a n n u a l F I n a n C I a l S T a T E M E n T S as at December 31, 2012 DDJ HIgH YIElD FunD

Transcription

1 a n n u a l F I N A N C I A L S T A T E M E N T S a s a t D e c e m b e r 3 1, DDJ High Yield Fund

2 table of contents Management s Responsibility for Financial Reporting 1 Independent Auditor s Report 2 Statement of Investment Portfolio 3 Statements of Net Assets 6 Statements of Operations and Retained Earnings ( Deficit) 7 Statements of Changes in Net Assets 8 Statements of Cash Flows 8 Fund Specific Financial Instruments Risks 9 Notes to the Financial Statements 14

3 Management s Responsibility for financial reporting The accompanying financial statements have been prepared by CI Investment Inc. (the Manager ), the Manager of the DDJ High Yield Fund (the Fund ), and approved by the Board of Directors of the Manager. The Fund s Manager is responsible for the information and representations contained in these financial statements and other sections of this report. CI Investments Inc. maintains appropriate processes to ensure that relevant and reliable financial information is produced. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include certain amounts that are based on estimates and judgments. The significant accounting policies which management believes are appropriate for the Fund are described in Note 2 to the financial statements. PricewaterhouseCoopers LLP is the external auditor of the Fund. They have audited the financial statements in accordance with Canadian generally accepted auditing standards to enable them to express to the unitholders their opinion on the financial statements. Their report is set out on the following page. Derek J. Green Douglas J. Jamieson Toronto, Ontario President and Chief Executive Officer Chief Financial Officer March 15, 2013 CI Investments Inc. CI Investments Inc. 1

4 independent auditor s report To the Unitholders of DDJ High Yield Fund (the Fund) We have audited the accompanying financial statements of the Fund, which comprise the statement of investment portfolio as at December 31, 2012, the statements of net assets as at December 31, 2012 and December 31, 2011 and the statements of operations and retained earnings (deficit), changes in net assets and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform an audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as at December 31, 2012 and December 31, 2011, and the results of its operations, the changes in its net assets and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants, Licensed Public Accountants Toronto, Ontario March 15,

5 statement of investment portfolio As at December 31, 2012 No. of Shares\ average Fair Par Value Description Cost ($) Value ($) No. of Shares\ average Fair Par Value Description Cost ($) Value ($) U.S.A. (94.5%) USD 450,000 Altegrity Inc., 10.5% 11/01/ , ,398 USD 530,000 American Residential Services LLC, 12% 04/15/ , ,412 USD 66,000 Arctic Glacier Inc., Private Placement, variable rate, 07/27/ ,516 65,928 USD 427,874 ARS Intermediate Holdings LLC, % 11/15/2015^ 406, ,029 USD 650,000 Assuramed Holding, Private Placement, variable rate, 04/24/ , ,484 USD 1,000,000 Beverages & More Inc., 9.625% 10/01/2014 1,036,906 1,017,521 USD 583,888 Bossier Casino Venture Holdco Inc., 14% 02/09/2018^ 503, ,628 39,099 Bossier Casino Venture Holdco Inc., Private Placement^ 77,823 - USD 190,000 Brickman Group Holdings, 9.125% 11/01/ , ,573 USD 222,000 Builders FirstSource Inc., 13% 02/15/ , ,116 USD 630,000 Caesar s Entertainment Operating Co., Inc., 10% 12/15/ , ,169 39,324 Champion Holdco, Private Placement^ 29,494 - USD 2,517 Champion Opco, LLC, Private Placement 10% 12/31/2013^ 2,473 - USD 280,000 Clear Channel Worldwide Holdings Inc., 7.625% 03/15/ , ,131 USD 120,000 Cleaver-Brooks Inc., 8.75% 12/15/ , ,400 USD 8,120 Cleveland Unlimited Inc., Private Placement 10% 07/25/2016^ 8,129 8,061 USD 4,145 Cleveland Unlimited Inc., Private Placement, variable rate, 12/31/2049^ 4,054 4,115 USD 630,000 Connolly Holdings PLC, Private Placement, variable rate, 07/15/ , ,749 - CUI Acquisition Corp., Warrants, Private Placement^ - 5,324 1 CUI Class A2, Warrants (31Dec49)^ 52,678 19, Dawn Holding Equity, Private Placement^ 240, ,092 USD 124,688 ELO Touch Solutions Inc., Private Placement, variable rate, 06/04/ , ,540 USD 375,000 ELO Touch Solutions Inc., Private Placement, variable rate, 12/04/ , ,165 USD 130,000 Energy Future Intermediate Holding Co., LLC 11% 10/01/ , ,892 USD 300,000 Energy Future Intermediate Holding Co., LLC 11.75% 03/01/ , ,432 USD 590,000 Entercom Radio LLC, 10.5% 12/01/ , ,925 U.S.A. (94.5%) (cont d) USD 750,000 Equinox Holdings Inc., Private Placement, variable rate, 05/16/ , ,250 USD 1,263,200 Expert Global Solutions Inc., Private Placement, variable rate, 04/03/2018 1,227,926 1,254,924 USD 790,000 Foresight Energy LLC, 9.625% 08/15/ , ,485 USD 850,000 Foresight Energy LLC, 9.625% 08/15/2017 (Restricted) 870, ,395 USD 400,000 FPC Holdings, Private Placement, variable rate, 05/27/ , ,096 USD 800,000 Global Generations Merger Sub Inc., 11% 12/15/ , ,046 USD 450,000 Grocery Outlet, Private Placement, variable rate, 05/26/ , ,782 USD 980,000 GXS Worldwide Inc., 9.75% 06/15/ ,838 1,014,196 25,950 Haights Cross Communications Inc., Private Placement^ 10,100 - USD 68,145 Haights Cross Operating Co., FRN, 13% 03/15/2013^ 68,952 67,648 USD 339,363 Haights Cross Operating Co., FRN, Private Placement 16% 03/15/2014^ 265,281 1,381 USD 481,745 Haights Cross Operating Co., Private Placement 13% 03/15/2013^ 493, ,795 USD 490,000 Harbinger Group Inc., 7.875% 07/15/ , , Harbinger Group Inc., Private Placement^ 238, ,163 USD 400,000 Heartland Dental Care Inc., Private Placement, variable rate, 06/20/ , ,125 USD 187,675 Highliner Food, Private Placement, variable rate, 12/19/ , ,237 USD 151,000 Hillman Group Inc., % 06/01/ , ,391 USD 210,000 Icon Health & Fitness Inc., % 10/15/ , ,250 USD 220,000 IDQ Holdings Inc., 11.5% 04/01/ , ,498 USD 120,000 Immucor Inc., % 08/15/ , ,611 USD 440,000 Intelligrated Inc., Private Placement, variable rate, 01/30/ , ,341 USD 380,000 Intelligrated Inc., Private Placement, variable rate, 07/30/ , ,000 USD 160,000 JMC Steel Group, 8.25% 03/15/ , ,901 USD 210,000 Merrill Corp., Private Placement 203, ,917 USD 1,091,613 Merrill Lynch & Co., Inc., 2nd Term Loan, Private Placement 16% 11/15/2013 1,082,325 1,029,466 USD 337,450 National Vision Inc., Private Placement, variable rate, 08/02/ , ,338 ^ Denotes illiquid securities. Percentages shown in brackets relate investments at fair value to net assets of the Fund. The accompanying notes are an integral part of these financial statements. 3

