CI Financial
Annual Report 1999

Plain-text annual report

C . I . F U N D M A N A G E M E N T I N C . 1 9 9 9 A N N U A L R E P O R T growth n 02 Financial highlights n 04 Message to our shareholders n 08 Operating review n 16 Management’s discussion and analysis n 24 Management’s report to shareholders n 25 Consolidated financial statements n 29 Notes to consolidated financial statements n 35 Corporate directory n 36 Corporate information An uncompromising focus 1981 C.I. Funds 1987 C.I. Sector Fund 1993 100% RSP-eligible International Funds 1996 Hansberger Value Series C.I. Fund Management Inc. is a publicly-traded Canadian corporation that carries on The Annual and Special Meeting of Shareholders activities primarily through its wholly-owned subsidiaries, C.I. Mutual Funds Inc. and will be held on November 19, 1999 at 2:00 p.m. at the BPI Financial Corporation, with assets under management of $17 billion. Toronto II Room of the Toronto Hilton, Toronto, Ontario. on shareholder value. 1997 Harbour Funds 1997 C.I. Segregated Funds 1998 1999 Signature Funds BPI Mutual Funds MU T UAL FUNDS Historical Financial Highlights 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 sales 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* 1999 9,700 1,369 157.6 14.4 32.0 204.0 48.3 18.1 37.0 9.6 67.3 2.6 182.9 21.1 8.7 89.8 1998 8,302 1,189 ** 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 64.4 0.25 2.51 126.6 36,055,115 0.24 1.80 140.2 36,871,722 *adjusted for 2 for 1 stock dividend in April 1998 **does not include $286 million in sales of the closed-end DDJ Canadian High Yield Fund Assets Under Management Net Sales Total Revenues [billions of dollars; years ended May 31] [millions of dollars; years ended May 31] [millions of dollars; years ended May 31] 10 8 6 4 2 0 $9.7 2500 2000 1500 1000 500 0 $1,369 250 200 150 100 50 0 $204 93 94 95 96 97 98 99 93 94 95 96 97 98 99 93 94 95 96 97 98 99 n 2 Financial Highlights 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 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 0.29 1.37 55.8 32,784,790 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 Net Income Total Shareholders' Equity [millions of dollars; years ended May 31] [millions of dollars; years ended May 31] [millions of dollars; years ended May 31] 100 80 60 40 20 0 $89.8 12 10 8 6 4 2 0 $8.7 150 120 90 60 30 0 $126.6 93 94 95 96 97 98 99 93 94 95 96 97 98 99 93 94 95 96 97 98 99 n 3 Financial Highlights The Executive Committee: G. Raymond Chang, Stephen A.MacPhail, Peter W. Anderson, William T. Holland Dear Shareholders, Fiscal 1999 was signified by an uncompromising A key factor supporting C.I.’s growth has been our focus on growing shareholder value. This is extensive line-up of 100% RSP-eligible internation- consistent with our corporate objectives of aggres- al funds. Originally established by C.I. in 1993, total sively growing C.I.’s assets while managing our assets in these funds exceeded $1.5 billion by business in a fiscally responsible manner. the end of fiscal 1999 and established C.I. as the industry leader in this product. As a result, C.I.’s assets under management grew by $1.4 billion to finish the year at $9.7 billion and The growth in C.I.’s assets under management continue C.I.’s strong record of double-digit asset was reflected in C.I.’s fiscal results. Revenues growth since 1990. rose by $23 million to $204 million, operating cash flow increased 39% to $90 million, operating Net sales increased 15% from the prior year to margins were among the highest in the industry, $1.4 billion, even though the industry trend saw net and C.I. continued to be debt-free. sales down approximately 50%. The momentum in C.I.’s net sales strengthened throughout the C.I. expanded its investment management expertise year, with C.I. currently ranking second among all and now includes outstanding in-house investment Canadian mutual fund companies. managers for C.I.’s domestic and international n 5 Message to Our Shareholders “ . . . C O N T I N U E S C . I . ’ S S T R O N G R E C O R D O F products. From a base of essentially zero only three $17 billion. The net sales of the combined com- years ago, over 70% of C.I.’s funds are now managed panies are second-highest in the Canadian internally. mutual fund industry. The cost synergies being achieved by the merger of BPI's operations are Recently, C.I. announced its intention to form C.I. significant and are expected to improve C.I.’s Global Advisors LLP in partnership with William financial results immediately. Sterling (formerly of Credit Suisse Asset Management) and his global asset management As we look forward to the remainder of fiscal 2000, team. In addition, recently-acquired BPI Global C.I. is firm in its resolve to continue to grow the com- Asset Management LLP in Orlando, Florida, whose pany. The management team holds a significant global funds have provided exceptional returns to equity stake in C.I., and our actions reflect the inter- Canadian investors, further strengthens C.I.’s ests of all shareholders. Our performance in fiscal in-house international management. 1999 is continued evidence that we are on the right track and we expect that the growth in our assets C.I. capped this successful year with the acqui- and profitability continues well into the future. sition of BPI Financial Corporation in August 1999, and the effect has been substantial. Combined total assets under management are October 6, 1999 G. Raymond Chang [signed] President and Chief Executive Officer William T. Holland [signed] Executive Vice-President and Chief Operating Officer n 6 Message to Our Shareholders D O U B L E - D I G I T A S S E T G R O W T H S I N C E 1 9 9 0 . ” $19.35 CIX Share Price [as at May 31] 20 15 10 5 0 '94 '95 '96 '97 '98 '99 CIX vs. TSE 300 Index Total Return [as at May 31] 400 350 300 250 200 150 100 50 0 CIX $368 TSE $175 '94 '95 '96 '97 '98 '99 n 7 Message to Our Shareholders Operating Review Environment In fiscal 1999, overall assets under management in recorded as such, drew investments that would the mutual fund industry grew by only 7% to total normally be recorded by the mutual fund industry. $346 billion at May 31, 1999. Most of this growth The investment of maturing GICs into mutual funds was represented by industry net sales of had far less effect than in the past five years, while $24.3 billion as equity markets were generally uncertainty about financial markets, especially unchanged from the prior year. This sharp decline Year 2000 concerns, has increased the reluctance in industry net sales was a major shift from the of investors. These factors combined to create a prior fiscal year. 50% decline in net industry mutual fund sales compared to the previous year. The year also saw two other major shifts in the mutual fund industry; increased sales concentra- The overall decline in mutual