Annual Financial Statements for the year ended December 31, 2011

Transcription

1 2011 Annual Financial Statements for the year ended December 31, 2011 Convertible & Yield Advantage Trust

2 Table of Contents Management s Responsibility for Financial Reporting Independent Auditor s Report CONVERTIBLE & YIELD ADVANTAGE TRUST Financial Statements Statement of Investment Portfolio Statements of Net Assets Statements of Operations and Retained Earnings (Deficit) Statements of Changes in Net Assets Statements of Cash Flows Trust Specific Financial Instruments Risks Notes to the Financial Statements Trust Information

3 MANAGEMENT S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying financial statements have been prepared by CI Investments Inc., the Manager of the Convertible & Yield Advantage Trust (the Trust ), and approved by the Board of Directors of the Manager. The Trust s Manager is responsible for the information and representations contained in these financial statements and other sections of this report. CI Investments Inc. maintains appropriate processes to ensure that relevant and reliable financial information is produced. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include certain amounts that are based on estimates and judgments. The significant accounting policies which management believes are appropriate for the Trust are described in Note 2 to the financial statements. PricewaterhouseCoopers LLP is the external auditor of the Trust. They have audited the financial statements in accordance with Canadian generally accepted auditing standards to enable them to express to the unitholders their opinion on the financial statements. Their report is set out on the following page. Derek. J. Green Douglas J. Jamieson Toronto, Ontario President and Chief Executive Officer Chief Financial Officer March 22, 2012 CI Investments Inc. CI Investments Inc. 1

4 INDEPENDENT AUDITOR S REPORT To the Unitholders of Convertible & Yield Advantage Trust (the Trust) We have audited the accompanying financial statements of the Trust, which comprise the statement of investment portfolio as at December 31, 2011, the statements of net assets as at December 31, 2011 and December 31, 2010 and the statements of operations and retained earnings (deficit), changes in net assets and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies, and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform an audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our 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 financial position of the Trust as at December 31, 2011 and December 31, 2010, and the results of its operations, the changes in its net assets and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Toronto, Ontario March 22, 2012 Chartered Accountants, Licensed Public Accountants 2

5 CONVERTIBLE & YIELD ADVANTAGE TRUST Financial Statements Statement of Investment Portfolio (as at December 31, 2011) Number of Shares/ Average Fair Par Value Description Cost ($) Value ($) CONSUMER DISCRETIONARY (26.2%) 26,087 Canadian Tire Corp., Ltd., Class A, Non-Voting Shares 1,495,211 1,712,872 43,097 Dorel Industries Inc., Class B 1,439,100 1,094,233 10,000 Emmis Communications Corp., 6.25% Preferred, Convertible/Callable 620, ,918 USD 625,000 Foot Locker Inc., 8.5% 01/15/ , ,382 USD 180,000 Lamar Media Corp., 6.625% 08/15/ , ,034 USD 500,000 Mandalay Resort Group 7.625% 07/15/ , ,078 USD 125,000 MGM Mirage Inc., 7.625% 01/15/ , ,289 4,119 RONA Inc. 56,615 40,119 32,784 Shaw Communications Inc., Class B 664, ,548 30,585 Thomson Corp. 880, ,606 80,476 Whistler Blackcomb Holdings Inc. 968, , ,000 Yellow Media Inc., 6.25% 10/01/ , ,000 8,539,720 6,928,982 TELECOMMUNICATION SERVICES (15.4%) 21,330 BCE Inc. 573, ,672 USD 500,000 Broadview Networks Holdings Inc., % 09/01/ , ,481 15,000 Crown Castle International Corp., 6.25% Preferred, 08/15/ , ,473 USD 500,000 Nextel Communications Inc., 5.95% 03/15/ , ,524 25,196 Rogers Communications Inc., Class B 875, ,691 6,298 TELUS Corp., Non-Voting Shares 302, ,619 3,567,071 4,061,460 FINANCIALS (13.2%) 10,119 Canadian Imperial Bank of Commerce 727, , Davis & Henderson Income Corp. 10,678 13,126 45,000 Fairfax Financial Holdings Ltd., 7.5% 08/19/ ,838 49, ,000 InnVest REIT 5.85% 08/01/ , , ,000 Intact Financial Corp., 4.7% 08/18/ , ,486 10,000 istar Financial Inc., 8% Preferred, Series D 336, ,639 38,634 Power Corporation of Canada 1,073, ,330 11,857 Royal Bank of Canada 541, ,734 8,916 The Bank of Nova Scotia 445, ,665 3,726,013 3,493,263 INDUSTRIALS (13.0%) 11,993 Canadian National Railway Co. 816, ,280 19,351 Celestica Inc. 174, ,939 USD 500,000 Geokinetics Holdings Inc. (USA) 9.75% 12/15/ , ,892 USD 500,000 Kratos Defense & Security Solutions Inc., 10% 06/01/ , , ,000 Livingston International Inc., % 11/09/ , , ,000 RTL-Westcan LP 9.5% 04/07/ , , ,000 Superior Plus Corp., 8.25% 10/27/ , ,750 3,517,333 3,435,904 CONSUMER STAPLES (10.7%) 11,897 Empire Co., Ltd., Class A 642, ,257 11,959 George Weston Ltd. 811, ,897 32,146 Shoppers Drug Mart Corp. 1,175,084 1,320,236 2,629,329 2,832,390 CI Investments Inc., the Manager, is a corporation controlled by CI Financial Corp. The Bank of Nova Scotia has a significant interest in CI Financial Corp. Investments in The Bank of Nova Scotia are identified above. Percentages shown in brackets relate investments at fair value to net assets of the Trust. The accompanying notes are an integral part of these financial statements. 3