6 statement of investment portfolio ( cont d) As at December 31, 2012 No. of Shares\ average Fair Par Value Description Cost ($) Value ($) No. of Shares\ average Fair Par Value Description Cost ($) Value ($) U.S.A. (94.5%) (cont d) USD 722,725 Newark Exit, Term Loan, Private Placement, variable rate, 03/03/2014^ 732, ,452 USD 125,000 Newark Group Inc., Private Placement 4% 01/16/2014^ 123, ,088 USD 540,000 North Atlantic Trading Co., Inc., 11.5% 07/15/ , ,832 USD 488,800 North Atlantic Trading Co., Inc., 19% 01/15/ , ,708 USD 410,000 Optima Speciality Steel Inc., 12.5% 12/15/ , ,517 USD 1,116,572 Paperworks Inc., Term Loan, variable rate, 07/21/2016^ 1,040,204 1,069,630 USD 250,000 Paradigm Ltd., Private Placement, variable rate, 07/27/ , ,658 USD 100,000 Physio-Control International Inc., 9.875% 01/15/ , ,701 USD 260,905 Prepaid Legal Services, Private Placement, variable rate, 01/03/ , ,620 USD 420,000 Radiation Therapy Services Inc., 8.875% 01/15/ , ,597 USD 420,000 Radiation Therapy Services Inc., 9.875% 04/15/ , ,940 USD 800,000 Radnet Management Inc., % 04/01/ , ,053 USD 295,000 ResCare Inc., 10.75% 01/15/ , ,329 USD 510,000 Ryerson Inc /Joseph T Ryerson & Son Inc., 9% 10/15/ , ,607 USD 370,000 Severstal Columbus LLC, 10.25% 02/15/ , ,502 USD 420,000 Shale Holdings LLC/Shale Finance Corp., 8.75% 11/15/ , ,528 USD 180,000 Sheridan Holdings Inc., Private Placement, variable rate, 06/29/ , ,985 USD 190,000 Sidewinder Drilling Inc., 9.75% 11/15/ , ,321 4 Simmons Escrow^ 13,207 12,939 USD 540,000 Sitel LLC/Sitel Finance Corp., 11% 08/01/ , ,441 USD 85,000 Star Gas Partners L.P., 8.875% 12/01/ ,456 85,540 USD 300,000 Sunstate Equipment Co., LLC 12% 06/15/ , ,264 USD 150,000 Symbion Inc., 8% 06/15/ , ,745 USD 160,000 Tempur-Pedic International Inc., 6.875% 12/15/ , ,186 USD 1,430,000 Thermadyne Holdings Corp., 9% 12/15/2017 1,442,970 1,508,289 USD 180,000 Tomkln, Private Placement, variable rate, 05/09/ , ,920 USD 580,000 Townsquare Radio LLC/Townsquare Radio Inc., 9% 04/01/ , ,830 U.S.A. (94.5%) (cont d) USD 290,000 United Surgical Partners International Inc., 9% 04/01/ , ,832 USD 390,000 US Oncology Inc., Private Placement, zero coupon, 08/15/2017-5,807 USD 670,000 Van Wagner Communications Inc., Private Placement, variable rate, 08/03/ , ,763 4,523 Viren Corp., Private Placement^ 219, ,726 USD 620,000 Wilton Brands Inc., Private Placement, variable rate, 08/07/ , ,015 USD 400,000 Wis Internation, Private Placement, variable rate, 05/30/ , ,154 32,168,999 32,410,334 CAYMAN ISLANDS (0.0%) 1,178,692 Frontera Resources Corp. - 9,606 Commissions and other portfolio transaction costs (2) Total Bonds & Equities (94.5%) 32,168,997 32,419,940 DERIVATIVE INSTRUMENTS Foreign Currency Forward Contracts (-0.3%) (see Schedule A) (103,403) Total Investments (94.2%) 32,168,997 32,316,537 Other Net Assets (Liabilities) (5.8%) 1,972,372 Net Assets (100.0%) 34,288,909 Principal amounts stated in: USD U.S. Dollar ^ Denotes illiquid securities. Percentages shown in brackets relate investments at fair value to net assets of the Fund. The accompanying notes are an integral part of these financial statements. 4

