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
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