Semi-Annual Report to Shareholders March 22, 2016
Notice: The unaudited interim condensed financial statements of the Company have been prepared by and are the responsibility of the Company s management. The Company s independent auditor has not reviewed these financial statements.
REPORT TO SHAREHOLDERS The following presents the financial results of BNS Split Corp. II (the Company ) for the six months ended March 22, 2016. Financial Performance At March 22, 2016, the net assets attributable to holders of Capital Shares were $18.10 per Capital Share as compared to $15.78 per Capital Share at September 22, 2015, representing a 14.7% increase over the six month period due to appreciation in the fair value of the Company s investment in common shares of The Bank of Nova Scotia (the BNS Shares ). The total fair value of the Company s BNS Shares at March 22, 2016 was $31.8 million (September 22, 2015 $29.2 million), reflecting unrealized appreciation of $7.1 million (September 22, 2015 $4.5 million). For the six months ended March 22, 2016, dividends and interest income less total operating expenses ( Net Investment Income ) was $0.6 million or $0.99 per Unit (2015 $0.6 million or $0.96 per Unit), with a Unit consisting of two Capital Shares and one Class B Preferred Share, Series 2 ( Preferred Share ). The increase of $0.03 per Unit, or 3.2%, primarily reflects the effects of a dividend increase on the BNS Shares and the effect of the capital reorganization (the Reorganization ) which was completed on September 22, 2015. The Company s Capital Share distribution policy is to pay holders of Capital Shares quarterly dividends in an amount equal to the Net Investment Income minus the fixed quarterly distribution payable on the Preferred Shares provided the net asset value per Unit at the time of declaration, after giving effect to the dividend, would be greater than the original issue price of the Preferred Shares. Accordingly, during the six months ended March 22, 2016, the Company paid ordinary dividends of $0.3 million or $0.295 per Capital Share (2015 $0.4 million or $0.275 per Capital Share), representing an annualized yield of 3.3% based on the closing price of a Capital Share at March 22, 2016. Holders of Preferred Shares are entitled to receive quarterly fixed cumulative distributions equal to $0.1971 ($0.7884 per annum) per Preferred Share, representing a yield of 4.0% per annum on their $19.71 offering price. During the six months ended March 22, 2016, the Company paid dividends of $0.2 million or $0.3942 per Preferred Share (2015 $0.3 million or $0.4006 per Class B Preferred Share, Series 1). This report, along with the accompanying financial statements of the Company, is respectfully submitted to you on behalf of the Board of Directors of BNS Split Corp. II. 6MAY200514374014 Brian D. McChesney President and Chief Executive Officer Toronto, Canada May 3, 2016 1
INTERIM CONDENSED STATEMENTS OF FINANCIAL POSITION (Unaudited) As at March 22, September 22, 2016 2015 Assets Current assets Investment, at fair value $ 31,819,255 $ 29,174,343 Cash 92,666 340,655 31,911,921 29,514,998 Liabilities Current liabilities Issue costs payable 40,626 237,042 Reorganization costs payable 35,809 92,309 Accrued liabilities 13,710 10,000 Class J and Class S shares 250 250 Preferred Shares 11,217,809 11,217,809 11,308,204 11,557,410 Net assets attributable to holders of Capital Shares $ 20,603,717 $ 17,957,588 Redeemable shares outstanding (note 4) Capital Shares 1,138,286 1,138,286 Preferred Shares 569,143 569,143 Net assets attributable to holders of Capital Shares per Capital Share $ 18.10 $ 15.78 Redemption Value per Preferred Share $ 19.71 $ 19.71 See accompanying notes to the interim condensed financial statements. On behalf of the Board: 6MAY200514374014 Brian D. McChesney President and Chief Executive Officer 18NOV200913533611 Allan D. Rowe Chairman of the Board 2
INTERIM CONDENSED STATEMENTS OF COMPREHENSIVE INCOME For the Six Months Ended March 22 (Unaudited) 2016 2015 Income Investment Dividends $ 702,633 $ 752,003 Unrealized appreciation (depreciation) of investment 2,644,912 (4,437,955) Net gain (loss) on investment 3,347,545 (3,685,952) Interest 755 1,099 Total income (loss), net 3,348,300 (3,684,853) Expenses Administrative fees (note 6) 39,940 52,950 Directors fees 28,600 30,935 Filing fees 12,760 9,740 Audit fees 12,555 10,800 Insurance premiums 9,385 9,625 Printing and mailing charges 9,050 5,850 Transfer agent fees 6,085 4,450 Listing fees 5,840 6,050 Legal fees 4,165 3,630 Independent Review Committee fees 3,750 3,750 Custodian fees 660 1,085 Other 9,230 4,855 Total operating expenses 142,020 143,720 Distributions on Preferred Shares 224,356 255,541 Total expenses 366,376 399,261 Increase (decrease) in net assets attributable to holders of Capital Shares $ 2,981,924 $ (4,084,114) Increase (decrease) in net assets attributable to holders of Capital Shares per Capital Share $ 2.62 $ (3.20) See accompanying notes to the interim condensed financial statements. 3
