, and no transfer of a Scott s LP Unit will be accepted by Scott s GP, as general partner of Scott s LP, unless a transfer form, duly completed and signed by the registered holder of the Scott s LP Unit, has been remitted to the registrar and transfer agent of Scott s LP. In addition, a transferee of a Scott s LP Unit must provide to Scott s GP such other instruments and documents as Scott s GP Trust may require, in appropriate form, completed and executed in a manner acceptable to Scott s GP and must pay the administration fee, if any, required by Scott s GP. A transferee of a Scott s LP Unit will not become a partner or be admitted to Scott s LP and will not be subject to the obligations and entitled to the rights of a partner under the Scott s LP Agreement until the foregoing conditions are satisfied and such transferee is recorded on Scott s LP s register of partners. In addition to the above requirements, the Scott s LP Agreement will also provide that no holder of Class B LP Units will be permitted to transfer such Class B LP Units, other than for Units in accordance with the terms of the Exchange Agreement or the Scott s LP Agreement, unless: (i) such transfer would not require the transferee to make an offer to Unitholders to acquire Units on the same terms and conditions under applicable securities laws if such Class B LP Units, and all other outstanding Class B LP Units, were converted into Units at the then current exchange ratio in effect under the Exchange Agreement immediately prior to such transfer; or (ii) the offeror acquiring such Class B LP Units makes a contemporaneous identical offer for the Units (in terms of price, timing, proportion of securities sought to be acquired and conditions) and does not acquire such Class B LP Units unless the offeror also acquires a proportionate number of Units actually tendered to such identical offer. Amendments to the Limited Partnership Agreement The Scott s LP Agreement may only be amended with the prior consent of all of the partners of Scott s LP. The Scott s LP Agreement further provides that the restrictions on transfer of the Class B LP Units cannot be amended without a Special Resolution. DETAILS OF THE OFFERING The Offering consists of 5,000,000 Units. See Scott s REIT Declaration of Trust and Description of Units for a description of the attributes of the Units. Transfer of Units Transfers of ownership in the Units will be effected only through records maintained by CDS or its nominee for such Units with respect to interests of CDS Participants, and on the records of CDS Participants with respect to interests of persons other than CDS Participants. Unitholders who are not CDS Participants, but who desire to purchase, sell or otherwise transfer ownership of or other interest in the Units, may do so only through CDS Participants. Payments of Distributions Payments of distributions on each Unit will be made by Scott s REIT to CDS or its nominee, as the case may be, as the registered holder of the Units and Scott s REIT understands that such payments will be forwarded by CDS or its nominee, as the case may be, to CDS Participants. As long as CDS or its nominee is the registered owner of the Units, CDS or its nominee, as the case may be, will be considered the sole owner of the Units for the purposes of receiving payments on the Units. The responsibility and liability of Scott s REIT in respect of the Units is limited to making payment of any distribution in respect of the Units to CDS or its nominee. 67

75 RISK FACTORS There are certain risks inherent in an investment in the Units and in the activities of Scott s REIT and the Operator, including the following, which investors should carefully consider before investing in Units. RISK FACTORS RELATED TO THE REAL ESTATE INDUSTRY Real Property Ownership and Illiquidity Real property investments are relatively illiquid. This illiquidity will tend to limit the ability of Scott s REIT to respond to changing economic or investment conditions. If Scott s REIT were to be required to liquidate its real property investments, the proceeds to Scott s REIT might be significantly less than the aggregate carrying value of its properties. Competition Numerous other developers, managers and owners of QSR properties will compete with Scott s REIT. The existence of competing developers, managers and owners and competition for the REIT s tenants could have an adverse effect on the rents charged by Scott s REIT and could adversely affect the REIT s revenues and, consequently, its ability to meet its debt obligations and pay distributions. Competition for acquisitions of real properties is intense, and some competitors may have the ability or inclination to acquire properties at a higher price or on terms less favourable than those that Scott s REIT is prepared to accept. An increase in the availability of investment funds and an increase in interest in real property investments may tend to increase competition for real property investments, thereby increasing purchase prices and reducing the yield on them. RISK FACTORS RELATED TO THE BUSINESS OF SCOTT S REIT Concentration of Tenants By specializing in a particular type of real estate, Scott s REIT is exposed to adverse effects on the QSR and retail segments of the real estate market and does not benefit from a diversification of its portfolio by property type. All real property investments are subject to elements of risk. Such investments are affected by general economic conditions, local real estate markets, changing demographics, supply and demand for leased premises, competition from other available premises and various other factors. Financing Scott s REIT will have indebtedness of approximately $65 million at Closing. A portion of the cash flow generated by the Initial Properties will be devoted to servicing such debt and there can be no assurance that Scott s REIT will continue to generate sufficient cash flow from operations to meet required interest and principal payments. If Scott s REIT is unable to meet interest or principal payments it could be required to seek renegotiation of such payments or obtain additional equity, debt or other financing. Scott s REIT is subject to the risks associated with debt financing, including the risk that the mortgages secured by the REIT s properties will not be able to be refinanced or that the terms of such refinancing will not be as favourable as the terms of existing indebtedness. Conflicts of Interest The Trustees will, from time to time, in their individual capacities, deal with parties with whom Scott s REIT may be dealing, or may be seeking investments similar to those desired by Scott s REIT. The relevant constating documents contain conflict of interest provisions requiring the Trustees to disclose material interests in material contracts and transactions and to refrain from voting thereon. See Management of Scott s REIT Conflicts of Interest. Conflicts will exist due to the fact that certain senior officers of Scott s REIT are directors and/or senior officers of SRI, JBM and/or KIT and due to the fact that SRI will have a retained interest in Scott s REIT and also has a 39.8% interest in KIT. The interest of these persons could conflict with those of Scott s REIT. See Interests of Promoter, Management and Others in Material Contracts. The transactions pursuant to which Scott s REIT will indirectly acquire its initial assets and business, including, without limitation, the acquisition of the Initial Properties from Yum! and SRI, have been negotiated by management of Scott s REIT with the vendors of those assets. Although it was intended that these transactions be negotiated 68

76 substantially upon arm s length commercial terms, there can be no assurance that independent parties negotiating at arm s length would have arrived at the same terms. Reliance on Key Personnel The management of Scott s REIT depends on the services of certain key personnel, including John Bitove, Lilly Di Massimo and Michael Washinushi. The loss of the services of any key personnel could have an adverse effect on Scott s REIT. Scott s REIT is also dependent upon JBM with respect to the administration of Scott s REIT and the asset and property management of the REIT s properties. There is no assurance that JBM will continue to be asset and property manager for Scott s REIT. General Uninsured Losses Scott s REIT carries comprehensive general liability, fire, flood, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of risks, generally of a catastrophic nature, such as wars, terrorist attacks or environmental contamination, which are either uninsurable or not insurable on an economically viable basis. Should an uninsured or underinsured loss occur, Scott s REIT could lose its investment in, and anticipated profits and cash flows from, one or more of its properties, but would continue to be obligated to repay any recourse mortgage indebtedness on such properties. Liability and Insurance The businesses which are carried on, directly or indirectly, by the Operator, entail an inherent risk of liability. Management expects that from time to time Scott s REIT and/or the Operator may be subject to lawsuits as a result of the nature of its businesses. The Operator maintains business and property insurance policies in amounts and with such coverage and deductibles as are deemed appropriate, based on the nature and risks of the businesses, historical experience and industry standards. There can be no assurance, however, that claims in excess of the insurance coverage or claims not covered by the insurance coverage will not arise or that the liability coverage will continue to be available on acceptable terms. A successful claim against Scott s REIT and/or the Operator not covered by, or in excess of, Scott s REIT and the Operator s insurance could have a material adverse effect on Scott s REIT and the Operator s businesses, operating results and financial condition. Claims against Scott s REIT and/or the Operator, regardless of their merit or eventual outcome, will require management to devote time to matters unrelated to the operation of the business. Acquisition and Development The REIT s external growth prospects will depend in large part on identifying suitable acquisition opportunities, pursuing such opportunities and consummating acquisitions. If Scott s REIT is unable to manage its growth and integrate its acquisitions effectively, its business, operating results and financial condition could be adversely affected. Acquisition and development agreements entered into with third parties may be subject to unknown, unexpected or undisclosed liabilities which could have a material adverse impact on the operations and financial results of Scott s REIT. Representations and warranties given by such third parties to Scott s REIT may not adequately protect against these liabilities and any recourse against third parties may be limited by the financial capacity of such third parties. Moreover, properties acquired by Scott s REIT may not meet expectations of operational or financial performance due to unexpected costs associated with developing an acquired property, as well as the general investment risks inherent in any real estate investment. Environmental Matters As an owner of interests in real property, Scott s REIT will be subject to various environmental laws and regulations. Such laws provide, among other things, that Scott s REIT could be liable for the costs of removal or remediation of certain hazardous substances. The failure to remove or remediate such substances, if any, could adversely affect the REIT s ability to sell such real estate or to borrow using such real estate as collateral and could potentially also result in claims against the owner by private plaintiffs. Notwithstanding the above, Scott s REIT is not aware of any material non-compliance with environmental laws at any of the Initial Properties and is also not aware of any pending or threatened investigations or actions by environmental regulatory authorities in connection with any of the Initial Properties. Scott s REIT is also not aware of any pending or threatened investigations or actions by environmental regulatory authorities in connection with any of 69

77 the Initial Properties or any pending or threatened claims relating to environmental conditions at the Initial Properties. It is the REIT s operating policy to obtain a Phase I environmental assessment, conducted by an independent and experienced environmental consultant, prior to acquiring a property and to obtain Phase II environmental assessments where recommended in the Phase I environmental assessment. Phase I environmental assessments, and all of the 79 recommended Phase II environmental assessments, have been performed in respect of the Initial Properties. Four of the Phase II environmental site assessments identified localized on-site petroleum hydrocarbon contamination in the soil. Management, after consultation with SEACOR and XCG, as applicable, has estimated that the aggregate cost to remediate the on-site petroleum hydrocarbon contamination at these four Initial Properties will be approximately $500,000. Under the terms of the SRI Purchase Agreement, SRI has agreed that it will, at its cost and expense, remediate these four Initial Properties, and has also agreed to indemnify Scott s LP and the REIT in respect of any losses suffered by them in respect of certain environmental matters, including the on-site petroleum hydrocarbon contamination at these four Initial Properties. Scott s LP will retain a holdback of $500,000 from the purchase price payable to SRI for these four Initial Properties. Although management believes that its estimate of the aggregate remediation costs in respect of these four Initial Properties is reasonable, the cost to remediate these four Initial Properties could exceed the amount of the holdback. If SRI fails to satisfy its remediation obligations, then Scott s LP may be required to take legal action against SRI in respect of its covenant to remediate these four Initial Properties and to indemnify Scott s LP and the REIT. Any such legal action could be costly and time-consuming. If the cost to remediate these four Initial Properties exceeded the amount of the holdback, and if Scott s LP was unable to recover these excess remediation costs from SRI, then Scott s LP could be forced to bear the cost of this remediation. Scott s REIT will make the necessary capital and operating expenditures to ensure compliance with environmental laws and regulations. Although there can be no assurances, Scott s REIT does not believe that costs relating to environmental matters will have a material adverse effect on the REIT s business, financial condition or results of operation. However, environmental laws and regulations can change and Scott s REIT may become subject to more stringent environmental laws and regulations in the future. Compliance with more stringent environmental laws and regulations could have an adverse effect on the REIT s business, financial condition or results of operation and distributions. Tenant Risks The value of real property and any improvements thereto depends on the credit and financial stability of the property s tenants. The REIT s Distributable Income may be adversely affected if tenants become unable to meet their obligations under their leases or if a significant amount of available space in the properties in which Scott s REIT will have an interest becomes vacant and is not able to be leased on economically favourable lease terms, if at all. Upon the expiry of any lease there can be no assurance that the lease will be extended or renewed or the tenant replaced. The terms of any subsequent lease may be less favourable to Scott s REIT than the existing lease. In the event of default by a tenant, delays or limitations in enforcing rights as lessor may be experienced and substantial costs in protecting the REIT s investment may be incurred. Furthermore, at any time, a tenant of any of the properties in which Scott s REIT has an interest may seek the protection of bankruptcy, insolvency or similar laws that could result in the rejection and termination of such tenant s lease and thereby cause a reduction in the cash flow available to Scott s REIT. The ability to rent unleased space in the properties in which Scott s REIT will have an interest will be affected by many factors, including general economic conditions, local real estate markets, supply and demand for leased premises, competition from other available premises and various other factors. Costs may be incurred in making improvements or repairs to the property required by a new tenant. Limit on Activities In order to maintain its status as a mutual fund trust under the Tax Act, Scott s REIT cannot carry on most active businesses and is limited in the types of investments it may make. The Declaration of Trust contains restrictions to this effect. Distributions Although Scott s REIT intends to make distributions of its available cash to Unitholders in accordance with its distribution policy, these cash distributions are not assured. The actual amount distributed to Unitholders will depend on numerous factors, including the REIT s financial performance, debt covenants and obligations, working capital 70

