Sceptre Investment Counsel 2008 Annual Report

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Sceptre Investment Counsel Limited

annual report 2008

TI_sceptre_ar_v14.indd 1 18/03/09 10:35 AM

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A difficult economy can challenge the conventions and ways of doing business for even the most well-established businesses. In one of the most tumultuous years ever for the global equity markets, we did not waver. With a 37-year track record in money management, we have seen market ups and downs. And in 2008 we relied on a well-entrenched investment process and experienced team to guide us. We once again delivered solid relative returns in Canadian equities, providing further evidence of the success of our process and adding to an enviable long-term track record.


revenue

highlights

earnings per share

dividends paid per share

number of institutional clients

$35.4MTotal revenue was $35.4 million, compared with $38.4 million in 2007, reflecting the impact of market declines on our assets under management.

$0.35Fully diluted earnings per share were $0.35, compared with $0.52 in the prior year.

$0.48Total dividends paid for fiscal 2008 year were $0.48, compared with $0.39 in 2007 and $0.28 in 2006.

130In 2008, we secured 27 new clients, bringing us to 130.

04 07 080605

130

$0.48

$0.35

$35.4M

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chairman’s letterThe past few months were excep-tionally difficult for investment managers. Equity markets plum-meted dramatically, credit markets tightened significantly and volatility was extreme as investor confidence sunk amid concerns of a global recession.

—Like others in the investment man

agement industry, Sceptre’s financial

performance was adversely affected by

these extraordinary events. However,

our team responded to these challenges

and delivered solid relative performance

considering the operating conditions.

Most importantly, the Company was

able to secure a significant number of new

institutional mandates during the year.

In addition to its longterm investment

track record, particularly in Canadian

equities, these results speak to the quality

of the Company’s investment team and

the strength of the investment processes

developed to support them.

During the year, Sceptre took steps to

fortify its executive ranks, with three senior

employees taking on expanded leadership

roles within the Company.

Glenn Inamoto was appointed

both Chief Executive Officer and Chief

Investment Officer. With Sceptre since

1999, Glenn was instrumental in achieving

outstanding investment returns in his

role as senior Canadian equity portfolio

manager. Glenn will continue to oversee

Canadian equities and will lead the

strategic direction for the firm. David

Pennycook, who has successfully led

the institutional business at Sceptre

since joining the Company in 1991, was

appointed President. David Morris, our

Chief Financial Officer, also assumed

responsibility for all operations functions

as Chief Operating Officer, where his deep

experience in the investment management

industry will prove beneficial.

While the global economy remains

highly uncertain, Sceptre is well prepared

to deal with the challenges and prosper

over the long term. With a solid operating

framework, underpinned by a dedicated

team of highly qualified professionals,

I am confident that Sceptre can continue

to execute its strategy to grow the business.

Sincerely,

W. Ross Walker

Chairman of the Board

TI_sceptre_ar_v16.indd 2 3/20/09 5:22 PM

letter to shareholdersFrom my more than 20 years in investment management, it is difficult to remember a more volatile period in the equity markets. The S&P/ TSX was down 33% in 2008 and the foreign markets decline was of a similar magnitude. In short, we were presented with an extremely challenging backdrop in 2008.

—Times like these underscore the

importance of a having a well-defined

investment process and the discipline to

stick to it, which is one of the hallmarks

of Sceptre. Our investment process,

which we worked to reengineer in 2001,

has proved successful. While not all asset

classes performed to our expectations,

2008 marked the ninth consecutive year

in which our Canadian equity composite

beat its benchmark — a substantial

achievement in our business.

This track record helped us retain

clients and supported our efforts to win

new mandates during the year. Armed with

top-quartile returns in the Canadian equity

and balanced categories, we were awarded

more than $1.0 billion in new institutional

business during the year — a tremendous

validation of the results we have achieved

and the foundation we have built to

deliver them.

These positive inflows helped buffer the

impact of the significant negative returns in

equity markets and negative cash flow from

existing clients. Market-driven depreciation

of $2.4 billion caused assets under

management to decrease to $6.8 billion,

from $9.1 billion in 2007, bringing revenue

and earnings lower as well. Net income for

2008 was $5,002,000, or $0.35 per share,

($0.36 per share basic) compared with

$7,354,000, or $0.52 per share, ($0.53 per

share basic) in 2007. Without the one-

time settlement charge related to the

management changes, net income for the

year would have been $6,441,000 or $0.45

per share ($0.46 per share basic). Our

success in terms of new mandates helped us

achieve positive net cash flow for the year,

and we paid dividends of $0.48 per share,

consistent with the prior year’s despite the

economic climate.

The new year has revealed a wave of

new negative economic reports that have

weighed on the financial markets and

resulted in continued volatility. We counsel

our clients to maintain perspective and avoid

emotional reactions in periods such as this, as volatile markets can create opportunities. We take a patient, long-term view at Sceptre. It is something we have learned in our 37 years as money managers. While there are challenges ahead, if we remain focused on continuing to deliver superior returns to our clients, we believe our shareholders will be rewarded over the long term.

Sincerely,

Glenn Inamoto

Chief Executive Officer

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#1

199%44%17%

#2

#3

Ranking System

At Sceptre, we employ a proprietary process to rank (equally from 1 to 4) and select

securities for our portfolios. This common approach creates consistency and ensures our

stock selections benefit from the views of our entire investment team. Put simply, it helps us

pick the winners and avoid the losers. And it has worked. For example, since 2001 large-cap

Canadian equity stocks that we have ranked #1 have returned 199% on average, while our

#3-ranked stocks have returned 17%. During this period, our #4-ranked stocks, which we

have avoided, lost 40%.

200

150

100

50

0


In 2008, we witnessed unprecedented market depreciation across essentially all indices and asset classes. For Sceptre, 2008 brought mixed results in terms of investment returns. Our investment process and team generated superior results in Canadian equities, our largest and most important asset class. However, foreign equity performance by our sub-adviser fell below our expectations and their historical returns.

—While the Canadian indices were hit by

broad declines, the relative performance of

the Sceptre Canadian Equity Pooled Fund

remained solid during 2008. In each of the

past nine years, the fund has outperformed

the S&P/ TSX Composite Index and ranked

in the top half of all money managers in

Canada. Based on four-year returns at

December 31, 2008, our Pooled Fund

ranked high in the first quartile (top 25%)

compared with other funds. This was

accomplished without taking on additional

risk; the fund’s information ratio, an

important measure of risk-adjusted returns,

continues to rank near the top in influential

industry surveys.

The Sceptre Foreign Equity Pooled Fund,

which is sub-advised by AllianceBernstein,

significantly underperformed its benchmark

in 2008 after outperforming since their

appointment in January 2005. The 2008 results

also brought our four-year return below the

benchmark. AllianceBernstein has an excellent

long-term track record and is one of the most

respected money managers globally.

We are confident that the Company can

improve its relative performance to

historical levels in the coming years.

Our decision to overweight non-

Government of Canada bonds (e.g. corporate

bonds) was not rewarded in 2008, and

as a result the Sceptre Bond Pooled Fund

underperformed its benchmark. Credit spreads

in high-quality corporate bonds increased to

historic levels as a result of the global liquidity

crisis. There is a strong belief among many

in the investment community, including our

team, that corporate bonds are well positioned

to generate above-average returns as these

spreads narrow to historical levels, which

should contribute positively to the relative

performance of our bond portfolios.

Although our Canadian equity

composite beat its benchmark and our

asset mix decisions during the year proved

effective, underperformance in the foreign

equity component impacted the relative

returns of the Sceptre Balanced Pooled Fund.

Returns for our balanced fund were below the

benchmark for the one-year period ending

December 31, 2008.

a proven method

consistently above median and indexSceptre Canadian Equity Pooled Fund

MedianS&P/TSX Composite Index

20

perc

ent r

etur

n

10

-10

-20

-30

0804 070605

0

5


Sceptre was founded in 1971 as an institutional fund manager focused on managing pension plans for corporations, governments and other organizations. We have since diversified to include both Private Client portfolio management and Mutual Fund management. While the clients may be different, our investment philosophy remains the same: to provide our clients with long-term investment performance which meets or exceeds their requirements, without assuming any unnecessary risk.

Despite our success in winning new

mandates, assets under management in our

Pension and Other Institutional Funds

business decreased to $5.8 billion in 2008,

compared with $7.4 billion in 2007.

New mandates helped offset significant

market depreciation and existing clients’

withdrawals, resulting in net cash flows of

$312 million. Management fee revenue

for 2008 was $20.3 million, an increase

of 5% over the previous year, which

reflects the increase in average assets under

management at billing points.

In 2008, we benefited from the strong

investment returns we recorded in previous

years. We entered the year with long-term

performance records that ranked at or near

the top of all Canadian money managers in

numerous asset classes. In total, we secured

27 new clients last year, principally for

Canadian equity and Balanced mandates.

Looking ahead, we continue to believe we

are well positioned to win new Canadian

equity mandates and, as performance

in our bond portfolios improves, we

expect to capitalize on opportunities to

win new domestic balanced mandates.

While we encourage our clients to assess

returns over a longer period, our relative

underperformance in foreign equities last

year may impact our ability to win specialty

foreign mandates in the near term.

pension and other institutional funds

revenue (thousands of dollars)

assets under management (millions of dollars)*

Pension & other institutional funds 57.4% $20,317

Private Client 14.8% $5,242

Mutual funds 25.4% $8,978

Investment & other income 2.4% $861

Total revenue 100% $35,398

Pension & other institutional funds 85.5% $5,816

Private Client 8.8% $599

Retail mutual funds 5.7% $391

Total assets 100% $6,806

*As at November 30, 2008


Our Private Client business saw assets under

management decrease 25% over the prior

year-end to $599 million, mainly as a result

of market depreciation. However, revenue

from this business remained fairly steady at

$5.2 million, compared with $5.5 million

in the previous year. Redemptions from

our Private Client business were modest

at $50 million, which we attribute in large

part to the strong relationships our team has

forged with our clients. Service and support

are paramount in difficult markets.

Wealth management for high-net-worth

investors is a growing segment of the in -

vestment management business and a natural

adjunct to our core competency. We are

currently working to leverage our capabilities

on the institutional side to our Private Client

business as we aim to establish a shared iden-

tity and better align our product offerings.

It was a very challenging year for the

Canadian mutual fund industry, with sales

of equity funds slowing considerably and

redemptions rising sharply in response to

the market downturn. For example, members

of the Investment Funds Institute of Canada

(IFIC) collectively suffered net redemptions

of $15 billion in long-term funds in 2008.

