KCP Income Fund and KIK Acquisition Company - MRRS Decision

Headnote

Mutual Reliance Review System for Exemptive Relief Applications - issuer is subsidiary of income trust -issuer carries on no independent operations and acts solely as a funding conduit between the income trust and its operating subsidiaries -issuer exempt from short form prospectus eligibility requirements provided income trust meets eligibility requirements -issuer exempt from continuous disclosure requirements provided income trust complies with its continuous disclosure requirements -other conditions applicable.

Applicable Ontario Statutory Provisions

Securities Act, R.S.O. 1990, c. S.5, as am.

Applicable Ontario Rules

National Instrument 44-101 Short Form Prospectus Distributions, ss. 2.1, 15.1.

National Instrument 51-102 Continuous Disclosure Obligations, s. 13.1.

Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings, s. 4.5.

April 19, 2005

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN, MANITOBA, ONTARIO,

QUÉBEC, NEW BRUNSWICK, PRINCE EDWARD ISLAND, NOVA SCOTIA,

AND NEWFOUNDLAND AND LABRADOR (THE "JURISDICTIONS")

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM FOR

EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

KCP INCOME FUND (THE "FUND") AND

KIK ACQUISITION COMPANY ("KIK ACQUISITION"

AND, TOGETHER WITH THE FUND, THE "FILERS")

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the "Decision Maker") in each of the Jurisdictions has received an application from the Filers for a decision under the securities legislation of the Jurisdictions (the "Legislation") for

(a) a decision in every Jurisdiction exempting KIK Acquisition from the requirement (the "Short Form Eligibility Requirements") contained in section 2.1 of National Instrument 44-101 Short Form Prospectus Distributions ("NI 44-101");

(b) a decision in every Jurisdiction exempting KIK Acquisition from the requirements in the Legislation to: (i) issue and file with the Decision Makers news releases and file with the Decision Makers reports upon the occurrence of a material change; (ii) file with the Decision Makers and send to its security holders audited annual comparative financial statements together with the auditor's report or annual reports containing such statements; (iii) file with the Decision Makers and send to its security holders unaudited interim comparative financial statements; (iv) file with the Decision Makers and send to its security holders annual and interim management's discussion and analysis with respect to annual or interim financial statements; (v) file with the Decision Makers an annual information form; (vi) file with the Decision Makers and send to holders of its security holders a form of proxy and information circular; and (vii) to otherwise comply with the requirements prescribed by National Instrument 51-102 Continuous Disclosure Obligations (the "Continuous Disclosure Requirements"); and

(c) a decision in every Jurisdiction other than British Columbia, Prince Edward Island and Québec exempting KIK Acquisition from the requirement to file annual certificates and interim certificates under Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (the "Certification Requirement").

Under the Mutual Reliance Review System for Exemptive Relief Applications:

(a) the Ontario Securities Commission is the principal regulator for this application; and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

The decision is based on the following facts represented by the Filers:

The Fund

1. The Fund is an unincorporated open-ended trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated July 9, 2002, as amended (the "Declaration of Trust"). The principal and head office of the Fund is located at 33 MacIntosh Blvd., Concord, Ontario, L4K 4L5.

2. The authorized capital of the Fund consists of an unlimited number of units ("Units"). The initial public offering of 22,500,000 Units was made pursuant to a prospectus dated August 13, 2002. The Fund is a reporting issuer or the equivalent in every Jurisdiction where such status exists and, to the best of its knowledge, information and belief, is not in default of any requirements of the Legislation. As at December 31, 2004, there were 26,365,853 Units issued and outstanding.

3. The Fund holds, indirectly, an approximate 82% interest in KIK Holdings Limited Partnership ("KLP") which owns, directly or indirectly, KIK Holdco Company ("KIK Holdco") and KIK Operating Partnership ("KOP", and together with KIK Holdco, "KIK"). KIK is North America's largest producer of private label household bleach. KIK is also a producer of other private label and branded household cleaning and laundry products.

4. The Fund's subsidiary entities have significant U.S. based operations and, as such, the Fund was established as a "fixed investment trust" for United States federal income tax purposes under U.S. Treasury Regulation section 301.7701-4(c).

5. The Fund's assets consist solely of all of the units of KIK Operating Trust ("KOT") and all of the C$223,982,267.50 principal amount of KOT notes. The Fund may from time to time subscribe for additional KOT units and KOT notes but, as a "fixed investment trust", and consistent with other restrictions contained in the Declaration of Trust, it is precluded from directly or indirectly owning any other securities or investments. KOT holds interest bearing (at a rate of 14% per annum) promissory notes ("KLP Debt") issued by KLP in the aggregate amount of C$197,631,412.50.