6 CONVERTIBLE & YIELD ADVANTAGE TRUST Financial Statements (cont d) Statement of Investment Portfolio (as at December 31, 2011) (cont d) Number of Shares/ Average Fair Par Value Description Cost ($) Value ($) ENERGY (9.5%) USD 1,000,000 Cal Dive International Inc., 3.25% 12/15/ ,991 1,021, ,000 Connacher Oil and Gas Ltd., 4.75% 06/30/ , ,000 51,374 Freehold Royalties Ltd. 857, ,169 2,294,035 2,508,419 INFORMATION TECHNOLOGY (7.5%) USD 1,000,000 Advanced Micro Devices Inc., 6% 05/01/ , ,509 USD 1,000,000 SanDisk Corp., 1% 05/15/ , ,962 1,773,162 1,986,471 UTILITIES (6.7%) 23,917 Atco Ltd., Class I 974,696 1,435,738 32,800 Innergex Renewable Energy Inc. 248, ,512 1,222,726 1,773,250 MATERIALS (6.0%) USD 650,000 Century Aluminum Co., 7.5% 08/15/ , ,914 65,000 Richards Packaging Income Fund 556, ,950 USD 500,000 Taseko Mines Ltd., 7.75% 04/15/ , ,690 1,830,383 1,591,554 HEALTH CARE (1.7%) USD 500,000 Radnet Management Inc., % 04/01/ , ,233 Commissions and other portfolio transaction costs (20,878) Total Bonds & Equities (109.9%) 29,580,435 29,059,926 Short-Term Investments (3.6%) 957, ,880 DERIVATIVE INSTRUMENTS Foreign Currency Forward Contracts (-0.1%) (see Schedule A) (38,860) Total Investments (113.4%) 30,537,560 29,976,946 Other Assets (net) (-13.4%) (3,545,386) Net Assets (100.0%) 26,431,560 Principal amounts stated in: USD U.S. Dollar Percentages shown in brackets relate investments at fair value to net assets of the Trust. The accompanying notes are an integral part of these financial statements. 4

7 CONVERTIBLE & YIELD ADVANTAGE TRUST Financial Statements (cont d) Statement of Investment Portfolio (as at December 31, 2011) (cont d) Schedule A Foreign Currency Forward Contracts (-0.1%) Credit Rating of Settlement Contract Unrealized Contracts Counterparty the Counterparty Date Rate ($) Pay Receive Gain (Loss) ($) 1 Royal Bank of Canada A Jan (505,734) Canadian $ 490,000 US $ (6,417) 1 Royal Bank of Canada A Jan (9,783,000) US $ 9,936,466 Canadian $ (32,443) Total Foreign Currency Forward Contracts Value (38,860) Credit ratings are obtained from Standard & Poor s, where available, otherwise ratings are obtained from: Moody's Investors Service, Dominion Bond Rating Services or Canadian Bond Rating Services. Percentages shown in brackets relate investments at fair value to net assets of the Trust. The accompanying notes are an integral part of these financial statements. 5

8 CONVERTIBLE & YIELD ADVANTAGE TRUST Financial Statements (cont d) Statements of Net Assets (in $000 s except for per unit amounts and number of units outstanding) As at As at December 31, 2011 December 31, 2010 ASSETS Investments at fair value* Cash Short-term investments Unrealized gain on futures and foreign currency forward contractss Receivable for securities sold Dividends and accrued interest receivable LIABILITIES Payable for securities purchased Payable for unit redemptions Management fees payable Unrealized loss on futures and foreign currency forward contracts Service fees payable Distributions payable Accrued expenses Net assets and unitholders equity UNITHOLDERS EQUITY Unit capital Contributed surplus Retained earnings (deficit) Net assets and unitholders equity *Investments at cost Net assets per unit (Note 9) Number of units outstanding (Note 3) 29,060 30, , ,468 35, ,688 3, ,036 3,905 26,432 31,653 22,475 27,489 2,947 3,261 1, ,432 31,653 29,580 27, ,242,321 1,416,075 The accompanying notes are an integral part of these financial statements. 6

9 CONVERTIBLE & YIELD ADVANTAGE TRUST Financial Statements (cont d) Statements of Operations and Retained Earnings (Deficit) (in $000 s except for per unit amounts) For the years ended December INVESTMENT INCOME Dividends Interest Management fee rebate Less: Foreign withholding taxes EXPENSES Management fees (Note 4) Administrative expenses (Note 4) Commitment fees Interest expense Service fees (Note 4) Legal fees Audit fees Independent review committee fees Harmonized sales tax/goods and services tax (Note 4) Net investment income (loss) for the year Realized and unrealized gain (loss) on investments and commissions and other portfolio transaction costs Realized gain (loss) on investments Foreign exchange gain (loss) Commissions and other portfolio transaction costs Change in unrealized appreciation (depreciation) of investments and derivatives Net gain (loss) on investments Increase (decrease) in net assets from operations Increase (decrease) in net assets from operations per unit STATEMENTS OF RETAINED EARNINGS (DEFICIT) Retained earnings (deficit), beginning of year Increase (decrease) in net assets from operations (Excess) deficiency on amounts paid on units redeemed Distribution from net income Distribution from realized gains Retained earnings (deficit), end of year Contributed surplus, beginning of year (Excess) deficiency on amounts paid on units redeemed Contributed surplus, end of year ,332 (8) (7) 1,349 1, ,160 3,673 2, (43) (54) (3,484) 3, , , (4,848) 945 6,915 (838) (1,164) 1, ,261 3,550 (314) (289) 2,947 3,261 The accompanying notes are an integral part of these financial statements. 7

10 CONVERTIBLE & YIELD ADVANTAGE TRUST Financial Statements (cont d) Statements of Changes in Net Assets (in $000 s) For the years ended December Net assets, beginning of year CAPITAL TRANSACTIONS Cost of units redeemed (Excess) deficiency on amounts paid on units redeemed DISTRIBUTIONS TO UNITHOLDERS From net income From realized gains From return of capital Increase (decrease) in net assets from operations Net assets, end of year 31,653 30,985 (3,374) (3,207) (314) (289) (3,688) (3,496) (838) (1,164) (1,640) (1,587) (2,478) (2,751) 945 6,915 26,432 31,653 Statements of Cash Flows (in $000 s) For the years ended December CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net investment income (loss) Proceeds from sale of investments Purchase of investments Net change in non-cash balances related to operations FINANCING ACTIVITIES Distributions paid Cost of units redeemed Increase (decrease) in cash during the year Cash (Bank overdraft), beginning of year Cash (Bank overdraft), end of year 751 1,160 25,033 22,344 (19,826) (18,224) ,968 5,447 (2,501) (2,775) (3,497) (3,196) (5,998) (5,971) (30) (524) The accompanying notes are an integral part of these financial statements. 8

11 CONVERTIBLE & YIELD ADVANTAGE TRUST Trust Specific Financial Instruments Risks (Note 13) The Trust s investments were concentrated in the following segments as at December 31, 2010 Category Net Assets (%) Consumer Discretionary 15.9 Short-Term Investments 13.9 Financials 12.6 Energy 11.9 Telecommunication Services 11.9 Utilities 9.7 Industrials 7.8 Consumer Staples 7.5 Health Care 7.1 Information Technology 6.2 Materials 5.6 Foreign Currency Forward Contracts 1.1 Other Assets (net) Other Price Risk As at December 31, 2011 and 2010, the Trust was exposed to other price risk as the Trust s holdings were sensitive to changes in general economic conditions in Canada and the U.S. The Trust s portfolio consisted of fixed income, convertible securities and equities, thus an overall downturn in Canadian and U.S. economic conditions could have led to a widening in credit spreads and a decrease in securities prices which could have then led to a decrease in the value of the Trust s holdings. As at December 31, 2011, had the Canadian and U.S. markets increased or decreased by 10% (December 31, %), with all other variables held constant, net assets of the Trust would have increased or decreased, respectively, by approximately $1,858,000 (December 31, $1,950,000). In practice, actual results may differ from this analysis and the difference may be material. The accompanying notes are an integral part of these financial statements. 9

12 CONVERTIBLE & YIELD ADVANTAGE TRUST Trust Specific Financial Instruments Risks (Note 13) (cont d) Interest Rate Risk As at December 31, 2011 and 2010, the Trust was exposed to interest rate risk as some of its assets were invested in fixed-income securities. Generally, fixed-income securities will increase in value when interest rates decline and decrease in value when interest rates rise. The tables below summarize the Trust s exposure to interest rate risk, categorized by the contractual maturity date. as at December 31, 2011 Less than Greater 1 Year Years Years than 5 Years Total (in $000 s) (in $000 s) (in $000 s) (in $000 s) (in $000 s) Interest Rate Exposure 1,896 3,301 2,167 4,110 11,474 as at December 31, 2010 Less than Greater 1 Year Years Years than 5 Years Total (in $000 s) (in $000 s) (in $000 s) (in $000 s) (in $000 s) Interest Rate Exposure 5,488 3,469 2,356 4,100 15,413 As at December 31, 2011, had the prevailing interest rates increased or decreased by 0.25% (December 31, %), with all other variables held constant, net assets of the Trust would have indirectly decreased or increased, respectively, by approximately $99,000 (December 31, $101,000). In practice, the actual results may differ from this analysis and the difference may be material. The accompanying notes are an integral part of these financial statements. 10

13 CONVERTIBLE & YIELD ADVANTAGE TRUST Trust Specific Financial Instruments Risks (Note 13) (cont d) Currency Risk As at December 31, 2011 and 2010, the Trust was exposed to currency risk as it was invested in fixed-income investments denominated in U.S. dollars, although the Canadian dollar is the functional currency of the Trust. To mitigate currency risk exposure the Trust s Manager used forward contracts to hedge the Trust s holdings denominated in U.S. dollars against fluctuations in U.S. currency. The tables below summarize the Trust s exposure to currency risk. as at December 31, 2011 Financial Instruments Derivatives Total Currency Net Exposure Exposure Exposure Assets CURRENCY (in $000 s) (in $000 s) (in $000 s) (%) US Dollar 9,588 (9,467) Total 9,588 (9,467) as at December 31, 2010 Financial Instruments Derivatives Total Currency Net Exposure Exposure Exposure Assets CURRENCY (in $000 s) (in $000 s) (in $000 s) (%) US Dollar 14,081 (13,576) Total 14,081 (13,576) As at December 31, 2011, had the Canadian dollar strengthened or weakened by 10% (December 31, %) in relation to all other foreign currencies held in the Trust, with all other variables held constant, net assets of the Trust would have decreased or increased, respectively, by approximately $12,000 (December 31, $51,000). In practice, the actual results may differ from this analysis and the difference may be material. The accompanying notes are an integral part of these financial statements. 11

14 CONVERTIBLE & YIELD ADVANTAGE TRUST Trust Specific Financial Instruments Risks (Note 13) (cont d) Credit Risk As at December 31, 2011 and 2010, the Trust was exposed to credit risk as some of its assets were invested in derivatives and some assets were invested in high-yield bonds that may bear a below investment grade rating. The Trust was invested in fixed income securities, preferred securities and derivative instruments, as applicable, with the following credit ratings: as at December 31, 2011* CREDIT RATING^ Net Assets (%) AA/Aa/A+ 2.1 BBB/Baa/B BB/Ba/B+ 8.1 B 15.3 CCC/Caa/C CC/Ca/C+ 0.6 Not Rated 12.7 Total 48.0 as at December 31, 2010* CREDIT RATING^ Net Assets (%) AAA/Aaa/A BBB/Baa/B BB/Ba/B+ 6.2 B 18.1 CCC/Caa/C CC/Ca/C+ 1.0 Not Rated 14.7 Total 53.5 *Credit ratings are obtained from Standard & Poor s, where available, otherwise ratings are obtained from: Moody s Investors Service, Dominion Bond Rating Services or Canadian Bond Rating Services, respectively. ^Refer to Note 13 for Credit Rating cross reference. The accompanying notes are an integral part of these financial statements. 12

15 CONVERTIBLE & YIELD ADVANTAGE TRUST Trust Specific Financial Instruments Risks (Note 13) (cont d) Fair Value Hierarchy The tables below summarize the inputs used by the Trust in valuing the Trust s investments and derivatives carried at fair value. Long Positions at fair value as at December 31, 2011 Level 1 Level 2 Level 3 Total (in $000 s) (in $000 s) (in $000 s) (in $000 s) Equities 18,584 18,584 Bonds 10,476 10,476 Short-term investments Foreign currency forward contracts, net (39) (39) Total 18,584 11,393 29,977 Long Positions at fair value as at December 31, 2010 Level 1 Level 2 Level 3 Total (in $000 s) (in $000 s) (in $000 s) (in $000 s) Equities 19,504 19,504 Bonds 10,940 10,940 Short-term investments 4,401 4,401 Foreign currency forward contracts, net Total 19,504 15,682 35,186 The accompanying notes are an integral part of these financial statements. 13

16 Notes to the Financial Statements 1. THE TRUST Convertible & Yield Advantage Trust (the Trust ) is a closed-end investment trust established under the laws of the Province of Ontario on September 24, On October 17, 2003, the Trust completed an initial public offering of 3,700,000 units at $25 per unit. The Trust s units are listed on the Toronto Stock Exchange, under the symbol CNV.UN. On November 14, 2003, an over-allotment option granted to agents was exercised for 230,000 units at $25 per unit. The Trust will terminate operations on October 31, 2013 (the Termination Date ), and the net assets will be distributed pro rata to unitholders unless an alternative later termination date is approved by the unitholders. The manager of the Trust is CI Investments Inc. (the Manager and the Trustee ). The Manager has retained MFC Global Investment Management (Canada), a division of Elliott & Page Limited (the Investment Advisor ) as investment advisor to the Trust to actively manage the Trust s investment portfolio, including the allocation of assets amongst convertible securities, high yield securities and income trust securities pursuant to an investment advisory agreement between the Manager and Investment Advisor. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles ( Canadian GAAP ). Certain prior period balances have been reclassified to conform with the current period presentation. The following is a summary of the significant accounting policies of the Trust: (a) Valuation of Investments Canadian GAAP requires the fair value of financial instruments traded in an active market to be measured based on an investment s bid/ask price depending on the investment position (long/short). For the purpose of processing unitholder transactions, net asset value is calculated based on the closing market price of exchange-traded investments (referred to as Net Asset Value ), while for financial statement purposes net assets are calculated based on bid/ask price of such investments (referred to as Net Assets ). In accordance with National Instrument , a comparison between the Net Asset Value per unit and the Net Assets per unit is disclosed in Note 9. At the financial reporting date, listed securities are valued based on the bid price for securities held long and the ask price for securities held short. Unlisted securities are valued based on price quotations from recognized investment dealers, or failing that, their fair value is determined by the Manager on the basis of the latest reported information available. Fixed income securities, debentures, money market investments and other debt instruments including short-term investments, are valued at the bid quotation from recognized investment dealers. Underlying funds are valued on each business day at their net asset value as reported by the Underlying Fund s manager. (b) Commissions and Other Portfolio Transaction Costs Transaction costs, such as brokerage commissions, incurred in the purchase and sale of securities, are included in Commissions and other portfolio transaction costs in the Statements of Operations. (c) Cost of Investments Cost of investments represents the amount paid for each security and is determined on an average cost basis excluding commissions and transaction costs. 14

17 Notes to the Financial Statements (cont d) (d) Investment Transactions and Income Recognition Investment transactions are accounted for on the trade date for financial reporting purposes and any unrealized and realized gains and losses on such transactions are calculated on an average cost basis. Dividend income and distributions from investments are recognized on the ex-dividend/ex-distribution date and interest income is accounted for on the accrual basis. Distributions received from income trust holdings are recorded as income, capital gains or a return of capital, based on the best information available to the Manager. Due to the nature of these investments, actual allocations could vary from this information. Distributions from income trusts that are treated as a return of capital for income tax purposes reduce the average cost of the underlying investment trust. (e) Foreign Exchange Foreign currency amounts are translated into Canadian dollars, the functional currency of the Trust, as follows: fair value of investments, forward currency contracts, other assets and liabilities at the closing rate of exchange on each business day; income and expenses, purchases, sales and settlements of investments at the rate of exchange prevailing on the respective dates of such transactions. Foreign exchange gains (losses) on completed transactions are included in Foreign exchange gain (loss) as reflected in the Statements of Operations. (f) Increase (Decrease) in Net Assets from Operations per Unit Increase (decrease) in net assets from operations per unit in the Statements of Operations is calculated by dividing the increase (decrease) in net assets from operations by the weighted average number of units outstanding during the period. (g) Forward Contracts The Trust may enter into forward contracts. Forward foreign currency contracts are valued on each valuation day based on the difference between the value of the contract on the date the contract originated and the value of the contract on the valuation day. All unrealized gains (losses) arising from forward foreign currency contracts are recorded as part of Change in unrealized appreciation (depreciation) of investments and derivatives in the Statements of Operations and Unrealized gain (loss) on futures and foreign currency forward contracts in the Statements of Net Assets until the contracts are closed out or expire, at which time the gains (losses) are realized and reported as Realized gain (loss) on investments in the Statements of Operations. (h) Cash and Short-Term Investments Cash is comprised of cash on deposit. Short-term investments are comprised of short-term debt instruments with terms to maturity of less than one year at acquisition. (i) Net Asset Value per Unit Net Asset Value per unit is calculated at the end of each day on which the Toronto Stock Exchange is open for business by dividing the total Net Asset Value by outstanding units. (j) Income Taxes The Trust complies with the Income Tax Act (Canada) to qualify as a mutual fund trust. A mutual fund trust is subject to tax in each taxation year under Part 1 of the Income Tax Act (Canada) on the amount of its income for the year, including net realized taxable capital gains, less the portion thereof that it claims in respect of the amounts paid or payable to the unitholders for the year. Income tax paid by the Trust on any net realized capital gains not paid or payable to unitholders is recoverable by virtue of refunding provisions contained in the Income Tax Act (Canada) and provincial legislation, as redemptions occur. The Trust intends to distribute all of its net income and net realized capital gains so that the Trust will not generally be liable for income tax thereon. 15

18 Notes to the Financial Statements (cont d) (k) Use of Estimates The preparation of financial statements in accordance with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the reporting date and the reported amounts of income and expenses during the reporting year. Actual results could differ from those estimates. 3. UNITHOLDERS EQUITY Units issued and outstanding represent the capital of the Trust. The relevant changes pertaining to subscription and redemption of the Trust units are disclosed in the Statements of Changes in Net Assets. In accordance with the objectives and risk management polices outlined in Note 13, the Trust endeavors to invest subscriptions received in appropriate investments while maintaining sufficient liquidity to meet redemptions through utilizing a short-term borrowing facility or disposal of investments when necessary. The Trust is authorized to issue an unlimited number of redeemable, transferable units of one class, each of which represents an equal, undivided interest in the net assets of the Trust. Unitholders are entitled to redeem their units outstanding monthly (the Monthly Redemption ) or at the end of each year (the Annual Redemption ). Monthly redemption price per unit is equal to the lesser of: (a) 90% of the 10 day average trading price on the applicable monthly valuation date; and (b) the closing market price per unit on the applicable monthly valuation date. Annual redemption price per unit is equal to Net Asset Value per unit determined on the annual valuation date. Unless the transfer agent and registrar is directed that units are being surrendered for redemption pursuant to a monthly redemption, units surrendered for redemption within the period commencing 45 days and ending ten business days prior to the second last day of December in any year will be deemed to have been surrendered for the Annual Redemption. The Trust endeavours to provide unitholders with monthly distributions of $ per unit ($1.75 per annum to yield 7.0% on the subscription price of $25.00 per unit). Distributions commenced on November 28, 2003 and are expected to continue until termination of the Trust. For the years ended December 31, net capital transactions of the Trust consisted of the following: Unit Transactions Balance, beginning of year 1,416,075 1,572,315 Units redeemed (173,754) (156,240) Balance, end of year 1,242,321 1,416,075 When units of the Trust are redeemed at a price per unit which is lower than the average cost per unit of capital, the difference is included in Contributed surplus on the Statements of Net Assets. If the redemption price is greater than the average cost of capital, the difference is first charged to Contributed surplus until the entire account is eliminated, and the remaining amount is charged to Retained Earnings (Deficit) in the Statements of Net Assets. 4. FEES AND OTHER EXPENSES (a) Management fees The Trust pays to the Manager an annual fee ( Management fees ) equal to 1.10% of the Net Asset Value of the Trust calculated and paid monthly in arrears. (b) Service Fees The Manager will pay to registered dealers of the Trust an annual fee of 0.40% of the Net Asset Value for units held by clients of the sales representatives of the registered dealers, calculated and payable semi-annually in arrears. 16

19 Notes to the Financial Statements (cont d) (c) Administrative Expenses The Trust is also responsible for all its expenses incurred in connection with its operations and administration (fees shown as administration fees include: trustee fees, transfer agency, custody and accounting fees). Audit fees, legal fees and independent review committee fees are disclosed separately. (d) Advisory Fees A portion of the Management Fees received by the Manager will be paid to the Investment Advisor by the Manager. (e) Harmonized Sales Tax As of July 1, 2010, Ontario combined the federal goods and services tax ( GST - 5%) with the provincial retail sales tax ( PST - 8%). The combination resulted in a Harmonized sales tax ( HST ) rate of 13%. 5. MARKET REPURCHASE PROGRAM In accordance with the Trust s prospectus, and to enhance liquidity and to provide support to the units, the Trust has a mandatory market purchase program under which the Trust, subject to exceptions contained in the Trust Agreement and in compliance with any regulatory requirements, is obligated to purchase its own units for cancellation. If, on any business day, the price at which units are offered for sale is less than 90% of the Net Asset Value per unit determined as of the most recent valuation date, the Trust will offer to purchase for cancellation any units offered in the market at the then prevailing market price. The maximum number of units to be purchased in any three month period will not be over 1.25% of the number of units outstanding at the beginning of such period. During the years ended December, 2011 and 2010, the Trust made no purchased no units for cancellation. 6. BROKERAGE AND OTHER COMMISSIONS Commissions paid for security transactions during the years ended December 31, were as follows: (in $000 s) Brokerage Commissions Convertible & Yield Advantage Trust Soft Dollar Commissions Convertible & Yield Advantage Trust 1 1 A portion of brokerage commissions paid was used to cover research and market data services, termed soft dollar commissions. These amounts have been estimated by the Manager. 7. SECURITIES LENDING The Trust may engage in securities lending. Under a Securities Lending Agreement: (i) the borrower will pay to the Trust a negotiated securities lending fee and will make compensation payments to the Trust equal to any distributions received by the borrower on the securities borrowed; (ii) the securities loans must qualify as securities lending arrangements for the purposes of the Tax Act; and (iii) the Trust will receive prescribed collateral security. The minimum level of collateralization in respect of a loan of securities will be 102%. The Trust may also receive a fee or interest on the collateral and may pay lending fees to a party arranging the loan. As at December 31, 2011 and 2010 the Trust was not engaged in securities lending. 8. INCOME TAX LOSSES CARRY FORWARD Net capital losses may be carried forward indefinitely to reduce future net realized capital gains. Non-capital losses arising in taxation years 2004 and 2005 may be carried forward ten years. Non-capital losses arising in taxation years after 2005 may be carried forward twenty years. Non-capital losses carried forward may reduce future taxable income. 17