78 requirements, fixture capital requirements and fluctuations in interest rates. The market value of the Units may deteriorate if Scott s REIT is unable to meet its cash distribution targets in the future, and that deterioration may be material. Financial Forecast The forecast results contained in this prospectus were prepared using assumptions that reflect the REIT s intended course for the periods covered, given the judgment of JBM, as asset manager and property manager, as to the most probable set of economic conditions. Significant assumptions reflected in the forecast include assumptions regarding: the number of Initial Properties to be acquired by Scott s LP, interest rates, administrative expenses, provision of tax on forecast income, future capital expenditure requirements and the absence of material adverse changes in economic conditions or legislation. There can be no assurance that these assumptions will prove to be accurate. Actual results for the forecast period may vary from the forecast results and those variations may be material. There is no representation by Scott s REIT that actual results achieved in the forecast period will be the same, in whole or in part, as those forecasted herein. RISK FACTORS RELATED TO KIT S BUSINESS Reliance on KIT KIT is the principal tenant of the Initial Properties, and operates KFC TM restaurants (single or multibranded) on these Initial Properties. As a result, the cash flow of Scott s REIT may be negatively affected if KIT s business or financial condition is materially adversely affected. The Competitive Nature of the QSR Industry KIT s cash flow from operations is subject to a number of factors that affect the restaurant industry generally and the quick service segment of this industry in particular, including intense competition with respect to price, service, location and food quality. The restaurant business is also affected by changes in demographic trends, traffic patterns, and the type, number, and location of competing restaurants. In addition, factors such as innovation, increased food, labour and benefits costs and the availability of experienced management and hourly employees may adversely affect the restaurant industry in general and KIT in particular. Changing consumer preferences and discretionary spending patterns could force KIT to modify its restaurant concepts and menus, with concomitant increased costs, and could result in a reduction of its revenue. Even if KIT was able to compete successfully with other restaurant companies with similar concepts, it may be forced to make changes in one or more of its concepts in order to respond to changes in consumer tastes or dining patterns. If KIT changes a restaurant concept it may lose additional customers who do not prefer the new concept and menu and it may not be able to attract a sufficient new customer base to produce the revenue needed to make the restaurants profitable. Similarly, KIT may have different or additional competitors for its intended customers as a result of such a concept change and may not be able to successfully compete against such competitors. KIT s success also depends on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. Adverse changes in these factors could reduce customer traffic or impose practical limits on pricing, either of which could reduce revenue and operating income. Government Regulation KIT is subject to various federal, provincial and local laws affecting its business. Each of its restaurants is subject to licensing and regulation by a number of governmental authorities, which may include alcoholic beverage control, smoking laws, health and safety and fire agencies. Difficulties in obtaining or failures to obtain the required licenses or approvals, or loss thereof, could harm KIT s operating results thereby affecting KIT s ability to make lease payments as they come due. Potential Litigation, Class Actions and Other Complaints KIT may be the subject of complaints or litigation from customers alleging food related illness, injuries suffered on the premises or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially affect the REIT s reputation as well as KIT s sales, regardless of whether such allegations are true or whether KIT is ultimately held liable. In addition, due to the nature of its business, KIT may be subject to class action suits, which may in turn subject Scott s REIT to such litigation. QSR chains in the United States have been the subject 71

79 of class action suits concerning obesity and there can be no assurance that KIT and/or Scott s REIT will not be subject to similar claims in Canada. Although Scott s REIT believes such claims are without merit, litigation is expensive, time consuming and may divert management s attention away from the operation of Scott s REIT. RISK FACTORS RELATED TO THE OFFERING Potential Volatility of Unit Prices One of the factors that may influence the market price of the Units is the annual yield on the Units. Accordingly, an increase in market interest rates may lead purchasers of Units to demand a higher annual yield which could adversely affect the market price of the Units. In addition, the market price of the Units may be affected by changes in general market conditions, fluctuations in the markets for equity securities and numerous other factors beyond the control of Scott s REIT. Tax-Related Risk Factors The extent to which distributions will be non-taxable amounts in the future will depend on the extent to which the Operator can offset its taxable income by claiming capital cost allowances and other available deductions. There can be no assurance that income tax laws (or the judicial interpretation thereof or the administrative and/or assessing practices of the CRA) and/or the treatment of mutual fund trusts will not be changed in the manner which adversely affects Unitholders. The February 23, 2005 Federal Budget indicated that the government would continue to monitor developments in relation to income trusts and similar flow-through vehicles and would release a consultation paper in that regard. The consultation paper, released on September 8, 2005, solicits the views of interested parties on a number of tax issues related to the income trust sector but does not make any definitive proposals. The release of the consultation paper was followed on September 19, 2005 by a further announcement from the Minister of Finance that he had requested that the CRA postpone providing advance income tax rulings respecting flow through entity structures. The consultation process is expected to extend into 2006 but it is uncertain as to when the process will be completed or what form the legislative proposals or amendments, if any, will take. Scott s REIT will endeavour to ensure that the Units continue to be qualified investments for Plans, but there is no assurance that Scott s REIT will be able to do so. Units will cease to be qualified investments for Plans if Scott s REIT is no longer qualified as a mutual fund trust. The Tax Act imposes penalties for the acquisition or holding of non-qualified investments by such Plans. Any Series 2 or Series 3 Notes or other property distributed to a Unitholder on an in specie redemption of Units may not be qualified investments under the Tax Act. See Eligibility for Investment and Certain Canadian Federal Income Tax Considerations. Interest on the Series 1 Notes must be recognized by Scott s REIT for income tax purposes whether or not actually paid. Where the amount of net income and net realized capital gains of Scott s REIT in a taxation year exceeds the cash available for distribution in the year (including, for instance, where interest payments on the Series 1 Notes are due but not paid in whole or in part during such year), such excess net income and net realized capital gains will be distributed to Unitholders in the form of additional Units. Unitholders will generally be required to include an amount equal to the fair market value of those Units in their taxable income, notwithstanding that they do not directly receive a cash distribution. See Certain Canadian Federal Income Tax Considerations Taxation of Unitholders. Although Scott s REIT is of the view that all expenses to be claimed by Scott s REIT, the Trust, and the Scott s LP will be reasonable and deductible and that the cost amount and capital cost allowance claims of such entities will have been correctly determined and that the allocation of Scott s LP s income for tax purposes among its partners is reasonable, there can be no assurance that CRA will agree. If CRA successfully challenges the deductibility of such expenses or the allocation of such income, Scott s LP s allocation of taxable income to the Trust, and indirectly the taxable income of Scott s REIT and the Unitholders, will increase or change. Some of the Initial Properties are being acquired by Scott s LP on a rollover basis with the result that the cost base for tax purposes in such properties is less than their current fair market value. On a future sale of such properties for a sale price in excess of such cost base, income and capital gain will be realized which may result in tax being payable by Unitholders. Certain rules in the Tax Act provide that where a taxpayer acquires property from a person (a vendor ) with whom the taxpayer does not deal at arm s length, and the vendor owes amounts in respect of taxes, the taxpayer may be assessed for the vendor s taxes to the extent that the taxpayer does not pay fair market value consideration for the 72

80 property acquired. Scott s REIT will indirectly acquire property from persons with whom Scott s REIT might be considered to not be dealing at arm s length. Scott s REIT believes that it will provide fair market value consideration for property acquired by it. Also, Scott s REIT has obtained or will obtain certain covenants, representations and indemnities from such parties designed to protect it from costs in respect of any unexpected assessment by tax authorities pursuant to the above mentioned rules; however, no assurance can be given that such assessments will not be made by tax authorities, that such assessment if successfully made would not be material or that such parties will be able to reimburse Scott s REIT for the full amount of any such costs. Dilution Scott s REIT may, in its sole discretion, issue additional Units from time to time, and the interests of the holders of Units may be diluted thereby. While Scott s REIT Trustees must determine such an issuance is not dilutive to the REIT s Distributable Income per Unit, such determination may prove to be incorrect over time. Absence of Public Market and Determination of Offering Price Prior to the Offering, there was no public market for the Units. The offering price of the Units offered hereunder was determined by negotiation between Scott s and the Underwriters. There can be no assurance that an active trading market will develop after the Offering or, if developed, that such a market will be sustained at the price level of the Offering. A publicly-traded real estate investment trust will not necessarily trade at values determined solely by reference to the underlying value of its real estate assets. Accordingly, the Units may trade at a premium or a discount to values implied by the valuations of the assets of Scott s REIT. Availability of Cash Flow Distributable Income accruing to Unitholders may exceed actual cash available to Scott s REIT from time to time because of items such as principal repayments, capital expenditures and redemption of Units, if any, or the failure of the Trust or Scott s LP to make sufficient distributions. Scott s REIT may be required to borrow funds or reduce distributions in order to accommodate such items. Scott s REIT anticipates temporarily funding such items, if necessary, through a credit facility, to the extent that it is available. Credit facility terms may prohibit payments from the Operator to the Trust and Scott s REIT in default circumstances. 73

81 PLAN OF DISTRIBUTION Pursuant to the Underwriting Agreement dated September 29, 2005 among Scott s REIT, SRI and the Underwriters, Scott s REIT has agreed to issue and sell 5,000,000 Units, and the Underwriters have agreed to purchase such Units, at a price of $10 per Unit payable in cash to Scott s REIT, against delivery of certificates representing such Units, subject to compliance with all necessary legal requirements and to the conditions contained in the Underwriting Agreement. The Underwriting Agreement provides that Scott s REIT will pay to the Underwriters a fee of $0.60 per Unit offered for sale by this prospectus in consideration for their services in connection with the Offering. The obligations of the Underwriters under the Underwriting Agreement may be terminated upon the occurrence of certain stated events. The Underwriters, however, are obligated to take up and pay for all Units offered by this prospectus if any of such Units are purchased under the Underwriting Agreement. Scott s REIT has granted to the Underwriters an Over-Allotment Option, exercisable at any time for a period of 30 days from Closing, to purchase up to 364,953 Units on the same terms as set forth above solely to cover overallotments, if any. Scott s REIT has agreed to pay the Underwriters a fee of $0.60 per Unit in respect of Units purchased pursuant to the exercise of the Over-Allotment option. The proceeds received by Scott s REIT on the exercise of the Over-Allotment Option, if exercised, will be used to increase the REIT s indirect interest in Scott s LP, which will then use such proceeds to redeem a proportionate number of the Class B LP Units issued to SRI. See Retained Interest and Exchange Rights, Principal Unitholder and Use of Proceeds. Purchasers who acquire Units pursuant to the Over-Allotment Option acquire those Units under this prospectus and will be provided with a copy of this prospectus. Pursuant to policy statements of certain securities commissions or regulatory authorities, the Underwriters may not, throughout the period of distribution under this prospectus, bid for or purchase Units. The foregoing restriction is subject to exceptions, on the condition that the bid or purchase not be engaged in for the purpose of creating actual or apparent active trading in, or raising the price of, the Units. These exceptions include a bid or purchase permitted under the by-laws and rules of relevant self-regulatory authorities relating to market stabilization and passive market making activities and a bid or purchase made for and on behalf of a customer where the order was not solicited during the period of distribution. Scott s REIT has been advised that in connection with the Offering and pursuant to the firstmentioned exception, the Underwriters may over-allot or effect transactions which stabilize or maintain the market price of the Units at levels other than those which might otherwise prevail on the open market. Such transactions, if commenced, may be discontinued at any time. The Units offered hereby are being offered by the Underwriters in Canada and may be offered for sale outside Canada only in accordance with applicable law. The Units offered by this prospectus have not been and will not be registered under the U.S. Securities Act or any state securities laws. Accordingly, except in limited circumstances, such Units may not be offered, sold or delivered in the U.S. or to or for the account of a U.S. person except for sales in accordance with exemptions from the registration requirements of the U.S. Securities Act. The Underwriters have agreed that, except as permitted by the Underwriting Agreement and as expressly permitted by applicable laws of the U.S., they will not offer or sell any Units within the U.S. The Underwriting Agreement permits the Underwriters to reoffer and resell Units purchased by them pursuant thereto to certain qualified institutional buyers in the U.S. provided that such re-offers and such resales are made only in accordance with Rule 144A under the U.S. Securities Act. This Canadian prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any of the Units in the U.S. In addition, until 40 days after the commencement of the Offering of Units, an offer or sale of the Units within the U.S. by any dealer (whether or not participating in the Offering) may violate the registration requirements of the U.S. Securities Act unless such offer is made pursuant to an exemption from registration under the U.S. Securities Act. Scott s REIT and SRI have agreed to indemnify the Underwriters and their directors, officers and employees against certain liabilities pursuant to the Underwriting Agreement. The maximum aggregate liability of SRI under its indemnity in the Underwriting Agreement will be limited to the cash portion of the purchase price paid by Scott s LP in respect of the purchase from SRI of the SRI Initial Properties. Any amount paid by SRI in respect of its indemnity to Scott s LP under the SRI Purchase Agreement will operate to reduce the maximum liability of SRI to the Underwriters in respect of its indemnity under the Underwriting Agreement. The REIT has agreed with the Underwriters that, subject to certain exceptions, the REIT will not, during the period ending 180 days after the date of Closing, issue, offer, sell or contract to sell any Units or securities convertible into or exercisable or exchangeable for Units or publicly disclose the intention to make any such issue, offer or sale 74

82 without the prior consent of BMO Nesbitt Burns Inc., such consent not to be unreasonably withheld. In addition, the Trustees, SRI and the members of senior management of the REIT have each agreed with the Underwriters that they will not, subject to certain exceptions, during the period ending 180 days after the date of Closing, offer, sell, transfer, dispose or contract to sell any Units or securities convertible into or exercisable or exchangeable for Units or publicly disclose the intention to make any such sale, without the prior consent of BMO Nesbitt Burns Inc., such consent not to be unreasonably withheld. Subscriptions will be received subject to rejection or allotment in whole or in part and the right is reserved to close the subscription books at any time without notice. No certificate evidencing the Units will be issued to purchasers, except in limited circumstances, and registration of ownership of Units will be effected only through the book-based system administered by CDS. See Scott s REIT Declaration of Trust and Description of Units Book-Based System. A purchaser of Units will receive only a customer confirmation from the registered dealer who is a CDS Participant and from or through whom the Units are purchased. CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS In the opinion of Borden Ladner Gervais LLP, special tax counsel to Scott s REIT, and McCarthy Tétrault LLP, counsel to the Underwriters, the following is a summary of the principal Canadian federal income tax considerations generally applicable under the Tax Act to a Unitholder who is an individual who acquires Units pursuant to this Offering and who, for purposes of the Tax Act and at all relevant times, is resident in Canada, deals at arm s-length, and is not affiliated with, Scott s REIT and holds the Units as capital property. Generally, Units will be considered to be capital property to a Unitholder provided that the Unitholder does not hold the Units in the course of carrying on a business of buying and selling securities and has not acquired them in one or more transactions considered to be an adventure in the nature of trade. Certain Unitholders who might not otherwise be considered to hold their Units as capital property may, in certain circumstances, be entitled to have them treated as capital property by making the irrevocable election permitted by subsection 39(4) of the Tax Act. Such Unitholders should consult their own tax advisors regarding their particular circumstances. This summary is based upon the facts set out in this prospectus, certificates as to certain factual matters, the provisions of the Tax Act and the Regulations in force at the date hereof, counsel s understanding of the current published administrative policies and assessing practices of CRA. There can be no assurance that CRA will not change its administrative policies and assessing practices. This summary takes into account all specific proposals to amend the Tax Act and the Regulations publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (the Proposed Amendments ). This summary does not otherwise take into account or anticipate any changes in law or administrative policies and assessing practices, whether by legislative, governmental or judicial decision or action, and does not take into account any provincial, territorial or foreign tax legislation or considerations, which may differ significantly from those discussed herein. This summary assumes that the Proposed Amendments will be enacted as proposed but no assurances can be given that this will be the case. On October 31, 2003, the Department of Finance (Canada) released, for public consultation, draft proposed amendments to the Tax Act (the REOP Proposals ) that would require, for taxation years commencing after 2004, that there be a reasonable expectation of cumulative profit from a business or property for a taxpayer to claim a loss in a particular taxation year from the business of property, and that make it clear that profit for this purpose does not include capital gains. The REOP Proposals could, among other things, adversely affect a unitholder who borrows funds in connection with the acquisition of Units. This summary does not address any special consideration for such unitholders and any such unitholders should consult their own tax advisors in this regard. On February 23, 2005, the Minister of Finance (Canada) announced that an alternative proposal to replace the REOP Proposals would be released for comment at an early opportunity. On March 23, 2004, the Minister of Finance (Canada), as part of the 2004 federal budget, proposed amendments to the Tax Act that would impose special taxes in respect of (i) the restricted investment property holdings of a designated taxpayer (which would include a trust governed by a registered pension plan, a registered pension plan corporation and a tax-exempt pension investment corporation but would not include Deferred Income Plans and RESPs), and (ii) the direct and indirect holdings of a designated taxpayer in units of a business income trust (all as defined in the proposed amendments). On May 18, 2004, the Minister of Finance (Canada) announced that the proposed amendments would be suspended to allow for further consultations and that legislative proposals would be 75