Our business showed similar trends; mutual

fund revenue was $9.0 million in 2008 com-

pared with $11.9 million in 2007 as average

assets declined from $954.0 million to

$721.6 million, mainly from the significant

negative returns in equity markets. Total

assets at year-end declined to $391 million.

We entered fiscal 2009 with the belief

that the mutual fund business will continue

to offer long-term growth opportunities.

In addition to selling directly and through

the broker-dealer channel, our model is

to secure distribution through alliance

partners. Our objective in 2009 is to

continue increasing and broadening these

relationships. In addition, we will work

to translate the key elements of Sceptre’s

brand in the institutional arena to the retail

mutual fund market. We believe this will

provide further differentiation to support

our sales and marketing efforts.

private client retail mutual funds

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table of contents

9 management’s discussion and analysis

21 auditors’ report 21 management’s report to shareholders

22 consolidated balance sheets 23 consolidated statements of earnings 24 consolidated statements of changes in shareholders’ equity 25 consolidated statements of comprehensive income 26 consolidated statements of cash flows

27 notes to consolidated financial statements

38 corporate governance 39 board of directors 40 senior officers IBC corporate information


management’s discussion and analysis For the year ended November 30, 2008

Forward-Looking StatementsThis Management’s Discussion and Analysis (MD&A) contains forward-looking statements about objectives, strategies and expected financial results. These statements reflect our current beliefs, plans, estimates, expectations and objectives. These statements are inherently subject to risks and uncertainties beyond the Corporation’s control including, but not limited to, economic and finan-cial conditions globally, regulatory developments in Canada and elsewhere, technological develop-ments and competition. These and other factors may cause the Corporation’s actual performance to differ materially from that contemplated by forward-looking statements. These forward looking statements are made as of the date of this MD&A and will not be updated or revised except as required by applicable securities law.

The past year was characterized by a global meltdown in equity markets with declines of a magnitude not seen since the Great Depression. While most of the developed world’s stock markets were in bear market territory (20% de-clines) by the early part of the year, Canada’s equity markets held up well through the spring and, in fact, hit a record high in June 2008. Thereafter, the declines were swift and sharp and by the end of November 2008, the Toronto Stock Exchange Composite was down 30% from December 1, 2007. The S&P 500 ended the calendar year 2008 down 37% and the MSCI World Index fell 42%.

The effect of the market decline on the Company’s assets under management was significant. Total assets under management fell from $9.07 billion at the start of the year to $6.81 billion at the end of the year, with market depreciation of $2.40 billion and posi-tive cash flows of $135 million. This decline in assets under management adversely impacted the Company’s financial results. Despite this challenging environment, the Company’s strong

long-term investment performance resulted in the addition of a significant number of new institutional mandates during the year.

Vision, Core Businesses and StrategySince 1971, the Company has concentrated on providing investment management services, and although, over the years, its client base has expanded beyond institutional pension plans, this segment remains its dominant sector. The needs of this client group and the nature of the products they seek have devel-oped significantly over time, and in response, the Company has shifted away from primarily balanced investment mandates to providing expertise in five investment groups: domestic equities, foreign equities, domestic and foreign integrated equities, fixed income and asset mix. A sub-advisor is used for a large part of the foreign equity investments. The fees from all investment management products are based on a percentage of the assets managed.

While the core competency of the Company is its investment management teams and the investment processes developed to support them, the Company also employs experienced marketing and service teams, who work with institutional, private and mutual fund clients. The range of products tailored for the various client groups includes segregated investing, and pooled and mutual fund investing. Investment management fees vary based upon the level of servicing and investment complexity aligned with the product. Competitive factors and the tapering fee scale associated with larger asset pools are also factors in determining the mix of revenue.

Pension plan investment management mandates are generally acquired either by direct contact with pension plan sponsors or through the pension consulting community. Access to distribution for certain markets (e.g. defined

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Management’s Discussion and Analysis

TI_sceptre_ar-BACK-v7.indd 9 17/03/09 3:55 PM

contribution programmes) has traditionally been an expensive proposition and several years ago the Company chose to form alliances with distributors in order to gain exposure for its products, rather than incur the cost of developing its own distribution network. Retail distribution of our investment products is achieved through the independent financial advisor channel, or directly to clients through our mutual fund dealership as well as through alliances with other organizations. Wealth man-agement for private client investors is a natural adjunct to our core competency. The Company significantly increased its commitment and presence in this area with the purchase on December 31, 2006 of the private client division of Legg Mason Canada. The combined Private Client business currently manages approxi-mately $600 million in assets in four offices across Canada.

The Company has worked diligently to develop its internal investment teams and has been successful in this endeavor. The current operational structure allows for the addition of new domestic assets with little additional cost.

Institutional rates of return for the periods ended December 31, 2008

1 Year 4 Years

Sceptre Balanced Pooled Fund -20.9% 2.0%Benchmark -16.5% 1.9%

Sceptre Canadian Pooled Fund -31.8% 3.7%S&P/TSX Composite -33.0% 1.7%

Sceptre Foreign Pooled Fund -39.9% -6.0%MSCI World ex-Canada -25.6% -3.4%

Sceptre Bond Pooled Fund 3.4% 4.2%DEX Universe 6.4% 5.1%

Canadian equity investment performance remained strong on a relative basis during 2008, and marked the 9th year in a row that it has beaten its benchmark.

Foreign equities, sub-advised by Alliance Bernstein, significantly underperformed their benchmark for the one year to December 2008, after outperforming since their appointment in January 2005. The 2008 underperformance also brought the four year performance number below the benchmark.

The Company’s bond returns underper-formed the benchmark, due to an overweight in non- Government of Canada bonds relative to the index. Credit spreads related to non-Government of Canada Bonds have increased to historic levels as a result of the ‘credit crunch’ and liquidity crisis. These elevated levels are expected to contribute positively to the Company’s relative bond performance over the next few years. Many of the Company’s significant competitors were also overweight non-Government of Canada bonds and therefore, our bond return was in line with our competitors’ returns.

The relative performance of the Balanced Pooled Fund comprises the performance of all of the above asset classes and an asset mix com-ponent. Positive out-performance in Canadian equities and a positive asset mix contribution was more than offset by the underperformance in foreign equities and bonds, resulting in a net underperformance versus the benchmark for the year ended December 31, 2008.

Our continued strong investment returns in Canadian equities should positively impact our ability to win new equity mandates. There is a strong belief among many market participants that future returns from corporate bonds (as an asset category) should be strong given the very depressed levels they have now reached. We believe our bond portfolios are well posi-tioned to benefit from such a situation and, therefore, we should be well positioned to win new domestic balanced mandates (i.e. Canadian Equity plus Bonds).

While we believe that it is important to assess returns over a period of time longer than one year, the underperformance in the foreign equity area may make it more difficult for us to win new specialty foreign equity mandates

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Management’s Discussion and Analysis Management’s Discussion and Analysis


in the short run and will negatively impact our marketing efforts for balanced mandates. It might also be a factor in retaining mandates in these areas.

It is our intention to have attractive prod-ucts in all asset categories that we choose to offer, and to be able to market and service the products with experienced people, supported by appropriate systems.

Key Performance DriversThe key performance driver of the Company’s ongoing results is the level of assets under man-agement. The level of assets under management is directly tied to investment returns and the Company’s ability to retain existing assets and attract new assets. In order to meet the goal of growing assets under management, it is vital that the Company retain its focus on a team based approach to managing investments. This allows for the integration of valuable investment pro-cesses which, when combined with the ongoing expansion and training of investment team members, ensures a continuity of the investment team distinct from any one individual. While past performance is no guarantee of future per-formance, the continuity of the investment team is viewed as a very positive asset by our clients and their advisors.

Measures put in place in recent years to enhance retention of personnel included com-pensation restructuring and research support. Our compensation objective is to align the in-terests of employees with those of the Company and, therefore, a significant portion of total compensation for senior personnel is linked to profitability and success of the Company, both short-term (via the bonus pool) and long-term (via the Long-Term Incentive Plans “LTIPs”).

Capabilities to Deliver ResultsThe Company has experienced staff in all func-tions and is in a position to service a higher level of assets with little cost increase. We continue to develop our operating relationship with RBC Dexia (“RBC”) which provides custodial, recordkeeping, fund accounting and other back office services for our funds. While this

is strictly a third party relationship, we benefit from a team at RBC which is dedicated to our products and whose systems meet our client needs. We also rely on the systems provided by S S & C (formerly Financial Models Company) (“SSC”) for our portfolio management pro-cessing and TooGood Financial Systems for our private client management system.

The Company has maintained a solid financial position as well as a strong working capital position. A more detailed description of the financial position is provided below under ‘Overall Performance and Results’.

Attracting new assets will continue to be our focus during 2009.

Overall Fiscal Performance and ResultsThe financial results in 2008 reflect the negative effect of the significant global market decline on the Company’s assets under management and revenue. Certain costs incurred by the Company in running its business are fixed costs (e.g. occupancy costs, systems costs, base salaries) and do not vary based on short-term changes in revenue. Other costs are variable costs, including revenue related expenses (trailer fees, sub-advisory fees and referral fees) and profitability related compensation ex-penses. The decrease in the Company’s revenue, combined with negative operating leverage (whereby total costs fell less than the decline in revenue due to fixed costs), adversely impacted the Company’s financial results.

As mentioned, the effect of the market decline on the Company’s assets under man-agement was significant: Total assets under management fell from $9.07 billion at the start of the year to $6.81 billion at the end of the year, with market depreciation of $2.40 billion and positive cash flows of $135 million.

The following summary financial infor-mation in Tables 1 and 2 is derived from the Company’s audited consolidated financial state-ments for the years ended November 30, 2008 and 2007. The information in Tables 3 and 4 is taken from the Company’s financial records and is unaudited.


