Annual Report to Unitholders December 31, 2012
REPORT TO UNITHOLDERS The following presents the financial results of Top 20 Dividend Trust (the Trust ) from its commencement of operations on June 20, 2012 to December 31, 2012. Commencement of Operations The Trust is a closed-end investment fund established as a trust to provide holders (the Unitholders ) of units (the Units ) of the Trust with investment exposure to an equally-weighted portfolio (the Portfolio ) comprised of the 20 highest yielding securities ( Portfolio Securities ) included in the S&P/TSX 60 Index. The S&P/TSX 60 Index consists of the 60 largest and most liquid issuers on the TSX and is generally maintained to have sector weights in line with the S&P/TSX Composite Index. The Trust s investment objectives are to provide holders of Units with: (i) stable monthly distributions; and (ii) the opportunity for capital appreciation. The distributions are funded from dividends generated by the Portfolio and supplemented by premiums received on writing options on a portion of the Portfolio Securities. The Portfolio is managed by Highstreet Asset Management Inc. ( Portfolio Manager and Options Advisor or Highstreet ). Highstreet has been retained to provide investment advisory and portfolio management services to the Trust and maintain the Portfolio in accordance with the investment objectives, strategy and restrictions of the Trust. The Portfolio is reconstituted annually to include the top 20 highest yielding constituents of the S&P/TSX 60 Index and is re-balanced to an equal weight basis prior to the end of each calendar quarter. Highstreet writes covered call options from time to time in respect of not more than 25% of the Portfolio in order to earn income from option premiums to supplement dividends generated by the Portfolio. Highstreet will generally only write covered calls to the extent needed to increase the yield on the Portfolio to a targeted yield. This targeted yield will enable the Trust to pay the targeted distribution. The Trust will purchase Units under the mandatory market purchase program to the extent premiums generated from writing covered call options are in excess of amounts needed to fund the distribution. The Trust commenced operations on June 20, 2012 and issued 7,960,000 units at a price of $10.00 per Unit from its initial public offering and over-allotment option raising gross proceeds of $79,600,000. To pursue its investment objectives, the Trust used the combined net proceeds aggregating $75.0 million to purchase the Portfolio. The Units of the Trust are listed for trading on the Toronto Stock Exchange ( TSX ) under the symbol TTY.UN. Report from Portfolio Manager and Options Advisor Overview Highstreet manages the option overlay strategy which involves selling covered call options on up to, but not more than, 25% of the Fund. The percentage of Portfolio Securities written on for each holding and the strike prices chosen are primarily a function of the Trust s income requirements. Highstreet may choose to 1
close out option positions prior to their expiry, for options that are both out-of-the-money, and/or in-the-money, when prudent. Highstreet endeavors to avoid assignment, when possible, on any in-the-money positions. The overall investment objectives of the Fund are to provide targeted monthly cash distributions, to provide the opportunity for capital appreciation, and to provide lower overall volatility of portfolio returns than would otherwise be experienced from owning the equity securities on a stand alone basis. Market Performance The Canadian market performed well during the period from inception on June 20, 2012 to December 31, 2012, with the S&P/TSX 60 delivering a total return of 7.6%. Performance improved throughout the period, despite the fact that it remained volatile due to political events such as the US election, US fiscal cliff concerns, additional announcements of economic stimulus throughout the world, and continued negotiations around Greece s debt, which had to be considered alongside improvements in underlying US economic fundamentals and rising industrial activity in China. In Canada, Financials were the best performing sector as recent earnings reports assured investors that growth opportunities remain in Canadian banks, and Canadian insurers continued to shift their operations in the right direction. Materials and Energy lagged in the period, and gold stocks particularly hurt the index return as rising production costs helped to reverse their positive trend from the previous quarter. Dividend producing stocks delivered the best performance in the period as investors favoured these holdings as protection from continued market volatility. 2
