10AUG Semi-Annual Report. to Unitholders

Transcription

1 10AUG Semi-Annual Report to Unitholders June 30, 2016

2 10AUG Notice: The unaudited interim condensed financial statements of the Trust have been prepared by and are the responsibility of the Trust s management. The Trust s independent auditor has not reviewed these financial statements.

3 10AUG REPORT TO UNITHOLDERS The following presents the financial results of Top 20 U.S. Dividend Trust (the Trust ) for the six months ended June 30, Trust Structure The Trust is a closed-end investment fund established as a trust to provide holders (the Unitholders ) of Class A units and Class U units (collectively, the Units and each, a Unit ) with investment exposure, on a tax-advantaged basis, to an equally-weighted portfolio (the Portfolio ) comprised of the 20 highest yielding equity securities (the Portfolio Securities ) included in the Dow Jones Industrial Average (the Dow ). The Dow is a price-weighted average index consisting of 30 large and well-known U.S. blue-chip companies. The Trust s investment objectives are to: (i) provide Unitholders with stable monthly tax-advantaged distributions and (ii) provide Unitholders with the opportunity for capital appreciation, in each case through exposure by virtue of the Forward Agreement (defined below). The distributions are funded from dividends generated by the Portfolio and supplemented by premiums received on writing options on a portion of the Portfolio Securities. The Trust does not have a fixed distribution but intends to pay monthly distributions through pre-settlements of the Forward Agreement based on dividends and other distributions received on the Portfolio and premiums received on writing covered call options less estimated expenses of the Trust and TTU Trust (defined below). Monthly distributions are currently targeted to be $ per Class A Unit and US$ per Class U Unit ($0.50 and US$0.50 per annum, respectively), consisting primarily of returns of capital which are not immediately taxable but which reduce the adjusted cost base of the Units. The net asset value for the Class A Units is calculated in Canadian dollars and for the Class U Units, in U.S. dollars. To pursue its investment objectives, the Trust entered into two forward purchase agreements (collectively, the Forward Agreement ) with The Bank of Nova Scotia (the Counterparty ) pursuant to which the Counterparty has agreed to pay the economic return provided by TTU Trust, the reference fund of the Trust, which holds the Portfolio. Substantially all of the value of the Portfolio attributable to the Class A Units is hedged back to the Canadian dollar. The Class U Units are designed for investors wishing to hold their investment in U.S. dollars. As a result of the forgoing, the net asset value of the Units will vary depending on the performance of TTU Trust by virtue of the Forward Agreement and will also vary depending on the expenses allocated to, and distributions paid in respect of, the particular class of Units of the Trust. The Trust partially pre-settles the Forward Agreement in order to fund (i) monthly distributions on the Units; (ii) redemptions of Units from time to time; and (iii) operating expenses and other liabilities of the Trust. Highstreet Asset Management Inc. (the Portfolio Manager and Options Advisor or Highstreet ) provides portfolio management services required by TTU Trust including currency hedging strategies and acts as the options advisor to execute and maintain the option writing strategy of TTU Trust. The Portfolio is 1

4 10AUG reconstituted annually to include the top 20 highest yielding constituents included in the Dow and is re-balanced to an equal weight basis prior to the end of each calendar quarter. Highstreet writes covered call options from time to time in respect of not more than 33% of the Portfolio in order to earn income from option premiums to supplement dividends generated by the Portfolio. Highstreet will generally only write covered calls to the extent for the Trust, by virtue of the Forward Agreement, to pay the targeted distribution. The Trust will purchase Units under the mandatory market purchase program to the extent premiums generated from writing covered call options are in excess of amounts needed to fund the distribution. The Class A Units of the Trust are listed for trading on the Toronto Stock Exchange under the symbol TUT.UN. The Class U Units are not listed on a stock exchange but may be converted into Class A Units on a weekly basis for liquidity purposes. Tax Changes Affecting Forward Agreement Structures In the Federal budget announced March 21, 2013, the Federal government proposed and enacted legislation to eliminate the tax benefits associated with forward agreements used by some investment funds to achieve capital gains treatment on income that would otherwise be treated as ordinary income. The government refers to these as character conversion transactions. Distributions from investment funds which enter into a forward agreement will now generally be taxed as income at the time of distribution as opposed to returns of capital, which are not generally taxable at time of receipt, and capital gains. This measure applies to forward agreements entered into on or after March 21, The less favorable tax treatment also applies to forward agreements entered into before March 21, 2013, if the terms of the agreement are extended or modified. This measure does not immediately affect the Trust as it entered into its Forward Agreement before March 21, 2013 and as such, the distributions will continue to be characterized primarily as returns of capital and capital gains until the Forward Agreement matures on October 31, Report from Portfolio Manager and Options Advisor Overview Highstreet manages the option overlay strategy which involves selling covered call options on up to, but not more than, 33% of the Trust. The percentage of Portfolio Securities written on for each holding and the strike prices chosen are primarily a function of the Trust s income requirements. Highstreet may choose to close out option positions prior to their expiry, for options that are both out-of-the-money, and/or in-the-money, when prudent. Highstreet endeavors to avoid assignment, when possible, on any in-the-money positions. The overall investment objectives of the Trust are to provide targeted monthly cash distributions, to provide the opportunity for capital appreciation, and to provide lower overall volatility of 2