20 Notes to the Financial Statements (cont d) Losses carry forwards (in $000 s) 2011 Net capital losses carry forward 2,742 Year of expiry Total Non-capital losses carry forward 9. NET ASSETS COMPARISON In accordance with National Instrument , a comparison of net assets per unit and net asset value per unit as at December 31, is as follows: 2011 ($) 2010 ($) Net assets per unit Net asset value per unit RELATED PARTY TRANSACTIONS The Bank of Nova Scotia has a significant interest in CI Financial Corp., the parent company of the Manager. The Trust may have direct or indirect holdings in The Bank of Nova Scotia and/or CI Financial Corp. as identified in the Statement of Investment Portfolio of the Trust, if applicable. The Trust paid $5,319 in brokerage commissions to The Bank of Nova Scotia during the year ended December 31, 2011 ( $6,896). 11. INTERNATIONAL FINANCIAL REPORTING STANDARDS On February 13, 2008, the Canadian Accounting Standards Board ( AcSB ) confirmed that the use of International Financial Reporting Standards ( IFRS ) will be required for all publicly accountable profit-oriented enterprises for interim and annual financial statements relating to fiscal years beginning on or after January 1, On December 12, 2011, the AcSB confirmed deferral of the IFRS changeover date for investment funds. Based on the AcSB decision, IFRS will become effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, Based on the Manager s current evaluation of the differences between IFRS and Canadian GAAP, the Manager currently does not expect any impact to net asset value or net asset value per unit, at this time, as a result of the transition to IFRS, and expects that the main impact will be on the financial statements, where additional disclosures or changes in presentation will be required. Further updates on the progress in the implementation of the IFRS transition plan and any changes to reporting will be provided during the implementation period leading up to the transition date. 12. FINANCIAL INSTRUMENTS The categorization of financial instruments is as follows: investments and derivatives are classified as held for trading and are stated at fair value. Receivable for securities sold and dividends and accrued interest receivable are designated as loans and receivables. They are recorded at amortized cost which approximates their fair value due to their short-term nature. Similarly, payable for unit redemptions, payable for securities purchased, management fees payable, accrued expenses, service fees payable and distributions payable are designated as financial liabilities and are carried at their amortized cost which approximates their fair value, due to their short-term nature. Financial liabilities are generally settled within three months. 18