7 statement of investment portfolio ( cont d) As at December 31, 2012 Schedule A Foreign Currency Forward Contracts (-0.3%) C credit Rating contract Contracts counterparty of the Counterparty Settlement Date Rate ($) Pay Receive Unrealized Gain (Loss) ($) 1 Royal Bank of Canada A Apr (1,089,000) US $ 1,092,594 Canadian $ 8,969 1 Royal Bank of Canada A Jan (2,413,000) US $ 2,388,870 Canadian $ (7,266) 1 Royal Bank of Canada A Jan (2,795,000) US $ 2,787,174 Canadian $ 11,167 1 Royal Bank of Canada A Jun (3,836,000) US $ 3,801,476 Canadian $ (21,657) 1 Royal Bank of Canada A-1+ 6-Feb (4,807,000) US $ 4,726,963 Canadian $ (48,565) 1 Royal Bank of Canada A Jun (6,096,000) US $ 6,064,910 Canadian $ (8,798) 1 Royal Bank of Canada A Feb (6,142,000) US $ 6,042,500 Canadian $ (61,846) 1 Royal Bank of Canada A Mar (6,997,000) US $ 6,977,129 Canadian $ 19,648 1 Royal Bank of Canada A-1+ 7-May (936,000) US $ 936,936 Canadian $ 4,945 Total Foreign Currency Forward Contracts Value (103,403) Credit ratings are obtained from Standard & Poor s, where available, otherwise ratings are obtained from: Moody s Investors Service, Dominion Bond Rating Services or Canadian Bond Rating Services. Percentages shown in brackets relate investments at fair value to net assets of the Fund. The accompanying notes are an integral part of these financial statements. 5

8 statements of net assets (in $000 s except for per unit amounts and units outstanding) As at as at December 31, 2012 December 31, 2011 Assets Investments at fair value* 32,420 30,925 Cash 4,047 1,526 Unrealized gain on futures and foreign currency forward contracts Receivable for securities sold 209 Fees rebate receivable 1 Dividends and accrued interest receivable ,156 33,235 Liabilities Investments sold short at fair value** Management and administration fees payable Accrued expenses 8 7 Payable for securities purchased 2, Payable for unit redemptions Distributions payable Unrealized loss on futures and foreign currency forward contracts ,867 1,970 Net assets and unitholders equity 34,289 31,265 Unitholders Equity Unit capital 52,026 52,624 Contributed surplus 32,852 32,603 Retained earnings (deficit) (50,589) (53,962) Net assets and unitholders equity 34,289 31,265 *Investments at cost 32,169 32,041 **Investments sold short at cost Net Assets per unit (Note 10) Number of units outstanding (Note 3) 3,078,229 3,113,629 The accompanying notes are an integral part of these financial statements. 6

9 statements of operations and Retained earnings ( deficit) For the years ended December 31 (in $000 s except for per unit amounts) Income Dividends 20 3 Interest 2,991 3,039 Securities lending (Note 6) Commitment fee income Fees rebate Less: Foreign withholding taxes 3,011 3,042 Expenses Management fees (Note 4) Administrative fees (Note 4) Interest expense Custody fees Legal fees Audit fees 3 Independent review committee fees 1 1 Harmonized sales tax Net investment income (loss) for the year 2,512 2,558 Realized and unrealized gain (loss) on investments and commissions and other portfolio transaction costs Realized gain (loss) on investments 1, Foreign exchange gain (loss) (59) (143) Commissions and other portfolio transaction costs (5) (7) Change in unrealized appreciation (depreciation) of investments 1,581 (2,153) Net gain (loss) on investments 3,367 (1,465) Increase (decrease) in net assets from operations 5,879 1,093 Increase (decrease) in net assets from operations per unit Statements of Retained Earnings (Deficit) Retained Earnings (Deficit), beginning of year (53,962) (52,511) Increase (decrease) in net assets from operations 5,879 1,093 (Excess) deficiency on amounts paid on units redeemed Distribution from net income (2,506) (2,544) Distribution from realized gains Retained Earnings (Deficit), end of year (50,589) (53,962) Contributed surplus, beginning of year 32,603 32,160 (Excess) deficiency on amounts paid on units redeemed Contributed surplus, end of year 32,852 32,603 The accompanying notes are an integral part of these financial statements. 7