INTERIM CONDENSED STATEMENTS OF CASH FLOWS For the Six Months Ended March 22 (Unaudited) 2016 2015 Operating activities Increase (decrease) in net assets attributable to holders of Capital Shares $ 2,981,924 $ (4,084,114) Adjustments for: Unrealized (appreciation) depreciation of investment (2,644,912) 4,437,955 Accrued liabilities 3,710 Net cash flow provided by operating activities 340,722 353,841 Financing activities Dividends paid on Capital Shares (335,795) (350,843) Share issue costs paid (196,416) Reorganization costs paid (56,500) Net cash flow used in financing activities (588,711) (350,843) Net (decrease) increase in cash (247,989) 2,998 Cash, beginning of period 340,655 13,084 Cash, end of period $ 92,666 $ 16,082 Supplemental cash flow information* Dividends received $ 702,633 $ 752,003 Interest received $ 755 $ 1,099 * Classified as operating activities See accompanying notes to the interim condensed financial statements. 4
INTERIM CONDENSED STATEMENTS OF CHANGES IN NET ASSETS ATTRIBUTABLE TO HOLDERS OF CAPITAL SHARES For the Six Months Ended March 22 (Unaudited) 2016 2015 Net assets attributable to holders of Capital Shares, beginning of period $ 17,957,588 $ 28,569,548 Increase (decrease) in net assets attributable to holders of Capital Shares 2,981,924 (4,084,114) Capital Share transactions: Dividends paid on Capital Shares (335,795) (350,843) Net assets attributable to holders of Capital Shares, end of period $ 20,603,717 $ 24,134,591 See accompanying notes to the interim condensed financial statements. 5
SCHEDULE OF INVESTMENT As at (Unaudited) Number of Common Shares Adjusted Cost Base Fair Value March 22, September 22, March 22, September 22, March 22, September 22, 2016 2015 Company 2016 2015 2016 2015 (note 11) 501,881 501,881 The Bank of Nova Scotia $ 24,693,397 $ 24,693,397 $ 31,819,255 $ 29,174,343 Adjustment for transaction costs (12,058) (12,058) $ 24,681,339 $ 24,681,339 $ 31,819,255 $ 29,174,343 See accompanying notes to interim condensed financial statements. 6
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS March 22, 2016 (Unaudited) 1. GENERAL INFORMATION BNS Split Corp. II (the Company ) is a mutual fund corporation incorporated under the laws of Ontario on February 28, 2005. The address of the Company s registered office is 40 King Street West, Toronto, Ontario M5W 2X6. Scotia Managed Companies Administration Inc. ( SMCAI or the Administrator ), a whollyowned subsidiary of Scotia Capital Inc. ( SCI ) which in turn is a wholly-owned subsidiary of The Bank of Nova Scotia ( BNS ), provides all administrative services for the Company. The Capital Shares and Preferred Shares are scheduled to be redeemed by the Company on September 22, 2020 (the Redemption Date ). The Company holds a portfolio consisting of common shares of The Bank of Nova Scotia (the BNS Shares ) in order to generate income for the holders of the Company s preferred shares (the Preferred Shares ) and to enable the holders of the Company s capital shares (the Capital Shares ) to participate in any capital appreciation in the BNS Shares and to benefit from any increase in the dividends payable on the BNS Shares. The policy of the Company is to invest in BNS Shares and not engage in trading except in limited circumstances, including to fund retractions or redemptions of Capital Shares and Preferred Shares. The Company s Capital Share distribution policy is to pay holders of Capital Shares quarterly dividends in an amount equal to the dividends received by the Company on the BNS Shares minus the distributions payable on the Preferred Shares and all administrative and operating expenses provided the net asset value per Unit at the time of declaration, after giving effect to the dividend, would be greater than the $19.71 original issue price of the Preferred Shares. These financial statements were authorized for issuance by the Board of Directors of the Company (the Board ) on May 3, 2016. 2. BASIS OF PRESENTATION Statement of Compliance These interim condensed financial statements have been prepared in compliance with International Financial Reporting Standards ( IFRS ) including, IAS 34, Interim Financial Reporting as issued by the International Accounting Standards Board ( IASB ). Accordingly, certain information and footnote disclosure included in the annual financial statements prepared in accordance with IFRS, as issued by the IASB, have been omitted or condensed. 7
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These interim condensed financial statements have been prepared using the same accounting policies as the annual financial statements for the year ended September 22, 2015. The disclosure in these interim condensed financial statements does not include all requirements of IAS 1, Presentation of Financial Statements. Accordingly, the interim condensed financial statements should be read in conjunction with the audited financial statements for the year ended September 22, 2015. Accounting Standards Issued But Not Yet Adopted The final version of IFRS 9 Financial Instruments was issued by the IASB in July 2014 and will replace IAS 39 Financial Instruments: Recognition and Measurement and applies to the classification and measurement of financial assets and liabilities as defined in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, however is available for early adoption. The Company is in the process of assessing the impact of IFRS 9 and has not yet determined when it will adopt the new standard. 