Interim Financial statements (unaudited) of. Lysander Bond Fund

Transcription

1 Interim Financial statements (unaudited) of Lysander Bond Fund For the six month period ending June 30, 2014 and 2013

2 For the six month period ending June 30, 2014 and 2013 Table of contents Statements of financial position... 3 Statements of comprehensive income... 4 Statements of changes in net assets attributable to holders of redeemable units... 5 Statements of cash flows... 6 Schedule of investment portfolio Notes to the financial statements

3 Statements of Financial Position (unaudited) As at June 30, 2014, December 31, 2013 and January 1, Jun Dec-13 1-Jan-13 $ $ $ Restated (Note 11) Restated (Note 11) Assets Cash and cash equivalents - 89,202 21,660 Subscriptions receivable 650,340 31,900 - Reimbursement receivable - 54,417 21,405 Accrued interest 293, ,365 18,516 Investments at fair value through profit or loss at inception* 42,414,824 20,009,306 2,569,353 43,359,097 20,330,190 2,630,934 Liabilities Bank overdraft 42,115 Redemption Payable 3,948 7,758 - Accrued expenses 74,120 46,377 18,548 Due to investment dealer 356,936 95, , ,293 18,548 Net assets attributable to holders of redeemable units 42,881,978 20,180,897 2,612,386 Net assets attributable to holders of redeemable units, by Series Series A 14,312,435 6,431, ,244 Series F 28,569,543 13,749,290 1,963,142 Total net assets 42,881,978 20,180,897 2,612,386 Number of redeemable units outstanding Series A 1,361, ,409 62,486 Series F 2,735,486 1,347, ,790 Net assets per redeemable unit Series A Series F *Financial assets at cost 41,756,058 20,088,647 2,560,965 Signed on behalf of Lysander Funds Limited, as Manager and Trustee Director Director The accompanying notes form an integral part of the financial statements. Page 3

4 Statements of Comprehensive Income (unaudited) For the six-month periods ending June 30, 2014 and June 30, Jun Jun-13 $ $ Restated (Note 11) Income Interest for distribution purposes and other 656,000 64,702 Realized and unrealized gain (loss) on investments Net realized gain (loss) on investments sold 2,850 (1,874) Change in unrealized (depreciation) appreciation on investments 738,103 (101,126) Total operating income 1,396,953 (38,298) Expenses Management fees (Note 4) 155,892 16,434 Fund administration fees 13,800 1,771 Filing Fees 10,141 5,000 Legal Fees 4,000 25,936 Custodial fees 3,433 (160) Foreign taxes withheld 2,077 - Audit fees ,288 Independent Review Committee fees Miscellaneous expenses Unitholder reporting expense Bank charges - 13 Total operating expenses 191,373 59,487 Expense reimbursement - (38,573) Total operating expenses net of expense reimbursement 191,373 20,914 Increase in net assets attributable to holders of redeemable units 1,205,580 (59,212) Increase in net assets attributable to holders of redeemable units per Series Series A 341,675 (25,860) Series F 863,905 (33,352) 1,205,580 (59,212) Increase in net assets attributable to holders of redeemable units per unit Series A 0.33 (0.18) Series F 0.37 (0.18) The accompanying notes form an integral part of the financial statements. Page 4

5 Statements of Changes in Net Assets Attributable to Holders of Redeemable Units (unaudited For the six-month periods ending June 30, 2014 and June 30, Jun Jun-13 $ $ Net assets attributable to holders of redeemable units, beginning of period 20,180,897 2,612,386 Increase in net assets attributable to holders of redeemable units 1,205,580 (59,212) Distributions to unitholders of redeemable units From net investment income (451,620) (43,114) From management fee rebate income (2,668) - (454,288) (43,114) Redeemable unit transactions: Proceeds from redeemable units issued Series A 8,266,227 2,074,082 Series F 19,828,385 2,115,928 28,094,612 4,190,010 Cost of units redeemed Series A (655,036) (76,023) Series F (5,724,959) (1,319,571) (6,379,995) (1,395,594) Reinvested distributions Series A 61,029 12,297 Series F 174,143 14, ,172 26,363 21,949,789 2,820,779 Increase in net assets attributable to holders of redeemable units for the period 22,701,081 2,718,453 Net assets attributable to holders of redeemable units, end of period 42,881,978 5,330,839 Series A Net assets attributable to holders of redeemable units, beginning of period 6,431, ,244 Increase in net assets attributable to holders of redeemable units 341,675 (25,860) Distributions to unitholders of redeemable units From net investment income (132,492) (17,713) From management fee rebate income (575) - (133,067) (17,713) Redeemable unit transactions: Proceeds from redeemable units issued 8,266,227 2,074,082 Cost of units redeemed (655,036) (76,023) Reinvested distributions 61,029 12,297 7,672,220 2,010,356 Increase in net assets attributable to holders of redeemable units for the period 7,880,828 1,966,783 Net assets attributable to holders of redeemable units, end of period 14,312,435 2,616,027 Series F Net assets attributable to holders of redeemable units, beginning of period 13,749,290 1,963,142 Increase in net assets attributable to holders of redeemable units 863,905 (33,352) Distributions to unitholders of redeemable units From net investment income (319,128) (25,401) From management fee rebate income (2,093) - (321,221) (25,401) Redeemable unit transactions: Proceeds from redeemable units issued 19,828,385 2,115,928 Cost of units redeemed (5,724,959) (1,319,571) Reinvested distributions 174,143 14,066 14,277, ,423 Increase in net assets attributable to holders of redeemable units for the period 14,820, ,670 Net assets attributable to holders of redeemable units, end of period 28,569,543 2,714,812 The accompanying notes form an integral part of the financial statements. Page 5

