OFFERING MEMORANDUM Dated March 31, 2011 Issuers: TERA HIGH INCOME FUND AND TERA BALANCED SMALL CAP FUND c/o Tera Capital Corporation 8 King Street East, Suite 1905 Toronto, Ontario M5C 1B6 Phone: (416) 368-8372 Toll Free Phone: 888-368-8372 Fax: (416) 368-1427 E-mail address: info@teracorp.com The redeemable trust units ( Units ) of Tera High Income Fund and Tera Balanced Small Cap Fund (the "Funds") do not trade on any exchange or market. The Funds are not reporting issuers in any jurisdiction and do not file disclosure material on SEDAR. The Offering: Securities Offered: Price per Security: Minimum / Maximum Offering: Minimum Subscription Amount: Payment Terms: Closing Date(s): Selling Agent(s): Resale Restrictions: Purchaser s Rights: The offering made hereunder (the Offering ) is of Units of the Funds and is being made only in the provinces and territories of Canada where they may lawfully be offered (the Offering Jurisdictions ) and to those persons to whom they may be lawfully offered for sale. The Offering is made only pursuant to this offering memorandum (this "Offering Memorandum"). Units of the Funds. The purchase price per Unit of a Fund subscribed for will be the Net Asset Value per Unit of the Fund on the Valuation Date next following the receipt and acceptance of the subscription by Tera Capital Corporation (the "Manager"). For each Fund, the Net Asset Value of the Fund and the Net Asset Value per Unit is determined on each Valuation Date (currently the last business day on which the Toronto Stock Exchange is open for trading in each month). See Section 5.4 for information about Net Asset Value and Valuation Date. See Section 5.5. Such purchase price, with no deductions, will be received by the Fund and invested in securities in accordance with the Fund's investment objectives and restrictions. There is no minimum offering. You may be the only purchaser under this Offering Memorandum, although there are currently Units issued and outstanding (see Part 4). The maximum offering is $50,000,000, including Units previously issued and outstanding. The minimum initial subscription amount is generally $25,000 per Fund. See Section 5.5. The purchase price for Units is payable in cash upon subscription, by certified cheque, bank draft, wire transfer or other form of immediately available funds. Units are offered on a continuous basis. Unit purchases (and redemptions) will be processed monthly on each Valuation Date. See Sections 5.3 and 5.5. The Units may be distributed through securities dealers, brokers or other firms ( Participating Dealers ) qualified in the Offering Jurisdictions to act on behalf of eligible investors in connection with purchases of Units. See Section 5.5. No selling commission or fee is payable by the Fund, but the Manager may pay servicing commissions to such Participating Dealers. See Part 7. You will be restricted from selling your Units for 4 months and a day (see Part 10). However, subject to a redemption discount declining from 5% in year one to nil after year four, you may generally redeem any or all of your Units as of any Valuation Date (see Section 5.3). You have 2 business days to cancel your agreement to purchase these Units. If there is a misrepresentation in this Offering Memorandum, you have the right to sue either for damages or to cancel the agreement. See Part 11. No securities regulatory authority has assessed the merits of these securities or reviewed this Offering Memorandum. Any representation to the contrary is an offence. This is a risky investment. See Part 8, 8.
TABLE OF CONTENTS PART 1 USE OF PROCEEDS... 1 1.1 Net Proceeds and Use of Proceeds... 1 1.2 Reallocation... 1 PART 2 BUSINESS OF THE FUNDS... 1 2.1 Structure... 1 General... 1 The Manager... 1 (c) Exclusion of Liability and Indemnification... 2 (d) Distribution Arrangements... 3 (e) Fees and Expenses... 3 2.2 Business... 4 2.3 Development of Business... 4 2.4 Objectives and Strategies... 4 Investment Objective... 4 Investment Policies and Restrictions... 4 (c) Fundamental Changes... 4 (d) Termination of a Fund... 5 (e) Material Contracts... 5 PART 3 DIRECTORS, MANAGEMENT, PROMOTERS AND PRINCIPAL HOLDERS... 5 3.1 Compensation and Securities Held... 5 Principal Holders of Units of the Funds... 5 Principal Holders of Shares of the Manager... 6 3.2 Management Experience... 6 3.3 Penalties, Sanctions and Bankruptcy... 6 PART 4 CAPITAL STRUCTURE... 6 PART 5 SECURITIES OFFERED... 6 5.1 Description of Units... 6 5.2 Distribution of Income and Gains... 7 5.3 Redemption of Units... 7 5.4 Net Asset Value... 8 5.5 Subscription Procedure... 9 5.6 Subscription Agreement... 9 PART 6 INCOME TAX CONSEQUENCES AND RRSP ELIGIBILITY... 9 6.1 Consult Your Own Tax Advisor... 9 6.2 Income Tax Consequences... 9 6.3 Registered Plan Eligibility... 11 PART 7 COMPENSATION PAID TO SELLERS AND FINDERS... 11 PART 8 RISK FACTORS... 11 8.1 General Risks... 11 8.2 Risks Related to Investments... 12 PART 9 REPORTING OBLIGATIONS... 13 PART 10 RESALE RESTRICTIONS... 14 PART 11 PURCHASERS' RIGHTS... 14 11.1 Two Day Cancellation Right for All Purchasers... 14 11.2 Statutory and Contractual Rights of Action in the Event of a Misrepresentation... 14 PART 12 FUND-SPECIFIC INFORMATION... 23 12.1 Tera High Income Fund... 24 12.2 Tera Balanced Small Cap Fund... 26 PART 13 DATE AND CERTIFICATE... 29