fund sales affected tion among the larger companies; and investor fund companies unevenly. Net sales continued to preference for global/international equities, espe- be concentrated among a select group of mutual cially 100% RSP-eligible products. fund companies, with other fund companies expe- The first shift, a reduction in industry net sales, many companies showed net sales declines well in was due to several factors. A proliferation of new excess of the average 50% industry reduction over riencing flat net sales or net redemptions. In fact, products, especially proprietary products of the previous year. investment dealers and financial planners that are essentially like mutual fund products but do not get The second shift, sales concentration among the n 8 Operating Review 1999 Growth Rate In Assets 1999 Growth Rate In Net Sales [year ended May 31, 1999] [year ended May 31, 1999] 17% 20 15 10 5 0 7% 15% 20 10 0 -10 -20 -30 -40 -50 -50% All IFIC Members C.I. All IFIC Members C.I. C.I. Funds Geographic Allocation C.I. Funds Asset Profile [as of September 30, 1999] [as of September 30, 1999] Closed-End Funds 2% Labour-Sponsored Funds 4% Segregated Funds 4% Institutional 8% Mutual Funds 82% Money Market/Cash 16.0% Canada 34.1% Other 0.7% Latin America 1.2% Far East 3.4% Japan 7.4% Europe 12.2% U.S.A. 25.0% “ T H E O N L Y M A J O R M U T U A L F U N D C O M P A N Y T O N E V E R E X P E R I E N C E A S I N G L E M O N T H O F N E T R E D E M P T I O N S T H R O U G H O U T T H E 1 9 9 0 S . ” larger fund companies, is one of the most dramatic continually throughout the RSP season. C.I. has changes in the business over the last decade. In been offering 100% RSP-eligible international funds the early 1990s, many small mutual fund companies since 1993 and was able to successfully respond could effectively compete for sales as shelf space to the demand for 100% RSP-eligible international was expanding and inflows of net money into funds throughout the 1999 RSP season. The rest mutual funds were very high. That has changed. of the mutual fund industry has recently responded Now, only larger, well-capitalized mutual fund to this demand by developing and launching companies have the financial strength to market similar products. effectively, the diversity to be attractive to invest- ment dealers and financial planners, and the Sales and Marketing profile to command the attention of a distribution In fiscal 1999, C.I. outpaced the industry both in asset network that is only willing to promote a limited growth and sales, resulting in a 12% market share number of fund families. gain. C.I.'s assets under management increased 17% to $9.7 billion, a growth rate more than double This change is driving the current industry consoli- the average industry growth of 7%. C.I.'s net sales of dation that has been forecast for many years. $1.4 billion reflected an increase of 15% over the Smaller firms faced with limited sales growth and prior year, dramatically ahead of the average 50% rising costs are finding it increasingly difficult to decline in net sales across the industry. justify their independent status. We expect more industry consolidation over the foreseeable future. C.I.'s success in fiscal 1999 can be attributed to a number of factors. C.I. has actively followed its The third shift was the strong demand for strategy of offering a wide range of products to global/international equities, especially 100% investors through one of the largest sales forces in RSP-eligible products. In the fall of 1998, C.I. had all Canada. As brokers and financial planners have three of its Canadian equity managers providing reduced the number of fund companies they top-quartile performance. Generally, this would consider, C.I. continues to aggressively maintain have led to strong sales the following RSP season. crucial shelf space. However, increased investor preference for global products, particularly 100% RSP-eligible internation- C.I.'s broad product range is market driven. First al funds, began in November of 1998 and grew and foremost, we create products based on the n 10 Operating Review Fund Families C.I. FUNDS A diverse family of Canadian and international equity, bond, balanced and money market funds C.I. SECTOR FUND Tax-deferred compounding in classes of Canadian and international shares HARBOUR FUNDS Long-term value in Canadian equity, balanced, mid-cap and small-cap funds 100% RSP-ELIGIBLE INTERNATIONAL FUNDS Global reach with full RSP eligibility SIGNATURE FUNDS Low-volatility investments for long-term growth HANSBERGER VALUE SERIES Long-term value in global equities C.I. GUARANTEED INVESTMENT FUNDS (GIFs) Solid guarantees and a proven approach to growth BPI FUNDS Canadian and global equity, balanced, income and money market funds constant feedback received from clients. Instead specific sector funds. C.I. continues to be the mar- of telling investors what is good for them, our phi- ket leader in 100% RSP-eligible international funds losophy is the opposite. We give our clients the with $2 billion of assets under management in ability to choose among different investment types, these funds alone (as at October 1999). investment styles, management themes, specific industries, geographic investments, segregated C.I. recently launched a new customized wrap products, and tax-efficient investments. This has program called the Insight Program™. This product made C.I. the only major mutual fund company was developed so financial planners could offer to never experience a single month of net customized investment pools to their higher net redemptions throughout the 1990s. worth clients. Insight™ is a comprehensive wealth management program, providing financial plan- C.I. continued to expand its product offerings in ners with a complete package including asset fiscal 1999. Among its domestic funds, C.I. added allocation, investment management, and adminis- the Signature Funds managed by Wally Kusters to tration. This diversification into non-traditional complement the family of C.I. funds managed by mutual fund products is key to maintaining J. Zechner Associates and the Harbour Funds relations with our distribution network whose managed by Gerald Coleman and Stephen Jenkins. clients require innovative and attractive alternatives. In addition, C.I. expanded its segregated fund line- up with C.I. Guaranteed Investment Funds created Portfolio Management with Transamerica Life Insurance Company of Canada. In fiscal 1998, C.I.'s in-house management of assets commenced with the launch of the Harbour Funds Among global products, C.I. increased its offerings under Gerald Coleman. By May 1998, approxi- with C.I. Global Boomernomics® Fund, C.I. Global mately 17% of C.I.'s assets under management Energy Fund, C.I. Japanese Fund, and C.I. Global were managed in-house. Since that date, two Biotechnology