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Table 1 — Selected Income Statement Information for the years ended November 30

Revenue

(in thousands of dollars) 2008 2007 % change

Pension and other Institutional funds $ 20,317 57.4% $ 19,340 50.3% 5.1%

Private Client 5,242 14.8% 5,453 14.2% (3.9)%

Mutual Funds 8,978 25.4% 11,865 30.9% (24.3)%

Total investment management fees 34,537 97.6% 36,658 95.4% (5.8)%

Investment & other income 861 2.4% 1,755 4.6% (50.9)%

Total revenue $ 35,398 100.0% $ 38,413 100.0% (7.8)%

Net Income $ 5,002 $ 7,354

– Per share $ 0.36 $ 0.53

– Per diluted share $ 0.35 $ 0.52

Table 2 — Balance Sheet Information as at November 30

(in thousands of dollars) 2008 2007

Cash and securities $ 15,713 $ 20,732

Receivables 1,717 2,496

Goodwill and intangible assets 7,486 7,906

Other assets 1,996 2,457

Total assets 26,912 33,591

Liabilities 6,038 9,215

Shareholders’ equity 20,874 24,376

Total liabilities and shareholders’ equity 26,912 33,591

Table 3 — Assets under Management (AUM) Continuity Schedule

(in millions of dollars)Opening

AUMNet

Cash Flows

Market Appreciation

(Depreciation)Closing

AUM

Pension and other Institutional funds $ 7,401 $ 312 $ (1,897) $ 5,816

Private Client 793 (51) (143) 599

Mutual Funds 875 (126) (358) 391

Total $ 9,069 $ 135 $ (2,398) $ 6,806

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Table 4 — Assets under Management by Business Segment

Assets under Management as at November 30, 2008 and 2007

(in millions of dollars) 2008 2007 % change

Pension and other Institutional funds $ 5,816 85.5% $ 7,401 81.5% (21.4)%

Private Client 599 8.8% 793 8.7% (24.5)%

Retail Mutual Funds 391 5.7% 875 9.8% (55.3)%

Total assets $ 6,806 100.0% $ 9,069 100.0% (25.0)%

In tables 3 and 4 above, assets and asset flows are classified into categories based on the nature of the client. For example, if private clients hold “O” class mutual funds, those assets are reflected as Private Client assets and not mutual fund assets. Therefore, mutual fund assets represent retail mutual fund assets only and not the total value of all mutual funds managed by the Company, which were $0.80 billion at November 30, 2008, including inter-fund holdings.

In all cases, management fee revenue is based on assets under management (“AUM”). In the case of retail mutual fund revenue and private client revenue, it is earned based on the daily av-erage AUM. Pension and Institutional revenue is earned primarily based on the closing value of AUM at the end of each calendar quarter, for example, Q4 institutional revenue is based on institutional assets at September 30, 2008. Therefore, the effect on revenue of the de-cline in institutional assets from the end of September to December 2008 will be reflected in the Company’s first 2009 fiscal quarter ended February 28, 2009. Therefore, the analysis of revenue that follows will make reference to average assets in the case of mutual fund and private client revenue and to billing point assets in the case of pension and institutional revenue.

Total revenue for the year ended November 30, 2008 was $35.40 million versus $38.41 million for the previous year. Total management fee revenue was $34.54 mil-lion this year versus $36.66 million in 2007. Institutional management fee revenue was $20.32 million compared with $19.34 mil-lion in 2007 as average assets at the billing

points increased from $7.25 billion in 2007 to $7.34 billion in 2008. Mutual fund revenue was $8.98 million in 2008 versus $11.87 million in 2007 as average assets declined from $954.05 million last year to $721.59 million this year, with the majority of the decrease resulting from significant negative returns in equity markets. Private Client revenue was $5.24 million in 2008 versus $5.45 million last year (Private Client revenue in the first quarter of fiscal 2007 only included two months worth of revenue for the newly acquired private client business, compared with a full three months of revenue in the first quarter of this year).

Investment income declined from $1.76 mil-lion in 2007 to $0.86 million this year as last year benefited from a gain of $0.83 million from the sale of a management contract and higher capital gains on disposal of seed capital investments in underlying funds managed by the Company.

Revenue related expenses (sub-advisory fees, trailer fees and referral fees) fell by $0.42 million this year versus a year ago, from $5.94 million to $5.52 million, in line with the decrease in assets subject to those charges. Other expenses increased by $0.99 million versus a year-ago, to $22.35 million from $21.36 million due to recognizing a charge of $2.16 million before tax ($1.44 million after tax) for the full cost relating to the departure of the Company’s former CEO in October 2008 (“Settlement Charge”). Without this charge, other expenses would have decreased by $1.17 million. Total com-pensation expense (including the Settlement Charge) was $18.01 million in 2008 versus $17.59 million in 2007. Excluding the


13



charge, compensation expense declined by $1.74 million due to lower profitability related remuneration. Included in other expenses are legal and consulting fees of $0.43 million which we consider to be one-time expenses.

We continue to balance the need to incur costs to retain our key investment professionals against reducing costs to improve the margin on operations. On the one hand, we need to maintain full service levels for existing clients and be able to assume new assets as we grow our business. On the other hand, we have reviewed all areas of the operations, and redistributed tasks or pared costs where appropriate. We have very little room to cut costs while offering all the current services. However, the profitability related components of remuneration will impact the overall level of compensation expense.

Sceptre currently has a staff of 62 people versus 64 people last year. We are confident we will be able to service a significant increase in assets under management with only minor changes to the complement of staff.

Earnings before income taxes were $7.53 mil-lion for fiscal 2008, versus $11.11 million for 2007, a decrease of 32.2%. Without the Settlement Charge, 2008 earnings before tax would have been $9.70 million or 12.7% lower than 2007. Net earnings for the year were $5.00 million compared to $7.35 in 2007. Without the Settlement Charge, earnings for the year would have been $6.44 million, or 12.4% lower than the prior year. Basic and diluted earn-ings per share decreased by 32.1% and 32.7% to $0.36 and $0.35 per share, respectively.

Total dividends declared for 2008 were $0.42 per share for the year, versus $0.42 in 2007.

At November 30, 2008, we had $13.04 mil-lion of net working capital, accrued liabilities due after one year of $1.06 million and no debt. A more detailed description of the liquid investments is provided in the Financial Instruments section below.

Effective November 30, 2008, the Company is committed under an operating lease for premises as follows:

$

2009 358,000

2010 385,000

2011 387,000

2012 363,000

2013 and beyond 20,000

During 2007, the Company closed its all cash acquisition of the Private Client Division of Legg Mason Canada. The carrying value on the Company’s balance sheet of the assets acquired as at November 30, 2008 is as follows:

Customer relationships and non-solicit

agreements (“intangible assets”)

$3.91 million

Goodwill $3.56 million

The Company performed an impairment assessment for the intangible assets and goodwill as at November 30, 2008 following the require-ments of the CICA Handbook Section 3062 Goodwill and other Intangible Assets and Section 3063 Impairment of Long-lived Assets.

The level of assets managed in the pur-chased private client business declined from approximately $625 million on December 31, 2006 (the closing date of the acquisition) to $568 million at December 31, 2007 (the first anniversary of the closing date). As a result, the purchase price paid by the Company was re-duced by $670,000 based on a revenue run rate adjustment formula. As at November 30, 2008, the assets managed by the purchased business were $437 million. The decline in assets in 2008 resulted from a combination of market declines (approximately $98 million) and net negative cash flows ($33 million). Therefore, revenue earned on the acquired business is lower than forecast at the time of the acquisition. However, expenses have been adjusted downwards and are significantly lower than forecast at the time of

14



acquisition and this business is presently both cash flow positive and profitable.

The assessment of intangible assets and goodwill incorporates a substantial level of estimates and assumptions by management. The results of these assessments are extremely sensitive to changes in assumptions meaning that small changes in estimates result in material changes in the resultant assessment of goodwill and intangible assets.

Section 3063 requires the Company to evaluate projected future cash flows after tax from the existing clients acquired from the pur-chase. If the sum of these future cash flows on an undiscounted basis is higher than the carrying value of the intangible asset, then there is no requirement to adjust the carrying value. In our model we assumed a 10% attrition rate in fore-casting future net revenue and applied a 30% margin to this net revenue to yield a pre- and post-tax net cash flow. The margin percentage was derived from the results of the net present value model described below, and the 10% attri-tion rate was considered conservative based on historical information available. On this basis, the undiscounted sum of future cash flows was higher than the carrying value of the intangible asset and, therefore, there was no requirement to adjust carrying value.

In order to evaluate the carrying value of the goodwill from the acquired business (“the reporting unit”), the Company developed a net present value model which discounts projected future net cash flows from the reporting unit. The current revenue run rate and expenses were used as a base level starting point. In order to project future revenue and expenses, the Company chose what it considered to be the ‘most likely outcome’ from a range of possible outcomes, for each of the variables required to complete the analysis. Many factors were considered in determining the ‘most likely out-come’ but it is important to be aware that there can be no certainty to any of these projections as they are subjective and actual results will be determined by unknown future events and circumstances.

The most important variables used in computing the net present value of estimated future cash flows are the revenue growth rate, the expense growth rate and the discount factor. The Company used a 5% growth rate for revenue, a 1.5% growth rate for expenses, other than for the compensation of private client managers which is tied to net revenue, and a 12.5% discount factor. The revenue growth rate estimate comprises a combination of negative cash flows and positive investment perfor-mance, based on management’s assessment of many different factors, including historical long-term market performance, historical cash flows and other factors specific to this business. The growth rate estimate for expenses (other than manager compensation) represents an estimate for future inflation. The discount factor comprises a number of components including the ‘risk free rate’ (represented by the yield on the Government of Canada 10 year bond on November 30, 2008), a market risk premium (based on historical stock market statistics), a size premium, and the Company’s stock beta.

Using the above estimates, the net present value calculation supported the goodwill valua-tion carried on the Company’s balance sheet at November 30, 2008. However, it is important to note that the results of the net present value calculation are extremely sensitive to the level of growth rate estimate used and to the discount factor used. For example, a 1% decrease in total estimated growth rate, all other variables held constant, decreases the net present value by $1.4 million. A 1% increase in the discount factor, all other variables held constant, de-creases the net present value by $0.9 million.

During 2008, the Company issued 217,100 common shares on the exercise of previously issued options and purchased for cancellation 123,900 common shares under a normal course issuer bid. Total shareholder return in the 2008 fiscal year was negative 41.5% taking into account the decline in stock price and dividends paid.


15



Selected Consolidated Annual and Quarterly InformationThe financial statements are presented in Canadian dollars, have been prepared in ac-cordance with Canadian generally accepted accounting principles, and are based on management’s best information and judgment. In fulfilling its responsibilities, management has developed internal control systems and proce-dures designed to provide reasonable assurance that the Company’s assets are safeguarded, that transactions are executed in accordance with appropriate authorization, and that accounting records may be relied upon to properly reflect the Company’s business transactions.

The total revenue, income before ex-traordinary items, net income, total assets, total long-term financial liabilities, and cash dividends declared per share of the Company, for each of its most recently completed three financial years are set forth below. There have been no discontinued operations, and no significant acquisitions apart from the private client acquisition. The only change in accounting policy affecting the Company relates to the timing of accounting for mutual fund revenue which has been described in the Company’s 2007 annual financial statements and MD&A. The 2006 comparative informa-tion was adjusted to reflect this change.