1.1 Net Proceeds and Use of Proceeds PART 1 USE OF PROCEEDS The Units of each Fund are offered for sale on a continuous basis at a price per Unit equal to the Net Asset Value per Unit of the Fund on the Valuation Date next following the receipt and acceptance of the subscription by the Manager. See Section 5.5. Such purchase price, with no deductions, will be received by the Fund and, subject only to payment of the fees and expenses of the Fund (see Section 2.1(e)), will invested in securities in accordance with the Fund's investment objectives and restrictions (see Section 2.4). 1.2 Reallocation We intend to spend the net proceeds as stated above. The net proceeds received by a Fund must be allocated in accordance with the Fund's investment objectives and restrictions (see Section 2.4 and Part 12). We will not be permitted to reallocate funds to any other purpose. 2.1 Structure PART 2 BUSINESS OF THE FUNDS General Each Fund is an unincorporated, open-end investment trust, established pursuant to a fund regulation made pursuant to a trust indenture made pursuant to the laws of Ontario. The trust indenture, as amended from time to time, is referred to as the Trust Indenture, the trustee for the time being thereunder is referred to as the Trustee, and the fund regulation establishing a Fund, as amended from time to time, is referred to as the "Fund Regulation". The current Trustee is Tera Capital Corporation, 8 King Street East, Suite 1905, Toronto, Ontario M5C 1B6. Pursuant to the Trust Indenture, the Trustee has assumed full authority for the administration and operation of the Funds to itself (in its capacity as such, the Manager ). See "The Manager" below. The Trust Indenture was originally made as of April 18, 2005 among Concentra Trust, as original trustee; Tera Capital Corporation, as settlor; and Tera Capital Corporation and Red Barn Capital Inc. together, as Manager. The Trust Indenture was amended and restated on December 15, 2007, at which time Concentra Trust was replaced as trustee by Red Barn Capital Inc. The Trust Indenture and Fund Regulation were further amended January 30, 2008 to make updating changes to bring them into conformity with current laws, regulations and practice and to change the name of the initial Fund to Tera Balanced Small Cap Fund. Pursuant to a Fund Regulation dated March 26, 2008, the Tera High Income Fund was established. The Trust Indenture was further amended and restated on May 1, 2010 at which time Red Barn Capital Inc. (which had transferred its portfolio management business to Leon Frazer & Associates Inc.), was replaced as trustee by Tera Capital Corporation, and updating changes were made to conform with current laws, regulation and practice. Each Fund is authorized to issue an unlimited number of Units, each of which represents an undivided interest in the Fund's net assets. However, the Manager has determined for the time being to limit the amount of Units of each Fund to be sold to $50,000,000, net of redemptions. The attributes of the Units are further described in Part 5. The sole purpose of each Fund is the investing of its funds. Each Fund is non-conventional, and observes investment practices and restrictions that do not conform to standard investment practices and restrictions which apply to conventional mutual funds. The Trustee holds legal title to each Fund s assets, and ultimate overall responsibility for each Fund rests with the Trustee. The Trustee is required by the Trust Indenture to exercise the powers and discharge the duties of its office honestly and in good faith and in connection therewith shall exercise the degree of care, diligence and skill that a reasonably prudent Canadian trust company would exercise in comparable circumstances. The Trustee may resign as Trustee or be required to resign as Trustee by the Manager each upon 60 days prior written notice given by the Trustee or the Manager, as the case may be, to the other party. If a successor trustee has not been appointed within the 60 day period following delivery of the notice, the Trustee or the Manager may apply to a court for the appointment of a successor trustee. If the Trustee becomes insolvent or bankrupt or goes into liquidation, the Manager may require the Trustee to resign immediately. In the event the Trustee resigns or is required to resign, the Manager may appoint a successor within 60 days. If no successor trustee has been appointed, the Trustee or the Manager may apply to a court of competent jurisdiction for the appointment of a successor trustee and the Trustee shall remain in office until such successor is appointed. The Manager From their inception until May 1, 2010, each Fund was sponsored and co-managed by Red Barn Capital Inc., a portfolio manager controlled and operated by Lyle Stein, and by Tera Capital Corporation, a portfolio manager controlled and operated by Howard Sutton. In late 2009, Lyle Stein was engaged as the Chief Executive Officer of Leon Frazer & Associates Inc. ("Leon Frazer" or the "Sub-Advisor"), which is the successor of one of the first investment counselling firms in Canada, and which has been offering independent investment management services to its clients for over 70 years. At the same time, Leon Frazer assumed responsibility for all portfolio management accounts of Red Barn Capital Inc., so that Lyle Stein continues his involvement with those accounts.
