CI Financial
Annual Report 1998

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C . I . F U N D M A N A G E M E N T I N C . 1 9 9 8 A N N U A L R E P O R T 02 Financial highlights 04 Message to our shareholders 08 Operating review 13 Investment management 16 Management’s discussion and analysis 24 Management’s report to shareholders 25 Consolidated financial statements 29 Notes to consolidated financial statements 35 36 Corporate directory Corporate information C.I. Fund Management Inc. is a publicly-traded Canadian corporation that carries on activities primarily through its wholly-owned subsidiary, C.I. Mutual Funds Inc., with assets under management of $8.3 billion. The Annual and Special Meeting of Shareholders will be held on October 8, 1998 at 2:00 p.m. at the Toronto III Room of the Toronto Hilton, Toronto, Ontario. Our corporate philosophy is simple: Be innovative in our thinking, generate trust by our actions, be responsible in our financial management and ensure clients receive a consistently high level of service. MU T UAL FUNDS S I X Y E A R F I N A N C I A L H I G H L I G H T S years ended may 31, [in millions of dollars except per share amounts] Total assets under management, end of year Net sales Revenue: Management fees and other income Redemption fees Expenses charged to mutual funds Total revenues Expenses: Selling, general and administrative Investment adviser fees Trailer fees Distribution fees to limited partnerships Amortization of deferred commissions Other (including securitization) Total expenses Income before taxes Net income Operating cash flow Earnings per share Operating cash flow per share Shareholders’ equity, end of year Shares outstanding, end of year* *adjusted for 2 for 1 stock split in April 1998 1998 8,302 1,475 143.8 8.4 28.9 181.1 46.5 16.3 34.9 11.3 47.3 8.5 164.8 16.3 8.6 64.3 1997 6,516 461 114.5 4.1 26.8 145.4 40.7 13.1 28.9 11.4 26.4 7.4 127.9 17.5 9.5 45.1 0.24 1.80 140.2 36,871,722 0.29 1.37 55.8 32,784,790 Assets Under Management [billions of dollars; years ended may 31] Net Sales [millions of dollars; years ended may 31] Total Revenues [millions of dollars; years ended may 31] 1 . 1 8 1 $9 8 7 6 5 4 3 2 1 3 . 8 $2,500 2,250 2,000 1,750 1,500 1,250 1,000 750 500 250 5 7 4 , 1 $180 160 140 120 100 80 60 40 20 93 94 95 96 97 98 93 94 95 96 97 98 93 94 95 96 97 98 2 F I N A N C I A L H I G H L I G H T S 1996 5,469 537 96.6 1.4 22.1 120.1 34.3 11.4 24.0 11.9 11.8 7.7 101.1 19.0 10.5 37.4 1995 4,394 909 86.9 0.1 21.6 108.6 34.9 11.2 19.9 11.9 1.2 10.2 89.3 19.3 10.5 20.9 1994 3,733 2,463 56.5 –– 12.1 68.6 29.4 7.8 10.0 8.7 –– 4.8 60.7 7.9 4.0 6.0 1993 960 402 14.7 –– 4.4 19.1 9.6 2.9 2.7 2.8 –– –– 18.0 1.1 0.6† 1.1 0.32 1.14 50.8 32,959,526 0.32 0.64 43.1 32,970,526 0.15 0.23 6.0 26,770,000 0.03 0.05 1.3 26,610,000 †net income from continuing operations Operating Cash Flow [millions of dollars; years ended may 31] Net Income [millions of dollars; years ended may 31] Total Shareholders’ Equity [millions of dollars; years ended may 31] $60 50 40 30 20 10 3 . 4 6 $11 10 9 8 7 6 5 4 3 2 1 2 . 0 4 1 6 . 8 $140 120 100 80 60 40 20 93 94 95 96 97 98 93 94 95 96 97 98 93 94 95 96 97 98 M E S S A G E T O O U R S H A R E H O L D E R S The Executive Committee: Peter W. Anderson, William T. Holland, Stephen A. MacPhail, G. Raymond Chang Fiscal 1998, by all measures, was a very successful year for C.I. Assets under management grew by 27%, ending the year at $8.3 billion. The increase for the year was $1.8 billion, the second highest in C.I.’s history. This growth was fueled by $1.5 billion in net sales of C.I.’s funds, a 220% increase from the prior year. C.I.’s asset growth, in combination with stringent financial management, produced $64 million in operating cash flow, a 43% increase for the year. In addition, we successfully raised $100 million through a common share issue, increased shareholders’ equity to $140 million, and repurchased C.I.’s securitization subsequent to year end. Now, C.I. has no debt on or off the balance sheet. 4 M E S S A G E T O O U R S H A R E H O L D E R S C.I.’s most notable activity in fiscal 1998 was the successful launch of the Harbour Funds under the management of Gerald Coleman of C.I. Capital Management. Launched in July 1997, the Harbour Funds assets totalled $1.4 billion by May 31, 1998. This represents one of the most successful new fund launches in Canada. The success of the Harbour Funds also increased the proportion of our assets that are invested in North American markets, a key C.I. objective. Fiscal 1998 also marked the launch of the C.I. Segregated Funds. C.I., in conjunction with a federally chartered mutual life insurance company, was the first mutual fund company to combine mutual funds with the insurance benefits of guaranteed principal at death or maturity of the investment, poten- tial creditor protection and probate exemption. Since their launch in late 1997, these funds have grown to almost $100 million. Equally important, the creation of these funds has opened the independent insurance channel to C.I.’s products which broadened our distribution network, another key C.I. objective. Since C.I., in conjunction with a federally chartered mutual life insurance company, launched its segregated funds, a number of other mutual fund companies have followed C.I.’s lead in what will continue to be an increasingly competitive but growing market. In August 1997, C.I., in conjunction with DDJ Capital Management, launched the DDJ Canadian High Yield Fund raising $290 million in a 10 year closed- end fund. This fund, like our C.I. Covington Fund, represents a unique opportunity that will contribute significantly to the revenues generated from our core mutual fund products. InfoWise, the subsidiary formed to provide administrative services to other 5 M E S S A G E T O O U R S H A R E H O L D E R S financial services companies, began to actively pursue business in fiscal 1998. To date, InfoWise results have been promising, with a number of major service contracts acquired and successfully brought on-line. We clearly view this as an excellent business opportunity for C.I. with InfoWise positioned to contribute to C.I.’s bottom line in 1999. Despite all of the successes listed above, C.I.’s growth was significantly affected by the ongoing crisis in the Asian markets. C.I. Pacific Fund, the company’s largest fund at the beginning of the Asian bear market, has lost over half of its value due to market depreciation. Given that all markets are cycli- cal in nature, conventional wisdom indicates that these markets represent an exceptional investment opportunity. C.I. is well positioned to benefit from the inevitable turnaround. Many of C.I.’s funds have provided excellent returns, based on relative performance. Most notable are the BEA-managed funds that rank among the top-performing funds in Canada, and the C.I. Canadian Growth Fund under the direction of J. Zechner Associates that has been one of the leading large Canadian equity funds in 1998. Prudent expense management is an integral part of delivering high quality invest- ment products. In fiscal 1998, C.I. dropped mutual fund operating expenses from a marginal cost of 45 basis points to 38 basis points. This 16% improve- ment is passed on to the investors in our funds. Our objective is to continue to reduce these costs to ensure that C.I.’s funds are competitive in all respects. 