CI Financial
Annual Report 2002

Plain-text annual report

C.I. Fund Management Inc. May 31, 2002 Annual Report Dear Shareholders: Fiscal 2002 was marked by extraordinary world events, including the terrorist attacks of September 11, 2001, and the U.S. invasion of Afghanistan. Financial markets were hit by unprecedented volatility and the blows of one corporate scandal after another. Many of these controversies involved questionable accounting and a shocking lack of ethics on the part of executives at many of America’s largest corporations. These developments helped to extend the bear market into its third year, making it the longest and deepest downturn in almost three decades. 1 Message to Our Shareholders 12 Historical Financial Highlights 14 Operating Review 24 Management’s Discussion and Analysis 42 Consolidated Financial Statements 47 Notes to Consolidated Financial Statements 58 Corporate Directory 59 Corporate Information To say that this has been a difficult time for our industry is an understatement. Nevertheless, CI continued to execute the strategy that has made it a success. We maintained the company’s financial efficiency while improving our product lineup, service and operations. Finally, at the end of the fiscal year, we announced the acquisition of Spectrum Investments, the SunWise segregated funds, as well as the mutual and segregated funds business of Clarica Life. The acquisition closed in July. This is an exceptional deal for CI, accomplished in an unfavourable environment. It materially boosts our assets and competitive position, while allowing us to take advantage of the synergies involved in merging these operations into CI. We will also benefit from the economies of scale that are so evident in our business. I will discuss this acquisition in more detail later, but I do want to emphasize one point: Whether it’s continuous improvement of all aspects of our operations or a major William T. Holland, President and Chief Executive Officer strategic initiative, we are focused on creating value for shareholders – regardless of market conditions. 2 Certainly, our task became more difficult in fiscal 2002. Over the 12-month period ending July 31, 2002, the MSCI World Index fell 18.2%, the S&P 500 Index lost 20.9% (both in Canadian dollars) and the S&P/TSX Composite Index declined 12.7%. The extended bear market, the collapse of former market leaders such as Nortel Networks, and the wave of corporate scandals have left investors shell-shocked, undermining their trust in the markets and wiping out their appetite for investing. Not surprisingly, the mutual fund industry’s net sales of long-term funds declined by almost 8% over the fiscal year. During the year, CI posted positive net sales each month until May, when we fell into net redemptions. Still, we can be proud that CI’s streak of positive monthly net sales lasted more than 12 years – a feat that is unmatched in the mutual fund industry. Once again, market conditions demonstrated the logic of our longtime strategy of offering investors a wide choice of funds, diversified by man- date, manager and style. Although growth-oriented funds were out of favour in fiscal 2002, we had best-sellers in our top-performing value- oriented Canadian funds – the Harbour Funds, managed by Gerry Coleman, and a number of funds managed by our Signature Funds group. These management teams received industry-wide recognition in December 2001 at the Canadian Mutual Fund Awards. Gerry Coleman was named Fund Manager of the Year and his CI Harbour Segregated Fund won the award for Best Segregated Canadian Equity Fund. Two funds managed by Eric Bushell, Chief Investment Officer of Signature Funds, also won the top awards in their categories. Signature Select Canadian Fund was named Best Canadian Equity Fund and Signature Dividend Fund was chosen Best Dividend Fund. 3 These awards are one result of our strategy of offering a wide selection of the best available portfolio managers. We remain dedicated to this approach and in August 2002, we succeeded in engaging Bill Miller as a sub- adviser. He is one of the world’s best U.S. equity fund managers and Morningstar’s Fund Manager of the Decade for the 1990s. As manager of the U.S.