2 Red Barn Capital Inc. having discontinued active business, it resigned as a co-manager of the Funds, leaving Tera Capital Corporation as the sole Manager of the Funds, pursuant to an Amended and Restated Management Agreement made as of May 1, 2010 (the "Management Agreement"). In order to ensure that Lyle Stein continued his involvement in the portfolio management of the Funds, and to avail itself of the experience, sources of information, advice, assistance and certain facilities of Leon Frazer, pursuant to an agreement (the "Sub-Advisor Agreement") made as of May 1, 2010, Leon Frazer was appointed as a sub-advisor for the Funds. The current Manager, Tera Capital Corporation, was incorporated under the laws of Ontario on July 9, 1996, and is registered as an exempt market dealer, investment fund manager and a portfolio manager, carrying on business as such at its principal office located at 8 King Street East, Suite 1905, Toronto, Ontario M5C 1B6. The Sub-Advisor, Leon Frazer (a successor of Leon Frazer & Associates Limited, which was incorporated on December 30, 1997) was amalgamated under the laws of Ontario on September 1, 2001, and is registered as a portfolio manager, carrying on business as such at its principal office located at Suite 2001, 8 King Street East, Toronto, Ontario M5C 1B6. The Manager may resign as Manager of a Fund by giving notice in writing to the Unitholders of the Fund of not less than 90 days prior to the date on which such notice is to take effect. If such resignation would result in there being no Manager, a successor manager shall be appointed by the Unitholders at a meeting to be called by the Manager, the Trustee or the Unitholders for the purpose of appointing a successor manager. If no successor manager is appointed by the Unitholders within 90 days after the notice is given or the vacancy occurs, the Fund shall be terminated. Any change in the Manager (other than to an affiliate of the Manager) or material change in the Manager's responsibilities requires the prior approval of Unitholders of a Fund (see Section 2.4(c)). The Funds may be subject to various conflicts of interest because the Manager, and its Sub-Advisor, are engaged in a range of management, advisory and other business activities. The services of the Manager, and its Sub-Advisor, are not exclusive, and nothing in the Trust Indenture prevents the Manager, and its Sub-Advisor, or any affiliate thereof from providing similar services to other investment funds and other clients (whether their investment objectives and policies are similar to those of a Fund), or from engaging in other activities. The Manager, and its Sub-Advisor, will make investment decisions (recommendations in the case of the Sub-Advisor) for the Funds independently of those made for their other clients and independently of their own investments. However, on occasion, the Manager, and its Sub-Advisor, may make (or recommend) the same investment for a Fund and one or more of its other clients. The Manager, its Sub-Advisor, are not obligated to present any particular investment opportunity to a Fund and each may take for its own account and recommend to others any such investment opportunity. Where a Fund and one or more of the other clients of the Manager are engaged in the purchase or sale of the same security, the same transaction will be effected on an equitable basis. The Manager, as such, assumes no responsibility to the Funds other than to render the services called for on a basis which is fair and reasonable and to exercise its powers and discharge its duties honestly, in good faith and in the best interests of the Funds, and in connection therewith, to exercise that degree of care, diligence and skill that would be expected of a prudent professional portfolio manager in comparable circumstances. Provided the Manager, as such, meets the required standard, it is entitled to indemnifications similar to those available to a director of a corporation under the Business Corporations Act (Ontario). Similar standards apply to the Sub-Advisor, Leon Frazer. The Manager's responsibilities include making investment decisions, purchase and sale of investments and brokerage arrangements relating thereto, (c) provision of administrative services and facilities to the Funds, and (d) payment of certain expenses related to the marketing of Units of the Funds. (c) Exclusion of Liability and Indemnification Under the Trust Indenture, the liability of Unitholders, the Manager and the Trustee for obligations and claims arising out of or in connection with the Funds is limited or excluded. The provisions of Article 13 - Limitations of Liability - of the Trust Indenture generally provide, in part, as follows: (c) (d) Unitholders are excluded from personal liability for satisfaction of any obligation or claim in connection with the Trust Indenture, any contract or other obligation of the Funds, the Manager or the Trustee, and for any act or omission of the Trustee, the Manager or any other person in the performance or exercise of any obligation, power, discretion or authority conferred under the Trust Indenture; No Unitholder is liable to indemnify the Trustee or the Manager and the Trustee and Manager have waived any right to such indemnification under any applicable law; The Trustee is excluded from any liability for any loss or damage relating to any matter regarding the Funds; and Subject to compliance at all times with the Trust Indenture, the Manager has no personal liability to satisfy any obligation or claim arising out of or in connection with any contract or other obligation of the Funds. The Trust Indenture provides that neither the Trustee nor the Manager will be liable to the Funds or to any Unitholder for any loss, damage or expense resulting from or caused by the carrying out of the terms and conditions of the Trust Indenture, provided
3 that in performing its powers and obligations, the Trustee or the Manager, as the case may be, acted in accordance with its respective standard of care. In addition, the Trust Indenture provides that neither the Trustee nor the Manager shall be liable for any indirect or consequential damages of any kind whatsoever. The Trust Indenture provides that each of the Trustee and the Manager will be indemnified and saved harmless out of the assets of the Funds from and against all claims in relation to the affairs of the Funds, provided that such person has acted in accordance with its standard of care. (d) Distribution Arrangements The Manager arranges for the distribution of the Units of the Funds. The Units may be distributed through securities dealers, brokers or other firms ( Participating Dealers ) qualified in the Offering Jurisdictions to act on behalf of investors in connection with purchases of Units. See Section 5.5. The amount of sales charge, commission or transaction fee, if any, charged by a Participating Dealer to an investor is a matter of private contract between the Participating Dealer and the investor. The Manager receives no compensation for arranging for the distribution of the Units, and does not participate in any sales charge, commission or transaction fee which may be levied by a Participating Dealer in respect of Unit transactions. The Manager may pay additional compensation to a Participating Dealer. See