Performance The Portfolio delivered a total return of 9.0% for the same period comprised of: 4.1% from price change, 3.0% from dividends and 1.9% from premium earned, outperforming the benchmark of 7.6%. In the period, nineteen of the twenty names in the Portfolio posted a positive return. Performance for each of the individual names, from top to bottom was as follows: Average Weight Performance* % Sun Life Financial Inc. (SLF) 5.2 17.3 Shaw Communications Inc. B (SJR.B) 5.1 17.1 TELUS Corp. (T) 5.1 9.5 Manulife Financial Corporation (MFC) 5.0 20.4 Canadian Imperial Bank of Commerce (CM) 5.0 13.2 Bank of Montreal (BMO) 5.0 11.4 Royal Bank of Canada (RY) 5.0 18.4 National Bank of Canada (NA) 5.0 7.9 BCE Inc. (BCE) 5.0 7.7 Power Corporation of Canada (POW) 5.0 9.6 TransCanada Corporation (TRP) 5.0 11.5 Husky Energy Inc. (HSE) 5.0 17.9 Rogers Communications Inc. B (RCI.B) 4.9 19.9 Bank of Nova Scotia (BNS) 4.9 14.4 ARC Resources Ltd (ARX) 4.9 30.9 Canadian Oil Sands Ltd (COS) 4.9 6.7 Enerplus Corp (ERF) 4.9 3.9 Thomson Reuters Corporation (TRI) 4.9 4.1 Penn West Petroleum Ltd (PWT) 4.6 15.3 Crescent Point Energy Corporation (CPG) 0.3 0.1 Encana Corporation (ECA) 0.1 0.5 * Total return includes dividends and effected for covered call writing. Options Activity Since inception, monthly covered call options written on the Trust s Portfolio Securities generated premium of $1,436,554. The percentage of the portfolio written on was approximately 21% on average with an average strike price for the calls of 101%. A summary of the monthly write activity is below: June July August September October November December Premium received $190,785 $199,161 $235,837 $ 179,910 $210,448 $ 217,463 $ 202,950 Percent written 16% 16% 22% 23% 23% 24% 23% Average strike 101% 101% 101% 101% 101% 100% 101% 3
Volatility Volatility levels have steadily declined throughout the period in review (with the exception of a brief upswing in November) to record their yearly lows at year-end. As at December 31, 2012, the average level of volatility for the Trust was 13.4%. 30.00% Average 30 Day Realised Volatility 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Jun-12 Sep-12 Dec-12 5MAR201322021634 On an individual stock basis, several stocks had volatilities well below the Portfolio average at period end, particularly bank stocks. The Portfolio s energy holdings skewed the average higher. 40.0% Individual Volatilities (30 day) 30.0% 4 20.0% 10.0% 0.0% ARX BCE BMO BNS CM ERF COS HSE MFC Volatility PWT NA RCI/B POW Average RY SJR/B SLF T TRI TA TRP 5MAR201322021930
Financial Performance The Trust commenced operations on June 20, 2012 with net assets, after deduction of issue expenses, of $9.42 per Unit. The Trust s net assets increased to $9.85 per Unit (after expenses and payment of distributions) or 4.6% as at December 31, 2012, primarily reflecting the net increase in the fair value of the Portfolio. Distributions The Trust does not have a fixed distribution but intends to pay equal monthly distributions based on, among other things, the actual and expected returns on the Portfolio and the actual and expected expenses of the Trust. Monthly distributions were initially targeted to be $0.0583 per Unit ($0.70 annually) representing an annual yield of 7.0% on the issue price of the Units. For the period ended December 31, 2012, the Trust declared total distributions of $2.94 million or $0.3693 per Unit consistent with the initially estimated monthly distribution of $0.0583 per Unit, prorated from June 20, 2012 to December 31, 2012. Distributions consisted of 43.97% return of capital, 28.13% dividend income and 27.90% capital gains. Dividends earned on the Portfolio Shares and premiums received on writing covered call options on a portion of the Portfolio Securities funded the distributions and operating expenses of the Trust. For the period ended December 31, 2012, $3.35 million was available for distribution comprised of dividends earned on the Portfolio Securities (including interest) of $2.26 million and option premiums received of $1.43 million offset by total operating expenses of $0.34 million. This report, along with the accompanying audited financial statements of the Trust, is respectfully submitted to you on behalf of the Board of Directors of T20 Ltd., Trustee of Top 20 Dividend Trust. Toronto, Canada March 7, 2013 6MAY200514374014 Brian D. McChesney President and Chief Executive Officer 5