10 statements of changes in net assets For the years ended December 31 (in $000 s) Net assets, beginning of year 31,265 33,284 Capital transactions Proceeds from units issued Reinvestment of distributions (Note 9) Cost of units redeemed (598) (1,011) (Excess) deficiency on amounts paid on units redeemed (349) (568) Distributions to unitholders From net income (2,506) (2,544) From realized gains Return of capital (2,506) (2,544) Increase (decrease) in net assets from operations 5,879 1,093 Net assets, end of year 34,289 31,265 STATEMENTs of cash flows For the years ended December 31 (in $000 s) Cash Provided by (used in) Operating activities Net investment income (loss) 2,512 2,558 Proceeds of disposition of investments 26,520 19,014 Purchase of investments (23,789) (21,092) Net change in non-cash balances related to operations , Financing activities Distributions paid (2,513) (2,525) Amounts paid for units redeemed (358) (549) (2,871) (3,074) Increase (decrease) in cash during the year 2,521 (2,565) Cash (bank overdraft), beginning of year 1,526 4,091 Cash (bank overdraft), end of year 4,047 1,526 The accompanying notes are an integral part of these financial statements. 8

11 fund Specific Financial Instruments Risks ( Note 14) The Fund s investments were concentrated in the following segments: As at December 31, 2011 Categories Net Assets (%) U.S.A Other Net Assets (Liabilities) Canada Cayman Islands Foreign Currency Forward Contracts (1.0) Other Price Risk As at December 31, 2012, had the global markets increased or decreased by 10% (December 31, %), with all other variables held constant, net assets of the Fund would have increased or decreased, respectively, by approximately $87,000 (December 31, $138,000). In practice, actual results may differ from this analysis and the difference may be material. Currency Risk The tables below summarize the Fund s exposure to currency risk. As at December 31, 2012 Financial Instruments Derivatives Total Currency Net E exposure Exposure exposure Assets Currency (in $000 s) (in $000 s) (in $000 s) (%) US Dollar 34,889 (34,855) Total 34,889 (34,855) As at December 31, 2011 Financial Instruments Derivatives Total Currency Net E exposure Exposure exposure Assets Currency (in $000 s) (in $000 s) (in $000 s) (%) US Dollar 32,279 (32,014) Total 32,279 (32,014) As at December 31, 2012, had the Canadian dollar strengthened or weakened by 10% (December 31, %) in relation to all other foreign currencies held in the Fund, with all other variables held constant, net assets of the Fund would have decreased or increased, respectively, by approximately $3,000 (December 31, $27,000). In practice, the actual results may differ from this analysis and the difference may be material. The accompanying notes are an integral part of these financial statements. 9

12 fund Specific Financial Instruments Risks ( Note 14) ( cont d) Credit Risk As at December 31, 2012 and 2011, the Fund was exposed to credit risk as substantially all of its assets were invested in fixed income securities that have below investment grade credit ratings or similar risk characteristics. All fixed income securities rated BB/Ba/B+ or lower are considered below investment grade and have a higher credit risk than investment grade bonds. The Fund was invested in fixed income securities, preferred securities and derivative instruments, as applicable, with the following credit ratings: As at December 31, 2012* Credit Rating^ net Assets (%) AAA/Aaa/A B 36.0 CCC/Caa/C CC/Ca/C+ 0.6 Not Rated 36.0 Total 92.1 As at December 31, 2011* Credit Rating^ net Assets (%) AAA/Aaa/A BBB/Baa/B B 41.9 CCC/Caa/C Not Rated 25.5 Total 96.9 * Credit ratings are obtained from: Standard & Poor s, where available, otherwise ratings are obtained from: Moody s Investors Service, Dominion Bond Rating Services or Canadian Bond Rating Services, respectively. ^ Refer to Note 14 for Credit Rating cross reference. The accompanying notes are an integral part of these financial statements. 10

13 fund Specific Financial Instruments Risks ( Note 14) ( cont d) Interest Rate Risk As at December 31, 2012 and 2011, the Fund was exposed to interest rate risk. The tables below summarize the Fund s exposure to interest rate risk, categorized by the contractual maturity date. As at December 31, 2012 Interest Rate Exposure Less than Greater 1 Year Years Years than 5 Years Total (in $000 s) (in $000 s) (in $000 s) (in $000 s) (in $000 s) 5,759 5,568 9,253 15,019 35,599 As at December 31, 2011 Interest Rate Exposure Less than Greater 1 Year Years Years than 5 Years Total (in $000 s) (in $000 s) (in $000 s) (in $000 s) (in $000 s) 1,719 6,884 12,917 10,077 31,597 As at December 31, 2012, had the prevailing interest rates increased or decreased by 0.25% (December 31, %), with all other variables held constant, net assets of the Fund would have decreased or increased, respectively, by approximately $257,000 (December 31, $232,000). In practice, the actual results may differ from this analysis and the difference may be material. The accompanying notes are an integral part of these financial statements. 11

14 fund Specific Financial Instruments Risks ( Note 14) ( cont d) Fair Value Hierarchy The tables below summarize the inputs used by the Fund in valuing the Fund s investments and derivatives carried at fair value. Long Positions at fair value as at December 31, 2012 Level 1 Level 2 Level 3 Total (in $000 s) (in $000 s) (in $000 s) (in $000 s) Equities Bonds - 28,175 3,377 31,552 Foreign currency forward contracts, net - (103) - (103) Total - 28,082 4,235 32,317 Long Positions at fair value as at December 31, 2011 Level 1 Level 2 Level 3 Total (in $000 s) (in $000 s) (in $000 s) (in $000 s) Equities ,109 1,303 Bonds - 24,094 5,528 29,622 Foreign currency forward contracts, net - (317) - (317) Total 62 23,909 6,637 30,608 There were no transfers between Level 1 and 2 and Level 1 and 3 during 2012 and The accompanying notes are an integral part of these financial statements. 12