6 M E S S A G E T O O U R S H A R E H O L D E R S In addition to a strong product lineup and competitive costs, it is critical that C.I. provides extensive support to those distributing our funds. We continue to expand our sales and marketing team, which now includes specialists in the area of independent insurance agents. We were the first in the industry to offer clients current statements on the Internet which ensures that our clients have all account information instantly available. A final comment: at C.I., we never lose sight of our obligation to continually build shareholder value. To accomplish this, we must continue to increase the assets under management while focusing on running our business efficiently. Our exceptional long-term growth and financial performance are evidence that we are on the right track. C.I.’s operating margins are comparable to our much larger competitors. All expenditures are evaluated on whether they build our business in a manner that increases shareholder value. Prudent financial management, combined with our focus on sales and marketing along with innovative products, will continue to produce strong results in the years to come. G. Raymond Chang [signed] President and Chief Executive Officer William T. Holland [signed] Executive Vice-President and Chief Operating Officer 7 M E S S A G E T O O U R S H A R E H O L D E R S O P E R A T I N G R E V I E W In fiscal 1998, the growth in the Canadian mutual fund industry continued with overall industry assets increasing 31% to total $330 billion. The primary contributor to this growth was the performance of the Canadian equity markets that posted a 20% return (TSE 300 one-year total return to May 31, 1998). Investors continued their preference for large domestic equity funds and conserva- tive global funds, very similar to the prior year. One significant change was the decrease in the relative number of mutual fund companies with growth exceeding the average industry growth rate. This trend became stronger later in the year, suggesting an increasingly competitive battle among fund companies for shelf space with fund distributors. In fiscal 1998, independent mutual fund companies fared better than the bank- owned mutual fund companies, as the latter experienced overall growth rates which were approximately 26% lower than the overall industry growth rate. C.I.’s overall growth improved significantly from the prior year with assets under management increasing by 27%. Of the overall growth in assets, 22% was from C.I.’s mutual fund assets and the remainder came from sales of C.I.’s segregated funds, the labour-sponsored fund, and the DDJ Canadian High Yield Fund. C.I.’s Since 1994, C.I.’s asset mix has shifted from predominately Asian and emerging markets to predomi- nately North American markets. Historical Geographic Breakdown [years ended may 31] Japan 2% Other1% Far East 7% Latin (cid:13) America 5% Money Market / (cid:13) Cash 18% Japan 6% Other 3% Money Market /(cid:13) Cash 17% Far East (cid:13) 24% Europe 18% Europe 8% Far East (cid:13) 38% North (cid:13) America (cid:13) 49% Latin (cid:13) America (cid:13) 13% North (cid:13) America (cid:13) 29% 1998 1996 Other 1% Money Market /(cid:13) Cash 8% Europe 11% North (cid:13) America (cid:13) 21% Latin America 21% 1994 8 O P E R AT I N G R E V I E W mutual fund sales accounted for approximately 67% of C.I.’s overall growth, well ahead of the industry where net sales represented approximately 32% of the overall growth in fiscal 1998. C.I. was affected by market-related growth, as a lower percentage of C.I.’s funds were in domestic funds that outperformed many international funds in fiscal 1998. Especially hard-hit were funds with Asian and emerging markets exposure. C.I. has proportionately more of these funds than other Canadian mutual fund companies. When C.I. became a publicly traded company in 1994, its Asian and emerging markets exposure represented almost 60% of total assets, primarily due to the success of those C.I. funds in the early 1990s. As a result of the strategy to broaden product lines, especially in core domestic and global funds, the Far East and emerging markets now represent only 13% of C.I.’s assets, but still enough to affect relative market growth. HARBOUR FUNDS Net sales of C.I. funds in fiscal 1998 were $1,475 million, an increase of 220% from fiscal 1997. The main contributing factor was the success of the Harbour Funds. During the year, a significant marketing effort by C.I.’s wholesaling staff and targeted advertising created a broad awareness for the Harbour Funds. Of note was the com- prehensive billboard campaign, a familiar sight in most major cities across Canada. The assets of the Harbour Funds totalled $1.4 billion one year after the funds launched in July 1997, making it C.I.’s most successful fund launch ever. 9 O P E R AT I N G R E V I E W C.I. pioneered the entry by mutual fund companies into segregated funds. C. I. S E G R E GAT E D F U N D S A Perfect Combination. The safety of a GIC. The growth potential of C.I. Mutual Funds. Designed for the conservative investor seeking equity returns and protection of capital. A perfect combination of risk and reward. MU T UAL FUNDS The C.I. Segregated Funds also had an impact on C.I.’s net sales during the year. C.I. pioneered the entry by mutual fund companies into segregated funds by forging a strategic alliance with an insurance company while leveraging C.I.’s investment man- agement, administrative, and marketing expertise. Six months after the launch of the C.I. Segregated Funds, C.I. has established relationships with a significant number of insurance dealerships who in many cases are also licensed to sell mutual funds. In August 1997, the 10 year closed-end DDJ Canadian High Yield Fund was completed, raising $290 million. C.I. was able to capitalize on the expertise of the back office administrative business, InfoWise, to win selection as manager of this product. An important development in fiscal 1998 was the rising popularity of Bill Sterling, Chief Investment Officer and global strategist for BEA Associates. Bill Sterling has been closely associated with C.I. since his arrival at BEA in 1995 and has been instrumental in turning many of the BEA-managed funds into top quartile performers. Sterling’s recognition as a leading authority on global trends has been building among the large investment dealers, which in turn is increasing the awareness of C.I.’s BEA-managed funds. The BEA brand is an important part of C.I.’s long-term strategy. 10 O P E R AT I N G R E V I E W As competition for shelf space among fund distributors intensifies, strong fund brands are vital. In addition to the positioning of the Harbour Funds and the BEA-managed funds, steps were taken to simplify C.I.’s mutual fund line-up into four major groups: Harbour Funds for domestic value-oriented investments; the Zechner-managed funds for active growth; BEA for global growth funds; and Hansberger for global value-based funds. The Monarch Funds previously offered by C.I. were rolled into the Harbour Funds after performance did not meet C.I.’s expectations. BEA has taken over the management of the C.I. Pacific Fund from TCW and is being advised by BEA’s Nandu Narayanan, who also advises the C.I. Emerging Markets Fund–the best performing emerging markets fund in calendar 1997 on an international basis. In addition to broadening C.I.’s product lineup, emphasis has continued on building C.I.’s sales force. A marketing office has been opened in Calgary, Alberta and the existing marketing groups have been expanded in Quebec, Ontario and British Columbia, including a sales team dedicated to insurance dealers and brokers. In-house support for C.I.’s products continues to be enhanced with current state- ment availability via the Internet and fax and advanced client services technology that facilitates one of the fastest telephone response times in the industry. In addition to Number of Funds [as at may 31] Assets Managed Per Employee [millions of dollars; as at may 31] 7 4 Benefits of technology and operating effective- ness continue to allow C.I. to increase assets managed per employee while improving overall customer service levels. 40 35 30 25 20 15 10 5 5 3 93 94 95 96 97 98 93 94 95 96 97 98 C.I. broadened its fund line-up in 1998 by adding the family of Harbour Funds, the family of C.I. Segregated Funds and the DDJ Canadian High Yield Fund. 45 40 35 30 25 20 15 10 5 11 O P E R AT I N G R E V I E W the improvements in service and client information technology, C.I. continued to reduce operating expense margins for its funds. In October 1997, C.I. reduced these expenses by almost 16% with further improvements expected from economies of scale and efficiency benefits derived from C.I.’s InfoWise operations. InfoWise is C.I.’s wholly-owned subsidiary, formed in fiscal 1997 to provide third- party administration to financial institutions. Contracts are now in place to provide a wide range of third-party services including wrap accounts for high net-worth investors, pooled funds, segregated funds, and other mutual funds. InfoWise, demonstrating its lead role in back office administration technology, positioned C.I. to launch new products with strategic partners in fiscal 1998 such as the C.I. Segregated Funds and the DDJ Canadian High Yield Fund. Finally, C.I. continued to maintain its strict financial discipline. Operating margins were maintained at nearly 100 basis points for the third consecutive year. At these levels, C.I.’s margins are comparable with significantly larger mutual fund competitors and have established C.I. as a lean, focused organization. 