-based Legg Mason Value Trust, he has become the only equity mutual fund manager to outperform the S&P 500 for 11 straight calendar years. Mr. Miller is a household name in the United States, but he is not as well-known in Canada – creating an exciting opportunity for CI. The expertise of Mr. Miller and his team is now available through the CI Value Trust Fund. Our emphasis on financial efficiency also served us well during the broad market decline. Our job is to focus on Harbour Fund Fund Manager of the Year CI Harbour Segregated Fund Best Segregated Canadian Equity Fund Signature Select Canadian Fund Best Canadian Equity Fund Signature Dividend Fund Best Dividend Fund Bill Miller Fund Manager of the Decade 4 the factors we can control and we ensured that expenses were kept in line with lower asset levels – benefiting the unitholders in our funds as well as CI’s shareholders. In fact, we cut total selling, general and administrative expenses by nearly 20%, compared with a decline of 12% in our mutual fund assets. (This includes fund operating expenses as well as corporate expenses.) It’s important to note that we did this without compromising the strength of our sales and marketing team, which is one of the largest and most experienced in the industry. CI remains financially strong and a key measure of this strength is our growing free cash flow. We are returning this increasing level of cash to shareholders through a higher dividend and the repurchasing of CI stock. That we are committed to buying back shares is without question. In fiscal 2002, CI became one of the few companies to actually repurchase the maximum number of shares allowed under a normal course issuer bid. We bought back approximately 11.9 million shares (10% of the public float at May 8, 2001). As I write this, we have completed the buyback for fiscal 2003, repurchasing about 9.7 million shares. In addition, we have raised CI’s dividend eight-fold over a year – to 32 cents a share annually effective September 2002, up from four cents a share in December 2001. CI will be generating so much free cash that, with the company having no significant debt and the share buyback completed, we decided to return the remaining cash to shareholders through dividends. 5 CIX share price years ended May 31 : $ 12.00 14.10 12.83 2002 2001 2000 1999 1998 1997 1996 1995 1994 4.84 3.84 2.75 1.63 1.36 1.38 CIX vs S&P/TSX Composite total return years ended May 31 except for June '94 2002 2001 2000 1999 1998 1997 1996 1995 1994 214 215 241 175 192 206 368 289 159 121 131 99 109 100 100 923 1,079 979 6 While these are very positive steps, CI’s share price was not immune to the effects of the severe decline in global equity markets in fiscal 2002. CI stock ended the year at $12.00, down from $14.10 at May 31, 2001. However, as all long-term investors know, one year does not tell the whole story. From CI’s initial public offering in June 1994 to May 31, 2002, CI stock has returned 823%. That’s an average annual return of 32%, which makes CI the seventh-best performing company on the S&P/TSX Composite Index and the top-performing financial services stock over that time period. As a company that has always focused on shareholder value, we believe this is our most important measure. CI also believes that its performance depends on a strong partnership of these essential elements – an entrepreneurial culture, financial prudence and good corporate governance. Over the past year, issues of corporate governance have become the subject of news headlines. We want to assure our shareholders that CI has always fostered excellent governance through a number of concrete actions. Independent directors constitute a majority on CI’s board. We have a Board of Governors with the power to monitor and review the operations of our mutual funds and to report its findings to unitholders. A majority of the governors are also independent. CI also has a Corporate Code of Conduct and a detailed Code of Ethics and Conduct that requires a high standard of conduct by employees, officers and directors in their work and in their personal trading of securities. These measures serve to reinforce the principle that the interests of the unitholders of our funds and the investors in our company are paramount. Furthermore, it is vitally important that CI, as an investor in other companies, lead by example. The expensing of employee stock options is one issue that now touches on corporate governance, even though it is an accounting matter. We believe that options are a beneficial form of compensation that do indeed align the interests of management with shareholders. However, that is not an excuse to misuse them and we have never lost sight of the reality that there is a real cost to stock options. With the introduc- tion of a GAAP methodology to allow the recording of the expense in our financial statements, we believe they should be fully reflected as an expense and CI will be doing so for the current fiscal year (when applicable). I do want to point out that CI has always taken a sensible position on stock options. The outstanding options represent less than 5.5% of outstanding shares (at August 31, 2002) and options at CI are not concentrated in the hands of a few, but are held by a diverse group of over 100 individuals. 7 Finally, I would like to discuss the Spectrum/Clarica acquisition, the most significant development for CI since our purchase of BPI Financial Corporation three years ago. With this deal, CI gained $11.7 billion in mutual and segregated fund assets. In exchange, CI issued approximately 71.2 million shares worth $652 million (at the time of closing on July 25, 2002) and equivalent to a 30% interest in CI. As part of the transaction, Sun Life Financial Services of Canada Inc. Current fee-earning assets years ended May 31 : $billions received two seats on the CI board, and agreed not to Aug. 31/02 2 0 0 2 2 0 0 1 2000 1999 1998 1997 1996 1995 1 9 9 4 1993 9.7 8.3 6.5 5.5 4.4 3.7 1.0 35.0 25.7 26.8 26.7 increase its stake in CI above 34% for three years, subject to certain exceptions. We believe this transaction is highly advantageous for CI and its shareholders. Its primary impact has been to boost CI’s total fee-earning assets by 43% to $35.0 billion and total mutual fund assets by 48% to $28.5 billion 8 (at August 31, 2002). This ensures our place in the top tier of the industry, as CI has become the sixth-largest mutual fund company and the fourth-largest independent (non-bank-owned). Size is clearly a critical competitive advantage in the Canadian mutual fund industry, for two key reasons. First, brokers and planners are increasingly dealing with only a few fund companies, and they prefer larger companies that can offer them a wide range of products and a relatively high level of service and support. CI, which continues to offer the largest and most diverse choice of funds in the industry, is in an even better position to remain a top choice of advisers. Second, larger fund companies benefit from economies of scale to gain a cost advantage. CI is the industry’s low-cost provider and we are already taking advantage of synergies between CI, Spectrum and Clarica to create savings. We expect substantial cost reductions as we merge the back offices, marketing functions and other operations, and as we rationalize the combined fund lineup. On that matter, our goal is to choose the best portfolio managers within each category, while reducing costs for both CI and the unitholders in the funds. Another key benefit of the deal is our preferred access to 4,000 Clarica representatives, the largest such sales force in Canada. CI has had great success in recent years in cultivating multiple distribution channels for our funds, and we believe that we can develop a successful and mutually beneficial relationship with the Clarica advisers. This is an excellent long-term opportunity for increased growth. 9 In financial terms, the transaction will have a strong, positive impact on our fiscal 2003 results. Overall, we are confident the acquisition will generate value for shareholders as a result of the advantages of our larger scale, the improvements in our financial position, the broader and very compelling selection of funds and portfolio managers, and the development of new distribution opportunities. Over the past year, the fund industry has suffered from turbulent financial markets. At CI, we have not allowed these conditions to change our commitment to being one of the top fund companies in Canada. As a result of the Spectrum/Clarica acquisition and other initiatives we have pursued over the past year, CI has significantly enhanced its standing within the industry and its ability to capitalize on a turnaround in the markets. With each milestone we achieve, we continue to look ahead – and to build for the future. Finally, we thank our shareholders for the faith they have put in CI. You have our assurances that increasing the value of your investment remains our number 1 priority. William T. Holland President and Chief Executive Officer September 17, 2002 10 G. Raymond Chang, Chairman William T. Holland, President and Chief Executive Officer Peter W. Anderson, Executive Vice-President and President, CI Mutual Funds Inc. Stephen A. MacPhail, Executive Vice-President, Chief Operating Officer and Chief Financial Officer 1 1 HISTORICAL FINANCIAL HIGHLIGHTS Fee-earning assets years ended May 31 : $billions Years ended May 31, [in millions of dollars except share and per share amounts] 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 9.7 8.3 6.5 5.5 4.4 3.7 1.0 25.7 26.8 26.7 Net sales years ended May 31 : $billions 3.5 5.8 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1.4 1.2 0.5 0.5 0.5 0.9 0.4 2.4 Total fee-earning assets, end of year Net sales Revenue: Management fees and other income Redemption fees Performance fees Expenses recovered from 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 and minority interest) Total expenses Income taxes Income before amortization of goodwill Net income [loss] Operating cash flow Operating cash flow years ended May 31 : $millions Earnings per share before amortization of goodwill 222.8 230.0 Operating cash flow per share 291.9 EBITDA** per share Shareholders’ equity, end of year Shares outstanding, end of year*** 2002 25,713 481 407.0 41.1 1.1 63.5 512.7 80.0 39.8 97.8 10.6 201.6 24.1 453.9 22.0 36.8 (61.4) 222.8 0.21 1.27 1.51 56.8 2001 26,834 3,468 510.3 28.7 2.6 73.5 615.1 99.7 41.5 115.6 16.2 183.9 33.8 490.7 34.3 90.1 11.5 291.9 0.49 1.60 1.75 260.8 2000 26,678 5,843 353.4 22.5 21.4 57.2 454.5 83.0 29.2 79.1 16.4 117.8 20.8 346.3 51.3 56.8 (2.1) 230.0 0.33 1.34 1.38 292.1 1999 9,700 1,369 158.0 14.4 — 32.0 204.4 48.3 18.1 37.0 9.6 67.3 3.0 183.3 12.4 8.8 8.7 89.8 0.06 0.63 0.64 126.6 170,785,428 180,684,728 182,829,928 144,220,460 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 89.8 64.4 45.1 37.4 20.9 6.0 1.1 *Does not include $286 million in sales of the closed-end DDJ Canadian High Yield Fund. **EBITDA (Earnings before interest, taxes, depreciation and amortization) is a non-GAAP (generally accepted accounting principles) earnings measure, however, management believes that most of its shareholders, creditors, other stakeholders and investment analysts prefer to analyze the company’s results based on this performance measure. ***Adjusted for two-for-one stock dividends in April 1998, January 2000 and November 2000. †Net income from continuing operations. 12 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 7.7 8.6 8.6 64.4 0.06 0.45 0.46 140.2 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 8.0 9.5 9.5 45.1 0.07 0.34 0.35 55.8 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 8.5 10.5 10.5 37.4 0.08 0.28 0.25 50.8 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 8.8 10.5 10.5 20.9 0.08 0.16 0.17 43.1 1994 3,733 2,463 56.5 — — 12.1 68.6 29.4 7.8 10.0 8.7 — 4.8 60.7 3.9 4.0 4.0 6.0 0.04 0.06 0.10 6.0 1993 960 402 14.7 — — 4.4 19.1 9.6 2.9 2.7 2.8 — — 18.0 0.5 0.6 0.6† 1.1 0.01 0.01 0.02 1.3 147,486,888 131,139,160 131,838,104 131,882,104 107,080,000 106,440,000 13 Total revenues years ended May 31 : $millions 512.7 615.1 454.5 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 204.4 181.1 145.4 120.1 108.6 68.6 19.1 Income before amortization of goodwill years ended May 31 : $millions 36.8 56.8 90.1 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 8.8 8.6 9.5 10.5 10.5 4.0 0.6 EBITDA** per share years ended May 31 : $ 1.51 1.75 1.38 2002 2 0 0 1 2000 1999 1998 1997 1996 1995 1 9 9 4 1993 0.64 0.46 0.35 0.25 0.17 0.10 0.02 OP ERAT I NG REVI EW m a n a g e m e n t marketing distribution administration of m utual funds m a n a g e m e n t marketing distribution administration of m utual funds m a n a g e m e n t marketing distribution administration of m utual funds m a n a g e m e n t What is the mark of a leading company in difficult times? A leader adapts to change. A leader seeks new sources of growth. A leader exploits challenging conditions to build on its position. CI displayed these qualities in fiscal 2002. Even as the continuing bear market took its toll on the industry, CI advanced its competitive position. This was accomplished through a major strategic initiative – the acquisition of Spectrum Investments and Clarica Diversico – and through improvements to CI’s competitive advantages in the key areas of its business: products, investment management, marketing and distribution, and operations. 15 OPERATING REVI EW May 31, 2002 Products CI believes that its strongest competitive advantage is its wide choice of investment funds -– the industry’s broadest selection. This not only includes a wide range of mutual funds with mandates diversified by asset class, region, industry and investment approach, but an extensive choice of segregated funds and hedge funds as well. CI has also built on this lineup by offering its funds in different versions to suit different needs – such as 100% RSP- eligible global funds, Class F and Class I units – and by packaging the funds into new products such as the portfolio funds and multi-manager funds. This industry-leading lineup allows financial advisers to meet the objectives of their clients within CI and makes it more likely that CI remains one of their favourites as they reduce the number of fund companies with which they do business. This broad range of funds also means that CI’s family of funds is able to accommodate investors as their preferences change