Annual Report to Shareholders

Transcription

1 Annual Report to Shareholders November 15, 2014

2 REPORT TO SHAREHOLDERS I am pleased to report on the financial results of TD Split Inc. (the Company ) for the years ended November 15, 2014 and Special Annual Retraction As a result of the Company s 2013 Special Annual Retraction on November 15, 2013 ( 2013 Retraction ), the number of Units outstanding decreased by 322,369, or 22.15%, and the investment portfolio decreased by $11,130,134, or 22.15%. The investment portfolio holdings have been adjusted to reflect the Company s 2013 Retraction, at which time a total of 322,369 Class C Capital Shares and no Class C Preferred Shares were retracted and consequently 322,369 of Class C Preferred Shares were redeemed, for a total consideration of $11,150,600. The retraction has been accounted for as a reduction of the Class C Preferred Share issued capital in the amount of $3,223,690 and a reduction of the Class C Capital shareholders equity in the amount of $7,926,910 net of allocated retained earnings of $2,611, Financial Performance As a result of the Company s 2013 Retraction, an assessment of the financial performance comparison on a Unit basis is considered to be more relevant than on a dollar basis which has been provided for informational purposes only. Net Investment Income For the year ended November 15, 2014 ( Year 2014 ), the Company s net investment income, prior to dividends paid to preferred shareholders, tax expense and realized and unrealized changes in investment portfolio, was $1.08, an increase of $0.11 per Unit, or 11.00% from the year ended November 15, 2013 ( Year 2013 ), which largely reflects a higher level of dividend income from the underlying investment holdings during the year. On a dollar basis, the Company s net investment income in Year 2014 was $1,216,937 compared to $1,411,386 in Year The decrease of $194,449 or 14.00% compared to the prior year primarily reflects the impact of the 2013 Retraction on the investment portfolio noted above. Revenue per Unit for Year 2014 compared to Year 2013 increased by 13.68%, reflecting the higher level of dividend income received. Total expenses per Unit were $0.28 compared to $0.20 in Year 2013, an increase of $0.08 or 40.00%, which primarily resulted due to the lower Unit base. Class C Preferred Shares Dividend Holders of Class C Preferred Shares are entitled to receive quarterly fixed cumulative dividends equal to $ per Class C Preferred Share. For Year 2014, the Company declared and paid dividends of $538,113 or $0.475 per Class C Preferred Share (Year 2013 $691,239 or $0.475 per Class C Preferred Share). Class C Capital Shares Dividend For Year 2014, the Company declared and paid dividends of $708,044 or $0.625 per Class C Capital Share (Year 2013 $720,343 or $0.495 per Class C Capital Share). This is an increase of 26.26% compared to Year Net Asset Value The Net Asset Value per Class C Capital Share as at November 15, 2014 was $31.09 compared to $25.11 as at November 15, 2013, reflecting an increase of 23.81% over the past year primarily due to appreciation in the market value of the Company s investment holding in TD Shares. The total fair value of the Company s investment portfolio as at November 15, 2014 was $39,796,808 (November 15, 2013 $39,700,915). Due the Company s Special Annual Retraction on November 15, 2014 ( 2014 Retraction ), 164,100 Class C Capital Shares (November 15, ,369 Class C Capital Shares) and 164,100 Class C Preferred Shares (November 15, ,369 Class C Preferred Shares) were retracted for a total consideration of $6,563,324 (November 15, 2013 $11,150,600). The 2014 Retraction has been accounted for as a reduction of the Class C Preferred Share issued capital in the amount of $1,641,000 2

3 (November 15, 2013 $3,223,690) and a reduction of the Class C Capital shareholders equity in the amount of $4,919,103 net of allocated retained earnings of $2,216,063 (November 15, 2013 $7,926,910 net of allocated retained earnings of $2,611,497). On January 31, 2014, The Toronto-Dominion Bank announced a 2-for-1 stock split. This split had no impact on the Portfolio Shares other than change in the number of TD shares held by the Company. 3