MANAGEMENT S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying financial statements of Top 20 Dividend Trust and all the information in this annual report are the responsibility of management and have been reviewed and approved by the Board of Directors of T20 Ltd. (the Board ), Trustee of Top 20 Dividend Trust. The financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. Financial statements are not precise since they include certain amounts based on estimates and judgements. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects. Management has ensured that the other financial information presented in this annual report is consistent with the financial statements. The financial statements have been audited by PricewaterhouseCoopers LLP on behalf of the Unitholders. The Board has oversight responsibility for ensuring 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 the external auditors to discuss internal controls, the financial reporting process, various auditing and financial reporting issues, and to review the annual reports, the financial statements and the external auditors report. The Committee reports its findings semi-annually to the Board for their consideration when approving the financial statements for issuance to the Unitholders. The Committee also considers, for review by the Board, the engagement or re-appointment of the external auditors. PricewaterhouseCoopers LLP has full and free access to the Committee. 6MAY200514374014 Brian D. McChesney President and Chief Executive Officer 18NOV200913524948 Stephen D. Pearce Chief Financial Officer and Secretary Toronto, Canada March 28, 2013 6
INDEPENDENT AUDITOR S REPORT To the Unitholders and Trustee of Top 20 Dividend Trust (the Trust) We have audited the accompanying financial statements of the Trust, which comprise the statements of net assets and investments as at December 31, 2012, and the statements of investment operations, cash flows, and changes in net assets for the period from June 20, 2012 (commencement of operations) to December 31, 2012 and the related notes which comprise a summary of significant accounting policies and other explanatory information (the financial statements). 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 of the Trust based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the 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 is sufficient and appropriate to provide a basis for our audit opinion. 7
Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Trust as at December 31, 2012, and the results of its operations, its cash flows and the changes in its net assets for the period from June 20, 2012 to December 31, 2012 in accordance with Canadian generally accepted accounting principles. 25MAR200900033605 Toronto, Canada March 28, 2013 Chartered Accountants Licensed Public Accountants 8
STATEMENT OF NET ASSETS As at December 31, 2012 2012 Assets Investments and options, at fair value $ 77,816,432 Receivable from sale of investments 4,062,983 Cash 746,469 Distributions and other income receivable 540,133 83,166,017 Liabilities Payable from purchase of investments 3,899,424 Distribution payable to Unitholders 464,068 Issue costs payable 223,392 Accrued liabilities (note 6) 188,657 4,775,541 Net assets representing Unitholders equity $ 78,390,476 Number of Units outstanding (note 4) 7,960,000 Net assets per Unit (note 3) $ 9.85 See accompanying notes to financial statements. On behalf of the Board of Directors of T20 Ltd., Trustee for Top 20 Dividend Trust: 6MAY200514374014 Brian D. McChesney President and Chief Executive Officer 16OCT200917074610 Thomas A. Pippy Chairman of the Board 9
STATEMENT OF INVESTMENT OPERATIONS For the period from June 20, 2012 to December 31, 2012 2012 Revenue Dividends $ 2,251,024 Interest and other income 11,114 2,262,138 Expenses Management fees (note 6) 226,478 Unitholders information cost 26,968 Audit fees 23,000 Directors fees 17,222 Index fees 11,300 Listing fees 7,840 Transfer agent fees 6,480 Custodial fees 5,040 Insurance premiums 5,000 Independent Review Committee fees 3,750 Legal fees 3,000 Other 3,326 339,404 Net investment income for the period 1,922,734 Net realized gain on investments and options 912,777 Trading commissions (118,866) Unrealized appreciation of investments and options 3,690,834 Total results of investment operations $ 6,407,479 Total results of investment operations per Unit* $ 0.808 * Based upon the weighted average number of Units outstanding during the period. See accompanying notes to financial statements. 10
STATEMENT OF CASH FLOWS For the period from June 20, 2012 to December 31, 2012 2012 Operating activities Total results of investment operations $ 6,407,479 Add (deduct): Net realized gain on disposition of investments and options (912,777) Unrealized appreciation of Portfolio Securities (3,690,834) Changes in non-cash operating items Increase in distributions and other income receivable (540,133) Increase in receivable from sale of Portfolio Securities (4,062,983) Increase in payable for purchase of investments 3,899,424 Increase in accrued liabilities 188,657 Net cash flow provided by operating activities 1,288,833 Investing activities Purchase of Portfolio Securities (87,251,675) Proceeds on disposition of Portfolio Securities 14,038,854 Net cash flow used in investing activities (73,212,821) Financing activities Proceeds from issuance of units 79,600,000 Issue costs paid (4,453,983) Distributions paid to Unitholders (2,475,560) Net cash flow provided by financing activities 72,670,457 Net increase in cash 746,469 Cash, beginning of period Cash, end of period $ 746,469 See accompanying notes to financial statements. 11
STATEMENT OF CHANGES IN NET ASSETS For the period from June 20, 2012 to December 31, 2012 2012 Total results of investment operations Net investment income for the period $ 1,922,734 Net realized gain on disposition of investments and options 912,777 Trading commissions (118,866) Unrealized appreciation of Portfolio Securities 3,690,834 6,407,479 Distributions to Unitholders (2,939,628) Unit transactions Units issued 79,600,000 Related issue costs (4,677,375) 74,922,625 Changes in net assets during the period 78,390,476 Net assets, beginning of period Net assets, end of period $ 78,390,476 Distributions per Unit $ 0.3693 See accompanying notes to financial statements. 12
STATEMENT OF INVESTMENTS As at December 31, 2012 Number of Average % of Portfolio Units/Shares Securities Cost Base Fair Value at Fair Value ENERGY 164,950 ARC Resources Ltd. $ 3,370,775 $ 4,003,337 5.1 196,500 Canadian Oil Sands Limited 3,829,127 3,959,475 5.1 103,900 Crescent Point Energy Corp. 3,926,894 3,896,250 5.0 199,300 Encana Corporation 3,899,424 3,906,280 5.0 301,954 Enerplus Corporation 3,932,637 3,865,011 5.0 135,400 Husky Energy Inc. 3,427,384 3,979,406 5.1 334,808 Penn West Petroleum Ltd. 4,397,638 3,605,882 4.6 26,783,879 27,215,641 34.9 FINANCIAL 64,465 Bank of Montreal 3,612,696 3,920,117 5.1 68,010 Bank of Nova Scotia (The) 3,630,936 3,907,855 5.0 Canadian Imperial Bank Of 47,700 Commerce 3,478,306 3,814,092 5.0 290,186 Manulife Financial Corporation 3,285,859 3,911,707 5.0 50,600 National Bank of Canada 3,762,768 3,901,260 5.0 157,800 Power Corporation of Canada 3,747,481 3,990,762 5.1 65,024 Royal Bank of Canada 3,451,819 3,888,435 5.0 148,700 Sun Life Financial Inc. 3,402,730 3,916,758 5.0 28,372,595 31,250,986 40.2 SERVICES 172,600 Shaw Communications Inc. 3,404,799 3,937,006 5.1 3,404,799 3,937,006 5.1 TECHNOLOGY 136,100 Thomson Reuters Corporation 3,946,387 3,915,597 5.0 3,946,387 3,915,597 5.0 TELECOMMUNICATIONS 90,914 BCE Inc. 3,792,462 3,872,936 5.0 59,760 TELUS Corporation 3,655,080 3,886,790 5.0 7,447,542 7,759,726 10.0 UTILITIES AND INFRASTRUCTURE 264,190 TransAlta Corp. 4,466,029 3,986,627 5.1 4,466,029 3,986,627 5.1 Total Common Shares $ 74,421,231 $ 78,065,583 100.3 See accompanying notes to financial statements. 13
STATEMENT OF INVESTMENTS (continued) % of Maturity Number of Strike Premium Portfolio at Options Date Contracts Price Received Fair Value Fair Value Written Call Options (100 shares per contract) ARC Resources Ltd. 1/18/2013 406 $ 23.96 $ (16,646) $ (33,490) Bank of Montreal 1/18/2013 108 61.45 (5,076) (4,748) Bank of Nova Scotia (The) 1/18/2013 113 58.25 (3,051) (4,137) BCE Inc. 1/18/2013 152 42.90 (3,800) (5,449) Canadian Imperial Bank Of Commerce 1/18/2013 79 83.05 (2,844) (1,124) Canadian Oil Sands Limited 1/18/2013 329 20.19 (8,554) (12,476) Crescent Point Energy Corp. 1/18/2013 256 37.80 (12,544) (14,340) Enerplus Corporation 1/18/2013 743 13.01 (25,262) (32,558) Husky Energy Inc. 1/18/2013 333 29.50 (13,986) (17,800) Manulife Financial Corporation 1/18/2013 486 13.77 (12,636) (10,696) National Bank of Canada 1/18/2013 84 78.72 (3,108) (2,943) Penn West Petroleum Ltd. 1/18/2013 824 11.50 (18,128) (10,695) Power Corporation of Canada 1/18/2013 264 25.30 (5,016) (11,574) Royal Bank of Canada 1/18/2013 109 61.26 (4,905) (2,233) Shaw Communications Inc. 1/18/2013 425 22.84 (12,325) (16,235) Sun Life Financial Inc. 1/18/2013 366 26.82 (16,104) (11,976) TELUS Corporation 1/18/2013 100 65.73 (3,800) (19,775) Thomson Reuters Corporation 1/18/2013 335 29.22 (13,065) (11,624) TransAlta Corp. 1/18/2013 650 14.92 (22,100) (25,277) Total Written Call Options $ (202,950) $ (249,151) 0.3% Average Cost Base/ % of Premium Portfolio at Summary Received Fair Value Fair Value Total Common Shares $ 74,421,231 $ 78,065,583 100.3 Total Options (202,950) (249,151) (0.3) Adjustment for trading commissions (92,683) Total Investments $ 74,125,598 $ 77,816,432 100.0% 14
