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Press release from Marketwire

Deans Knight Income Corporation Releases Annual Management Report of Fund Performance and Financial Statements for the year ended December 31, 2012

Monday, March 11, 2013

Deans Knight Income Corporation Releases Annual Management Report of Fund Performance and Financial Statements for the year ended December 31, 201220:26 EDT Monday, March 11, 2013VANCOUVER, BRITISH COLUMBIA--(Marketwire - March 11, 2013) - Deans Knight Income Corporation (the "Company") (TSX:DNC) is pleased to release its annual Management Report of Fund Performance and Financial Statements for the year ended December 31, 2012. These documents can be found on SEDAR at www.sedar.com or the Company's website: www.dkincomecorp.com. Forward-Looking Statements This press release contains forward-looking statements. More particularly, this press release contains forward-looking statements concerning the Company's corporate objectives, the investment of the Company's proceeds from the sale of investments previously made, availability of tax losses and deductions, the anticipated total return to the Company's shareholders and the Company's intention to pay out earned income in the form of monthly dividends. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, undue reliance should not be placed on them because the Company can give no assurance that they will prove to be correct since forward-looking statements address future events and conditions and by their very nature, involve inherent risks and uncertainties. The forward-looking statements contained in this press release are made as of the date hereof and the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.Annual Report of Fund Performance This annual management report of fund performance (the "Report") contains financial highlights of Deans Knight Income Corporation (the "Company"). This Report should be read in conjunction with the annual financial statements of the Company for the year ended December 31, 2012 (the "Financial Statements"), which, if not included with this Report, can be obtained at your request, at no cost by emailing info@dkincomecorp.com, visiting our website at www.dkincomecorp.com for contact details or on SEDAR at www.sedar.com. Readers may also contact us to request a free copy of the Company's proxy voting policies and procedures, proxy voting disclosure record or quarterly portfolio disclosure.A NOTE ON FORWARD-LOOKING STATEMENTS This Report contains certain forward-looking statements. In particular, this Report contains forward-looking statements in respect of the Company's targeted dividend payout, investment strategy, behaviour of financial markets and reflects the Company's expectations regarding the growth, results of operations, performance and business prospects and opportunities of the Company and its investments. In some cases, forward-looking statements can be identified by terminology such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "estimate", "predict", "potential", "continue" or the negative of these terms or other comparable terminology. Such forward-looking statements reflect the Company's current beliefs and are based on information currently available to the Company. With respect to such forward-looking statements, the Company has made assumptions regarding, among other things, what type of debt securities will be included in its investment portfolio, currency, exchange and interest rates. A number of factors could cause actual events or results to differ materially from the results discussed in the forward-looking statements. In evaluating these statements, prospective investors should specifically consider various factors, including global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events and the risks outlined under "Risk Factors" in the AIF (as defined herein), which may cause actual results to differ materially from any forward-looking statement. Although the forward-looking statements contained in this Report are based upon what the Company believes to be reasonable assumptions, the Company cannot assure investors that actual results will be consistent with these forward-looking statements. Forward-looking statements are made as of the date of this Report and, other than as required by applicable law, the Company assumes no obligation to update or revise them to reflect new events or circumstances. This Report also contains certain financial and operational information obtained from public sources in respect of certain companies included in the Company's investment portfolio. While management believes this data to be reliable, such information is subject to variations and may not be able to be verified due to limits on the availability and reliability of data inputs, the nature of the data gathering process and other limitations and uncertainties inherent in such information. Accordingly, the accuracy, currency and completeness of this information cannot be guaranteed. The Company has not independently verified any of the data from third party sources referred to in this Report or ascertained the underlying assumptions relied upon by such sources.Investment Objectives and Strategies The Company is a closed-end, non-redeemable investment company focused on investing in corporate debt securities. The Company's assets are actively managed by Deans Knight Capital Management Ltd. ("Deans Knight"), a respected British Columbia-based investment firm focused on managing high income and growth mandates for high net worth individuals. Deans Knight, formed in 1992, has an experienced management team and a long history of successful investing in corporate debt securities.The Company's investment objectives are to: (i) maximize the total return for shareholders, consisting of dividend income and capital appreciation; and (ii) provide shareholders with monthly dividends, which to date have been set at $0.0583 per common share per month. The Company intends to continue to achieve these objectives by investing primarily in corporate debt securities rated BBB or below by Standard & Poor's Rating Services ("S&P") or an equivalent rating by another nationally recognized statistical rating organization. The Company may also invest in investment grade debt securities rated above BBB and non-rated debt securities from time to time. Examples of investments made during the period are detailed below in the Results from Operations. The Company believes there are attractive investment opportunities today in owning corporate debt of businesses with tangible assets, strong cash flows and reasonable leverage. When evaluating securities to purchase for the Company, Deans Knight focuses on the following:amount of security or collateral within a business to support the value of the securities; the position of the debt in the capital structure; covenants; liquidity; the business' ability to reduce or refinance the debt; and the overall term of the debt and yield to bondholders. Deans Knight uses the above credit-based analysis to identify corporate debt for inclusion in the Company's investment portfolio with attractive valuations in order to maintain its targeted dividend payment. RiskThe overall risks of the Company are as described in its annual information form of the Company dated March 11, 2013 (the "AIF"). Prior to the reorganization and change in business as discussed in Note 1 of the Financial Statements, the Company generated significant tax losses and other tax attributes as a result of its prior businesses and research activities. The Company has