Securities Law & Instruments

Headnote

Mutual Reliance Review System for Exemptive Relief Applications -- relief to income fund from the requirement to provide pro forma financial statements in a Business Acquisition Report for issuer's most recently completed financial year for which financial statements are required to have been filed - most recent 12-month period for which audited financial statements have been filed relate to income fund's acquired business for year ending August 31, 2003 -- income fund permitted to include pro forma financial statements for the 12 month period ended September 30, 2004 and pro forma financial statements for the 84 day period ended September 30, 2004 in its business acquisition report - pro forma financial statements would provide secondary market with similar financial information as was provided in prospectus of December 9, 2004

Applicable Instruments

National Instrument 51-102 Continuous Disclosure Obligations

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ALBERTA, SASKATCHEWAN, MANITOBA, ONTARIO,

QUEBEC, NEW BRUNSWICK, NOVA SCOTIA, AND

NEWFOUNDLAND AND LABRADOR

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

TERRAVEST INCOME FUND

 

MRRS DECISION DOCUMENT

WHEREAS the local securities regulatory authority or regulator (the "Decision Maker") in each of Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia and Newfoundland and Labrador (the "Jurisdictions") has received an application from TerraVest Income Fund ("TerraVest") for a decision under the securities legislation of the Jurisdictions (the "Legislation") for an exemption order granting relief from certain requirements of NI 51-102 -- Continuous Disclosure Obligations ("NI 51-102") and in the case of Quebec by a revision of the general order that will provide the same result as such an order (or some text which will have the same signification), to allow TerraVest to include certain pro forma income statements in its Business Acquisition Report ("BAR") which is to be filed in connection with its acquisition (the "Stylus Acquisition") of an 80% interest in the business of Atlantic Furniture Manufacturing Ltd. ("Atlantic") and Atlantic's wholly owned subsidiary, Stylus Furniture Limited, (collectively "Stylus"):

AND WHEREAS TerraVest made a similar application to the Decision Makers, as well as to the local securities regulatory authorities of British Columbia and Prince Edward Island, by letter dated November 15, 2004 pursuant to National Policy 43-201 and Ontario Securities Commission NI 51-102 in connection with the Prospectus (as herein defined) and relief was granted.

AND WHEREAS pursuant to the Mutual Reliance Review system for Exemptive Relief Applications (the "System"), the Alberta Securities Commission is the principal regulator for this application.

AND WHEREAS, unless otherwise defined, the terms herein have the meaning set out in National Instrument 14-101 Definitions.

AND WHEREAS TerraVest has represented to the Decision Makers that:

Background

1. TerraVest is an open-ended investment trust established for the purposes of investing in a diversified group of income producing businesses.

2. The head office of TerraVest is located in Vegreville, Alberta.

3. TerraVest is a reporting issuer or the equivalent in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador.

4. TerraVest is not in default of any requirements of securities legislation in any of the Jurisdictions, nor is it in default of the requirements of the securities legislation of British Columbia and Prince Edward Island.

5. Prior to the Stylus Acquisition, TerraVest had two operating divisions, RJV Gas Field Services ("RJV") and Ezee-On Manufacturing ("Ezee-On"). RJV is one of the largest providers of wellhead processing equipment for the Canadian natural gas industry. Ezee-On manufactures heavy duty equipment for large acreage grain farms and livestock operations.

6. RJV and Ezee-On are businesses that were owned and operated by Laniuk Industries Inc. ("Laniuk"). Laniuk was a reporting issuer, the common shares of which were listed on the TSX Venture Exchange.

7. TerraVest acquired Laniuk pursuant to a plan of arrangement (the "Arrangement") that was approved by the security holders of Laniuk on June 21, 2004. By the Arrangement, all shareholders of Laniuk received, in exchange of each of their common shares of Laniuk, units of TerraVest or shares exchangeable for units of TerraVest.