15 fund Specific Financial Instruments Risks ( Note 14) ( cont d) The tables below summarize the movement in Level 3 financial instruments at fair value using unobservable inputs. For the year ended December 31, 2012 balanced at change in Balance at December 31, net transfers Realized gain unrealized gain December 31, 2011 Purchases Sales in (out) (loss) (loss)* 2012 (in $000 s) (in $000 s) (in $000 s) (in $000 s) (in $000 s) (in $000 s) (in $000 s) Long Positions: Equities 1, (1,181) (249) 858 Bonds 5, (4,098) 2, (644) 3,377 Total 6, (5,279) 2, (893) 4,235 *Change in unrealized gain (loss) related to investments held at December 31, 2012 was ($350,227). During the year ended 2012, fixed income investments with a net fair value of $2,220,000 were transferred into Level 3 from Level 2 as observable market input were no longer available for these investments. Investments classified as Level 3 are valued as fair valued based on unobservable inputs and assumptions, which may include credit spreads, industry multipliers and discount rates. Management has assessed that the effect of changing the credit spreads to reasonably possible alternatives would increase their fair value by $119,433, or decrease their value by $63,957. For the year ended December 31, 2011 balanced at change in Balance at December 31, net transfers Realized gain unrealized gain December 31, 2010 Purchases Sales in (out) (loss) (loss)** 2011 (in $000 s) (in $000 s) (in $000 s) (in $000 s) (in $000 s) (in $000 s) (in $000 s) Long Positions: Equities (28) 1,109 Bonds (258) 4,238 (26) 636 5,528 Total 1,024 1,051 (258) 4,238 (26) 608 6,637 **Change in unrealized gain (loss) related to investments held at December 31, 2011 was ($96,335). During the year ended 2011, fixed income investments with a net fair value of $4,238,000 were transferred into Level 3 from Level 2 as observable market input were no longer available for these investments. Investments classified as Level 3 are valued as fair valued based on unobservable inputs and assumptions, which may include credit spreads, industry multipliers and discount rates. Management has assessed that the effect of changing the credit spreads to reasonably possible alternatives would increase their fair value by $79,174, or decrease their value by $231,332. The accompanying notes are an integral part of these financial statements. 13

16 notes to THE financial statements As at December 31, The Fund DDJ High Yield Fund (the Fund ) is a closed-end investment trust established under the laws of the Province of Ontario pursuant to a Trust Agreement dated August 15, The Fund commenced operations on August 28, The Fund is listed on The Toronto Stock Exchange, under the symbol HYB.UN for the trust units. CI Investments Inc. is the Manager of the Fund. The Manager has retained DDJ Capital Management, LLC (the Investment Advisor ) to provide investment advisory and portfolio management services to the Fund. A unitholders meeting was held on October 11, 2005, at which the unitholders of the Fund approved the following changes: (a) Change the investment strategy of the Fund Under the revised investment strategy, the Fund is permitted to invest in high-yield debt securities on a global basis. As a result of this change the Fund s name was changed to DDJ High Yield Fund. (b) Extend the term of the Fund The term of the Fund was extended by 10 years to August 15, 2017, from August 15, 2007, and all net assets will be distributed to unitholders on that date. (c) Ability to terminate the Fund after August 15, 2007 The Manager, at any time after August 15, 2007, may terminate the Fund if the net asset value of the Fund falls to a level that the Manager believes is not beneficial to unitholders. Following these approvals, the Fund entered into an amended and restated trust agreement dated as of October 11, SUMMARY OF SIGNIFICANT ACCOUNTING POLICES These financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ( Canadian GAAP ). Certain prior period balances have been reclassified to conform with the current period presentation. The following is a summary of the significant accounting policies of the Fund: (a) Valuation of Investments Canadian GAAP requires the fair value of financial instruments traded in an active market to be measured based on an investment s bid/ask price depending on the investment position (long/short). For the purpose of processing unitholder transactions, net asset value is calculated based on the closing market price of exchange-traded investments (referred to as Net Asset Value ), while for financial statement purposes net assets are calculated based on bid/ask price of such investments (referred to as Net Assets ). In accordance with National Instrument , a comparison between the Net Asset Value per unit and the Net Assets per unit is disclosed in Note 10. At the financial reporting date, listed securities are valued based on the bid price for securities held long and the ask price for securities held short. Unlisted securities are valued based on price quotations from recognized investment dealers, or failing that, their fair value is determined by the Manager on the basis of the latest reported information available. Fixed income securities, debentures, money market investments and other debt instruments including short-term investments, are valued at the evaluated bid quotation from recognized investment dealers. Underlying funds are valued on each business day at their net asset value as reported by the Underlying Fund s manager. The fair value of private placements is determined by using valuation models that may be based, in part, on assumptions that are not supported by observable market inputs. These methods and procedures may include, but are not limited to, performing comparisons with prices of comparable or similar securities, obtaining valuation related information from issuers and/or other analytical data relating to the investment and using other available indications of value. These values are independently assessed internally to ensure that they are reasonable. However, because of the inherent uncertainty of valuation, the estimated fair values for the aforementioned securities and interests may be materially different from the values that would have been used had a ready market for the investment existed. The fair values of private placements are affected by the perceived credit risks of the issuer, predictability of cash flows and the length of time to maturity. (b) Commissions and Other Portfolio Transaction Costs Transaction costs, such as brokerage commissions, incurred in the purchase and sale of securities, are included in Commissions and other portfolio transaction costs in the Statements of Operations. (c) Cost of Investments Cost of investments represents the amount paid for each security, and is determined on an average cost basis excluding commissions and other portfolio transaction costs. (d) Investment Transactions and Income Recognition Investment transactions are accounted for on the trade date for financial reporting purposes and any unrealized and realized gains and losses on such transactions are calculated on an average cost basis. Dividend income and distributions from investments are recognized on the ex-dividend/ex-distribution date and interest income is accounted for on the accrual basis. Distributions received from income trust holdings are recorded as income, capital gains or a return of capital, based on the best information available to the Manager. Due to the nature of these investments, actual allocations could vary from this information. Distributions from income trusts that are treated as a return of capital for income tax purposes reduce the average cost of the underlying investment trust. (e) Foreign Exchange Foreign currency amounts are translated into Canadian dollars the functional currency of the Fund as follows: fair value of investments, forward currency contracts, other assets and liabilities at the closing rate of exchange on each business day; income and expenses, purchases, sales and settlements of investments at the rate of exchange prevailing on the respective dates of such transactions. Foreign exchange gains (losses) on completed transactions are included in Foreign exchange gain (loss) as reflected in the Statements of Operations. (f) Forward Contracts The Fund may enter into forward contracts. Forward foreign currency contracts are valued on each valuation day based on the difference between the value of the contract on the date the contract originated and the value of the contract on the valuation day. All unrealized gains (losses) arising from forward foreign currency contracts are recorded as part of Change in unrealized appreciation (depreciation) of investments in the Statements of Operations and Unrealized gain (loss) on futures and foreign currency forward contracts in the Statements of Net Assets until the contracts are closed out or expire, at which time the gains (losses) are realized and reported as Realized gain (loss) on investments in the Statements of Operations. 14