Quarters ended(in thousands of dollars, except per share amounts)

Nov. 30,

2008Aug. 31,

2008May 31,

2008Feb. 29,

2008Nov. 30,

2007Aug. 31,

2007May 31,

2007Feb. 28,

2007

Total revenue $ 7,690 $ 9,332 $ 9,055 $ 9,321 $ 10,485 $ 10,081 $ 9,398 $ 8,449

Income before extraordinary items (103) 1,873 1,700 1,532 2,529 2,098 1,564 1,163

– Per share (0.01) 0.13 0.12 0.11 0.18 0.15 0.11 0.08

– Per diluted share (0.01) 0.13 0.12 0.11 0.18 0.15 0.11 0.08

Net income (103) 1,873 1,700 1,532 2,529 2,098 1,564 1,163

– Per share (0.01) 0.13 0.12 0.11 0.18 0.15 0.11 0.08

– Per diluted share (0.01) 0.13 0.12 0.11 0.18 0.15 0.11 0.08

Years Ended November 30 (in thousands of dollars, except per share amounts) 2008 2007 2006

Total revenue $ 35,398 $ 38,413 $ 27,488

Income before extraordinary items 5,002 7,354 5,338

– Per share 0.36 0.53 0.38

– Per diluted share 0.35 0.52 0.38

Net income 5,002 7,354 5,338

– Per share 0.36 0.53 0.38

– Per diluted share 0.35 0.52 0.38

Total assets 26,912 33,591 29,544

Long-termfinancialliabilities Nil Nil Nil

Cash dividends declared per common share 0.42 0.42 0.31

The total revenue, income before extraordinary items and net income of the Company, on a consolidated basis, including amounts on a per share basis for all figures except total revenue, for each of its most recently completed eight quarterly periods are as follows:

16



The Company follows a policy of paying out substantially all of its after-tax earnings in dividends annually. The Company sets the divi-dend level based on a quarterly assessment of its financial needs.

At the end of the 2008 fiscal year, the Company had 14,044,590 Common shares is-sued and outstanding, compared to 13,951,390 in the prior year. This increase was the result of shares issued on exercise of options under the Company’s stock option plan net of open market purchases of shares for cancellation by the Company under a Normal Course Issuer Bid.

Fourth Quarter ResultsFor the fourth quarter, the Company incurred a loss of $103,000 or 1 cent per share fully diluted (1 cent per share basic) after recognizing a charge of $2.16 million before tax ($1.44 mil-lion after tax) for the Settlement Charge. Without this charge, fourth quarter earnings would have been $1.34 million or 9 cents per share (10 cents per share basic). Earnings for the fourth quarter of 2007 were $2.53 million or 18 cents per share.

Q4 RevenueThe most important driver affecting revenue during the quarter was the significant decline in the level of equity markets compared to a year ago, which impacted the level of assets under management and, therefore, the fees charged by the Company.

Total revenue for the fourth quarter was $7.69 million, compared with $10.49 million for the fourth quarter of 2007. Total management fee revenue for the fourth quarter was $7.53 mil-lion, versus $9.42 million for the fourth quarter last year. Institutional management fee revenue was $4.87 million compared with $5.03 million for the fourth quarter last year as assets at the billing point (September 30) decreased from $7.45 billion last year to $6.85 billion this year as a result of declines in equity markets, which more than offset positive cash flows. Mutual fund revenue was $1.52 million in the fourth quarter this year versus $2.91 million in the same quarter last year as average assets decreased from

$907.70 million last year to $497.60 million this year, with the majority of the fall resulting from significant declines in equity markets. Private Client revenue was $1.13 million in the fourth quarter this year versus $1.48 million in the same quarter last year as average assets declined from $764.8 million last year to $ 602.0 million this year, with the bulk of the decrease coming from negative returns in equity markets. Investment income of $0.17 million this quarter was lower than last year’s $1.06 million as last year’s quarter benefited from a gain of $0.83 million from the sale of a management contract.

Q4 ExpensesRevenue related expenses (sub-advisory fees, trailer fees and referral fees) declined by $0.29 million in the fourth quarter versus a year ago, from $1.50 million to $1.21 million, in line with the decline in assets subject to those charges. Other Expenses increased by $1.30 mil-lion versus a year-ago, to $6.76 million from $5.46 million due to the Settlement Charge. Without this charge, Other Expenses would have decreased by $0.87 million. Within Other Expenses, compensation expense (excluding the Settlement Charge) fell $1.33 million due to lower profitability related remuneration. Other expenses in Q4 2008 include an expense of $0.18 million which we do not expect to recur.

Transactions with Related PartiesThe Company manages pooled funds and Class O mutual fund units as cost-effective ways to provide segments of its investment management services to its segregated clients. Investment management fees are earned from the clients’ total portfolios and no fees are earned directly from the pooled funds or Class O units. Retail investors can purchase Class A and Class F units of the Company’s open-end mutual funds, which are sold under a prospectus, and which provide an opportunity for a wider group of individuals to access the Company’s investment expertise. Investment management fees earned from Class A and Class F units in these funds are based on the level of assets managed within the funds and charged at competitive industry rates.


17



The funds are available on the same terms to all investors who meet the particular criteria of the specific fund.

Included in the Company’s assets at November 30, 2008 were mutual fund invest-ments under the management of the Company, valued at $3.29 million. Investment income in the 2008 consolidated statement of earnings includes $434 thousand from these investments including any realized capital gains from the sale of such investments during the year.

During the year, the Company made a loan of $35,000 to provide financial assistance to an employee. The loan will be repaid by semi- annual installments commencing in June 2008 and ending in June 2011. The loan bears interest at the greater of 3% per annum and the Canada Revenue Agency prescribed rate used to calculate taxable benefits.

Critical Accounting EstimatesThe summary of significant accounting policies in the notes to the Company’s consolidated financial statements for the year ended November 30, 2008 makes reference to the use of assumptions and estimates by management in reporting results. The nature of the opera-tions of the Company does not, in fact, require a significant level of estimating, except in the assumptions and estimates used in the impair-ment testing for Goodwill and Intangible Assets detailed elsewhere in this MD&A. Apart from the impairment testing, the fol-lowing element of remuneration cost does involve the use of estimates.

One component of the Company’s long-term share purchase incentive plan requires senior employees to commit personal funds which the Company then matches on a two-for-one basis. The employee has until November 1 of the following year to make the commitment. The Company’s policy has been to assume the maximum commitment allowed under the plan will be made each year and has accrued on that basis. Actual experience has substantiated the validity of this approach and the personal com-mitments have generally been made within three months of the earliest eligible date.

Financial InstrumentsAt November 30, 2008 the Company held $7.36 million in short-term notes, $4.41 mil-lion in corporate debt securities, preferred shares valued at $0.49 million and mutual fund investments valued at $3.29 million. These investments are carried on the November 2008 balance sheet at fair value using bid prices. No investments are valued using non-observable data. The Company does not hold any non-bank asset-backed commercial paper. The short-term notes have maturities up to six months and are issued by the Government of Canada. Mutual fund investments comprise a well diversified portfolio of Canadian investments. Preferred shares and mutual fund units have no specific maturities. All corporate debt securities mature within five years, and their interest rates range from 4.35-10.80%. None of the investments with market values lower than original cost are considered to be permanently impaired at November 30, 2008.

On December 1, 2006, the Company adopted the following new accounting stan-dards: The Canadian Institute of Chartered Accountants (CICA) Handbook Section 1530, “Comprehensive Income”; Section 3251, “Equity”; Section 3855, “Financial Instruments – Recognition and Measurement”; and Section 3861, “Financial Instruments – Disclosure and Presentation”.

The standards require that all financial assets be classified as trading, available-for-sale, held-to-maturity or loans and receivables. The Company’s marketable securities have been designated as available-for-sale financial assets and are carried on the November 2008 balance sheet at fair value, with changes in unrealized gains and losses being recognized in other com-prehensive income (OCI). Accumulated OCI is included on the consolidated balance sheet as a separate component of shareholders’ equity and includes, on a net of tax basis, net unrealized gains and losses on available-for-sale securities. The Company adopted these standards retro-spectively without prior period restatement. Fair value is based on bid prices from published

18



price quotations for short-term notes, corporate debt securities and preferred shares and on net asset values for mutual fund investments.

The use of financial instruments exposes the investor to such risks as credit risk, interest rate risk, and market value risk. On December 1, 2007, the Company adopted three new ac-counting standards that were issued by the Canadian Institute of Chartered Accountants: Section 1535, Capital Disclosures; Section 3862, Financial Instruments – Disclosures and Section 3863, Financial Instruments – Presentation. Section 3862, Financial Instruments – Disclosures and Section 3863, Financial Instruments – Presentation replace Section 3861, Financial Instruments – Disclosure and Presentation. These sections establish standards for the comprehen-sive disclosure and presentation requirements for financial instruments. The standards include new requirements to quantify certain risk exposures and to provide sensitivity analysis for certain risks. Adoption of these standards has no effect on net income or shareholders’ equity. Refer to Note 10 in the November 30, 2008 consolidated financial statements for the new disclosures.

The Company is required to convert to International Financial Reporting Standards (IFRS) by the 2012 fiscal year. The Company will develop a changeover plan to IFRS during the 2009 fiscal year. The key elements of the plan will include disclosure of the qualitative impact in the 2010 annual financial statements, the disclosures of the quantitative impact, if any, in the 2011 financial statements and the preparation of the 2012 financial statements in accordance with IFRS with comparatives.

Disclosure Controls and Internal Control over Financial Reporting

Disclosure Controls and Procedures Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Chief Executive Officer and the Chief Financial Officer, on a timely basis so that appropriate decisions can be made regarding public disclosure.

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures and have concluded that they are adequate and effective as of November 30, 2008.

Internal Control over Financial Reporting Management of the Company has ensured that internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles. There have been no changes in internal control over financial reporting in the most recent quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

Risk FactorsThe Annual Information Form (“AIF”) of the Corporation describes the major risks facing the Corporation and its shareholders. Please refer to (“RISK FACTORS” in the AIF).

One of the most significant risks an investment manager faces is long-term relative underperformance. Managers can make intelli-gent and informed decisions and still be wrong. As investment styles differ among managers, every investment management company must expect and plan for periods of relative under-performance. These periods are an opportunity to re-examine operating and investment procedures and refine and improve them. This is especially important in today’s environment. Several management responses follow from this:

• Weneedtodesignandstructureportfoliosforthe long term, with a global perspective, and limit the risk exposure to any one particular investment judgment. The cumulative effect of incremental performance in each part of the portfolio should result in overall outperfor-mance over the long term, with less risk.