12 O P E R AT I N G R E V I E W I N V E S T M E N T M A N A G E M E N T The investment counselling firms which advise C.I.’s funds are critical to the company’s ability to offer Canadian investors a broad range of investment products. Our fund advis- ers are selected for the specialized management styles they bring to the portfolios, and managing C.I. products becomes their highest priority. In each case, C.I. is the largest client account for these firms. As the relationships with core investment managers have evolved over the past few years, the advisers have become a key component of the C.I. brand. The mandate for BEA Associates of New York has expanded from its beginnings with the C.I. Global Fund to a full spectrum of globally-oriented equity and fixed income portfolios, including emerging markets as well as industry and theme-specific funds. The creation of C.I. Capital Management in July 1997 was consistent with the company’s philosophy of responding to investor needs. Investors were seeking the long-term growth potential associated with established companies, managed in a style that would provide a buffer in volatile markets. C.I.’s mutual fund portfolios are now managed by two domestic and two international fund advisers. Within each category, investors can choose from a value-driven, relatively conservative approach or a more growth-oriented style of portfolio management. DOMESTIC ADVISER – C.I. Capital Management (C.I.C.M.)*, the company’s in-house asset management division, was established with Gerald Coleman as the pri- mary investment adviser. Mr. Coleman had built up a sterling reputation during more than 20 years of value management. His value orientation was considered ideal for developing core Canadian investment products as an alternative to the more actively managed, growth-oriented funds advised by J. Zechner Associates. The flagship products of C.I.C.M. are the Harbour Funds. The advisers typically look for fundamentally sound, well-managed companies at attractive prices and give equal priority to value and growth. Investments may be held for four or five years, with the objective of delivering solid returns in a low risk environment. DOMESTIC ADVISER – J. Zechner Associates has played a key role in establish- ing a C.I. presence in Canadian markets. Since 1993, when the first Canadian funds *subject to regulatory approval 13 I N V E S T M E N T M A N A G E M E N T were launched, assets under management have increased to over $2.0 billion. At the time the funds were established, C.I. was looking for an active manager who could build portfolios of large, blue-chip companies with an emphasis on growth. Management style focuses on a thorough study of the top-down economic environ- ment both in Canada and abroad, followed by selection of companies from Canadian market sectors judged most likely to produce maximum growth. INTERNATIONAL ADVISER – BEA Associates has been instrumental in the evolution of C.I.’s substantial roster of international funds. In 1990, C.I. sought a man- ager for the C.I. Global Fund that was recognized for its investing expertise outside North America, and particularly the emerging markets. At that time, BEA was among the top-rated global and emerging market money managers. Respected for the strength of its global strategy team and depth of resources, the com- pany today manages assets of some $60 billion. Management style is growth oriented, with an emphasis on advanced asset allocation models as determined by extensive macro-economic research from the global strategy team. Using these guidelines, BEA’s portfolio advisers are well equipped to select companies from around the world most likely to deliver healthy growth over the long term. INTERNATIONAL ADVISER – Hansberger Global Investors. When C.I. conducted a search in 1995 for a value-oriented international manager to complement BEA’s growth approach, one candidate stood out. Thomas Hansberger, long-time part- ner of Sir John Templeton and Chief Executive Officer of Templeton Worldwide, was starting up his own business. After observing his careful structuring of the new business, the management of C.I. was able to retain Hansberger Global Investors with a high degree of confidence. Hansberger Global Investors takes a meticulous, bottom-up approach to global investing. Analysts and researchers from four international offices work closely as a team to identify the best managed companies available at the most attractive prices. These companies undergo exhaustive scrutiny by the entire team. Those considered suitable candidates are placed on the company’s Value List, which is used for portfolio selection. 14 I N V E S T M E N T M A N A G E M E N T C . I . F u n d A d v i s e r s C . I . F u n d F a m i l y Domestic Advisers International Advisers C.I. Capital Management J. Zechner Associates BEA Associates Hansberger Global Investors $1.4 billion $2.0 billion $3.4 billion $1.1 billion Advises 7 funds Advises 8 funds Advises 22 funds Advises 7 funds Offering over 40 Canadian and international funds. Harbour Funds C.I. Funds Harbour* Harbour Growth & Income Harbour Explorer* C.I. Segregated Funds C.I. Harbour Segregated C.I. Harbour Growth & Income Segregated C.I. Global Segregated C.I. American Segregated C.I. Hansberger Value Segregated C.I. Money Market Segregated Hansberger Value Series Funds Hansberger Value* Hansberger International* Hansberger Global Small Cap* Hansberger European* Hansberger Developing Markets* Hansberger Asian* Labour-Sponsored Fund C.I. Covington Closed-End Fund DDJ Canadian High Yield *also available as a class of C.I. Sector Fund Limited. C.I. Canadian Growth* C.I. Canadian Balanced C.I. Dividend C.I. Canadian Income C.I. Canadian Bond C.I. Canadian Resource C.I. Money Market C.I. US Money Market C.I. Global* C.I. Global Equity RSP C.I. American* C.I. American RSP C.I. International Balanced C.I. International Balanced RSP C.I. World Bond C.I. Global High Yield C.I. Global Bond RSP C.I. Latin American* C.I. Emerging Markets* C.I. Pacific* C.I. Sector Funds C.I. Global Financial Services C.I. Global Health Sciences C.I. Global Resource C.I. Global Technology C.I. Global Telecommunications C.I. Global Consumer Products C.I. Global Boomernomics C.I. Global Energy 15 I N V E S T M E N T M A N A G E M E N T M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S SUMMARY OF FINANCIAL POSITION years ended may 31, [millions of dollars except per share amounts] 1998 1997 % change 140.3 8.4 3.5 28.9 181.1 46.5 16.3 34.9 7.4 11.3 47.3 1.1 16.3 8.6 0.24 64.3 1.80 140.2 7,175 8,302 2,706 1,231 1,475 112.6 4.1 1.9 26.8 145.4 40.7 13.1 28.9 6.8 11.4 26.4 0.6 17.5 9.5 0.29 45.1 1.37 55.8 5,754 6,516 1,482 1,021 461 +24.6 +104.9 +84.2 +7.8 +24.6 +14.3 +24.4 +20.8 +8.8 -0.9 +79.2 +83.3 -6.9 -9.5 -17.2 +42.6 +31.4 +151.3 +24.7 +27.4 +82.6 +20.6 +220.0 INCOME STATEMENT DATA Revenue Management fees Redemption fees Administration fees and other income Expenses charged to mutual funds Total revenues Operating Expenses Selling, general and administrative Investment adviser fees Trailer fees Commission Related Expenses Net fees paid to securitization Distribution fees to limited partnerships Amortization of deferred commissions Other items Income before taxes Net income Earnings per share Operating cash flow Operating cash flow per share Shareholders’ equity, end of year ASSET MANAGEMENT DATA Average net assets under management Total assets under management, end of year Total gross sales Total redemptions Total net sales 16 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S OVERVIEW OF BUSINESS Toronto and for the DDJ Canadian High Yield Fund (a closed-end investment trust) is DDJ Capital Management, The principal business of C.I. Fund Management Inc. is LLC, Wellesley, Massachusetts. the management, marketing, distribution, and adminis- tration of mutual funds and other investment products Increasing C.I.’s assets under management requires good for Canadian investors through its wholly-owned sub- fund performance and continuous support to investment sidiary C.I. Mutual Funds Inc. ("C.I."). At May 31, dealers, mutual fund dealers, and insurance agents. 