and that CI is not dependent on just one or two funds for its growth. CI’s funds reflect the company’s ability to identify investors’ changing needs and to quickly bring innovative products to mar- ket. In fiscal 2002, CI continued to enhance its lineup across the board, with key product launches in the following areas: Hedge funds. CI introduced four new hedge funds in fiscal 2002, creating a comprehensive hedge fund lineup diversified by investment manager and approach. The new funds were Landmark Global Opportunities Fund, Trilogy Global Opportunities Fund, Altrinsic Opportunities Fund and CI Multi-Manager Opportunities Fund, which uses a fund-of-funds structure to invest in five other CI hedge funds. In addition, CI created RSP-eligible versions of five of its hedge funds. With these additions, CI has reinforced its leadership in this growing sector. CI remains one of Canada’s largest hedge fund managers with approximately $800 million in assets in these funds (at May 31, 2002). Class I Units. Class I Units, launched in October 2001, are the key vehicles in CI’s development of business with institutional investors and high-net-worth individuals. Class I Units offer reduced management fees in more than 35 CI funds, subject to large minimum investments. Class I accounts are more efficient to service because of their CI Products Mutual Funds Segregated Funds Portfolio Series Funds Multi-Manager Funds Hedge Funds 100% RSP-eligible Global Funds Class F Funds Class I Funds m m a n a g e m e n t , marketing, distribution and administration of m ut 16 OPERATING REVI EW May 31, 2002 larger size, and they do not pay trailer fees. The Class I funds are designed primarily for institutions such as banks, insurance companies and mutual fund dealers that offer CI funds to their own customers, either directly or through programs such as wrap accounts. CI’s participation in these programs is a result of the strength of CI’s brand, which symbolizes a reputation for industry leadership and excellence in portfolio management – providing credibility and attracting customers to the third-party program. The success of the Class I units, which accounted for $524 million in assets at May 31, 2002, also reflects CI’s ability to secure new business by adapting its core products to meet different needs. (For more information on CI’s growing institutional business, please see the section on Marketing and Distribution.) Portfolio Funds. During the fiscal year, CI launched the CI Portfolio Series and a similar product within its segregated fund family – the CI Guaranteed Investment Fund Portfolios. The portfolio funds invest in up to 14 underlying CI funds in combinations that vary according to the fund’s target asset allocation. The CI Global Conservative Portfolio, for example, is 50% equities and 50% fixed income. However, the portfolio funds also offer additional diversification by asset class and investment style. These funds give investors many of the benefits of a wrap program – asset allocation, diversification and regular rebalancing – with the convenience of purchasing a single mutual fund. They also make it easier for financial advisers to provide the proper asset allocation to their clients. Once again, CI’s broad lineup provides an advantage, making it possible for the company to develop these well-constructed portfolio funds using only CI funds. Investment Management The foundation that supports CI’s extensive lineup of funds is a strategy of offering investors a wide choice of the best available portfolio managers across a variety of investment styles – value, growth at a reasonable price, growth, and momentum. The quality of CI’s management teams is shown in their consistent prominence at the Canadian Mutual Fund Awards and in the top five-star ratings from Morningstar, a leading investment fund research firm. At August 31, 2002, CI was second in the industry with 12 five-star funds. CI took home some of the most prestigious awards from the Canadian Mutual Fund Awards in December 2001, including Fund Manager of the Year, which went to Gerry Coleman. The award recognized his strong performance in the face of uncertain markets with the Harbour Fund and Harbour Growth & Income Fund. Mr. Coleman’s fund, CI Harbour Segregated Fund, was named Best Segregated Canadian Equity Fund. CI funds also won top honours for Best Canadian Equity Fund (Signature Select Canadian Fund), and Best Dividend Fund (Signature Dividend Fund). Both of these funds are managed by Eric Bushell of CI’s Signature Funds group – who was also a finalist for Fund Manager of the Year. The winners were selected by an independent panel of mutual fund analysts. m a n