• Wemustcontinuetoconcentrateourenergieson attracting and retaining dedicated, ethical investment professionals who, on balance, make good investment judgments. We must


19



also maintain a creative environment, which is conducive to good investment decision making.

• Wemustensurethateverythingwecancontrolremains of the highest standard, including:• continuity and quality of personnel in

all areas;• careful administration and regulatory

compliance; • coherent and consistent communication of

investment decisions and results to clients.Sceptre’s culture is to clearly and con-

tinuously analyze our results. When we underperform, we act to position ourselves to outperform in the long term for our clients.

Other related risks facing many investment management companies are the risks associated with losing investment personnel. In order to mitigate these risks, the Company has put in place measures to enhance retention of per-sonnel as highlighted in the ‘Key Performance Drivers’ section of this document. As well, the Company retains its focus on a team based ap-proach to managing investments. This allows for the integration of valuable investment processes which, when combined with the ongoing expan-sion and training of investment team members, ensures a continuity of the investment team distinct from any one individual.

OutlookCertain factors affecting the Company’s perfor-mance are beyond the control of the Company. For example, overall market performance impacts the level of assets managed, and there-fore revenue. The Company’s long-term relative investment performance is a significant factor affecting our ability to attract new investment mandates (and in preventing the loss of existing mandates). Relative investment performance, and its possible impact on the Company’s business going forward, was discussed under the section “Vision, Core Businesses and Strategy” above.

Additional information relating to the Company, including the Company’s annual in-formation form, is on SEDAR at www.sedar.com.

Toronto, CanadaFebruary 19, 2009

20



To the Shareholders of Sceptre Investment Counsel Limited

We have audited the consolidated balance sheets of Sceptre Investment Counsel Limited as at November 30, 2008 and 2007, the consolidated statements of earnings, changes in shareholders’ equity, comprehensive income and cash flows for the years then ended. These financial state-ments are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reason-able assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at November 30, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

Chartered Accountants, Licensed Public AccountantsJanuary 15, 2009

Management of Sceptre Investment Counsel Limited is responsible for the integrity and objectivity of the consolidated financial state-ments and all other information contained in the Annual Report. The financial statements have been prepared in accordance with generally accepted accounting principles and are based on management’s best information and judgment.

In fulfilling its responsibilities, manage-ment has developed internal control systems and procedures designed to provide reason-able assurance that the Company’s assets are safeguarded, that transactions are executed in accordance with appropriate authorization, and that accounting records may be relied upon to properly reflect the Corporation’s business transactions.

The Audit Committee of the Board of Directors is composed of independent directors who meet periodically and independently with management and the auditors to discuss the Corporation’s financial reporting and internal control. The Audit Committee reviews the re-sults of the audit by the auditors and their audit report prior to submitting the consolidated fi-nancial statements to the Board of Directors for approval. The external auditors have unrestricted access to the Audit Committee.

Management recognizes its responsibility to conduct the Company’s affairs in the best interests of its shareholders.

Glenn R. Inamoto Chief Executive Officer

David R. Morris Managing Director, Chief Financial Officer, Chief Operating Officer & Treasurer

auditors’ report

management’s report to shareholders


21

TI_sceptre_ar-BACK-v7.indd 21 3/20/09 10:34 AM

(in thousands of dollars)2008

$2007

$

Assets

Current assets

Cash 160 35

Available-for-sale financial assets (note 3) 15,553 20,697

Accounts receivable 1,717 2,496

Deferred compensation (note 4) — 1,337

Current portion of loans to related parties (note 5) 25 38

Income taxes recoverable 219 —

Current portion of future income taxes 346 —

18,020 24,603

Loans to related parties (note 5) 21 19

Furniture, equipment and leaseholds (note 6) 932 1,063

Future income taxes 453 —

Intangible assets (note 7) 3,911 4,331

Goodwill (note 7) 3,575 3,575

26,912 33,591

Liabilities

Current liabilities

Accounts payable and accrued liabilities 3,528 4,754

Bonuses due to employees 1,453 2,500

Income taxes payable — 1,346

Future income taxes — 450

4,981 9,050

Accrued liabilities 1,057 —

Future income taxes — 165

6,038 9,215

Shareholders’ Equity

Capital stock (note 8) 16,228 15,913

Contributed surplus (note 8) 1,749 1,518

Retained earnings 4,706 6,437

Accumulated other comprehensive (loss) income (note 1) (1,809) 508

20,874 24,376

26,912 33,591

Approved by the Board of Directors

Director Director

The accompanying notes are an integral part of these consolidated financial statements.

consolidated balance sheets As at November 30, 2008 and 2007

22

Consolidated Financial Statements Consolidated Financial Statements


(in thousands of dollars, except per share amounts)2008

$2007

$

Revenue

Investment management fees 34,537 36,658

Investment income

Interest, dividends and distributions from available-for-sale financial assets 703 700

Capital gains on sale of available-for-sale financial assets 158 225

Gain on sale of management contract — 830

35,398 38,413

Expenses

Operating 21,705 20,686

Trailer and referral fees 1,873 2,267

Sub-advisory fees 3,646 3,671

Amortization of furniture, equipment and leaseholds 223 294

Amortization of intangible assets 420 385

27,867 27,303

Earnings before income taxes 7,531 11,110

Provision for (recovery of) income taxes (note 11)

Current 3,489 4,180

Future (960) (424)

2,529 3,756

Net earnings for the year 5,002 7,354

Earnings per share (note 9)

Basic 0.36 0.53

Diluted 0.35 0.52


consolidated statements of earnings For the years ended November 30, 2008 and 2007

Consolidated Financial Statements

23




$2007

$

Common shares

Balance — Beginning of year 15,913 16,259

Stock options exercised 1,297 234

Purchased for cancellation (982) (580)

Balance — End of year 16,228 15,913

Contributed surplus


Stock option expense 231 228


Retained earnings



Dividends (6,733) (5,451)


Accumulated other comprehensive (loss) income

Balance — Beginning of year 508 —

Transition adjustment, net of income taxes of $84 (note 1) — 383

Other comprehensive (loss) income (2,317) 125

Balance — End of year (1,809) 508

20,874 24,376


consolidated statements of changes in shareholders’ equity For the years ended November 30, 2008 and 2007


24




$2007

$


Other comprehensive (loss) income

Unrealized (loss) gain on available-for-sale financial assets, net of income taxes of $338 (2007 — $32) (2,173) 127

Reclassification of realized gains to earnings (144) (2)

(2,317) 125

Comprehensive income 2,685 7,479


consolidated statements of comprehensive income For the years ended November 30, 2008 and 2007

Consolidated Financial Statements Consolidated Financial StatementsConsolidated Financial Statements

25




$2007

$

Cashflowsprovidedby(usedin)

Operating activities


Items not affecting cash

Gain on sale of investments and management contract (158) (1,055)

Fair market value adjustment of available-for-sale financial assets 451 (30)

Amortization of furniture, equipment and leaseholds 223 294

Amortization of intangible assets 420 385

Compensation expense — stock options (note 8) 231 228

Recovery of future income taxes (1,414) (424)

Changes in non-cash working capital

Decrease (increase) in accounts receivable 779 (986)

Increase in income taxes recoverable (219) —

Decrease in loans to related parties 11 37

Decrease in deferred compensation 1,337 1,251

Decrease in income taxes payable (1,346) (1,351)

(Decrease) increase in accounts payable and accrued liabilities (169) 909

(Decrease) increase in bonuses due to employees (1,047) 1,040

4,101 7,652

Investing activities

Proceeds on sale of available-for-sale financial assets 7,811 5,360

Proceeds on sale of investment management contract — 830

Purchase of available-for-sale investments (5,277) (1,169)

Purchase of furniture, equipment and leaseholds (92) (126)

Payment on closing of purchase of private client business (note 7) — (6,764)

2,442 (1,869)

Financing activities

Purchase of capital stock for cancellation (note 8) (982) (580)

Issue of capital stock for options exercised (note 8) 1,297 234

Payment of dividends (6,733) (5,451)

(6,418) (5,797)

Net change in cash during the year 125 (14)

Cash — Beginning of year 35 49

Cash — End of year 160 35

Supplemental information

Income taxes paid during the year 4,429 5,531

Interest and dividends received 688 625


consolidated statements of cash flows For the years ended November 30, 2008 and 2007

Consolidated Financial Statements Notes to Consolidated Financial Statements

26

Consolidated Financial Statements Notes to Consolidated Financial Statements


1Summaryofsignificant accounting policies

Principles of consolidationThe consolidated financial statements include the accounts of Sceptre Investment Counsel Limited (the Company) and its wholly owned subsidiaries, Sceptre Mutual Fund Dealer Inc. (SMFDI) and Sceptre Fund Management Inc. (SFMI). All intercompany transactions and bal-ances have been eliminated on consolidation.

Use of estimatesThe preparation of consolidated financial statements in accordance with Canadian gener-ally accepted accounting principles requires management to make estimates and assump-tions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consoli-dated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Adoption of new accounting standardsOn December 1, 2007, the Company adopted three new accounting standards that were is-sued by The Canadian Institute of Chartered Accountants (CICA) Handbook: Section 1535, Capital Disclosures; Section 3862, Financial Instruments — Disclosures; and Section 3863, Financial Instruments — Presentation. Section 3862, Financial Instruments — Disclosures, and Section 3863, Financial Instruments — Presentation, replace Section 3861, Financial Instruments — Disclosure and Presentation. There was no impact on the consolidated financial statements on adoption of these new standards, other than the additional disclosure presented in note 10.

On December 1, 2006, the Company adopted the following new accounting stan-dards: Section 1530, Comprehensive Income;

Section 3251, Equity; Section 3855, Financial Instruments — Recognition and Measurement; Section 3861, Financial Instruments — Disclosure and Presentation; and Section 3865, Hedges.

Financial Instruments — recognition and measurementUnder Section 3855, the Company’s invest-ments have been designated as available-for-sale financial assets and, therefore, are carried on the consolidated balance sheets at fair value, with unrealized gains and losses being recognized in other comprehensive income (OCI). OCI and net earnings comprise comprehensive income. The transition adjustment of $383,000 repre-sents net unrealized gains (net of income taxes of $84,000) as at December 1, 2006, the date of adoption of these new accounting standards. All other financial instruments are classified as loans and receivables and other liabilities and are carried at amortized cost.

Transaction costs related to the purchase and sale of financial instruments are included in the consolidated statements of earnings. Transactions are recorded on the trade date.

Cash Cash comprises bank balances.

Available-for-sale financial assetsInvestments in short-term notes, corporate debt securities and preferred shares are carried on the consolidated balance sheets at fair value using bid prices. Investments in mutual fund units are carried at the net asset value reported by the fund managers.