Part 7. (e) Fees and Expenses Management Fee The Manager provides all facilities necessary to conduct the Funds' business and, except as indicated below under Expenses of the Funds, pays all expenses associated with the management and administration of the Funds and its investment portfolio. In return for providing these services, each Fund pays the Manager a fee (the "Management Fee"), which is calculated monthly and payable quarterly, based on an annual percentage rate, of the average net assets of the Fund. From this Management Fee, the Manager may pay an annual trailer fee to registered dealers or investment advisors representing investors in the Fund. See Parts 7 and 12. Performance Fee The Manager is entitled to receive a performance incentive fee ("Performance Fee") in addition to the basic Management Fee. The Performance Fee payable, if any, is calculated and payable quarterly at the end of each calendar quarter (a "Calculation Quarter") based on a Fund's performance. At the time of each purchase of Units of a Fund by a Unitholder, an amount equal to 125% of the Subscription Price per Unit will be ascribed to each Unit of the Fund purchased by such Unitholder. This amount is referred to as the Unitholder s initial "High Water Mark" for those Units of the Fund. A Performance Fee will not be payable in respect of a Unitholder's investment in Units of a Fund unless and until the Net Asset Value per Unit on the last Valuation Date of a subsequent Calculation Quarter exceeds the Unitholder s initial High Water Mark ascribed to those Units. When this happens, the Net Asset Value per Unit on the last Valuation Date of that Calculation Quarter becomes the Unitholder s new "High Water Mark" for those Units. The Performance Fee payable in respect of a Unitholder s Units for any Calculation Quarter will be equal to 20% of the increase, if any, of the Net Asset Value Per Unit on the last Valuation Date of that Calculation Quarter over the Unitholder s High Water Mark at the commencement of that Calculation Quarter, multiplied by the number of Units held by the Unitholder on the last Valuation Date of the Calculation Quarter. Any Performance Fee payable by a Unitholder will be paid by redemption of a number of the Unitholder s Units, valued at the Net Asset Value Per Unit on the last Valuation Date of the Calculation Quarter, with the proceeds being paid to the Manager. Units redeemed for this purpose will not be subject to any redemption fee or charge. Expenses of the Funds The only expenses, other than the Management Fees, that are borne by a Fund are: (iii) (iv) the costs of legal, audit, custodial and banking fees and expenses, costs of portfolio valuation, Unitholder registration and accounting services, reporting and making distributions to Unitholders and communications with Unitholders that are mandatory requirements of law or of the Canadian securities regulatory authorities, including fees and expenses related to the Offering Memorandum, Subscription Agreement, prospectus or annual information form, if any, of the Fund as well as HST on such costs; brokerage fees and commissions and other expenses of portfolio transactions; any other taxes directly attributable to the Fund; and interest charges should the Fund be required to borrow temporarily to provide funds for payment of redemptions. The Management Fees and Performance Fees received by the Manager from the Funds are payable in Ontario and will be subject to the harmonized sales tax (HST) of Ontario. Generally, HST paid or payable by a Fund will not be recoverable and will accordingly increase its operating expenses.
4 2.2 Business The sole business of each Fund is the investing of its funds in accordance with its investment objective, strategies and restrictions as described below (see Section 2.4 and Part 12). 2.3 Development of Business The sole purpose of each Fund since its inception has been the investing of its funds. Each Fund was founded by Tera Capital Corporation and Red Barn Capital Inc., upon receiving its initial capital and the execution of its Fund Regulation on its inception date as set forth below in Part 12. 2.4 Objectives and Strategies Investment Objective Each Fund's fundamental investment objective is set forth below in Part 12. Any change in the fundamental investment objective of a Fund will require prior approval of its Unitholders (see Section 2.4(c)). The value of a Fund's portfolio is directly related to, and will fluctuate with changes in, the market value of its investments. There can be no guarantee against loss resulting from an investment in Units of a Fund and there can be no assurance that the Fund's investment approach will be successful or that its investment objective will be attained. Please see Part 8, 8. In managing the investment portfolio of a Fund, the Manager will always use its best efforts to achieve the Fund's objectives. Investment Policies and Restrictions Each Fund's investment strategy, policies and restrictions are set forth below in Part 12. Except as identified in Part 12, a Fund will not be subject to any investment restrictions. (c) Fundamental Changes Unitholders of a Fund are entitled to vote at meetings of its Unitholders on resolutions to approve or confirm with or without variation (which variation, if any, need not be accepted by the Trustee of the Fund which may withdraw any resolution from voting): (iii) (iv) (v) (vi) (vii) (ix) a change in the fundamental investment objective of the Fund a change in the basis of calculation of a fee or other expense chargeable to the Fund that could result in an increase in charges to the Fund (except if the change arises in circumstances where the Fund contracts at arm's length and with parties other than the Manager or an associate or affiliate of the Manager for all or part of the services it requires in order to carry on its operations and Unitholders are given at least 60 days' notice before the effective date of any change which is to be made which could result in an increase in charges to the Fund); a change of the Manager to a successor manager (other than a successor manager that is an affiliate of the Manager such successor manager is to replace); amendments or alterations in the provisions of the Trust Indenture of the Fund relating to the provisions or rights attaching to the Units; a reorganization with, or transfer of the Fund s assets to, another fund, if: the Fund would cease to continue after the reorganization with or transfer of assets to the other fund, and the transaction would result in the Unitholders of the Fund having units in the other fund; a reorganization with, or acquisition of assets from, another fund, if: the Fund continues after the reorganization or acquisition of assets, the transaction results in the unitholders of the other fund becoming Unitholders in the Fund, and the transaction would be a significant change to the Fund; to consent to or approve any other matter or thing stated in the Trust Indenture, this Offering Memorandum or in applicable laws or in any agreement to which the Fund is a party, to be required to be consented to or approved by the Unitholders; and to confirm or approve any other matter which the Trustee or Manager deems appropriate to present to the Unitholders for their confirmation or approval.