4. REDEEMABLE SHARES The Company is authorized to issue an unlimited number of Capital Shares, Preferred Shares, Class J shares and Class S shares. An unlimited number of Class B, C, D and E capital shares and Class C, D and E preferred shares are also issuable in series. A summary of the Company s issued and outstanding shares is as follows: Series 1 Series 2 Class A Preferred Preferred Capital Shares Class J Class S Shares outstanding on September 22, 2014 and March 22, 2015 637,896 1,275,792 150 100 Capital reorganization on September 22, 2015 (637,896) (137,506) Issued September 22, 2015 569,143 Shares outstanding on September 22, 2015 and March 22, 2016 569,143 1,138,286 150 100 The weighted average number of Preferred Shares and Capital Shares outstanding for the six months ended March 22, 2016 was 569,143 Preferred Shares and 1,138,286 Capital Shares (March 22, 2015 637,896 Preferred Shares and 1,275,792 Capital Shares). The Company will ensure that two Capital Shares continue to be outstanding for every Preferred Share. 8
The Preferred Shares rank prior to the Capital Shares, Class J shares and Class S shares with respect to the payment of dividends, distributions upon a redemption, retraction or return of capital and distributions upon a dissolution, liquidation or wind-up of the Company. The market value of the Capital Shares on March 22, 2016 was $17.86 (September 22, 2015 $15.28) per share and the market value of the Preferred Shares on March 22, 2016 was $20.07 (September 22, 2015 $19.71) per share. 5. RELATED PARTY INFORMATION For its services to the Company, which includes the provision of key management personnel, SMCAI is entitled to receive an administrative fee of 0.25% per annum of the market value of the BNS Shares. For the six month period ended March 22, 2016, total administrative fees paid to SMCAI were $39,940 (2015 $52,950). For the six month period ended March 22, 2016, total administrative and operating expenses of $142,020 (2015 $143,720) were paid and satisfied by way of a dividend on the Company s Class S shares. At March 22, 2016, the Company had cash on deposit with SCI and BNS of $86,667 (2014 $4,493). At March 22, 2016, the Company held 501,881 (September 22, 2015 501,881) BNS Shares. 6. CAPITAL MANAGEMENT The Company s capital is represented by net assets attributable to holders of Capital Shares and Preferred Shares. The Administrator, with oversight from the Company s Board, is responsible for managing the Company s BNS Shares in line with its mandate and the business affairs of the Company, including receipt of income and the payment of distributions to shareholders. The Company pays fixed dividends on the Preferred Shares and should the net asset value per Unit at the date of each dividend declaration exceed the original issue price of the Preferred Shares after giving effect to the Capital Share dividend, the Company s policy is to pay dividends on the Capital Shares equal to the excess, if any, of dividends received by the Company on the BNS Shares less the fixed preferential dividend paid on the Preferred Shares and all administrative and operating expenses. 9
7. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table outlines the fair value hierarchy of the financial instruments as at March 22, 2016 and September 22, 2015 as follows: Level 1 Level 2 Level 3 Total As at March 22, 2016 Investment $ 31,819,255 $ $ $ 31,819,255 As at September 22, 2015 Investment $ 29,174,343 $ $ $ 29,174,343 All fair value measurements are recurring. The carrying amounts of cash and accrued liabilities approximate their fair value because of the short-term nature of these items. Instruments are classified as Level 1 when the related security or derivative is actively traded and a quoted price is available. Instruments are classified as Level 2 when the related security or derivative has inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. If an instrument classified as Level 1 subsequently ceases to be actively traded, it is transferred out of Level 1. In such cases, instruments are reclassified into Level 2, unless the measurement of its fair value requires the use of significant unobservable inputs, in which case it is classified as Level 3. The Company s policy is to recognize transfers into and out of fair value hierarchy levels as of the date of the event or change in circumstances giving rise to the transfer. There were no transfers between levels during the current period and prior year presented. 