Other financial instrumentsThe carrying values of cash, accounts receiv-able, accounts payable and accrued liabilities and bonuses due to employees approximate fair values due to their short-term nature. The loans to related parties are carried at cost which approximates the fair value.

notes to consolidated financial statements November 30, 2008 and 2007 (tabular amounts in thousands of dollars, except number of shares and per share amounts)

Consolidated Financial Statements Notes to Consolidated Financial StatementsConsolidated Financial Statements

27

Notes to Consolidated Financial Statements


Intangible assetsIntangible assets comprise the value assigned to acquired customer contracts and relationships and non-solicit agreements. These assets are amortized over the periods noted below and are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

GoodwillGoodwill represents the excess of the acquisi-tion cost over fair value of net assets acquired. Goodwill is not amortized but it is tested for impairment on an annual basis.

Revenue recognitionCertain investment management fees are calculated and invoiced monthly or quarterly in arrears, based on daily assets under manage-ment, and others are calculated and invoiced quarterly in arrears, based on calendar quarter-end assets under management or on an average of opening and closing assets under management for the quarter. Revenue is recog-nized when services have been rendered and the fee is determinable.

AmortizationAmortization of furniture and equipment is calculated using the declining balance method at an annual rate of 20%. In the year of acquisi-tion, one-half year’s amortization is taken.

Leasehold improvements are amortized on a straight-line basis over the term of the related lease.

Finite-life intangible assets are amortized on a straight-line basis, based on the estimated useful lives of these assets as follows:

Customer contracts and relationships 12 years

Non-solicit agreements 8 years

Income taxesThe Company utilizes the liability method of measuring income taxes, based on temporary differences between the financial reporting and income tax bases of assets and liabilities. Future

income tax expense (recovery) represents the change during the year in the future income tax assets and liabilities. Future income tax assets and liabilities are measured using enacted income tax rates and laws that are expected to apply when the income tax assets or liabilities are expected to be either settled or realized.

Stock-based compensation planCompensation expense is recognized when stock or stock options are issued to employees with an offset to contributed surplus. Any consideration paid by employees on the exercise of stock options or purchase of stock is credited to capital stock.

Deferred share unit planThe expense associated with granting new deferred share units (DSUs) is recognized when the deferred shares are issued. Changes in the fair value of previously issued DSUs that arise due to changes in the price of the Company’s common shares are recognized on an ongoing basis in the consolidated statements of earnings. The number of DSUs granted to directors is determined by dividing the dollar value of the portion of directors fees to be paid in DSUs by the closing price of the Company’s shares on the TSX for the business day immediately preceding the date of the grant. DSUs are granted on the third business day following the publication by the Company of its earnings results for each quarter.

Earnings per shareEarnings per share are presented for basic and diluted net earnings. Basic earnings per share are computed by dividing net earnings by the weighted average number of outstanding shares for the year. The computation of diluted earn-ings per share is computed using the treasury stock method. This method assumes that any proceeds obtained upon the exercise of em-ployee stock options would be used to purchase common shares at the average market price during the year.

Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements

28



2 Financial instruments by category

2008

Assets as per consolidated balance sheets

Loans and receivables

$

Available- for-sale

$Total

$

Available-for-sale financial assets — 15,553 15,553

Loans to related parties 46 — 46

Trade and other receivables, excluding prepayments 1,612 — 1,612

Cash 160 — 160

1,818 15,553 17,371

2007

Assets as per consolidated balance sheets

Loans and receivables

$

Available- for-sale

$Total

$

Available-for-sale financial assets — 20,697 20,697

Loans to related parties 57 — 57

Trade and other receivables, excluding prepayments 2,334 — 2,334

Cash 35 — 35

2,426 20,697 23,123

Accounts payable and accrued liabilities of $6,376,000 (2007 — $7,254,000) are based on carrying values, as the carrying values approximate fair values due to the short-term nature of these financial instruments.

3Available-for-salefinancialassets

2008 2007

Cost

$Fair value

$Cost

$Fair value

$

Short-term notes 7,362 7,362 10,760 10,784

Corporate debt securities 4,421 4,407 1,009 1,027

Preferred shares 508 492 1,258 1,269

Mutual fund investments under management of the Company 5,409 3,292 6,996 7,617

17,700 15,553 20,023 20,697

Notes to Consolidated Financial Statements Notes to Consolidated Financial StatementsNotes to Consolidated Financial Statements Notes to Consolidated Financial Statements

29


Fair value is based on bid prices from published price quotations for short-term notes, corporate debt securities and preferred shares and on net asset values for mutual fund investments.

No transaction costs were incurred and ex-pensed in fiscal 2008 (2007 — $nil). Investment income in the consolidated statements of earn-ings includes $277,000 (2007 — $322,000) from mutual fund investments under the management of the Company.

Available-for-sale financial assets are held to manage the Company’s liquidity needs and are held in marketable securities all denomi-nated in Canadian dollars. The short-term notes have maturities up to six months and are issued by the Government of Canada. Mutual fund investments under management of the Company comprise a well-diversified portfolio of Canadian investments. Preferred shares and mutual fund units have no specific maturities. All corporate debt securities mature within five years, and their interest rates range from 4.35% — 10.80%.

4 Deferred compensationIn October 2005, the Company accelerated awards under two stock purchase incentive plans. An amount equivalent to three and one-half years of plan awards at current com-pensation levels was paid to senior employees who invested the after-tax amount in common

shares of the Company. Other than being received on an accelerated basis, the common shares purchased are subject to the normal terms of the plans, one of which is a continuing service requirement, in order to avoid forfeiture of the common shares. Further awards under the plans for the next three years will only be made when increases in cash compensation occur or when new plan participants are designated.

The remaining deferred compensation on the consolidated balance sheets was fully expensed in fiscal 2008.

5 Loans to related partiesIn connection with the accelerated awards under one of the incentive plans referred to under de-ferred compensation (note 4), an employee was loaned $130,000 to assist with the employee’s matching portion of the plan requirements. The loan will be repaid in equal, semi-annual instalments, commencing in December 2005 and ending in December 2008. The loan is secured by common shares of the Company.

During the year, the Company loaned $35,000 to an employee to provide financial assistance. The loan will be repaid by semi- annual instalments, commencing in June 2008 and ending in June 2011.

Both loans bear interest at the greater of 3% per annum and the Canada Revenue Agency prescribed rate used to calculate taxable benefits (issued quarterly).

6 Furniture, equipment and leaseholdsFurniture, equipment and leaseholds are recorded at cost with any expenditure for repairs and maintenance charged to expense as incurred.

2008 2007

Cost

$

Accumulated amortization

$Net

$Cost

$


$Net

$

Furniture and equipment 4,163 3,422 741 4,071 3,248 823

Leasehold improvements 906 715 191 906 666 240

5,069 4,137 932 4,977 3,914 1,063

30



7 Intangible assets and goodwillIntangible assets and the increase in goodwill in 2007 relate to the acquisition by the Company of the private client division of Legg Mason Canada on December 31, 2006. The all-cash acquisition cost was based on a formula related to the management fee revenue run rate measured at the closing date and 12 months following the closing date. The purchase price for the assets acquired (including transaction costs of $404,000) was allocated as follows:

2007

$

Customer relationships and non-solicit agreements 4,716

Goodwill 3,512

8,228

The remaining goodwill of $63,000 relates to assets acquired prior to April 1, 1974. Intangible assets are stated at cost, net of accumulated amortization. The amortization charge of $420,000

recognized in 2008 (2007 — $385,000) comprises the following:

2008

Cost

$


$Net

$

Customer contracts and relationships 4,036 644 3,392

Non-solicit agreements 680 161 519

4,716 805 3,911

2007

Cost

$


$Net

$

Customer contracts and relationships 4,036 308 3,728

Non-solicit agreements 680 77 603

4,716 385 4,331

8 Capital stockAuthorized

Unlimited common shares

2008

$2007

$

Issued and outstanding

14,044,590 (2007 — 13,951,390) common shares 16,228 15,913

During 2008, the Company issued an additional 217,100 common shares at prices ranging from $5.71 to $7.44 per share on the exercise of previously issued stock options, generating proceeds of $1,297,000.

During 2008, the Company purchased for cancellation under a normal course issuer bid 123,900 common shares at an average cost of $7.92 per share for a total cost to the Company of $982,000.

During 2007, the Company issued an additional 40,600 common shares at prices ranging from $5.71 to $8.46 per share on the exercise of previously issued stock options, generating proceeds of $234,000.


31



During 2007, the Company purchased for cancellation under a normal course issuer bid 56,700 common shares at an average cost of $10.22 per share for a total cost to the Company of $580,000.

As at November 30, 2008, 97,263 (2007 — 17,868) common shares, which were forfeited prior to vesting under stock purchase incentive plans, were held in trust and are available for future allocation under these plans.

During 2008, 93,811 (2007 — 22,143) common shares, which had previously been purchased by participants in stock purchase incentive plans, were forfeited prior to vesting. Under the terms of the plans, such forfeited shares are available for allocation to other participants in the plans. During 2008, 14,416 (2007 — 4,275) common shares were used toward new awards, representing a reduction of $113,883 (2007 — $46,597) in expenses that would otherwise have been incurred by the Company. As at November 30, 2008, 97,263 common shares remain, pending future allocation under these plans.

Stock-based compensation planOn May 7, 2007, the shareholders of the Company approved the adoption of a new stock

option plan (the 2007 plan). Options issued prior to that date were issued, pursuant to the Company’s 1998 stock option plan (the 1998 plan). Under the 2007 plan, 1,000,000 shares were reserved for issuance. At the time of the approval of the 2007 plan, there were 1,347,700 stock options issued and outstanding under the 1998 plan. Following the adoption of the 2007 plan, no new stock options will be granted under the 1998 plan. Under the 1998 plan, the exercise price of each stock option equals the market price of the Company’s common shares on the day preceding the date of grant and each stock option’s maximum term is five years. Stock op-tions vest at a rate of 20% per year, commencing one year after the grant date. Under the 2007 plan, the exercise price of each stock option equals the volume weighted average trading price of the Company’s common shares on the TSX for the five trading days immediately preceding the day the stock option is granted and each stock option’s maximum term is five years. Stock options vest at a rate of 33.33% per year, on each anniversary date of the grant.