5 A resolution in respect of any matter referred to above requires the affirmative vote of a majority of the votes cast on such resolution at a duly held meeting of the Unitholders to be duly passed. Meetings of Unitholders for any of the foregoing purposes may be called by the Trustee, the Manager or by the holders of at least 75% of the Units then outstanding. The required quorum for any such meeting is holders of 10% of the Units outstanding present in person or by proxy. No further voting rights exist in respect of the holding of Units. (d) Termination of a Fund A Fund will be terminated when: (iii) there are no Units outstanding; the Manager has been removed or resigned and a successor manager has not been appointed in accordance with the provisions of the Trust Indenture; or the Manager in its discretion instruct the Trustee to terminate the Fund. As soon as may be reasonably practicable after the happening of an event of termination of a Fund, the Trustee or the Manager on behalf of the Trustee, is required to proceed to wind up the affairs of the Fund and sell and convert into money all securities and other assets, pay and satisfy, or provide for the payment and satisfaction of, all liabilities of the Fund and do all other acts appropriate to liquidate the affairs of the Fund. Thereafter, the remaining proceeds received from such sales are to be paid into the Fund's capital account for distribution to the Unitholders pro rata based upon their respective holdings of Units. (e) Material Contracts The material contracts entered into by or on behalf of the Funds are: (iii) (iv) the Trust Indenture referred to in Section 2.1, the Management Agreement referred to in Section 2.1, the Sub-Advisor Agreement made between the Manager its Sub-Advisor, Leon Frazer, referred to in Section 2.1, and the Custodian Agreement referred to in the next paragraph. These contracts may be inspected during normal business hours at the principal office of the Manager in Toronto at 8 King Street East, Suite 1905, Toronto, Ontario M5C 1B6. Custodian. BMO Nesbitt Burns Inc. (the "Custodian") of 100 King Street West, 3 rd Floor Podium, 1 First Canadian Place, Toronto, Ontario M5X 1H3, is the custodian of the Fund's cash and securities pursuant to a Custodian Agreement with the Fund. All securities other than foreign securities are held at Custodian's principal office in Toronto. Foreign securities are held by a sub-custodian appointed in the country where the principal trading market is located. The Custodian and any sub-custodian may use a domestic or foreign depositary authorized to operate a book-based system, such as CDS Inc. in Canada. Auditor. Rosenswig McRae Thorpe, Chartered Accountants, of 655 Bay Street, Suite 1101, Toronto, Ontario, M5G 2K4, is the auditor of the Funds. Registrar and Transfer Agent. The Manager is the Registrar. The Unit transfer registers of the Funds will be kept by the Registrar at its principal office in Toronto. PART 3 DIRECTORS, MANAGEMENT, PROMOTERS AND PRINCIPAL HOLDERS 3.1 Compensation and Securities Held The Funds do not have any directors or officers. The Funds have not paid, and are not obligated to pay, any remuneration to the director and officer of the Manager/Trustee. Principal Holders of Units of the Funds Please see Part 12 and the Funds' most recent annual financial statements and any interim financial statements of the Funds dated after those annual financial statements for information about Units of the Funds outstanding, and any Units of a Fund owned directly or indirectly by the Manager/Trustee or by any director or senior officer of the Manager/Trustee.
6 Principal Holders of Shares of the Manager Howard G. Sutton, the President, Secretary and sole director of Tera Capital Corporation, owns, directly and beneficially, all 2,000 (100%) of the outstanding Common Shares (which are the only voting securities) of Tera Capital Corporation. 3.2 Management Experience The following table discloses the principal occupations and any relevant related experience of Howard G. Sutton, the sole director and officer of the Manager and of Lyle Stein, the sole officer of Leon Frazer engaged under the Sub-Advisor Agreement to provide portfolio management services, during the past five years. Name and municipality of principal residence Howard G. Sutton Newmarket, Ontario Lyle Stein Etobicoke, Ontario Present Position(s) President, Secretary and sole director of Tera Capital Corporation Chief Executive Officer, Leon Frazer & Associates Inc. Principal Occupation and Related Experience During the past Five Years President, Secretary and sole director of Tera Capital Corporation. Chief Executive Officer of Leon Frazer & Associates Inc. since 2009; prior thereto; President, Secretary and sole director of Red Barn Capital Inc. 3.3 Penalties, Sanctions and Bankruptcy There are no penalties, sanctions, declarations of bankruptcy, voluntary assignments in bankruptcy, proposals under any bankruptcy or insolvency legislation or proceedings, arrangements or compromises with creditors, appointments of a receiver, receiver manager or trustee to hold assets, that have been in effect during the last ten years against or in respect of a Fund, the Manager, any director, executive officer or control person of a Fund or the Manager or, to the knowledge of the Manager, any issuer of which any director, executive officer or control person of a Fund or the Manager was a director, executive officer or control person at that time. PART 4 CAPITAL STRUCTURE Please see Part 12 and the Funds' most recent annual financial statements and any interim financial statements of the Funds dated after those annual financial statements for information about the issued and outstanding capital securities (the Units) of the Funds. 5.1 Description of Units PART 5 SECURITIES OFFERED An investment in a Fund is represented by redeemable "Units" of the Fund, each of which represents an undivided interest in the Fund's net assets. Each Fund is authorized to issue an unlimited number of Units of one or more Classes. Tera Capital Corporation, in its capacity as Trustee, has sole discretion to determine whether the capital of a Fund is divided into one or more Classes of Units and the attributes which attach to each Class of Units. The Funds are not intended to issue any securities other than the Units. No certificates representing Units of the Funds will be issued. Units of the Funds are issued only as fully paid and are not subject to further assessment. See Section 5.3 for a description of the redemption feature and procedure. Each Unit entitles the holder, on a show of hands to one vote only, and on a poll, to one vote for each whole Unit of the Fund held. (See Section 2.4(c) for information about matters which are to be referred to Unitholders of a Fund for approval or confirmation.) Each Unit entitles the holder to participate pro rata in such manner and at such times as the Trustee considers appropriate and equitable, with respect to all distributions of the net income and net realized capital gains to holders of Units. Each Unit also entitles the holder, on liquidation of the issuing Fund, to participate pro rata with the other Unitholders in the net assets of the Fund remaining after the satisfaction of its outstanding liabilities. No Unitholder shall have any right of ownership in any of the assets of a Fund. Fractional Units may, in the discretion of the Manager, be issued, which will carry and be subject to the rights, limitations and conditions respectively applicable to a Unit in the proportions they bear to one Unit (other than the right to vote). Units are transferable on the register of the issuing Fund only by a registered Unitholder or his or her legal representative, subject to compliance with securities laws and the terms of the Trust Indenture. Any costs including charges of the Manager in connection with transferring Units shall be borne by the transferor. The rights of Unitholders of a Fund are contained in the Trust Indenture and may be modified, amended or varied only in accordance with the provisions contained therein. Unitholders are entitled to redeem their Units, subject to the Manager's right to suspend or postpone redemptions under certain circumstances. See Section 5.3.