83 releases following consultations. This position was reiterated by the Minister of Finance (Canada) in a press release dated September 16, 2004 and the federal budget of February 23, It is uncertain whether any new legislative proposals would apply to Scott s REIT or to a holder of Units. Prospective purchasers should consult their own tax advisors regarding the potential application of the proposed amendments as a result of an acquisition of Units. The February 23, 2005 Federal Budget also indicated that the government would continue to monitor developments in relation to income trusts and similar flow-through vehicles and would release a consultation paper in that regard. That consultation paper was released on September 8, The consultation paper solicits the views of interested parties on a number of tax issues related to the income trust sector but does not make any definitive proposals. It is expected that the consultation process will extend into 2006, but it is uncertain as to when that process will be completed and what form the legislative proposals, if any, will take. The release of the consultation paper was followed on September 19, 2005 by a further announcement from the Minister of Finance that he had requested that CRA postpone providing advance income tax rulings respecting flow through entity structures, that the Department of Finance would monitor developments in the flow through entity market with a view to proposing measures in response to the consultations and that consideration will be given to what, if any, transitional measures would be appropriate. This summary is not exhaustive of all possible Canadian federal income tax considerations applicable to an investment in Units. Moreover, the income and other tax consequences of acquiring, holding or disposing of Units will vary depending on the Unitholder s particular circumstances, including the province(s) in which the Unitholder resides or carries on business. Accordingly, this summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any prospective purchaser of Units. Consequently, prospective Unitholders should consult their own tax advisors for advice with respect to the tax consequences to them of an investment in Units based on their particular circumstances. Status of Scott s REIT Mutual Fund Trust This summary is based on the assumption that Scott s REIT will qualify as a mutual fund trust as defined in the Tax Act on completion of the Offering and will thereafter continuously qualify as a mutual fund trust. This summary assumes that Scott s REIT will be able to elect and will elect to be deemed to be a mutual fund trust from the date it is established. If Scott s REIT were not to qualify as a mutual fund trust, the income tax considerations as described below would, in some respects, be materially different. Qualified Investment Provided Scott s REIT is, on Closing, a mutual fund trust within the meaning of the Tax Act, Units will be, on that date, qualified investments under the Tax Act for Plans. If Scott s REIT fails or ceases to qualify as a mutual fund trust under the Tax Act, the Units will not be qualified investments under the Tax Act for Plans. Series 2 and Series 3 Notes or other property received as a result of an in specie redemption of Units by Scott s REIT may not be qualified investments for Plans, which could give rise to adverse consequences to the Plan or the annuitant or beneficiary thereunder. Accordingly, Plans that own Units should consult their own tax advisors before deciding to exercise the redemption rights attached to the Units. Taxation of Scott s REIT The taxation year of Scott s REIT is the calendar year. In each taxation year, Scott s REIT will be subject to tax under Part I of the Tax Act on its income for the year, including net realized taxable capital gains, less the portion thereof that it deducts in respect of the amounts considered to be paid or payable in the year to Unitholders. An amount will be considered to be payable to a Unitholder in a taxation year if it is paid to the Unitholder in the year by Scott s REIT or if the Unitholder is entitled in that year to enforce payment of the amount. Income and Gains The REIT s income will be determined under the Tax Act for each taxation year and will include such amount of the Trust s income for tax purposes, including net taxable capital gains, as is paid or becomes payable to Scott s REIT in the year in respect of Trust Units and all interest on the Series 1 Notes that accrues to Scott s REIT to the end of the 76

84 year, or that becomes receivable or is received by it before the end of the year, except to the extent that such interest was included in computing its income for a preceding taxation year. Scott s REIT generally will not be subject to tax on any amount received as a repayment of principal in respect of the Series 1 Notes. Scott s REIT will, generally, also not be subject to tax on any amounts received as distributions on the Trust Units that are in excess of the income of the Trust that is paid or payable to Scott s REIT in a year, which amounts will generally reduce the REIT s adjusted cost base of the Trust Units. If, as a result, the REIT s adjusted cost base in any taxation year of its Trust Units would otherwise be a negative amount, Scott s REIT will be deemed to realize a capital gain in such amount for that year, and the REIT s adjusted cost base of its Trust Units at the beginning of the next taxation year will then be nil. Provided that appropriate designations are made by the Trust, that portion of net taxable capital gains of the Trust as is considered to be paid or payable to Scott s REIT will retain its character and be treated as such in the hands of Scott s REIT for purposes of the Tax Act. Upon redemption of Trust Units and Series 1 Notes in exchange for Series 2 and/or Series 3 Notes and a transfer by Scott s REIT of the Series 2 or Series 3 Notes or other property of Scott s REIT to a Unitholder, in connection with an in specie redemption of Units by the Unitholder, Scott s REIT will be considered to dispose of the Trust Units and the Notes for proceeds of disposition equal to their fair market value (which may give rise to income or capital gains to Scott s REIT). The REIT s proceeds from the disposition of Notes will generally be reduced by any accrued but unpaid interest in respect thereof, which interest will generally be included in the REIT s income in the year of disposition to the extent it was not included in the REIT s income in a previous year. Scott s REIT will realize a capital gain (or a capital loss) to the extent that the proceeds from the disposition exceed (or are less than) the adjusted cost base of the Trust Units and/or Notes as the case may be and any reasonable costs of disposition. Income Deductions In computing its income, Scott s REIT may deduct reasonable administrative costs and other unreimbursed expenses incurred by it for the purpose of earning income. Scott s REIT may also deduct from its income for the year a portion of the reasonable expenses incurred by Scott s REIT to issue Units pursuant to this Offering. The portion of the issue expenses deductible by Scott s REIT in a taxation year is 20% of the total unreimbursed issue expenses, pro-rated where the REIT s taxation year is less than 365 days. Under the Declaration of Trust, an amount equal to the income for each taxation year of Scott s REIT, including net realized taxable capital gains (other than income and taxable capital gains of Scott s REIT arising on or in connection with an in specie redemption of Units which are paid or payable by Scott s REIT to redeeming Unitholders and capital gains which may be offset by capital losses carried forward from prior years or on which tax is recoverable by Scott s REIT), and the non-taxable portion of net realized capital gains of Scott s REIT, will be payable in the year to the holders of Voting Units, in cash or in Units. Amounts payable to Voting Unitholders, whether in cash or Units, will generally be deductible by Scott s REIT in computing its income. Counsel has been advised that Scott s REIT intends to distribute a sufficient amount to Voting Unitholders and to deduct in computing its income for purposes of the Tax Act the full amount available for deduction in each taxation year to the extent of its taxable income for the year otherwise determined so that Scott s REIT will generally not be liable in such year for income tax under Part I of the Tax Act. Scott s REIT will be entitled for each taxation year to reduce (or receive a refund in respect of) its liability, if any, for tax on its net realized taxable capital gains by an amount determined under the Tax Act based on the redemption of Units during the year (the Capital Gains Refund ). In certain circumstances, the Capital Gains Refund in a particular taxation year may not completely offset the REIT s tax liability for such taxation year arising as a result of the exchange of Trust Units and Series 1 Notes and the transfer of Series 2 or Series 3 Notes, or other property of the Trust, on an in specie redemption of Units. The Declaration of Trust provides that all or a portion of the income (including interest accrued on Notes) and any capital gains, realized by Scott s REIT in connection with an in specie redemption of Units may, at the discretion of Scott s REIT Trustees, be treated as paid or payable to, and as applicable designated as a taxable capital gain of, the redeeming Unitholders. Any amount so paid or payable must be included in the income of the redeeming Unitholders and will be deductible by Scott s REIT. 77

85 Losses of Scott s REIT cannot be allocated to Unitholders but may be deducted by Scott s REIT in future years, subject to the detailed rules in the Tax Act in that regard. Taxation of the Trust The taxation year of the Trust is the calendar year. In each taxation year, the Trust will be subject to tax under Part I of the Tax Act on its income for the year, including net realized capital gains, less the portion thereof that it deducts in respect of amounts paid or payable in the year to Scott s REIT. The income of the Trust will include its share of the income of Scott s LP for each fiscal year ending on or before the year-end of the Trust. Generally, distributions to partners in excess of the income for tax purposes of Scott s LP for a fiscal year will result in a reduction of the adjusted cost base of the partner s Units in Scott s LP by the amount of such excess. If, as a result, the Trust s adjusted cost base at the end of a taxation year of its Units in Scott s LP would otherwise be a negative amount, the Trust will be deemed to realize a capital gain in such amount for that year, and the Trust s adjusted cost base at the beginning of the next taxation year of its Units in Scott s LP will then be nil. If Scott s LP were to incur losses for tax purposes, the Trust s ability to deduct such losses may be limited by certain rules under the Tax Act. In computing its income, the Trust may generally deduct its reasonable expenses incurred to earn such income. Under the Declaration of Trust of the Trust, an amount equal to the income of the Trust (including net realized taxable capital gains), and the non-taxable portion of net realized capital gains of the Trust, will be paid or payable in the year to Scott s REIT. Counsel has been advised that the Trust intends to distribute a sufficient amount to Scott s REIT and to deduct in computing its income for purposes of the Tax Act the full amount available for deduction in each taxation year to the extent of its taxable income for the year otherwise determined so that the Trust will generally not be liable in such year for income tax under Part I of the Tax Act. Taxation of Scott s LP Scott s LP will not be subject to tax under the Tax Act. Each partner of Scott s LP, including the Trust, will be required to include in computing the partner s income the partner s share of the income or loss of Scott s LP for its fiscal year ending in or coincident with the partner s taxation year, whether or not any such income is distributed to the partner in the taxation year. For this purpose, the income or loss of Scott s LP will be computed for each fiscal year as if Scott s LP were a separate person resident in Canada. In computing the income or loss of Scott s LP, deductions will be claimed in respect of its reasonable administrative and other expenses incurred for the purpose of earning income and available capital cost allowances. The income (including taxable capital gains) or loss of Scott s LP for a fiscal year will be allocated to the partners of Scott s LP, including the Trust, on the basis of their respective share of such income or loss, subject to the detailed rules in the Tax Act in that regard. Scott s LP may also deduct from its income for the year a portion of the reasonable expenses incurred by it to issue units of Scott s LP pursuant to the transactions contemplated in this Offering. The portion of such issue expenses deductible by Scott s LP in a taxation year is 20% of the total issue expenses, pro-rated where the partnership s taxation year is less than 365 days. Taxation of Unitholders Distributions A Unitholder will generally be required to include in income for a particular taxation year the portion of the net income of Scott s REIT for a taxation year, including net realized taxable capital gains, that is paid or payable to the Unitholder in the particular taxation year (and that Scott s REIT deducts in computing its income), whether such portion is received in cash, additional Units or otherwise. Provided that appropriate designations are made by Scott s REIT, such portion of its net taxable capital gains as is paid or payable to a Unitholder will effectively retain its character and be treated as such in the hands of the Unitholder for purposes of the Tax Act. The tax treatment of capital gains is described below. The non-taxable portion of any net realized capital gains of Scott s REIT paid or payable to a Unitholder in a taxation year will not be included in computing the Unitholder s income for the year. Any other amount in excess of the net income of Scott s REIT that is paid or payable to a Unitholder in such year (otherwise than as proceeds of 78