8. TerraVest filed a prospectus (the "IPO Prospectus") dated June 29, 2004 with the Decision Makers and the local securities regulatory authorities of British Columbia and Prince Edward Island. Pursuant to the IPO Prospectus TerraVest issued 2,830,000 units (including 190,000 units issued under the over-allotment option) to raise gross proceeds of $23,064,500. As well, pursuant to the IPO Prospectus, the principal shareholder of Laniuk sold 675,000 units (including 60,000 units sold under the over-allotment option).

9. Both of the primary offering under the IPO Prospectus and the Arrangement closed on July 9, 2004. The issuance of securities pursuant to exercise the over allotment option closed on July 23, 2004.

10. The purchase method of accounting was used for the acquisition of Laniuk by TerraVest. Deloitte & Touche LLP was the auditor of Laniuk and is the auditor of TerraVest.

The Stylus Acquisition

11. The Stylus Acquisition was undertaken pursuant to an acquisition agreement dated November 17, 2004, among the Stylus Commercial Trust ("Stylus Trust"), a subsidiary of the Fund, and Rick Ripoli, Dennis Ripoli and Derek Barichello (the "Vendors") and parties wholly-owned by them, as amended by an amended and restated acquisition agreement dated December 2, 2004 (collectively the "Purchase Agreement"). Pursuant to the Purchase Agreement, Stylus Trust acquired an 80% interest in the business of Atlantic and its wholly owned subsidiary, Stylus Furniture Limited, ("Stylus") for $21.6 million, subject to working capital adjustments, through a purchase of shares and assets. The assets and shares of Stylus are held by a limited partnership in which Stylus Trust holds an 80% equity interest and the Vendors hold a 20% equity interest.

12. The Stylus Acquisition, which closed in escrow on December 2, 2004 pending completion of the financing under the Prospectus (as herein defined), is the first acquisition by TerraVest since its conversion to an income fund on July 9, 2004.

13. TerraVest financed the Stylus Acquisition through a public offering pursuant to a prospectus dated December 9, 2004 (the "Prospectus"), which Prospectus was filed with all of the Decision Makers and the local securities regulators of British Columbia and Prince Edward Island. TerraVest closed its offering of 3,277,500 Units under the Prospectus on December 17, 2004

14. The Prospectus includes the following Financial Statements:

(a) Audited annual financial statements for Atlantic for the year ended July 31, 2004;

(b) Pro forma financial statements for the 12 month period ended September 30, 2004 which compiles (i) results of TerraVest, and Laniuk prior to its acquisition by TerraVest, for the 12 months ended September 30, 2004 and (ii) the results of Atlantic for the year ended July 31, 2004; and

(c) Pro forma financial statements for the 84 day period ended September 30, 2004 which compile (i) the results of TerraVest (and Laniuk prior to its acquisition by TerraVest) for the 84 day period ended September 30, 2004 and (ii) the results of Atlantic for the three months ended October 31, 2004 pro rated for an 84 day period.

Significant Acquisition Test -- The Optional Income Test

15. Pursuant to paragraph 8.3(4)(c) of NI 51-102 the income test is to be calculated based upon the issuer's consolidated income from the later of: (i) the most recently completed financial year, without giving effect to the acquisition; or (ii) the 12 months ended on the last day of the most recently completed interim period of the reporting issuer, without giving effect to the acquisition.

16. TerraVest has not been in existence for twelve months, TerraVest has neither a complete fiscal year for which audited financial statements have been prepared nor financial results for any other 12 month period. Accordingly TerraVest has performed the calculation for the income test using the consolidated income from continuing operations of its businesses generated from the pro forma income statements of TerraVest for the twelve month period ended September 30, 2004 (calculated, with the exception of the inclusion of Atlantic, using the same assumptions as the pro forma income statement included in the Prospectus) and the financial statements of Atlantic for the year ended July 31, 2004. By these tests, the Stylus Acquisition is a "significant acquisition" for which TerraVest is required to file a BAR.

Submissions: BAR Financial Statements

17. Paragraph 8.4(3) of NI 51-102, requires an issuer to include in its BAR, a pro forma income statement that gives effect to significant acquisitions after the ending date of the issuer's most recently completed financial year for which financial statements are required to have been filed, for each of the following financial periods: (i) the issuer's most recently completed financial year for which financial statements are required to have been filed; and (ii) the most recently completed interim period that ended after the period in subparagraph (i) for which financial statements are required to have been filed.