5 10AUG portfolio returns than would otherwise be experienced from owning the equity securities on a stand-alone basis. Market Performance The first half of 2016 started on a negative note for US markets as the S&P 500 broad market index experienced its worst start of year decline in history. Global markets followed suit experiencing some of the steepest start of the year declines in more than a decade, all fueled by anxiety over global growth, persistent weak inflation in Japan and Europe, continuing concerns over the Chinese economy, and somewhat paradoxically uncertainty over the future path of interest rate increases out of the Federal Reserve, following the Federal Reserve s Federal Open Market Committee s decision to raise interest rates for the first time in 9 years, setting the United States on a divergent monetary policy course from other central banks. The Federal Reserve, citing continued concern about the global economy, took a more dovish tone to raising rates, and lowered its guidance for the future path of rate expectations early in the year. Somewhat positive economic data through the first half of the year in the form of strong jobs reports saw a more hawkish tone from the Fed and revived hopes for the US to resume its path of raising interest rates this year. Global economies continued to exhibit sluggish growth, and engaged in further easing with the European and Japanese Central Banks adopting negative rates while Chinese officials cut their required Reserve Ratio requirement. Norway, Indonesia, and Hungary also cut interest rates. With the Federal Reserve telegraphing a wait-and-see approach to the Brexit question, combined with a disappointing jobs number in May, rate hike expectations once again declined. The Fed s whipsawing between dovish and hawkish sentiment resulted in elevated US Dollar volatility which, in addition to uncertainty over global growth spurred by the surprise decision by the British people to leave the European Union, caused a prevalent risk-off sentiment. As a result, the 10-Year US yield dropped to record lows while gold and the Japanese yen rallied due to their safe haven status. The Trust s benchmark, the Dow Jones Industrial Average, delivered a total return over the period of 4.3%, while the Trust delivered a total return of 5.0%. Portfolio Performance The portfolio delivered a total return of 6.1% for the year comprised of: 2.7% of price change, 1.4% from dividends received and 2.0% from option premiums earned. 3

6 10AUG Performance for each of the individual Portfolio Securities held during the period was as follows: Performance 1 Securities (%) Consumer Discretionary McDonald s Corp. 3.4% Consumer Staples Procter & Gamble Co. 8.4% The Coca-Cola Company 7.2% Wal-Mart Stores Inc. 20.9% Energy Chevron Corp. 19.3% Exxon Mobil Corp. 22.4% Financial Services JPMorgan Chase & Co. 4.5% Health Care Johnson & Johnson 19.8% Merck & Co Inc. 10.9% Pfizer Inc. 11.2% Industrials 3M Company 17.9% Caterpillar Inc. 14.1% General Electric Company 2.6% Boeing Co. 8.6% United Technologies Corp. 8.6% Information Technology Cisco Systems Inc. 7.5% Intel Corp. 3.1% International Business Machines Corp. 12.5% Microsoft Corp. 6.5% Materials EI du Pont de Nemours & Co. 5.3% Telecommunications Verizon Communications Inc. 23.6% 1 Performance comprised of price change and dividends. 4

7 10AUG Options Activity For the period, call options were written on the Trust s Portfolio Securities raising $1.0 million in premiums or approximately 2.0% on the Portfolio. The average percentage written on the Portfolio was approximately 27.7% with an average strike percentage of 102.0%. Highstreet s proprietary option overlay model examines a number of factors, including short-term price change and momentum metrics, to determine a target level of call writing and level of strike for each holding in the underlying Portfolio. Targeted strike levels are preferably out-of-the-money to allow the opportunity to capture potential positive performance of the underlying stocks in addition to option premiums. Financial Performance The net assets attributable to Unitholders were $10.84 per Class A Unit and US$10.93 per Class U Unit at June 30, 2016 as compared to $10.58 per Class A Unit and US$10.63 per Class U Unit at December 31, Pursuant to the mandatory market purchase program the Trust may purchase any Units offered in the market at a price less than 98% of the latest net asset value per Unit. For the six month period ended June 30, 2016, 11,000 Class A Units ( ,790) were purchased under this program at an average price of $10.02 (2015 $11.09) per Class A Unit for a total purchase amount of $110,221 (2015 $175,122). Distributions For the six months ended June 30, 2016, the Trust declared total distributions of $1.2 million (2015 $1.7 million) comprised of $1.0 million or $ per Class A Unit (2015 $1.4 million or $ per Class A Unit) and US$0.2 million or US$ per Class U Unit (2015 US$0.3 million or US$ per Class U Unit). Dividends earned on the Portfolio Securities and premiums received on writing covered call options on a portion of the Portfolio Securities funded the distributions and operating expenses of the Trust. For the six months ended June 30, 2016, $1.2 million (2015 $1.8 million) was available for distribution comprised of dividends earned on the Portfolio Securities (including interest) of $0.8 million (2015 $1.3 million) and net option premiums received of $1.0 million (2015 $1.4 million) offset by total operating expenses (excluding transaction costs) and purchases under the mandatory market purchase program of $0.6 million (2015 $0.9 million). This report, along with the accompanying financial statements of the Trust, is respectfully submitted to you on behalf of the Board of Directors of TTU Ltd., as general partner of TTU Limited Partnership, Trustee for Top 20 U.S. Dividend Trust. 6MAY Brian D. McChesney President and Chief Executive Officer Toronto, Canada August 16,

8 10AUG INTERIM CONDENSED STATEMENTS OF FINANCIAL POSITION (unaudited) As at June 30 December 31 All amounts are in CAD $ unless otherwise noted Assets Current assets Forward Agreement, at fair value (note 4) $ 53,275,343 $ 75,438,215 Receivable from Counterparty (note 4) 235, ,228 Cash 180, ,499 53,691,277 76,003,942 Liabilities Current liabilities Distributions payable 204, ,460 Accrued liabilities (note 7) 155, ,148 Retraction proceeds payable 22,723, ,963 23,168,918 Net assets attributable to Unitholders $ 53,331,314 $ 52,835,024 Net assets attributable to Unitholders per Class Class A $ 44,404,179 $ 42,283,668 Class U (in equivalent CAD$) $ 8,927,135 $ 10,551,356 Class U USD $ 6,787,337 $ 7,505,599 Number of Units outstanding (note 6) Class A 4,096,206 3,994,779 Class U 621, ,153 Net assets attributable to Unitholders per Unit Class A $ $ Class U (in equivalent CAD$) $ $ Class U USD $ $ See accompanying notes to the interim condensed financial statements. On behalf of the Board of Directors of TTU Ltd.: 6MAY Brian D. McChesney President and Chief Executive Officer 12MAY James P. Bowland Chairman of the Board 6