4 Statement of Corporate Governance Practices The Board of Directors of the Company is responsible, through oversight, for the overall stewardship of the Company s business and affairs. The Company is a mutual fund corporation created to acquire and hold an investment portfolio and only trades in limited circumstances as described in the Company s prospectus dated October 26, As such, its investment portfolio is not actively traded and can be considered to be a passive investment holding. The Company s administrator, Timbercreek Asset Management Ltd. (the Administrator ) as of September 19, 2014 (previously, TD Sponsored Companies Inc. was the Administrator) administers most of the functions associated with the operations of the Company pursuant to an administration agreement dated November 15, Under this agreement, the Administrator is responsible for certain day-to-day operations of the Company, including the payment of dividends on the Preferred and Capital Shares and managing the retraction or redemption of the Preferred and Capital Shares in accordance with its terms. In addition, the Company, through its Administrator, maintains an Investor Relations line, an address and a website to deal with shareholder concerns and inquiries. The Board of Directors consists of five directors. Three directors are independent and two are senior officers of the Administrator. The Board of Directors believes that this number of directors is appropriate for the Company. The Chairman of the Board of Directors is not the Chief Executive Officer of the Company and is an independent director. Only the independent directors are compensated by the Company. Compensation is considered appropriate given the risk and responsibilities borne by each director. The Board of Directors is responsible for developing the Company s approach to governance issues and for proposing new nominees to the Board (should the need arise) and has not assigned these responsibilities to a committee. Individual directors may engage outside advisors at the Company s expense in the appropriate circumstances. The only standing committee of the Board of Directors is the Audit Committee. The Audit Committee consists of three members, all of them are independent directors. The Audit Committee has the responsibility to oversee the Company s financial statements and reports and makes recommendations in respect thereof to the Board of Directors for its consideration prior to the Board s approval. The Company believes the Board of Directors, as currently constituted with three independent directors, is fully capable of performing its duties, given the nature of the Company s business, the narrow scope of its operations, and the fixed term of the Capital and Preferred Shares. The Company has an Independent Review Committee ( IRC ) to which the Administrator must refer all conflict of interest matters for review or approval as required by National Instrument , Independent Review Committee for Investment Funds ( NI ). The Administrator has established written policies and procedures for dealing with conflict of interest matters in accordance with NI The IRC consists of three independent directors, each of whom is independent of the Company. This report, along with the accompanying audited financial statements of the Company, is respectfully submitted to you on behalf of the Board of Directors of TD Split Inc. Toronto, Canada, January 20, 2015 Corrado Russo Chief Executive Officer 4

5 MANAGEMENT S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying financial statements of TD Split Inc. and all the information in this annual report are the responsibility of management and have been approved by the Board of Directors (the Board ). The financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. Financial statements include certain amounts based on estimates and judgments. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects, with Canadian generally accepted accounting principles. Management has ensured that the other financial information presented in this annual report is consistent with the financial statements. The Board is responsible, through oversight, that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board carries out these responsibilities through its Audit Committee (the Committee ). The Committee is appointed by the Board. The Committee meets periodically with management and external auditors to discuss internal controls, the financial reporting process, and various auditing and financial reporting issues, and to review the annual report, the financial statements and the external auditors report. The Committee reports its findings to the Board for its consideration when approving the financial statements for issuance to the shareholders. The Committee also considers, for review by the Board, the engagement or re-appointment of the external auditors. The financial statements have been audited by Ernst & Young LLP, the Company s external auditors, in accordance with Canadian generally accepted auditing standards on behalf of the shareholders. Ernst & Young LLP has full and free access to the Committee. Corrado Russo Chief Executive Officer David Melo Chief Financial Officer Toronto, Canada January 20,

6 INDEPENDENT AUDITORS REPORT TO THE SHAREHOLDERS We have audited the accompanying financial statements of TD Split Inc., which comprise the statements of net assets and the statements of investments as at November 15, 2014 and 2013, and the statements of income and retained earnings, statement of cash flows and the statement of changes in net assets for the years then ended, and 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 these 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. Auditors responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audits 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 auditors 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 auditors consider 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 audits 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 statements of net assets and the statements of investments of TD Split Inc. as at November 15, 2014 and 2013, and the statements of income and retained earnings, statement of cash flows and the statement of changes in net assets for the years then ended in accordance with Canadian generally accepted accounting principles. Toronto, Canada January 20, 2015 Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants 6

7 STATEMENTS OF NET ASSETS As at November Assets Cash $ 181,078 $ 189,508 Investment portfolio, at fair value 39,796,808 39,700,915 39,977,886 39,890,423 Liabilities Accrued liabilities (note 4 and 5) 167, ,839 Class C Preferred Shares (note 3) 9,687,700 11,328,700 9,855,491 11,438,539 $ 30,122,395 $ 28,451,884 Capital Shareholders' Equity Class C Capital and Class E Shares (note 3) $ 15,976,497 $ 18,679,537 Retained earnings 14,145,898 9,772,347 $ 30,122,395 $ 28,451,884 Number of Units Outstanding (note 3) 968,770 1,132,870 Unit Value (note 2) $ $ Redemption Value per Class C Preferred Share (note 3) (10.00) (10.00) Net Asset Value per Class C Capital Share $ $ See accompanying notes to financial statements. On behalf of the Board: Corrado Russo Chief Executive Officer Michele McCarthy Chairman of the Board 7