6 Statements of Cash Flows (unaudited) For the six-month periods ending June 30, 2014 and June 30, Jun Jun-13 $ $ Cash flows used in operating activities Increase in net assets attributable to holders of redeemable units 1,205,580 (59,212) Adjustments for: Net realized loss (gain) on sales of investments (2,850) 1,874 Change in unrealized (appreciation) depreciation of investments (738,103) 101,126 Purchases of investments (33,102,964) (4,396,551) Proceeds from sale and maturity of investments 11,438,401 1,598,866 Accrued interest and dividends (148,570) (26,878) Reimbursements receivable 54,417 (17,169) Subscriptions receivables (618,440) (20,000) Due to investment dealers 261,778 - Redemption payable (3,810) 1,622 Accrued expenses 27,743 8,868 Net cash used in operating activities (21,626,818) (2,807,454) Cash flows used in financing activities Distributions paid to holders of redeemable units, net of reinvested distributions (219,116) (16,751) Proceeds from issuances of redeemable units 28,094,612 4,190,010 Amounts paid on redemption of redeemable units (6,379,995) (1,395,594) Net cash from financing activities 21,495,501 2,777,665 Increase in cash and cash equivalents during the period (131,317) (29,789) Balance of cash and cash equivalents, beginning of period 89,202 21,660 Cash and cash equivalents, end of period (42,115) (8,129) Supplemental cash flow disclosure Cash Interest received 507,432 37,824 The accompanying notes form an integral part of the financial statements. Page 6

7 Schedule of Investment Portfolio (unaudited) As at June 30, 2014 Par value/# of shares Average cost Fair value $ $ Bonds (19.3%) 562,000 Central 1 Credit Union FRN April 28, 2015 (3M CDOR +45) 562, , ,000 Cogeco Cable 4.925% Feb 14, , ,013 39,000 Cogeco Cable Inc % May 26, ,623 40, ,000 Enbridge Inc. FRN Aug 19, 2015 (Q CDOR +100) 200, , ,000 G.T.A.A. (amort) 6.45% Jul 30, , ,718 36,000 GE Capital Canada FRN Feb 15, 2022 (Q CDOR +35) 33,020 35, ,000 GE Capital Canada FRN Feb 6, 2023 (Q CDOR +120) 627, ,158 44,000 Hwy 407 Jr Secured 7.125% 26 Jul ,353 62,639 1,259,000 Hydro One FRN Dec 3, 2016 (Q CDOR + 37) 1,261,001 1,264,558 67,000 Loblaws 6.15% Jan 29, ,845 78,688 79,000 Loblaws 6.45% Feb ,798 94,815 13,000 Loblaws 6.50% Jan 22, ,947 15,628 25,000 Loblaws 6.54% Feb 17, ,848 30, ,000 Loblaws 6.85% Mar 1, , , ,000 Nav Canada (amort) 7.56% Mar 1, , , ,000 Nova Gas 9.90% 16 Dec , , ,000 Rogers Communication Inc. 6.11% Aug 25, , ,634 7,000 Rogers Communication Inc. 6.56% Mar 22, ,368 8, ,000 Shaw Communications Inc 6.75% Nov 9, , ,077 1,133,000 SNC Lavalin 6.19% Jul 3, ,284,969 1,307, ,341 Toronto Hospital Secured (amort) 5.64% Dec 8, , ,260 8,092,749 8,286,236 Foreign Fixed Income (39.6%) 111,000 BNG 4.55% Feb 15, , , ,000 Caisse Francaise de Financement Local 4.625% May 30, , , ,000 Caisse Francaise de Financement Local 5.0% Mar 9, , , ,000 Depfa ACS Bank 4.90% Aug 24, ,326 1,041, ,000 Depfa ACS Bank 5.25% Mar 31, ,746 1,126, ,000 Eurofima 5.15% Dec 13, , ,446 40,000 Goldman Sachs 3.375% Feb 1, ,443 41, ,000 Goldman Sachs 5.0% May 3, , , ,000 Heathrow Funding Limited 4.0% Jul 3, , ,262 1,171,000 Heathrow Funding Limited 3.0% Jun 17, ,162,077 1,178, ,000 Hypothekenbank FRA LUX 4.38% Dec 15, , , ,000 KFW 1.875% Jun 13, , ,746 1,057,000 KFW 5.05% Feb 4, ,210,638 1,225, ,000 Kimco North Trust III 5.99% April 13, , , ,000 Lloyds Bank PLC 5.28% Apr 19, , , ,000 Met Life FRN Sep 25, 2017 (Q CDOR +102) 553, ,683 2,574,000 Met Life Global Funding I 3.107% Apr 16, ,578,750 2,631, ,000 National Grid Electricity Trans FRN Jan 25, 2018(Q CDOR +86) 463, ,163 30,000 Neder Waterschapsbank 5.20% Mar 31, ,242 33,964 71,000 Principal Fin. Gl. Fdn II 4.65% Oct 11, ,352 74, ,000 Royal Bank of Scotland PLC 10.50% Mar 16, , ,125 1,982,000 Royal Bank of Scotland PLC 5.875% May 12, ,143,961 2,098,982 1,263,000 Unicredit FRN May 29, 2018 (Q CDOR +217) 1,284,676 1,319,076 16,535,122 16,983,871 The accompanying notes form an integral part of the financial statements. Page 7