6. The Units are listed and posted for trading on the Toronto Stock Exchange under the symbol "KCP.UN".

KIK Acquisition

7. KIK Acquisition is an unlimited liability company established under the laws of Nova Scotia. All of the issued and outstanding shares of KIK Acquisition are owned by KLP. KIK Acquisition is the owner of all the issued and outstanding shares of KIK Holdco. KLP holds interest bearing (at a rate of 14.01% per annum) promissory notes ("KIK Debt") issued by KIK Acquisition in the aggregate amount of C$194,062,500.00. The principal and head office of KIK Acquisition is located at Halifax, Nova Scotia.

8. The authorized capital of KIK Acquisition consists of 500,000,000 Voting Common Shares without nominal or par value and 500,000,000 Non-voting Common Shares without nominal or par value. The current shareholder is KLP, which holds 10,828,446 Voting Common Shares.

9. KIK Acquisition is not a "reporting issuer" or the equivalent in any Jurisdiction.

10. KIK Acquisition is a wholly owned subsidiary of KLP, which is in turn a controlled subsidiary entity of the Fund. KIK Acquisition carries on no independent operations. It acts solely as a funding conduit between the Fund and its operating subsidiaries.

The Offering

11. The Fund intends to acquire indirectly through certain of its affiliates the custom manufacturing division (the "Custom Division") of CCL Industries Inc. and all of the issued and outstanding shares of CCL Custom Manufacturing, Inc. ("Custom Inc.", and together with the Custom Division, "Custom"). The combined purchase price for the Custom Division and Custom Inc. is currently expected to be over US$200,000,000.

12. The Fund proposes to finance a portion of the purchase price through an underwritten public offering of Units by the Fund and Debentures by KIK Acquisition in all of the provinces of Canada and privately to institutional investors in the United States.

13. The salient terms of the proposed Debentures are as follows:

(i) The Debentures will be dated as of the closing of the offering and will mature on November 30, 2010 ("Maturity").

(ii) The Debentures will bear interest from the date of issue at a rate of 6.5% per annum payable semi-annually in arrears on the last day of May and November in each year, commencing on November 30, 2005. The interest on the Debentures will be payable in lawful money of the United States of America.

(iii) The Debentures will be exchangeable at the holder's option into fully paid and non-assessable Units if the closing price of the Units on the TSX is $10.00 or more for five consecutive trading days, at any time prior to 5:00 p.m. (Toronto time) on the earlier of November 30, 2010 and the business day immediately preceding the date specified by KIK Acquisition for redemption of the Debentures, at a certain exchange price (the "Exchange Price"). Debentureholders exchanging their Debentures will receive accrued and unpaid interest thereon up to, but excluding, the date of exchange.

(iv) On redemption or at Maturity, KIK Acquisition will repay the indebtedness represented by the Debentures by paying to the debenture trustee in lawful money of the United States of America an amount equal to the principal amount of the outstanding Debentures, together with accrued and unpaid interest thereon.

(v) The Debentures will not be redeemable prior to November 30, 2008. On or after November 30, 2008 and prior to November 30, 2009, the Debentures will be redeemable in whole or in part from time to time at the option of KIK Acquisition on not more than 60 days and not less than 30 days prior notice at a price equal to the principal amount thereof plus accrued and unpaid interest, provided that the weighted average trading price of the Units on the TSX for the 20 consecutive trading days ending on the fifth trading day preceding the day prior to the date upon which the notice of redemption is given, converted into US dollars (based on the Bank of Canada noon exchange rate on each such trading day) is at least 125% of the Exchange Price. On or after November 30, 2009, the Debentures will be redeemable prior to Maturity in whole or in part from time to time at the option of the Fund on not more than 60 days and not less than 30 days prior notice at a price equal to the principal amount thereof plus accrued and unpaid interest.

(vi) The payment of the principal of, and interest on, the Debentures will rank senior to Subordinated Intercompany Debt and subordinate in right of payment, as set forth in the Indenture, to the prior payment in full of all Senior Indebtedness of KIK Acquisition. "Subordinated Intercompany Debt" means intercompany debt of the Fund and its subsidiaries, including KIK Debt. "Senior Indebtedness" of KIK Acquisition is defined in the Indenture as all indebtedness, liabilities and obligations of KIK Acquisition (other than the Debentures), whether outstanding on the date of the Indenture or thereafter created, incurred, assumed or guaranteed in connection with the acquisition by KIK Acquisition of any businesses, properties or other assets or for monies borrowed or raised by whatever means (including, without limitation, by means of commercial paper, banker's acceptances, letters of credit, debt instruments, bank debt and financial leases, and any liability evidenced by bonds, debentures, notes or similar instruments) or in connection with the acquisition of any businesses, properties or other assets or for monies borrowed or raised by whatever means (including, without limitation, by means of commercial paper, banker's acceptances, letters of credit, debt instruments, bank debt and financial leases, and any liability evidenced by bonds, debentures, notes or similar instruments) by others including, without limitation, any subsidiary (as defined in the Securities Act (Ontario)) of KIK Acquisition, for payment of which KIK Acquisition is responsible or liable, whether absolutely or contingently.