NOTES TO FINANCIAL STATEMENTS December 31, 2012 1. TRUST ACTIVITIES Top 20 Dividend Trust (the Trust ) is an investment trust established under the laws of the Province of Ontario and is governed by a Declaration of Trust dated May 29, 2012. Pursuant to this Declaration of Trust, T20 Ltd. acts as the trustee (the Trustee ) and is responsible for managing the affairs of the Trust. Under its mandate, the Trust invested in an equally-weighted portfolio (the Portfolio ) comprised of the 20 highest yielding equity securities ( Portfolio Securities ) included in the S&P/TSX 60 Index. The S&P/TSX 60 Index consists of the 60 largest and most liquid issuers on the Toronto Stock Exchange (the TSX ) and is generally maintained to have sector weights in line with the S&P/TSX Composite Index. The Portfolio is reconstituted annually to include the then top 20 highest yielding constituents of the S&P/TSX 60 Index and is rebalanced to an equal weight basis prior to the end of each calendar quarter. The annual rebalancing will be completed within 15 business days following the last business day of December. Highstreet Asset Management Inc. (the Portfolio Manager and Options Advisor or Highstreet ) is responsible for managing the option writing strategy and determining the securities on which the Trust will write calls and at what level relative to the current market price. The Portfolio Manager and Options Advisor will also determine the percentage of each security that the Fund will write covered calls on in order to meet the Trust s distribution target subject to the maximum of 25% of the Portfolio. The Trust issued a total of 7,960,000 Units at a price of $10.00 including 7,600,000 units closing on June 20, 2012 and an additional 360,000 Units under the over-allotment option closing on July 6, 2012 for gross proceeds of $79,600,000. The net proceeds of $74,922,625 after deducting agent fees of $4,179,000 and issue costs of $498,375 were invested in the Portfolio in accordance with the investment objectives of the Trust. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with Canadian generally accepted accounting principles ( GAAP ). The preparation of financial statements requires management to make estimates and assumptions on a fair and reasonable basis that may impact the reported amounts of assets and liabilities at the date of the financial statements and revenue and expenses during the year. Actual 15
results could differ from these estimates. The significant accounting policies followed in the preparation of these financial statements are summarized below: Investments Portfolio Securities are classified as held for trading and are presented at fair value. The fair value is computed using the closing bid prices on the TSX. The difference between fair value and the average cost of Portfolio Securities is recorded as unrealized appreciation/(depreciation) of investments. Investment transactions are recorded on a trade-date basis. Realized gains/(losses) on the disposition of Portfolio Securities and unrealized appreciation/(depreciation) of Portfolio Securities are determined on an average cost basis. Trading commissions incurred for securities bought and sold are included in the Statement of Investment Operations. The total average cost base of the Portfolio has been reduced by net buying commissions incurred. Options are contracts entitling the holder to purchase or sell a specified item at a specified price, during a specified period or on a specified date. Options purchased are recorded as investments; options written (sold) are recorded as liabilities in the Statement of Net Assets. Any gain or loss resulting from revaluation is included in unrealized appreciation (depreciation) in value of investments in the Statement of Operations. Upon closing of an option other than by exercise, which results in a cash settlement, the difference between the premium (original option value) and the settlement proceeds is included in gain (loss) on investments and options in the Statement of Operations. When securities are acquired or delivered upon exercise, the acquisition cost or sale proceeds are adjusted by the amount of the premium. When an option is closed, the difference between the premium and the cost to close the position is included in gain (loss) on investments and options in the Statement of Operations, as is the premium for options written or purchased when an option expires. Over the counter options are priced using an options pricing model. Cash is presented at cost plus accrued interest which approximates fair value. Revenue Recognition Dividend income is recorded on an ex-dividend date basis. Interest and securities lending income are recorded on an accrual basis. Trading Commissions Trading commissions incurred for securities bought and sold are included as an expense in the Statements of Investment Operations. The total average cost base of the Portfolio has been reduced by net buying commissions incurred. 16
Transition to International Financial Reporting Standards ( IFRS ) The Canadian Institute of Chartered Accountants ( CICA ) Accounting Standards Board extended the deferral of the mandatory International Financial Reporting Standards ( IFRS ) changeover date for investment companies to fiscal years beginning on or after January 1, 2014. The Trust, which is an investment company, will adopt IFRS commencing January 1, 2014. In order to prepare for the transition to IFRS, the Manager has performed an assessment of the impact of significant accounting differences between IFRS and Canadian GAAP including the impact to business processes and systems. Currently, the Manager does not expect an impact to net assets from the changeover to IFRS with the main impact of IFRS on the Fund s financial statements being additional disclosures in the financial statements and a potential change in the presentation of Unitholders equity. Finally, the Manager affirms that the current business processes and information technology will not be impacted on the adoption of IFRS. Further updates on implementation progress and any changes to reporting impacts from the adoption of IFRS will be provided during the implementation period leading up to January 1, 2014. 3. NET ASSETS PER UNIT Under Section 3855 of the CICA Handbook Accounting, the Trust is required to prepare its financial statements using the closing bid prices for actively traded securities. Pursuant to National Instrument 81-106, the Trust continues to calculate and report the net asset value using closing sale prices (the Transaction NAV ) for purposes other than the financial statements and provides a reconciliation to net assets per Unit calculated in accordance with Section 3855 below. As at December 31, 2012: Transaction NAV 9.87 Valuation adjustment to Portfolio Securities (0.02) Net assets per Unit $ 9.85 4. UNITHOLDERS CAPITAL Pursuant to the Declaration of Trust, the Trust is authorized to issue an unlimited number of transferable, redeemable Trust Units of one class, each of which represents an equal, undivided interest in the net assets of the Trust. All Units have equal rights and privileges. Each whole 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 Trust and distributions upon the termination of the Trust. 17
The Trust may purchase any Units offered in the market at a price that is less than 98% of the latest NAV per Unit. Pursuant to the mandatory market purchase program, the Trust will purchase up to a maximum amount in any rolling 10 day period of 10% of the number of Units outstanding at the beginning of such 10 day period, subject to the terms set out in the Declaration of Trust. Purchases under the mandatory market purchase program will only be made to the extent they may be funded by premiums generated from writing covered call options in excess of amounts needed to fund the distribution up to the limit of 25% of the Portfolio. No purchases were made under the market purchase program for the period ended December 31, 2012. Redemption of Trust Units Commencing in 2013, Units may be redeemed on the last business day in December of each year (each, an Annual Redemption Date ) at a redemption price per Unit equal to net realized proceeds per Unit redeemed. Units must be surrendered for annual redemption to the Trust s registrar by November 15 of such year or the immediately preceding business day, in the event that November 15 is not a business day. Payment of the proceeds of redemption will be made on or before the last business day of January. Net realized proceeds per Unit is equal to: (i) either (a) the aggregate proceeds received by the Trust on the sale of the pro rata share of the Portfolio Securities represented by the Units surrendered for redemption (rounded down to the nearest whole security for each Portfolio Security); or (b) if for any reason the Manager determines that it is not desirable for the Trust to sell Portfolio Securities in such proportions, the Trust may fund such redemptions out of cash on hand and/or sell a sufficient number of Portfolio Securities to fund such cash redemptions. For the purpose of such determination, the aggregate value of Portfolio Securities will be, where Portfolio Securities have been sold, the realized price for those securities, and otherwise will be calculated using closing sale prices; (ii) divided by, in the case of (a), the number of Units surrendered for redemption and in the case of (b), the total number of Units outstanding. 