8 Schedule of Investment Portfolio (unaudited) As at June 30, 2014 Par value/# of shares Average cost Fair value $ $ Mortgage Backed Securities (25.3%) 7,700,000 Claregold Trust A A % Jun 15, ,803,230 1,796,817 1,905,000 Concentra NHA MBS ( ) % May 15, ,898,633 1,896, ,501 Equitable Trust NHA MBS ( ) 4.35% Jan 1, , , ,000 First National NHA MBS ( ) 2.29% Oct 1, , , ,000 Merrill Lynch NHA MBS ( ) 1.9% April 01, , ,137 2,328,000 Merrill Lynch NHA MBS ( ) 1.8% Jun. 1, ,313,264 2,313, ,000 MLFA 2006-CA19 A % Jun 12, , , ,000 MLFA 2007-CA21 A % Oct 12, 2016/ , ,810 2,057,000 MLFA 2007-CA22 A % Oct 12, , , ,000 MLFA 2007-CA23 A % Aug 12, , ,469 49,473 Peoples Trust NHA MBS ( ) 4.20% Oct 1, ,914 48,993 84,457 RBC NHA MBS ( ) 3.55% Sep 1, ,998 71, ,000 REALT A % Sep 12, 2016/ , , ,000 Schooner Trust A % Feb 12, 2017/ , ,329 2,173,000 TD Bank NHA MBS ( ) 2.05% Dec 1, ,944,819 1,952,544 10,864,787 10,848,239 Private Placements (14.7%) 515,000 Arrow Lakes Power Corp 5.516% Apr 5, 2041 Series B 588, , ,000 Bankers Hall LP (amort) 4.377% November 20, , ,920 78,000 Honda Canada Finance Inc FRN Dec 3, 2015 (Q CDOR +42) 78,263 78, ,000 Honda Canada Finance Inc FRN Feb 23, 2015(Q CDOR +95) 895, , ,000 Inpower BC GP (AMORT) 4.471% Mar 31, , , ,000 Maritime & NE Pipe LP 6.90% Nov 30, , ,827 39,000 McCain Finance Canada 3.868% Feb 7, ,000 40, ,267 Milit-Air Inc. (amort) 5.75% Jun 30, , ,155 23,109 N.B. Highway 6.47% Nov 30, ,310 20,516 9,000 North Battleford Power L.P 4.958% Dec 31, ,841 9,596 6,000 NorthwestConnect 5.95% Apr 30, ,797 7, ,038 Ontrea Inc ( RBC CENTRE) 4.619% Apr 9, , , ,811 ORNGE Issuer Trust (amort) 5.727% Jun 11, , , ,999 PSPIB-RE Summit Inc % Jun 12, , ,430 10,000 Royal Office LLP 5.209% Nov 12, ,582 11,395 83,000 SP LP & SP1 LP (Scotia Plaza) 3.21% Jun 15, ,465 80,319 63,000 St.Clair Holding ULC 4.881% Aug 31, ,285 58, ,000 Stantec Inc % May 10, , , ,000 Strait Crossing Dev. Inc. (amort) 6.17% Sep 15, , ,371 72,504 University Ont Institute of Tech 6.351% 15 Oct ,693 71, ,000 WTH Car Rental ULC ( AVIS) 2.619% Dec 20, , , ,000 WTH Car Rental ULC ( AVIS) 4.143% Mar 20, , , ,000 WTH Car Rental ULC (AVIS) 2.542% Aug 20, , ,471 6,263,400 6,296,478 Total investment portfolio (98.9%) 41,756,058 42,414,824 Cash and cash equivalents (-0.1%) (42,115) Other assets net of liabilities (1.2%) 509,269 Net assets attributable to holders of redeemable units 42,881,978 The accompanying notes form an integral part of the financial statements. Page 8