9 10AUG INTERIM CONDENSED STATEMENTS OF COMPREHENSIVE INCOME For the six months ended June 30 (unaudited) Income Foreign exchange (loss) gain on cash $ (14,784) $ 15,037 Forward Agreement Net realized gain on partial pre-settlements of Forward Agreement 4,972,725 11,406,642 Unrealized (depreciation) on Forward Agreement (2,819,017) (12,306,009) Forward Agreement fees (note 7) (106,300) (183,100) Net gain (loss) on Forward Agreement 2,047,408 (1,082,467) Realized loss on foreign exchange transactions (41,649) (20,873) Total income (loss), net 1,990,975 (1,088,303) Expenses Management fees (note 7) 72, ,500 Unitholders information costs 22,600 22,300 Directors fees 11,500 12,500 Listing fees 5,500 7,600 Audit fees 7,350 7,575 Transfer agent fees 6,000 6,000 Insurance premiums 5,750 5,825 Legal fees 4,500 4,500 Independent Review Committee fees 1,875 1,875 Transaction costs (note 7) Other 4,330 2, , ,724 Increase (decrease) in net assets attributable to Unitholders $ 1,849,249 $ (1,271,027) Net increase (decrease) in net assets attributable to Unitholders per class Class A $ 2,088,411 $ (1,774,754) Class U (239,162) 503,727 $ 1,849,249 $ (1,271,027) Net increase (decrease) in net assets attributable to Unitholders per Unit Class A $ 0.52 $ (0.30) Class U $ (0.36) $ 0.58 See accompanying notes to the interim condensed financial statements. 7

10 10AUG INTERIM CONDENSED STATEMENTS OF CASH FLOWS For the six months ended June 30 (unaudited) Operating activities Increase (decrease) in net assets attributable to Unitholders $ 1,849,249 $ (1,271,027) Adjustments for: Foreign exchange loss (gain) on cash 14,784 (15,037) Net realized gain on partial pre-settlements of Forward Agreement (4,972,725) (11,406,642) Unrealized depreciation on Forward Agreement 2,819,017 12,306,009 Proceeds on partial pre-settlements of Forward Agreement 24,316,581 27,178,429 Receivable from Counterparty 123, ,848 Accrued liabilities 5,540 (2,172) Net cash flow provided by operating activities 24,156,064 26,908,408 Financing activities Units purchased for cancellation (110,221) (175,122) Proceeds paid on Units retracted (22,735,451) (24,925,955) Distributions paid to Unitholders (1,321,783) (1,829,005) Net cash flow used in financing activities (24,167,455) (26,930,082) Foreign exchange loss (gain) on cash (14,784) 15,037 Net decrease in cash (11,391) (21,674) Cash, beginning of period 206, ,722 Cash, end of period $ 180,324 $ 190,085 See accompanying notes to the interim condensed financial statements. 8

11 10AUG INTERIM CONDENSED STATEMENTS OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS For the six months ended June 30 (unaudited) Net assets attributable to Unitholders, beginning of period Class A $ 42,283,668 $ 66,801,300 Class U 10,551,356 11,761,995 52,835,024 78,563,295 Increase (decrease) in net assets attributable to Unitholders Class A 2,088,411 (1,774,754) Class U (239,162) 503,727 1,849,249 (1,271,027) Unit transactions (note 6): Units purchased for cancellation Class A (110,221) (175,122) Retraction of Units Class A Class U (12,141) (45,586) (12,141) (45,586) Conversion of Units Class A 1,157, ,875 Class U (1,157,344) (390,875) Financing unit transactions: Distributions to Unitholders (return of capital) Class A (1,015,023) (1,481,424) Class U (215,574) (259,783) (1,230,597) (1,741,207) Net assets attributable to Unitholders, end of period Class A 44,404,179 63,760,875 Class U 8,927,135 11,569,478 $ 53,331,314 $ 75,330,353 See accompanying notes to the interim condensed financial statements. 9

12 10AUG NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS June 30, 2016 (unaudited) 1. GENERAL INFORMATION Top 20 U.S. Dividend Trust (the Trust ) is a closed-end investment fund established as a trust under the laws of the Province of Ontario and is governed by a declaration of trust dated September 12, 2012 (the Declaration of Trust ). The address of the Trust s registered office is 40 King Street West, Toronto, Ontario, M5W 2X6. Pursuant to this Declaration of Trust, TTU Limited Partnership acts as the trustee (the Trustee ) and is responsible for managing the affairs of the Trust. Highstreet Asset Management Inc. (the Portfolio Manager and Options Advisor or Highstreet ) provides portfolio management services required by TTU Trust (see below) and acts as the options advisor to execute and maintain the option writing strategy of TTU Trust. Scotia Managed Companies Administration Inc. ( SMCAI or the Manager ), a wholly-owned subsidiary of Scotia Capital Inc. ( SCI ) which in turn is a wholly-owned subsidiary of The Bank of Nova Scotia, provides all administrative services for the Trust. The Trust is scheduled to terminate on October 31, 2017 (the Termination Date ). The Trust provides holders (the Unitholders ) of Class A units and Class U units (collectively, the Units and each, a Unit ) with investment exposure, on a tax-advantaged basis, to an equally-weighted portfolio (the Portfolio ) comprised of the 20 highest yielding equity securities (the Portfolio Securities ) included in the Dow Jones Industrial Average (the Dow ). The Dow is a price-weighted average index consisting of 30 large and well-known U.S. blue-chip companies. The Trust s investment objectives are to: (i) provide Unitholders with stable monthly tax-advantaged distributions and (ii) provide Unitholders with the opportunity for capital appreciation, in each case through exposure by virtue of the Forward Agreement (as defined herein). To pursue its investment objectives, the Trust entered into two forward purchase and sale agreements (collectively, the Forward Agreement ) with The Bank of Nova Scotia (the Counterparty ) pursuant to which the Counterparty has agreed to pay the economic return provided by TTU Trust, the reference fund of the Trust, which holds the Portfolio. The Forward Agreement is scheduled to terminate on October 31, Substantially all of the value of the Portfolio attributable to the Class A Units is hedged back to the Canadian dollar. The Class U Units are designed for investors wishing to make their investment in U.S. dollars. As a result of the forgoing, the net asset value of the Units will vary depending on the performance of the TTU Trust by virtue of the Forward Agreement and will also vary depending on the expenses allocated to, and distributions paid in respect of, the particular class of Units of the Trust. The Portfolio Manager and Options Advisor determines the Portfolio Securities on which TTU Trust writes covered call options and at what level relative to the current market price. The Portfolio Manager and 10