18. Since its formation as a trust, TerraVest has not completed a financial year for which financial statements are required to have been filed. Audited financial statements for TerraVest since its conversion to a trust are not required to be filed until after the deadline for filing the BAR has passed and therefore will not be available in time to be included in the BAR. As a result, the most recent twelve month period for which there are audited financial statements that relate to TerraVest are the financial statements of Laniuk for the year ended August 31, 2003 which were included in the IPO Prospectus and the Prospectus (the "Laniuk Financial Statements").

19. By the time the BAR is filed, approximately 18 months will have passed since the period covered by the Laniuk Financial Statements. During this time, there have been a number of important developments relating to TerraVest, including, the acquisition of Laniuk by TerraVest pursuant to the Arrangement using the purchase method of accounting and the completion of Terravest's conversion to an income fund with the closing of the offerings under the IPO Prospectus.

20. Therefore, in lieu of pro forma financial statements as at and for the year ended August 31, 2003 and some later interim period (which may exceed 12 months) TerraVest seeks relief from the BAR financial statement filing requirements in section 8.4(3) of NI 51-102 to allow it to include the same pro forma financial statements as were included in the Prospectus as follows:

(a) Pro forma financial statements for the 12 month period ended September 30, 2004 which compiles (i) results of TerraVest and Laniuk prior to its acquisition by TerraVest, for the 12 months ended September 30, 2004 and (ii) the results of Atlantic for the year ended July 31, 2004; and

(b) Pro forma financial statements for the 84 day period ended September 30, 2004 which compile (i) the results of TerraVest (and Laniuk prior to its acquisition by TerraVest) for the 84 day period ended September 30, 2004 and (ii) the results of Atlantic for the three months ended October 31, 2004 pro rated for an 84 day period;

(collectively the "Proposed Pro Forma Financial Statements").

21. While the financial statements compiled in the Proposed Pro Forma Financial Statements were not audited, they were reviewed by Deloitte and Touche LLP for the purpose of inclusion in an offering document (the Prospectus).

22. Based on the foregoing, it is submitted that the Proposed Pro Forma Financial Statements are consistent with the objectives of the BAR which are to provide to investors in the secondary market with information consistent with the information provided to investors in the primary market and to provide that information on a timely basis. The Proposed Pro Forma Financial Statements will (i) provide the secondary market with similar information as was available to the primary market in the Prospectus and (ii) provide more timely and relevant information to investors as compared to the only alternative pro forma financial statements which would be based on the Laniuk Financial Statements.

23. If the relief is granted, TerraVest will include the Proposed Pro Forma Financial Statements, the audited annual financial statements for Atlantic for the year ended July 31, 2004 and the financial statements for Atlantic for the three months ended October 31, 2004 in its BAR.

AND WHEREAS under the System, this MRRS Decision Document evidences the decision of each Decision Maker (collectively the "Decision").

AND WHEREAS each of the Decision Makers is satisfied that the test contained in the Legislation providing the decision Maker with the jurisdiction to make the Decision has been met.

THE DECISION of the Decision Makers pursuant to the Legislation is that in lieu of any other requirements to include financial statement in its BAR, TerraVest shall include the following financial statements in its BAR:

(a) Pro forma financial statements for the 12 month period ended September 30, 2004 which compiles (i) results of TerraVest, and Laniuk prior to its acquisition by TerraVest, for the 12 months ended September 30, 2004 and (ii) the results of Atlantic for the year ended July 31, 2004;

(b) Pro forma financial statements for the 84 day period ended September 30, 2004 which compile (i) the results of TerraVest (and Laniuk prior to its acquisition by TerraVest) for the 84 day period ended September 30, 2004 and (ii) the results of Atlantic for the three months ended October 31, 2004 pro rated for an 84 day period;

(c) Audited annual financial statements for Atlantic for the year ended July 31, 2004; and

(d) Financial statements for Atlantic for the three months ended October 31, 2004.

February 1, 2005

"Mavis Legg", CA