8 STATEMENTS OF INCOME AND RETAINED EARNINGS For the Years Ended November Revenue Dividends $ 1,501,227 $ 1,697,844 Expenses Management fees (note 5) 120, ,516 Shareholder reporting costs (note 2) 63,900 67,366 Audit and tax services fees 38,376 34,996 Custodial fees 11,368 11,356 Directors' fees 34,500 33,000 Independent Review Committee fees 7,500 7,500 Legal fees 548 1,086 Transaction costs (note 2) 4,727 2,322 Other fees and costs 2,740 3, , ,458 Net investment income before taxes, dividends and the undernoted: 1,216,937 1,411,386 Dividends paid on Class C Preferred Shares (note 3) (538,113) (691,239) Net investment income before taxes and the undernoted: 678, ,147 Tax expense (note 4) 32,725 - Net investment income before the undernoted: 646, ,147 Net realized gain on disposition of investment portfolio 2,941,115 4,029,480 Change in unrealized appreciation of investment portfolio 3,710,444 5,503,080 Net investment income and appreciation available to Capital Shareholders $ 7,297,658 $ 10,252,707 Retained earnings, beginning of the year $ 9,772,347 $ 2,851,480 Net investment income and appreciation available to Capital Shareholders 7,297,658 10,252,707 Dividends paid on Class C Capital Shares (note 3) (708,044) (720,343) Net allocations on redemption/retraction (2,216,063) (2,611,497) Retained earnings, end of the year $ 14,145,898 $ 9,772,347 Dividends Preferred Share Class C $ $ Capital Share Class C $ $ Net investment income and appreciation available to Capital Shareholders Class C Capital Share $ $ See accompanying notes to financial statements. 8

9 STATEMENTS OF CASH FLOWS For the Years Ended November Cash flows from operating activities Net investment income and appreciation available to Capital Shareholders $ 7,297,658 $ 10,252,707 Adjustments to determine net cash flows from operating activities Change in unrealized appreciation of investment portfolio (3,710,444) (5,503,080) Net realized gain on disposition of investment portfolio (2,941,115) (4,029,480) Proceeds from disposition of investment portfolio 6,555,666 11,130,134 Dividends paid on Class C Preferred Shares 538, ,239 Change in accrued liabilities 57,952 (12,160) Net cash flows from operating activities 7,797,830 12,529,360 Cash flows used in financing activities Dividends paid on Class C Capital Shares (708,044) (720,343) Dividends paid on Class C Preferred Shares (538,113) (691,239) Distribution on Class C Preferred Shares retracted/redeemed (1,641,000) (3,223,690) Distribution on Class C Capital Shares retracted/redeemed (4,919,103) (7,926,910) Net cash flows used in financing activities (7,806,260) (12,562,182) Net decrease in cash during the year (8,430) (32,822) Cash, beginning of the year 189, ,330 Cash, end of the year $ 181,078 $ 189,508 See accompanying notes to financial statements. 9

10 STATEMENTS OF CHANGES IN NET ASSETS For the Years Ended November Net assets, beginning of the year $ 28,451,884 $ 26,846,430 Capital transactions Retractions of Class C Capital Shares (note 3) (4,919,103) (7,926,910) Dividends paid on Class C Capital Shares (708,044) (720,343) (5,627,147) (8,647,253) Investment transactions Cost of investment portfolio, beginning of the year (24,953,092) (32,053,746) Cost of investment portfolio, end of the year 21,338,541 24,953,092 Change in cost during the year (3,614,551) (7,100,654) Market value of investments disposed of 6,555,666 11,130,134 Net realized gain on disposition of investment portfolio 2,941,115 4,029,480 Change in unrealized appreciation of investment portfolio 3,710,444 5,503,080 6,651,559 9,532,560 Income transactions Net investment income prior to Preferred Share dividends 1,216,937 1,411,386 Dividends paid on Class C Preferred Shares (538,113) (691,239) Net investment income before taxes 678, ,147 Tax expense (note 4) 32,725 - Net investment income 646, ,147 Change in net assets during the year 1,670,511 1,605,454 Net assets, end of the year $. 30,122,395 $ 28,451,884 See accompanying notes to financial statements. 10

11 STATEMENTS OF INVESTMENTS Number of Unrealized As at Common Shares Company Fair Value Cost Appreciation November 15, ,700 The Toronto-Dominion Bank $ 39,796,808 $ 21,338,541 $ 18,458,267 November 15, ,884 The Toronto-Dominion Bank $ 39,700,915 $ 24,953,092 $ 14,747,823 See accompanying notes to financial statements. 11