21 Notes to the Financial Statements (cont d) 13. FINANCIAL INSTRUMENTS RISK Risk Management The Trust is exposed to a variety of financial instruments risks: credit risk, liquidity risk and market risk (including interest rate risk, currency risk and other price risk). The level of risk to which the Trust is exposed to depends on the investment objective and the type of investments held by the Trust. The value of the investments within the portfolio can fluctuate daily as a result of changes in prevailing interest rates, economic and market conditions and company specific news related to investments held by the Trust. The Manager of the Trust may minimize potential adverse effects of these risks on the Trust s performance by, but not limited to, regular monitoring of the Trust s positions and market events, diversification of the investment portfolio by asset type, issuer, sector, term to maturity within the constraints of the stated objectives, and through the usage of derivatives to hedge certain risk exposures. Other Price Risk Other price risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or currency risk). The value of each investment is influenced by the outlook of the issuer and by general economic and political conditions, as well as industry and market trends. All securities present a risk of loss of capital. Except for options written, future contracts sold short and investments sold short, the maximum risk resulting from financial instruments is equivalent to their fair value. Other assets and liabilities are monetary items that are short-term in nature and therefore are not subject to significant other price risk. Interest Rate Risk Interest rate risk is the risk that the fair value of interest-bearing investments and interest rate derivative instruments will fluctuate due to changes in prevailing levels of market interest rates. As a result, the value of the Trust will be affected by changes in applicable interest rates as it invests in debt securities and income trusts. If interest rates fall, the fair value of existing debt securities may increase due to the increase in yield. Alternatively, if interest rates rise, the yield of existing debt securities decrease which may then lead to a decrease in their fair value. The magnitude of the decline will generally be greater for long-term debt securities than for short-term debt securities. Interest rate risk also applies if the Trust invests in convertible securities. The fair value of these securities varies inversely with interest rates, similar to other debt securities. However, since they may be converted into common shares, convertible securities are generally less affected by interest rate fluctuations than other debt securities. Currency Risk Currency risk arises from financial instruments that are denominated in a currency other than the Canadian dollar, the functional currency of the Trust. As a result, the Trust may be exposed to the risk that the value of securities denominated in other currencies will fluctuate due to changes in exchange rates. The Statement of Investment Portfolio identifies all bonds and derivative instruments denominated in foreign currencies. Equities traded in foreign markets are exposed to currency risk as the prices denominated in foreign currencies are converted to the Trust s functional currency to determine their fair value. Credit Risk Credit risk is the risk that a security issuer or counterparty to a financial instrument will fail to meet its financial obligations. The fair value of debt instruments includes consideration of the credit worthiness of the debt issuer. Credit risk exposure for derivative instruments, if applicable, is based on the Trust s unrealized gain of the contractual obligations with the counterparty as at the reporting date. The credit risk exposure of the Trust s other assets are represented by their carrying amount as disclosed in the Statements of Net Assets. Credit ratings for fixed income securities, preferred securities and derivative instruments are obtained from Standard & Poor s, where available, otherwise ratings are obtained from: Moody's Investors Service, Dominion Bond Rating Services or Canadian Bond Rating Services. 19

22 Notes to the Financial Statements (cont d) Credit ratings can be either long-term or short-term. Short-term credit ratings are generally assigned to those obligations and derivative instruments considered short-term in nature. The table below provides a cross-reference between the long-term credit ratings disclosed in the Credit Rating table inclusive of the short-term credit ratings disclosed in the derivatives schedule in the Statement of Investment Portfolio. Credit Rating as per Credit Risk table Credit Rating as per derivatives schedules AAA/Aaa/A++ A-1+ AA/Aa/A+ A-1, A-2, A-3 A B, B-1 BBB/Baa/B++ B-2 BB/Ba/B+ B-3 B C CCC/Caa/C++ CC/Ca/C+ C and Lower D Not Rated WR Significant cash balances as disclosed in the Statements of Net Assets are maintained by the Custodian, RBC Dexia. The Manager monitors the credit worthiness of the custodian on a regular basis. All transactions executed by the Trust in listed securities are settled / paid for upon delivery using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligation. Liquidity Risk Liquidity risk is 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 exposed to monthly and annual cash redemptions of redeemable units. Therefore, the Trust aims to invest the majority of its assets in investments that are traded in active markets and can be readily disposed of. In addition, the Trust aims to retain sufficient cash and cash equivalent positions to maintain liquidity. From time to time, the Trust may enter into derivative contracts or invest in unlisted securities that may not trade in an organized market and may be illiquid. Illiquid securities are identified in the Statement of Investment Portfolio of the Trust, if applicable. Fair Value Hierarchy The Trust is required to classify financial instruments measured at fair value using a fair value hierarchy. Investments whose values are based on quoted market prices in active markets are classified as Level 1. This level may include publicly traded equities, exchange traded and retail mutual funds, exchange traded warrants, futures contracts, traded options, American depositary receipts ( ADRs ) and Global depositary receipts ( GDRs ). Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified as Level 2. These may include fixed income securities, mortgage backed securities ( MBS ), short-term instruments, non-traded warrants, over-the-counter options, structured notes of indexed securities, foreign currency forward contracts and swap instruments. Investments classified as Level 3 have significant unobservable inputs. Level 3 instruments may include private equities, private term loans, private equity funds and certain derivatives. As observable prices are not available for these securities, the Trust may use a variety of valuation techniques to derive the fair value. Details of the Trust s exposure to financial instruments risks including fair value hierarchy classifications are available in the Trust Specific Financial Instruments Risks section of the financial statements. 20

23 Trust Information Manager and Trustee CI Investments Inc. 2 Queen Street East, 20th Floor Toronto, Ontario M5C 3G7 Phone: (416) Fax: (416) Toll Free: service@ci.com Custodian RBC Dexia Investor Services Trust 155 Wellington Street West 5th Floor Toronto, Ontario M5V 3L3 Auditor PricewaterhouseCoopers LLP 18 York Street Suite 2600 Toronto, Ontario M5J 0B2 Registrar & Transfer Agent Computershare Investor Services Inc. 100 University Avenue 8th Floor Toronto, Ontario M5J 2Y1 Listed The Toronto Stock Exchange Ticker Symbol CNV.UN For more information on the Trust, visit us online at 21

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