Fund. events have significantly increased C.I.'s in-house C.I.'s popular 100% RSP-eligible international managed assets. funds were improved to make them the most cost- First, C.I. has announced its intention to form C.I. effective in the industry. The product line was also Global Advisors LLP, in partnership with William expanded to include a number of C.I.'s industry- Sterling and his global management team, to n 12 Operating Review Portfolio Management D O M E S T I C A D V I S E R S G L O B A L A D V I S E R S Harbour Funds Lead Managers Gerald Coleman and Stephen Jenkins of C.I. Mutual Funds Inc. Assets of $1.4 billion in seven funds C.I. Funds Advised by C.I. Global Advisors LLP Assets of $3.9 billion in six funds Signature Funds Lead Manager Wally Kusters of C.I. Mutual Funds Inc. Assets of $0.8 billion in twelve funds BPI Global Funds Advised by BPI Global Asset Management LLP Assets of $1.9 billion in six funds C.I. Funds Advised by J. Zechner Associates Inc. Assets of $1.7 billion in six funds Hansberger Value Series Advised by Hansberger Global Investors, Inc. Assets of $0.6 billion in six funds BPI Funds Advised by BPI management team, Wally Kusters and C.I. Mutual Funds Inc. Assets of $2.4 billion in seven funds C.I. Funds Primarily industry-specific funds advised by Credit Suisse Asset Management, LLC Assets of $2.0 billion in fifteen funds “ T H E C O M B I N E D S A L E S O F C . I . A N D B P I I N C A L E N D A R 1 9 9 9 A R E C U R R E N T L Y T H E S E C O N D - H I G H E S T I N T H E I N D U S T R Y . . . ” manage global and other products. Majority- million), closed-end funds ($133 million), and insti- owned by C.I., $3.9 billion (as at October 1999) of tutional assets ($1,250 million). C.I.'s assets under management are managed by C.I. Global Advisors including many of C.I.'s This acquisition has made C.I. Fund Management Inc. fastest-growing funds. the 10th-largest mutual fund company in Canada, and increased C.I.’s market share by over 40%. The In conjunction with C.I. Global Advisors, Trilogy combined sales of C.I. Mutual Funds and BPI Mutual Advisors, LLC has been formed to provide money Funds in calendar 1999 (as of October 1999) are the management services to U.S. and international second-highest in the industry and the highest institutions, pension funds, and mutual funds. C.I. among the publicly-traded companies. is a significant equity participant and we expect the exceptional profile of William Sterling to help This acquisition was attractive for a number of this business grow rapidly. reasons: Second, C.I. acquired BPI Financial Corporation, a] C.I. and BPI had similar operating structures. all of the assets of which are managed in-house This combination creates the opportunity or through majority-owned BPI Global Asset for significant cost savings and improved Management. Following the completion of this acqui- available cash flow from the BPI assets. sition in August, 1999, C.I. now has approximately b] BPI offered a line-up of international funds 70% of total assets under in-house management. managed by Orlando-based BPI Global Asset Management with substantial sales momen- Acquisition of BPI Mutual Funds tum due to their strong performance. In August 1999, C.I. Fund Management Inc. acquired c] BPI’s majority stake in BPI Global Asset all the shares of BPI Financial Corporation and its Management also included a fast-growing 100% stake in BPI Capital Management Corporation. institutional asset management business. At the time of the acquisition, BPI Capital Management Over the course of fiscal 2000, C.I. will be fully Corporation had approximately $6.3 billion in assets integrating the operations of BPI into C.I., including under management represented by mutual funds all administrative functions, to provide incremental ($4,400 million), labour-sponsored funds ($485 benefits to shareholders in the current year. n 14 Operating Review Acquisition of BPI Mutual Funds C.I. Assets Under Management [billions of dollars] $15.6 20 15 10 5 0 May 31'98 May 31'99 Sept. 30'99 *excludes $1.3 billion in institutional assets C.I. Market Share C.I. Net Sales [as percentage of IFIC members] [millions of dollars] 5 4 3 2 1 0 4.01% 250 200 150 100 50 0 $203.3 May 31'98 May 31'99 Aug. 30'99 Jun'99 Jul'99 Aug'99 Sept'99 Management’s Discussion and Analysis SUMMARY OF FINANCIAL POSITION Years ended May 31, [millions of dollars except per share amounts] 1999 1998 % change 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 sales commissions Other items Income before taxes Net income Earnings per share Operating cash flow Operating cash flow per share 154.1 14.4 3.5 32.0 204.0 48.3 18.1 37.0 0.6 9.6 67.3 2.0 21.1 8.7 0.25 89.8 2.51 140.3 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 64.4 1.80 Shareholders’ equity, end of year 126.6 140.2 ASSET MANAGEMENT DATA Average net assets under management Total assets under management, end of year Total gross sales Total redemptions Total net sales 8,086 9,700 2,611 1,242 1,369 7,175 8,302 2,420 1,231 1,189 +9.8 +71.4 0.0 +10.7 +12.6 +3.9 +11.0 +6.0 -91.9 -15.0 +42.3 +81.8 +29.4 +1.2 +4.2 +39.4 +39.4 -9.7 +12.7 +16.8 +7.9 +0.9 +15.1 n 16 Management’s Discussion and Analysis OVERVIEW OF BUSINESS The principal business of C.I. Fund Management Inc. is the management, marketing, distribution, and administration of mutual funds and other investment products for Canadian investors through its wholly- owned subsidiary C.I. Mutual Funds Inc. (“C.I.”). At May 31, 1999, C.I. managed $9.7 billion in assets in 58 domestic and international mutual funds, 23 seg- regated funds, one labour-sponsored fund, and one closed-end fund. C.I. markets its funds to Canadian retail investors through approximately 15,000 invest- ment and mutual fund dealers representing over 650,000 retail investment accounts owning C.I. mutual funds and over 3,500 life-licensed insurance representatives with agreements allowing for the sale of C.I.’s segregated funds. In order to offer a broad range of domestic and inter- national funds to Canadian investors, C.I. utilizes the expertise of external and internal investment advisers. The investment advisers to C.I.’s international mutual funds are Credit Suisse Asset Management (formerly BEA Associates) of New York and Hansberger Global Investors of Ft. Lauderdale. The advisers to C.I.’s domestic funds are J. Zechner Associates and C.I.’s in- house asset management division, both of Toronto. The investment adviser for C.I.’s labour-sponsored fund, the C.I. Covington Fund, is Covington Capital Corporation, Toronto and for DDJ Canadian High Yield Fund (a closed-end investment trust) is DDJ Capital Management, LLC, Wellesley, Massachusetts. Increasing C.I.’s assets under management requires maintaining an attractive product line in combination with good fund performance and continuous support to