1998, C.I. managed $8.3 billion in assets in 39 domestic C.I.’s products must continue to attract investor interest, and international mutual funds, six segregated funds, one so new funds are created that appeal to a wide range labour-sponsored fund, and one closed-end fund. C.I. of investor needs. Over the years, C.I. has consistently markets its funds to Canadian retail investors through developed new products for investors such as the sector approximately 10,000 investment and mutual fund deal- funds, global funds, Hansberger Value Series, and a ers representing over 500,000 retail investment accounts owning C.I. mutual funds and over 2,000 life-licensed labour-sponsored fund. insurance representatives with agreements allowing for In fiscal 1998, C.I. introduced three major new prod- the sale of the C.I. Segregated Funds. ucts. In July 1997, C.I. launched the Harbour Funds, consisting of the Harbour Fund, Harbour Growth & In order to offer a broad range of domestic and interna- Income Fund, and the Harbour Explorer Fund. The tional funds to Canadian investors, C.I. utilizes the primary investment adviser is Gerald Coleman of C.I. expertise of external and internal investment advisers. Capital Management. The investment advisers to C.I.’s international mutual funds are BEA Associates of New York and Hansberger In August 1997, the DDJ Canadian High Yield Fund Global Investors of Ft. Lauderdale. C.I.’s domestic funds was launched. C.I. acts as manager and administrator for advisers are J. Zechner Associates and C.I. Capital this ten year closed-end fund with assets of $290 million. Management (C.I.’s in-house asset manager) of Toronto. The investment adviser for C.I.’s labour-sponsored fund, In November 1997, C.I. launched the C.I. Segregated the C.I. Covington Fund, is Covington Capital Corporation, Funds in conjunction with Toronto Mutual Life Operating Cash Flow [millions of dollars; years ended may 31] 3 . 4 6 $60 50 40 30 20 10 The growth in C.I.’s operating cash flow reflects increased assets under management, consistent margins and an increasing proportion of self-financed assets. Net income decreased as a result of C.I.’s rapid amortization of sales commissions and increased sales. 6 . 8 Net Income [millions of dollars; years ended may 31] $11 10 9 8 7 6 5 4 3 2 1 93 94 95 96 97 98 93 94 95 96 97 98 17 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Insurance Company. These funds are similar to mutual sales of the funds. The prevailing market conditions help funds, yet offer guaranteed principal at death of the determine the effectiveness of sales and marketing investor or maturity of the investment. The guarantees campaigns with investment and mutual fund dealers. are reinsured through a major international re-insurer to eliminate C.I.’s exposure to this risk. C.I. also earns revenues from redemption fees. Investors REVENUES are subject to redemption fees when mutual funds are pur- chased on a deferred sales charge basis and the investment The majority of C.I.’s revenues are earned from the is redeemed within seven years. Redemption fees are cal- management services it provides as fund manager. The culated as a percentage of the initial value of the funds sold key determinant of C.I.’s revenue is the level of assets and start at 5.5%, declining to zero after seven years. under management, determined by market returns of the funds and positive or negative net sales (gross sales C.I. is responsible for the administration of the funds less redemptions). Management fees charged by C.I. to the funds range up to 2.25% of the average net asset and incurs expenses on behalf of the funds. C.I. recovers most operating expenses by charging an administration value of the funds. The mix of funds managed by C.I. fee to the funds which is recognized as revenue. Since will also affect revenues. Emerging markets funds tend these revenues represent a recovery of expenses, they do to generate the highest management fees with bond not affect the overall profitability of C.I. and money market funds being the lowest. The mix of C.I.’s funds is determined by the relative performance C.I.’s third party administration business, InfoWise, of the funds and the level of net sales of each of generates revenue by providing back office adminis- the funds. trative services to other financial service companies. At May 31, 1998, InfoWise had agreements with a number Market returns on the funds are influenced by the of outside parties. During fiscal 1998, revenues from performance of the financial markets and the position of InfoWise were not material to C.I.’s overall business. C.I.’s investment advisers within those markets. The resulting fund performance is a key factor influencing net Net Operating Margin [as a % of average assets under management; years ended may 31] 1.00 0.80 0.60 0.40 0.20 C.I. maintained its 1.00% oper- ating margin through a combina- tion of offering higher fee equity funds and consistent expense 0 0 . 1 management. C.I.’s products are dominated by equity funds that generally earn 2.00% management fees. New products are evaluated on margin contribution. Management Fees [from mutual funds as a % of average assets under management; years ended may 31] 6 9 . 1 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 93 94 95 96 97 98 93 94 95 96 97 98 18 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S EXPENSES C.I. monitors its operating profitability by measuring the C.I. incurs certain key expenses in conjunction with the operating margin calculated as a percentage of assets under management, marketing, and distribution of its funds management. C.I.’s operating margin is defined as man- which constitute the majority of its expenses outside agement fees from C.I.’s funds less investment adviser fees, those operational expenses incurred on behalf of, and trailer fees, and selling, general and administrative expenses recovered from, the funds. These expenses include net of expenses recovered from the funds, calculated as a advisory fees paid to investment advisers, marketing percentage of mutual/segregated funds under management. expenses, trailer fees, and commission expenses. This allows C.I. to manage profitability when changes in Advisory fees paid to investment advisers are generally paid revenue flows and permits adjustments to discretionary on the basis of a percentage of assets under management. expenditures in order to maintain its margins. the market value of assets under management affect C.I.’s advisers have different fee agreements and therefore the mix of funds will affect the overall expense level. Commissions paid to investment and mutual fund dealers and life insurance agents on the sale of funds on a deferred Operating expenses, net of those recovered from sales charge basis vary directly with the level of sales. For the funds, (referred to as net selling, general and admin- financial reporting purposes, these deferred sales commis- istrative expenses) are primarily marketing expenses. In sions are amortized over 36 months and have a negative general, marketing expenses increase as C.I.’s assets under effect on reported earnings during the 36 month period management increase. after the sale of the funds. C.I. has financed sales commis- sions with its own cash resources since January 1, 1995. Trailer fees are paid out to investment and mutual fund dealers and life insurance agents to assist them in provid- Commissions incurred prior to January 1, 1995 were ing ongoing support to the investors in C.I. funds. financed by limited partnerships or a securitization Trailer fees are calculated as a percentage of assets and vehicle. The expenses to C.I. for commissions financed will vary with overall assets under management. by limited partnerships are reported as distribution fees paid to limited partnerships and are calculated as a percentage of Net SG&A Expense [as a % of average assets under management; years ended may 31] 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 Marketing expenses constitute the majority of net SG&A expense and are increased proportionately with asset growth. 4 2 . 0 Trailer fees paid to investment and mutual fund dealers reflect C.I.’s high level of equity funds and are consistent with industry standards. 9 4 . 