86 disposition of the Units), will not generally be included in the Unitholder s income for the year; however, such amounts will reduce the adjusted cost base of the Units held by the Unitholder. To the extent that the adjusted cost base of a Unit would otherwise be less than zero in any taxation year, the negative amount will be deemed to be a capital gain realized by the Unitholder in that taxation year and the adjusted cost base of the Unitholder s Units will be zero at the beginning of the next taxation year. The cost to a Unitholder of additional Units received in lieu of a cash distribution will be the amount of that distribution. Purchases of Units Since the net income of Scott s REIT will be distributed on a monthly basis, a purchaser of a Unit may become taxable on a portion of the net income of Scott s REIT accrued or realized by Scott s REIT in a month before the time the Unit was purchased but which was not paid or made payable to Unitholders until the end of the month and after the time the Unit was purchased. A similar result may apply on an annual basis in respect of a portion of capital gains accrued or realized by Scott s REIT in a year before the time the Unit was purchased but which is paid or made payable to Unitholders at year end and after the time the Unit was purchased. Dispositions of Units On the disposition or deemed disposition of a Unit, including on the redemption of the Unit, the Unitholder will realize a capital gain (or capital loss) equal to the amount by which the Unitholder s proceeds of disposition exceed (or are less than) the aggregate of the adjusted cost base of the Unit and any reasonable costs of disposition. Proceeds of disposition will not include an amount that is otherwise required to be included in the Unitholder s income such as amounts treated as having been paid to the Unitholder out of income or capital gains of Scott s REIT. For the purpose of determining the adjusted cost base to a Unitholder of Units, when a Unit is acquired, the cost of the newly-acquired Unit will be averaged with the adjusted cost base of all of the Units owned by the Unitholder as capital property immediately before that time. Where, on a redemption of Units, Series 2 or Series 3 Notes or other property of Scott s REIT is transferred by Scott s REIT to the redeeming Unitholder, the proceeds of disposition of the Units to the Unitholder will be equal to the fair market value of the Series 2 or Series 3 Notes or other property of Scott s REIT so transferred less any income or capital gain realized by Scott s REIT as a result of or in connection with such distribution which is treated as being paid or payable by Scott s REIT to the redeeming Unitholder including, in the case of Notes, any accrued interest thereon. Where such income or capital gain is treated as paid or payable by Scott s REIT to the redeeming Unitholder, the Unitholder will be required to include such income, and the taxable portion of any such capital gain so designated by Scott s REIT, in the Unitholder s income. The cost to a Unitholder of any Notes or other property of Scott s REIT transferred by Scott s REIT to the Unitholder upon a redemption of Units will be equal to the fair market value of such property at the time of the transfer less, in the case of a Trust Note, any accrued interest. The Unitholder will thereafter be required to include in income interest on any Trust Note so distributed in accordance with the provisions of the Tax Act but, to the extent such interest inclusion is in respect of any interest accrued to the date of the acquisition of a Trust Note by the Unitholder, an offsetting deduction will be available. Capital Gains and Capital Losses One-half of any capital gains realized by a Unitholder on a disposition or deemed disposition of Units and the amount of any net taxable capital gains designated by Scott s REIT in respect of a Unitholder will be included in the Unitholder s income as a taxable capital gain. One-half of any capital loss realized by a Unitholder on a disposition or deemed disposition of Units may generally be deducted only from taxable capital gains of the Unitholder subject to and in accordance with the provisions of the Tax Act. Alternative Minimum Tax In general terms, net income of Scott s REIT paid or payable to a Unitholder who is an individual that is designated as net realized capital gains and capital gains realized on the disposition of Units may increase the Unitholder s liability for alternative minimum tax. 79

87 PRINCIPAL UNITHOLDER To the knowledge of Scott s REIT, no person or company will beneficially own, directly or indirectly, or own of record, more than 10% of the Units of Scott s REIT (assuming the indirect exchange of all Class B LP Units for Units of Scott s REIT) following the Offering and other transactions described under Use of Proceeds other than SRI, which will own, after Closing, 2,254,909 Class B LP Units that are exchangeable (subject to customary anti-dilution provisions) on a one-for-one basis for 2,254,909 Units, representing approximately 31.1% of the Units to be issued and outstanding on Closing (calculated on a fully-diluted basis). The proceeds received by Scott s REIT on the exercise of the Over-Allotment Option, if exercised, will be used to increase the REIT s indirect interest in Scott s LP, which will then use such proceeds to redeem a proportionate number of the Class B LP Units issued to SRI. Exercise of the Over-Allotment Option in full will reduce SRI s retained interest to 26.1%. INTERESTS OF PROMOTER, MANAGEMENT AND OTHERS IN MATERIAL CONTRACTS SRI has taken the initiative in organizing Scott s REIT and the acquisition by Scott s REIT and the Operator of the Initial Properties and may therefore be considered the promoter of Scott s REIT for purposes of applicable securities legislation. Certain members of management and shareholders of SRI are also directors and/or officers of Trustee Corp., the trustee of Scott s GP Trust, the general partner of Scott s LP. On or about September 30, 2002, SRI, through a wholly-owned subsidiary, acquired 26 of the Initial Properties from priszm brandz LP for a total consideration of $17,832,556. On or about March 31, 2003, SRI, through a whollyowned subsidiary, acquired 36 of the Initial Properties from priszm brandz LP for a total consideration of $18,176,817. In each case the purchase price for the properties acquired was determined by negotiation between SRI and priszm brandz LP. At the times of such respective purchases, SRI was a limited partner of priszm brandz LP. Under the terms of the SRI Purchase Agreement, Scott s LP has agreed to purchase the 26 Initial Properties acquired by SRI on September 30, 2002 for a total consideration of $21,610,000 and the 36 Initial Properties acquired by SRI on March 31, 2003 for a total consideration of $24,630,000. In connection with the purchase of the SRI Initial Properties, Scott s LP will issue the SRI Promissory Note in the amount of $578,085 to SRI. Interest will accrue on amounts outstanding under the SRI Promissory Note at the rate of 4.90% per annum. The principal and cumulative accrued interest can be repaid at any time but become due and payable on the date that is five years after the Closing Date. Scott s LP will not pay accrued interest on the SRI Promissory Note for any year prior to maturity unless distributions totaling at least $0.85 per Unit for such year have been paid. LEGAL PROCEEDINGS To the knowledge of management of Scott s REIT and the Operator, no legal proceedings of a material nature by or against Scott s REIT and/or the Operator, or in respect of the Initial Properties, are pending or threatened. EXPERTS The matters referred to under Eligibility for Investment and Certain Canadian Federal Income Tax Considerations as well as certain other legal matters relating to the issue and sale of the Units will be passed upon on behalf of Scott s REIT by Stikeman Elliott LLP and Borden Ladner Gervais LLP, special tax counsel to Scott s REIT, and on behalf of the Underwriters by McCarthy Tétrault LLP. In addition, certain information relating to the Appraisals has been based upon reports by Altus Helyar (a division of Altus Group Limited), and certain information relating to the Environmental Reports has been based upon reports by Jacques Whitford Limited, Golder Associates Ltd., SEACOR Environmental Inc. or XCG Consultants Ltd., respectively. AUDITORS, TRANSFER AGENT AND REGISTRAR The auditors of Scott s REIT are PricewaterhouseCoopers LLP. The transfer agent and registrar for the Units is CIBC Mellon Trust Company at its principal office in Toronto. 80

88 MATERIAL CONTRACTS Except for agreements entered into in the ordinary course of business, the only agreements which will be material to Scott s REIT which were entered into during the two year period prior to the date hereof or will be entered into prior to Closing are the following: a) the Underwriting Agreement described under Plan of Distribution ; b) the Declaration of Trust described under Scott s REIT Declaration of Trust and Description of Units ; c) the Trust Declaration described under The Trust ; d) the Scott s LP Agreement described under Scott s LP ; e) the Purchase Agreements described under Acquisition of the Portfolio Properties Acquisition ; f) the Exchange Agreement described under Scott s LP Partnership Units ; g) the Mortgage described under Debt Strategy ; h) the Asset Management Agreement described under Asset and Property Management Asset Manager ; and i) the Property Management Agreement described under Asset and Property Management Property Manager. Copies of the foregoing documents will be filed with the Canadian securities regulatory authorities and available on the internet at and may be examined during normal business hours at the office of the Scott s REIT at 161 Bay Street, Suite 2300, Toronto, Ontario, M5J 2S1. PURCHASERS STATUTORY RIGHTS Securities legislation in certain of the provinces of Canada provides purchasers with the right to withdraw from an agreement to purchase securities within two Business Days after receipt or deemed receipt of a prospectus and any amendment. In several of the provinces, the securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, damages where a prospectus and any amendment contains a misrepresentation or is not delivered to the purchaser, but such remedies must be exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser s province. A purchaser should refer to any applicable provisions of the securities legislation of the purchaser s province for the particulars of these rights or consult with a legal adviser. 81

89 GLOSSARY means Ontario Inc., a corporation incorporated under the laws of the Province of Ontario. Affiliate means in respect of a person or company, another person or company that would be considered to be an affiliate in respect of such person or company for the purposes of Ontario Securities Commission Rule as in effect on the date hereof. Altus Group means the independent appraiser of the Initial Properties to be acquired by the Operator. Appraisals means the independent appraisals of the Initial Properties undertaken by the Altus Group. Appraisers means Altus Helyar, a division of Altus Group Limited. Asset Management Agreement means the agreement dated as of August 31, 2005, between Scott s REIT, Scott s LP and the Asset Manager, pursuant to which the Asset Manager provides advisory, asset management, and administrative services to Scott s LP and Scott s REIT. Asset Manager means JBM, its capacity as asset manager. Beneficial Owner means a beneficial owner of a Unit or Units. Book-Entry System means a book-based system administered by CDS. bps means basis points. Business Day means any day other than a Saturday, Sunday or statutory holiday in the City of Toronto, Ontario. CAGR means compounded annual growth rate. Capital Gains Refund means the amount determined under the Tax Act, based on the redemption of Units during the year, by which Scott s REIT is entitled to reduce (or receive a refund in respect of) its liability for tax on its net realized capital gains for each taxation year. CBCA means the Canada Business Corporations Act. CDS means The Canadian Depository for Securities Limited. CDS Participant means a participant in the CDS depository service. Class A LP Units means the Class A limited partnership units of Scott s Limited Partnership. Class B LP Units means the Class B limited partnership units of Scott s Limited Partnership. Class B LP Unitholders means the holders of Class B LP Units. Closing means the completion of the Offering. CRA means Canada Revenue Agency. CREST means the Consumer Reports Eating Share Trends report prepared by the NPD Foodservice Information Group. Declaration of Trust means the declaration of trust dated as of August 23, 2005, as amended or amended and restated from time to time, pursuant to which Scott s REIT was established and is governed. Depository means CDS. Distributable Income means the income before non-controlling interest of Scott s REIT on a consolidated basis as determined in accordance with GAAP, subject to certain adjustments as set out in the Declaration of Trust. Environmental Reports means the reports prepared by JWL, Golder, SEACOR and XCG with respect to the Initial Properties. Exchangeable Securities means other securities exchangeable, directly or indirectly, for Units. Exchange Agreement means the agreement entered into following Closing between Scott s REIT, the Trust, Scott s LP, Scott s GP and SRI pursuant to which holders of Class B LP Units have the right to indirectly exchange Class B LP Units into Units on a one-for-one basis, subject to adjustment in the exchange ratio in certain circumstances. 82

90 Financial Forecast means the financial forecast prepared by JBM on behalf of Scott s REIT and reported upon by PricewaterhouseCoopers LLP, using assumptions with an effective date of September 1, Forecast Period means the 12-month period ending August 31, GAAP means, at any time, Canadian generally accepted accounting principles, including those set out in the Handbook of the Canadian Institute of Chartered Accountants, applied on a consistent basis. Global Unit Certificates means the one or more fully registered global unit certificates representing the Units, and held by, or on behalf of, CDS. Golder means Golder Associates Ltd. Governance Agreement means the agreement to be entered into between SRI and Trustee Corp., which will provide for various matters relating to Trustee Corp., including composition of the board of directors. Governance, Compensation and Investment Committee means the Governance, Compensation and Investment Committee of Trustee Corp. Gross Book Value means the book value of the assets of Scott s REIT and its consolidated subsidiaries, as shown on its then most recent consolidated balance sheet, plus accumulated depreciation on buildings and excluding the amount of any receivable reflecting interest rate subsidies on any debt assumed by Scott s REIT, or, if approved by a majority of the independent Trustees, the appraised value of the assets of Scott s REIT and its consolidated subsidiaries may be used instead of book value. independent has the meaning ascribed thereto under applicable securities laws. Initial Properties means all of the properties listed in Appendix I to this prospectus. JBM means JBM Properties Inc., a corporation incorporated under the laws of the Province of Ontario. joint venture entity means a corporation or other entity, in which Scott s REIT owns securities, and thereby holds a joint interest in a retail location with that corporation or entity. joint venturers means the other party with whom Scott s REIT holds an interest in a retail location jointly or in common. JWL means Jacques Whitford Limited. KIT means KIT Limited Partnership, together with its general partner and subsidiaries. KIT LP means KIT Limited Partnership, a limited partnership formed under the laws of the Province of Manitoba. Lender means GE Canada Equipment Financing G.P. Monthly Limit means the limit placed on the total amounts payable in cash by Scott s REIT in respect of Units tendered for redemption in the same calendar month. Mortgage means the $65 million mortgage to be entered into by Scott s LP with the Lender in connection with the acquisition of the Initial Properties. Note Indenture means the indenture made between the Trust and the Note Trustee providing for the issuance of Notes. Note Trustee means CIBC Mellon Trust Company, as note trustee under the Note Indenture. Notes means the Series 1 Notes, the Series 2 Notes and the Series 3 Notes issuable under the Note Indenture. Operator means Scott s LP, together with its general partner and subsidiaries. Offering means the offering of Units pursuant to this prospectus, as described under Plan of Distribution. Other Issuable Securities means the other securities that may be issued by Scott s REIT including Special Voting Units issued in conjunction with the issuance of Class B LP Units or securities convertible into or exchangeable for Units or other securities of Scott s REIT or warrants, options or other rights to acquire Units or other securities of Scott s REIT. 83

91 person means a natural person, partnership, limited partnership, limited liability partnership, corporation, joint stock company, trust, unincorporated association, limited liability company, joint venture or other entity or governmental or regulatory authority or entity. Phase I ESA Report means a Phase I environmental site assessment report. Phase II ESA Report means a Phase II environmental site assessment report. Plans means registered retirement savings plan, registered retirement income funds, deferred profit sharing plans and registered education plans. Promoter means SRI. Property Management Agreement means the agreement dated as of August 31, 2005 between Scott s REIT, Scott s LP and JBM. Property Manager means JBM, in its capacity as property manager. QSR means quick service restaurant. REIT and Scott s REIT mean Scott s Real Estate Investment Trust. SEACOR means SEACOR Environmental Inc. Scott s Entities means the REIT, the Trust, Scott s GP, Scott s LP, , Trustee Corp. and Ontario Inc. and any of their respective affiliates from time to time. Scott s GP means Scott s GP Trust, a trust established under the laws of the Province of Ontario, the general partner of Scott s LP. Scott s GP Trust Declaration of Trust means the declaration of trust dated as of August 23, 2005, pursuant to which Scott s GP Trust was established and is governed. Scott s LP means Scott s Real Estate Limited Partnership, a limited partnership formed under the laws of the Province of Manitoba. Scott s LP Agreement means the limited partnership agreement dated as of August 23, 2005, as amended or amended and restated, between the Trust and Scott s GP Trust. Scott s LP Units means, collectively, the Class A LP Units and the Class B LP Units. Scott s REIT means Scott s Real Estate Investment Trust. Series 1 Notes means the Series 1 Notes issuable under the Note Indenture. Series 2 Notes means the Series 2 Notes issuable under the Note Indenture. Series 3 Notes means the Series 3 Notes issuable under the Note Indenture. Special Resolution means a resolution proposed to be passed as a special resolution at a meeting (including an adjourned meeting), of Voting Unitholders, duly convened for that purpose at which a quorum is present, which resolution is passed by the affirmative votes of the holders of more than 66 2 /3% of the Voting Units represented in person or by proxy at the meeting and voted upon such resolution. Special Voting Units means the securities issued in connection with or in relation to Class B LP Units for the purpose of providing voting rights with respect to Scott s REIT to the holders of such securities. Special Voting Rightsholders means the holders of Special Voting Rights. SRI means Scott s Restaurants Inc., a corporation incorporated under the laws of the Province of Ontario, and includes its affiliates, as applicable. SRI Initial Properties means the properties being directly and indirectly acquired by Scott s LP pursuant to the SRI Purchase Agreement. SRI Promissory Note means the unsecured promissory note issued by Scott s LP to SRI in connection with the purchase of the SRI Initial Properties in the amount of $578,085, bearing interest at a rate of 4.90% per annum and becoming due on the date that is five years after the Closing Date. 84