17 DDJ canadian high yield fund notes to THE financial statements ( cont d) As at December 31, 2012 (g) Increase (Decrease) in Net Assets from Operations per Unit Increase (decrease) in net assets from operations per unit in the Statements of Operations is calculated by dividing the increase (decrease) in net assets from operations by the weighted average number of units outstanding during the period. (h) Cash and Short-Term Investments Cash is comprised of cash on deposit. Short-term investments are comprised of short-term debt instruments with terms to maturity of less than one year at acquisition. (i) Net Asset Value per Unit Net Asset Value per unit is calculated at the end of each day on which the Toronto Stock Exchange is open for business by dividing the total Net Asset Value by outstanding units. (j) Income Taxes The Fund complies with the Income Tax Act (Canada) to qualify as a mutual fund trust. A mutual fund trust is subject to tax in each taxation year under Part 1 of the Income Tax Act (Canada) on the amount of its income for the year, including net realized taxable capital gains, less the portion thereof that it claims in respect of the amounts paid or payable to the unitholders for the year. Income tax paid by the Fund on any net realized capital gains not paid or payable to unitholders is recoverable by the Fund. The Fund intends to distribute all of its net income and net realized capital gains so that the Fund will not generally be liable for income tax thereon. Distributions commenced December 31, 1997, and are expected to be quarterly thereafter until termination of the Fund. (k) Use of Estimates The preparation of financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the reporting date and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. 3. UNITHOLDERS EQUITY Units issued and outstanding represent the capital of the Fund. The relevant changes pertaining to subscription and redemption of the Fund units are disclosed in the Statements of Changes in Net Assets. In accordance with the objectives and risk management polices outlined in Note 14, the Fund endeavors to invest subscriptions received in appropriate investments while maintaining sufficient liquidity to meet redemptions through utilizing a short-term borrowing facility or disposal of investments when necessary. The Fund is authorized to issue an unlimited number of transferable units of the Fund of a single class and series, each of which represents an equal, undivided interest in the net assets of the Fund. The Fund s trust agreement was amended in August 2007 to allow unitholders to exercise their redemption rights on a monthly basis. The monthly redemption entitles unitholders to receive a price per unit equal to the lesser of (i) 90% of the market price per unit on the applicable monthly valuation date (10 day average trading price); and (ii) the closing market price per unit on the applicable monthly valuation date. On February 2, 2009, the Fund announced its distribution policy. The Fund will now pay $0.20 per quarter for an annual total of $0.80 for Capital transactions of the Fund for the years ended December 31 consisted of the following: 4. MANAGEMENT AND OTHER FEES (a) Management Fees The Fund pays to the Manager an annual fee (the Management fees ) equal to 1.10% of the Net Asset Value of the Fund calculated and paid monthly in arrears. (b) Administrative Fees The Fund is also responsible for all its expenses incurred in connection with its operations and administration (fees shown as administration fee include: trustee fees, transfer agency, custody and accounting fees). Audit fees, legal fees and independent review committee fees, are disclosed separately. (c) Performance Fees In addition, the Manager will receive an annual performance fee (the Performance fees ) equal to 20% of the amount by which the percentage increase in net asset value of the Fund exceeds an annualized threshold increase of 8%. To the extent that the increase in net asset value of the Fund does not exceed the threshold, then the amount by which such increase falls below the threshold will be carried forward on a cumulative basis and deducted from the amount of any increase in net asset value of the Fund on which the performance fee is calculated in subsequent years. The performance fee will be accrued weekly and payable within ten days after the last day of each fiscal year of the Fund. No performance fee has been earned or paid since inception of the Fund. (d) Advisory Fees A portion of the management fees and all of the performance fees payable to the Manager will be paid to the Investment Advisor by the Manager. 5. MARKET REPURCHASE PROGRAM In accordance with the Fund s prospectus, and to enhance liquidity and to provide support to the units, the Fund has a mandatory market purchase program. The Fund may purchase any units offered in the market at the then prevailing market price up to a maximum amount in any year of 10% of the number of units outstanding at the beginning of the calendar year. Units that have been purchased by the Fund will be cancelled. The Fund filed a notice of intention to make a normal course issuer bid on December 4, The issuer bid commenced on December 7, 2012 and will terminate on the earliest of the date on which the maximum number of units have been purchased, the date the Fund provides notice of termination, or December 6, The maximum number of units that may be acquired is 308,173 units. Under its previous normal course issuer bid commencing December 7, 2011 and terminating December 6, 2012, the Fund purchased 35,900 units. Unitholders may obtain a copy of the notice of intention to make a normal course issuer bid by contacting the Manager. At December 31, 2012, 3,500 units have been purchased under the current normal course issuer bid at a total cost of $35,805 (35,900 units at cost of $360,795 for 2011). 6. SECURITIES LENDING The Fund has entered into a securities lending program with its custodian, RBC Investor Services Trust. The aggregate market value of all securities loaned by the Fund cannot exceed 50% of the assets of the Fund. The Fund will receive collateral of at least 102% of the value of securities on loan. Collateral will generally be comprised of cash and obligations of or guaranteed by the Government of Canada or a province thereof, or by the United States government or its agencies, but may include obligations of other governments with appropriate credit ratings. As at December 31, 2012 and 2011 the Fund was not engaged in any securities lending. Unit Transactions Balance, beginning of year 3,113,629 3,173,529 Reinvestments Redemptions (35,400) (59,900) Balance, end of year 3,078,229 3,113,629 15