recorded, as a tax asset, the full amount of the potential tax benefit of such items to the extent of its projected taxable income. There is uncertainty as to whether the tax authorities will allow the Company to deduct some or all of the tax losses and other attributes. Should the Company be denied the deductions in full, the recorded amount of the tax assets as well as such amounts claimed to date would be recorded as a charge to income. The total tax assets recognized and tax losses and other attributes claimed to date, which are subject to uncertainty, amount to $21,154,044 (2011 - $21,024,806), representing $2.01 per common share at December 31, 2012 (2011 - $2.00).There were no significant changes during the year ending December 31, 2012 that affected the overall risk of investing in the Company. Given the type of investments made by the Company, an investment in the Company may be considered to be speculative. An investment in the Company is generally suitable for investors who are looking to receive income, yet are willing to tolerate volatility in the value of their investment. Results of OperationsThe net assets of the Company at December 31, 2012 were $142,275,000 or $13.50 per common share (2011 - $141,539,920 or $13.43 per common share). The net assets of the Company consisted of the following components:December 31, 2012$Per common share(1)%Investments(2)118,788,75311.2783.5Cash and short-term deposits20,091,1251.9114.1Accrued income1,662,3730.161.2Prepaid expenses56,4600.000.0Future income tax asset(3)2,390,0000.231.7Accounts payable and accrued liabilities(713,711)(0.07)(0.5)142,275,00013.50100.0(1)Based on 10,537,263 common shares, including 10,191,592 voting common shares and 345,671 non-voting common shares, as outlined in the notes to the Financial Statements. (2)The details of the investments are outlined in the Summary of Investment Portfolio below. (3)Refer to the Taxation note to the Financial Statements for more detail.December 31, 2011$Per common share(1)%Investments(2)129,918,54312.3391.8Cash and short-term deposits4,997,7150.473.5Accrued income2,339,7510.221.7Prepaid expenses73,1510.010.0Future income tax asset(3)4,920,0000.473.5Accounts payable and accrued liabilities(709,240)(0.07)(0.5)141,539,92013.43100.0(1)Based on 10,537,263 common shares, including 10,191,592 voting common shares and 345,671 non-voting common shares, as outlined in the notes to the Financial Statements. (2)The details of the investments are outlined in the Summary of Investment Portfolio below. (3)Refer to the Taxation note to the Financial Statements for more detail.The Company began operating as an Investment Company in March 2009 to take advantage of attractive pricing in the high yield market with the objectives of: (i) maximizing the total return for Shareholders, consisting of dividend income and capital appreciation; and (ii) providing Shareholders with monthly dividends targeted to payout a minimum of 75% of net earnings annually. During 2012, the Company made monthly dividend payments totalling $7,371,869, or $0.70 per common share (2011 - $7,371,869, or $0.70 per common share). This represented approximately 83.9% of net investment income (2011 - 83.4%). Since commencement of its investment business, the Company has made monthly dividend payments totalling $26,415,864, or $2.51 per common share. This represents approximately 90.3% of net investment income earned since March 17, 2009. On January 4, 2013, the Company announced it will maintain monthly cash dividends at $0.0583 per common share for each of the first three months of 2013. The net assets of the Company grew in 2012 from $13.43 per common share to $13.50. The net asset value was actually down 3.4% for the first 6 months of the year but was up 4.0% in the second half contributing to the $0.07 increase in our net assets per common share. Since inception, the Company's net assets per common share have appreciated from the issue price of $10 by 35%. Over half of the capital appreciation came in the first twelve months following the issue as the economy showed signs of life from the 2008/09 credit crunch. Since that time, we have added additional value as spreads continued to narrow and from a handful of creatively structured private debt financings. The private debt financings are typically short term in nature; pay a high coupon; in some cases are fully secured; and, provide the aforementioned capital growth through "equity kickers" in the form of warrants or convertible debt. As an example, in April 2012, Deans Knight structured a secured debt financing with Petroamerica Oil Corp. for $35 million, of which $4.0 million was subscribed to by the Company. The debentures mature on April 19, 2015 and bear interest of 11.5%. In addition to the coupon, the Company received a commitment fee of 1.5% and warrants to purchase 100 common shares per $100 of debt at an exercise price of $0.20 per share, which mature on April 19, 2015. Petroamerica is an oil producer with assets in Colombia. They started 2012 producing 200 barrels of oil equivalent per day ("boepd") with proceeds from the debt financing to be used to develop and appraise their assets. They drilled 5 wells on their Las Maracas property which, at year end, were producing 4,000 boepd net to Petroamerica. In addition to the Las Maracas asset, Petroamerica announced a new discovery at La Casona in November 2012 with one well testing at 480 boepd net to Petroamerica. With this success, Petroamerica's stock was trading at $0.35 per share at December 31, 2012, almost double the exercise price. Deans Knight Capital Management, the Company, and related parties did not receive compensation for structuring the debt financing.Recent DevelopmentsComparison of net asset value and net assetsNational Instrument 81-106 ("NI 81-106") permits investment companies to have two different net asset values: (i) one for financial statements, which will be prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP") including Section 3855 (and referred to as "net assets") and (ii) another for all other purposes, including unit pricing for investor transactions (referred to as "net asset value"). The main difference in calculating net assets and net asset value is that GAAP requires bid price to be used in valuing securities traded in an active market where quoted prices are readily and regularly available, rather than the use of a price between the bid and the ask price currently used for determining net asset value. This difference results in an insignificant difference of approximately $0.08 per common share at December 31, 2012 (2011 - $0.06 per common share), as outlined in the notes to the Financial Statements.International Financial Reporting StandardsThe Company will be required to adopt international financial reporting standards ("IFRS"). The Canadian Accounting Standards Board (AcSB) previously announced January 1, 2011 as the date international financial reporting standards (IFRS) would replace current Canadian standards and interpretations as GAAP for publicly accountable enterprises, which include investment companies. In December 2011, the AcSB issued a decision to defer adoption of IFRS for investment companies currently applying Accounting Guideline 18 - Investment Companies until years beginning on or after January 1, 2014.Under the above noted decision, the Company's first set of financial statements to be reported on under IFRS would be for the semi-annual period ending June 30, 2014. These statements would include corresponding comparative financial information for 2013, including an opening