13 10AUG Options Advisor writes covered call options from time to time in respect of not more than 33% of the Portfolio in order to earn income from option premiums to supplement dividends generated by the Portfolio. The Portfolio Manager and Options Advisor will generally only write covered calls to the extent for the Trust, by virtue of the Forward Agreement, to pay the targeted distributions. The Trust will purchase Units under the mandatory market purchase program to the extent premiums generated from writing covered call options are in excess of amounts needed to fund the distribution. These financial statements were authorized for issuance by the Board of Directors of TTU Ltd., as general partner of the Trustee, on August 16, BASIS OF PRESENTATION Statement of Compliance These interim condensed financial statements have been prepared in compliance with International Financial Reporting Standards ( IFRS ), including IAS 34, Interim Financial Reporting as issued by the International Accounting Standards Board ( IASB ). Accordingly, certain information and footnote disclosure included in the annual financial statements prepared in accordance with IFRS, as issued by the IASB, have been omitted or condensed. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These interim condensed financial statements have been prepared using the same accounting policies as the annual financial statements for the year ended December 31, The disclosure in these interim condensed financial statements does not include all requirements of IAS 1, Presentation of Financial Statements. Accordingly, the interim condensed financial statements should be read in conjunction with the audited financial statements for the year ended December 31, Accounting standards issued but not yet adopted The final version of IFRS 9 Financial Instruments was issued by the IASB in July 2014 and will replace IAS 39 Financial Instruments: Recognition and Measurement and applies to the classification and measurement of financial assets and liabilities as defined in IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, however is available for early adoption. The Trust is in the process of assessing the impact of IFRS 9 and has not yet determined when it will adopt the new standard. 4. FORWARD AGREEMENT Pursuant to the Forward Agreement, the Counterparty will acquire, on or before the Termination Date, securities of Canadian public issuers ( Canadian Securities ) having a value based on the economic return provided by the Portfolio from inception to the Termination Date. Under the Forward Agreement, the 11

14 10AUG Counterparty will deliver, on the Termination Date, a specified portfolio of Canadian Securities with an aggregate value equal to the redemption proceeds of all of the corresponding units of TTU Trust, net of any amount then owing by the Trust to the Counterparty. The Trust partially settles the Forward Agreement prior to the Termination Date in order to fund (i) monthly distributions on the Units; (ii) redemptions of Units; and (iii) operating expenses and other liabilities of the Trust. Settlement of the Forward Agreement is unconditionally guaranteed by The Bank of Nova Scotia, a company with a current credit rating of AA as rated by DBRS. The Trust is fully exposed to the credit risk associated with the Counterparty. To secure obligations of the Counterparty under the Forward Agreement, the Counterparty pledges collateral in favour of the Trust with an aggregate value equal to the exposure under the Forward Agreement with the amount of collateral re-set on a weekly basis. As at June 30, 2016, collateral of $51.8 million (December 31, 2015 $76.4 million) consisting of liquid TSX-listed securities with no more than 10% of the value in any one issuer was held in trust for the Trust. On July 8, 2016, the Trust instructed the Counterparty to partially pre-settle $0.2 million of the Forward Agreement to fund the payment of the distributions. The Portfolio Securities whose fair value is based on the closing sale prices on the stock exchange on which such Portfolio Securities are listed and other net assets as reported by TTU Trust as at June 30, 2016 and December 31, 2015 are as follows. June 30 December Portfolio Securities $ 52,811,978 $ 76,273,271 Other net assets (liabilities) 463,365 (835,056) Net assets attributable to Unitholder $ 53,275,343 $ 75,438,215 In addition, to the income and expenses detailed in the Trust s Interim Condensed Statements of Comprehensive Income, the following shows the combined operations of the Trust and TTU Trust including 12

15 10AUG dividends earned on the Portfolio Securities net of administrative and operating expenses for the six months ended June 30, 2016 and 2015 representing amounts available for distribution to Unitholders. Top 20 U.S. Select information from the Dividend TTU Total Total Statements of Comprehensive Income Trust Trust Income Dividends $ $ 830,499 $ 830,499 $ 1,272,947 Interest , ,541 1,273,361 Expenses Management fees 72,100 71, , ,900 Withholding taxes 124, , ,942 Operating expenses (1) 69,405 39, , , , , , ,066 Income less expenses (141,505) 594, , ,295 Less: Forward Agreement fees (106,300) (106,300) (183,100) Available for distribution after deduction of Forward Agreement Fees $ (247,805) $ 594,786 $ 346,981 $ 575,195 Amounts available for distribution to Unitholders consist of: Total Total Available for distribution after deduction of Forward Agreement fees $ 346,981 $ 575,195 Plus: option premiums received 997,419 1,352,023 Less: Class A Units purchased under mandatory market purchase program (110,221) (175,122) Amounts available for distribution to Unitholders $ 1,234,178 $ 1,752,096 (1) Excluding transaction costs 13

