National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Reporting issuer seeking relief from requirement under section 3.2 of NI 52-107 to permit the issuer to file financial statements of its primary tenant, Symcare, prepared using US GAAP pursuant to an undertaking.
Applicable Legislative Provisions
National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards, s. 3.2.
June 2, 2016
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF MAINSTREET HEALTH INVESTMENTS INC. (the Filer)
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the Legislation) that the Filer be exempt from filing unaudited quarterly and audited annual financial statements (collectively, the Symcare Financial Statements) for its primary tenant, Symcare ML, LLC (Symcare) prepared in accordance with International Financial Reporting Standards (IFRS), as required under Sections 2.1(2)(e) and 3.2 of National Instrument 52-107 -- Acceptable Accounting Principles and Auditing Standards (NI 52-107), and, instead, allow the Symcare Financial Statements to be prepared using United States Generally Accepted Accounting Principles (US GAAP) (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application;
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Manitoba, Saskatchewan, Quebec, Nova Scotia, New Brunswick, Prince Edward Island, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut (collectively, the Passport Jurisdictions); and
(c) the decision of the principal regulator automatically results in an equivalent decision in the Passport Jurisdictions.
Terms defined in National Instrument 14-101 Definitions, MI 11-102 or NI 52-107 have the same meanings if used in this decision, unless otherwise defined herein.
This decision is based on the following facts represented by the Filer:
1. The Filer was incorporated under the Business Corporations Act (Ontario) by articles of incorporation on May 31, 2007. The Filer amalgamated with its two wholly owned subsidiaries, 2322003 Ontario Inc. and 2172568 Ontario Limited pursuant to articles of amalgamation dated July 31, 2015.
2. The Filer's head office is located at 11 King Street West, Suite 700, Toronto, Ontario, M5H 4C7.
3. The Filer is in the business of investing in investment properties focused on senior care facilities. The Filer is a holding company whose revenues/cash flows and ability to pay regular dividends to its shareholders are dependent upon the financial performance of its tenants/operators and their ability to satisfy their lease obligations.
4. The authorized share capital of the Filer consists of an unlimited number of common shares (Common Shares), an unlimited number of non-voting shares (Non-Voting Shares) and an unlimited number of Class A preferred shares (Class A Shares).
5. As of the date hereof, there are 22,771,543 Common Shares issued and outstanding, no Non-Voting Shares issued and outstanding and no Class A Shares issued and outstanding.
6. The Common Shares are listed and posted for trading on the Toronto Stock Exchange under the symbol "HLP.U".
7. The Filer is a reporting issuer under the Legislation and the securities legislation of the Passport Jurisdictions (collectively, the Passport Jurisdiction Legislation) and is not in default of any requirement under the Legislation or the Passport Jurisdiction Legislation.
8. The Filer is not an "SEC issuer" as defined in NI 52-107.
9. Symcare is not a reporting issuer or equivalent in any of the Passport Jurisdictions or an "SEC issuer" as defined in NI 52-107.
10. The Filer is not a party to any proceeding or, to the best of its knowledge, information and belief, any pending proceeding under the Legislation (or the Passport Jurisdiction Legislation).
11. On October 30, 2015, Mainstreet Health Holdings Inc. (MHI Holdco), a newly formed Cayman Islands corporation, indirectly acquired a portfolio of 10 senior care properties in Illinois and agreed to acquire an eleventh senior care property in 2016 from Symphony (as defined below) (the eleven properties are collectively referred to herein as the Symphony Portfolio). The initial 10 properties in the Symphony Portfolio were acquired for a purchase price of approximately US$268.4 million, plus expenses, which was funded by MHI Holdco through the issuance of approximately US$20.7 million of shares of MHI Holdco (MHI Holdco Shares) to Mainstreet Investment Company, LLC (Mainstreet) and third party investors, the issuance of approximately US$108.0 million of convertible debentures to third party investors, approximately US$142.3 million of senior bank financing, a US$2.0 million loan from Mainstreet and negative working capital of approximately US$3.2 million.
12. The purchase price for the eleventh senior care property (located in Hanover Park Illinois), which was acquired on April 29, 2016, was approximately US$34.1 million, plus expenses.
13. On February 29, 2016, the Filer entered into an amended and restated purchase agreement (the Purchase Agreement) with Mainstreet. Pursuant to the Purchase Agreement, the Filer agreed to acquire all of the MHI Holdco Shares held by Mainstreet (the Mainstreet MHI Holdco Shares), for an implied purchase price of approximately US$15,552,794 (the Transaction). The Transaction was completed on April 4, 2016. The Mainstreet MHI Holdco Shares represent approximately 75% of the issued and outstanding MHI Holdco Shares.