0 Trailer Fees [as a % of average assets under management; years ended may 31] 0.50 0.40 0.30 0.20 0.10 93 94 95 96 97 98 93 94 95 96 97 98 19 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S the assets where commissions were specifically financed same period in 1997, an increase of 83%. Net sales by the limited partnerships. The effective amortization (gross sales less redemptions) were $1,475 million for the period for commissions financed by limited partnerships year ended May 31, 1998 compared to $461 million for is the life of the limited partnership of 15 to 20 years. the same period in 1997. The increase in C.I.’s net sales from 1997 reflected the popularity of C.I.’s Harbour The expense to C.I. for commissions financed by the Funds with assets totalling $1.4 billion by May 31, 1998, securitization is reported as the net fees paid to securitiza- the best new fund launch for C.I. tion and reflects an effective amortization period of the commissions of seven years, the life of the securitization Total revenues increased to $181.1 million for the year vehicle. In June 1998, C.I. repurchased all the outstanding ended May 31, 1998 from $145.4 million for the same notes issued by the securitization vehicle. The remaining period in 1997. Revenues from management fees rose by effective unamortized commissions will be included in the 25% to $140.3 million for the year ended May 31, 1998 amortization of C.I.’s deferred sales commissions. YEAR ENDED MAY 31, 1998 from $112.6 million in 1997. As a percentage of average assets under management, management fees charged to mutual funds were 1.96% for fiscal 1998, unchanged COMPARED WITH YEAR ENDED from 1.96% in fiscal 1997. Administration fees and MAY 31, 1997 other income (which include administrative fees, inter- est, and investment income) increased from $1.9 million Assets under management (which includes C.I. Covington to $3.5 million due to investment gains and interest Fund, DDJ Canadian High Yield Fund and C.I. Segregated income. Redemption fees rose from $4.1 million in fiscal Funds) increased from $6,516 million at May 31, 1997 to 1997 to $8.4 million, reflecting the benefit of C.I. having $8,302 million at May 31, 1998, an increase of $1,786 initiated the self-funding of commissions in January million or 27%. Average assets under management were 1995 and therefore retaining the right to any redemption $7,175 million in fiscal 1998, an increase of 25% from fees paid. $5,754 million for the same period in fiscal 1997. As most of C.I.’s revenues and expenses are based on assets Revenues represented by expenses recovered from throughout the year, average asset levels are critical to the the funds rose to $28.9 million for the year ended analysis of C.I.’s financial results. May 31, 1998 from $26.8 million in 1997. The increase in revenues reflected increased operating costs resulting The growth in assets under management was a result from the increase in C.I. assets under management of the net sales (gross sales less redemptions) of $1,475 and the cost of improving C.I.’s administrative and million and an overall performance increase of $311 mil- technology systems. lion. This compares to fiscal 1997, when the annual growth in assets under management was $1,047 million Net fees paid to C.I.’s securitization vehicle (the "Trust") or 19%, comprised of net sales of $461 million and an (which represents principal and interest payments and overall performance increase of $586 million. certain expenses of the Trust, net of redemption fees) were $7.4 million for the year ended May 31, 1998 The overall market performance of C.I.’s funds both in compared to $6.8 million for the year ended May 31, fiscal 1997 and 1998 resulted from strong market gains 1997. The increase reflects the lower level of redemption in Canadian, European and U.S. markets. fees received on the securitized assets in the Trust. As a Gross sales of the funds were $2,706 million for the year to the securitization were 0.10%. At May 31, 1998, the ended May 31, 1998 compared to $1,482 million for the principal outstanding on the securitization was $29.1 percentage of assets under management, the net fees paid 20 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S million, down $9.4 million from the level at May 31, management at May 31, 1998 compared to 0.50% in the 1997. This facility was repurchased in full in June 1998. prior fiscal year. C.I.’s operating margin (measured as Total net operating expenses (which are comprised of net management fees less the net operating expenses as selling, general and administrative expenses, investment described above, as a percentage of mutual/segregated adviser fees, and trailer fees) for the year ended May 31, funds under management) was 1.00% compared to 1998 increased by $12.9 million or 23% to $68.8 million 0.99% for the prior fiscal year. from $55.9 million in 1997. Selling, general and admin- istrative expenses (net of expenses recovered from the Distribution fees to limited partnerships totalled $11.3 funds for activities carried out in support of the funds) million, down from $11.4 million in fiscal 1997. As a were $17.6 million, up from $13.9 million in the prior percentage of average assets, distribution fees to limited fiscal year. This increase arose primarily due to increased partnerships declined from 0.20% to 0.16%, reflecting a advertising expenses, the cost of launching the Harbour lower percentage of C.I.’s overall assets under manage- Funds and the C.I. Segregated Funds, and expenses associated with increasing the marketing sales staff. As a ment having been financed by limited partnerships. percentage of assets under management, the net selling, Amortization of deferred sales commissions represented general and administrative expenses were 0.24% in fiscal C.I.’s largest expense increase, rising from $26.4 million 1998, unchanged from 0.24% in fiscal 1997. in fiscal 1997 to $47.3 million in fiscal 1998. Investment adviser fees increased from $13.1 million in Net income for the year ended May 31, 1998 was fiscal 1997 to $16.3 million in fiscal 1998 due to $8.6 million compared to $9.5 million in the same increased assets under management. However, as a per- period in 1997. Though operating earnings were up sub- centage of average assets under management, investment stantially from fiscal 1997, the impact of the additional adviser fees were unchanged at 0.23%. Trailer fees $20.9 million in amortization of sales commissions had increased from $28.9 million to $34.9 million due to the effect of reducing net earnings. increased assets under management. As a percentage of average assets, trailer fees were 0.49% of assets under Fund Operating Expenses [charged to mutual funds as a % of average assets under management; years ended may 31] 0 4 . 0 0.60 0.50 0.40 0.30 0.20 0.10 Fund operating expenses declined in 1998 reflecting efficiencies of asset growth and investments in technology from prior years and are currently at a marginal rate of 0.38%. A significant increase in sales in 1998 resulted in C.I. financing over $84 million in sales commissions. DSC Commissions Financed [millions of dollars; years ended may 31] 2 . 4 8 $100 80 60 40 20 93 94 95 96 97 98 95 96 97 98 21 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S FINANCING AND LIQUIDITY Since January 1, 1995, C.I. has used internally generated C.I.’s capital requirements are primarily to fund commis- cash flow and existing cash resources to finance sions arising from the sale of funds on a deferred sales sales commissions. After November 1997, the money charge basis. In fiscal 1998, C.I. financed $84.2 million in obtained from the public share offering significantly sales commissions, up from $45.6 million in fiscal 1997. added to the available cash resources. As a result, by In addition, during fiscal 1998, C.I. used $23.1 million to May 31, 1998, 61% of mutual fund assets were financed repurchase 1.6 million common shares at an average price by C.I.’s cash resources (adjusted for the securitization of $14.06 per share. This compares to $4.9 million used repurchased in June 1998), up from 35% financed by to repurchase 0.7 million common shares at an average cash resources and 15% financed by securitization price of $6.79 per share in fiscal 1997. at May 31, 1997. The self-financed assets had a current redemption value of $203 million ($5.52 per share) at These funding requirements were met by cash and short- May 31, 1998 compared to $106 million ($3.23 per term investments of $7.8 million at May 31, 1997, the issuance of 5.08 million common shares in a public share) at May 31, 1997. At May 31, 1998, 24% of C.I.’s assets were financed by limited partnerships, down from offering at an average price of $19.75 per share for total 35% at May 31, 1997. The front-end load sales assets at gross proceeds of $100.33 million and an operating cash May 31, 1998 were 15% of assets under management. flow in fiscal 1998 of $64.3 million (up from $45.1 million in 1997). Capital expenditures incurred during the year ended May 31, 1998 totalling $2.1 million were primarily for At May 31, 1998, C.I. had cash, short-term investments, computer hardware and software related to the improve- and marketable securities totalling $67.9 million ($12.1 ment of systems technology and additional space require- million at May 31, 1997) and an undrawn $30 million line ments. Depreciation charges on these assets are recover- of credit with a Canadian chartered bank. In June 1998, able from the funds. C.I. repurchased the notes issued under its securitization vehicle at a total cost of $28.7 million plus accrued interest. Cash, Short-Term Investments and Marketable Securities [millions of dollars; years ended may 31] 9 7. 