12 NOTES TO FINANCIAL STATEMENTS 1. CORPORATE INFORMATION TD Split Inc. (the Company ), incorporated under the laws of the Province of Ontario on July 31, 2000, is a closed-end investment fund corporation whose principal business is to invest in common shares of The Toronto-Dominion Bank (the TD Shares ). The Company s principal business offices are located at 1000 Yonge Street, Suite 500, Toronto, Ontario, M4W 2K2. On August 22, 2014, shareholders of the Company approved the proposed change in the Administrator and Investment Manager of the Company to Timbercreek Asset Management Ltd. ( Timbercreek or the Administrator ) from TD Sponsored Companies Inc. ( TDSCI ). The transaction closed and became effective on September 19, In September 2000, the Company issued 6,075,000 Class A Capital Shares and 6,075,000 Class A Preferred Shares for cash consideration of $176,053,500 and $89,302,500, respectively, the net proceeds of which were used to fund the purchase of the TD Shares. On November 15, 2005, the Company issued 1,700,000 Class B Capital Shares and 1,700,000 Class B Preferred Shares for consideration of $52,972,000 and $47,770,000, respectively, the net proceeds of which were used to fund the purchase of additional TD Shares and to fund the redemption of the Class A Preferred Shares and Class A Capital Shares of the Company. On November 15, 2010, the Company issued 3,120,000 Class C Capital Shares and 3,120,000 Class C Preferred Shares pursuant to a final prospectus dated October 26, 2010, for consideration of $56,160,000 and $31,200,000, respectively, the net proceeds of which were used to fund the purchase of additional TD Shares and to fund the redemption of the Class B Preferred Shares and Class B Capital Shares of the Company. As a result of the Company s redemption on November 15, 2010, 712,861 Class B Preferred Shares and 712,861 Class B Capital Shares were redeemed for a total consideration of $52,300,965. The redemption has been accounted for as a reduction of the Class B Preferred issued capital in the amount of $20,031,394 and a reduction of the Class B Capital shareholders equity in the amount of $32,269,571, net of allocated earnings of $12,171,158. The Class B Preferred Shares were redeemed for cash consideration of $28.10 per Class B Preferred Share and the Class B Capital Shares were redeemed for consideration of $ per Class B Capital Share. Holders of Class B Capital Shares were redeemed in cash, or if they had previously elected, TD Shares together with a cash amount equal to the holder s pro rata share of the other net assets of the Company. Class B Capital Shareholders were also offered the opportunity to continue their investment in the Company by acquiring Class C Capital Shares in satisfaction of the redemption price of their Class B Capital Shares. As a result, holders of 280,396 Class B Capital Shares received Class C Shares in exchange for their Class B Capital Shares based on an exchange ratio of Class C Capital Shares for each Class B Capital Share tendered. Due to the Company s 2014 Retraction, 164,100 Class C Capital Shares ( ,369 Class C Capital Shares) and 164,100 Class C Preferred Shares ( ,369 Class C Preferred Shares) were retracted for total consideration of $6,563,324 (2013 $11,150,600). The retraction has been accounted for as a reduction of the Class C Preferred Share issued capital in the amount of $1,641,000 (2013 $3,223,690) and a reduction of the Class C Capital shareholders equity in the amount of $4,919,103, net of allocated retained earnings of $2,216,063 (2013 $7,926,910, net of allocated retained earnings of $2,611,497). 12

13 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These annual financial statements have been prepared in accordance with Canadian generally accepted accounting principles ( GAAP ). Going Concern The Company s management has made an assessment of the Company s ability to continue as a going concern and is satisfied that the Company has the resources to continue in business for the foreseeable future. Furthermore, the Company s management is not aware of any material uncertainties that may cast significant doubt upon the Company s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on a going concern basis. The significant accounting policies and practices followed by the Company are as follows: Unit Value Unit Value is defined as the amount that would be received by the Company on the disposition of that number of TD Shares represented by the Unit s pro rata share of each of the TD Shares, less brokerage fees, commissions and all other transaction costs relating to such sale plus (minus) the pro rata share of the amount by which the value of the other assets of the Company exceeds (is less than) the liabilities (including any extraordinary liabilities) of the Company as at the relevant valuation date and the redemption value of the Class E Shares, all as determined by the Board of Directors. A Unit consists of one Class C Preferred Share and one Class C Capital Share. If it is not possible to sell the TD Shares due to the cessation or suspension of trading of TD Shares on the stock exchanges, the Company will sell such TD Shares as soon as possible following the resumption of trading of TD Shares and the proceeds therefrom will be paid within five business days following such sale. Net Asset Value per Unit Under CPA Canada Handbook Section 3855, the Company is required to prepare its financial statements by recording its portfolio securities at fair value based on the last bid price. In accordance with the decision made by the Canadian securities regulatory authorities, a reconciliation of the net asset value ( NAV ) using the closing price ( Pricing NAV ) on the Toronto Stock Exchange and the NAV calculated in accordance with CPA Canada Handbook Section 3855 ( GAAP NAV ) of the Company is required disclosure in the notes to the financial statements. The reconciliation of the Company s Pricing NAV to GAAP NAV as at November 15, 2014 is presented in the following table: Number of Units NAV/Unit Total Pricing NAV (Closing price) 968,770 $ $ 39,824,049 Bid-Offer spread adjustment 968,770 $ (0.01) $ (13,954) GAAP NAV (Last bid price) 968,770 $ $ 39,810,095 13