investment dealers, mutual fund dealers, and insurance agents. Over the years, C.I. has consistent- ly developed new products for investors such as the sector-specific funds, global funds, segregated funds, and a labour-sponsored fund. In fiscal 1999, C.I. introduced three major new prod- ucts. In July 1998, C.I. launched the C.I. Global Boomernomics® Fund, whose investment mandate is based upon the changing global demographics. In December 1998, the Signature Canadian Fund and the Signature Canadian Balanced Fund were launched. Wally Kusters of C.I. is the primary invest- ment adviser to these funds. In February 1999, C.I. launched the C.I. Guaranteed Investment Funds in conjunction with Transamerica Life Insurance Company of Canada. These funds are similar to mutual funds, yet offer guaranteed principal at death of the annuitant or maturity of the investment. These funds complement the C.I. Segregated Funds 1.02% Cash Flow Per Share Net Operating Margin [years ended May 31] [as a % of assets under management; years ended May 31] 3.0 2.5 2.0 1.5 1.0 0.5 0 $2.51 2.0 1.0 0.8 0.6 0.4 0.2 0 93 94 95 96 97 98 99 93 94 95 96 97 98 99 n 17 Management’s Discussion and Analysis launched in the prior year. For both families of funds, the guarantees are the responsibility of the insurance company directly or through a major international reinsurer to eliminate C.I.’s exposure to this risk. REVENUES The majority of C.I.’s revenues are earned from the management services it provides as fund manager. The key determinant of C.I.’s revenue is the level of assets under management which, in turn, is determined by market returns and net sales (gross sales less redemp- tions) of the funds. Management fees charged by C.I. to the funds range up to 2.25% of the average net asset value of the funds. The mix of funds managed by C.I. will also affect revenues. Emerging markets funds tend to generate the highest management fees with bond and money market funds being the lowest. The mix of C.I.’s funds is determined by the relative performance of the funds and net sales of each of the funds. A key factor influencing net sales of the funds is fund performance. In addition, prevailing market condi- tions help determine the effectiveness of sales and marketing campaigns with investment and mutual fund dealers. C.I. also earns revenues from redemption fees. Investors are subject to redemption fees when mutual funds are purchased on a deferred sales charge basis and the investment is redeemed within seven years. Redemption fees are calculated as a percentage of the initial value of the funds sold and start at 5.5%, declining to zero after seven years. C.I. is responsible for the administration of the funds and incurs expenses on behalf of the funds. C.I. recov- ers most operating expenses by charging an adminis- tration fee to the funds which is recognized as revenue. As these revenues represent a recovery of expenses, they do not affect the overall profitability of C.I. C.I.’s third party administration business, through its subsidiary InfoWise Inc., generates revenue by provid- ing back office administrative services to other finan- cial services companies. At May 31, 1999, InfoWise had agreements with a number of outside parties. During fiscal 1999, revenues from InfoWise were not material to C.I.’s overall business. EXPENSES C.I. incurs certain key expenses in conjunction with the management, marketing, and distribution of the funds. These expenses constitute the majority of its expenses outside those operational expenses incurred on behalf of, and recovered from, the funds. These expenses include investment management expenses, Management Fees Net SG&A Expense [as a % of average assets under management; years ended May 31] [as a % of average assets under management; years ended May 31] 2.00 1.50 1.00 0.50 0 1.91% 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0 0.20% 93 94 95 96 97 98 99 93 94 95 96 97 98 99 n 18 Management’s Discussion and Analysis marketing expenses, trailer fees and selling commis- sions paid to financial advisers. Advisory fees paid to investment advisers are generally paid on the basis of a percentage of assets under management. C.I.’s advisers have different fee agreements and therefore the mix of funds will affect the overall expense level. Operating expenses, net of those recovered from the funds, (referred to as net selling, general and adminis- trative expenses) are primarily marketing expenses. In general, marketing expenses are managed in propor- tion to C.I.’s assets under management and increase as assets under management increase. Trailer fees are paid out to investment and mutual fund dealers and life insurance agents to assist them in pro- viding ongoing support to the investors in C.I. funds. Trailer fees are calculated as a percentage of assets and will vary with overall assets under management. C.I. monitors its operating profitability by measuring the operating margin calculated as a percentage of assets under management. C.I.’s operating margin is defined as management fees from C.I.’s funds less investment adviser fees, trailer fees, and selling, gener- al and administrative expenses net of expenses recov- ered from the funds, calculated as a percentage of average assets under management. This allows C.I. to manage profitability when changes in the market value of assets under management affect revenue flows and permits adjustments to discretionary expenditures to maintain its margins. Commissions paid to investment and mutual fund dealers and life insurance agents on the sale of funds on a deferred sales charge basis vary directly with the level of sales. For financial reporting purposes, these deferred sales commissions are amortized evenly over the 36 months immediately following the sale of the funds. C.I. has financed sales commissions with its own cash resources since January 1, 1995. Commissions incurred prior to January 1, 1995 were financed by limited partnerships or a securitization vehicle. The expenses to C.I. for commissions financed by limited partnerships are reported as distribution fees paid to limited partnerships and are calculated as a percentage of the assets where commissions were specifically financed by the limited partnerships. The effective amortization period for commissions financed by limited partnerships is the life of the limited partnership of 15 to 20 years. The expense to C.I. for commissions financed by the securitization is reported as net fees paid to securitiza- Trailer Fees Investment Adviser Expenses [as a % of average assets under management; years ended May 31] [as a % of average assets under management; years ended May 31] 0.5 0.4 0.3 0.2 0.1 0 0.46% 0.5 0.4 0.3 0.2 0.1 0 0.22% 93 94 95 96 97 98 99 93 94 95 96 97 98 99 n 19 Management’s Discussion and Analysis tion and reflects an effective amortization period for the commissions of seven years, the life of the securi- tization vehicle. In June 1998, C.I. repurchased all the outstanding notes issued by the securitization vehicle. The remaining effective unamortized commissions are being amortized over the period ending February 28, 2001 and are included in the amortization of C.I.’s deferred sales commissions. YEAR ENDED MAY 31, 1999 COMPARED WITH YEAR ENDED MAY 31, 1998 Assets under management (including C.I. Covington Fund and DDJ Canadian High Yield Fund) increased from $8,302 million at May 31, 1998 to $9,700 mil- lion at May 31, 1999, an increase of $1,398 million or 17%. Average mutual fund assets under management were $8,086 million in fiscal 1999, an increase of 13% from $7,175 million for the same period in fiscal 1998. As most of C.I.’s revenues and expenses are based on assets throughout the year, average asset lev- els are critical to the analysis of C.I.’s financial results. The growth in assets under management was a result of net sales (gross sales less redemptions) of $1,369 million and an overall performance increase of $29 million. This compares to fiscal 1998, when the annual growth in assets under management was $1,786 million or 27%, comprised of net sales of $1,189 million, $286 million from the sale of the closed-end DDJ Canadian High Yield Fund and an overall performance increase of $311 million. Gross sales of the funds were $2,611 million for the year ended May 31, 1999 compared to $2,420 million for the same period in 1998. (1998 sales do not include $286 million in sales of the closed-end DDJ Canadian High Yield Fund that are included in C.I.’s assets under management.) Net sales (gross sales less redemptions) were $1,369 million for the year ended May 31, 1999 compared to $1,189 million for the same period in 1998, an increase of 15%. The increase in C.I.’s net sales from 1998 reflected the increased popularity of C.I.’s global and 100% RSP- eligible international funds. Redemptions of C.I.’s funds were $1,242 million in fiscal 1999 compared to $1,231 in fiscal 1998. Overall, C.I.’s redemption rate as a percentage of average assets under management declined from 17.3% in fiscal 1998 to 15.5% in fiscal 1999. Of the C.I. funds financed on a deferred sales charge basis (which represented 85% of mutual fund assets at May 31, 1999) the redemption rate was 8.4% in fiscal 1999, down from 9.4% in fiscal 1998. Total revenues increased to $204.0 million for the year ended May 31, 1999 from $181.1 million for the Cash, Short-term Investments Portfolio Value of Redemption Fees [millions of dollars; years ended May 31] [millions of dollars; years ended May 31] $253 80 70 60 50 40 30 20 10 0 300 250 200 150 100 50 0 $20.9 93 94 95 96 97 98 99 n/a n/a 95 96 97 98 99 n 20 Management’s Discussion and Analysis same period in 1998. Revenues from management fees rose by 10% to $154.1 million for the year ended May 31, 1999 from $140.3 million in 1998. As a per- centage of average assets under management, manage- ment fees charged to mutual funds were 1.91% for fiscal 1999, down from 1.96% in fiscal 1998, due to changes in asset mix. Administration fees and other income (which include administrative fees, interest, and investment income) decreased from $3.5 million to $3.4 million due to higher investment gains and interest income earned in fiscal 1998. Though redemptions of C.I.’s funds were unchanged in fiscal 1999 from 1998, redemption fees rose from $8.4 million in fiscal 1998 to $14.4 million due to C.I. initiating the self-funding of commissions in January 1995 and therefore retaining the right to any redemp- tion fees paid. By having repurchased C.I.’s securiti- zation vehicle, C.I. FEES Trust, C.I. gained unfettered rights to all redemption fees on those assets. Revenues represented by expenses recovered from the funds rose to $32.0 million for the year ended May 31, 1999 from $28.9 million in 1998. This increase was from higher assets under management and the cost of continuing to improve C.I.’s administrative systems, including costs associated with ensuring all systems are Year 2000 compliant. Net fees paid to C.I.’s securitization vehicle (the “Trust”) (which represents principal and interest pay- ments and certain expenses of the Trust, net of redemption fees) were $556,000 for the year ended May 31, 1999 compared to $7.4 million for the year ended May 31, 1998. The decrease reflects C.I. hav- ing repurchased the securitization in full in June 1998. Total net operating expenses (net selling, general and administrative expenses, investment adviser fees, and trailer fees) for the year ended May 31, 1999 increased by $2.5 million or 4% to $71.3 million from $68.8 million in 1998. Selling, general and administrative expenses (net of expenses recovered from the funds for activities carried out in support of the funds) were $16.2 million, down from $17.6 million in the prior fiscal year. This reduction in costs was from C.I. focussing more of its marketing expenditures on sales staff and less on gen- eral advertising in combination with not having the costs incurred in fiscal 1998 associated with launching the Harbour Funds and the C.I. Segregated Funds. As a percentage of assets under management, the net sell- ing, general and administrative expenses were 0.20% in fiscal 1999, down from 0.24% in fiscal 1998. $86.2 Percentage of Assets Self-financed DSC Financed [years ended May 31] [millions of dollars; years ended May 31] 80 70 60 50 40 30 20 10 0 65% 100 80 60 40 20 0 94 95 96 97 98 99 n/a n/a 95 96 97 98 99 n 21 Management’s Discussion and Analysis Investment adviser fees increased from $16.3 million in fiscal 1998 to $18.1 million in fiscal 1999 due to increased assets under management. However, as a percentage of average assets under management, investment adviser fees were 0.22% versus 0.23% in fiscal 1998 because of higher levels of in-house man- aged funds. Trailer fees increased from $34.9 million to $37.0 million due to increased assets under man- agement. As a percentage of average assets, trailer fees were 0.46% of assets under management at May 31, 1999 compared to 0.49% in the prior fiscal year. C.I.’s operating margin (measured as management fees less the net operating expenses described above, as a percentage of mutual funds under management) was 1.02%, up from 1.00% in the prior fiscal year. Distribution fees to limited partnerships totalled $9.6 million, down from $11.3 million in fiscal 1998. As a percentage of average assets, distribution fees to lim- ited partnerships declined from 0.16% to 0.12%, reflecting a lower percentage of C.I.’s overall assets under management financed by limited partnerships. The marginal cost of the distribution fees to limited partnerships at May 31, 1999 was approximately 0.10% of assets under management as these assets continue to decline on a percentage