6 $70 60 50 40 30 20 10 Proceeds of 5 million shares issued in October 1997 resulted in a significant increase in financial resources. The majority of C.I.’s fund assets are now self-financed which at May 31, 1998 had current redemption fees of $203 million (adjusted for securitization repurchase). 1 6 Percentage of Assets Self-Financed [years ended may 31] 70% 60 50 40 30 20 10 93 94 95 96 97 98 95 96 97 98 22 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S OUTLOOK to eliminate or significantly reduce the risk. The project At May 31, 1998, the net asset value of the funds was has been staffed with highly skilled people and supplied $8,302 million. Should assets remain at this level during with the necessary technology. Also, as part of our fiscal 1999, C.I. would expect total revenues and operating initiative, we have been working with our investment cash flow to increase from fiscal 1998. Net income will be advisers, business partners, service providers and vendors affected by the overall level of sales and the resulting impact to verify their obligations and monitor their progress. on the amortization of deferred sales commissions. Systems supplied by outside sources have been vigorously THE YEAR 2000 ISSUE reviewed and tested for compliance; non-compliant software has been replaced during our regular process of The historical use of two digits to indicate the year in software upgrading. computer software could potentially cause software applications to misinterpret dates with the arrival of the The Year 2000 issue is an additional business risk that year 2000. Many companies face a high risk of applica- tion problems due to their reliance on dates in their daily has to be taken into account when investing. Our invest- ment advisers are aware of the risks involved and are operations and to their dependence on other entities to considering the issue in their investment strategy by provide key services to help manage their operations and focusing not only on the specific entities in which they the services provided to their security holders. invest but also on the general environment in which the At C.I., we realize the importance of the year 2000 issue and have already taken the steps necessary to address the The expenditures incurred to date and the future antici- problem. A Year 2000 project was initiated in 1997 to pated expenses will not be material. Our project deadline review our systems and implement any actions necessary is targeted for fall 1998. To date, we are on schedule. entities operate. 23 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S M A N A G E M E N T ’ S R E P O R T T O S H A R E H O L D E R S Management of C.I. Fund Management Inc. is responsible for the integrity and objectivity of the financial statements and all other information contained in the Annual Report. The financial state- ments have been prepared in accordance with generally accepted accounting principles and are based on management’s best information and judgement. In fulfilling its responsibilities, management has developed internal control systems and procedures designed to provide reasonable assurance that the Corporation’s assets are safeguarded, that transactions are executed in accordance with appropriate authorization, and that accounting records may be relied upon to properly reflect the Corporation’s business transactions. The Audit Committee of the Board of Directors is composed of outside directors who meet periodical- ly and independently with management and the auditors to discuss the Corporation’s financial report- ing and internal control. The Audit Committee reviews the results of the audit by the auditors and their audit report prior to submitting the consolidated financial statements to the Board of Directors for approval. The external auditors have unrestricted access to the Audit Committee. Management recognizes its responsibility to conduct the Corporation’s affairs in the best interests of its shareholders. G. Raymond Chang [signed] President and Chief Executive Officer Stephen A. MacPhail [signed] Executive Vice-President and Chief Financial Officer August 26, 1998 24 M A N A G E M E N T ’ S R E P O RT T O S H A R E H O L D E R S C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S AUDITORS’ REPORT To the Shareholders of C.I. Fund Management Inc. We have audited the consolidated balance sheets of C.I. Fund Management Inc. as at May 31, 1998 and 1997 and the consolidated statements of income and retained earnings and changes in financial position for the years then ended. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material mis- statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at May 31, 1998 and 1997 and the results of its operations and the changes in its financial position for the years then ended in accordance with generally accepted accounting principles. Toronto, Canada, July 3, 1998. Ernst & Young [signed] Chartered Accountants 25 C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S CONSOLIDATED BALANCE SHEETS as at may 31, 1998 $ 1997 $ 61,382,122 6,485,217 5,503,477 771,718 74,142,534 748,195 6,333,446 100,757,662 7,397,953 189,379,790 15,520,418 15,520,418 2,108,736 31,595,544 49,224,698 130,423,379 9,731,713 140,155,092 189,379,790 7,820,673 4,300,320 4,560,098 1,175,964 17,857,055 2,000,000 5,997,039 63,933,377 7,472,950 97,260,421 12,230,838 12,230,838 2,283,692 26,909,297 41,423,827 32,195,984 23,640,610 55,836,594 97,260,421 G. Raymond Chang [signed] William T. Holland [signed] Director Director ASSETS Current Cash and short-term investments {note 4} Marketable securities, at cost which approximates market value Accounts receivable and prepaid expenses Income taxes recoverable Total current assets Advance to C.I. FEES Trust {note 4} Capital assets {note 5} Deferred sales commissions, net of accumulated amortization of $86,814,096 (1997–$39,469,884) Other assets {note 6} LIABILITIES AND SHAREHOLDERS’ EQUITY Current Accounts payable and accrued liabilities Total current liabilities Deferred lease inducement Deferred income taxes Total liabilities Shareholders’ equity Share capital {note 8} Retained earnings Total shareholders’ equity See accompanying notes On behalf of the Board: 26 C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS years ended may 31, 1998 $ 1997 $ 140,288,115 3,590,609 28,876,570 8,382,570 181,137,864 (7,389,561) 173,748,303 46,469,561 16,328,550 34,904,411 11,258,940 47,344,212 1,106,421 157,412,095 16,336,208 1,236,160 6,549,437 7,785,597 8,550,611 23,640,610 (2,312,460) (17,308,250) (2,838,798) 9,731,713 0.24 0.23 112,588,105 1,887,019 26,778,224 4,104,022 145,357,370 (6,762,262 ) 138,595,108 40,723,073 13,125,608 28,879,917 11,440,612 26,435,540 450,000 121,054,750 17,540,358 831,512 7,179,676 8,011,188 9,529,170 21,008,162 –– (4,268,283 ) (2,628,439 ) 23,640,610 0.29 0.27 REVENUE Management fees Administration fees and other income Expenses charged to mutual funds Redemption fees Total revenues Net fees paid to securitization EXPENSES Selling, general and administrative Investment adviser fees Trailer fees Distribution fees to limited partnerships Amortization of deferred sales commissions Other Income before income taxes Provision for income taxes Current Deferred Net income for the year Retained earnings, beginning of year Share issues expense, net of income taxes Cost of shares repurchased in excess of stated value{note 8} Dividends Retained earnings, end of year Earnings per share Fully diluted earnings per share See accompanying notes 27 C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION years ended may 31, 1998 $ 1997 $ 8,550,611 1,585,701 6,549,437 47,344,212 300,000 64,329,961 2,750,447 67,080,408 (2,092,067) (2,184,897) (84,168,497) (230,000) –– (88,675,461) 1,251,805 (23,143,347) 104,062,492 (4,175,650) 77,995,300 (2,838,798) 53,561,449 7,820,673 61,382,122 1.80 1.68 9,529,170 1,488,509 7,179,676 26,435,540 450,000 45,082,895 3,870,256 48,953,151 (1,644,854 ) (3,078,341 ) (45,637,102 ) (4,422,000 ) 298,697 (54,483,600 ) –– (4,925,231 ) 3,011,852 –– (1,913,379 ) (2,628,439 ) (10,072,267 ) 17,892,940 7,820,673 1.37 1.26 OPERATING ACTIVITIES Net income for the year Add items not involving cash Depreciation and amortization Deferred income taxes Amortization of deferred sales commissions Other Operating cash flow Net change in non-cash working capital balances relating to operations Cash provided by operating activities INVESTING ACTIVITIES Additions to capital assets, net Purchase of marketable securities, net Sales