7 The Funds will not hold regular meetings of Unitholders. However, the Manager will call meetings of Unitholders of a Fund as it determines necessary, or if requested in writing by holders of at least 75% of the Units. Notwithstanding the foregoing, the Trustee reserves the right to call meetings of Unitholders as it determines necessary. Meetings require not less than 21 days and not more than 50 days' prior written notice to Unitholders, and the quorum for a meeting of Unitholders is two Unitholders holding not less than an aggregate of 10% of the Units. 5.2 Distribution of Income and Gains Each Fund distributes its net income, whether actually received or only accrued, to Unitholders, in each calendar year. For information regarding the frequency of such distributions, please see Part 12. The amount of any interim distribution by a Fund during the calendar year is estimated by the Manager, based on the securities owned by the Fund from time to time and amounts previously distributed by the Fund in the year, so that any such net income distributions will be approximately equal throughout such year. Net realized capital gains of the Fund (reduced by loss carry forwards, if any) may be distributed at such times and in such amounts as the Manager, in its discretion determines. The Fund will ordinarily distribute, at the end of each calendar year, such amount in respect of its net realized capital gains, if any (reduced by loss carry forwards, if any) as should generally result in no income tax being payable by the Fund. A Unitholder who requires that distributions be paid rather than reinvested must provide written instructions in acceptable form to the Manager; otherwise the Manager will automatically reinvest all distributions on behalf of the Unitholder. The Units purchased from a Fund pursuant to such reinvestment, including fractional Units, will be issued to the Unitholders in proportion to their share of the distribution. No commission or fees are payable with respect to any purchase of Units made under the reinvestment program. All distributions which are payable by a Fund constitute liabilities of the Fund until they are paid and are therefore taken into account in the determination of the Net Asset Value of the Fund. Distributions from a Fund for each year will be made first out of net income, second out of realized gains, if any, on investments and, if the distributions actually made exceed such net income and realized gains, then out of contributed capital. 5.3 Redemption of Units Units may be surrendered at least 15 days prior to the last business day of each month (each, a "Redemption Date") for redemption on such Redemption Date. Units so surrendered for redemption by a Unitholder will be redeemed on such Redemption Date for a redemption price at a discount to the Net Asset Value per Unit of the issuing Fund on such Redemption Date less any redemption charges payable and any withholding or other taxes required to be deducted. Units purchased under on a distribution reinvestment are considered to have been purchased on the same date as the Units on which the Units that gave rise to the distribution were purchased. The redemption discount is 5% for Units held less than 12 months, 4% for Units held more than 12 but less than 24 months, 3% for Units held more than 24 but less than 36 months, 2% for Units held more than 36 but less than 48 months, 1% for Units held more than 48 but less than 60 months, and 0% for Units held more than 60 months. The Manager encourages all investors to consult their financial advisors in connection with any redemption. The redemption right may be exercised by causing written notice to be given within the notice period described herein to the Manager. Alternatively, applications for redemption may be forwarded to Registered Dealers for delivery to the Fund. Registered Dealers must transmit the particulars of such application for redemption to the issuing Fund without charge to the investor and must make such transmittal wherever practical by same day courier, priority post or telecommunications facility. No payment of redemption proceeds will be made until a duly completed request for redemption has been received from the registered holder of the Units, properly executed with the signature guaranteed. Redemption requests:! for redemption proceeds in excess of $25,000; or! that direct redemption proceeds to be paid to other than the registered investor or to an address other than the registered address of the investor; are, in each case, required to have signatures guaranteed by a Canadian chartered bank or trust company or by a member of a recognized stock exchange in Canada or any other guarantor acceptable to the Manager. If the investor is a corporation, partnership, agent, fiduciary or surviving joint owner, additional documentation is required. Subject to any suspension of redemption, the subject Fund will pay the redemption proceeds within ten business days of the Valuation Date. Payment for Units which are redeemed will be made either by cheque, by wire transfer or by such other manner of payment approved by the Manager from time to time including, if the Units are to be redeemed in Canadian dollars and the Unitholder provides a void personal cheque with the Unitholder's redemption order, by direct deposit to the Unitholder's bank account. If at any time there is not sufficient cash on hand to redeem Units, the Manager may, in its discretion, realize upon a sufficient number of securities selected by the Manager in its sole discretion to redeem the Units; borrow an amount to finance the redemption of the Units, provided the aggregate amount outstanding for this purpose from time to time does not
8 exceed 10% of the Net Asset Value and the term of such borrowing does not exceed 90 days from the date of the related redemptions; or (c) where redemption requests have been received to redeem 25% or more of the outstanding Units on a Valuation Date, defer payment of the redemption proceeds for up to 60 days beyond such Valuation Date. Suspension of Redemptions A Fund may suspend the redemption of Units or payment of redemption proceeds in respect thereof for a period of 90 days, or such other period as the Manager may determine in its sole discretion if the Manager has received requests to redeem 25% or more of the outstanding Units on a Valuation Date to allow for the orderly liquidation to satisfy such redemption requests; the Custodian is temporarily closed for business; (c) normal trading is suspended on any stock exchange, within or outside Canada on which securities are listed for trading which represent more than 25% by value of the Fund, or (d) the Manager determines that conditions exist which render impractical the sale of assets or impair the ability to determine the value of any of the subject Fund's assets and/or impairs the ability to determine Net Asset Value, provided, that any suspension shall terminate on the first day on which the condition giving rise to the suspension has ceased to exist, provided that no other condition under which a suspension is authorized to be imposed then exists. The suspension may apply to all requests for redemption received prior to the suspension but as to which payment has not been made, as well as to all requests received while the suspension is in effect. All Unitholders of a Fund making such requests shall (unless the suspension lasts for less than 24 hours) be given notice by the Manager advising of the suspension, that redemptions shall be effected on the basis of 95% of the Net Asset Value Per Unit determined on the first Valuation Day following the termination of the suspension and that Unitholders have the right to withdraw their requests for redemption. Any declaration of suspension made by the Manager shall be final and conclusive. Mandatory Redemptions