18 notes to THE financial statements ( cont d) As at December 31, BROKERAGE AND OTHER COMMISSIONS Brokerage commissions paid for security transactions during the years ended December 31 were as follows: (in $000 s) Brokerage Commission 5 6 Soft Dollar commission A portion of brokerage commissions paid was used to cover research and market data services, termed soft dollar commissions. These amounts have been estimated by the Manager. No soft dollar commissions were paid in 2012 and INCOME TAX LOSSES CARRY FORWARD Net capital losses may be carried forward indefinitely to reduce future net realized capital gains. Non-capital losses arising in taxation years 2004 and 2005 may be carried forward ten years. Non-capital losses arising in taxation years after 2005 may be carried forward twenty years. Non-capital losses carried forward may reduce future taxable income. Loss carry forwards (in $000 s) N net capital loss carried forward , 603 Year of expiry non-capital loss carried forward Total 9. REINVESTMENT OF DISTRIBUTIONS When the Fund pays a distribution to a unitholder, it will be paid in the same currency in which the units are held. Distributions due to those unitholders (the Plan Participants ) who participate in the Reinvestment Plan will be applied to the purchase of trust units on behalf of Plan Participants. The Manager may change the distribution policy at its sole discretion. Further information regarding reinvestment of distributions can be found in the Prospectus or by writing to the Manager, or by contacting your dealer. 10. NET ASSETS COMPARISON In accordance with National Instrument , a comparison of net assets per unit and net asset value per unit as at December 31, is as follows: ($) ($) Net Assets per unit Net Asset Value per unit RELATED PARTY TRANSACTIONS The Bank of Nova Scotia has a significant interest in CI Financial Corp., the parent company of the Manager. The Fund may have direct or indirect holdings in The Bank of Nova Scotia and/or CI Financial Corp. as identified in the Statement of Investment Portfolio of the Fund, if applicable. 12. INTERNATIONAL FINANCIAL REPORTING STANDARDS As previously confirmed by the Canadian Accounting Standards Board ( AcSB ), most Canadian publicly accountable entities adopted International Financial Reporting Standards ( IFRS ), as published by the International Accounting Standards Board, on January 1, However, the AcSB has allowed most investment funds to defer adoption of IFRS until fiscal years beginning on or after January 1, Accordingly, the Fund will adopt IFRS for its fiscal period beginning January 1, 2014, and will issue its initial financial statements in accordance with IFRS, including comparative information, for the interim period ending June 30, FINANCIAL INSTRUMENTS The categorization of financial instruments is as follows: investments and derivatives are classified as held for trading and are stated at fair value. Receivable for securities sold and dividends and accrued interest receivable are designated as loans and receivables. They are recorded at amortized cost which approximates their fair value due to their short-term nature. Similarly payable for securities purchased, management and administration fees payable, accrued expenses and distributions payable are designated as financial liabilities and are carried at their amortized cost which approximates their fair value, due to their short-term nature. Financial liabilities are generally settled within three months. 14. FINANCIAL INSTRUMENTS RISK Risk Management The Fund is exposed to a variety of financial instruments risks: credit risk, liquidity risk and market risk (including interest rate risk, currency risk and other price risk). The level of risk to which the Fund is exposed to depends on the investment objective and the type of investments the Fund holds. The value of investments within a portfolio can fluctuate daily as a result of changes in prevailing interest rates, economic and market conditions and company specific news related to investments held by the Fund. The Manager of the Fund may minimize potential adverse effects of these risks on the Fund s performance by, but not limited to, regular monitoring of the Fund s positions and market events, diversification of the investment portfolio by asset type, country, sector, term to maturity within the constraints of the stated objectives, and through the usage of derivatives to hedge certain risk exposures. Other Price Risk Other price risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or currency risk). The value of each investment is influenced by the outlook of the issuer and by general economic and political conditions, as well as industry and market trends. All securities present a risk of loss of capital. Except for options written, future contracts and investments sold short, the maximum risk resulting from financial instruments is equivalent to their fair value. Other assets and liabilities are monetary items that are short-term in nature and therefore are not subject to other price risk. Interest Rate Risk Interest rate risk is the risk that the fair value of interest-bearing investments will fluctuate due to changes in prevailing levels of market interest rates. As a result, the value of the Fund that invests in debt securities and/or income trusts will be affected by changes in applicable interest rates. If interest rates fall, the fair value of existing debt securities may increase due to the increase in yield. Alternatively, if interest rates rise, the yield of existing debt securities decrease which may then lead to a decrease in their fair value. The magnitude of the decline will generally be greater for long-term debt securities than for short-term debt securities. 16