14. On March 1, 2016, the Filer filed a management information circular in connection with an annual and special meeting held on March 30, 2016, at which shareholders were asked to, among other things, approve (i) the Filer's continuance into the Province of British Columbia, (ii) the Filer's name change from Kingsway Arms Retirement Residences, Inc. to Mainstreet Health Investments Inc. and (iii) the Transaction. Such matters were approved by the shareholders of the Filer on March 30, 2016.
15. In consideration for the Mainstreet MHI Holdco Shares, the Filer agreed to issue to Mainstreet 81,160,000 Common Shares and 307,659,850 Non-Voting Shares at an implied price of US$0.04 per Common Share (but, in any event, no less than CDN$0.05 per Common Share).
16. On May 26, 2016, the Filer filed, and obtained a receipt for, a final long form prospectus for its public offering of 9,500,000 Common Shares (the Offering). The gross proceeds of the Offering were US$95 million. The Filer intends to acquire additional senior care facilities with the proceeds from the Offering. These additional acquisitions do not individually represent significant assets to the Filer.
17. In connection with the closing of the Offering, Mainstreet will convert its Non-Voting Shares into Common Shares of the Filer.
18. Following completion of the Offering, MHI Holdco will be wound up or continued pursuant to the laws of Canada or a province thereof.
19. The properties comprising the Symphony Portfolio have been leased to Symcare, a third party master tenant, pursuant to a triple net lease (the Lease). Symcare, has, in turn, entered into a sublease agreement with newly formed affiliates (the New Operators). The New Operators will operate the senior care businesses comprising the Symphony Portfolio properties.
20. Symcare and the New Operators are under common ownership and control, and are owned by certain principals of Symphony Post Acute Network or its affiliates (together, referred to as Symphony).
21. Symcare and the New Operators are arm's length parties to the Filer and Mainstreet. The Filer will not participate in the profits generated by the New Operators. The Symcare Financial Statements are financial statements of an unrelated, third party operator. The Filer does not have legal control over Symphony and does not have the legal ability to require the Symcare Financial Statements to be prepared in accordance with IFRS. Symcare and the New Operators are not promoters of the Filer and they will not receive any proceeds from any prospectus offerings contemplated by the Filer.
22. The Purchase Agreement in respect of the Symphony Portfolio and the Lease were filed by the Filer as material contracts on the System for Electronic Document Analysis and Retrieval in accordance with National Instrument 51-102 -- Continuous Disclosure Obligations (NI 51-102).
23. Pursuant to the Lease, Symcare, the Filer's primary tenant, is required to provide the landlord, an affiliate of MHI Holdco, with, among other things, the Symcare Financial Statements under US GAAP (which will be comprised of combined financial information of the New Operators including operational information). The annual Symcare Financial Statements will be audited in accordance with US American Institute of Certified Public Accountants Generally Accepted Auditing Standards.
24. The Lease also contains certain financial covenants that are determined based on US GAAP that must be maintained by Symcare. As such, preparing the Symcare Financial Statements under US GAAP (as compared to preparing the Symcare Financial Statements in accordance with IFRS) will allow shareholders of the Filer to assess Symcare's financial performance relative to its covenants under the Lease.
25. Until the Filer diversifies its portfolio of investment properties, the Filer's financial results and ability to pay dividends will depend, in part, on the financial performance of the Symphony Portfolio operated by the Filer's primary tenant, Symcare. The preparation and filing of the Symcare Financial Statements are intended to provide shareholders of the Filer with information relating to Symcare's operations, including information with respect to its ability to satisfy its lease payments to the Filer on an ongoing basis, until such time that the Symphony Portfolio no longer represents a significant asset of the Filer.
26. Shareholders of the Filer will not be prejudiced by the preparation of the Symcare Financial Statements under US GAAP. The Filer has represented that based on a comparison of the application of IFRS versus US GAAP, the US GAAP financial statements will not be materially different than financial statements prepared under IFRS.
27. The Filer has provided an undertaking to the applicable Canadian securities regulatory authorities wherein the Filer has agreed to file the Symcare Financial Statements prepared using US GAAP and related management's discussion and analysis (MD&A), prepared in accordance with NI 51-102, in each case in accordance with the applicable filing deadlines for the Filer's financial statements and MD&A pursuant to NI 51-102, until such time as the Symphony Portfolio no longer represents a significant asset to the Filer.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted.