Brookfield New Horizons Income Fund BIF.UN. Interim Financial Statements As at June 30, 2011

Transcription

1 Brookfield New Horizons Income Fund BIF.UN Interim Financial Statements As at June 30, 2011

2 Notice to Reader These interim financial statements and related notes of Brookfield New Horizons Income Fund (the Fund ) for the period ended June 30, 2011 have been prepared by the management of the Fund. The external auditors of the Fund have not audited or reviewed these interim financial statements. CONTENTS Financial Statements 1 Notes to Financial Statements 6 Fund and Contact Information 16

3 STATEMENT OF NET ASSETS As at 2011 Assets Investment portfolio 127,600,548 Cash and cash equivalents 212, ,812,614 Liabilities Distributions payable 2,600,000 Accounts payable and accrued liabilities 527,300 3,127,300 Net assets, representing Unitholders' equity 124,685,314 Number of Units outstanding 13,000,000 Net assets per Unit 9.59 See accompanying notes to financial statements. Approved on behalf of the Manager, Brookfield Investment Management (Canada) Inc. Signed George E. Myhal, Director Signed Gail Cecil, Director 2011 Interim Financial Statements 1

4 STATEMENT OF OPERATIONS For the period from April 1, 2011 to 2011 Expenses Forward fees (142,365) Hedging fees (78,383) Management fees (36,539) Operating expenses (57,947) (315,234) Net realized and unrealized gain (loss) on investment portfolio Change in unrealized appreciation (depreciation) on investment portfolio (1,499,452) (1,499,452) Decrease in net assets from operations for the period (1,814,686) Decrease in net assets from operations per Unit (0.14) See accompanying notes to financial statements. 2 Brookfield New Horizons Income Fund

5 STATEMENT OF CHANGES IN NET ASSETS For the period from April 1, 2011 to Net assets, beginning of period 2011 Decrease in net assets from operations (1,814,686) Capital transactions Proceeds from issue 130,000,000 Agents fees and expenses of issue (Note 1) (900,000) 129,100,000 Distributions to Unitholders Distributions payable (2,600,000) (2,600,000) Net assets, end of period 124,685,314 See accompanying notes to financial statements Interim Financial Statements 3

6 STATEMENT OF INVESTMENTS As at Average Cost Fair Value Investment portfolio 129,100, ,600,548 Cash and cash equivalents 212,066 Other assets and liabilities (3,127,300) Net assets 124,685,314 As a result of the Forward Agreement described in Note 4, the net asset value of the Fund s investment portfolio (which includes the Forward Agreement) is equal to the net asset value of the New Horizons Master Fund (as described in Note 1). The investment portfolio of 127,600,548 presented in this Statement of Investments differs from the net asset value calculated for fund pricing purposes. An explanation of this difference can be found in Notes 2 and 4 of these interim financial statements. The net assets of the New Horizons Master Fund as at June 30, 2011 are listed below: 4 Brookfield New Horizons Income Fund

7 STATEMENT OF INVESTMENTS As at Quantity Fixed Income Bonds United States Security Average Cost Fair Value % of Net Assets 9,562,289 Ainsworth Lumber Co. Ltd. 11% 07/29/2015 9,345,518 8,521, ,000 AS Americas, Inc % 01/15/ ,611 92, ,500,000 Beazer Homes USA, Inc % 05/15/2019 7,881,700 7,042, ,000,000 Cincinnati Bell Inc % 10/15/2020 1,907,211 1,921, ,000,000 Clear Channel Communications Inc. 9% 03/01/2021 5,851,867 5,534, ,000,000 Clearwire Communications 12% 12/01/2017 6,279,118 6,054, ,000,000 DineEquity Inc. 9.5% 10/30/2018 6,334,977 6,271, ,000,000 Dynegy Holdings Inc. 7.75% 06/01/2019 1,506,843 1,401, ,500,000 Edison Mission Energy 7% 05/15/2017 5,841,745 5,852, ,000,000 Essar Steel Algoma Inc % 03/15/2015 4,852,955 4,829, ,873,000 First Data Corp. 8.25% 01/15/ ,526,854 10,265, ,000,000 Forbes Energy Services Ltd. 9% 06/15/2019 9,750,712 9,489, ,500,000 Hovnanian Enterprises, Inc % 10/15/2016 7,734,398 7,207, ,000,000 Rite Aid Corp % 03/01/2015 5,339,139 5,404, ,500,000 Tembec Industries Inc % 12/15/2018 7,034,359 6,551, ,130,000 Trinidad Drilling Ltd % 01/15/2019 3,205,037 3,120, ,500,000 USG Corp. 7.75% (9.75%) 01/15/2018 7,625,206 7,117, Canada 101,121,250 96,680, ,000,000 North American Energy Partners Inc % 04/07/2017 4,068,750 4,060, ,068,750 4,060, Brazil 2,000,000 Companhia de Eletricidade do Estado da Bahia 11.75% 04/27/2016 1,330,146 1,327, ,330,146 1,327, Term Loans United States 7,000,000 Mitel Networks Corp. Adj% Term Loan B 08/16/2015 6,284,577 6,275, ,500,000 Realogy Corp. 13.5% Term Loan A 10/15/ ,896,847 11,760, ,775,450 Supermedia Inc. 11% Term Loan B 12/31/2015 3,062,258 2,747, ,243,682 20,784, Total investments 127,763, ,852, Cash and cash equivalents 2,632, Accrued investment income 2,628, Liabilities, net of other assets (122,812) (0.10) Net assets of the Master Fund 127,989, See accompanying notes to financial statements Interim Financial Statements 5

8 1. THE FUND Brookfield New Horizons Income Fund (the Fund ) is an investment fund established under the laws of the Province of Ontario pursuant to a Declaration of Trust dated March 1, New Horizons Master Fund (the Master Fund ), and together with the Fund, (the Funds ) is an investment fund established under the laws of the Province of Ontario pursuant to a Declaration of Trust dated March 1, The Fund effectively began operations on April 1, 2011 when it completed an initial public offering of 13,000,000 units (the Units ) at per Unit (the Offering ), for gross proceeds of 130 million and net proceeds of million after deducting issuance costs of 0.9 million. The Master Fund effectively began operations on April 1, The investment objectives of the Fund are (i) to provide holders of the Units ( Unitholders ) with tax-advantaged quarterly cash distributions, and (ii) to preserve the net asset value of the Fund. Brookfield Investment Management (Canada) Inc. ( BIM Canada ) is the manager (the Manager ) and investment manager (the Investment Manager ) of the Funds. The Investment Manager makes all of the investment and trading decisions on behalf of the Funds. Caledon Trust Company is the trustee of the Funds. The Fund was created to obtain exposure to a portfolio (the Portfolio ) which will focus on, but will not be limited to, investments in high yield corporate debt, and publicly-listed securities in infrastructure and real estate companies across a global universe. The Portfolio may also invest in other fixed income and equity and derivative securities. The Fund obtained exposure to the Portfolio through a forward agreement (the Forward Agreement ) as explained below and in Note 4. The Fund invested the net proceeds of the Offering in a portfolio of common shares of Canadian public companies (the Common Share Portfolio ). The Fund then entered into the Forward Agreement with a Canadian chartered bank (the Counterparty ) pursuant to which the Counterparty agreed to pay to the Fund on the scheduled settlement date of the Forward Agreement as the purchase price for the Common Share Portfolio, an amount based on the value of the Units of the Master Fund. 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with Part V of the Canadian Institute of Chartered Accountants Handbook - Canadian generally accepted accounting principles ( GAAP ). Actual results could differ from those estimates. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements: Cash and cash equivalents Cash and cash equivalents consist of cash on deposit and short-term, interest bearing notes with a term to maturity of less than three months from the date of purchase. Cash and cash equivalents are deemed to be held for trading and therefore recorded at fair value. Valuation of investments Investments are deemed to be classified as held for trading in accordance with Canadian Institute of Chartered Accountants ( CICA ) Handbook Section 3855, Financial Instruments Recognition and Measurement ( Section 3855 ) and are recorded at their fair value. In the case of publicly traded securities, such as the investments pledged under the Forward Agreement, fair value means the closing bid price for long positions and the closing ask price for short positions. The Fund, through its exposure to the economics of the Master Fund, is also exposed to non-publicly traded securities. For bonds and bank debt, fair value means the bid price for long positions and the ask price for short positions, provided by independent security pricing services or broker quotes. Securities for which reliable quotations are not readily available or not traded in an active market are valued at fair value as determined by the Manager (see Note 6). All investment transactions are accounted for on the trade date. Realized gains and losses from investment transactions and unrealized appreciation or depreciation in the value of investments are calculated on an average cost basis, excluding transaction costs and the effect of foreign exchange fluctuations, which are disclosed separately. 6 Brookfield New Horizons Income Fund

9 Other assets and liabilities For the purpose of categorization in accordance with Section 3855, accrued investment income and prepaid expenses designated as loans and receivables, if applicable, are recorded at cost or amortized cost. Similarly, payables for securities purchased, distributions payable and accounts payable and accrued liabilities are deemed to be other financial liabilities and reported at amortized cost. Investment transactions and income and expense recognition All investment transactions are accounted for on the trade date. Dividend income is recognized on the ex-dividend date and interest income is recognized as earned. Transaction costs Transaction costs, such as brokerage commissions incurred in the purchase and sale of securities by the Funds, are expensed and are included in operating expenses in the Statement of Operations. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of an investment, which include fees and commissions paid to agents, advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Foreign currency translation Investments and other assets denominated in foreign currencies are translated into Canadian dollars using the rate of exchange prevailing on the trade date. Investment transactions and income and expenses are translated at the rate of exchange on the date of such transactions. The fair values of investments and other assets and liabilities in foreign currencies are translated at the period-end exchange rates. All realized and unrealized foreign exchange adjustments are recorded in the Statement of Operations. Forward foreign currency contracts Forward foreign currency contracts, if applicable, are valued at current market value on each valuation date. The value is determined as the gain or loss that would be realized, if on the valuation date, the position of the forward foreign currency contracts were closed out. Forward Agreement The fair value of the Forward Agreement (see Note 4) is the gain or loss that would be realized on the valuation date if the contract were closed out or expired. The unrealized appreciation (depreciation) and the realized gains (losses) on partial settlements of the Forward Agreement are included in the Statement of Operations. Accounting estimates The preparation of the financial statements in accordance with Canadian GAAP requires the Manager to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Significant estimates were used in the valuation of the investments. Actual results could differ from those estimates. 3. NET ASSETS PER UNIT The net assets per Unit are the net assets of the Fund divided by the number of Units outstanding as at June 30, Any difference between the net asset value per Unit and the net assets per Unit on the Statement of Net Assets is due to different pricing methodologies used to calculate the net assets for financial reporting purposes as described in Note 2 and the net asset value used for Fund pricing purposes. June 30, 2011 Total Per Unit Net asset value 125,074, Section 3855 adjustments (389,431) (0.03) Net assets 124,685, Interim Financial Statements 7

10 4. FORWARD AGREEMENT In order to achieve its investment objectives, the Fund obtained economic exposure to the returns of the Master Fund by investing the net proceeds of its initial public offering in the Common Share Portfolio and entering into the Forward Agreement with the Counterparty. As at June 30, 2011, the Counterparty had a credit rating of A+ according to Standard and Poor s Rating Services. The Fund does not invest directly in the Master Fund. By virtue of the Forward Agreement, the returns of the Fund are dependent upon the economic performance of the Master Fund and the Portfolio. The Fund will partially settle the Forward Agreement prior to the Forward Agreement termination date in order to fund quarterly distributions as well as redemptions of fund Units by Unitholders from time to time and for payment of expenses of the Fund. The Forward Agreement has a scheduled termination settlement date of April 1, 2016, but may be extended in five-year increments subject to agreement by the Counterparty. As at June 30, 2011, the unrealized gain on the Forward Agreement, at fair value, was 4,218,170. This unrealized gain represents the difference as at June 30, 2011, between the net asset value of the Common Share Portfolio of 123,771,808 and the net asset value of the Portfolio of 127,989,978. For financial statement reporting purposes, the value of the Common Share Portfolio includes the investments measured in accordance with Section 3855 of the CICA Handbook, which for publicly listed securities is based on closing bid prices for securities held long and on closing ask prices for securities held short, on a recognized stock exchange on which the investments are listed or principally traded. The following reconciles the value of the Common Share Portfolio for financial reporting purposes to the fair value of the Forward Agreement: As at June 30, 2011 Value of the Common Share Portfolio, at closing bid prices 123,382,377 Valuation adjustment to Portfolio Securities to closing prices 389,431 Value of the Common Share Portfolio, at closing prices 123,771,808 Net asset value of the Master Fund Portfolio 127,989,978 Gain (Loss) on Forward Agreement, at fair value 4,218,170 The investments of the Common Share Portfolio are listed below: Number of shares Security Average Cost Net Asset Value 1,158,782 Bankers Petroleum Ltd. 9,930,761 7,972,420 1,369,760 Blackpearl Resources Inc. 9,930,764 9,328, ,591 Celestica Inc. 9,930,756 8,007, ,984 CGI Group Inc. 9,930,763 11,190, ,607 Firstservice Corporation 9,930,702 8,835, ,578 Flint Energy Services Ltd. 9,930,767 8,176,897 1,289,743 Great Canadian Gaming Corporation 9,931,021 9,892, ,239 Open Text Corporation 9,930,706 9,969, ,664 Osisko Mining Corporation 9,930,748 10,802, ,235 Precision Drilling Corporation 9,930,753 10,349, ,435 Quadra FNX Mining Ltd. 9,930,756 10,660, ,793 Stantec Inc. 9,930,749 9,598, ,651 Transat A.T. Inc. Class B 9,930,754 8,989,527 Total investments of Common Share Portfolio 129,100, ,771,808 8 Brookfield New Horizons Income Fund

11 5. MANAGEMENT OF FINANCIAL RISKS Through the Forward Agreement described in Note 4, the Fund is economically exposed to financial risks of the Portfolio held by the Master Fund, which invests in, but is not limited to, high yield corporate debt, and publiclylisted securities in infrastructure and real estate companies, across a global universe. The Fund and the Master Fund are exposed to various financial risks, including market risk (consisting of currency risk, interest rate risk, and other price risk), credit risk and liquidity risk. The Fund and the Master Fund s overall risk management programme seeks to minimize potentially adverse effects of those risks on the Fund s financial performance by employing experienced portfolio managers and by continuous monitoring of the Fund and Master Fund s securities positions and markets. The Manager maintains a corporate governance structure that oversees the Fund and the Master Fund s investment activities. The Master Fund may use derivative financial instruments to mitigate certain risk exposures, though none were outstanding as of June 30, Currency risk Currency risk is the risk that the value of an investment will change due to fluctuations in foreign exchange rates. The Fund s net assets are measured in Canadian dollars and payments to Unitholders are made in Canadian dollars. The Master Fund is exposed to currency risks as it may hold assets or have liabilities denominated in currencies other than in Canadian dollars. As at June 30, 2011, the Master Fund was exposed to currency risk, as the value of any assets or liabilities denominated in currencies other than the Canadian dollar will vary due to changes in foreign exchange rates. Currency risks of the Master Fund can be mitigated with the use of forward foreign currency contracts. As at June 30, 2011 there were no such contracts outstanding. The following summarizes the Master Fund s exposure to currency risks, as at June 30, 2011: June 30, 2011 Investments Cash Other net assets Total % of net assets U.S. Dollar 117,464,619 2,930,612 2,525, ,920, Brazilian Real 1,327,788 (1,352,716) 25, Total 118,792,407 1,577,896 2,551, ,921, As at June 30, 2011, had the Canadian dollar strengthened or weakened by 1% against each of the other currencies with all other variables remaining constant, net assets of the Master Fund would have decreased or increased by 1,229,215. Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or fair values of financial instruments. As at June 30, 2011, the Fund did not hold short-term deposit notes or other interest-bearing securities. The Master Fund is exposed to interest rate risk from its holding fixed-rate debt instruments, the values of which fluctuate due to changes in prevailing levels of market interest rates. As at June 30, 2011, the Master Fund s debt instruments remaining terms to maturity were as follows: Debt Instruments % of net assets Less than 1 Year 1 to 3 Years 3 to 5 Years 29,199, Greater than 5 Years 93,653, Total 122,852, Interest rate risk of the Master Fund is currently mitigated by the relatively short duration and high credit spread of the high yield bonds and loans in the Portfolio. These characteristics make the Portfolio s sensitivity to interest rate risk relatively less than what would be experienced by a portfolio with longer duration investments that trade 2011 Interim Financial Statements 9

12 at tight spreads to government backed fixed income securities. It would also be possible to hedge interest rate risk by shorting government backed fixed income securities or engaging in various interest rate derivatives. As at June 30, 2011 the Master Fund had no such hedges in place. At June 30, 2011, if the prevailing interest rates had risen or declined by 0.25%, assuming a parallel shift in the yield curve, with all other variables held constant, the Master Fund s net assets would have decreased or increased, respectively, by approximately 1,449,307. The Master Fund s sensitivity to interest rate changes was estimated using the weighted average duration of the bonds. In practice, the actual results may differ from this sensitivity analysis and the differences could be material. Other price risk Other price risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or currency risk). Such changes may be the result of factors affecting multiple instruments traded in a market, market segment or asset class. Although the Fund s Common Share Portfolio is comprised of equity securities that are subject to market price risk and the value of the Forward Agreement will fluctuate as a result of changes in market conditions, the Fund itself is not exposed to the other price risk of the equity securities as they are collateral for the Forward Agreement. The Master Fund is exposed to other price risk of securities held in the Portfolio. The Master Fund may take outright long or short positions in any of its investments, which may include derivative instruments for purposes consistent with its investment objectives and investment strategy and subject to its investment restrictions. As at June 30, 2011 the Master Fund had no direct exposure to equity markets or derivatives and had no securities sold short, however, all investments in securities present a risk of loss of capital. The Manager mitigates this risk through careful selection of securities and other financial instruments, within specified limits. Credit risk Credit risk is the risk of non-payment of scheduled interest and/or principal payments. As at June 30, 2011, the Fund did not hold short-term deposit notes or other interest-bearing securities. The Fund was exposed to credit risk through the Counterparty of the Forward Agreement. The Manager believes the Fund had minimal credit risk exposure due to the strong credit rating of the Counterparty. The Master Fund is exposed to several types of credit risks including the risk that one or more investments in the Portfolio will decline in price, or fail to pay interest or principal when due, because the issuer of the security experiences a decline in its financial status. As at June 30, 2011, the maximum exposure to any one debt issuer in the Portfolio was 11,760,470, representing 9.19% of the net assets. The performance of the Master Fund is also subject to general economic and specific industry conditions that could impact the fair value of one or more debt securities in the Portfolio. Securities with lower ratings tend to be more sensitive to these kinds of risks. 10 Brookfield New Horizons Income Fund

13 At June 30, 2011, the Master Fund was invested in debt securities with the following credit ratings: Debt Instruments by S&P Rating % of net assets Cash 2.06 BBB+ or better BBB BBB BB+ BB BB B B 7.13 B CCC+ or lower Not rated* Accrued income and other liabilities 1.95 Total * Not rated by Standard & Poor s Rating Services. The Manager seeks to mitigate the above credit risk through the careful selection of investments, through the employment of experienced portfolio managers and through continuous monitoring of the Master Fund s securities positions and markets. Another type of credit risk is exposure to the creditworthiness of the Fund and the Master Fund s trading counterparties. All transactions executed by the Fund and Master Fund are settled upon delivery using approved brokers. The risk of payment default is considered negligible, as delivery of securities sold is only made once the broker has received payment on behalf of the Fund or Master Fund. Payment is not made on a purchase until the securities have been received by the broker on behalf of the Fund or Master Fund. The trade will fail if either party fails to meet its obligation. Liquidity risk Liquidity risk is the possibility that investments cannot be readily converted into cash when required. The Fund maintains liquidity through its ability to carry out partial settlements of the Forward Agreement. The Master Fund is exposed to liquidity risk as the resale, or secondary market, for high yield corporate bonds held by the Master Fund is less liquid and less transparent than publicly-traded markets. The Manager seeks to mitigate this liquidity risk by ensuring that a reasonable portion of the Portfolio s investments are in bond issues with relatively high liquidity due to large issuance size and frequent market activity. Please refer to the above section on interest rate risk for the Master Fund s debt instruments remaining terms to maturity as at June 30, FAIR VALUE OF FINANCIAL INSTRUMENTS The Handbook Section 3862 Financial Instruments Disclosures ( Section 3862 ) requires enhanced disclosure of fair value and liquidity risk. This includes classification of the fair value measurements associated with the financial instruments held by a fund. The classifications use a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The hierarchy has the following levels: quoted prices in an active market (Level 1 unadjusted inputs); inputs other than quoted prices (Level 2 directly or indirectly derived from observational market data); and inputs not based on observable market data (Level 3 unobservable inputs). In addition to the above disclosure requirements, Section 3862 requires disclosure of significant transfers between Levels 1 and 2 since the prior reporting period, as well as reconciliation of Level 3 assets, disclosing separately changes during the reporting period attributable to i) total gains or losses recognized in net income, and a description of where they are presented in the income statement, ii) purchases, sales, issues and settlements, iii) 2011 Interim Financial Statements 11

14 transfers into or out of Level 3 and the reasons for those transfers. Any significant transfers between Level 1 and Level 2 are disclosed. Further, for fair value measurements in Level 3, if changing one or more type of the inputs to reasonably possible alternative assumptions would change fair value significantly, the entity shall state this fact and disclose both the effect of those changes and how the effect was calculated. The following is a summary of the inputs used as of June 30, 2011 in valuing the Fund s and the Master Fund s investments carried at fair value: Brookfield New Horizons Income Fund As at June 30, 2011 Level 1 Level 2 Level 3 Total Investment Portfolio Equities Common stock 123,382, ,382,377 Forward agreement 4,218,170 4,218,170 Total investment portfolio 123,382,377 4,218, ,600,548 New Horizons Master Fund As at June 30, 2011 Level 1 Level 2 Level 3 Total Investments Fixed income Corporate bonds 102,068, ,068,109 Term loans 20,784,298 20,784,298 Total investments 102,068,109 20,784, ,852,407 The following tables summarize changes in the Level 3 assets of the Fund and the Master Fund for the period ended June 30, 2011: Brookfield New Horizons Income Fund Beginning balance, April 1 Purchases, issuances and settlements Total gains (losses) Net realized gains (losses) Level 3 Net unrealized appreciation (depreciation) 4,218,170 Net transfers into (out of) Level 3 assets Ending balance, June 30, ,218,170 New Horizons Master Fund Beginning balance, April 1 Level 3 Purchases, issuances and settlements 21,244,371 Total gains (losses) Net realized gains (losses) 25,536 Net unrealized appreciation (depreciation) (485,610) Net transfers into (out of) Level 3 assets Ending balance, June 30, ,784, Brookfield New Horizons Income Fund

15 7. INCOME TAXES The Fund qualifies as a mutual fund trust under the Income Tax Act (Canada) and, accordingly, is not subject to tax on that portion of its income, including net realized capital gains for its taxation year that is paid or payable to Unitholders. Income tax on net realized capital gains not paid or payable will be generally recoverable by virtue of refunding provisions contained in the Income Tax Act (Canada) and provincial income tax legislation, as redemptions occur. It is the intention of the Fund to pay all net taxable income and sufficient net taxable gains so that the Fund will not be subject to income taxes. The Fund may distribute more than it earns, in which case the excess distribution is a return of capital and is not taxable to Unitholders. No provision for income taxes has been recorded in the accompanying financial statements as all income and net realized capital gains are to be distributed to the Unitholders. Capital losses realized in excess of those utilized to offset realized capital gains in the current taxation year can be carried forward indefinitely and may be applied against future years capital gains. Non-capital losses may be carried forward for a period of 20 years and applied against future years taxable income. 8. EXPENSES OF THE FUND The Manager is entitled to an annual management fee equal to 0.10% per annum based on the net asset value of the Fund as well as an annual fee of 0.30% based on the net asset value of the Master Fund (total overall management fee of 0.40%). These fees are calculated daily and payable monthly in arrears, plus applicable taxes and totalled 36,539 for the Fund and 109,751 for the Master Fund for the period. Under the Forward Agreement, the Fund will pay to the Counterparty an annual fee of no greater than 0.45% of the net asset value of the Fund plus a fee, which may vary, based on the value of the Common Share Portfolio, calculated and payable monthly in arrears. This fee is intended to compensate the counterparty for the costs of hedging its exposure under the Forward Agreement. The Fund pays for all ordinary expenses incurred in connection with its operation and administration, including but not limited to, fees payable to the Manager, administrator, custodian and other third party services providers, legal, accounting, audit and valuation fees and expenses. The Fund will also pay any extraordinary expenses which it may incur from time to time. 9. RELATED PARTY DISCLOSURE The Manager and the Funds are deemed to be related parties. Transactions with related parties, including investment transactions, are conducted in the normal course of operations and are recorded at exchange amounts, which are equivalent to normal market terms. Please refer to Note 8, Expenses of the Fund, which outlines the fees paid to the Manager by the Funds. The Manager is a wholly owned subsidiary of Brookfield Asset Management Inc. ( Brookfield ) and it manages the investment and trading activities of the Funds pursuant to a management agreement. Due to Brookfield s ability to control the Funds, Brookfield, and its affiliates over which it has the ability to exercise control or significant influence, are related parties of the Fund by virtue of common control or common significant influence. The Master Fund entered into an agreement dated March 1, 2011 with three entities, two of which were related parties of the Master Fund (the Exchange Option Purchasers ) due to common control. Each of the Exchange Option Purchasers agreed to sell to the Master Fund on the Closing Date, April 1, 2011, a portfolio of securities (the Exchange Option Securities ). The Investment Manager determined that the Exchange Option Securities complied with the Master Fund s investment restrictions, that owning such securities was consistent with the Master Fund s investment objectives and that acquiring these securities on this basis was in the best interest of the Master Fund. The transaction was effected at the market price of the Exchange Option Securities on the day before the Closing Date (Closing Date being April 1, 2011). The total value of the Exchange Option Securities was million. There were no other transactions conducted with related parties during the period. Brookfield and its affiliates own a 49% interest in the Fund. An additional 47% of the Fund s Units are held by BAM Investments Corp. which is a related party due to its ability to exercise significant influence over the Fund resulting from its ownership interest. Subsequent to June 30, 2011, one of the affiliates sold its interest in the Fund to Brookfield Interim Financial Statements 13