9 1. Formation of Fund The Lysander Bond Fund ( Fund ) is an open-end unit trust established under the laws of the Province of Ontario pursuant to a master declaration of trust dated December 8, 2011 (the Declaration of Trust ). On December 23, 2011 the Fund was qualified for distribution by a simplified prospectus. The address of the Fund s registered office is 100 York Boulevard, Suite 501, Richmond Hill, Ontario. The Fund has been established for the purposes of acquiring and holding a portfolio (the Portfolio ) consisting primarily of a portfolio of high quality Canadian denominated fixed income securities of Canadian and foreign issuers. Lysander Funds Limited (the Manager ) is the manager and trustee of the Fund and is responsible for providing or arranging the provision of all general management and administrative services required by the Fund in its day-to-day operations, including but not limited to, calculating and reporting the net asset value of the Fund and its series, preparing all offering documents, unitholder recordkeeping and other administrative services. The portfolio manager ( Portfolio Manager ) of the Fund is Canso Investment Counsel, a company under common control. 2. Basis of presentation and adoption of IFRS These financial statements have been prepared in compliance with International Financial Reporting Standards ( IFRS ) as published by the International Accounting Standards Board ( IASB ). The Fund adopted this basis of accounting in 2014 as required by Canadian securities legislation and the Canadian Accounting Standards Board. Previously, the Fund prepared its financial statements in accordance with Canadian generally accepted accounting principles as defined by Part V of the CPA Handbook ( Canadian GAAP ). The Fund has consistently applied the accounting policies used in the preparation of its opening IFRS statement of financial position at January 1, 2013 and throughout all periods presented, as if these policies had always been in effect. Note 11 discloses the impact of the transition to IFRS on the Fund s reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies from those used in the Fund s financial statements for the year ended December 31, 2013 prepared under Canadian GAAP. The financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for assets. Judgments made by management in the application of IFRS that have significant effects on the financial statements are disclosed, where applicable, in the relevant notes to the financial statements. These semi-annual financial statements have been prepared in accordance with IAS 34-Interim Financial Reporting. 3. Significant accounting policies These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). The significant accounting policies of the Fund are as follows: Financial instruments The Fund accounts for its financial instruments in accordance with IAS 39, Financial instruments: recognition and measurement (IAS 39), which include cash and cash equivalents, investments at fair value through profit or loss, accrued interest, reimbursement receivable, subscriptions receivable, redemption payable, due to/from investment dealer and accrued expenses. Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term investments in an active market with original maturities of three months or less, bank overdrafts and money market funds with daily liquidity and all highly liquid financial instruments that mature within three months of being purchased. Accrued interest are designated as loans and receivables and reported at amortized cost. Accrued expenses are designated as financial liabilities and reported at amortized cost. Due to their short term nature, the carrying value of these financial assets and liabilities approximates fair value. The Fund recognizes financial instruments at fair value upon initial recognition on trade date basis. The Fund classifies its investment in debt and equity securities and derivatives as financial assets or financial liabilities at fair value through profit or loss. These financial assets or financial liabilities are either held for trading or designated at fair value through profit or loss at inception. Page 9