92 SRI Purchase Agreement means the agreements dated as of September 29, 2005, between Scott s LP and Scott s Restaurants Inc. and its affiliates, as applicable, pursuant to which Scott s LP will acquire 79 properties from SRI for an aggregate purchase price of $64,790,000. take-over bid means an offer made to Unitholders to acquire, directly or indirectly, outstanding Units where the units that are the subject of the offer, together with the Offeror s Units, constitute in the aggregate 20% or more of all outstanding units Tax Act means the Income Tax Act (Canada). Trust means SR Operating Trust, a trust established under the laws of the Province of Ontario. Trust Declaration of Trust means the declaration of trust dated as of August 23, 2005, as amended or amended and restated, pursuant to which the Trust was established and is governed. Trustee Corp means Scott s Trustee Corp., a corporation incorporated under the laws of the Province of Ontario, the sole trustee of Scott s GP. Trust Units means units of the Trust. Trust Unitholders means the holders of Trust Units. Trustees means the trustees of Scott s REIT. Underwriters means BMO Nesbitt Burns Inc., CIBC World Markets Inc., Genuity Capital Markets, RBC Dominion Securities Inc., Desjardins Securities Inc. and Canaccord Capital Corporation. Underwriting Agreement means the underwriting agreement dated September 29, 2005 among Scott s REIT, SRI and the Underwriters, as described under Plan of Distribution. Units means the units of Scott s REIT being offered under this prospectus, as described under Scott s REIT Declaration of Trust and Description of Units. Unitholders means the holders of the Units. Voting Units means collectively the Units and the Special Voting Units. Voting Unitholders means Unitholders and Special Voting Unitholders. XCG means XCG Consultants Ltd. Yum! means Yum! Brands Canada Management LP, a limited partnership established under the laws of the Province of Ontario, and includes its affiliates, as applicable. Yum! Initial Properties means the properties being directly and indirectly acquired by Scott s LP pursuant to the Yum! Purchase Agreement. Yum! Purchase Agreement means the agreement dated as of September 29, 2005, between Scott s LP and Yum! pursuant to which Scott s LP will acquire 111 properties from Yum! for an aggregate purchase price of $65,940,

93 APPENDIX I INITIAL PROPERTIES Store Building Size Lot Size In 1st Year Rent Ser. # Number Street Address City Prov. In Sq. Ft. Sq. Ft. in REIT QUINPOOL RD HALIFAX NS 2,726 10,956 $ 41, TITUS ST/MAIN AVENUE HALIFAX NS 1,500 7,230 $ 46, HERRING COVE HALIFAX NS 1,805 18,610 $ 35, COLE HARBOUR RD. DARTMOUTH NS 3,455 34,110 $ 61, WARWICK ST. DIGBY NS 1,935 7,637 $ 30, * 279 MAIN ST. LIVERPOOL NS 2,240 5,632 $ 24, SACKVILLE DR. LOWER SACKVILLE NS 2,160 66,870 $ 79, COMMERCIAL ST. NEW MINAS NS 2,500 30,850 $ 61, KING ST & O BRIEN ST. WINDSOR NS 2,092 33,186 $ 34, HIGHWAY #1 COLDBROOK NS 1,320 52,357 $ 37, REEVES ST & KENNEDY ST PORT HAWKESBURY NS 3,800 37,199 $ 38, CENTRAL AVE. GREENWOOD NS 2,300 50,662 $ 37, KING ST. NORTH SYDNEY NS 1,560 24,757 $ 35, BLISS ST. OROMOCTO NB 1,620 NA $ 37, MAIN ST. NASHWAAKSIS NB 1,692 NA $ 59, PROSPECT STREET FREDERICTON NB 1,617 NA $ 68, WATER ST. CAMPBELLTON NB 1,580 NA $ 28, PLEASANT ST. NEWCASTLE NB 1,692 NA $ 46, ST. PETER AVE. BATHURST NB 1,617 NA $ 53, BLVD. HEBERT EDMUNDSTON NB 2,430 NA $ 79, WEST RIVER RD. PICTOU NS 1,050 19,716 $ 24, JAMES ST. ANTIGONISH NS 1,908 29,550 $ 56, CLOVERDALE RD. RIVERVIEW NB 2,250 NA $ 46, MOUNTAIN RD. MONCTON NB 2,095 NA $ 71, BD LEGER MONTREAL QC 2,076 20,450 $ 62, AV. REGINA VERDUN QC 1,863 7,594 $ 42, RUE SHERBROOKE E. MONTREAL QC 3,060 14,175 $ 47, DE LA CONCORDE E. DUVERNAY QC 2,269 22,044 $ 45, BOUL TASCHEREAU GREENFIELD PARK QC 2,223 29,250 $ 44, BD ST. CHARLES KIRKLAND QC 2,554 27,872 $ 58, CH.CHAMBLY LONGUEUIL QC 2,227 15,906 $ 55, ST-JEAN BAPTISTE POINTE TREMBLES QC 2,196 24,579 $ 42, RUE MONTARVILLE BOUCHERVILLE QC 2,034 22,647 $ 36, RUE PAPINEAU MONTREAL QC 2,293 14,750 $ 41, BD STE FOY LONGUEUIL QC 2,178 14,634 $ 41, RUE BEAUBIEN EST MONTREAL QC 2,279 23,286 $ 47, BD DES LAURENTIDES VIMONT QC 2,211 16,361 $ 42, RUE PROVOST LACHINE QC 1,486 8,126 $ 43, BD LACORDAIRE ST-LEONARD QC 2,632 20,997 $ 66, BD PIE IX MONTREAL QC 4,543 18,308 $ 50, RUE SHERBROOKE O. MONTREAL QC 1,978 5,157 $ 59, BD DES SOURCES PIERREFONDS QC 2,650 16,561 $ 52, COTE VERTU ST. LAURENT QC 3,140 18,942 $ 67, AV. VICTORIA MONTREAL QC 1,485 13,365 $ 59, BD SHEVCHENKO LASALLE QC 2,321 11,624 $ 40, TASCHEREAU BLVD. BROSSARD QC 3,193 29,637 $ 55, BOUL HENRI CHARLESBOURG QC 1,262 NA $ 50,640 BOURASSA CHEMIN STE FOY STE FOY QC 1,792 17,787 $ 47, BOUL PERE LELIEVRE DUBERGER QC 1,152 NA $ 34, BOUL L ORMIERE NEUFCHATEL QC 1,328 25,199 $ 46, IEME AVE. ST. ROMUALD QC 1,720 NA $ 50, ROUTE PRES.KENNEDY LEVIS QC 3,200 49,375 $ 59,986 86

94 Store Building Size Lot Size In 1st Year Rent Ser. # Number Street Address City Prov. In Sq. Ft. Sq. Ft. in REIT BOUL STE ANNE BEAUPORT QC 2,600 NA $ 61, BD ARTHUR-SAUVE ST. EUSTACHE QC 1,913 11,071 $ 65, BD DU SEMINAIRE ST-JEAN QC 3,442 27,167 $ 64, BD TASCHEREAU LA PRAIRIE QC 2,646 19,328 $ 43, BD DES LAURENTIDES ST-JEROME QC 3,553 34,179 $ 97, BD CURE LABELLE STE THERESE QC 2,286 10,609 $ 70, SIR WILFRID LAURIER BELOEIL QC 2,010 10,091 $ 37, RUE PRINCIPALE STE AGATHE QC 2,213 25,741 $ 38, BD DES SEIGNEURS TERREBONNE QC 3,276 21,303 $ 71, BD HARWOOD DORION QC 2,196 19,263 $ 56, RUE FISET SOREL-TRACY QC 2,094 20,562 $ 47, * 1465 RUE KING OUEST SHERBROOKE QC 4,323 45,427 $ 87, RUE PRINCIPALE GRANBY QC 2,681 18,583 $ 67, RUE MERRY NORD MAGOG QC 2,448 16,649 $ 44, RUE SUD COWANSVILLE QC 2,985 19,762 $ 53, RUE CHILD COATICOOK QC 1,916 32,085 $ 40, CH. LAROCQUE VALLEYFIELD QC 2,196 15,454 $ 38, BD DANJOU CHATEAUGUAY QC 3,161 37,635 $ 76, BD LAFRAMBOISE ST-HYACINTHE QC 2,652 12,000 $ 67, RUE DU PHARE O. MATANE QC 1,982 22,586 $ 38, AV. LAURE SEPT-ILES QC 2,228 19,920 $ 54, BD HARVEY JONQUIERE QC 2,855 16,403 $ 49, STE GENEVIEVE CHICOUTIMI QC 2,316 15,524 $ 42, RUE COLLARD O. ALMA QC 2,586 22,378 $ 49, BD MELLON JONQUIERE QC 1,874 16,501 $ 34, BD DUCHARME LA TUQUE QC 1,179 10,000 $ 29, E AVENUE DOLBEAU QC 2,652 12,875 $ 44, BD MARCOTTE ROBERVAL QC 2,032 13,195 $ 40, BD ST-JOSEPH HULL QC 2,900 15,269 $ 89, RUE NOTRE-DAME GATINEAU MILLS QC 2,361 13,024 $ 80, BLVD. GREBER POINTE GATINEAU QC 3,934 37,881 $ 86, RUE BETHANY LACHUTE QC 2,215 21,383 $ 44, BD PAQUETTE MONT LAURIER QC 2,542 25,380 $ 48, RUE NOTRE-DAME O. VICTORIAVILLE QC 2,376 34,404 $ 41, BD ST-JOSEPH DRUMMONDVILLE QC 2,257 22,427 $ 59, BD DES RECOLLETS TROIS-RIVIERES QC 2,588 23,522 $ 42, RUE ST-MARC SHAWINIGAN QC 2,196 17,850 $ 29, BD. SMITH SUD. THETFORD MINES QC 3,010 28,285 $ 64, E AVENUE O. ST. GEO. BEAUCE QC 2,560 20,887 $ 81, DUNDAS STREET E. MISSISSAUGA ON 2,095 NA $ 86, * 3351 LAWRENCE AVE. E. SCARBOROUGH ON 3,477 NA $224, QUEEN STREET E. BRAMPTON ON 2,036 NA $ 76, GERRARD STREET E. TORONTO ON 2,253 12,900 $ 78, SHEPPARD AVE. E. SCARBOROUGH ON 1,840 18,135 $ 51, EGLINTON AVE. E. SCARBOROUGH ON 7,894 27,632 $101, LAKESHORE BLVD. ETOBICOKE ON 1,878 6,000 $ 60, ST. CLAIR AVE. TORONTO ON 2,593 11,590 $ 81, KIPLING AVE. N. ETOBICOKE ON 1,574 14,700 $ 85, DUNDAS STREET W. TORONTO ON 1,380 8,900 $ 56, YONGE STREET AURORA ON 2,358 NA $ 47, DUNDAS STREET W. TORONTO ON 1,086 4,547 $ 63, MT. PLEASANT RD TORONTO ON 2,275 6,600 $ 74, KENNEDY ROAD SCARBOROUGH ON 2,597 23,400 $ 76, QUEEN STREET W. TORONTO ON 2,062 4,800 $ 61, BLOOR STREET W. TORONTO ON 2,461 5,272 $ 62, DANFORTH AVENUE TORONTO ON 2,205 8,614 $ 77, WESTON ROAD TORONTO ON 1,657 14,838 $ 63,694 87