basis relative to C.I.’s self-financed assets. Amortization of deferred sales commissions represent- ed C.I.’s largest expense increase, rising from $47.3 million in fiscal 1998 to $67.3 million in fiscal 1999. The $67.3 million amortization in fiscal 1999 includes $4.9 million in amortization of the excess of the purchase price over fair value of net assets acquired for the acquisition of the Trust (nil in fiscal 1998). Net income for the year ended May 31, 1999 was $8.7 million compared to $8.6 million in the same period in 1998. Though operating earnings were up substantially from fiscal 1998, the impact of the additional $20 million in amortization of sales com- missions had the effect of reducing net earnings. FINANCING AND LIQUIDITY C.I.’s capital requirements are primarily to fund com- missions arising from the sale of funds on a deferred sales charge basis. In fiscal 1999, C.I. financed $86.2 million in sales commissions, up from $84.2 million in fiscal 1998. In addition, during fiscal 1999, C.I. used $25.1 million to repurchase 1.8 million common shares at an average price of $13.62 per share. This compares to $23.1 million used to repurchase 1.6 mil- lion common shares at an average price of $14.06 per share in fiscal 1998. On May 31, 1999, the closing price per share for C.I. common shares was $19.35. In addition, in June 1998, C.I. repurchased the notes issued under its securitization vehicle at a total cost of $28.7 million. These funding requirements were met by cash, short- term investments and marketable securities of $67.9 million at May 31, 1998, operating cash flow in fiscal 1999 of $89.8 million (up from $64.4 million in 1998) and the issuance of 1.0 million common shares from the exercise of stock options at an average price of $6.28 per share for total gross proceeds of $6.5 million. At May 31, 1999, C.I. had cash, short-term invest- ments and marketable securities totalling $20.9 million ($67.9 million at May 31, 1998) and an undrawn $75 million line of credit with a Canadian chartered bank. Since January 1, 1995, C.I. has used internally gener- ated cash flow, proceeds from the issue of common shares, and existing cash resources to finance sales commissions. As a result, by May 31, 1999, 67% of mutual fund assets were financed by C.I.’s cash resources, up from 61% financed by cash resources at May 31, 1998. C.I. has no debt associated with these self-financed assets. The self-financed assets had a cur- rent redemption value of $253 million ($7.02 per share) at May 31, 1999 compared to $203 million ($5.52 per share) at May 31, 1998. At May 31, 1999, 18% of C.I.’s assets were financed by limited partner- ships, down from 24% at May 31, 1998. The front- end load sales assets at May 31, 1999 were 15% of mutual fund assets under management, unchanged from the prior year. n 22 Management’s Discussion and Analysis the period June 1999 to December 1999, this will be done as part of C.I.’s previously scheduled software upgrading process. Contingency plans to deal with the Year 2000 issue are currently being developed and are expected to be in place by November 15, 1999. C.I. believes that, to the extent it is an operating expense of the company, the anticipated expenditures of any required remediation of such systems will not be mate- rial and that such remediation will be completed before such systems are at risk of a Year 2000 issue. C.I. is working with certain corporate affiliates and external service providers, upon which it is dependent, to ensure such affiliates and service providers are tak- ing steps to address their Year 2000 issues. Although C.I. is using reasonable efforts to monitor the Year 2000 compliance of its service providers, a failure of key service providers to address their Year 2000 issue in a timely manner may have a material adverse effect on C.I.’s ability to manage its operations. While C.I.’s efforts to address the Year 2000 issue are proceeding expeditiously, there can be no guarantee that deficiencies in the systems of other entities on which C.I. is dependent will not have an adverse effect on our operations. Although the Year 2000 issue is an additional business risk that must be taken into account when investing, C.I.’s investment advisers are considering the impact of the Year 2000 on their respective portfolios as one of the factors influencing investment decisions. Capital expenditures incurred during the year ended May 31, 1999 totalling $2.1 million were primarily for computer hardware and software related to the improvement of systems technology and additional space requirements. Depreciation charges on these assets are generally recoverable from the funds. OUTLOOK At July 6, 1999, C.I.’s total assets under management totalled $10,450 million, up 24% from the average level of assets in fiscal 1999. In June 1999, net sales of C.I.’s funds were $120 million, up 152% from June 1998. Should assets remain at this level or, as expect- ed, continue to grow during fiscal 2000, C.I.’s total revenues, operating cash flow and underlying prof- itability will increase significantly from fiscal 1999. THE YEAR 2000 ISSUE C.I. realizes the importance of the Year 2000 issue and has taken the necessary steps to address the problem. Like many organizations, C.I. is highly dependent on computer systems, both those that are operated inter- nally, as well as those operated by external service providers, to ensure optimal operations. C.I.’s Year 2000 project was initiated in 1997 to review its sys- tems and implement any procedures necessary to eliminate or significantly reduce the Year 2000 risk. The project has been staffed with highly skilled indi- viduals and supplied with the necessary technology. C.I.’s Year 2000 review included assessing the limited number of systems that are operated internally. Essentially all of C.I.’s Year 2000 testing was success- fully completed prior to June 30, 1999. Accordingly, while C.I. will continue to be involved in Year 2000 testing throughout the remainder of the year, its efforts will be focused mainly on continued participa- tion in industry-wide evaluations rather than its own internal testing. The primary systems used by C.I. are relatively new. All of C.I.’s mission critical systems are operated inter- nally, have been fully tested and are Year 2000 compli- ant. In addition, service contracts entered into by C.I. that involve computer systems generally include Year 2000 compliance provisions. While some of the com- mercial software used by C.I. will be replaced during n 23 Management’s Discussion and Analysis Management’s Report to Shareholders Management of C.I. Fund Management Inc. is responsible for the integrity and objectivity of the consolidated financial statements and all other information contained in the Annual Report. The consolidated financial statements 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 periodically and independently with management and the auditors to discuss the Corporation’s financial reporting 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 July 7, 1999 n 24 Management’s Report to Shareholders Consolidated Financial Statements 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, 1999 and 1998 and the consolidated statements of income and retained earnings (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Corporation's management. Our responsibil- ity 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 misstatement. 