The Manager may redeem, on a pro rata basis, Units of a Fund held by Financial Institutions if at any time, as a result of any new subscription for, redemption of, or distribution of Units, more than 45% of all outstanding Units of the Fund is held by Financial Institutions. Such right of redemption entitles the Manager to redeem only such number of Units held by Financial Institutions as are required to reduce the number of such Units to the point at which they represent no more than 45% of all outstanding Units of the Fund. The Manager will redeem the Units held by any person who is determined to be a "designated beneficiary" of a Fund, as such term is defined in Part XII.2 of the Income Tax Act (Canada) (the "Income Tax Act"), and in such circumstances, the Fund may, without limiting its recourses, indemnify itself in respect of taxes paid or payable by the Fund as a result of the Unitholder having become a designated beneficiary, by deducting the amount of such taxes from the redemption proceeds. In addition, the Manager reserves the right to require any Unitholder to redeem its entire holding of Units of a Fund, upon 30 days' prior written notice. In the event of any such mandatory redemption made or required by the Manager, there is no redemption discount, even if the Units so redeemed have been outstanding less than 60 months. 5.4 Net Asset Value The Manager will determine the Net Asset Value of each Fund and of each Unit as of every Valuation Date. A "Valuation Date" is the last business day of each month on which the Toronto Stock Exchange is open for trading, and such other date as considered appropriate in the discretion of the Manager from time to time. The Net Asset Value of each Fund is computed by the Manager by valuing the assets of the Fund and deducting all its liabilities, at their fair value. For this purpose, fair value of assets and liabilities means the current market value based on reported prices and quotations in an active market. When a current market value is not available, or the Manager determines that it is unreliable, fair value will mean a value that is fair and reasonable as determined by the Manager. The Net Asset Value per Unit of a Fund on a Valuation Date is the Net Asset Value of the Fund on that date, divided by the number of Units then issued and outstanding. The Trust Indenture contains provisions relating to the procedure for computation of Net Asset Value. The Manager may declare a suspension of the determination of Net Asset Value for the whole or part of any period in which the right of redemption has been suspended. See Section 5.3. 5.5 Subscription Procedure Units are offered for sale on a continuous basis and are distributed by Participating Dealers in the Offering Jurisdictions at a subscription price equal to the Net Asset Value per Unit on the Valuation Date following acceptance of the subscription by the Manager. (See Section 5.4) The Manager may discontinue the offering of Units at any time and end or restrict purchases at any time. All subscriptions for Units are to be transmitted by Participating Dealers, without charge to the investor, to the Manager for acceptance or rejection on behalf of the Fund. They must make such transmittal wherever practical by same day courier, priority post or telecommunications facility. The Manager reserves the right to reject any subscription in whole or in part. The decision
9 to accept or reject any order for Units will be made within one business day following receipt of the order by the Manager. In the event that any subscription is rejected, all monies received with the subscription are returned immediately to the subscriber. Payment for all subscriptions for Units, together with a duly completed Subscription Agreement and Accredited Investor Certificate, must be received by the Manager for acceptance or rejection on behalf of the Fund on or before the fifth business day prior to (but not including) the Valuation Date on which the Subscription Price for the Units so subscribed is determined. The Manager shall not accept subscriptions from, and shall not issue Units to, any person who is or would be a "designated beneficiary" of the Fund, as such term is defined in Part XII.2 of the Income Tax Act. All subscriptions for Units shall, if required by the Manager, be accompanied by evidence satisfactory to the Manager confirming that the person making the subscription is not and will not be a "designated beneficiary" of the Fund. Payment of the purchase price of Units must be by cash, certified cheque, bank draft, wire transfer or other form of immediately available funds, or, if acceptable to the Manager, in securities. Each investor in Units will receive from the Manager or an agent of the Manager, a copy of the Unitholder's subscription accepted on behalf of the Fund by the Manager. The net subscription proceeds received for each Unit is paid directly to the issuing Fund and will be invested in securities in pursuance of the investment objective of the Fund. In respect of each sale of Units, a report will be prepared, executed and filed in accordance with the requirements of the applicable Offering Jurisdictions. Minimum Investment The minimum investment in a Fund is $25,000. The Manager, in its sole discretion, may accept minimum investments of less than $25,000 per Fund. The Manager reserves the right to waive or change the minimum amounts for investments in the Fund at any time and from time to time, subject to compliance with applicable securities laws. Securities Law Exemptions Units are offered only to investors resident in the Offering Jurisdictions pursuant to exemptions from the prospectus requirements contained in the securities legislation of such Offering Jurisdictions. 5.6 Subscription Agreement An investor must submit, together with payment of the subscription price: a duly completed and originally executed Subscription Agreement, and unless the investor subscribes for Units having an acquisition cost to the investor of at least $150,000, is an Accredited Investor and completes an Accredited Investor Certificate as appended to the Subscription Agreement. By delivering to the Manager a duly completed Subscription Agreement and any applicable Appendices thereto, an investor is deemed to make certain representations, warranties and covenants to the Manager pursuant to such Subscription Agreement. 6.1 Consult Your Own Tax Advisor PART 6 INCOME TAX CONSEQUENCES AND RRSP ELIGIBILITY You should consult your own professional advisers to obtain advice on the tax consequences that apply to you. 6.2 Income Tax Consequences Provided that appropriate designations are made by a taxable Canadian corporation that is the issuer of securities held by a Fund, taxable dividends and eligible dividends paid by the issuer to the Fund will effectively retain their character in the hands of the Fund. An "eligible dividend" as defined in the Income Tax Act will be entitled to an enhanced gross-up and dividend tax credit. To the extent available under the Income Tax Act and the administrative practice of Canada Revenue Agency ("CRA"), each Fund will pass on to securityholders in respect of eligible dividends the benefit of the enhanced gross-up and dividend tax credit. Each Fund will designate, to the extent permitted, any eligible dividends received by the Fund as eligible dividends to the extent such dividends are included in distributions to Unitholders. A Fund is liable for tax in each year on:! the amount of its net income for the year, including net realized taxable capital gains, less! the portion of the net income for the year, including net realized taxable capital gains, that is paid or payable to Unitholders in the year. (For convenience, in the balance of this summary of income tax considerations, the term distributed is used in place of paid or payable ).
