Western Financial Group Inc. - MRRS Decision

Headnote

Mutual Reliance Review Systemfor Exemptive Relief Applications - issuer bid - relief grantedfrom the valuation requirement in connection with an offer bythe issuer for its out-of-the-money convertible debentures -issuer representing in order that convertibility feature isof no material value and debentures trade only on the issuer'sunderlying creditworthiness - offer otherwise to be made incompliance with issuer bid requirements - offer document toinclude summary of financial opinion on convertibility feature.

Applicable Ontario RulesCited

Rule 61-501 - Insider Bids,Issuer Bids, Going Private Transactions and Related Party Transactions,ss. 3.3, 3.4(1) and 9.1.

IN THE MATTER OF

THE SECURITIES LEGISLATIONOF

ALBERTA, BRITISH COLUMBIA,ONTARIO AND

QUEBEC

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEWSYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

WESTERN FINANCIAL GROUP INC.

MRRS DECISION DOCUMENT

WHEREAS the local securitiesregulatory authority or regulator (the "Decision Maker")in each of Alberta, British Columbia, Ontario and Quebec (the"Jurisdictions") has received an application fromWestern Financial Group Inc. ("Western" or the "Corporation")for a decision under the securities legislation of the Jurisdictions(the "Legislation") that in connection with Western'soffer to acquire all of its issued and outstanding 10% convertibleredeemable subordinated debentures (the "Original Debentures"),which were issued on June 17, 1998, in exchange for either:(i) cash (subject to a maximum amount of $2,000,000 in cash),(ii) the issuance of 9% convertible unsecured subordinated debentures(the "New Debentures"), or (iii) a combination ofcash and New Debentures, that Western shall be exempted fromthe requirements in the Legislation to obtain a formal valuationof the Original Debentures and the New Debentures (the "ValuationRequirements").

AND WHEREAS under theMutual Reliance Review System for Exemptive Relief Applications(the "System"), the Alberta Securities Commissionis the principal regulator for this application;

AND WHEREAS Western hasrepresented to the Decision Makers that:

1. Western was incorporatedas 674658 Alberta Inc. under the Business CorporationsAct (Alberta) on November 14, 1995 and its name was changedto Hi-Alta Capital Inc. on January 22, 1996, after which itcommenced active business operations. The name of the Corporationwas then changed to Western Financial Group Inc. on May 27,2002.

2. The common shares in thecapital of Western (the "Common Shares") and a seriesof 9% convertible unsecured subordinated debentures whichwere issued on February 26, 2002 (the "February Debentures")are listed and posted for trading on the Toronto Stock Exchange.

3. Western is a reportingissuer in the provinces of British Columbia, Alberta, Saskatchewan,Manitoba, Ontario and Quebec. To the best of its knowledge,Western is not in default of any requirement of the securitieslegislation of these provinces and the rules and regulationsthereunder. The authorized capital of Western consists ofan unlimited number of common shares, an unlimited numberof first preferred shares, and an unlimited number of secondpreferred shares. Western has created and authorized the issuanceof 500 First Preferred Shares, Series One. As at April 4,2001, 11,539,775 Common Shares of the Corporation were issuedand outstanding and there were no first preferred shares orsecond preferred shares issued and outstanding. In addition,as at the same date, Western has $28,000,000 in aggregateprincipal amount of convertible debentures outstanding (thisincludes $6,000,000 in Original Debentures and $7,000,000in February Debentures).

4. The Common Shares closedat $2.35 per Common Share at the close of business on April17, 2002 and the February Debentures closed at $96.00 perDebenture at the close of business on April 8, 2002, the lastday of which the Debentures traded.

5. Western issued $6,000,000in aggregate principal amount of Original Debentures on June17, 1998. The interest rate on such debentures is 10% perannum which is payable semi-annually in arrears on June 30and December 31 in each year. These Original Debentures areconvertible at any time at the option of the holder into CommonShares at a deemed price of $3.80 (subject to adjustment)per share. The Original Debentures are redeemable by the Corporationin the event that the Common Shares are trading at $6.00 pershare (on a 20 day weighted average basis) for cash or CommonShares. The maturity date of the Original Debentures is June30, 2003. The Original Debentures are not listed on any stockexchange. The Original Debentures are subordinated to seniorindebtedness of the Corporation, which includes bank indebtedness,and are secured.

6. Western intends to issueup to $6,000,000 in aggregate principal amount of New Debentureswhich will have terms identical to the February Debentures.Accordingly, the New Debentures will bear interest at 9% perannum which will be payable semi-annually in arrears on June30 and December 30 in each year. These New Debentures willbe convertible at any time at the option of the holder intoCommon Shares at a deemed price of $2.50 (subject to adjustment)per share. The New Debentures will be redeemable by the Corporationin the event that the Common Shares are trading at 124% ofthe conversion price of $2.50 per share (on a 20 day weightedaverage basis) for cash or Common Shares. The maturity dateof the New Debentures is February 28, 2007. The principalwill be repayable at the option of the Corporation in CommonShares on maturity. Western intends to apply to have the NewDebentures listed and posted for trading on the Toronto StockExchange. The New Debentures will be subordinate to seniorindebtedness of the Corporation, including bank indebtedness,and will not be secured.

7. Western intends to makea securities exchange issuer bid (the "Bid") forall of the issued and outstanding Original Debentures. Westernwould offer to acquire the Original Debentures in exchangefor: (i) an amount of cash equal to the principal of the OriginalDebentures, (ii) an equal principal amount of New Debentures,or (iii) a combination of cash and New Debentures equal tothe principal amount of the Original Debentures.

8. To the best of the Corporation'sknowledge, information and belief, none of the Original Debenturesare currently owned by any insiders of the Corporation.

9. The acquisition of theOriginal Debentures pursuant to the Bid is permissible underthe terms of the trust indenture governing such Original Debentures.

10. The Bid is being madeto provide holders of Original Debentures with an opportunityto realize an immediate cash return for all or a portion oftheir investment in the Corporation and to provide holderswhich elect to receive New Debentures, an opportunity to extendtheir investment in the Corporation, with improved liquidityand a conversion feature at a price closer to the currentmarket price of the Common Shares.

11. In a letter (the "OpinionLetter") dated June 4, 2002, J. D. McCormick FinancialServices, Inc. advised the Corporation that in its opinionthe convertibility feature of the Original Debentures is ofno material value.

12. The Bid will be made incompliance with all applicable securities laws and wil l includeprospectus level disclosure on Western and the New Debentures.

13. The issuer bid circularprovided to the holders of the Original Debentures in connectionwith the Bid will include a summary of the Opinion Letter.

14. Pursuant to the Legislation,subject to certain exceptions, in the context of an issuerbid, the issuer must obtain a valuation of its securities,and the issuer bid circular must, subject to any waiver orvariation consented to in writing by the Executive Director(or his or her counterpart in the other provinces), containa summary of the valuation of its securities.

AND WHEREAS under theSystem, this MRRS Decision Document evidences the decision ofeach Decision Maker (collectively the "Decision");

AND WHEREAS each of theDecision Makers is satisfied that the test contained in theLegislation that provides the Decision Maker with the jurisdictionto make the Decision has been met;

THE DECISION of the DecisionMakers under the Legislation is that Western is exempt fromthe Valuation Requirements contained in the Legislation withrespect to the Bid provided that Western complies with all applicablesecurities laws in making the Bid, which would include providingprospectus level disclosure on Western and the New Debenturesto the holders of Original Debentures.

June 11, 2002.

"Agnes Lau"