(vii) Upon the occurrence of a change of control of the Fund involving the acquisition of voting control or direction over 662/3% or more of the outstanding Units and securities convertible into or carrying the right to acquire Units or upon KIK Acquisition ceasing to be a controlled indirect subsidiary of the Fund (collectively, a "Change of Control"), each holder of Debentures may require KIK Acquisition to purchase, on the date which is 30 days following the giving of notice of the Change of Control as set out below (the "Put Date"), the whole or any part of such holder's Debentures at a price equal to 101% of the principal amount thereof (the "Put Price") plus accrued and unpaid interest up to, but excluding, the Put Date. If 90% or more in the aggregate principal amount of the Debentures outstanding on the date of the giving of notice of the Change of Control have been tendered for purchase on the Put Date, KIK Acquisition will have the right to redeem all the remaining Debentures on such date at the Put Price, together with accrued and unpaid interest up to, but excluding, the Put Date.

(viii) Pursuant to the terms of the Indenture, the Fund shall take all actions and do all things reasonably necessary or desirable to enable and permit KIK Acquisition, in accordance with applicable law, to perform its obligations under the Indenture to deliver the requisite number of Units to the extent holders of Debentures exercise their exchange rights as set out above.

14. The Fund, KOT, and KLP have no independent business operations, interests in other businesses or material assets and liabilities other than their direct or indirect investment in KIK Acquisition and its subsidiaries.

Decision

Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make he decision has been met.

The decision of the Decision Makers under the Legislation is that the KIK Acquisition is exempt from the Short Form Eligibility Requirement provided that:

(a) the Fund is eligible to file a prospectus in the form of a short form prospectus under NI 44-101;

(b) KIK Acquisition remains a subsidiary of the Fund;

(c) all audited annual comparative financial statements and interim comparative financial statements filed by the Fund under the Legislation are prepared on a consolidated basis in accordance with Canadian generally accepted accounting principles or such other standards as may be permitted under the Legislation from time to time; and

(d) the business of KIK Acquisition continues to be the same as the business of the Fund, in that the Fund, KOT and KLP have no independent business operations, interests in other businesses or material assets and liabilities other than their direct or indirect investment in KIK Acquisition and its subsidiaries.

The further decision of the Decision Makers under the Legislation is that KIK Acquisition is exempt from the Continuous Disclosure Requirements provided that:

(a) the Fund remains a reporting issuer or the equivalent thereof in each Jurisdiction and an electronic filer within the meaning of National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR);

(b) KIK Acquisition remains a subsidiary of the Fund;

(c) the business of KIK Acquisition continues to be the same as the business of the Fund, in that the Fund, KOT and KLP have no independent business operations, interests in other businesses or material assets and liabilities other than their direct or indirect investment in KIK Acquisition and its subsidiaries;

(d) the Fund complies with the Continuous Disclosure Requirements and files with the Jurisdictions all documents required to be filed under the Legislation;

(e) the Fund complies with the Certification Requirements;

(f) all audited annual comparative financial statements and interim comparative financial statements filed by the Fund under the Legislation are prepared on a consolidated basis in accordance with Canadian generally accepted accounting principles or such other standards as may be permitted under the Legislation from time to time;

(g) KIK Acquisition sends to all holders of Debentures resident in Canada the Fund's continuous disclosure materials, contemporaneously with the furnishing by the Fund of such materials to holders of Units;

(h) if there is a material change in the affairs of KIK Acquisition that is not material change in the affairs of the Fund, KIK Acquisition will comply with the requirements of the Legislation to issue a press release and file a material change report;

(i) the documents required to be filed by the Fund under the Legislation are filed under the SEDAR profiles of each of the Fund and KIK Acquisition within the time limits and in accordance with applicable fees required for the filing of such documents;

(j) KIK Acquisition does not issue any securities to the public other than the Debentures; and

(k) KIK Acquisition files a notice in its SEDAR profile stating that it has been granted relief from its continuous disclosure obligations and that the investors should refer to the continuous disclosure documents filed by the Fund which are also available in KIK Acquisition's SEDAR profile.

The further decision of the Decision Makers (other than the Decision Makers in British Columbia, Québec and Prince Edward Island) is that KIK Acquisition is exempt from the Certification Requirement for so long as it is exempt from the Continuous Disclosure Requirements in the manner provided for above.