95 Store Building Size Lot Size In 1st Year Rent Ser. # Number Street Address City Prov. In Sq. Ft. Sq. Ft. in REIT EGLINTON AVE. W. TORONTO ON 2,168 12,000 $ 71, SCARLETT ROAD TORONTO ON 1,483 12,470 $ 45, QUEEN ST. E. TORONTO ON 1,707 14,000 $ 39, HIGHWAY #7 MARKHAM ON 1,529 29,779 $ 48, SIMCOE STREET OSHAWA ON 2,104 15,665 $ 69,993 NORTH SIMCOE STREET OSHAWA ON 2,980 20,950 $ 78,176 SOUTH KING STREET EAST OSHAWA ON 1,936 10,500 $ 68, DUNDAS STREET WEST WHITBY ON 2,543 22,445 $ 40, ST. JOSEPHS BD. ORLEANS ON 1,982 NA $ 58, ST. LAURENT BD. OTTAWA ON 2,448 13,140 $ 87, WELLINGTON STREET OTTAWA ON 1,484 7,313 $ 52, BANK STREET OTTAWA ON 1,416 8,909 $ 68, HWY 31, 2919 BANK OTTAWA ON 2,176 NA $ 85,277 STREET DUFFERIN STREET PERTH ON 2,387 NA $ 38, PEMBROKE STREET PEMBROKE ON 1,875 17,634 $ 53,587 EAST MADAWASKA BLVD ARNPRIOR ON 2,372 15,000 $ 30, MUNRO STREET CARLETON PLACE ON 1,535 19,135 $ 32, BASELINE ROAD OTTAWA ON 1,590 NA $ 53, RICHMOND ROAD OTTAWA ON 1,476 NA $ 50, CANNON STREET E. HAMILTON ON 1,168 2,982 $ 43, MAIN STREET E. HAMILTON ON 1,664 8,889 $ 45, PARKDALE AVE. N. HAMILTON ON 1,625 13,524 $ 39, BARTON STREET E. HAMILTON ON 1,828 NA $ 46, KING STREET W. HAMILTON ON 2,370 10,454 $ 59, WHARNCLIFFE ROAD LONDON ON 1,790 16,640 $ 65, DUNDAS STREET LONDON ON 1,942 NA $ 67, COMMISSIONERS LONDON ON 2,158 12,900 $ 43,654 ROAD W WELLINGTON ROAD LONDON ON 4,705 NA $ 98, DOUGALL ROAD WINDSOR ON 2,341 43,560 $ 86, HURON CHURCH RD WINDSOR ON 2,496 39,204 $ 46, WYANDOTTE ST. E. WINDSOR ON 1,532 7,864 $ 41, ERIE STREET WINDSOR ON 2,058 10,530 $ 49, TECUMSEH RD E. WINDSOR ON 2,367 21,000 $ 72, CHEMONG ROAD PETERBOROUGH ON 3,256 22,867 $ 74, DIVISION STREET COBOURG ON 2,030 NA $ 63, LINDSAY STREET LINDSAY ON 2,211 NA $ 74, NORTH FRONT STREET BELLEVILLE ON 1,973 18,000 $ 74, DUNDAS STREET BELLEVILLE ON 2,310 28,000 $ 57, MAIN STREET PICTON ON 2,427 19,219 $ 40, DUNDAS STREET CAMBRIDGE ON 2,619 NA $ 86, KING STREET BRANTFORD ON 2,387 9,640 $ 86, ST. CLAIR STREET CHATHAM ON 1,701 14,349 $ 45, DUFFERIN ST. WALLACEBURG ON 1,249 7,021 $ 35, TALBOT STREET ESSEX ON 2,270 32,996 $ 46,004 NORTH LASALLE BLVD SUDBURY ON 1,288 12,470 $ 61, MARTINDALE ROAD SUDBURY ON 1,667 13,897 $ 46, KATHLEEN STREET SUDBURY ON 1,426 7,927 $ 29,661 WEST COTE AVENUE CHELMSFORD ON 1,697 12,499 $ 31, TRUNK ROAD SAULT STE MARIE ON 2,520 22,476 $ 41,664 88

96 Store Building Size Lot Size In 1st Year Rent Ser. # Number Street Address City Prov. In Sq. Ft. Sq. Ft. in REIT HARTZELL ROAD ST. CATHARINES ON 2,640 17,670 $ 41, PORTAGE ROAD NIAGARA FALLS ON 1,075 9,000 $ 34, MAIN STREET DUNNVILLE ON 1,152 10,158 $ 34, ARGYLE STREET CALEDONIA ON 2,054 NA $ 54,162 SOUTH McGILL STREET HAWKESBURY ON 2,271 11,000 $ 60, DUMFRIES STREET PARIS ON 1,439 7,008 $ 31, HENDERSON HWY WINNIPEG MB 2,060 NA $ 75, PORTAGE AVE. WINNIPEG MB 1,476 NA $ 35, REGENT AVE. WINNIPEG MB 3,570 NA $ 77, SHERBROOK ST. WINNIPEG MB 3,900 NA $119, ST. MARY S RD. WINNIPEG MB 2,400 NA $ 74, PRINCESS AVE. BRANDON MB 1,200 NA $ 38, KASKA RD. SHERWOOD PARK AB 2,283 43,608 $ 34, AVENUE S.W. CALGARY AB 2,134 11,358 $ 68, EDMONTON TR. N.E. CALGARY AB 1,494 13,047 $ 52, STREET S.W. CALGARY AB 2,161 15,715 $ 47, CENTRE STREET N. CALGARY AB 1,481 6,560 $ 34, AVENUE S.E. CALGARY AB 2,879 15,682 $101, FALSBRIDGE DR. N.E. CALGARY AB 2,859 27,444 $111, BANNISTER RD. S.E. CALGARY AB 2,201 20,038 $ 76, EDMONTON TRAIL AIRDRIE AB 2,264 13,940 $ 49, STREET OLDS AB 2,776 14,500 $ 29, STREET BROOKS AB 2,710 16,989 $ 50, AVENUE, BOX 6134 DRAYTON VALLEY AB 2,597 23,087 $ 40, E. HASTINGS ST. BURNABY BC 1,156 8,052 $ 51, KINGSWAY VANCOUVER BC 1,565 6,964 $ 56, E. BROADWAY VANCOUVER BC 1,473 8,062 $ 49, DOUGLAS ST. VICTORIA BC 1,408 15,111 $ 60, GELLANTLY RD. WESTBANK BC 2,088 25,149 $ 46, HIGHWAY. 99 SQUAMISH BC 2,752 23,500 $ 44, MAIN ST. SELKIRK MB 2,900 NA $ 38, ROBLIN BLVD. WINKLER MB 3,072 52,701 $ 50,000 * Multi-Tenant Properties 89

97 SCOTT S REAL ESTATE INVESTMENT TRUST INDEX TO FINANCIAL STATEMENTS Auditors Consents ************************************************************************** F-2 Scott s Real Estate Investment Trust Auditors Report **************************************************************************** F-3 Audited consolidated balance sheet as at August 23, 2005 ****************************************** F-4 Notes to consolidated balance sheet ************************************************************ F-5 Compilation Report************************************************************************** F-6 Unaudited pro forma consolidated financial statements as at June 30, 2005 and for the six-month period ended June 30, 2005 and for the year ended December 31, 2004 ********************************** F-7 Notes to pro forma consolidated financial statements ********************************************** F-10 Scott s Restaurants Inc. (SRI) Initial Properties Auditors Report **************************************************************************** F-13 Audited financial statements as at June 30, 2005, December 31, 2004 and December 31, 2003 and for the six-month period ended June 30, 2005, the year ended December 31, 2004 and the period from November 10, 2003 to December 31, 2003 **************************************************** F-14 Notes to financial statements ****************************************************************** F-16 Yum! Brands Canada Management LP (Yum!) Initial Properties Auditors Report **************************************************************************** F-18 Audited financial statements as at June 30, 2005, December 31, 2004 and December 31, 2003 and for the six-month period ended June 30, 2005, the year ended December 31, 2004 and the period from November 10, 2003 to December 31, 2003 **************************************************** F-19 Notes to financial statements ****************************************************************** F-21 Page F-1

98 AUDITORS CONSENT We have read the prospectus of the Scott s Real Estate Investment Trust ( Scott s REIT ) dated September 29, 2005 relating to the issue and sale of units of Scott s REIT. We have complied with Canadian generally accepted standards for an auditor s involvement with offering documents. We consent to the use in the above-mentioned prospectus of our report to the trustees of Scott s REIT on the consolidated balance sheet of Scott s REIT as at August 23, Our report is dated August 23, 2005 (except as to note 2 which is as of September 29, 2005). (signed) PRICEWATERHOUSECOOPERS LLP Chartered Accountants Toronto, Ontario September 29, 2005 AUDITORS CONSENT We have read the prospectus of the Scott s Real Estate Investment Trust ( Scott s REIT ) dated September 29, 2005 relating to the issue and sale of units of Scott s REIT. We have complied with Canadian generally accepted standards for an auditor s involvement with offering documents. We consent to the use in the above-mentioned prospectus of our reports to the directors on the balance sheets of Scott s Restaurants Inc. ( SRI Initial Properties ) and Yum! Brands Canada Management LP ( Yum! Initial Properties ) as at June 30, 2005, December 31, 2004 and December 31, 2003 and the statements of income and divisional equity for the six-months ended June 30, 2005, the year ended December 31, 2004, and the period from November 10, 2003 to December 31, 2003, respectively. Our reports are dated July 27, 2005 (except as to note 7 in the case of SRI Initial Properties and note 8 in the case of Yum! Initial Properties which is as of September 29, 2005). (signed) PRICEWATERHOUSECOOPERS LLP Chartered Accountants Toronto, Ontario September 29, 2005 AUDITORS CONSENT We have read the prospectus of the Scott s Real Estate Investment Trust ( Scott s REIT ) dated September 29, 2005 relating to the issue and sale of units of Scott s REIT. We have complied with Canadian generally accepted standards for an auditor s involvement with offering documents. We consent to the use in the above-mentioned prospectus of our report to the trustees of Scott s REIT on the consolidated statement of forecasted net income for the twelve-month period ended August 31, Our report is dated September 29, (signed) PRICEWATERHOUSECOOPERS LLP Chartered Accountants Toronto, Ontario September 29, 2005 F-2

99 August 23, 2005 (except as to note 2, which is as at September 29, 2005) Auditors Report To the Trustees of Scott s Real Estate Investment Trust We have audited the consolidated balance sheet of Scott s Real Estate Investment Trust as at August 23, This consolidated financial statement is the responsibility of the Trust s management. Our responsibility is to express an opinion on this consolidated financial statement based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. In our opinion, this consolidated balance sheet presents fairly, in all material respects, the financial position of the Trust as at August 23, 2005 in accordance with Canadian generally accepted accounting principles. (signed) PRICEWATERHOUSECOOPERS LLP Chartered Accountants Toronto, Ontario F-3

100 SCOTT S REAL ESTATE INVESTMENT TRUST CONSOLIDATED BALANCE SHEET As at August 23, 2005 Assets Cash ************************************************************************************** 100 Unitholders Equity ************************************************************************* 100 $ Scott s Real Estate Investment Trust By its attorney Scott s Trustee Corp. (signed) John Bitove Director (signed) Michael Washinushi Director See accompanying notes to balance sheet. F-4

101 SCOTT S REAL ESTATE INVESTMENT TRUST NOTES TO CONSOLIDATED BALANCE SHEET August 23, The Trust Scott s Real Estate Investment Trust (Scott s REIT) is an open-ended real estate investment trust established under the laws of the Province of Ontario that was created pursuant to the Declaration of Trust dated August 23, 2005, when ten trust units were issued for $ Subsequent event On September 29, 2005, Scott s REIT entered into an underwriting agreement, whereby Scott s REIT will raise gross proceeds of $50,000,000 pursuant to an initial public offering (the Offering) through the issuance of 5,000,000 units at $10 per unit (excluding any over-allotment option). Costs relating to the Offering, including underwriters fees, are estimated to be $5,626,932 and will be charged directly to unitholders equity. Scott s LP has arranged a fixed rate mortgage on the Initial Properties in the amount of $65,000,000 for a term of five years, bearing interest at a blended fixed rate of 4.90%, based on 130 basis points over five-year Government of Canada bonds. Upon completion of the Offering, Scott s REIT will use the proceeds of the Offering to subscribe, indirectly, for 5,000,000 Class A LP Units. Scott s LP will use the proceeds of the subscription, together with the amount of $65,000,000 drawn down under the new fixed rate mortgage, the issuance of a promissory note in the amount of $578,085 and the issuance of 2,254,909 Class B LP Units, to pay the expenses of the Offering and to acquire the Initial Properties. Scott s LP will acquire 79 properties from SRI for an aggregate purchase price of $64,790,000 (subject to usual closing adjustments). The purchase price for these properties will be satisfied by the payment of $41,662,825 in cash (of which $500,000 will be withheld for environmental remediation) the issuance of a promissory note in the amount of $578,085 and the issuance of 2,254,909 Class B LP Units to SRI. Scott s LP will also acquire 111 properties from Yum! for an aggregate purchase price of $65,940,000 (subject to usual closing adjustments). The purchase price of these properties will be satisfied by the payment of $65,940,000 in cash. Immediately after the Offering, Scott s REIT will indirectly hold all of the Class A LP Units representing a 68.9% interest in Scott s LP, and SRI will hold all of the Class B LP Units representing a 31.1% interest in Scott s LP. Each Class B LP Unit will be indirectly exchangeable, at the option of SRI, into Units of Scott s REIT, and will be entitled to the same distributions as the Units of Scott s REIT. F-5

102 September 29, 2005 Compilation Report To the Trustees of Scott s Real Estate Investment Trust We have read the accompanying unaudited pro forma consolidated balance sheet of Scott s Real Estate Investment Trust (Scott s REIT) as at June 30, 2005 and the unaudited pro forma consolidated statements of income for the six-month period ended June 30, 2005 and for the year ended December 31, 2004, and have performed the following procedures: 1. Compared the figures in the columns captioned SRI Initial Properties and Yum! Initial Properties to the audited financial statements of SRI Initial Properties and Yum! Initial Properties, respectively, as at June 30, 2005 and for the six-month period ended June 30, 2005 and the year ended December 31, 2004 and found them to be in agreement. 2. Recalculated the figures in the column captioned Scott s Combined Total by reference to the sum of the columns captioned SRI Initial Properties and Yum! Initial Properties and found the amounts to be arithmetically correct. 3. Compared the figures in the column captioned Scott s REIT to the audited financial statements of Scott s REIT as at August 23, 2005 and found them to be in agreement. 4. Made inquiries of certain officials of Scott s REIT who have responsibility for financial and accounting matters about: a) the basis for determination of the pro forma adjustments; and b) whether the unaudited pro forma consolidated financial statements comply as to form in all material respects with the requirements of the Canadian securities commissions. The officials: a) described to us the basis for the determination of the pro forma adjustments; and b) stated that the unaudited pro forma consolidated financial statements comply as to form in all material respects with the requirements of the Canadian securities commissions. 5. Read the notes to the unaudited pro forma consolidated financial statements and found them to be consistent with the basis described to us for determination of the pro forma adjustments. 6. Recalculated the application of the pro forma adjustments to the columns captioned Scott s Combined Total and Scott s REIT as at and for the six-month period ended June 30, 2005 and for the year ended December 31, 2004 and found the amounts in the column captioned Scott s REIT Pro Forma Total to be arithmetically correct. A pro forma financial statement is based on management assumptions and adjustments that are inherently subjective. The foregoing procedures are substantially less than either an audit or a review, the objective of which is the expression of assurance with respect to management s assumptions, the pro forma adjustments, and the application of the adjustments to the historical financial information. Accordingly, we express no such assurance. The foregoing procedures would not necessarily reveal matters of significance to the unaudited pro forma consolidated financial statements, and we therefore make no representation about the sufficiency of the procedures for the purposes of a reader of such statements. (signed) PRICEWATERHOUSECOOPERS LLP Chartered Accountants Toronto, Ontario F-6