14 The reconciliation of the Company s Pricing NAV to GAAP NAV as at November 15, 2013 is presented in the following table: Number of Units NAV/Unit Total Pricing NAV (Closing price) 1,132,870 $ $ 39,784,664 Bid-Offer spread adjustment 1,132,870 $ (0.01) $ (4,080) GAAP NAV (Last bid price) 1,132,870 $ $ 39,780,584 Financial Instruments Financial instruments are accounted, presented and disclosed in accordance with the CPA Canada Handbook Section 3855 Financial Instruments. The Company s financial assets include cash and the investment portfolio. The Company s financial liabilities include accrued liabilities, taxes and the Class C Preferred Shares. Cash Cash consists of cash held in bank accounts. Cash is carried at fair value. Investments Investments consist of TD shares and are carried at fair value. A. Valuation of Investments The Company s investments in common stock are held for trading and are carried at fair value. The fair value of the investment portfolio is determined using the last bid prices on the TSX. Changes in fair value are recorded in Change in unrealized appreciation of investment portfolio in the Statements of Income and Retained Earnings. Investment transactions are recorded on a trade date basis. B. Transaction Costs Transaction costs for the purchase and sale of investments are expensed and are included in Transaction costs in the Statements of Income and Retained Earnings. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or a liability, which includes fees and commission paid to agents, advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Liabilities and Equity Class C Preferred Shares The Company s issued and outstanding Class C Preferred Shares are classified as other liabilities and are initially recorded at fair value. Class C Preferred Shares are subsequently carried at amortized cost. Accrued Liabilities Accrued liabilities include fees and taxes payable that are recorded on an accrual basis over the term of the service provided. 14

15 Class C Capital and Class E Shares The Company s issued and outstanding Class C Capital Shares and Class E Shares are recorded at the proceeds received, net of direct issue costs. Revenue Recognition Dividend Income Revenue is primarily dividend income. Dividend income is recorded on the ex-dividend date. Shareholder Reporting Costs Shareholder costs are recorded on an accrual basis and include costs incurred for TSX listing fees, filing fees, transfer agent, printing and mailing fees, rating agency fees, and administration costs. Other Fees Other fees are booked on an accrual basis and include costs incurred for banking charges and miscellaneous expenses. Functional Currency The Company s functional currency is the Canadian dollar, which is the currency of the primary economic environment in which it operates. The Company s performance is evaluated and its liquidity is managed in Canadian dollars. Therefore, the Canadian dollar is considered as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The Company s presentation currency is also the Canadian dollar. Offsetting Financial Instruments Financial assets and liabilities are offset, with the net amount presented in the Statement of Net Assets, only if the Company currently has a legally enforceable right to set off the recognized amounts, and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. In all other situations they are presented on a gross basis. Based on these criteria, the Company does not have any financial assets and financial liabilities presented on a net basis. Significant Accounting Judgments, Estimates and Assumptions The preparation of financial statements in conformity with GAAP requires management to exercise judgment in the process of applying accounting policies and requires management to make estimates and assumptions that affect the amounts reported in those financial statements and accompanying notes. Changes in these judgments or estimates could have a significant impact on the Company s financial statements. Future Changes in Accounting Policies On February 13, 2008, the Accounting Standards Board ( AcSB ) confirmed that publicly accountable enterprises would be required to adopt International Financial Reporting Standards ( IFRS ), as published by the International Accounting Standards Board ( IASB ), on January 1, However, the AcSB deferred the mandatory IFRS changeover date for Canadian investment entities to January 1,