10 Financial assets or financial liabilities held for trading are those acquired or incurred principally for the purpose of selling or repurchasing in the near future or on initial recognition they are part of a portfolio of identified financial instruments that the Fund manages together and has a recent actual pattern of shortterm profit-taking. All derivatives are also included in this category. The Fund does not classify any derivatives as hedges in a hedging relationship. Financial assets or financial liabilities designated at fair value through profit or loss at inception are those that are managed and their performance evaluated on a fair value basis in accordance with the Fund s investment strategy as documented in its offering memorandum, and information about these financial assets and liabilities are evaluated by the management of the Fund on a fair value basis together with other relevant financial information. All other financial assets and liabilities, including redeemable units, are measured at amortized cost. The Fund classifies financial instruments carried at fair value using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The hierarchy has the following levels (Refer to Note 9 for the Fair Value Hierarchy): - Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; - Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and - Level 3 inputs are unobservable inputs for the asset or liability Fair value measurements The securities in the Fund s Portfolio are measured at Fair Value Through Profit or Loss ( FVTPL ). The fair value of financial assets and liabilities traded in active markets (such as publicly traded derivatives and securities) are based on quoted market prices at the close of trading on the year-end date. The quoted market price used for financial assets and financial liabilities of the Fund is the last traded price provided such price is within the bid-ask spread. In circumstances where the last traded price is not within the bid-ask spread, management will determine the points within the bid-ask spread that are most representative of the fair value. The fair value of financial assets and liabilities that are not traded in an active market is determined using valuation techniques. The Fund uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date. Valuation techniques used include the use of comparable recent arms length transactions, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entityspecific inputs. Income recognition Interest income is recognized gross of withholding tax, if any. The interest income for distribution purposes shown on the statements of comprehensive income represents the coupon interest received by the Fund accounted for on an accrual basis. The Fund does not amortize premiums paid or discounts received on the purchase of fixed income securities except for zero coupon bonds which are amortized on a straight line basis. The interest income for distribution purposes is the tax basis of calculating the interest received and which is subject to tax. Recognition, derecognition and measurement At initial recognition, financial assets and liabilities are measured at fair value. Transaction costs on financial assets and liabilities at fair value through profit or loss are expensed as incurred in the statement of comprehensive income. Subsequent to initial recognition, financial assets and liabilities at fair value through profit or loss are measured at fair value. Gains and losses arising from changes in their fair value are included in the statement of comprehensive income for the period in which they arise. Interest earned on financial assets at fair value through profit or loss and interest expense on the financial liabilities at fair value through profit or loss are disclosed in a separate line item in the statement of comprehensive income. Page 10

11 Financial assets are derecognized when the contractual rights to the cash flows from the investments have expired or the Fund has transferred substantially all risks and rewards of ownership. Financial liabilities at fair value through profit or loss are derecognized when the obligation specified in the contract is discharged, cancelled or expired. Investment transactions are accounted for on a trade date basis. Interest income is recorded on an accrual basis. Realized gains and losses on the disposition of investments, and unrealized appreciation and depreciation of investments, are determined on an average cost basis and are included in the change statement of comprehensive income. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. Accounting estimates In the application of the Fund s accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily available from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered relevant. The most significant estimates relate to the valuation of investments. Actual results could differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Net assets attributable to holders of redeemable units The Fund has two series of redeemable units: Series A Units and Series F Units, with units in each series representing an equal and rateable share in the assets allocated to each series. The management fee rates are different for each of the series. Please refer to Note 4 for discussion of management fee rates. The redeemable units are classified as financial liabilities and are measured at the redemption amounts. Units of the Fund may be purchased at a price per unit equal to the net asset value of a unit of the applicable series of the Fund on each Valuation Date. Units of the Fund may be redeemed at a price per unit equal to the net asset value of a unit of the applicable series of the Fund on each Valuation Date. Net asset value The net asset value per unit of each series of units of the Fund is computed by dividing the net asset value of a series of units by the total number of units of the series outstanding at the time. The Fund s accounting policies for measuring the fair value of its investments and derivatives are identical to those used in measuring its net asset value ( NAV ) for transactions with holders of redeemable units. Foreign currency translation The Fund s subscriptions and redemptions are denominated in Canadian Dollars ( CAD ), which is also its functional and presentation currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the measurement date. Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the prevailing rate of exchange on each valuation date. Purchases and sales of investments are translated at the rate of exchange prevailing on the respective dates of such transactions. Page 11