statement of net assets as at January 1, 2013. However, the Company has a termination date of April 30, 2014, and as such will not be required to issue statements reported on under IFRS. The Company will continue to monitor any further AcSB decisions that may affect the Company's requirement to adopt IFRS.Harmonized Sales TaxThe Company is subject to non-recoverable Harmonized Sales Tax on its expenses. The BC Government has announced that the Harmonized Sales Tax will be replaced by the Federal Goods and Services Tax and a Provincial Sales Tax in April 2013; however, this is not expected to have a significant impact on net assets per common share.Related Party TransactionsThe officers, and certain directors, of the Company are also employees of Deans Knight, the Company's investment advisor. These officers, and directors, are not paid by the Company. Deans Knight provides investment management services to the Company, as well as administration, financial reporting and other ancillary services required by a publicly listed company. Management fees, for the services outlined above, are computed and paid quarterly, at an annual rate of 1.5% of the net asset value plus applicable taxes, and adjusted for certain non-investment related assets. For the year ended December 31, 2012, management fees totaled $2,311,284 (2011 - $2,283,158). At December 31, 2012, $589,251 (December 2011- $575,224) was owed to Deans Knight, which was included in accounts payable and accrued liabilities in the statement of net assets, and is payable immediately. In calculating the management fee, the net asset value was reduced by the value of the future income tax asset included in the statement of net assets.A director of the Company is a partner at a law firm that provides legal services to the Company. During the year ended December 31, 2012, the Company incurred $14,014 (2011 - $42,750) in legal services and disbursements received from this related party. At December 31, 2012, accounts payable and accrued liabilities include $226 (2011 - $4,185) due to the law firm for legal fees and disbursements.Financial HighlightsThe following tables show selected key financial information about the Company and are intended to help you understand the Company's financial performance since it began operating its new business of investing in corporate debt in March 2009. The Company's Net Assets per Common Share (1)2012 $2011 $2010 $Period March 17 to December 31, 2009 $Net assets, beginning of year (2)13.4313.6012.219.12Increase from operationsTotal revenue1.101.100.940.62Total expenses(0.26)(0.26)(0.24)(0.20)Realized gains0.440.361.821.25Unrealized losses(0.27)(0.52)(0.27)1.21Future income taxes(0.24)(0.15)(0.16)0.62Total increase from operations (2)0.770.532.093.50Dividends (2)(3)(0.70)(0.70)(0.70)(0.41)Net assets, end of year (4)13.5013.4313.6012.21(1)The information is derived from the Company's audited annual financial statements. Common shares outstanding are 10,537,263, including 10,191,592 voting common shares and 345,671 non-voting common shares. (2)Net assets and dividends are based on the actual number of common shares outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of common shares outstanding over the year. (3)Dividends were paid in cash. (4)The net assets per common share presented in the financial statements differs from the net asset value per common share calculated for fund pricing purposes due to the provisions of CICA Handbook Section 3855. An explanation of the differences can be found in the notes to the financial statements. Ratios and Supplemental Data (1)201220112010Period March 17 to December 31, 2009Net asset value (000's)$143,065$142,178$143,880$128,930Number of common shares outstanding (000's)10,53710,53710,53710,537Management expense ratio (2)1.96%1.90%1.91%5.51%Portfolio turnover rate (3)14.79%79.90%86.60%36.69%Trading expense ratio (4)0.01%0.00%0.01%0.01%Net asset value per common share$13.58$13.49$13.65$12.23Closing market price - common share$12.69$11.84$12.54$11.40(1)This information is provided as at December 31 of the years shown. (2)Management expense ratio is based on total expenses for the period and is expressed as an percentage of weekly average net asset values over the year. (3)The Company's portfolio turnover rate indicates how actively the Company manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Company buying and selling all of the securities in its portfolio once in the course of the year. The higher a portfolio turnover-rate in a year, the greater the trading costs payable by the Company in the year. There is not necessarily a relationship between a high turnover rate and the performance of the investment portfolio. (4)The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. This expense is $11,318 for 2012 (2011- $nil), as the purchasing and selling of bonds do not generally attract a commission from the buying or selling party. Management FeesDeans Knight provides investment management services to the Company, as well as administration, financial reporting and other ancillary services required by a publicly listed company. Management fees are computed and paid quarterly, at an annual rate of 1.5% of the net asset value plus applicable taxes, and adjusted for certain non-investment related assets. Past PerformanceThis section shows the Company's past performance, since it began operating its business as an investment fund. The past performance information includes changes in net asset value and assumes the reinvestment of all dividends paid to common shareholders. It is important to note that the past performance will not necessarily indicate what performance in the future will be.Year-by-year ReturnsThe accompanying bar chart shows the Company's performance for the years shown and illustrates how the Company's performance has changed from year to year. The bar chart shows, in percentage terms, how much an investment made from when the Company began its operation as an investment fund on March 17, 2009 to December 31, 2009, and how much an investment made for the years ending December 31, 2010, 2011 and 2012. To view the Year-by-year Returns graph, please visit the following link: http://media3.marketwire.com/docs/311dnc_graph1.jpg.Annual Compound ReturnsThe table below summarizes the Company's annual compound total returns for the periods ended December 31 as indicated. As a basis for comparison, we have provided the performance of the Merrill Lynch Canada High Yield Bond Index ("Index"). The Index is a broad based index that tracks the performance of the Canadian high-yield bond market. As the criteria for determining the constituents of the Company's investment portfolio and the Index differ, it is not expected that the Company's performance will mirror that of the Index. Further, the return of the Index is calculated without the deduction of management fees and fund expenses whereas the performance of the Company is calculated after deducting fees and expenses.Annual Compound ReturnsCompanyIndex1 Year6.70%15.10%2 Years5.60%9.10%3 Years9.10%10.60%Since Inception14.00%19.90%Summary of Investment PortfolioThe following is a summary of the Company's investment portfolio as at December 31, 2012. This is a summary only and will change due to ongoing portfolio transactions of the Company. A quarterly update is available at www.dkincomecorp.com. Top 25 Investments% of NetAsset ValuePARAMOUNT RESOURCES8.250%13-Dec-176.7WHITECAP RESOURCESN/AN/A6.1MIRABELA NICKEL LTD8.750%15-Apr-186.0STONE ENERGY CORP8.625%1-Feb-175.8NORTH AMERICA ENERGY9.125%7-Apr-175.4SOUTHERN PACIFIC RES10.500%1-Jan-164.2CALFRAC HOLDINGS LP7.500%1-Dec-204.1NORTHLAND RESOURCES13.000%6-Mar-173.4PERPETUAL ENERGY INC8.750%15-Mar-183.4TEMBEC INDUSTRIES11.250%15-Dec-183.2CCS INC11.000%15-Nov-153.1PETROAMERICA OIL11.500%19-Apr-152.8SHERRITT INTL CORP8.000%15-Nov-182.8CARA OPERATIONS LTD9.125%1-Dec-152.5GARDA WORLD SECURITY9.750%15-Mar-172.4BEAZER HOMES USA9.125%15-Jun-182.4CONIFEX TIMBER INC12.000%31-Dec-132.1GATEWAY CASINOS8.875%15-Nov-172.0BLACK PRESS GROUP10.000%4-Feb-141.9PACIFIC RUBIALES7.250%12-Dec-211.8SURE ENERGY6.250%21-Jan-141.8WESTERN ENERGY SVS7.785%30-Jan-191.6NIKO RESOURCES LTD.7.000%13-Dec-171.599 CENTS ONLY STORES11.000%15-Dec-191.5SHERRITT INTL CORP7.500%24-Sep-201.4Portfolio Composition% of NetAsset ValueFixed IncomeCanadian denominated in CAD39.9Canadian denominated in USD18.2United States denominated in USD14.6Other Foreign denominated in USD3.4Other Foreign denominated in EUR0.977.0Convertible DebenturesOther Foreign denominated in AUD-77.0Equity and Warrants6.6Investment Portfolio83.6Cash & Short-term Deposits14.1Other Net Assets2.3100.0Sector BreakdownEnergy49.9Materials & Metals13.7Consumer Discretionary8.4Forestry6.2Industrial/Manufacturing4.3Technology0.9Services0.2Investment Portfolio83.6Cash & Short-term Deposits14.1Other Net Assets2.3100.0Deans Knight Income CorporationFinancial StatementsDecember 31, 2012Deans Knight Income CorporationStatements of Net AssetsAs at December 31, 2012 and 201120122011$$AssetsInvestments - at fair value (cost - $117,207,284 ;2011 - $125,475,983)118,788,753129,918,543Cash and cash equivalents20,091,1254,997,715Accrued interest receivable1,662,3732,339,751Prepaid expenses56,46073,151Future income tax benefits (note 7)2,390,0004,920,000142,988,711142,249,160LiabilitiesAccounts payable and accrued liabilities (note 5)713,711709,240Net assets142,275,000141,539,920Shareholders' equityCommon shares (note 3)99,366,42999,366,429Contributed surplus (note 3)9,904,5049,904,504Retained earnings (note 4)33,004,06732,268,987142,275,000141,539,920Number of common shares outstanding (note 3)10,537,26310,537,263Net assets per common share (notes 7 and 10)13.5013.43Contingencies (notes 1 and 7)Commitments (notes 1 and 9)Subsequent events (note 11)Approved by the Board of Directors (signed) Wayne Deans Director (signed) Craig Langdon Director The accompanying notes are an integral part of these financial statements.Deans Knight Income CorporationStatements of OperationsFor the years ended December 31, 2012 and 201120122011$$Investment incomeInterest and other11,547,74411,607,293ExpensesManagement fees (note 5)2,311,2892,283,158Directors' fees and expenses148,727157,681Public company reporting costs127,384141,111Audit, accounting and tax fees82,02487,003Custodial fees50,65151,354Legal fees (note 5)14,01437,336Independent Review Committee fees12,18012,000Transaction costs11,318-2,757,5872,769,643Net investment income8,790,1578,837,650Realized and unrealized gains (losses) on investmentsNet realized gain on investments sold (note 6)2,548,8184,695,889Net realized gain (loss) on settlement of foreign currency contracts (note 6)2,159,065(892,178)Change in unrealized appreciation on investments(2,564,496)(5,832,280)Unrealized (depreciation) appreciation on foreign currency contracts(296,595)389,347Net gain (loss) on investments1,846,792(1,639,222)Increase in net assets from operations before tax10,636,9497,198,428Provision for future income tax (note 7)(2,530,000)(1,630,000)Increase in net assets from operations8,106,9495,568,428Increase in net assets from operations per weighted average common share (note 2)0.770.53The accompanying notes are an integral part of these financial statements.Deans Knight Income CorporationStatements of Changes in Net AssetsFor the years ended December 31, 2012 and 201120122011$$Increase in net assets from operations8,106,9495,568,428Dividends to common shareholders (notes 4 and 9)(7,371,869)(7,371,869)Increase (decrease) in net assets during the year735,080(1,803,441)Net assets - Beginning of year141,539,920143,343,361Net assets - End of year142,275,000141,539,920The accompanying notes are an integral part of these financial statements.Deans Knight Income CorporationStatements of Cash FlowsFor the years ended December 31, 2012 and 201120122011$$Cash flows from operating activitiesIncrease in net assets from operations8,106,9495,568,428Items not affecting cashNet realized gain on investments sold(2,548,818)(4,695,889)Net realized (gain) loss on settlement of foreign currency contracts(2,159,065)892,178Change in unrealized appreciation on investments2,564,4965,832,280Unrealized depreciation (appreciation) on foreign currency contracts296,595(389,347)Future income tax provision2,530,0001,630,0008,790,1578,837,650Cost of investments purchased (note 6)(18,898,699)(62,743,948)Proceeds from investments sold (note 6)31,875,28159,635,633Net change in non-cash balances related to operationsAccrued interest receivable677,378(530,995)Prepaid expenses16,69116,511Accounts payable and accrued liabilities4,47116,76622,465,2795,231,617Cash flows from financing activitiesDividends paid to common shareholders (notes 4 and 9)(7,371,869)(7,371,869)Net increase (decrease) in cash and cash equivalents during the year15,093,410(2,140,252)Cash and cash equivalents - Beginning of year4,997,7157,137,967Cash and cash equivalents - End of year20,091,1254,997,715Cash and cash equivalents compriseCash9,110,8752,402,631Short-term deposits10,980,2502,595,08420,091,1254,997,715The accompanying notes are an integral part of these financial statements.Deans Knight Income CorporationStatement of InvestmentsAs at December 31, 2012Par value 1Average cost ²Fair value ²Percentage of total fair value 3$$$%Fixed income - CanadianDenominated in Canadian dollarsAthabasca Oil Corp 7.5% 11-19-20171,500,0001,500,0001,500,0001.3Black Press Group 10.00% 02-04-2014 42,750,0002,750,0002,746,5632.3Cara Operations Ltd. 9.13% 12-01-20153,500,0003,500,0003,622,5003.0Conifex Timber Inc. 12.00% 12-31-2013 43,000,0003,000,0003,000,0002.5Garda World Security 9.75% 03-15-20173,250,0003,237,1053,380,0002.8Gateway Casinos 8.88% 11-15-20172,750,0002,816,8752,894,3752.4North American Energy Partners Inc. 9.13%8,750,0008,793,1257,743,7506.504-07-2017Paramount Resources Ltd. 8.25% 12-13-20179,250,0009,250,0009,596,8758.1Perpetual Energy Inc. 8.75% 03-15-20185,000,0005,000,0004,775,0004.0Petroamerica Oil Corp. 11.50% 04-19-2015 44,000,0004,000,0004,000,0003.4Sherritt International Corp. 7.75% 10-15-2015196,000152,233208,7400.2Sherritt International Corp. 8.00% 11-15-20183,750,0003,750,0003,937,5003.3Sherritt International Corp. 7.50% 09-24-20202,000,0002,000,0002,045,0001.7Skylink Aviation Inc. 12.25% 03-15-20165,450,0005,357,2501,635,0001.3Sure Energy Inc. 6.25% 01-21-2014 42,500,0002,500,0002,500,0002.1Western Energy Services Corp. 7.88%01-30 -20192,250,0002,250,0002,317,5002.059,856,58855,902,80346.9Denominated in United States dollarsCCS Inc. 11.00% 11-15-20154,500,0002,252,5684,465,8563.8Mirabela Nickel Ltd. 8.75% 04-15-201810,050,0009,138,3208,498,9337.2Pacific Rubiales Energy Corp. 7.25%12-12-20212,300,0002,365,7802,628,6502.2Southern Pacific Resources Libor+8.5%01-01-20165,880,0005,808,7585,908,5135.0Tembec Industries 11.25% 12-15-20184,250,0004,494,7794,503,1663.824,060,20526,005,11822.0Total Canadian fixed income83,916,79381,907,92168.9(1)Par values are presented in their source currency(2)All amounts are shown in Canadian dollars(3)Percentages are shown as a percentage of total investments (4)These investments represent loans receivableThe accompanying notes are an integral part of these financial statements.Deans Knight Income CorporationStatement of Investments...continuedAs at December 31, 2012Percentage oftotal fairPar value 1Average cost ²Fair value ²value 3$$$%Fixed income - United StatesDenominated in United States dollars99 Cents Only Stores 11.00% 12-15-20191,850,0001,926,5842,079,8381.8Abitibibowater Inc. 10.25% 10-15-20181,185,0001,221,7351,349,9051.1Beazer Homes USA, Inc. 9.13% 06-15-20183,250,0003,327,0563,370,8462.8Calfrac Holdings LP 7.5% 12-01-20206,000,0006,130,3295,894,7835.0Stone Energy Corp. 8.63% 02-01-20177,750,0007,813,4518,211,6566.9Total United States fixed income20,419,15520,907,02817.6Fixed income - InternationalDenominated in United States dollarsNorthland Resources 13.0% 03-16-20174,750.0004,678,2754,820,2914.1Total fixed income109,014,223107,635,24090.6Convertible debentures - CanadaDenominated in Canadian dollarsNiko Resources Ltd. 7.00% 12-13-20172,000,0002,000,0002,200,0001.9Equities - CanadaConifex Timber Inc.