16 Consequently, the Company will publish its first annual audited financial statements in accordance with IFRS for the year ending November 15, 2015, with comparatives for the year ending November 15, 2014, and prepare an opening IFRS statement of net assets as at November 16, The Company will also be publishing unaudited interim financial statements in accordance with IFRS for the 6-month period ending May 15, IFRS is expected to affect the overall presentation of the financial statements and will require enhanced disclosures in the financial statements. Upon adoption of IFRS, the Company will apply IAS 32 Financial Instruments: Presentation, which requires that units or shares of an entity that include a contractual obligation for the issuer to repurchase or redeem them for cash or another financial asset be classified as a financial liability. The Company s Class C Capital Shares do not meet the criteria in IAS 32 for classification as equity and will be reclassified to financial liabilities upon transition to IFRS. Upon adoption of IFRS, the Company will apply IFRS 13 Fair Value Measurement. IFRS 13 defines fair value, sets out a single IFRS framework for measuring fair value and requires disclosure about fair value measurements. It applies when other IFRSs require or permit fair value measurement. If an asset or a liability measured at fair value has a bid price and an ask price, it requires valuation to be based on a price within the bid-ask spread that is most representative of fair value. It allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurements within a bid-ask spread. As a result, the Company will use the last traded market price where the last traded price falls within that day s bid-ask spread. This will result in eliminating the difference between the Pricing NAV and GAAP NAV. 3. SHARE CAPITAL AND SHARE ISSUE COSTS A. Authorized, Issued and Outstanding The Company s authorized share capital consists of an unlimited number of Class C Preferred Shares, an unlimited number of Class C Capital Shares, an unlimited number of Class E voting shares (the Class E Shares ) and an unlimited number of Class D Capital Shares and Class D Preferred Shares, issuable in series. A summary of the Company s share capital and related share issue costs is as follows: Number of Units Class E Shares Class C Capital Shares Issue Costs Total Class C Capital & Class E Shares Class C Preferred Shares Outstanding as at November 16, ,455,239 $ 100 $ 26,194,302 $ (2,199,452) $ 23,994,950 $ 14,552,390 Retractions during fiscal year 2013 (322,369) (5,801,275) 485,862 (5,315,413) (3,223,690) Outstanding as at November 15, ,132, ,393,027 (1,713,590) 18,679,537 11,328,700 Retractions during fiscal year 2014 (164,100) (2,953,119) 250,079 (2,703,040) (1,641,000) Outstanding as at November 15, ,770 $ 100 $ 17,439,908 $ (1,463,511) $ 15,976,497 $ 9,687,700 Issue costs incurred in connection with the organization of the Company are reduced on a pro rata basis with retractions shown in the table above. During fiscal 2010, issue costs of $4,905,600 were incurred in connection with the issuance of the Class C Preferred Shares and Class C Capital Shares. These costs have been charged against share capital and will be reduced on a pro rata basis with any future retractions. As a result of the Company s 2014 Annual Retraction, issue costs have been reduced by $250,

17 Units in the table above represent one Class C Preferred Share and one Class C Capital Share. The issued and outstanding Units as at November 15, 2014 consist of 968,770 Class C Preferred Shares (2013 1,132,870 Class C Preferred Shares) and 968,770 Class C Capital Shares (2013 1,132,870 Class C Capital Shares). The Company will ensure that one Class C Preferred Share will be issued and outstanding for each Class C Capital Share issued and outstanding and that it will be in compliance with the provisions in the articles attaching to the Class C Preferred Shares and Class C Capital Shares. Consequently, any retractions of Class C Preferred Shares or Class C Capital Shares will require the Company to make an aggregate retraction payment for the Class C Preferred Shares and Class C Capital Shares so that the retraction amount is based on the Unit Value (note 2). For the purposes of the Income Tax Act (Canada) and any other similar provincial and territorial tax legislation, the dividends paid on Class C Preferred Shares and Class C Capital Shares are designated as eligible dividends. Unless stated otherwise, all dividends (and deemed dividends) paid hereafter are designated as eligible dividends for the purposes of such legislation. Class C Preferred Shares Holders of the Class C Preferred Shares are entitled to receive quarterly fixed cumulative preferential distributions equal to $ (the Preferred Share Dividend Amount ). On an annualized basis, this represents a dividend yield on the offering price of the Class C Preferred Shares of 4.75%. Such distributions consist primarily of ordinary dividends but may also include non-taxable returns of capital and capital gains dividends. The holders of the Class C Preferred Shares will not be entitled to dividends in excess of the Preferred Share Dividend Amount. Any Class C Preferred Shares outstanding on November 15, 2015 (the Redemption Date ) will be redeemed by the Company on such date for a redemption price per share equal to the lesser of $10.00 and the Unit Value. The Class C Preferred Shares may be surrendered at any time for retraction. Retraction payments for Class C Preferred Shares will be made on the 15 th day of each month or, where such day is not a business day, on the preceding business day (a Retraction Payment Date ) provided that the Class C Preferred Shares have been surrendered for retraction at least 10 business days prior to such date. A holder who surrenders a Class C Preferred Share for retraction will receive on the Retraction Payment Date the amount, if any, by which 95% of the Unit Value exceeds the aggregate of (i) the average cost to the Company, including commissions, of purchasing a Class C Capital Share in the market and (ii) $1.00. If any Class C Preferred Shares are surrendered for retraction (other than in the event of a Concurrent Retraction or a special annual retraction where Class C Capital Shares are surrendered to the Company), the Company will purchase for cancellation that number of Class C Capital Shares which is equal to the number of Class C Preferred Shares so retracted. The Company will sell TD Shares owned by the Company to the extent required to fund such redemptions or purchases and to pay the retraction price for the Class C Preferred Shares so retracted. Holders of Class C Preferred Shares are not entitled to vote on TD Shares and are not entitled to vote at meetings of the Company, except as set forth in the Company s articles and as provided by law. 17