12 Foreign currency forward contracts The value of the foreign currency forward contracts is the gain or loss that would be realized if the position in the forward contract was closed out in accordance with its terms. The unrealized gains or losses on the forward contract are reported as part of the change in unrealized appreciation or depreciation on investments in the statement of comprehensive income. Forward currency contracts manage exposure to foreign currency gains and losses arising from short and long-term investments denominated in foreign currencies. Taxation The Fund is a unit trust within the meaning of the Income Tax Act (Canada) (the Act ). The Fund is subject to tax on its net taxable income, including net realized capital gains, for the calendar year which is not paid or payable to its unitholders as of the end of the calendar year. It is the intention of the Fund to pay all of its net taxable income and net realized capital gains so that the Fund will not be subject to income taxes other than foreign withholding taxes, if applicable. Therefore, no provision for income taxes has been made in these financial statements. Distributions The Fund makes distributions of net income quarterly and any net realized capital gains annually. These are recognized in the Statements of Changes in Net Assets Attributable to Holders of Redeemable Units. Future changes in accounting standards IFRS 9 In November 2009, the IASB issued IFRS 9 as part of its plan to replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 requires financial assets, including hybrid contracts, to be measured at either fair value or amortized cost. In October 2010, the IASB added to IFRS 9 the requirements for classification and measurement of financial liabilities previously included in IAS 39. In November 2013, the IASB introduced a new hedge accounting model, and allowed early adoption of the own credit provisions of IFRS 9. It also removed the mandatory effective date of January 1, 2015 and the new effective date is January 1, The Manager is currently evaluating the impact of IFRS 9 on the financial statements of the Fund. 4. Management fees The Manager is entitled to receive from the Fund a management fee which is calculated daily and payable monthly at an annualized rate of up to 1.15% on Series A units and up to 0.65% on Series F units, based on the net asset value of each respective series. The Manager may offer a reduced management fee to selected investors in Series A and Series F Units who (among other considerations) hold large investments in the Fund. This is achieved by reducing the management fee charged to the Fund based on the assets units held by such investor and the Fund distributing the amount of the reduction in additional units of the same series of the Fund to the investor. 5. Expenses The Fund is responsible for the payment of all expenses related to its operations, including but not limited to audit fees, Independent Review Committee fees, fund administration fees, filing fees, redeemable unitholder reporting and custodian fees plus harmonized sales tax. At their discretion, the Manager or a Portfolio Manager may pay certain of the expenses of the Fund but any such payments shall not oblige the Manager or a Portfolio Manager to make similar future payments. All expenses are recognized in the statement of comprehensive income on the accrual basis. Service fees may be paid by the manager from the management fees it receives from the Fund. Service fees may be paid to brokers and dealers to compensate them for providing ongoing services to redeemable unitholders holding Series A units. The maximum service fee is 0.50% on the Series A units, exclusive of any applicable taxes. Page 12

13 6. Issuance and redemption of units The Fund is authorized to issue an unlimited number of transferable, redeemable units of beneficial interest, each of which represents an equal undivided interest in the net assets of the Fund. Each unit entitles the holder to the same rights and obligations as a holder of any other unit and no holder of units is entitled to any privilege, priority or preference in relation to any other holder of units. Each holder of units is entitled to one vote for each whole unit held and is entitled to participate equally with respect to any and all distributions made by the Fund, including distributions of net income and net realized capital gains, if any. On termination or liquidation of the Fund, the holders of outstanding units of record are entitled to receive on a pro rata basis all of the assets of the Fund remaining after payment of all debts, liabilities and liquidation expenses of the Fund. The units of the Fund are issued and redeemed at their Net Asset Value. During the period ended June 30, 2014 and 2013, the number of units issued, redeemed and outstanding were as follows: Series A June 30, 2014 June 30, 2013 Number of Units, beginning of period 625,409 62,486 Redeemable units issued 792, ,493 Redeemable units redeemed (62,736) (7,351) Redeemable units issued on reinvestments 5,837 1,202 Number of Units, end of period 1,361, ,830 Series F June 30, 2014 June 30, 2013 Number of Units, beginning of period 1,347, ,790 Redeemable units issued 1,917, ,638 Redeemable units redeemed (547,012) (128,186) Redeemable units issued on reinvestments 16,808 1,382 Number of Units, end of period 2,735, , Related party transactions At June 30, 2014, the shareholders of the Manager and Portfolio Manager, together with certain immediate family members of such shareholders had an ownership interest in the Fund amounting to 0.4% ( December 31, %, January 1, %). The Manager is responsible for the day to day management of the fund and its investment portfolio in compliance with the Fund s constating documents. The Manager pays for the investment management services and provides all administrative services required by the Fund. As compensation for its services the Manager is entitled to receive a management fee as disclosed in Note 4. The Manager paid the Portfolio Manager, an affiliate of the Manager $55,801 (June 30, $3,362) for managing the Portfolio of the fund As at June 30, 2014 the amount payable to the Portfolio Manager was $11,713 (December 31, $3,274, January 1, $430). Page 13