16 10AUG OFFSETTING FINANCIAL ASSETS AND LIABILITIES Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements. Gross Gross amounts amounts Amounts not of recognized of recognized Net amounts set-off financial financial of financial financial assets liabilities offset assets instruments Net amount June 30, 2016 Forward Agreement $ 53,275,343 $ $ 53,275,343 $ $ 53,275,343 December 31, 2015 Forward Agreement $ 75,438,215 $ $ 75,438,215 $ $ 75,438,215 The Counterparty has pledged collateral in respect of their obligations under the Forward Agreement as indicated in note NET ASSETS ATTRIBUTABLE TO UNITHOLDERS The Trust may purchase any Units offered in the market at a price that is less than 98% of the latest net asset value for transactions ( Transaction NAV ) per Unit. Pursuant to the mandatory market purchase program, the Trust will purchase up to a maximum amount in any rolling 10 day period of 10% of the number of Units outstanding at the beginning of such 10 day period, subject to the terms set out in the Declaration of Trust. Purchases under the mandatory market purchase program will only be made to the extent they may be funded by premiums generated from writing covered call options in excess of amounts needed to fund the distribution up to the limit of 33% of the Portfolio. For the six months ended June 30, 2016, 11,000 Class A Units were purchased at an average price of $10.02 per Unit for a total purchase amount of $110,221 ( ,790 Class A Units totalling $175,122) under the mandatory market purchase program. 14

17 10AUG The number of Units issued and outstanding for the six months ended June 30, 2016 and the year ended December 31, 2015 for each respective class is summarized below: Class A Balance, beginning of period 3,994,779 5,909,019 Units retracted (2,015,624) Units converted from Class U Units 112, ,774 Units purchased under mandatory market purchase program (11,000) (30,390) Balance, end of period 4,096,206 3,994,779 Class U Balance, beginning of period 706, ,303 Units retracted (1,000) (74,050) Units converted to Class A Units (83,900) (102,100) Balance, end of period 621, ,153 The weighted average number of Units outstanding for the six months ended June 30, 2016 was 4,048,028 (December 31, ,950,290) Class A Units and 664,144 (December 31, ,465) Class U Units. The market value of the Class A Units on June 30, 2016 was $10.44 per Unit (December 31, 2015 $10.29). 7. RELATED PARTY INFORMATION For its services to the Trust, which include the provision of key management personnel, SMCAI is entitled to receive a management fee equal to 0.25% per annum of the net asset value. SMCAI is responsible for paying fees to Highstreet. The total management fee paid or payable to SMCAI for the six months ended June 30, 2016 was $72,100 (2015 $111,500). The ongoing management fee is calculated and accrued weekly and is payable quarterly in arrears. Under the Forward Agreement, the Trust pays to the Counterparty an additional purchase amount, calculated weekly and payable quarterly in arrears, of 0.45% per annum of the notional amount of the Forward Agreement being the net asset value of TTU Trust. The total fees paid or payable to The Bank of Nova Scotia relating to the Forward Agreement for the six months ended June 30, 2016 were $106,300 (2015 $183,100). At June 30, 2016, the Trust had accrued liabilities of $36,045 (December 31, 2015 $85,289) payable to SMCAI and had cash on deposit with SCI and The Bank of Nova Scotia of $180,191 (December 31, 2015 $206,638). For the six months ended June 30, 2016, transaction costs of $220 (December 31, 2015 $612) were paid to SCI under the mandatory market purchase program. 15

18 10AUG CAPITAL MANAGEMENT The Trust s capital is represented by net assets attributable to Unitholders. The Manager, with oversight from the Trustee, is responsible for providing all administrative services required by the Trust, including the receipt of cash from partial unwinds of the Forward Agreement and the payment of distributions to the Unitholders. The Trust makes cash distributions funded from proceeds received from partial unwinds of the Forward Agreement after deduction of operating expenses of the Trust subject to maintaining a minimum level of cash. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table outlines the fair value hierarchy of the financial instruments as at June 30, 2016 and December 31, Level 1 Level 2 Level 3 Total As at June 30, 2016 Forward Agreement $ $ 53,275,343 $ $ 53,275,343 As at December 31, 2015 Forward Agreement $ $ 75,438,215 $ $ 75,438,215 All fair value measures are recurring. The carrying amounts of receivable from Counterparty, cash and all liabilities approximate their fair value because of the short-term nature of these items. Instruments are classified as Level 1 when the related security or derivative is actively traded and a quoted price is available. Instruments are classified as Level 2 when the related security or derivative has inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. If an instrument classified as Level 1 subsequently ceases to be actively traded, it is transferred out of Level 1. In such cases, instruments are reclassified into Level 2, unless the measurement of its fair value requires the use of significant unobservable inputs, in which case it is classified as Level 3. The Trust s policy is to recognize transfers into and out of fair value hierarchy levels as of the date of the event or change in circumstances giving rise to the transfer. There were no transfers between levels during the period/year presented. Forward Agreement The fair value is based on the net asset value of TTU Trust, the difference between the contract rate and current market rates, substantially based on U.S. dollar denominated equity securities comprising the Portfolio. The inputs that are significant to the valuation are observable and therefore the Forward Agreement has been classified as Level 2. 16