16 10. UNITHOLDERS EQUITY The Fund is authorized to issue an unlimited number of redeemable and transferable Units of a single class, each of which represents an equal, undivided interest in the net assets of the Fund. Each Unit is entitled to one vote at all meetings of Unitholders and is entitled to participate equally with respect to any and all distributions made by the Fund, including distributions of net income and net realized capital gains, and distributions upon the termination of the Fund. Units are issued only as fully paid and are non-assessable. The Declaration of Trust provides that the Fund may not issue additional Units except: i) for net proceeds not less than 100% of the net asset value per Unit calculated as of the close of business on the business day immediately prior to the pricing of such offering; (ii) by way of Unit distributions; or (iii) with the approval of Unitholders. Commencing in 2012, Units may be surrendered annually for redemption during the period from February 15th until 5:00 p.m. (Toronto time) on the 10th business day in March of each year (the Notice Period ) subject to the Fund s right to suspend redemptions in certain circumstances. Units properly surrendered for redemption during the Notice Period will be redeemed on the last business day in March of each year (the Annual Redemption Date ) and the Unitholder will receive a redemption price per Unit equal to 100% of the net asset value per Unit as determined on the Annual Redemption Date on or before the 15th business day of the month following the Annual Redemption Date, less any costs and expenses incurred by the Fund in order to fund such redemption, if any, including costs related to the partial settlements of the Forward Agreement. 11. CAPITAL TRANSACTIONS Changes in the number of Units outstanding for the Fund for the period ended June 30, 2011 consisted of the following: 2011 Subscription of Units 13,000,000 Repurchase of Units Number of Units outstanding, end of period 13,000,000 Capital management Units issued and outstanding represent the capital for the Fund. The Fund has no restrictions or specific capital requirements and is authorized to issue an unlimited number of transferable Units (see Note 10). Restrictions and specific requirements on the redemption of Units are described in Note 10. The Statement of Changes in Net Assets and the above table outline the relevant changes of the Fund s Units for the period. The Fund manages its capital in accordance with its investment objectives and strategies and the risk management practices outlined in Note 5 while maintaining sufficient liquidity to meet Unitholder redemptions. 12. DISTRIBUTIONS In accordance with the Fund s investment objective to provide Unitholders with quarterly cash distributions, the Fund intends to make quarterly distributions to Unitholders of record on the last business day of each of March, June, September and December (each, a Distribution Record Date ). Distributions will be paid on a business day designated by the Manager that will be no later than the 15th Business Day of the month following the Distribution Record Date. The initial quarterly distributions are targeted to be 0.20 per Unit (0.80 per annum representing an annual cash distribution of 8% based on the per Unit issue price). An initial cash distribution was declared on June 22, 2011 for Unitholders of record on June 30, The distribution was subsequently paid to Unitholders in early July The Fund does not have a fixed quarterly distribution. In any year after such distributions, there would otherwise remain in the Fund additional net income or net realized capital gains, the Fund intends to make, on or before December 31 of that year, a special distribution of such portion of the remaining net income and net realized capital gains as is necessary to ensure the Fund will not be liable for income tax under the Income Tax Act (Canada). 14 Brookfield New Horizons Income Fund

17 13. FUTURE ACCOUNTING CHANGES International Financial Reporting Standards ( IFRS ) will replace Canadian GAAP for publicly accountable enterprises, which include investment funds and other reporting issuers. Under the general transition rules for publicly accountable enterprises the Fund would adopt IFRS for its fiscal period beginning January 1, Canadian publicly accountable enterprises, which include investment funds, are required to prepare financial statements in accordance with IFRS, as issued by the International Accounting Standards Board ("IASB"), for years beginning on or after January 1, On September 7, 2010, the Canadian Accounting Standards Board ("AcSB") approved an optional one year deferral of IFRS adoption for investment companies applying Accounting Guideline AcG 18, Investment Companies until fiscal years beginning on or after January 1, On January 12, 2011, the AcSB approved an additional one year extension to the optional one year deferral until fiscal years beginning on or after January 1, Accordingly, the Fund will adopt IFRS no later than for the fiscal year beginning January 1, 2013, and will issue its initial financial statements in accordance with IFRS, including comparative information, no later than for the interim period ending June 30, Interim Financial Statements 15

18 FUND INFORMATION INDEPENDENT REVIEW COMMITTEE John P. Barratt (Chair) Corporate Director James L. R. Kelly President Earth Power Inc. Frank Lochan Corporate Director MANAGER AND INVESTMENT MANAGER Brookfield Investment Management (Canada) Inc. George E. Myhal Director, President & Chief Executive Officer Jonathan Tyras Chief Financial Officer, Treasurer and Secretary Gail Cecil Director Kim G. Redding Director CONTACT INFORMATION Brookfield New Horizons Income Fund welcomes inquiries from Unitholders, analysts, media representatives or other interested parties. Manager and Investment Manager Brookfield Investment Management (Canada) Inc. Brookfield Place 181 Bay Street, Suite 300 Toronto, Ontario M5J 2T3 t w. Transfer Agent and Registrar Unitholder inquiries relating to distributions, address changes and Unitholder account information should be directed to the Fund s Transfer Agent: Valiant Trust Company 710, 130 King Street West Toronto, Ontario M5X 1A9 t (toll-free North America) f (toll-free North America) International e. inquiries@valianttrust.com w. Trustee Caledon Trust Company Suite Adelaide Street West Toronto, Ontario M5H 3P5 t Brookfield New Horizons Income Fund

19 s at 2011 Interim Financial Statements 17