5. INCOME TAXES The Trust qualifies as a mutual fund trust under the Income Tax Act (Canada). A mutual fund trust is subject to tax on its net investment income, including net realized capital gains, which is not paid to its Unitholders. The financial statements of the Trust do not include a provision for income taxes because under the terms of the Declaration of Trust, the income, including net realized capital gains, is distributed each year to Unitholders and is taxable in their hands. The Trust may realize capital gains as a result of Portfolio rebalancing activities. Allocations of capital gains as a result of portfolio transactions are reflected below the net investment income line as net realized gain/(loss) on disposition of Portfolio Securities. Where the Trust realizes income for tax purposes which is in excess of any distributions paid or made payable to the Unitholder during the year, the Declaration of Trust provides that an additional distribution (the Additional Distribution ) will be automatically payable in 18
each year to the Unitholder on December 31. The Additional Distribution will be automatically reinvested in additional Units of the Fund on December 31, following which the outstanding Units of the Trust will be automatically consolidated on a basis such that the number of consolidated Units is equal to the number of Units outstanding immediately preceding the Additional Distribution. 6. RELATED PARTY INFORMATION The Trust retained Scotia Managed Companies Administration Inc. ( SMCAI ), a wholly owned subsidiary of Scotia Capital Inc. ( SCI ), to administer the ongoing operations of the Trust in a management agreement (the Management Agreement ) dated May 29, 2012. In consideration for the services provided by SMCAI as manager, including portfolio and cash management, accounting and tax administration, the Trust pays SMCAI a quarterly fee (the Management Fee ) equal to 1 4 of 0.50% of the net asset value of the Trust. SMCAI pays the Highstreet out of the Management Fee. The Management Agreement has a term expiring on the redemption of all of the Units. The total management fees paid for the period ended December 31, 2012 were $226,478. At December 31, 2011, the Trust had accrued liabilities of $5,851 payable to SMCAI and had cash on deposit with SCI and its parent company, The Bank of Nova Scotia, of $4,006. The Portfolio Manager and Options Advisor is responsible for managing the purchase and sale of Portfolio Securities as required to meet investment objectives and operating policies of the Trust. Such transactions may be carried out using the services of SCI or other brokerage houses on an agency basis for a fixed cost per security traded or on an auction basis involving a number of brokerage houses. Trading commissions are not explicitly charged on these auction bids. All transactions involving SCI are reported to the Trustee. During the period ended December 31, 2012, all portfolio transactions were conducted on an agency basis with SCI receiving commissions of nil. Commissions on unit offering include amounts paid to SCI, as lead agent, aggregating $2,690,479. 7. CAPITAL MANAGEMENT The Trust s capital consists of the Unitholders equity. The Manager, with oversight from the Trustee, is responsible for providing all administrative services required by the Trust, including the receipt of revenues and the payment of distributions to Unitholders. The Trust makes cash distributions from net investment income and option premiums received after deduction of operating expenses subject to maintaining a minimum level of cash on hand. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of all receivables, cash and short-term investments and all liabilities approximate their fair value because of the short-term nature of these items. The following table outlines the fair value hierarchy of the remaining financial instruments as at December 31, 2012. Level 1 Level 2 Level 3 Total Investments held for trading $78,065,583 $ $ $78,065,583 Options (249,151) (249,151) $78,065,583 $ (249,151) $ $77,816,432 19