19 10AUG FINANCIAL INSTRUMENT RISK MANAGEMENT In the normal course of business, the Trust is exposed to a variety of financial risks: market risk (including price risk, interest rate risk and currency risk), credit risk and liquidity risk. As it is the Trust s mandate, through the Forward Agreement, to be fully invested in a defined portfolio and pay distributions from cash flows to the maximum extent possible, the Trust s overall risk management program focuses on compliance and execution of the Trust s investment objectives and strategies. Price Risk By virtue of the Forward Agreement, the value of a Unit is dependent on the value of the Portfolio Securities held by TTU Trust. The value of the Portfolio Securities can fluctuate on a daily basis as a result of factors outside of TTU Trust s control, including financial performance of the issuers, operational risks relating to the specific business activities of the respective issuers, quality of assets owned by respective issuers, commodity prices, exchange rates, interest rates, environmental risks, political risks, issues relating to government regulation and taxation, composition of the portfolio and other financial market conditions. The covered call writing program generates an additional stream of income to the Portfolio and reduces the overall level of portfolio volatility. As TTU Trust s mandate is to track the 20 highest yielding members of the Dow and pay distributions to the maximum extent possible, it does not use any other strategies in managing any of these market price risks. If the prices for the Portfolio Securities held by TTU Trust had increased by 5% as at June 30, 2016, with all other variables held constant, the Trust s net assets would have increased by approximately $1.6 million or $0.38 per Unit (December 31, 2015 $2.2 million or $0.36 per Unit) of Class A Units and $0.3 million or $0.48 per Unit (December 31, 2015 $0.6 million or $0.77 per Unit) of Class U Units. Similarly, if prices had decreased by 5%, net assets would have decreased by approximately ($2.0) million or ($0.48) per Unit (December 31, 2015 ($2.2) million or ($0.36) per Unit) of Class A Units and ($0.4) million or ($0.49) per Unit (December 31, 2015 ($0.6) million or ($0.77) per Unit) of Class U Units. In practice, the actual results may differ materially from this sensitivity analysis. Interest Rate Risk Interest rate risk arises from changes in the prevailing levels of market interest rates, resulting in fluctuations in the value of interest bearing financial instruments. By virtue of the Forward Agreement, the majority of the Trust s assets are equities that do not pay a fixed rate of interest; however, the Trust is exposed to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on the Portfolio Securities. Any excess cash is invested in short-term money market instruments or in a deposit account. 17

20 10AUG Currency Risk Currency risk arises from financial instruments that are denominated in a currency other than the Canadian dollar, which is the Trust s functional and presentation currency. By virtue of the Forward Agreement, the Trust is exposed to equity securities denominated in U.S. dollars and is therefore indirectly exposed to currency risk due to changes in the foreign currency rates of those equity securities denominated in U.S. dollars in relation to the Canadian dollar. The Manager enters into foreign exchange contracts in TTU Trust for hedging purposes to reduce its foreign currency exposure. No U.S. dollar hedging is done on the portion of TTU Trust attributable to Class U Units as they are denominated in U.S. dollars. The table below indicates the foreign currencies to which TTU Trust had exposure as at June 30, 2016 and December 31, 2015 in Canadian dollar terms. The table also illustrates the potential impact to TTU Trust s net assets as at June 30, 2016 and December 31, 2015 if TTU Trust s functional currency, the Canadian dollar, had strengthened or weakened by 5% in relation to U.S. dollars, with all other variables held constant. In practice, the actual results may differ materially from this sensitivity analysis. Substantially all of the currency exposure detailed below is attributed to the Class A Unitholders. Class A Units Total exposure* Impact on Net Assets June 30 December 31 June 30 December United States Dollar $ 1,956,000 $(1,546,000) $ 97,800 $ (77,300) As a % of Net Assets 4.42% 2.42% 0.22% 0.12% * Exposure to U.S. dollars has been hedged in TTU Trust with US$33.1 million (December 31, 2015 US$48.0 million) notional foreign exchange contract. Credit Risk Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with another party. The Trust maintains all of its cash and cash equivalents in bankers acceptances or term deposits with financial institutions having a minimum debt rating of A. All transactions in listed securities undertaken by TTU Trust are settled or paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is made only when TTU Trust has received payment. Payment is made on purchases once the securities have been received by TTU Trust. Should either party not meet its obligation, the trade will fail. Credit risk pertaining to the Forward Agreement is detailed in Note 4. 18

21 10AUG Liquidity Risk Liquidity risk is defined as the risk that the Trust may not be able to settle or meet its obligations on time or at a reasonable price. The Trust is only exposed to annual cash redemptions and receives notification 45 days prior to payment. By virtue of the Forward Agreement, the Trust invests its assets in investments that are traded in an active market and can be readily disposed of. There can be no assurance that an adequate market for the Portfolio Securities will exist at all times, or that the prices at which the Portfolio Securities trade, accurately reflect their net asset values. The Trust and TTU Trust maintain cash and cash equivalents to offset all of its liabilities with the exception of the Trust s obligation for net assets attributable to Unitholders. As at June 30, 2016, the maturity of the Trust s financial liabilities based on the remaining period between the financial statement date and the contractual maturity date was $0.4 million (December 31, 2015 $23.2 million) due in 1 to 6 months. 19

22 10AUG NOTES 20

23 10AUG CORPORATE INFORMATION PRINCIPAL OFFICE Scotia Plaza, 26th Floor 40 King Street West Station A, P.O. Box 4085 Toronto, Ontario M5W 2X6 Telephone: (416) Facsimile: (416) Web site: TRUSTEE TTU Limited Partnership Toronto, Ontario DIRECTORS AND OFFICERS James P. Bowland CPA, CA * Director and Chairman of the Board Brian D. McChesney Director, President and Chief Executive Officer Robert Hall Director PORTFOLIO MANAGER AND OPTIONS ADVISOR Highstreet Asset Management Inc. 244 Pall Mall Street, Suite 350 London, Ontario N6A 5P6 REGISTRAR & TRANSFER AGENT Computershare Investor Services Inc. 100 University Avenue Toronto, Ontario M5J 2Y1 LEGAL COUNSEL Stikeman Elliott LLP Toronto, Ontario SYMBOL Class A Units TUT.UN AUDITOR PricewaterhouseCoopers LLP Toronto, Ontario Stephen D. Pearce CPA, CA Director, Chief Financial Officer and Secretary Thomas A. Pippy CPA, CA * Director Patrick Lincoln* Director * Audit Committee Member INDEPENDENT REVIEW COMMITTEE James P. Bowland CPA, CA Thomas A. Pippy CPA, CA (Chairman) Patrick Lincoln 21