14 8. Financial Instruments by Category The following tables present the carrying amounts of the Fund s financial instruments by category as at June 30, 2014: Financial assets at FVTPL at inception ($) Loans and Receivables ($) Assets Total ($) - Fixed income securities 42,414,824-42,414,824 - Subscriptions receivable - 650, ,340 - Accrued interest - 293, ,933 Total 42,414, ,273 43,359,097 Financial liabilities at FVTPL at inception ($) Other Financial Liabilities ($) Total ($) Liabilities - Bank overdraft 42,115-42,115 - Redemption payable - 3,948 3,948 - Due to investment dealer - 356, ,936 - Accrued expenses - 74,120 74,120 Total 42, , ,119 The following tables present the carrying amounts of the Fund s financial instruments by category as at December 31, 2013: Financial assets at FVTPL at inception ($) Loans and Receivables ($) Assets Total ($) - Fixed income securities 20,009,306-20,009,306 -Cash and cash equivalents 89,202-89,202 - Subscriptions receivable - 31,900 31,900 -Reimbursements receivable - 55,417 55,417 - Accrued interest - 145, ,365 Total 20,098, ,682 20,331,190 Financial liabilities at FVTPL at inception($) Other Financial Liabilities ($) Total ($) Liabilities - Redemption payable - 7,758 7,758 - Due to investment dealer - 95,158 95,158 - Accrued expenses - 46,377 46,377 Total - 149, ,293 Page 14

15 The following tables present the carrying amounts of the Fund s financial instruments by category as at January 1, 2013: Financial assets at FVTPL at inception ($) Loans and Receivables ($) Assets Total ($) - Fixed income securities 2,569,353-2,569,353 - Cash and cash equivalents 21,660-21,660 - Subscriptions receivable Reimbursements receivable - 21,405 21,405 - Accrued interest - 18,516 18,516 Total 2,591,013 39,921 2,630,934 Financial liabilities at FVTPL at inception ($) Other Financial Liabilities ($) Total ($) Liabilities - Redemption payable Due to investment dealer Accrued expenses - 18,548 18,548 Total - 18,548 18, Fair value hierarchy The Fund s assets recorded at fair value have been categorized based upon the fair value hierarchy described in Note 3. The following fair value hierarchy table presents information about the Fund s assets measured at fair value as at June 30, 2014 and December 31, 2013 and January 1, 2013 and there have been no transfers between levels during the year. Financial assets at fair value as at June 30, 2014 Level 1 ($) Level 2 ($) Level 3 ($) Total ($) Investments Fixed income - 42,414,824-42,414,824-42,414,824-42,414,824 Financial liabilities at fair value as at June 30, 2014 Level 1 ($) Level 2 ($) Level 3 ($) Total ($) Bank overdraft 42,115 42,115 42, ,115 Financial assets at fair value as at December 31, 2013 Level 1 ($) Level 2 ($) Level 3 ($) Total ($) Cash and cash equivalents 89, ,202 Investments Fixed income - 20,009,306-20,009,306 89,202 20,009,306 20,098,508 Page 15

16 Financial assets at fair value as at January 1, 2013 Level 1 ($) Level 2 ($) Level 3 ($) Total ($) Cash and cash equivalents 21, ,660 Investments Fixed income - 2,569,353-2,569,353 21,660 2,569,353 2,591, Risk management The Fund s activities expose it to a variety of financial risks in the normal course of operations. These include credit risk, liquidity risk, and market risk. The value of the investments in the Fund s portfolio can fluctuate as a result of changes in interest rates, general economic conditions, supply and demand conditions relating to specific securities, or news relating to a specific issuer. In order to manage risk, the Portfolio Manager will diversify the portfolio based on industry and credit rating category. Significant risks that are relevant to the fund are discussed below. Credit risk Credit risk is the risk of financial loss that could arise from a security issuer or counterparty to a financial instrument not being able to meet its financial obligations. The Fund s main exposure to credit risk consists of investments in debt instruments, such as bonds. The Fund is also exposed to counterparty risk from other assets, such as amounts due from brokers or subscriptions receivable. To manage this risk, the Portfolio Manager monitors the Fund s credit exposure and counterparty ratings. As at June 30, 2014 and December 31, 2013 and January 1, 2013, the Fund had directly invested in debt instruments with the following credit ratings: June 30, 2014 (%) December 31, 2013 (%) January 1, 2013 (%) AAA AA A BBB Not Rated Liquidity risk Liquidity risk is the risk that the Fund will encounter difficulty in meeting obligations, including any redemption of units for cash. The Fund is exposed to possible daily redemptions at the then current net asset value per unit. Liquidity risk is managed by investing a significant portion of the Fund s assets in investments that are traded in an active market and that can be readily sold. All liabilities of the Fund are due within one year. The following table presents the liabilities according to their maturity date as at June 30, 2014, December 31, 2013 and January 1, 2013: June 30, 2014 Less Than One Month 1-3 Months 3 Months 1 Year Bank overdraft $42, Redemption Payable $3,948 - Accrued Expense Payable $35,613 - $38,507 Due to investment dealer $356, December 31, 2013 Less Than One Month 1-3 Months 3 Months 1 Year Redemption Payable $7, Accrued Expense Payable $16,260 - $30,117 Due to investment dealer $95, January 1, 2013 Less Than One Month 1-3 Months 3 Months 1 Year Redemption Payable Accrued Expense Payable $2,035 - $16,513 Page 16