103 SCOTT S REAL ESTATE INVESTMENT TRUST PRO FORMA CONSOLIDATED BALANCE SHEET (Unaudited) As at June 30, 2005 Scott s Pro forma Scott s REIT SRI Initial Yum! Initial Combined Scott s adjustments Pro Forma Properties Properties Total REIT $ Total $ $ $ $ (note 2) Notes $ Assets Cash**************** ,900 2(c) 500,000 Income-producing properties ********* 43,249,648 72,991, ,241,219 12,523,825 2(c) 128,765,044 Intangible assets****** 2,932,700 2(c) 2,932,700 Straight-line revenue accrual************ 752, ,560 1,211,872 (1,211,872) 2(d) Deferred financing cost 802,500 2(b) 802,500 44,001,960 73,451, ,453, ,547, ,000,244 Liabilities Mortgages payable *** 65,000,000 2(b) 65,000,000 Taxes and other payable ****** 293, , , ,485 2(c)(e) 1,078, , , ,601 65,619,485 66,078,086 Non-controlling interest *********** 22,549,090 2(c) 22,549,090 Unitholders Equity Divisional equity ***** 43,708,177 73,286, ,994,490 (116,994,490) Unitholders equity *** ,372,968 2(a) 44,373,068 43,708,177 73,286, ,994, (50,072,432) 66,922,158 44,001,960 73,451, ,453, ,547, ,000,244 See accompanying notes to pro forma consolidated financial statements. F-7

104 SCOTT S REAL ESTATE INVESTMENT TRUST PRO FORMA CONSOLIDATED STATEMENT OF INCOME (Unaudited) For the six-month period ended June 30, 2005 Scott s Pro forma Scott s REIT SRI Initial Yum! Initial Combined Scott s adjustments Pro Forma Properties Properties Total REIT $ Total $ $ $ $ (note 2) Notes $ Rental revenue Rental revenue received **** 2,584,138 2,750,885 5,335,023 5,335,023 Straight-line revenue accrual 131, , ,690 40,316 2(d) 312,006 2,715,929 2,890,784 5,606,713 40,316 5,647,029 Expenses Amortization ************* 640,862 1,235,082 1,875, ,490 2(h) 2,446,434 Operating expenses ******** 82,621 5,848 88, ,414 2(f) 201,883 Interest expense*********** 1,606,663 2(b) 1,606,663 General and administrative ** 164,622 2(g) 164, ,483 1,240,930 1,964,413 2,455,189 4,419,602 Income before noncontrolling interest ***** 1,992,446 1,649,854 3,642,300 (2,414,873) 1,227,427 Non-controlling interest *** (619,252) (512,775) (1,132,027) 750,542 (381,485) Net income for the period 1,373,194 1,137,079 2,510,273 (1,664,331) 845,942 Net income per unit basic *********************************************************** $ 0.17 Net income per unit fully diluted ***************************************************** $ 0.17 See accompanying notes to pro forma consolidated financial statements. F-8

105 SCOTT S REAL ESTATE INVESTMENT TRUST PRO FORMA CONSOLIDATED STATEMENT OF INCOME (Unaudited) For the year ended December 31, 2004 Scott s Pro forma Scott s REIT SRI Initial Yum! Initial Combined Scott s adjustments Pro Forma Properties Properties Total REIT $ Total $ $ $ $ (note 2) Notes $ Rental revenue Rental revenue received ****** 5,168,275 5,501,770 10,670,045 10,670,045 Straight-line revenue accrual ** 263, , ,380 80,631 2(d) 624,011 5,431,856 5,781,569 11,213,425 80,631 11,294,056 Expenses Amortization *************** 1,281,723 2,515,338 3,797,061 1,095,808 2(h) 4,892,869 Operating expenses ********** 165,242 11, , ,827 2(f) 403,735 Interest expense************* 3,213,326 2(b) 3,213,326 General and administrative **** 329,244 2(g) 329,244 1,446,965 2,527,004 3,973,969 4,865,205 8,839,174 Income before noncontrolling interest ******* 3,984,891 3,254,565 7,239,456 (4,784,574) 2,454,882 Non-controlling interest ***** (1,238,504) (1,011,519) (2,250,022) 1,487,046 (762,976) Net income for the year ***** 2,746,387 2,243,046 4,989,434 (3,297,528) 1,691,906 Net income per unit basic************************************************************ $ 0.34 Net income per unit fully diluted****************************************************** $ 0.34 See accompanying notes to pro forma consolidated financial statements. F-9

106 SCOTT S REAL ESTATE INVESTMENT TRUST NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Six-months ended June 30, 2005 and year ended December 31, Proposed transaction and basis of presentation Scott s Real Estate Investment Trust (Scott s REIT) was created pursuant to a Declaration of Trust dated August 23, 2005, when ten units were issued for $100 cash. Scott s REIT will issue additional units for cash pursuant to an initial public offering (the Offering). On closing of the transactions contemplated in this prospectus, Scott s REIT will, indirectly, acquire 79 income-producing retail properties (the SRI Initial Properties) from Scott s Restaurants Inc. and/or its subsidiaries (SRI) and 111 income-producing properties (the Yum! Initial Properties) from Yum! Brands Canada Management LP and/or its subsidiaries (Yum!). These unaudited pro forma consolidated financial statements have been prepared from, and should be read in conjunction with, the audited balance sheets of SRI Initial Properties and Yum! Initial Properties as at June 30, 2005, the audited statements of income for the six-month period ended June 30, 2005, the audited statements of income for the year ended December 31, 2004, and the audited balance sheet of Scott s REIT as at August 23, These unaudited pro forma consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. The accounting policies used in the preparation of the unaudited pro forma financial statements are consistent with those used in the preparation of the audited financial statements of the SRI Initial Properties and the Yum! Initial Properties included elsewhere in this prospectus. The pro forma consolidated balance sheet gives effect to the transactions in note 2 as if they had occurred on June 30, The pro forma consolidated statements of income give effect to the transactions in note 2 with effect from January 1, The unaudited pro forma consolidated financial statements are not necessarily indicative of the financial position or results of operations that would have actually occurred had the transactions been in effect on the dates indicated, nor are they necessarily indicative of the future operating results or the financial position of Scott s REIT. The unaudited pro forma consolidated financial statements are not a forecast or projection of future results. The actual financial position and results of operations of Scott s REIT following the closing of the transactions contemplated by this prospectus will likely vary from the amounts set forth in the unaudited pro forma consolidated financial statements and such variations may be material. As more detailed information becomes available to thoroughly assess and determine the fair values of assets and liabilities, the fair value adjustments for the purchase allocation will be updated. Based on preliminary estimates, management has allocated the majority of the purchase price discrepancy to income-producing properties. The assigned values may be subsequently adjusted for changes in the fair value of assets and liabilities, as appropriately determined. 2 Pro forma adjustments The pro forma adjustments to the pro forma consolidated financial statements have been prepared to account for the impact of the acquisition transactions contemplated by this prospectus as described below: a) Initial public offering The pro forma consolidated financial statements assume that Scott s REIT will raise gross proceeds of approximately $50,000,000 pursuant to an initial public offering (the Offering) through the issuance of 5,000,000 units at $10 per unit (excluding any over-allotment option). Costs relating to the Offering, including underwriters fees, are estimated to be $5,626,932 and are charged directly to unitholders equity. b) Mortgages Scott s LP has arranged a blended fixed rate mortgage on the Initial Properties in the amount of $65,000,000 for a term of five years, bearing interest at a fixed rate of 4.90%, based on 130 basis points over five-year Government of Canada bonds. Debt placement fees associated with issuance of debt are estimated to be $802,500. c) Acquisitions Upon completion of the Offering, Scott s REIT will use the proceeds of the Offering to subscribe, indirectly, for 5,000,000 Class A LP Units. Scott s LP will use the proceeds of the subscription, together with the amount of $65,000,000 drawn down under the mortgage and the issuance of 2,254,909 Class B LP Units, to pay the expenses of the Offering and to acquire the Initial Properties. Scott s LP will acquire 79 properties from SRI for an aggregate purchase price of $64,790,000 (subject to usual closing adjustments). The purchase price for these properties will be satisfied by the payment of $41,662,825 in cash (of which $500,000 will be withheld for environmental remediation), the issuance of a promissory note in the amount of $578,085 and the issuance of 2,254,909 Class B LP Units to SRI. Scott s LP will also acquire 111 properties from Yum! for an aggregate purchase price of $65,940,000 (subject to usual closing adjustments). The purchase price of these properties will be satisfied by the payment of $65,940,000 in cash. F-10

107 The acquisition of the Initial Properties has been accounted for using the purchase method of accounting based on preliminary allocations, as follows: $ Fair value of the consideration SRI promissory note***************************************************************************** 578,085 Cash (i) **************************************************************************************** 107,602,825 Scott s LP Class B units (non-controlling interest) **************************************************** 22,549, ,730,000 Net assets acquired (ii) SRI Initial Properties and Yum! Initial Properties (iii)(iv) ************************************************* 127,797,300 Intangible assets (iii)(iv) **************************************************************************** 2,932,700 Net purchase price of income-producing properties**************************************************** 130,730,000 (i) Consistent with the requirement to remediate certain conditions on four of the properties, Scott s REIT has withheld $500,000 from the cash portion of the purchase price, the estimated cost of that remediation, and accrued a liability for the remittance of the withheld funds to SRI to be paid as a reimbursement of the costs once the work is completed. (ii) In addition to the net assets acquired, an amount of $967,744 has been included for the land transfer tax as a pro forma adjustment. (iii) The allocation of the purchase price will be based on the fair value of the assets and liabilities purchased at the effective date of the acquisition and other information including internal and/or independent asset valuations. For purposes of these unaudited pro forma consolidated financial statements, management has made estimates of the fair value to be allocated to the assets and liabilities acquired, as indicated below. The actual amounts of each of the assets and liabilities will vary from the pro forma amounts and the variations could be material. For the purposes of these unaudited pro forma consolidated financial statements, management has ascribed $11,556,081 of additional value to income-producing properties based on individual property valuations performed by an independent appraiser. In estimating the preliminary value for the intangible assets, consideration has been given to the fair value of in place leases and customer relationships. An initial estimate of $2,932,700 has been made for the value of in place leases representing the estimated present value of leasing costs and foregone rents during the estimated lease up period. Based on the information provided in the independent appraisals of the properties, it would appear that, overall, the rates on the existing property leases approximate current market value. Management believes that the extent to which certain leases are slightly above market is approximately offset by those which are slightly below market. No value has been initially attributed to the customer relationship with the Priszm Canadian Income Fund given the 13 year average remaining term of the leases and the estimate of a very short lease up period (less than 3 months) at the end of the lease term if the Priszm Canadian Income Fund does not renew their leases. (iv) The net assets acquired have been reduced on a pro-rata basis to reflect the fact that the net purchase price is less than the fair value of the income producing properties. d) Straight-line revenue accrual For purposes of the pro forma consolidated statement of income, the straight-line revenue accrual has been calculated assuming leases commenced on January 1, 2004 for the year ended December 31, 2004 and January 1, 2005 for the six-month period ended June 30, For purposes of the pro forma consolidated balance sheet, the straight-line revenue accrual has been calculated assuming the leases commenced July 1, e) Taxes payable No taxes payable will be transferred on closing. f) Operating costs Pursuant to a Property Management Agreement to be entered into on Closing, Scott s REIT will retain JBM Properties Inc. (JBM), a company controlled by the principal shareholder of SRI, to administer the day-to-day property and leasing operations of the REIT s real estate properties. Fees payable under the Property Management Agreement amounting to 2.5% of the REIT s rental revenue received from income-producing properties have been included in the pro forma consolidated statements of income. g) General and administrative expenses Estimated general and administrative expenses have been included in the pro forma consolidated statements of income, as follows: Six-month period ended Year ended June 30, December 31, $ $ Asset management fee ********************************************************* 164, ,244 F-11

108 Pursuant to an Asset Management Agreement to be entered into on Closing, Scott s REIT will retain JBM, a company controlled by the principal shareholder of SRI, as an advisor to provide advisory, asset management and administrative services, subject to the overriding supervision and direction of the Trustees of Scott s REIT. Fees payable under the Asset Management Agreement amounting to 0.25% of the gross book value of the income-producing properties have been included in the pro forma consolidated statements of income. An additional incentive fee amounting to 15% of the REIT s distributable income per unit in excess of $0.85 per unit is payable to JBM; however, for purposes of the pro forma consolidated statements of income, no such amounts are currently estimable. Other trust expenses include estimated direct administrative costs of Scott s REIT, including legal and audit fees, trustee fees, insurance costs and various other regulatory and public company listing costs. h) Amortization expense Amortization expense of $2,446,434 and $4,892,869 have been included in the pro forma consolidated statements of income for the sixmonth period ended June 30, 2005 and the year ended December 31, 2004, respectively, to reflect the allocation of the purchase price to depreciable income-producing properties, intangible assets, and deferred financing costs, using the depreciation policies of Scott s REIT. i) Income and capital taxes Capital tax, current income tax and future income tax expenses have been excluded from the pro forma consolidated financial statements. Scott s REIT is taxed as a mutual fund trust for income tax purposes. Pursuant to the Declaration of Trust, the Trustees intend to distribute or designate all taxable income directly earned by the Trust to unitholders of the Trust and to deduct such distributions and designations for income tax purposes. Therefore, no provision for income taxes is required for direct investments. F-12

109 July 27, 2005 (except as to note 8, which is as at September 29, 2005) Auditors Report To the Board of Directors of Scott s Restaurants Inc. We have audited the balance sheets of SRI Initial Properties as at June 30, 2005, December 31, 2004 and December 31, 2003 and the statements of income and divisional equity for the six-month period ended June 30, 2005, the year ended December 31, 2004 and the period from November 10, 2003 to December 31, These financial statements are the responsibility of the management of Scott s Restaurants Inc. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of SRI Initial Properties as at June 30, 2005, December 31, 2004 and December 31, 2003 and the results of its operations for the six-month period ended June 30, 2005, the year ended December 31, 2004 and the period from November 10, 2003 to December 31, 2004 in accordance with Canadian generally accepted accounting principles. (signed) PRICEWATERHOUSECOOPERS LLP Chartered Accountants Toronto Ontario F-13