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, 1999 and 1998 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 2, 1999 Ernst & Young LLP [signed] Chartered Accountants n 25 Consolidated Financial Statements Consolidated Financial Statements CONSOLIDATED BALANCE SHEETS As at May 31, 1999 $ 1998 $ 9,285,190 11,647,511 5,883,685 1,537,266 28,353,652 –– 6,514,821 134,271,371 7,872,515 177,012,359 16,974,753 16,974,753 1,922,927 31,487,723 50,385,403 130,350,843 (3,723,887) 126,626,956 177,012,359 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 G. Raymond Chang [signed] William T. Holland [signed] Director Director ASSETS Current Cash and short-term investments 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 $99,559,772 [1998 - $86,814,096] 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 (deficit) Total shareholders' equity See accompanying notes On behalf of the Board: n 26 Consolidated Financial Statements Consolidated Financial Statements CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (DEFICIT) Years ended May 31, 1999 $ 1998 $ 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 REVENUE Management fees Administration fees and other income Expenses charged to mutual funds Redemption fees Total revenue Net fees paid to securitization [note 4] 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 issue expense, net of income taxes Cost of shares repurchased in excess of stated value [note 8] Dividends Retained earnings (deficit), end of year Earnings per share Fully diluted earnings per share See accompanying notes 154,085,314 3,448,846 32,039,431 14,405,728 203,979,319 (556,000) 203,423,319 48,280,548 18,089,245 36,970,991 9,637,888 67,325,751 2,004,448 182,308,871 21,114,448 956,086 11,411,953 12,368,039 8,746,409 9,731,713 –– (18,588,597) (3,613,412) (3,723,887) 0.25 0.24 n 27 Consolidated Financial Statements Consolidated Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended May 31, 1999 $ 1998 $ 8,746,409 1,911,048 11,411,953 67,325,751 380,000 89,775,161 (988,107) 88,787,054 (2,121,985) (5,162,294) (86,177,238) (24,288,365) (859,559) (118,609,441) –– (25,120,658) 6,459,525 –– (18,661,133) (3,613,412) (52,096,932) 61,382,122 9,285,190 2.51 2.32 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 related to operations Cash provided by operating activities INVESTING ACTIVITIES Additions to capital assets, net Purchase of marketable securities, net Sales commissions Purchase of C.I. FEES Trust notes, net of cash Other assets 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 n 28 Consolidated Financial Statements 8,550,611 1,585,701 6,549,437 47,344,212 380,000 64,409,961 2,750,447 67,160,408 (2,092,067) (2,184,897) (84,168,497) – (310,000) (88,755,461) 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 Notes to Consolidated Financial Statements MAY 31, 1999 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, InfoWise Inc., Canadian International GP Limited and C.I. Fund Services Inc. The accounts of C.I. FEES Trust [the "Trust"] have been consolidated from June 29, 1998. Hereinafter, the Corporation and its subsidiaries are referred to as the Corporation. Investment in limited partnership The investment in limited partnership is being amortized over its estimated life using a 10% annual diminishing balance basis. Amortization of the investment in limited partnership is included in other expenses in the consolidated statements of income and retained earnings (deficit). 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 and include investments in demand notes and C.I. Money Market Fund. Capital assets Capital assets are recorded at cost less accumulated depreciation and amortization. These assets are depreciated or amortized over their estimated useful lives as follows: Computer hardware Computer software Office equipment Leasehold improvements 30% diminishing balance or straight-line over four years 50% straight-line or straight-line over four years 20% diminishing balance 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. Administration 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 brokers and dealers, and are recorded on the trade date of the sale of the applicable mutual fund securities. These commissions are deferred and amortized over 36 months from the date recorded. n 29 Notes to Consolidated Financial Statements 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 which consist of the following: 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 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 Harbour Mid-Cap Fund n 30 Notes to Consolidated Financial Statements Fund Month of establishment of Fund C.I. Dividend Fund C.I. Canadian Resource Fund Harbour Fund Harbour Growth & Income Fund Harbour Explorer Fund C.I. Global Boomernomics® RSP Fund Signature Canadian Balanced Fund Signature Canadian Fund October, 1996 April, 1997 June, 1997 June, 1997 October, 1997 October, 1998 December, 1998 December, 1998 The Corporation also markets, manages and administers the C.I. Segregated Funds and the C.I. Guaranteed Investment Funds. 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 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 oblig- ated 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, 1999, the net asset value of securities of the Funds financed by the limited partnerships was $1,757 million [1998 - $1,985 million]. 4. C.I. FEES TRUST During the period from 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 interest over a period of 7 years. The notes mature on February 1, 2001 and the interest rate on the notes is 6.65%. The outstanding balance of the notes as at May 31, 1998 was $29,128,525. The Trust has assumed responsibility for provid- ing 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 annu- al distribution and administrative fees totalling a maximum of 1.35% of the net asset value of the outstanding 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 n 31 Notes to Consolidated Financial Statements an accrual basis, are not payable by the Trust unless certain financial ratios are maintained in the Trust. On June 29, 1998, the Corporation purchased all of the outstanding notes of the Trust for a purchase price of $28,685,146. This transaction, which conferred a beneficial interest in the Trust to the Corporation, has been accounted for as a purchase as follows: Net assets acquired, at fair value [including cash of $4,396,781] Tax benefit of unrecognized losses Excess of the purchase price over fair value of net assets acquired Purchase price $ 2,503,150 11,519,774 14,662,222 28,685,146 The excess of the purchase price over fair value of net assets acquired has been included in deferred sales commissions and is being amortized on a straight-line basis over the remaining term of the notes purchased. 