A summary of the status of the Company’s stock option plans as at November 30, 2008 and 2007 and the changes during the years then ended are presented below:

2008 2007

Stock optionsNumber of shares

Weighted average exercise price

$Number of shares

Weighted average exercise price

$

Outstanding — Beginning of year 1,154,700 7.00 1,329,200 7.03

Granted 209,700 8.83 111,100 10.02

Exercised (217,100) 5.97 (40,600) 5.76

Expired (44,500) 12.75 (51,000) 14.96

Forfeited (76,400) 6.46 (194,000) 7.07

Outstanding — End of year 1,026,400 7.38 1,154,700 7.00

Options exercisable — End of year 540,100 6.73 623,340 6.81

32



The weighted average grant-date fair value of the stock options issued in 2008 is $1.71 (2007 — $1.91), using the Black-Scholes option pricing model. The following factors were used to determine the fair value:

Weighted average

2008 2007

Risk-free interest rate based on five-year Government of Canada yield 3.32% 4.16%

Expected life 60 months 60 months

Expected volatility based on daily five-year historical volatility 0.3584 0.3944

Expected dividends

Current yield plus annual growth factor 3% 8%

During the year, the Company recorded $231,000 (2007 — $228,000) in compensation expense with an offset to contributed surplus.

The following table summarizes information about stock options outstanding as at November 30, 2008:

Stock options outstanding Stock options exercisable

Range of exercise prices $

Numberoutstanding

as atNovember 30,

2008

Weightedaverage

remainingcontractuallife (years)

Weightedaverageexercise

price$

Numberexercisable

as atNovember 30,

2008

Weightedaverageexercise

price$

5–10 989,800 2.64 7.23 532,780 6.66

11–20 36,600 4.22 11.65 7,320 11.65

Deferred share unit planDuring 2007, the board of directors adopted a deferred share unit plan (DSU Plan) for the purposes of strengthening the alignment of interests between the directors and the share-holders of the Company, by linking a portion of annual director compensation to the future value of the Company’s common shares, in lieu of cash compensation. Under the DSU Plan, each director receives on the date in each quarter which is three business days following the publication by the Company of its earnings results for the previous quarter, that number of DSUs having a value equal to up to 100% of such director’s base retainer for the current quarter, provided that a minimum of 50% of the base retainer must be in the form of DSUs. The number of DSUs granted to a director is determined by dividing the dollar value of the portion of the director’s fees to be paid in DSUs by the closing price of the Company’s shares on the TSX for the business day immediately preceding the date of the grant. At such time as

a director ceases to be a director, the Company will make a cash payment to the director equal to the closing price of the Company’s common shares on the date of departure, multiplied by the number of DSUs held by the director on that date.

A summary of the status of the Company’s DSU Plan as at November 30 and the changes during the year are presented below:

2008 2007

Number of DSUs

Number of DSUs

Outstanding — Beginning of year 4,000 —

Issued during the year 15,000 4,000

Outstanding — End of year 19,000 4,000

The fair value of DSUs outstanding as at November 30, 2008 is $101,000 (2007 — 41,000).


33



9 Earnings per shareThe calculation of basic earnings per share is based on the weighted average number of shares outstanding during the year of 13,999,000 (2007 — 13,971,000). The calculation of diluted earnings per share is based on a weighted average number of shares outstanding during the year of 14,093,000 (2007 — 14,265,000), which in-cludes an adjustment for dilutive stock options.

10 Financial risk and capital managementThe Company’s business is the management of investment assets. The key performance driver of the Company’s ongoing results is the level of assets under management. The level of assets under management is directly tied to investment returns and the Company’s ability to retain existing assets and attract new assets.

The Company’s consolidated balance sheets include a portfolio of investments. The value of these investments is subject to a number of risk factors. While a number of these risk factors also affect the value of client assets under man-agement, the following discussion relates only to the Company’s own portfolio of investments.

The Company’s exposure to potential loss from its financial instruments investments is primarily due to market risks, including interest rate and equity market fluctuation risk, liquidity risk as well as credit risk.

Market riskMarket risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, equity market fluctuations and other relevant market rate or price changes. Market risk is directly influenced by the vola-tility and liquidity in the markets in which the related underlying assets are traded. Below is a discussion of the Company’s primary market risk exposures and how these exposures are currently managed.

Interest rate riskFluctuations in interest rates have a direct im-pact on the market valuation of the Company’s fixed income securities portfolio. Generally, the Company’s investment income will be reduced during sustained periods of lower interest rates as higher yielding fixed income securities are called, mature or are sold and the proceeds are reinvested at lower rates. During periods of rising interest rates, the fair value of the Company’s existing fixed income securities will generally decrease. The table that follows shows the potential impact of interest rate fluctuations on OCI relating to the Company’s corporate debt securities portfolio as at November 30, 2008, based on parallel 200 basis point shifts in interest rates up and down in 100 basis point increments.

As at November 30, 2008, the impact of rate fluctuations is as follows:

Change in interest rates

Fair value of fixed income

portfolio $

Hypothetical change in fair value

%

Effect on OCI (pre-tax)

$

200 basis point rise 4,189 (4.94) (217)

100 basis point rise 4,298 (2.47) (108)

No change 4,407 — —

100 basis point decline 4,516 2.47 108

200 basis point decline 4,688 4.94 217

34



All corporate debt securities mature within five years, and their interest rates range from 4.35–10.80%. Computations of the prospective effects of hypothetical interest rate changes are based on numerous assumptions, including the maintenance of the existing level and composi-tion of fixed income available-for-sale financial assets at the indicated date, and should not be relied on as indicative of future results. Actual values may differ from the projections presented should market conditions vary from assump-tions used in the calculation of the fair value of individual securities (for example a change in individual issuer credit spreads).

Equity market fluctuation riskFluctuations in the value of equity securities af-fect the level and timing of recognition of gains and losses on equity and mutual fund securities held in the Company’s portfolio, and causes changes in realized and unrealized gains and losses. General economic conditions, political conditions and many other factors can also adversely affect the stock and bond markets and, consequently, the value of the equity, mutual fund and fixed income available-for-sale finan-cial assets held.

The Company’s investment portfolio is managed by the Company with a medium risk mandate. The Company’s particular expertise is investment management and, as part of its daily operations, it has resources to assess and manage the risks of a portfolio. The Company’s portfolio of equity and equity-related securities as at November 30, 2008 comprises preferred shares with a fair value of $492,000 and mutual fund investments under the management of the Company with a fair value of $3,292,000. Mutual fund investments comprise a well diversified portfolio of Canadian investments. Preferred shares and mutual fund units have no specific maturities.

The table below summarizes the potential impact of a 10% change in the Company’s equity and equity-related holdings on OCI as at November 30, 2008. Certain shortcomings are inherent in the method of analysis presented, as the analysis is based on the assumptions that

all equity and equity-related holdings have increased/decreased by 10% with all other vari-ables held constant.

Change in equity-related holdings

Effect on OCI (pre-tax)

$

10% rise 378

10% decline (378)

Liquidity riskLiquidity risk is the risk that an entity will encounter difficulty in raising funds to meet cash flow commitments associated with financial instruments. The purpose of liquidity management is to ensure that there is sufficient cash to meet all financial commitments and obligations as they fall due. The Company has financial liabilities of $6,038,000 (2007 — $7,254,000), comprising of accounts payable and accrued liabilities and bonuses due to employees with $4,981,000 due within one year (2007 — $7,254,000) and $1,057,000 due within two years (2007 — $nil). To manage short-term cash flow requirements, the Company maintains a portion of invested assets in liquid short-term notes. As at November 30, 2008, the Company holds $7,362,000 in short-term notes. The short-term notes have maturities up to six months and are issued by the Government of Canada. The Company does not hold any non-bank, asset-backed commercial paper.

Credit riskCredit risk is the risk that one party to a financial instrument fails to discharge an obligation and causes financial loss to another party. The Company is exposed to credit risk principally on its corporate debt securities. The Company’s risk management strategy is to invest primarily in debt instruments of high credit quality issuers and to limit the amount of credit exposure with respect to any one issuer. The breakdown of the Company’s corporate debt portfolio, by the higher of the S&P, Moody’s and DBRS Inc. credit ratings as at November 30, 2008 is presented below.


35



Credit rating

Corporate debt securities

$

AA+ 1,100

AA 544

AA- 1,018

A 1,489

A- 256

The accounts receivable relate to management fees from the funds and client accounts man-aged by the Company. Credit risk for these accounts receivable is managed by dealing with counterparties the Company believes to be creditworthy. All accounts receivable are within the credit terms.

Cash is held at an AAA rated bank.

Capital managementThe Company’s capital comprises equity, including capital stock, contributed surplus and retained earnings. The Company has no issued debt. The Company’s objectives when managing

capital are to maintain financial strength, manage liquidity requirements, maintain compliance with regulatory capital require-ments and maximize returns for shareholders over the long term. In addition, the Company has historically maintained a dividend policy of paying out a substantial portion of its earnings each quarter. The Company’s registration with securities commissions in Canada requires it to maintain a minimum free capital of $15,000.

11 Income taxesFuture income taxes have been recorded to reflect the deduction of all payments made under the stock purchase incentive plans (note 4) on a current basis for income tax purposes, while deferring and amortizing portions for ac-counting purposes, as well as differences between accounting and income tax values for available-for-sale financial assets.

The future income tax asset includes estimated future income taxes on unrealized capital losses from available-for-sale financial assets of $338,000.

For the years ended November 30, 2008 and 2007, the Company’s effective income tax rate comprises the following:

2008

%2007

%

Statutory rate 33.50 36.12

Adjustments

Non-taxable portion of investment income (0.23) (0.19)

Non-deductible expenses 1.37 1.10

Utilization of capital loss not previously recognized (0.56) (1.19)

Non-taxable portion of capital gains (0.34) (1.72)

Others — net (0.16) (0.32)

Effective income tax rate 33.58 33.80

36



The income tax effects of temporary differences which gave rise to future income tax assets and liabilities are as follows:

Future income tax asset (liability)2008

$2007

$

Unrealized capital losses (gains) from available-for-sale financial assets 338 (116)

Carrying values of furniture, equipment and leaseholds in excess of income tax values (59) (32)

Carrying value of intangible assets and goodwill in excess of income tax values (165) (17)

Accrued expenses payable after 180 days 607 —

Deferred compensation (note 4) — (461)

Deferred share units (note 8) 29 —

Discounts on available-for-sale financial assets 4 11

Loss carry-forwards 42 —

Prepaid expenses 3 —

799 (615)

Less: Current portion 346 (450)

Future income tax asset (liability) — long-term portion 453 (165)

12 Lease commitmentEffective November 30, 2008, the Company is committed under an operating lease for premises as follows:

$

2009 358,000

2010 385,000

2011 387,000

2012 363,000

2013 and beyond 20,000

1,513,000

13 Future changes in accounting standardsThe Company is required to convert to International Financial Reporting Standards (IFRS) by the 2012 fiscal year. The Company will develop a changeover plan to IFRS during the 2009 fiscal year. The key elements of the plan will include disclosure of the qualita-tive impact in the 2010 annual consolidated financial statements, the disclosures of the quantitative impact, if any, in the 2011 consolidated financial statements and the preparation of the 2012 consolidated financial statements with comparatives in accordance with IFRS.