commissions Other assets Deferred lease inducement Cash used in investing activities FINANCING ACTIVITIES Repayment of advance to C.I. FEES Trust Repurchase of share capital {note 8} Issue of share capital {note 8} Share issue expenses Cash provided by (used in) financing activities DIVIDENDS PAID Net increase (decrease) in cash during the year Cash and short-term investments, beginning of year Cash and short-term investments, end of year Operating cash flow per share Fully diluted operating cash flow per share See accompanying notes 28 C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S MAY 31, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements have been prepared in accordance with generally accepted accounting principles. The significant accounting policies are summarized as follows: Basis of presentation The consolidated financial statements include the accounts of C.I. Fund Management Inc. [the “Corporation”], C.I. Mutual Funds Inc. [“CIMF”] and its wholly-owned subsidiaries, Canadian International GP Limited and C.I. Fund Services Inc. Hereinafter, the Corporation and its subsidiaries are referred to as the Corporation. Investment in limited partnership During part of fiscal 1997 the investment in the limited partnership was considered a temporary investment and was car- ried at the lower of cost and net realizable value. In the third quarter of fiscal 1997 the investment was reclassified as a long-term investment. As a result, effective in the third quarter of fiscal 1997 the investment is being amortized over its estimated life using a 10% annual diminishing balance basis. Amortization or adjustments to the net realizable value of the investment in limited partnership is included in other expenses in the consolidated statements of income and retained earnings. The carrying value of the investment approximates market value based on the net present value of estimated future cash flows. Short-term investments Short-term investments are carried at cost which approximates market value. Capital assets Capital assets are recorded at cost less accumulated depreciation and amortization. These assets are depreciated or amor- tized over their estimated useful lives as follows: Computer hardware Computer software Office equipment Trademark Leasehold improvements 30% diminishing balance or straight-line over four years 50% straight-line or straight-line over four years 20% diminishing balance 20% straight-line straight-line over the term of the lease Revenue recognition Management fees are based upon the net asset value of the respective funds and are recognized on an accrual basis. Administrative fees are recognized as earned. Redemption fees payable by unitholders of deferred sales charge mutual funds, the sales commission of which was financed by the Corporation, are recognized as revenue on the trade date of the redemption of the applicable mutual fund securities. Deferred sales commissions Commissions paid on sales of deferred sales charge mutual funds represent commissions paid by the Corporation to bro- kers and dealers, and are recorded on the trade date of the sale of the applicable mutual fund securities. These commis- sions are deferred and amortized over 36 months from the date recorded. 29 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Foreign currency transactions Foreign currency accounts are translated into Canadian dollars as follows: At the transaction date, each asset, liability, revenue or expense is translated into Canadian dollars by the use of the exchange rate in effect on that date. At the year-end date, monetary assets and liabilities are translated into Canadian dollars by using the exchange rate in effect at that date and the resulting foreign exchange gains and losses are included in income. Goodwill Goodwill is recorded at cost less accumulated amortization. Amortization is provided on a straight-line basis over 40 years. Earnings and operating cash flow per share Earnings and operating cash flow per share have been computed using the weighted average number of common shares outstanding. Fully diluted earnings and operating cash flow per share have been computed using the weighted average number of common shares outstanding assuming exercise of stock options. Deferred lease inducement Lease inducements are deferred and amortized over the term of the lease. 2. OPERATIONS The Corporation is incorporated under the laws of Ontario. The primary business of the Corporation is the marketing, management and administration of the C.I. Mutual Funds and the C.I. Segregated Funds [the “Funds”] which consists of the following Funds: Fund Month of establishment of Fund October, 1981 February, 1986 July, 1987 October, 1990 September, 1991 September, 1991 August, 1992 August, 1992 January, 1993 January, 1993 January, 1993 August, 1993 August, 1993 September, 1993 September, 1993 June, 1994 September, 1994 October, 1994 October, 1994 January, 1995 October, 1995 June, 1996 June, 1996 June, 1996 June, 1996 October, 1996 October, 1996 C.I. Pacific Fund C.I. Global Fund C.I. Sector Fund Limited C.I. Money Market Fund Hansberger European Fund C.I. Emerging Markets Fund C.I. World Bond Fund C.I. American Fund C.I. Canadian Balanced Fund C.I. Canadian Bond Fund C.I. Canadian Growth Fund C.I. Global Bond RSP Fund C.I. Global Equity RSP Fund C.I. Latin American Fund Hansberger Asian Fund C.I. Global High Yield Fund C.I. International Balanced Fund C.I. Canadian Income Fund C.I. International Balanced RSP Fund C.I. US Money Market Fund C.I. American RSP Fund Hansberger Value Fund Hansberger International Fund Hansberger Global Small Cap Fund Hansberger Developing Markets Fund Monarch Canadian Fund Monarch Dividend Fund 30 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Fund Month of establishment of Fund Monarch Canadian Resource Fund Harbour Fund Harbour Growth & Income Fund Harbour Explorer Fund C.I. American Segregated Fund C.I. Hansberger Value Segregated Fund C.I. Global Segregated Fund C.I. Money Market Segregated Fund C.I. Harbour Segregated Fund C.I. Harbour Growth & Income Segregated Fund April, 1997 June, 1997 June, 1997 October, 1997 October, 1997 October, 1997 October, 1997 October, 1997 October, 1997 October, 1997 In addition to management fees derived from the Funds, the Corporation recovers administrative expenses incurred on behalf of the Funds relating to their operation. The Corporation employs the services of various investment advisers to act as advisers with respect to the investment port- folios of the Funds. In certain cases, the Corporation has granted the rights to arrange for the distribution of the securities of the Funds sold on a deferred sales charge basis to certain limited partnerships [note 3] and C.I. FEES Trust [the “Trust”] [note 4]. In addition to commissions paid to dealers on the sale of securities of the Funds by the Corporation, certain limited part- nerships and the Trust, the Corporation pays fees [“trailer fees”] to dealers to provide ongoing services to investors in Fund securities. These trailer fees range up to 1% per annum of the average net asset value of the underlying securities of the Funds and are payable monthly or quarterly. 3. LIMITED PARTNERSHIPS During the period up to January 21, 1994 and from June 10, 1994 to December 31, 1994, selling commissions on sales of securities of the Funds under the deferred sales charge method were financed by various limited partnerships. In return, the limited partnerships receive any redemption fees paid with respect to the related securities and the Corporation is obligated to pay the limited partnerships an annual fee of up to 0.6% of the net asset value of the securities sold so long as such securities remain outstanding and the applicable partnership has not been wound up. As at May 31, 1998, the net asset value of securities of the Funds financed by the limited partnerships was $1,985 million [1997–$2,211 million]. 