18 Class C Capital Shares Any Class C Capital Shares outstanding on the Redemption Date will be redeemed by the Company on such date. On such redemption, each holder will receive for each Class C Capital Share redeemed at the holder s option, either: (a) the amount, if any, by which the Unit Value exceeds $10.00; or (b) provided the holder tenders to the Company at least 20 business days prior to the Redemption Date a cash amount of $10.00 for each Class C Capital Share redeemed, TD Shares represented by such holder s pro rata share thereof plus (minus) the pro rata share of the amount by which the value of the other assets of the Company exceed (are less than) the liabilities (including any extraordinary liabilities) of the Company as at the Redemption Date and the redemption value of the Class E Shares, as determined by the Board of Directors of the Company. The Class C Capital Shares may be surrendered at any time for retraction. Holders may surrender their Class C Capital Shares for retraction by exercising a regular retraction, a concurrent retraction or a special annual retraction, all as described below. Retraction payments for Class C Capital Shares will be made on the Retraction Payment Date provided that the Class C Capital Shares have been surrendered for retraction at least 10 business days prior thereto. A holder who surrenders Class C Capital Shares under a regular retraction (a Regular Retraction ) will receive for each Class C Capital Share retracted on the Retraction Payment Date the amount, if any, by which 95% of the Unit Value exceeds the aggregate of (i) the average cost to the Company, including commissions, of purchasing a Class C Preferred Share in the market and (ii) $1.00. A holder who surrenders for retraction one Class C Capital Share concurrently with one Class C Preferred Share (a Concurrent Retraction ) will receive on the Retraction Payment Date an amount equal to 95% of the Unit Value less $1.00. A holder of Class C Capital Shares who surrenders Class C Capital Shares for the Retraction Payment Date occurring on November 15 in each year (a Special Annual Retraction ) or, where such day is not a business day, the preceding business day (each such date being an Annual Retraction Payment Date ) will receive on the applicable Retraction Payment Date the amount, if any, by which the Unit Value exceeds $ A holder who surrenders one Class C Capital Share together with one Class C Preferred Share under a Special Annual Retraction will receive on the applicable Annual Retraction Payment Date an amount equal to the Unit Value. If any Class C Capital Shares are surrendered for retraction (other than in the event of a Concurrent Retraction or Special Annual Retraction where Class C Preferred Shares are surrendered to the Company), the Company will redeem or purchase for cancellation that number of Class C Preferred Shares equal to the number of Class C Capital Shares so retracted. The Company will sell TD Shares owned by the Company to the extent required to fund such redemptions or purchases and to pay the retraction price for the Class C Capital Shares so retracted. Holders of Class C Capital Shares are not entitled to vote on TD Shares and are not entitled to vote at meetings of the Company, except as set forth in the Company s articles and as provided by law. The Board of Directors of the Company has indicated that the Company s policy, subject to the prior rights of the Preferred Shareholders, is to pay quarterly dividends on the Class C Capital Shares if and to the extent that the dividends paid on the TD Shares, less the administrative and operating expenses of the Company, exceed the Preferred Share Dividend Amount. The Class C Capital Shares will rank subsequent to the Class C Preferred Shares and prior to the Class E Shares with respect to the payment of dividends, distributions upon a redemption, retraction or return of capital and distribution upon a dissolution, liquidation or winding-up of the Company. 18

19 Class E Shares The holders of the Class E Shares are entitled to receive dividends, if, as and when declared by the Board of Directors of the Company. However, holders of Class E Shares are not entitled to receive any dividends on the Class E Shares at any time when there are any Class C Preferred Shares or Class C Capital Shares issued and outstanding unless approved by all the independent directors of the Company. The Class E Shares of the Company are redeemable by the Company at any time for a redemption price of $1.00 per share. Each Class E Share entitles the holder to participate in the distribution of the remaining net assets of the Company on a dissolution, liquidation or winding-up of the Company. Holders of the Class E Shares are entitled to one vote per share. The Class E Shares of the Company are retractable at any time. For retractions occurring at a time when any Class C Preferred Shares or Class C Capital Shares are outstanding, the retraction price will be $1.00 per share; for other retractions, the retraction price will be based on the net asset value of the Company. B. Managing Capital The Company's capital consists of its Class C Preferred Shares and Class C Capital Shares. The Company seeks to maximize the value of its capital through the holding of common shares of The Toronto-Dominion Bank. The Company does not intend to actively trade its investment portfolio. The Company will distribute its earnings according to the terms of the Class C Preferred Shares and Class C Capital Shares, and redeem its capital funded by the sale of securities as needed. 4. INCOME TAXES The Company qualifies and intends to continue to qualify as a mutual fund corporation under the Income Tax Act (Canada) throughout each subsequent taxation year in which any Class C Preferred Shares or Class C Capital Shares remain outstanding. As a result thereof and after deduction of issue costs in computing taxable income, the Company has a tax liability of $32,725 (2013 nil). The Company has nil (2013 $157,000) of non-capital loss carry-forwards that have not been recognized for financial statement purposes. 5. RELATED PARTY INFORMATION As of September 19, 2014, Timbercreek has assumed the role of Administrator and Investment Manager of the Company and administers the ongoing operations pursuant to the original Administration Agreement with TDSCI, which now applies to Timbercreek, dated December 15, The Administration Agreement has a term expiring upon the redemption of all Class C Preferred Shares and Class C Capital Shares. As part of the reorganization of the Company on November 15, 2010, the monthly management fee payable to the Administrator, beginning November 16, 2010, was amended to 1/12 of 0.25% of the market value of the TD Shares. The total management fee paid to TDSCI and the Administrator for the year ended November 15, 2014 were $101,879 and $18,752 respectively (November 15, 2013 $125,516 and nil). Accrued liabilities include an amount of $18,752 payable to the Administrator (November 15, 2013 $10,487 due to TDSCI) for the management fee and recovery of administration costs. All of the issued and outstanding Class E Shares of the Company are owned by TD Split Trust, a trust established for the benefit of the holders from time to time of the Class C Preferred Shares and the Class C Capital Shares. The Class E Shares have been lodged in escrow with Computershare Trust Company of Canada pursuant to an agreement dated as at December 15, 2003 between TD Split Trust, Computershare Trust Company of Canada and the Company and will not be disposed of or dealt with in any manner until all the Class C Preferred Shares and Class C Capital Shares have been retracted or redeemed, without the express consent, order or direction in writing of the Ontario Securities Commission. 19