24 TOP 20 U.S. DIVIDEND TRUST 40 KING STREET WEST, SCOTIA PLAZA, 26TH FLOOR Toronto, Ontario M5W 2X6 22

25 TTU Trust Semi-Annual Report to Unitholder June 30,

26 24 Notice: The unaudited interim condensed financial statements of the Fund have been prepared by and are the responsibility of the Fund s management. The Fund s independent auditor has not reviewed these financial statements.

27 TTU Trust REPORT TO UNITHOLDER The following presents the financial results of TTU Trust (the Fund ) for the six months ended June 30, Trust Structure The Fund is an investment trust created to invest in an equally-weighted portfolio (the Portfolio ) comprised of the 20 highest yielding equity securities (the Portfolio Securities ) included in the Dow Jones Industrial Average. The Fund commenced operations on October 15, 2012 with The Bank of Nova Scotia as its sole holder of units (the Counterparty and Unitholder ). The Fund issued Class A Units (the Class A Units ) and U.S. dollar denominated Class U units (the Class U Units, and together with the Class A Units, the Units ). Substantially all of the U.S. dollar value of the Portfolio attributable to the Class A Units is hedged back to the Canadian dollar. The Counterparty entered into two forward purchase and sale agreements (collectively, the Forward Agreement ) with Top 20 U.S. Dividend Trust (the Trust ) pursuant to which the Counterparty has agreed to pay the economic return provided by the Fund. The Trust partially pre-settles the Forward Agreement in order to fund (i) monthly distributions on the Units; (ii) redemptions of Units from time to time; and (iii) operating expenses and other liabilities of the Trust. Highstreet Asset Management Inc. (the Portfolio Manager and Options Advisor ) provides any portfolio management services required by the Fund including currency hedging strategies and acts as the options advisor to execute and maintain the option writing strategy of the Fund. The Portfolio Manager and Options Advisor determines the Portfolio Securities on which the Fund writes covered call options and at what level relative to the current market price. The Portfolio Manager and Options Advisor writes covered call options from time to time on respect of not more than 33% of the Portfolio in order to earn income from option premiums to supplement dividends generated by the Portfolio. The Portfolio Manager and Options Advisor will generally only write covered calls to the extent needed to increase the yield on the Portfolio to a targeted yield. Financial Performance The net assets attributable to the Unitholder were $10.49 per Class A Unit and US$11.31 per Class U Unit as at June 30, 2016 as compared to $10.43 per Class A Unit and US$10.93 per Class U Unit as at December 31, 2015, reflecting appreciation in the fair value of the Portfolio Securities. 25

28 TTU Trust Distributions For the six months ended June 30, 2016, the Fund declared distributions on the Units aggregating $1.51 million (2015 $2.14 million). The distributions were funded through dividends received on the Portfolio Securities net of operating expenses, excluding transaction costs, ( Net Investment Income ) together with premiums received on writing covered call options on a portion of the Portfolio Shares. For the six months ended June 30, 2016, funding totaled $1.59 million (2015 $2.29 million) comprised of Net Investment Income of $0.59 million (2015 $0.94 million) and option premiums received of $1.00 million (2015 $1.35 million). This report, along with the accompanying financial statements of the Fund, is respectfully submitted to you on behalf of the Board of Directors of TTU Ltd., as general partner of TTU Limited Partnership, Trustee for TTU Trust. 6MAY Brian D. McChesney President and Chief Executive Officer Toronto, Canada August 12,

29 TTU Trust INTERIM CONDENSED STATEMENTS OF FINANCIAL POSITION As at (unaudited) June 30 December 31 All amounts are in CAD $ unless otherwise noted Assets Current assets Investments, at fair value $ 52,811,978 $ 76,273,271 Cash 1,222, ,955 Dividends receivable 50,850 77,077 54,085,434 76,895,303 Liabilities Current liabilities Unrealized loss on foreign exchange contracts (note 4) 503,527 1,078,976 Distributions payable 235, ,228 Accrued liabilities (note 7) 70,954 18, ,091 1,457,088 Net Assets attributable to Unitholder $ 53,275,343 $ 75,438,215 Net assets attributable to Unitholder per Class Class A $ 44,206,262 $ 63,805,847 Class U (in equivalent CAD$) $ 9,069,081 $ 11,632,368 Class U USD $ 7,016,117 $ 8,467,363 Number of Units outstanding (note 6) Class A 4,215,716 6,118,913 Class U 620, ,800 Net assets attributable to Unitholder per Unit Class A $ $ Class U (in equivalent CAD$) $ $ Class U USD $ $ See accompanying notes to the interim condensed financial statements. On behalf of the Board of Directors of TTU Ltd.: 6MAY Brian D. McChesney President and Chief Executive Officer 12MAY James P. Bowland Chairman of the Board 27