19 DDJ canadian high yield fund notes to THE financial statements ( cont d) As at December 31, 2012 Interest rate risk also applies to a Fund that invests in convertible securities. The fair value of these securities varies inversely with interest rates, similar to other debt securities. However, since they may be converted into common shares, convertible securities are generally less affected by interest rate fluctuations than other debt securities. Currency Risk Currency risk arises from financial instruments that are denominated in a currency other than the Canadian dollar, the functional currency of the Fund. As a result, the Fund may be exposed to the risk that the value of securities denominated in other currencies will fluctuate due to changes in exchange rates. The Statement of Investment Portfolio identifies all bonds and derivative instruments denominated in foreign currencies. Equities traded in foreign markets are exposed to currency risk as the prices denominated in foreign currencies are converted to the Fund s functional currency to determine their fair value. Credit Risk Credit risk is the risk that a security issuer or counterparty to a financial instrument will fail to meet its financial obligations. The fair value of a debt instrument includes consideration for the credit worthiness of the debt issuer. The fair value of debt instrument as shown on the Statement of Investment Portfolio represents credit risk exposure of the Fund. Credit risk exposure for derivative instruments is based on the Fund s unrealized gain on the contractual obligations with the counterparty as at the reporting date. The credit risk exposure of the Fund s other assets are represented by their carrying amount as disclosed in the Statements of Net Assets. Credit ratings for debt securities, preferred securities and derivative instruments are obtained from Standard & Poor s, where available, otherwise ratings are obtained from: Moody s Investors Service, Dominion Bond Rating Services or Canadian Bond Rating Services. Credit ratings can be either long-term or short-term. Short-term credit ratings are generally assigned to those obligations and derivative instruments considered short-term in nature. The table below provides a cross-reference between the longterm credit ratings disclosed in the Credit Rating table inclusive of the short-term credit ratings disclosed in the derivative schedule in the Statement of Investment Portfolio. Credit Rating as per credit Rating as per Credit Risk table derivatives schedule AAA/Aaa/A++ A-1+ AA/Aa/A+ A-1, A-2, A-3 A B, B-1 BBB/Baa/B++ B-2 BB/Ba/B+ B-3 B C CCC/Caa/C++ - CC/Ca/C+ - C and Lower D Not Rated WR Liquidity Risk Liquidity risk is the risk that the Fund may not be able to settle or meet its obligations, on time or at a reasonable price. The Fund s exposure to liquidity risk is moderate, as some of the Fund s assets are in private investments such as term loans, which are not traded in an organized market and may experience periods of low liquidity. Similarly, there may be circumstances where the supply or demand for a particular bond issue may be limited as well. However, the Fund is closed-ended and does not require high levels of liquidity to meet potential redemption requests. DDJ believes that the Fund s liquidity is sufficient to meet quarterly distributions and redemptions either from income or asset disposition. Illiquid securities are identified in the Statement of Investment Portfolio. Fair Value Hierarchy The Fund is required to classify financial instruments measured at fair value using a fair value hierarchy. Investments whose values are based on quoted market prices in active markets are classified as Level 1. This level may include publicly traded equities, exchange traded and retail mutual funds, exchange traded warrants, futures contracts, traded options, American depositary receipts ( ADRs ) and Global depositary receipts ( GDRs ). Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified as Level 2. These may include fixed income securities, mortgage backed securities ( MBS ), shortterm instruments, non-traded warrants, over-the-counter options, structured notes of indexed securities, foreign currency forward contracts and swap instruments. Investments classified as Level 3 have significant unobservable inputs. Level 3 instruments may include private equities, private term loans, private equity funds and certain derivatives. As observable prices are not available for these securities, the Fund may use a variety of valuation techniques to derive the fair value. Details of the Fund s exposure to financial instruments risks including the fair value hierarchy classifications are available in the Fund Specific Financial Instruments Risks section of the financial statements. 15. OTHER At December 31, 2012, the Fund had no unfunded commitments outstanding (2011- US$65,528). Significant cash balances as disclosed in the Statements of Net Assets are maintained by the Custodian, RBC Investor Services Trust. The Manager monitors the credit worthiness of the custodian on a regular basis. All transactions executed by the Fund in listed securities are settled / paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligation. 17