- purchase warrants$9.38 strike, 12-31-201481,250-16,1020.0Petroamerica Oil Corp. - purchase warrants$0.20 strike, 04-19-2015400-661,3110.6Sure Energy Inc.- purchase warrants$1.80 strike, 12-21-2013625,000--0.0Whitecap Resources Inc.- common shares1,005,3676,193,0618,696,4257.3Total equities6,193,0619,373,8387.9Royalties - CanadaDenominated in EuroRapidEye Canada Royalty-1,238,7701.0Provision for investments-(1,362,500)(1.1)Investments subtotal117,207,284119,085,348100.3Foreign Currency Contracts (note 8)Denominated in United States dollarsPayable 01-08-2013 at 0.9931025,000,000-(47,949)(0.1)Payable 01-08-2013 at 0.993563,000,000-(4,356)(0.0)Payable 02-12-2013 at 0.9869828,000,000-(244,290)(0.2)Total foreign currency contracts-(296,595)(0.3)117,207,284118,788,753100.0(1)Par values are presented in their source currency(2)All amounts are shown in Canadian dollars(3)Percentages are shown as a percentage of total investments (4)These investments represent loans receivableThe accompanying notes are an integral part of these financial statements.Deans Knight Income CorporationNotes to Financial StatementsDecember 31, 20121 Nature of operations and basis of presentationDeans Knight Income Corporation (the "Company") is a corporation continued under the laws of Canada on April 11, 2001. The Company is a closed-end, non-redeemable investment company. It invests, primarily, in corporate debt rated BBB or below by recognized credit rating organizations.Prior to its reorganization in May 2008, the Company was a life sciences company involved in the research, development and commercialization of innovative products for the prevention and treatment of life-threatening diseases. Forbes Medi-Tech Inc ("Forbes"), who now carries on the prior business of the Company, has provided an indemnity to the Company with respect to liabilities relating to the Company's assets transferred to Forbes and the Company's prior business. In addition, Forbes obtained, on behalf of the Company, product liability insurance for certain claims that may arise in the future in connection with the Company's prior business. To date, no such claims or potential claims have arisen. There can be no assurance that the above noted guarantee will be sufficient to cover any future claims. In March 2009, the Company completed an initial public offering, whereby it raised gross proceeds of $100,368,900 and began operating its new business as an investment company.As per the Company's Articles of Incorporation, the common shares of the Company are to be redeemed on, or around, April 30, 2014, for a cash amount equal to 100% of the net asset value per common share.The accompanying financial statements are prepared in accordance with Part V of the Canadian Institute of Chartered Accountants Handbook, Pre-changeover Accounting Standards (GAAP). All amounts are presented in Canadian dollars, unless otherwise noted.2 Summary of significant accounting policies The following is a summary of significant accounting policies followed by the Company:Financial instrumentsInvestments Investments are held for trading and are recorded at fair values determined as follows: Fixed income investmentsFixed income investments traded on a public securities exchange or traded on an over-the-counter market are valued at the closing bid price. Where no closing bid price is available, the last sale or close price is used where, in management's opinion, this provides the best estimate of fair value.Unlisted or non-exchange traded investments, or investments where a last bid, sale or close price is unavailable, or investments for which market quotations are, in the Company's opinion, inaccurate, unreliable, or not reflective of all available material information, are valued at their fair value as determined by the Company using appropriate and accepted industry valuation techniques including valuation models. The fair value determined using valuation models requires the use of inputs and assumptions based on observable market data including volatility and other applicable rates or prices. In certain circumstances, the fair value may be determined using valuation techniques that are not supported by observable market data.The resulting values for investments not traded in an active market may differ from values that would be determined had a ready market existed, and the difference could be significant.Foreign currency contractsForeign currency contracts are recorded at fair value. The proceeds (payments) on contracts settled during the year are included in the net realized gain (loss) on settlement of foreign currency contracts (note 6). The Company's policy is to hedge 95% - 105% of the fair value of foreign denominated investments with foreign exchange forward sell contracts.Public company equitiesPublicly traded equities are recorded at bid prices as quoted on recognized stock exchanges.The amounts at which the Company's publicly-traded investments could be disposed of currently may differ from carrying value based on market quotes, as the value at which significant ownership positions are sold is often different than the quoted market price due to a variety of factors such as premiums paid for large blocks or discounts due to illiquidity.WarrantsWarrants are recorded at their estimated fair value using appropriate and accepted industry valuation techniques.The impact of changes in fair value of investments is recorded in the statement of operations.Cash and cash equivalentsCash and cash equivalents are accounted for at amortized cost. They consist of cash and deposits with maturities, at the time of purchase, of three months or less and are held with a Canadian chartered bank.Accrued interest receivableAccrued interest is designated as loans and receivables and is accounted for at amortized cost. Due to the immediate and short-term nature, carrying value approximates fair value.Financial liabilitiesFinancial liabilities, consisting of accounts payable and accrued liabilities, are designated as other financial liabilities and are accounted for at amortized cost. Due to the immediate and short-term nature, the carrying value approximates fair value.Investment transactionsInvestment transactions are recorded on the trade date. 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. These costs are expensed and are included in the statement of operations.Income recognitionIncome from investments is recognized on an accrual basis. Interest income is accrued based on the number of days the investment is held during the year. Royalty income is recognized on an accrual basis as earned. Gains or losses on the sale of investments, including foreign exchange gain or loss on such investments, are calculated on an average cost basis.Foreign currency contractsForeign currency contracts (note 8) entered into by the Company are valued at an amount that is equal to the gain or loss that would be realized if the position were to be closed out, which is equivalent to the difference between the deliverable asset and the value of the asset to be received. Changes in the value of a forward contract or the assets deliverable under such a contract are included as unrealized appreciation/depreciation on foreign currency contracts in the statement of operations.Foreign exchangeAssets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rate applicable on the valuation date. Purchases and sales of investments, investment income and expenses are calculated at the exchange rates prevailing on the dates of the transactions.Income taxesThe Company follows the asset and liability method of accounting for income taxes. Future income tax assets and liabilities are measured using rates expected to apply to the taxable income in the years in which the temporary differences are expected to be settled. The Company accounts for uncertain tax positions using the contingent liability model, whereby a provision is established only where it is likely that a payment will be required to be made.A valuation allowance is recognized to the extent that it is more likely than not future income tax assets will not be realized. Management has estimated the income tax provision and future income tax balances taking into account its expectation of future taxable income and an interpretation of the various income tax laws and regulations. It is possible, due to the complexity inherent in estimating income taxes, that the tax provision and future tax balances could change (note 7), and the change could be significant.Use of estimatesThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Actual results could differ from those reported and such differences could be material. Significant areas involving the use of estimates include determining the estimated fair value of investments and future income tax assets.Net assets per common shareThe net assets per common share are computed by dividing the net assets of the Company by the total number of common shares outstanding on the statements of net assets date.Increase in net assets from operations per weighted average common shareThe increase in net assets from operations per common share represents the increase in net assets from operations divided by the weighted average number of common shares outstanding during the year.The weighted average number of shares outstanding during the year ended December 31, 2012 was 10,537,263 (2011 - 10,537,263). This weighted average includes both the voting common shares and non-voting common shares of the Company.3 Capital stock The Company is authorized to issue an unlimited number of voting common shares without par value, and an unlimited number of non-voting common shares without par value. There were no changes in the number of voting and non-voting common shares for the years ended December 31, 2011 and 2012. The total shares outstanding at December 31 are summarized as follows:20122011Number ofAmountNumber ofAmountShares$Shares$Voting common shares10,191,59296,273,34310,191,59296,273,343Non-voting common shares345,6713,093,086345,6713,093,086Total common shares outstanding10,537,26399,366,42910,537,26399,366,429Contributed surplusContributed surplus consists of:20122011$$Surplus related to stock compensation, warrants and options associated with common shares8,030,2958,030,295Surplus relating to warrants associated with previously issued preferred shares1,874,2091,874,2099,904,5049,904,5044 Retained earningsThe changes in retained earnings for the year were as follows:20122011$$Retained earnings - opening balance32,268,98734,072,428Increase in net assets from operations8,106,9495,568,428Dividends paid from net investment income(7,371,869)(7,371,869)Retained earnings - closing balance33,004,06732,268,9875 Related party transactions and balances Management fees are paid quarterly to Deans Knight Capital Management Ltd. (the Investment Advisor), a corporation with certain common directors and officers of the Company, for services received in connection with the management of the investment portfolio and financial accounts, among other services provided. Management fees are computed quarterly at an annual rate of 1.5% of net asset value, adjusted for certain non- investment related assets. For the year ended December 31, 2012, management fees (including applicable taxes) totalled $2,311,289 (2011- $2,283,158). At December 31, 2012, $589,251 (2011 - $575,224) was owed to the Investment Advisor, which was included in accounts payable and accrued liabilities in the statement of net assets, and is payable immediately. A director of the Company is a partner at a law firm that provides legal services to the Company. During the year ended December 31, 2012, the Company incurred $14,014 (2011 - $ 42,750) in legal services and disbursements received from this related party. At December 31, 2012, accounts payable and accrued liabilities include $226 (2011 - $4,185) due to the law firm for legal fees and disbursements. 6 Net realized gains on investments sold and foreign currency contractsThe net realized gain on investments sold and foreign currency contracts for the year ended December 31 was as follows:20122011$$Proceeds from sale of investments31,875,28159,635,633Investments at cost - Beginning of year125,475,983118,563,957Add: Cost of investments purchased18,898,69962,743,948144,374,682181,307,905Less: Investments at cost - End of year(117,207,284)(125,475,983)Cost of investments sold27,167,39855,831,922Net realized gain on investments sold4,707,8833,803,711Net realized gain on investments sold and foreign currency contracts consists of:20122011$$Realized gain on investments sold2,548,8184,695,889Realized gain (loss) on settlement of foreign currency contracts2,159,065(892,178)4,707,8833,803,7117 Taxation Uncertainty of deductibility of tax losses Prior to the reorganization and change in business as discussed in note 1, the Company had generated significant tax losses and other tax attributes as a result of its prior businesses and research activities. The Company has recorded, as a tax asset, the full amount of the potential tax benefit of such items to the extent of its projected taxable income. There is no guarantee that the tax authorities will allow the Company to deduct some, or all, of the tax losses and other attributes. Should the Company be denied the deductions, the recognized amount of the tax assets, as well as such amounts claimed to date, would be recorded as a charge to income. The total tax assets recognized and tax losses and other attributes claimed to December 31, 2012, which are subject to uncertainty, amount to $21,154,044 (2011 - $21,024,806), representing $2.01 per common share at December 31, 2012 (2011 - $2.00 per common share). Future tax assetCanadian GAAP requires a valuation allowance to be recognized against any future tax asset to the extent that it is more likely than not that the future income tax asset will not be realized. This is also the Company's stated accounting policy.As the Company's investments in debt securities are generating interest income, but are not expected to generate sufficient taxable income in order to fully utilize the available tax credits during the years of operations through to April 30, 2014, the Company has recorded a valuation allowance. The difference between the total value of these tax benefits less the valuation allowance, being $2,390,000 (2011 - $4,920,000), is the amount of the future income tax asset that has been recorded by the Company in the statement of net assets. The valuation allowance is reviewed, based on updated projections of taxable income, and adjusted accordingly by a credit or charge to the statement of operations.The tax effects of temporary differences and tax credits that give rise to significant components of the future income tax assets, at the statutory enacted rates when such benefits are expected to be realized, are as follows:20122011$$Future tax assetsResearch and development expenditures4,533,2506,879,250Investment tax credits5,322,7505,322,750Share issuance costs313,440626,880Total gross future tax assets10,169,44012,828,880Valuation allowance(7,779,440)(7,908,880)Net future tax asset2,390,0004,920,000Future tax assets expected to be realized in:20122011$$Less than 12 months1,930,0002,180,000Greater than 12 months460,0002,740,000Net future tax asset2,390,0004,920,000The tax balances and income tax expense recognized by the Company are based on management's interpretation of the tax laws. Due to the complexity inherent in tax interpretations, regulations and legislation, there are significant estimates required to compute income tax balances. It is possible that some or all of the Company's significant components of the future income tax assets may not be deductible for tax purposes and, accordingly, the amount of future income taxes and provision for income taxes recorded in the financial statements could change by a material amount.In determining the amount of future income tax assets recognized, management assessed the projected taxable income of the Company. Inherent in all forward looking information is uncertainty and actual amounts could differ from these estimates and the difference could be material. In developing the projection, management has assumed full payment of all contractual interest, that investments maturing prior to April 30, 2014 will be redeemed for par value, and that investments maturing after April 30, 2014 will be sold at their current value.Tax pools available to offset future tax expense and payableThe operations of the Company and related tax interpretations, regulations and legislation are continually changing. As a result, significant estimates are required to compute income tax balances. As at December 31, 2012, the Company has accumulated scientific research and experimental development expenditures in the amount of $18,133,000 available for carry-forward indefinitely. The Company also has accumulated approximately $7,097,000 of unclaimed federal investment tax credits, which expire as follows:Investmenttax credits$Year of expiry2018265,0002019990,00020201,872,00020212,483,0002022298,0002023187,0002024496,0002025506,0007,097,000Reconciliation of income tax expenseThe reconciliation of income tax computed at the statutory tax rate to income tax expense, using a 25.0% statutory tax rate (2011 - 26.5%), is:20122011$$Increase in net assets from operations before tax10,636,9497,198,428Statutory tax rate25.0%26.5%Income tax expense at statutory rates2,659,2381,907,583Use of scientific research and experimental development expenditures(2,345,798)(1,575,337)Reduction of future tax asset2,530,0001,630,000Current tax deductions for offering costs(313,440)(332,246)Provision for future income tax2,530,0001,630,0008 Financial instruments Fair value measurement Financial instruments are classified in a hierarchy that prioritizes the inputs to fair value measurement. Each level is based on the transparency of the inputs used to measure the fair values of assets and liabilities. The three levels of the fair value hierarchy are: Level 1 - inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 - inputs that reflect other than quoted prices that are observable for the assets or liabilities either directly or indirectly; Level 3 - inputs that are not based on observable market data. The following tables illustrate the classification of the Company's financial instruments within the fair value hierarchy:Financial assets at fair value - 2012Level 1Level 2Level 3Total$$$$Corporate debt-93,669,38313,965,857107,635,240Convertible debentures-2,200,000-2,200,000Equity8,696,425-677,4139,373,838Royalty--1,238,7701,238,770Other-(1,362,500)-(1,362,500)Foreign currency contracts-(296,595)-(296,595)8,696,42594,210,28815,882,040118,788,753Financial assets at fair value - 2011Level 1Level 2Level 3Total$$$$Corporate debt-94,406,53422,965,956117,372,490Convertible debentures--1,554,2181,554,218Equity10,397,044-205,44410,602,488Foreign currency contracts-389,347-389,34710,397,04494,795,88124,725,618129,918,543All investments remained at their respective levels within the fair value hierarchy during the year.The following table reconciles the Company's Level 3 fair value measurements:Fair value measurements of Level 3 inputsCorporateConvertibledebtdebenturesEquitiesRoyaltyTotal$$$$$Balance - December 31, 201014,475,8753,617,677400,000-18,493,552Purchases14,812,500---14,812,500Sales(7,031,250)(2,148,120)--(9,179,370)Unrealized appreciation(depreciation) included in net gain on investments708,83184,661(194,556)-598,936Balance - December 31, 201122,965,9561,554,218205,444-24,725,618Purchases4,000,000--4,000,000Sales(13,081,762)(1,558,378)--(14,640,140)Unrealized appreciation(depreciation) included in net gain on investments81,6634,160471,9691,238,7701,796,562Balance - December 31, 201213,965,857-677,4131,238,77015,882,040Level 3 fair value measurements have predominantly been valued by considering data inputs such as the last price the security was traded at, most recent bid/ask information, prices of similar securities with available prices, and comparison of yields of comparable investments. Accordingly, in the absence of any reasonably possible alternative assumptions, and except as noted below, it is not practicable to provide a sensitivity analysis.For certain Level 3 investments measured on a discounted cash flow basis the value is imputed through forecasted cash flows and discount rates. The following summarizes the affect a change in assumptions would have on total net assets at December 31, 2012:Increase by 5%Decrease by 5%Cash flow growth rate198,972(189,288)Discount rate(219,021)279,418Management of financial risksIn the normal course of business, the Company is exposed to various financial risks, including credit risk, liquidity risk and market risk (consisting of interest rate risk, currency risk and other price risk). The Company's overall risk management program seeks to minimize potentially adverse effects of these risks on the Company's financial performance by employing a professional, experienced portfolio advisor, monitoring daily the Company's positions and market events, diversifying the investment portfolio within the constraints of the investment guidelines and periodically using derivatives to hedge certain risk exposures. Further, the Company monitors the portfolio to ensure compliance with its investment strategy, investment guidelines and securities regulations.Fair value riskThe Company's investments are exposed to market price risk and this risk affects the fair value of the investments. All investments have an inherent risk of loss of capital. The maximum risk resulting from investments is determined by their fair value. The Company seeks to manage valuation risks by careful selection of fixed income investments prior to making an investment and by regular ongoing monitoring of the investment performance