17 Market risk Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a fund asset will fluctuate because of changes in market interest rates. To manage interest rate risk, the Portfolio Manager monitors exposures and maintains the portfolio duration within the limits specified in the investment policies and objectives of the fund. The table below summarizes the Fund s exposure to interest rate risks based on the remaining term to maturity of the investments. Less than 1 year ($) 1-5 years ($) More than 5 years ($) Interest rate exposure June 30, ,023,493 19,295,359 21,095,972 December 31, ,868 12,808,203 6,544,235 January 1, ,547,416 1,021,937 If interest rates had increased or decreased by 1 % at June 30, 2014, with all other variables remaining constant, net assets of the portfolio would have decreased or increased by approximately $1,908,667 or 4.5% (December 31, 2013-$160,074 or 0.80%, January 1, 2013-$110,482 or 4.3%). In practice, the actual results may differ from this sensitivity analysis and the difference could be material. Currency risk Currency risk arises when the value of investments denominated in currencies other than Canadian dollars fluctuate due to changes in exchange rates. The currency risk will typically be hedged by entering into foreign currency forward contracts if required, however some moderate currency exposure may be assumed if deemed to be beneficial to the Fund. As at June 30, 2014 and December 31, 2013 and January 1, 2013 there was no significant foreign currency exposure. Price risk Price risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices, whether caused by factors specific to an individual investment, its issuer or all factors affecting all instruments traded in a market or market segment. This risk is managed through a careful selection of securities and other financial instruments within the parameters of the investment strategy and by maintaining a well-diversified portfolio. As per the portfolio manager s analysis of the portfolio no significant other price risk is applicable to the Fund. 11. Transition to IFRS The effect of the Fund s transition to IFRS is summarized in this note as follows: Transition elections The only voluntary exemption adopted by the Fund upon transition was the ability to designate a financial asset or financial liability at fair value through profit and loss upon transition to IFRS. All financial assets and liabilities designated at fair value through profit and loss upon transition were previously carried at fair value under Canadian GAAP as required by Accounting Guideline 18, Investment Companies. Other exemptions available under IFRS 1, which are not discussed here, are either not material or not relevant to the business. Statement of cash flows Under Canadian GAAP, the Fund was exempt from providing a statement of cash flows. IAS 1 requires that a complete set of financial statements include a statement of cash flows for the current and comparative periods, without exception. Page 17

18 Reconciliation of net assets and comprehensive income as previously reported under Canadian GAAP to IFRS: Net Assets December 31, 2013 ($) June 30, 2013 ($) January 1, 2013 ($) Net Assets as reported under Canadian GAAP 20,144,633 5,319,064 2,606,170 Revaluation of investments at FVTPL 36,264 11,775 6,216 Net assets attributable to holders of redeemable units 20,180,897 5,330,839 2,612,386 Year ended December 31, 2013 ($) Period ended June 30, 2013 ($) Comprehensive income Comprehensive income as reported under Canadian GAAP 41,188 (64,771) Revaluation of investments at FVTPL 30,048 5,559 Increase in net assets attributable to holders of redeemable units 71,236 (59,212) Classification of redeemable units issued by the Fund Under Canadian GAAP, the Fund accounted for its redeemable units as equity. Under IFRS, IAS 32 requires that units or shares of an entity which include a contractual obligation for the issuer to repurchase or redeem them for cash or another financial asset be classified as financial liability. The Fund s units do not meet the criteria in IAS 32 for classification as equity and therefore, have been reclassified as financial liabilities on transition to IFRS and are represented on the Statements of financial position in the Net assets attributable to holders of the redeemable units line item. Revaluation of investments at FVTPL Under Canadian GAAP, the Fund measured the fair values of its investments in accordance with Section 3855, Financial Instruments Recognition and Measurement, which required the use of bid prices for long positions and ask prices for short positions to the extent such prices are available. Under IFRS, the Fund measures the fair values of its investments using the guidance in IFRS 13, Fair Value Measurement (IFRS 13), which requires that if an asset or a liability has a bid price and an ask price, then its fair value is to be based on a price within the bid-ask spread that is most representative of fair value. It also allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurements within a bid-ask spread. As a result, upon adoption of IFRS an adjustment was recognized to increase the carrying amount of the Fund s investments by $6,216 as at January 1, 2013 and $36,264 as at December 31, The impact of this adjustment was to increase the Fund s net assets attributable to holders of redeemable units by $30,048 for the year ended December 31, Page 18