8. FINANCIAL INSTRUMENT RISK MANAGEMENT In the normal course of business, the Company is exposed to a variety of financial risks: market risk (including price risk, interest rate risk and currency risk), credit risk and liquidity risk. As it is the Company s mandate to be fully invested in BNS Shares and pay distributions from cash flows to the maximum extent possible, the Company s overall risk management program focuses on compliance and execution of the Company s investment objectives. Price Risk The value of the Capital Shares is dependent on the value of the BNS Shares. The value of the BNS Shares will be influenced by factors outside of the Company s control, including the financial performance of BNS, operational risks relating to the specific business activities of BNS, quality of assets owned by BNS, prices, exchange rates, interest rates, environmental risks, political risks, issues relating to government regulation and other financial market conditions. If the price of the BNS Shares increased or decreased by 5% as at March 22, 2016, all other variables held constant, the net assets attributable to holders of Capital Shares would have increased or decreased, respectively, by $1.40 (September 22, 2015 $1.28) per Capital 10
Share or 7.7% (September 22, 2015 8.1%) of which $0.49 (September 22, 2015 $0.49) per Capital Share or 2.7% (September 22, 2015 3.1%) is the result of leverage to which holders of Capital Shares are exposed. In practice, the actual trading results may differ materially from this sensitivity analysis. The value of the Preferred Shares is dependent on the prevailing level of market interest rates and on the level of downside protection on the Preferred Shares which is a function of the price of the BNS Shares. Downside protection is the percentage by which the net assets can decline and still cover the $19.71 redemption price of a Preferred Share. Downside protection on the Preferred Shares as at March 22, 2016 was 65% (September 22, 2015 62%). Interest Rate Risk Interest rate risk arises from changes in the prevailing levels of market interest rates resulting in fluctuations in the value of interest-bearing financial instruments. The majority of the Company s assets are non-interest bearing; however, the Company is indirectly exposed to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its BNS Shares. Any excess cash is invested in short-term money market instruments or in a deposit account. Currency Risk The assets and liabilities are held in the functional currency of the Company which is the Canadian dollar. The Company is not exposed to direct significant foreign currency risks except to the extent that the business activities of BNS are subject to foreign currency fluctuations. Credit Risk Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The Company maintains all its cash and cash equivalents at its custodian or in bankers acceptances or term deposits with financial institutions having a minimum debt rating of A. All transactions in listed securities are settled or paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is made only when the Company has received payment. Payment is made on purchases once the securities have been received by the Company. Should either party not meet its obligation, the trade will fail. Liquidity Risk The Company is exposed to annual retractions and receives notification no later than seven business days prior to the Valuation Date. The BNS Shares are traded in an active market and can normally be readily disposed of. There can be no assurance that an adequate market for the BNS Shares will exist at all times, 11
or that the prices at which the BNS Shares trade, accurately reflect their net asset values. Low trading volumes for the BNS Shares could make it difficult to liquidate holdings quickly. The Company s redeemable Capital Shares and Preferred Shares represent a financial liability. The Capital Shares and Preferred Shares become payable when retracted by shareholders in accordance with the retraction rights described in the prospectus dated September 15, 2015 and ultimately on the Redemption Date. As at March 22, 2016, the maturity of the Company s financial liabilities, other than the redeemable shares, based on the remaining period between the financial statement date and the contractual maturity date was $0.01 million due greater than 1 year (September 22, 2015 $0.01 million due greater than 1 year). 12
Corporate Information Principal Office Scotia Plaza, 26th Floor 40 King Street West Station A, P.O. Box 4085 Toronto, Ontario M5W 2X6 Telephone: (416) 863-7301 Facsimile: (416) 863-7425 E-mail: mc.bnssplit2@scotiabank.com Web site: www.scotiamanagedcompanies.com Directors & Officers Brian D. McChesney Director, President & Chief Executive Officer Allan D. Rowe * Director & Chairman of the Board Stephen D. Pearce CPA, CA Director, Chief Financial Officer & Secretary Michael K. Warman CPA, CA Director Registrar & Transfer Agent Computershare Investor Services Inc. 100 University Avenue Toronto, Ontario M5J 2Y1 Legal Counsel Osler, Hoskin & Harcourt LLP Toronto, Ontario Auditor PricewaterhouseCoopers LLP Toronto, Ontario Stock Exchange Listing The Toronto Stock Exchange (TSX) Symbols Capital Shares BSC Preferred Shares BSC.PR.C Timothy G. Spark * Director Robert Hall Director Michael A. Grandin * Director & Chairman of the Audit Committee * Audit Committee Member Independent Review Committee Timothy G. Spark (Chairman) Allan D. Rowe Michael A. Grandin
BNS SPLIT CORP. II 40 KING STREET WEST, SCOTIA PLAZA, 26TH FLOOR TORONTO, ONTARIO M5W 2X6