14 Segmented informationManagement has determined that the Company’s dominant industry segment is in-vestment management services in Canada. All of the Company’s assets are located in Canada.


37



The objective of good corporate governance is to enhance value for all stakeholders over the long term. At Sceptre, we believe that in order to achieve this goal, our first priority must be to achieve supe-rior investment results for our clients. We depend on our employees to deliver those results. If we do well by each of these key stakeholder groups, shareholders will benefit in the long run.

Board CompositionThe Board consists of seven directors, six of whom are independent. The independent directors are not employees of the Company, are not parties to material contracts with Sceptre and do not receive remuneration from the Company in excess of direc-tors’ fees. Sceptre believes the size and composition of the Board are well suited to the circumstances of the Company.

Review of Corporate Governance PracticesThe Board of Directors has responsibility for the stewardship of the Company. The Board’s key functions are to approve the direction of corpo-rate strategy, supervise risk management, evaluate the performance of the Company and its senior management and, concurrently, maintain full accountability to shareholders. In performing these tasks the Board acts independently from manage-ment. All directors are nominated on the basis of experience and professional expertise.

The Board is not large and has functioned most effectively by using the contribution of all members in nominating new members. The Chairman facili-tates the process and all directors participate fully in discussions and the final decision.

Board effectiveness is the responsibility of the Chairman. To date the process of evaluating the contribution of individual Board members, com-mittee work and Board decision making, as well as the communication of the findings, has been informal but nonetheless effective. W. Ross Walker, the Board’s Chairman, is an independent director and is not a member of management. He has the role of ensuring the Board fully discharges its responsibilities.

The Board meets without management present at the end of each Board meeting and all Board members can and do interact with management as situations arise.

Sceptre conducts an informal orientation and education program for new independent direc-tors. All independent Board members have full and ready access to the managing directors at all times and may engage an outside advisor at the expense of the Company in appropriate circumstances and subject to the approval of the Board. The Corporate Secretary provides the Board members with infor-mation on industry and regulatory changes on an

ongoing basis. Such information includes bulletins and reports issued by the Company’s legal counsel and external auditors. In addition, Board members may request financial assistance to attend educa-tional presentations designed to provide relevant industry background.

The Audit, Executive Compensation, Governance and Nominating Committees are exclusively com-posed of independent directors. No formal position description of the Board and the limits of manage-ment’s responsibilities have been established. With the small size of the Board, the high level of experi-ence among the members, and the open working relationship between the independent directors and management, the need for formalized descriptions is considered minimal.

The Governance Committee is chaired by Robert G. Thomson and is responsible for developing the Company’s approach to corporate governance issues. Within this mandate, it has the responsibility of reviewing the size of the Board. The current year review has concluded that a six member Board is appropriate. The Committee has also concluded that the composition does not require any change and that the compensation of independent directors is fair. The Chief Executive Officer does not receive directors’ fees for his services.

The Executive Compensation Committee is chaired by David Shaw and administers the Company’s compensation policy.

The Audit Committee is chaired by Patricia Meredith, who has extensive financial experience. The mandate of the Committee is to assist the Board of Directors in fulfilling its oversight responsibili-ties for the financial reporting process, the system of internal control over financial reporting, and the Company’s process for monitoring compliance with laws and regulations and the code of conduct. The Audit Committee recommends the appointment of the external auditors and their compensation, oversees the audit process, facilitates better com-munication between the Directors and the external auditors, and increases the credibility and objec-tivity of financial reports. The Audit Committee has authority to conduct or authorize investigations into any matters within its scope of responsibility. Key procedures carried out by this committee are the detailed review of interim and year-end financial statements for completeness and appropriateness of accounting policies; review of the scope and plan of approach of the external auditors, including an assessment of their independence and the level of their remuneration; and evaluation of the system of internal control. The Audit Committee meets regu-larly and holds in-camera meetings with and without the external auditors after most meetings.

corporate governance 38

Board of DirectorsCorporate Governance


board of directors

W. Ross Walker, FcaChairman of the Board Director since 1997

Ross Walker is the former Chairman and Chief Executive of KPMG Canada, a position he held from 1989 to 1993. From 1993 to 1996, Mr. Walker served as International Executive Partner of KPMG International. He is a member of the Board of Directors of three corporations. Mr. Walker was appointed Sceptre’s Chairman in May 2003.

Glenn R. Inamoto*, MBa, cFaChief Executive Officer,Sceptre Investment Counsel LimitedDirector since 2008

Glenn Inamoto joined Sceptre in 1999 as a member of the Canadian Equity Portfolio Management Team. His responsi-bilities included both Canadian equity and Integrated equity portfolios. In October 2008, Mr. Inamoto was appointed Chief Executive Officer and Chief Investment Officer. He continues to focus on his role as Senior Canadian Equity Portfolio Manager on a day-to-day basis.

Prior to joining Sceptre, Mr. Inamoto was a Senior Equities Analyst for the U.S. portfolio at OMERS and Portfolio Manager of OMERS’ Canadian Equity Core Fund.

George P. Jameson, MBaFounding Partner, Dearborn Partners LLCDirector since 2007

George P. Jameson is a founding partner of Dearborn Partners LLC of Chicago, Illinois, a billion dollar asset management company. Prior to Dearborn, Mr. Jameson was Managing Director and head of U.S. Fixed Income at a BMO Nesbitt Burns organization and spent 15 years with Goldman Sachs & Company in Philadelphia, New York and Chicago. Mr. Jameson is a graduate of Georgia Tech University and received his MBA from Emory University in Atlanta, Georgia.

Patricia Meredith, FcaSenior Advisor, Monitor Group Director since 2002

Patricia Meredith is a Professional Associate and Senior Advisor with strategy consulting firm Monitor Group. Ms. Meredith was Executive Vice-President, corporate strategy at Canadian Imperial Bank of Commerce and a member of the bank’s senior executive team. She has also served as a director of several organizations, including TAL Asset Management Ltd. and CIBC Mortgages Inc.

arthur R. a. Scace, c.M., q.c.Corporate DirectorDirector since 1989

Arthur Scace is the former national Chairman of McCarthy Tétrault LLP and former managing partner of the Toronto office. He serves on the Board of Directors of a number of Canadian corporations.

Robert G. Thomson, q.c.President, Rovalex Investments Inc.Director since 2005

Robert Thomson is the President of Rovalex Investments Inc. a privately held investment company. He formerly practiced corporate law in Toronto and has served as a director of sev-eral private and public companies, foundations and charitable organizations.

David R. ShawPresident and Chief Executive Officer, Knightsbridge Human Capital ManagementDirector since 2006

David Shaw is the Founder, President and Chief Executive Officer of Knightsbridge Human Capital Management. Mr. Shaw was formerly Chief Executive Officer of PepsiCola Canada Beverages and, prior to his role as CEO, he spent 22 years with PepsiCo International holding executive assignments in Australia, Southeast Asia and Turkey. He has served as the Chairman of the North York General Hospital Foundation and is a member of the Queen’s School of Business Advisory Board.

*Non-independent director

Board of Directors

39

Board of DirectorsCorporate Governance


senior officers

NameYears in

InvestmentsYears at Sceptre Age Position

John H. Bai, CA, CFA 10 4 39 Vice-President

John J. Brophy, BSC, FCIA, CFA 23 10 59 Managing Director

D. Nicholas Cape, MBA 12 7 39 Vice-President

Michael W. Chan, MBA, CFA 14 1 42 Vice-President

Tom Czitron, MBA, CFA 28 6 51 Managing Director

Garreth G. Fallis, BA, CFA 20 2 46 Vice-President

Laura Filippetto, BSC 19 16 41 Vice-President

Timothy A. G. Hylton, BA, CFA 17 16 41 Managing Director

Glenn R. Inamoto, MBA, CFA 23 9 50 Chief Executive Officer & Managing Director

Jean-Francois Lemay, BSC, FSA, FCIA 15 4 39 Vice-President

Robert R. Lorimer, BSC 21 12 55 Vice-President

Leslie A. Macdonald 20 20 44 Vice-President

D. Walter McCormick, BA, CFA 29 2 51 Managing Director

David R. Morris, CA 18 3 44 Managing Director, Chief Financial Officer

and Chief Operating Officer

Gopa Nair, MSC, MBA, CFA 13 5 39 Vice-President

Mira Newport, BCOMM 20 10 41 Vice-President

David B. Pennycook, BCOMM 29 17 54 President & Managing Director

Glen C. Rattray, BCOMM, CFA 24 2 46 Vice-President

Mario D. Richard, BMATH, CFA 27 11 53 Managing Director

Sunil Shah, MHSC, MBA, CFA 12 4 40 Vice-President

F. John Stittle, BA, CFA 38 20 63 Managing Director

James A. Sutherland 24 10 52 Managing Director

Paul L. Valois, BCOMM, FCSI 40 2 60 Vice-President

David Wai, P. ENG, CFA 14 5 37 Vice-President

Senior Officers

40

Senior Officers

TI_sceptre_ar-BACK-v7.indd 40 18/03/09 11:40 AM

corporate information

Managing DirectorsJohn J. Brophy Tom CzitronTimothy A. G. HyltonGlenn R. InamotoD. Walter McCormickDavid R. MorrisDavid B. Pennycook Mario D. RichardF. John StittleJames A. Sutherland

Head Office 26 Wellington Street East12th FloorToronto, OntarioCanada M5E 1W4Tel: 416-601-9898Fax: 416-367-8716Email: [email protected]: www.sceptre.ca

Transfer Agent & RegistrarComputershareInvestor Services Inc.100 University AvenueToronto, OntarioCanada M5J 2Y1Tel: 416-263-9701

AuditorsPricewaterhouseCoopers LLP

Legal CounselCassels Brock & Blackwell LLP

Stock Exchange ListingCommon shares (“SZ”)Toronto Stock Exchange

Annual MeetingSt. Andrew’s Club & Conference Centre150 King Street West27th FloorToronto, OntarioCanada M5H 1J9Monday, May 4, 20093:00 pm

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Senior Officers


Sceptre Investment Counsel Limited26 Wellington Street East, 12th Floor Toronto, Ontario, Canada M5E 1W4

www.sceptre.ca


Investor Relations

Sceptre Investment Counsel 2008 Annual Report