5. CAPITAL ASSETS Capital assets consist of the following: Computer hardware and software Office equipment Leasehold improvements 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, 1999 Accumulated depreciation and amortization $ 7,705,864 1,249,051 1,068,268 10,023,183 Cost $ 11,060,939 2,440,696 3,036,369 16,538,004 10,023,183 6,514,821 May 31, 1998 Accumulated depreciation and amortization $ 6,231,400 1,030,690 820,483 8,082,573 Cost $ 9,498,564 2,110,759 2,806,696 14,416,019 8,082,573 6,333,446 1999 $ 2,281,463 20,000 129,493 4,422,000 1,019,559 7,872,515 1998 $ 2,581,463 20,000 134,490 4,422,000 240,000 7,397,953 The long-term portfolio investment represents an investment in a public company which had a quoted market value of $9,047,500 as at May 31, 1999. n 32 Notes to Consolidated Financial Statements 7. CREDIT FACILITY The Corporation has arranged a credit facility with a Canadian chartered bank for general corporate purposes for $75 million which expires on October 28, 1999. Amounts borrowed under this facility bear interest at prime or bankers' acceptance rates plus 0.375% to 0.625%, depending on the amounts borrowed and when the facility is drawn. The facility is secured by all property currently owned or acquired in the future by CIMF and a general guarantee by the Corporation. As at May 31, 1999 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, 1997 Issue of share capital Share repurchase Exercise of stock options May 31, 1998 Share repurchase Exercise of stock options May 31, 1999 32,784,790 5,080,000 (1,646,200) 653,132 36,871,722 (1,844,983) 1,028,376 36,055,115 32,195,984 100,330,000 (5,835,097) 3,732,492 130,423,379 (6,532,061) 6,459,525 130,350,843 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 were charged to retained earnings. On April 8, 1998, the Board of Directors approved a 2 for 1 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. 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 5,540,426. As at May 31, 1999, there are 3,493,202 common shares reserved for issue on exercise of stock options. These options may be exercised at prices ranging from $5.375 to $19.50 per common share with a total exerciseable value of $42,927,936 and expire at dates up to 2006. During fiscal 1999, 1,844,983 common shares [1998 - 1,646,200] were repurchased under a normal course issuer bid at an average cost of $13.62 per share [1998 - $14.06] for a total consideration of $25,120,658 [1998 - $23,143,347]. Retained earnings was reduced by $18,588,597 [1998 - $17,308,250] for the cost of the shares in excess of their stated value. n 33 Notes to Consolidated Financial Statements 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 in taxes resulting from: Non-deductible amortization Large corporations tax Other Effective income tax rate 1999 % 44.6 10.4 2.4 1.2 58.6 1998 % 44.6 –– 2.3 0.8 47.7 The non-deductible amortization relates to the excess of the purchase price over fair value of the net assets acquired of the Trust [note 4]. 10. LEASE COMMITMENTS 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 2000 2001 2002 2003 2004 2005 and thereafter 11. YEAR 2000 ISSUE $ 1,486,137 1,108,544 937,980 493,192 485,203 2,156,755 The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date- sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to rep- resent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be cer- tain that all aspects of the Year 2000 Issue affecting the Corporation, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 12. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 1999 consolidated financial statements. n 34 Notes to Consolidated Financial Statements Corporate Directory 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 Ronald D. Besse Chairman of the Board and Director George W. Oughtred Director Stephen A. MacPhail Executive Vice-President and Chief Financial Officer Michael J. Killeen General Counsel and Corporate Secretary A. Winn Oughtred Director David J. Riddle Director C.I. MUTUAL FUNDS INC. MANAGEMENT Executive G. Raymond Chang President and Chief Executive Officer Marketing Scott Pehleman Senior Vice-President Sales Ontario Howard J. Atkinson Senior Vice-President Thomas V. Caswell Senior Vice-President John Dale Senior Vice-President K. Michael Kelly Senior Vice-President David R. McBain Senior Vice-President Carey W. McIntee Senior Vice-President Kevin Bonello Vice-President 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 Marcelo A. Donato Vice-President Julie A. Warren Vice-President Western Provinces Quebec and Eastern Provinces Sean Hayes Vice-President Ron Bowes Vice-President Michael Warus Vice-President Alain Ruel Senior Vice-President Sylvain Rivard Senior Vice-President Patrick LeFrancois Vice-President Patrick Flemming Vice-President Robert J. Costigan Senior Vice-President Derek J. Green Senior Vice-President Dave M. Rupert Senior Vice-President Karl Palmen Vice-President Roy Ratnavel Vice-President Nigel Stewart Vice-President Tracy C. Wood Vice-President Operations and Corporate Ian T. Madill Senior Vice-President, Administration Mark MacLeod Vice-President, Client Services Michael J. Killeen General Counsel and Corporate Secretary Douglas J. Jamieson Vice-President, Finance Munir T. Issa Senior Vice-President, Information Systems David C. Pauli Vice-President, Financial Operations Lorraine P. Blair Vice-President, Human Resources Greg Shin Vice-President, Fund Accounting n 35 Corporate Directory Corporate Information 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 300 Calgary, Alberta T2P 0N7 Tel: 403-205-4396 Toll Free: 1-800-776-9027 Montreal 630 René-Lévesque Blvd. West Suite 1820 Montréal, Québec H3B 1S6 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 Montreal Trust Company 151 Front Street West Eighth Floor Toronto, Ontario M5J 2N1 416-981-9633 Ernst & Young LLP Toronto-Dominion Centre P.O. Box 251 Toronto, Ontario M5K 1J7 INVESTOR RELATIONS Contact: Stephen A. MacPhail Head Office 416-681-6579 1-800-268-9374 email: smacphail@cifunds.com TRADING SYMBOL 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 n 36 Corporate Information Design & Production: C.I. Creative Services Department. Printed in Canada on recycled paper. 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 

Continue reading text version or see original annual report in PDF format above