30 TTU Trust INTERIM CONDENSED STATEMENTS OF COMPREHENSIVE INCOME For the six months ended June 30 (unaudited) Income Foreign exchange (loss) gain on cash $ (112,456) $ 56,616 Investments and options: Dividends 830,499 1,272,947 Net realized gain on investments and options (note 8) 7,330,516 12,177,762 Net unrealized loss on investments and options (7,952,219) (8,566,812) Net gain on investments and options 208,796 4,883,897 Foreign exchange transactions and contracts: Realized gain (loss) on foreign exchange transactions and contracts 1,702,248 (4,778,843) Net unrealized gain (loss) on foreign exchange contracts 575,448 (701,781) Net gain (loss) on foreign exchange transactions and contracts 2,277,696 (5,480,624) Net gain (loss) on financial instruments at fair value 2,374,036 (540,111) Interest Total income (loss), net 2,374,080 (539,697) Expenses Withholding taxes 124, ,942 Management fees (note 7) 71, ,400 Transaction costs (note 7) 26,152 32,098 Directors fees 10,255 13,000 Custodial fees 9,180 6,750 Audit fees 5,870 9,875 Insurance premiums 5,750 5,825 Legal fees 3,950 1,950 Independent Review Committee fees 1,875 1,875 Unitholder s information costs Dow Jones Index fees (recovery) (8,875) Other 1,520 (1,300) Total expenses 261, ,440 Increase (decrease) in net assets attributable to Unitholder $ 2,112,173 $ (904,137) Increase (decrease) in net assets attributable to Unitholder per class Class A $ 2,183,457 $ (1,480,336) Class U (71,284) 576,199 $ 2,112,173 $ (904,137) Increase (decrease) in net assets attributable to Unitholder per Unit Class A $ 0.51 $ (0.25) Class U $ (0.10) $ 0.68 See accompanying notes to the interim condensed financial statements. 28

31 TTU Trust INTERIM CONDENSED STATEMENTS OF CASH FLOWS For the six months ended June 30 (unaudited) Operating activities Increase (decrease) in net assets attributable to Unitholder $ 2,112,173 $ (904,137) Adjustments for: Foreign exchange loss (gain) on cash 112,458 (56,616) Net realized gain on investments and options (note 8) (7,330,516) (12,177,762) Net unrealized loss (gain) on investments and options 7,952,219 8,566,812 Unrealized loss (gain) on foreign exchange contracts (575,447) 701,782 Purchase of investments and options (10,290,857) (22,140,337) Proceeds on sale of investments and options 33,130,445 53,602,926 Dividends receivable 26,226 18,337 Accrued liabilities 52,070 (8,599) Net cash flow provided by operating activities 25,188,771 27,602,406 Financing activities Units retracted (22,765,225) (25,037,137) Distributions paid to Unitholder (1,633,438) (2,255,370) Net cash flow used in financing activities (24,398,663) (27,292,507) Foreign exchange (loss) gain on cash (112,458) 56,616 Net increase in cash 790, ,899 Cash, beginning of period 544, ,795 Cash, end of period $ 1,222,605 $ 1,026,310 Supplemental cash flow information* Dividends received, net of withholding taxes $ 732,765 $ 1,047,579 Interest received $ 42 $ 414 * Classified as operating activities. See accompanying notes to the interim condensed financial statements. 29

32 TTU Trust INTERIM CONDENSED STATEMENTS OF CHANGES IN NET ASSETS ATTRIBUTABLE TO THE UNITHOLDER For the six months ended June 30 (unaudited) Net assets attributable to Unitholder, beginning of period Class A $ 63,805,847 $ 91,824,449 Class U 11,632,368 11,509,723 75,438, ,334,172 Increase (decrease) in net assets attributable to Unitholder: Class A 2,183,457 (1,480,336) Class U (71,284) 576,199 2,112,173 (904,137) Unit Transactions (note 6): Retraction of Units Class A (21,691,339) (24,838,357) Class U (1,073,886) (198,780) (22,765,225) (25,037,137) Conversion of Units Class A 1,157, ,875 Class U (1,157,282) (390,875) Financing Unit Transactions: Distributions to Unitholder Class A (1,248,985) (1,985,915) Class U (260,835) (150,607) (1,509,820) (2,136,522) Net assets attributable to Unitholder, end of period Class A 44,206,262 63,910,716 Class U 9,069,081 11,345,660 $ 53,275,343 $ 75,256,376 See accompanying notes to the interim condensed financial statements. 30

33 TTU Trust SCHEDULE OF INVESTMENTS As at June 30, 2016 (unaudited) Number of Average % of Portfolio Shares Securities Cost Base Fair Value at Fair Value Consumer Discretionary 16,400 McDonald s Corp. $ 1,650,338 $ 2,554, ,650,338 2,554, Consumer Staples 24,363 Procter & Gamble Co. 1,939,200 2,670, ,000 The Coca-Cola Company 1,996,403 2,640, ,400 Wal-Mart Stores Inc. 2,883,051 2,684, ,818,654 7,994, Energy 19,800 Chevron Corporation 2,431,151 2,686, ,300 Exxon Mobil Corporation 2,274,330 2,705, ,705,481 5,392, Financials 32,051 JPMorgan Chase & Co. 1,703,146 2,577, ,703,146 2,577, Health Care 17,400 Johnson & Johnson 1,568,052 2,731, ,983 Merck & Co Inc. 2,217,166 2,683, ,900 Pfizer Inc. 1,738,658 2,684, ,523,876 8,099, Industrials 11,783 3M Company 1,700,778 2,670, ,200 Boeing Co. 2,511,656 2,555, ,300 Caterpillar Inc. 2,774,905 2,580, ,400 General Electric Company 1,785,779 2,664, ,800 United Technologies Corp. 2,643,837 2,628, ,416,955 13,100, Information Technology 70,000 Cisco Systems, Inc. 1,645,111 2,599, ,100 International Business Machines Corp. 2,468,004 2,573, ,965 Intel Corporation 1,794,497 2,673, ,300 Microsoft Corporation 1,794,261 2,669, ,701,873 10,515, Telecommunication Services 38,000 Verizon Communications Inc. 1,895,091 2,746, ,895,091 2,746, Adjustment for transaction costs (16,358) Total investments $ 41,399,056 $ 52,981,