20 6. RISK MANAGEMENT Market Risk The value of the Class C Preferred Shares may vary and the Class C Capital Shares will vary according to the price of the TD Shares. The value of the TD Shares will be influenced by factors that are not within the control of the Company, including the financial performance of The Toronto-Dominion Bank, interest rates and other financial market conditions. Accordingly, the value of Class C Preferred Shares and Class C Capital Shares will vary from time to time. If the price of the TD Shares as at November 15, 2014 increased or decreased by 5%, all other variables held constant, the NAV per Unit would have increased or decreased, respectively, by $2.05. In practice, the actual trading results may differ materially from this sensitivity analysis. Interest Rate Risk It is anticipated that the market value of the Class C Preferred Shares and the Class C Capital Shares will, at any given time, be affected by the level of interest rates prevailing at such time. A rise in interest rates may have a negative effect on the value of the Class C Preferred Shares and the Class C Capital Shares. The Company is also exposed to risk associated with the effects of fluctuations in the prevailing levels of market interest rates on its cash. Credit Risk The Company maintains all of its cash either with its custodian or in a bank account with The Toronto-Dominion Bank. All of the transactions in the listed securities are settled and paid for upon delivery using approved brokers. The only credit risk the Company is exposed to is counterparty credit risk, which is the risk a counterparty to a financial transaction entered into with the Company will fail to discharge its obligation or commitment in accordance with the terms and conditions of the contract or agreement. The Company s main counterparty credit risk exposure is considered to be in relation to the sale of securities. The risk of default is considered minimal as all such transactions are executed through a clearing house, thus delivery of securities sold is only made once the Company has received payment. As at November 15, 2014, the Company had no significant counterparty credit risk exposure. Currency Risk The assets and liabilities are held in the functional currency of the Company, which is the Canadian dollar. The Company is not exposed to significant foreign currency risk except to the extent the business of The Toronto-Dominion Bank is subject to foreign currency fluctuations. Liquidity Risk The Company invests its assets in investments that are traded in an active market and can normally be readily disposed of. There can be no assurance that an adequate market for the TD Shares will exist at all times or that the prices at which the TD Shares trade accurately reflect their true net asset values. Low trading volumes of the TD Shares will make it difficult to liquidate holdings quickly. 7. Comparatives Comparative figures have been adjusted, where necessary, to conform with changes in presentation in the current year. 20

21 CORPORATE INFORMATION Principal Office Registrar and Transfer Agent 1000 Yonge Street, Suite 500 Computershare Investor Services Inc. Toronto, Ontario 100 University Avenue M4W 2K2 Toronto, Ontario M5J 2Y1 Telephone: Legal Counsel Website: Osler, Hoskin & Harcourt LLP Officers & Directors Toronto, Ontario Michele McCarthy 1 2 Director and Chairman of the Board Corrado Russo Chief Executive Officer and Director David Melo Chief Financial Officer and Director Chris Slightham 1 2 Director Kenneth Thomson 1 2 Director Auditors Ernst & Young LLP Toronto, Ontario Custodian RBC Investor Services Trust Toronto, Ontario Stock Exchange Listing Toronto Stock Exchange (TSX) Symbols 1 Audit Committee Member Class C Capital Shares TDS.C 2 Independent Review Committee Member Class C Preferred Shares TDS.pr.C 21