4. C.I. FEES TRUST During the period January 21, 1994 to June 9, 1994, selling commissions on sales of securities of the Funds under the deferred sales charge method were paid by the Trust which the Trust financed by the issuance of notes repayable with inter- est over a period of 7 years. The notes mature on February 1, 2001 and the interest rate on the notes is 6.65%. The out- standing balance of the notes at May 31, 1998 is $29,128,525 [1997 - $38,487,051]. The Trust has assumed responsi- bility for providing transfer agency functions, accounting services, daily valuation and investor reporting services for the securities financed. In return, the Trust receives any redemption fees paid with respect to the financed securities and receives annual distribution and administrative fees totalling a maximum of 1.35% of the net asset value of the out- standing financed securities. The Trust has entered into a sub-administration agreement with the Corporation to provide the above services. In return, the Corporation receives a fee equal to the above fees earned by the Trust net of required interest and principal payments on the notes and any other expenses of the Trust. The Corporation’s fees from the Trust, which are recognized in income on an accrual basis, are not payable by the Trust unless certain financial ratios are maintained in the Trust. Additionally, 31 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S the Corporation has advanced $748,195 to the Trust as at May 31, 1998 [1997 - $2,000,000]. Recovery of this advance is also subject to the maintenance of certain financial ratios in the Trust. As at May 31, 1998 the Trust was in compli- ance with these ratios. On June 29, 1998, the Corporation purchased all of the outstanding notes of the Trust. The purchase price of $28,685,146 plus accrued interest was $364,486 in excess of the book value of the notes. 5. CAPITAL ASSETS Capital assets consist of the following: Computer hardware and software Office equipment Leasehold improvements Trademark Less accumulated depreciation and amortization Net book value 6. OTHER ASSETS Other assets consist of the following: Investment in limited partnership Contingency fund deposits Goodwill, net of accumulated amortization Long-term portfolio investment, at cost Other May 31, 1998 Accumulated depreciation and amortization $ 6,231,400 1,030,690 820,483 100,000 8,182,573 Cost $ 9,498,564 2,110,759 2,806,696 100,000 14,516,019 8,182,573 6,333,446 May 31, 1997 Accumulated depreciation and amortization $ 4,941,720 819,784 577,076 88,333 6,426,913 Cost $ 7,836,729 1,851,897 2,635,326 100,000 12,423,952 6,426,913 5,997,039 1998 $ 2,581,463 20,000 134,490 4,422,000 240,000 7,397,953 1997 $ 2,881,463 30,000 139,487 4,422,000 –– 7,472,950 Management believes that the cost of the long-term portfolio investment approximates its fair market value. 32 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 7. CREDIT FACILITY The Corporation has arranged a credit facility with a Canadian chartered bank of $30 million for the purpose of financ- ing sales commissions. As at May 31, 1998, this facility is undrawn. 8. SHARE CAPITAL Details with respect to share capital are as follows: Common shares Number of shares Stated value $ Authorized Unlimited preference shares Unlimited common shares Issued (reflects 2 for 1 stock split in April 1998) May 31, 1996 Share repurchase Exercise of stock options May 31, 1997 Issue of share capital Share repurchase Exercise of stock options May 31, 1998 32,959,526 (725,600 ) 550,864 32,784,790 5,080,000 (1,646,200 ) 653,132 36,871,722 29,841,080 (656,948) 3,011,852 32,195,984 100,330,000 (5,835,097) 3,732,492 130,423,379 On April 8, 1998, the Board of Directors approved a two-for-one stock split of the common shares of the Corporation. The stock split was effected by declaring a stock dividend of one additional common share for each common share of the Corporation issued and outstanding on the dividend record date of April 21, 1998. In November 1997, the Corporation completed a public offering of 5,080,000 common shares for gross proceeds of $100,330,000. The expenses of the offering net of income taxes have been charged to retained earnings. The Corporation has established an incentive stock option plan [the “Plan”] for the executives, key employees and direc- tors of the Corporation. The maximum number of common shares that may be issued under the Plan is 4,880,364. As at May 31, 1998, there are 3,498,714 shares reserved for issue on exercise of stock options. These options may be exer- cised at prices ranging from $5.375 to $19.50 per common share and expire at dates up to 2006. During fiscal 1998, 1,646,200 common shares [1997 – 725,600] were repurchased under a normal course issuer bid at an average cost of $14.06 per share [1997 – $6.79] for a total consideration of $23,143,347 [1997 – $4,925,231]. Retained earnings was reduced by $17,308,250 [1997 – $4,268,283] for the cost of the shares in excess of their stated value. 33 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 9. INCOME TAXES The components of the Corporation’s effective income tax provision rates are as follows: Combined Canadian federal and provincial income tax rate Increase (decrease) in taxes resulting from Large corporations tax Other Effective income tax rate 10. LEASE COMMITMENTS 1998 % 44.6 2.3 0.8 47.7 1997 % 44.6 1.3 (0.2 ) 45.7 The Corporation has entered into leases relating to the rental of office premises and computer equipment. The future minimum annual rental payments under such leases are as follows: Year ending May 31 1999 2000 2001 2002 2003 2004 and beyond $ 1,411,067 828,795 461,168 427,223 325,860 1,832,062 11. COMPARATIVE FINANCIAL STATEMENTS The comparative financial statements have been reclassified from statements previously presented to conform to the presentation of the 1998 financial statements. 34 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S C O R P O R A T E D I R E C T O R Y C.I. FUND MANAGEMENT INC. DIRECTORS AND OFFICERS G. Raymond Chang President, Chief Executive Officer and Director William T. Holland Executive Vice-President, Chief Operating Officer and Director Stephen A. MacPhail Executive Vice-President and Chief Financial Officer Michael J. Killeen General Counsel and Corporate Secretary A. Winn Oughtred Director George A. Mochizuki Corporate Controller George W. Oughtred Director Ronald D. Besse Chairman of the Board and Director David J. Riddle Director C.I. MUTUAL FUNDS INC. MANAGEMENT Executive G. Raymond Chang President and Chief Executive Officer Sales and Marketing Howard J. Atkinson Senior Vice-President, Sales David R. McBain Senior Vice-President, Sales Alain Ruel Senior Vice-President, Sales Shawn F. O’Brien Vice-President, Sales Operations and Corporate William T. Holland Executive Vice-President and Chief Operating Officer Stephen A. MacPhail Executive Vice-President and Chief Financial Officer Peter W. Anderson Executive Vice-President, Sales and Marketing Robert J. Costigan Senior Vice-President, Sales Carey W. McIntee Senior Vice-President, Sales David M. Rupert Senior Vice-President, Sales Julie A. Warren Vice-President, Sales Derek J. Green Senior Vice-President, Sales Jane A. Rogers Senior Vice-President, Marketing Thomas V. Caswell Vice-President, Sales Tracey C. Wood Vice-President, Sales K. Michael Kelly Senior Vice-President, Sales Sylvain Rivard Senior Vice-President, Sales Daniel V. Hall Vice-President, Sales Ian T. Madill Senior Vice-President, Administration Michael J. Killeen General Counsel and Corporate Secretary Lorraine P. Blair Vice-President, Human Resources Munir T. Issa Vice-President, Information Systems Douglas J. Jamieson Vice-President, Finance George A. Mochizuki Corporate Controller David C. Pauli Vice-President, Fund Accounting 35 C O R P O R AT E D I R E C T O R Y C O R P O R A T E I N F O R M A T I O N HEAD OFFICE Toronto 151 Yonge Street Seventh Floor Toronto, Ontario M5C 2W7 Tel: 416-364-1145 Toll Free: 1-800-268-9374 www.cifunds.com SALES OFFICES Vancouver 650 West Georgia Street Suite 2420 Vancouver, B.C. V6B 4N9 Tel: 604-681-3346 Toll Free: 1-800-665-6994 Calgary 926 5th Avenue SW Suite 780 Calgary, Alberta T2P 0N7 Tel: 403-205-4396 Toll Free: 1-800-776-9027 Montreal 1 Place Ville Marie Suite 2130 Montreal, Quebec H3B 2C6 Tel: 514-875-0090 Toll Free: 1-800-268-1602 Halifax 1969 Upper Water Street Suite 1705 Halifax, Nova Scotia B3J 3R7 Tel: 902-422-2444 Toll Free: 1-888-246-8887 REGISTRAR AUDITORS INVESTOR RELATIONS TRADING SYMBOL Montreal Trust Company 151 Front Street West Eighth Floor Toronto, Ontario M5J 2N1 416-981-9633 Ernst & Young Toronto-Dominion Centre P.O. Box 251 Toronto, Ontario M5K 1J7 Contact: Stephen A. MacPhail Head Office 416-681-6579 1-800-268-9374 C.I. Fund Management Inc. trades on The Toronto Stock Exchange under the symbol “CIX”. This Annual Report can be downloaded from C.I.’s website at www.cifunds.com 36 C O R P O R AT E I N F O R M AT I O N . r e p a p l d e c y c e r n o a d a n a C n i d e t n i r P . t n e m t r a p e D s e c i v r e S e v i t a e r C . I . C : n o i t c u d o r P & i n g s e D 1 5 1 Yo n g e S t r e e t , S e v e n t h F l o o r, To r o n t o , O n t a r i o M 5 C 2 W 7 w w w. c i f u n d s . c o m MU T UAL FUNDS

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