110 SRI INITIAL PROPERTIES BALANCE SHEETS June 30, December 31, December 31, $ $ $ Assets Income-producing properties (note 3) *************************** 43,249,648 43,890,510 45,172,233 Straight-line revenue accrual ********************************** 752, , ,940 44,001,960 44,511,031 45,529,173 Liabilities Taxes payable (note 4) **************************************** 293, , ,416 Divisional Equity ******************************************** 43,708,177 44,217,248 45,361,757 44,001,960 44,511,031 45,529,173 Scott s Restaurants Inc. (signed) John Bitove Director (signed) Lilly Di Massimo Director See accompanying notes to the financial statements. F-14

111 SRI INITIAL PROPERTIES STATEMENTS OF INCOME AND DIVISIONAL EQUITY Period from Six-month November 10, period ended Year ended 2003 to June 30, December 31, December 31, $ $ $ Rental revenue Rental revenue received**************************************** 2,584,138 5,168, ,302 Straight-line revenue accrual************************************ 131, ,581 37,551 2,715,929 5,431, ,853 Expenses Amortization************************************************* 640,862 1,281, ,601 Operating expenses ******************************************* 82, ,242 23, ,483 1,446, ,142 Net income for the period************************************* 1,992,446 3,984, ,711 Divisional equity Beginning of period ************************ 44,217,248 45,361,757 45,396,483 Funds transferred to Scott s Restaurants Inc. ******************* (2,501,517) (5,129,400) (602,437) Divisional equity End of period ***************************** 43,708,177 44,217,248 45,361,757 See accompanying notes to the financial statements. F-15

112 SRI INITIAL PROPERTIES NOTES TO FINANCIAL STATEMENTS June 30, 2005, December 31, 2004 and Basis of presentation The financial statements of SRI Initial Properties have been prepared on a carve-out basis from the financial statements of Scott s Restaurants Inc. and its affiliates to account solely for the properties Scott s Real Estate Investment Trust (Scott s REIT) anticipates purchasing. In particular, these financial statements have been prepared for the specific purpose of reporting on the assets, liabilities, revenue, expenses and divisional equity in net assets of SRI Initial Properties included in, and for inclusion in, the prospectus relating to the initial public offering of the units of Scott s REIT. Because the properties were part of a corporate group, these financial statements depict the divisional equity in net assets representing the amount associated specifically with these properties. Management s estimates, where necessary, have been used to prepare such allocation. Amounts not specifically carved out for purposes of these financial statements include mortgage debt, income taxes and administrative costs of managing the properties. SRI Initial Properties is not a legal entity and is comprised of 79 income-producing properties across Canada. All amounts have been derived from accounting information specific to the properties to be sold to Scott s REIT. These financial statements may not necessarily reflect SRI Initial Properties results of operations and financial position in future periods, nor do they necessarily reflect the results of operations, financial position and cash flows that would have been realized had SRI Initial Properties been a stand-alone entity during the periods presented. 2 Summary of significant accounting policies The financial statements of SRI Initial Properties have been prepared in accordance with Canadian generally accepted accounting principles. Income-producing properties Income-producing properties include land and buildings. Income-producing properties are recorded at cost and reduced to fair market value where cost is higher than the net recoverable amount. Net recoverable amount for each property is the undiscounted projected future cash flow to be generated by the property from use, plus its residual value. On the disposal of assets, the resulting gains and losses are included in earnings. An impairment loss is recognized if the carrying amount of the property exceeds its net recoverable amount. Impairment loss is calculated as the difference between carrying amount and fair value. Amortization of buildings is provided using the straight-line method in annual amounts, which is designed to fully amortize the cost of the buildings over their estimated useful lives of up to 20 years. Revenue recognition Revenue from income-producing properties includes rents earned from tenants under operating lease agreements. All the leases provide for fixed rent increases at certain intervals during the term of the lease. Effective from the commencement of the lease, minimum rental income is recorded for the fixed term of each lease on a straight-line basis. Use of estimates The preparation of the financial statements, in conformity with Canadian generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and sales and expenses for the period reported. Actual results may differ from those estimates. 3 Income-producing properties June 30, December 31, December 31, $ $ $ Land******************************************************************* 20,710,161 20,710,161 20,710,161 Buildings *************************************************************** 26,946,315 26,946,315 26,946,315 47,656,476 47,656,476 47,656,476 Less: Accumulated amortization ******************************************** 4,406,828 3,765,966 2,484,243 43,249,648 43,890,510 45,172,233 4 Taxes payable Taxes payable represent certain commodity taxes collected on rental revenue. 5 Segmented information SRI Initial Properties operates in the retail real estate business in Ontario, New Brunswick, Quebec and Manitoba, Canada. Substantially all of the rental revenue is generated from leasing the properties to KIT Limited Partnership, a subsidiary of Priszm Canadian Income Fund. F-16

113 6 Statement of cash flows A statement of cash flows has not been provided, as it would not provide any additional useful information. 7 Related party transactions During the six months ended June 30, 2005 SRI Initial Properties collected cash rent under triple-net lease agreements in the amount of $2,567,931 (year ended December 31, 2004: $5,135,922; period from November 10, 2003 to December 31, 2003: $731,685) from KIT LP. KIT LP is owned, directly or indirectly, as to approximately 60.2% by Priszm Canadian Income Fund and as to approximately 39.8% by SRI. 8 Subsequent event On September 29, 2005, Scott s REIT filed a prospectus with the securities regulatory authorities. Upon closing of the transactions described in the prospectus, Scott s REIT will indirectly acquire, for $64,790,000, 79 income-producing properties of SRI Initial Properties. F-17

114 July 27, 2005 (except as to note 7, which is as at September 29, 2005) Auditors Report To the Board of Directors of Yum! Brands Canada Management Holding, Inc., the General Partner of Yum! Brands Canada Management LP We have audited the balance sheets of Yum! Initial Properties as at June 30, 2005, December 31, 2004 and December 31, 2003 and the statements of income and divisional equity for the six-month period ended June 30, 2005, the year ended December 31, 2004 and the period from November 10, 2003 to December 31, These financial statements are the responsibility of the management of Yum! Brands Canada Management LP. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of Yum! Initial Properties as at June 30, 2005, December 31, 2004 and December 31, 2003 and the results of its operations for the six-month period ended June 30, 2005, the year ended December 31, 2004 and the period from November 10, 2003 to December 31, 2003 in accordance with Canadian generally accepted accounting principles. (signed) PRICEWATERHOUSECOOPERS LLP Chartered Accountants Toronto, Ontario F-18

115 Yum! INITIAL PROPERTIES BALANCE SHEETS June 30, December 31, December 31, $ $ $ Assets Income-producing properties (note 3) *************************** 72,991,571 74,226,653 76,741,991 Straight-line revenue accrual ********************************** 459, ,661 39,862 73,451,131 74,546,314 76,781,853 Liabilities Taxes payable (note 4) **************************************** 164, ,818 93,159 Divisional Equity ******************************************** 73,286,313 74,381,496 76,688,694 73,451,131 74,546,314 76,781,853 Yum! Brands Canada Management LP by its General Partner Yum! Brands Canada Management Holding, Inc. (signed) Jonathan Prinsell Director, Chief Executive Officer and President (signed) Evan Davis Chief Financial Officer See accompanying notes to the financial statements. F-19

116 Yum! INITIAL PROPERTIES STATEMENTS OF INCOME AND DIVISIONAL EQUITY Period from Six-month November 10, period ended Year ended 2003 to June 30, December 31, December 31, $ $ $ Rental revenue Rental revenue received**************************************** 2,750,885 5,501, ,814 Straight-line revenue accrual************************************ 139, ,799 39,862 2,890,784 5,781, ,676 Expenses Amortization************************************************* 1,235,082 2,515, ,654 Operating expenses ******************************************* 5,848 11,666 1,666 1,240,930 2,527, ,320 Net income for the period************************************* 1,649,854 3,254, ,356 Divisional equity Beginning of period ************************ 74,381,496 76,688,694 76,229,346 Funds transferred to Yum! Brands Canada Management LP ****** (2,745,037) (5,561,763) (8) Divisional equity End of period ***************************** 73,286,313 74,381,496 76,688,694 See accompanying notes to the financial statements. F-20

117 Yum! INITIAL PROPERTIES NOTES TO FINANCIAL STATEMENTS June 30, 2005, December 31, 2004 and Basis of presentation The financial statements of Yum! Initial Properties have been prepared on a carve-out basis from the financial statements of Yum! Brands Canada Management LP (Yum!) and its affiliates to account solely for the properties Scott s Real Estate Investment Trust (Scott s REIT) anticipates purchasing. In particular, these financial statements have been prepared for the specific purpose of reporting on the assets, liabilities, revenue, expenses and divisional equity in net assets of Yum! Initial Properties included in, and for inclusion in, the prospectus relating to the initial public offering of the units of Scott s REIT. Because the properties were part of a corporate group, these financial statements depict the divisional equity in net assets representing the amount associated specifically with these properties. Management s estimates, where necessary, have been used to prepare such allocation. Amounts not specifically carved out for purposes of these financial statements include mortgage debt, income taxes and administrative costs of managing the prospectus. Yum! Initial Properties is not a legal entity and is comprised of 111 income-producing properties across Canada. All amounts have been derived from accounting information specific to the properties to be sold to Scott s REIT. These financial statements may not necessarily reflect Yum! Initial Properties results of operations and financial position in future periods, nor do they necessarily reflect the results of operations, financial position and cash flows that would have been realized had Yum! Initial Properties been a stand-alone entity during the periods presented. 2 Summary of significant accounting policies The financial statements of Yum! Initial Properties have been prepared in accordance with Canadian generally accepted accounting principles. Income-producing properties Income-producing properties include land and buildings. Income-producing properties are recorded at cost and reduced to fair market value where cost is higher than the net recoverable amount. Net recoverable amount for each property is the undiscounted projected future cash flow to be generated by the property from use, plus its residual value. On the disposal of assets, the resulting gains and losses are included in earnings. An impairment loss is recognized if the carrying amount of the property exceeds its net recoverable amount. Impairment loss is calculated as the difference between carrying amount and fair value. Amortization of buildings is provided using the straight-line method in annual amounts, which is designed to fully amortize the cost of the buildings over their estimated useful lives of up to 20 years. Revenue recognition Revenue from income-producing properties includes rents earned from tenants under operating lease agreements. All the leases provide for minimum rent increases at certain intervals during the term of the lease. Effective from the commencement of the lease, minimum rental income is recorded for the fixed term of each lease on a straight-line basis. Use of estimates The preparation of the financial statements, in conformity with Canadian generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and sales and expenses for the period reported. Actual results may differ from those estimates. 3 Income-producing properties June 30, December 31, December 31, $ $ $ Land******************************************************************* 38,328,865 38,328,865 38,328,865 Buildings *************************************************************** 38,775,780 38,775,780 38,775,780 77,104,645 77,104,645 77,104,645 Less: Accumulated amortization ******************************************** 4,113,074 2,877, ,654 72,991,571 74,226,653 76,741,991 F-21

118 4 Taxes payable Taxes payable represent certain commodity taxes collected on rental revenue. 5 Segmented information Yum! Initial Properties operates in the retail real estate business in Ontario, Nova Scotia, Quebec, Alberta, Manitoba and British Columbia, Canada. Substantially all of the rental revenue is generated from leasing the properties to KIT Limited Partnership, a subsidiary of Priszm Canadian Income Fund. 6 Statement of cash flows A statement of cash flows has not been provided, as it would not provide any additional useful information. 7 Subsequent event On September 29, 2005, Scott s REIT filed a prospectus with the securities regulatory authorities. Upon closing of the transactions described in the prospectus, Scott s REIT will indirectly acquire, for $65,940,000, 111 income-producing properties of Yum! Initial Properties. F-22

119 Dated: September 29, 2005 CERTIFICATE OF THE REIT AND THE PROMOTER The foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by Part 9 of the Securities Act (British Columbia), by Part 9 of the Securities Act (Alberta), by Part XI of The Securities Act, 1988 (Saskatchewan), by Part VII of The Securities Act (Manitoba), by Part XV of the Securities Act (Ontario), by Part 6 of the Securities Act (New Brunswick), by Section 64 of the Securities Act (Nova Scotia), by Part II of the Securities Act (Prince Edward Island) and by Part XIV of the Securities Act, 1990 (Newfoundland and Labrador) and the respective regulations thereunder. This prospectus does not contain any misrepresentation likely to affect the value or market price of the securities to be distributed within the meaning of the Securities Act (Québec) and the regulations thereunder. SCOTT S REAL ESTATE INVESTMENT TRUST by its attorney SCOTT S TRUSTEE CORP. By: (signed) John Bitove President and Chief Executive Officer By: (signed) Lilly Di Massimo Chief Financial Officer By: (signed) Michael Washinushi Executive Vice-President and Director By: (signed) Douglas L. Fowles Director The Promoter SCOTT S RESTAURANTS INC. By: (signed) John Bitove President and Chief Executive Officer C-1

120 Dated: September 29, 2005 CERTIFICATE OF THE UNDERWRITERS To the best of our knowledge, information and belief, the foregoing constitutes full, true and plain disclosure of all material facts relating to the securities offered by this prospectus as required by Part 9 of the Securities Act (British Columbia), by Part 9 of the Securities Act (Alberta), by Part XI of The Securities Act, 1988 (Saskatchewan), by Part VII of The Securities Act (Manitoba), by Part XV of the Securities Act (Ontario), by Part 6 of the Securities Act (New Brunswick), by Section 64 of the Securities Act (Nova Scotia), by Part II of the Securities Act (Prince Edward Island) and by Part XIV of the Securities Act, 1990 (Newfoundland and Labrador) and the respective regulations thereunder. To our knowledge, this prospectus does not contain any misrepresentation likely to affect the value or market price of the securities to be distributed within the meaning of the Securities Act (Québec) and the regulations thereunder. BMO NESBITT BURNS INC. By: (signed) HAROLD M. WOLKIN CIBC WORLD MARKETS INC. GENUITY CAPITAL MARKETS RBC DOMINION SECURITIES INC. By: ALLAN S. KIMBERLEY By: ROBERT PENTELIUK By: CAROLYN A. BLAIR DESJARDINS SECURITIES INC. By: JAKE A. HERMAN CANACCORD CAPITAL CORPORATION By: CRAIG G. H. WARREN C-2

121