of the individual investee companies. Due to the predominantly fixed income nature of the investment portfolio, the Company has minimal direct price risk. A 10% change in the value of the Company's equity investments (excluding warrants) would have a $869,643 impact on net assets, on an after tax basis.Credit riskCredit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company.All transactions executed by the Company in listed securities are settled/paid for upon delivery using approved brokers. The risk of this settlement not occurring 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. Since the Company invests in high-yield debt instruments and derivatives, this represents the main concentration of credit risk. The fair value of debt securities includes consideration of the creditworthiness of the debt issuer. The maximum credit exposure of these assets is represented by their carrying amounts. This maximum exposure may be offset to varying degrees in each investment, based on the collateral held, if any. Collateral may include such things as a general security agreement over all assets, or specific security over specific assets. It may also entitle the debt holder to take over the overall business through restructuring of the investment.The Company's credit risk exposure by credit ratings on its investments is listed as follows:As a % of net assets20122011Credit ratingBB+4.4-BB1.81.7BB-0.9-B+8.3-B6.037.3B-10.6-CCC+30.3-CCC3.123.0CCC-2.4-Not rated*15.729.383.591.3* Unrated debt securities consist primarily of loans receivable. Credit ratings are obtained from various credit rating agencies and sources. Where one or more rating is obtained for a security, the lowest rating has been used.The Company's credit risk exposure by sector on its investments is as follows:As a % of net assets20122011SectorConsumer goods8.47.5Energy49.850.4Financial services-2.9Forestry6.26.9Industrial/manufacturing4.33.5Materials and metals13.712.2Services0.24.2Technology0.93.783.591.3Interest rate riskInterest rate risk arises from the possibility that changes in interest rates will affect future cash flows or fair values of financial instruments.The Company invests primarily in interest-bearing financial instruments. As such, the Company is exposed to the risk that the value of such financial instruments will fluctuate due to changes in the prevailing levels of market interest rates. The table below summarizes the Company's exposure to interest rate risk by term to maturity:Fair value20122011$$MaturityLess than 1 year-1,943,5651 - 3 years20,543,66020,139,1653 - 5 years46,527,95927,120,250Greater than 5 years42,639,89170,113,075109,711,510119,316,055As at December 31, 2012, if the prevailing interest rates had been raised or lowered by 1%, assuming a parallel shift in the yield curve, with all other factors remaining constant, net assets could possibly have decreased or increased, respectively, by approximately $4,000,000, or approximately 2.8% of net assets (December 31, 2011 - $5,000,000, or approximately 3.5% of net assets).Liquidity riskAs the Company is a publicly traded, closed-end investment company with a fixed number of common shares outstanding, unlike an open-ended mutual fund, it is not exposed to the liquidity risk associated with daily cash redemptions of securities.Investments in fixed income investments may not be able to be liquidated quickly at an amount close to their fair value to respond to specific events such as deterioration in the creditworthiness of any particular issuer. Fixed income investments purchased by the Company may be subject to resale restrictions such as hold periods. The resulting values for fixed income investments may differ from values that would be realized had a ready market existed.The Company actively reviews its investment portfolio, and the fixed income market, to assess liquidity risk on its holdings.Currency riskCurrency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Company invests a portion of its assets in securities that are denominated in a currency other than the Canadian dollar, which represents the functional currency of the Company. Consequently, the Company is exposed to currency risk as the value of the portfolio securities denominated in currencies other than the Canadian dollar will vary due to changes in foreign currency exchange rates.The Company enters into foreign currency contracts with financial institutions to hedge the value of foreign currency denominated investments. The fair value of these contracts is reflected in investments. Gains or losses arising from these contracts offset the gains or losses from translation of the underlying investments. The unrealized gains or losses are reflected in unrealized appreciation/depreciation on foreign currency contracts on the statement of operations. The potential impact to net assets of a 5% change in foreign currency rates against the Canadian dollar, assuming all other variables remain constant, would be $16,000 (2011 - $160,000).9 Capital management The capital of the Company is divided into voting and non-voting common shares, each having an unlimited authorized amount. The number of voting and non-voting shares outstanding and changes thereto, are outlined in note 3. The Company manages its capital in accordance with the Company's investment objectives. The Company's investment objectives are to: (i) maximize the total return for common shareholders, consisting of dividend income and capital appreciation; and (ii) provide shareholders with monthly dividends targeted to payout a minimum of 75% of net investment income annually. Net investment income, in reference to the Company's dividend payments to shareholders, excludes any realized and unrealized capital gains and losses from debt securities in the portfolio and any income or loss not derived from debt securities in the portfolio. The Company commenced its dividend payments on June 30, 2009, making monthly payments of $0.0583 per voting and non-voting common share, or $614,322. During the year ended December 31, 2012, the Company made dividend payments of $7,371,869 (December 31, 2011 - $7,371,869). The Company is committed to continue paying a monthly dividend of $0.0583 per voting and non-voting common share for the three months ending March 31, 2013, totalling $1,842,966 (note 11). 10 Comparison of net asset value per share and net assets per share In accordance with Section 3.6(1) of National Instrument 81-106, the Company's net asset value per share, the net assets per share calculated in accordance with Canadian GAAP for financial reporting purposes, and an explanation of the differences between such amounts, are required disclosures in the notes to the financial statements. For investments that are traded in an active market, Canadian GAAP requires that bid prices be used in the fair value of instruments, rather than the use of the last traded price, as currently used for the purpose of determining net asset value. This change accounts for the difference between the net asset value and the net assets. 20122011$$Net asset value per share13.5813.49Canadian GAAP adjustments(0.08)(0.06)Net assets per share13.5013.4311 Subsequent events On January 4, 2013, the Company announced a monthly dividend of $614,322, or $0.0583 per common share, payable on each of January 31, 2013, February 28, 2013 and March 29, 2013. FOR FURTHER INFORMATION PLEASE CONTACT: Contact Information: Deans Knight Income CorporationCraig LangdonChief Executive Officer and Director(604)669-0212Deans Knight Income CorporationMark MylesChief Financial Officer(604)669-0212