10 If a Fund makes distributions of its net income and net realized capital gains in any year and deducts the full amount available for deduction in computing its income for that year, as is the stated intention of the Fund, then the Fund will usually not have any income tax liability for that year. However, if a Fund does not distribute the full amount of its net realized capital gains in the year that the gains are realized, the Fund may be liable for tax on the undistributed portion. If a Fund is liable for tax in a given year on undistributed net realized capital gains, the Fund can reduce this liability by an amount based on redemptions of its Units during the year. The Manager intends that, generally, each Fund will include gains and deduct losses on income account in connection with its derivative activities and will recognize such gains or losses for tax purposes at the time they are realized by the Fund; and each Fund will generally report its gains (or losses) from the disposition of its investments as capital gains (or capital losses). If CRA should consider a Fund to be a trader or dealer in securities, a capital gain (or capital loss) might be characterized as an income gain (or loss). On November 9, 2006, the Minister of Finance introduced revised foreign investment tax proposals ("FIE Tax Proposals") regarding the taxation of investments in foreign investment entities ("FIEs"). These FIE Tax Proposals were to apply for taxation years beginning after 2006 (changed from 2002 as previously proposed in July 2005). In general, these FIE Tax Proposals may require a Fund, if it invests in a "participating interest" (as defined in the FIE Tax Proposals) of a FIE, to include in income for income tax purposes each year, an amount equal to a prescribed percentage of the Fund's designated cost of its participating interest in the FIE; if certain conditions are met, any gain on such participating interest for the year on a mark-to-market basis whether or not such gain has been realized, or (iii) if certain conditions are met, the Fund s share of the FIEs' income (or loss) calculated using Canadian tax rules. In limited circumstances, the resulting gain under the mark-to-market regime may be treated on capital account. Accordingly, if these FIE Tax Proposals apply to a Fund, the Fund may be required to include in income amounts that the Fund has not earned or received and Unitholders will be taxable on the portion of such payments payable to them by the Fund as described below. In the 2009 federal budget, the federal government announced that it will review these FIE Tax Proposals before proceeding with them. Accordingly, the FIE Tax Proposals may not be implemented in their current form. Amendments to the Income Tax Act in 2007 significantly changed the income tax treatment of most publicly traded trusts and partnerships (other than certain REITs) and distributions or allocations, as the case may be, from such entities to their investors. In particular, certain income earned by these entities will be taxed in a manner similar to income earned by a corporation and distributions or allocations made by these entities to investors will be taxed in a manner similar to dividends from taxable Canadian corporations. If paid or allocated to a resident of Canada, these distributions or allocations will be deemed an eligible dividend for the purposes of the enhanced gross-up and dividend tax credit. Income and gains of a Fund may arise from investments in countries other than Canada. As a result, the Fund may be liable to pay income or profits tax to those countries. Such foreign tax up to 15% of the foreign income would give rise to a foreign tax credit. If the foreign tax paid by a Fund exceeds 15% of the foreign income, the excess above 15% may in limited circumstances be deducted from the Fund s income under the Income Tax Act. Each Fund intends to make appropriate designations so that the following will retain their character in the Unitholder s hands for purposes of the Income Tax Act when they are distributed:! taxable dividends received by the Fund on shares of the capital stock of taxable Canadian corporations (these amounts will be eligible for the normal gross-up and credit rules under the Income Tax Act);! net realized taxable capital gains of the Fund; and! foreign source income of the Fund and foreign taxes eligible for the foreign tax credit. 6.3 Registered Plan Eligibility Each Fund qualifies as a "quasi mutual fund trust" for the purposes of the Income Tax Act, and has been accepted for registration as a "registered investment" for Registered Retirement Savings Plans, Deferred Profit Sharing Plans and Registered Retirement Income Funds. Provided that a Fund continues to qualify as a quasi mutual fund trust and as a registered investment, or as a mutual fund trust, for the purposes of the Income Tax Act at all material times, Units of the Fund may be qualified investments for trusts governed by Registered Retirement Savings Plans, Deferred Profit Sharing Plans and Registered Retirement Income Funds. If a Fund does not qualify as a "quasi mutual fund trust" and is not accepted for registration as a "registered investment", or if it, as a registered investment, acquires non-prescribed property in respect of registered retirement savings plans, the Fund and investors in the Units may be subject to adverse tax implications. There is a risk that CRA might assert that a Fund, as a consequence of certain investment enhancement or protection strategies in which it may engage, should be considered to be carrying on a business and not restricting its undertaking to investment. Such an assertion, if made and sustained, could result in the Fund's disqualification as a registered investment.