Instruments are classified as Level 1 when the related security or derivative is actively traded and a quoted price is available. If an instrument classified as Level 1 subsequently ceases to be actively traded, it is transferred out of Level 1. In such cases, instruments are reclassified into Level 2, unless the measurement of its fair value requires the use of significant unobservable inputs, in which case it is classified as Level 3. There were no transfers between levels during the year. 9. FINANCIAL INSTRUMENT RISK MANAGEMENT In the normal course of business, the Trust is exposed to a variety of financial risks: market risk (including price risk, interest rate risk and currency risk), leverage risk, credit risk and liquidity risk. As it is the Trust s mandate to be fully invested on an equal weight basis in the 20 highest yielding members of the S&P/TSX 60 Index and pay distributions from net investment income to the maximum extent possible, the Trust s overall risk management program focuses on compliance and execution of the Trust s investment objectives. Price Risk The value of a Unit is dependent on the value of the Portfolio Securities. The value of the Portfolio Securities can fluctuate on a daily basis as a result of factors outside of the Trust s control, including financial performance of the issuers of the Portfolio Securities, operational risks relating to the specific business activities of the respective issuers, quality of assets owned by respective issuers, commodity prices, exchange rates, interest rates, environmental risks, political risks, issues relating to government regulation and taxation, composition of the Portfolio and other financial market conditions. As the Trust s mandate is to track the 20 highest yielding members of the S&P/TSX 60 Index and pay distributions to the maximum extent possible, it does not use any strategies in managing any of these market price risks. If the prices for the Portfolio Securities on the TSX had increased or decreased by 5% as at December 31, 2012, with all other variables remaining constant, net assets would have increased or decreased, respectively, by approximately $0.49 per Unit or 5%. In practice, the actual results may differ materially from this sensitivity analysis. Interest Rate Risk Interest rate risk arises from changes in the prevailing levels of market interest rates, resulting in fluctuations in the value of interest bearing financial instruments. The majority of the Trust s assets are equities that do not pay a fixed rate of interest, however, the Trust is exposed to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its Portfolio Securities. Any excess cash is invested in short-term money market instruments or in a deposit account. 20
Currency Risk The assets and liabilities are predominately held in the functional currency of the Trust, which is the Canadian dollar. The Trust is not exposed to significant foreign currency risks except to the extent that the business activities of its underlying investments that comprise the Portfolio are subject to foreign currency fluctuations. Credit Risk Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Trust. The Trust maintains all of its cash at its custodian or in bankers acceptances or term deposits with financial institutions having a minimum debt rating of A. All transactions 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 made only when the Trust has received payment. Payment is made on purchases once the securities have been received by the Trust. Should either party not meet its obligation, the trade will fail. Liquidity Risk The Trust invests its assets in investments that are traded in an active market and can be readily disposed of. There can be no assurance that an adequate market for the Portfolio Securities will exist at all times, or that the prices at which the Portfolio Securities trade, accurately reflect their net asset values. Low trading volumes of the Portfolio Securities will make it difficult to liquidate holdings quickly. The Trust maintains cash and cash equivalents to offset all its liabilities. 21
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CORPORATE INFORMATION PRINCIPAL OFFICE Scotia Plaza, 26th Floor 40 King Street West Station A, P.O. Box 4085 Toronto, Ontario M5W 2X6 Telephone: (416) 763-7007 Facsimile: (416) 863-7425 Web site: www.scotiamanagedcompanies.com E-mail: mc.top20dividend@scotiabank.com TRUSTEE T20 Ltd. Toronto, Ontario DIRECTORS & OFFICERS Thomas A. Pippy CPA, CA * Director & Chairman of the Board Brian D. McChesney Director, President & Chief Executive Officer Stephen D. Pearce, CA Director, Chief Financial Officer & Secretary James P. Bowland CPA, CA * Director & Chairman of the Audit Committee PORTFOLIO MANAGER AND OPTIONS ADVISOR Highstreet Asset Management Inc. London, Ontario REGISTRAR & TRANSFER AGENT Computershare Investor Services Inc. 100 University Avenue Toronto, Ontario M5J 2Y1 LEGAL COUNSEL Osler, Hoskin & Harcourt LLP Toronto, Ontario AUDITOR PricewaterhouseCoopers LLP Toronto, Ontario STOCK EXCHANGE LISTING The Toronto Stock Exchange SYMBOL TTY.UN Thomas C. Dawson, CA * Director Farooq N.P. Moosa Director * Audit Committee Member INDEPENDENT REVIEW COMMITTEE Thomas C. Dawson (Chairman) James P. Bowland Thomas A. Pippy
TOP 20 DIVIDEND TRUST 40 KING STREET WEST, SCOTIA PLAZA, 26TH FLOOR Toronto, Ontario M5W 2X6