a g e m e n t , marketing, distribution and administration of m utu 17 OPERATING REVI EW May 31, 2002 The performance of CI’s managers is driven in part by a structure in which the different portfolio management teams operate independently of one another. CI believes this structure encourages excellence, discipline and focus, and it allows CI to emphasize each team’s distinct investment style. The fact that several teams manage funds with their own brand, including Harbour, Landmark, Signature and BPI, adds to the distinction. Harbour Funds, for example, encompasses Canadian equity, Canadian balanced and global equity funds, but all are managed by Gerry Coleman using his proven value-oriented approach. This identification of a portfolio management group with a particular investment approach makes it easier for financial advisers and investors to understand CI’s lineup and to select funds. It also means that CI is well placed to benefit as advisers and investors become more aware of the need for “style diversification’’ – the view that investors’ portfolios should be diversified not only by asset class, but by investment style, as different styles outperform at different times. On the business side, the portfolio management teams’ relationships with CI are organized in one of three ways: • They are employed directly by CI Mutual Funds Inc., which is the case with the Harbour and Signature teams; • They are partnerships in which CI holds a majority or a significant stake, and these include Altrinsic Advisors, LLC; BPI Global Asset Management LLP; CI Global Advisors LLP; and Webb Capital Management LLP. • They are independent companies retained as sub-advisers to CI, and these include Legg Mason Funds Management, Inc.; Steinberg Priest & Sloane Capital Management, LLC; Trident Investment Management, LLC; and J. Zechner Associates Inc. CI’s use of partnerships is unique in the industry. By offering portfolio managers an equity stake in the business, CI has attracted leading managers and given them a powerful incentive to perform and to remain with CI over the long term. Furthermore, they are encouraged to build that business by seeking institutional and other assets that do not conflict with CI’s funds. This model has already proven itself to be highly successful. CI’s U.S. subsidiaries managed $4.3 billion in institutional assets at May 31, 2002, an increase of more than $1 billion from CI Fund Managers Altrinsic Advisors, LLC BPI Global Asset Management LLP CI Global Advisors LLP Harbour Group Howson Tattersall Investment Counsel Limited J. Zechner Associates Inc. Legg Mason Funds Management, Inc. MFS Institutional Advisors, Inc. Signature Group Sionna Investment Managers Inc.* Steinberg Priest & Sloane Capital Management, LLC Trident Investment Management, LLC Webb Capital Management LLP Fidelity Investments Canada Ltd. AIM Funds Management Inc. Natcan Investment Management Inc. UBS Global Asset Management (Canada) Co. *pending regulatory approval m m a n a g e m e n t , marketing, distribution and administration of m ut 18 OPERATING REVI EW May 31, 2002 a year earlier. In this way, CI and its partners have built a significant U.S. money management business in a low-cost, low-risk fashion. CI continues to use sub-advisers who meet its criteria, with Bill Miller of Legg Mason being a notable example. Mr. Miller – named Fund Manager of the Decade by Morningstar in 1999, and the only equity mutual fund manager to have outperformed the S&P 500 Index for 11 straight calendar years – is adviser to the CI Value Trust Fund, launched in August 2002. With the acquisition of the Spectrum and Clarica funds, CI gained another 20 sub-advisory relationships. Neither company used in-house portfolio management. CI’s goal is to reduce the number of relationships while keeping the best portfolio advisers within each category. The key sub-advisers retained by CI include Kim Shannon, a highly regarded value-oriented Canadian equity manager. Ms. Shannon has an extraordinary track record, with her fund ranking in the top decile of the Canadian equity/large cap Canadian equity category for the one- to five-year periods ending August 31, 2002. She has produced these superior returns with exceptionally low volatility. Also managing portfolios for CI are Boston-based MFS Institutional Advisors, Inc., a large U.S. fund company known for its in-depth investment research, and Howson Tattersall Investment Counsel Limited, a Canadian firm with a reputation for expertise in small-cap investing. As CI completes the rationalization of its combined roster of advisers, it will continue to offer the industry’s strongest lineup and widest choice of leading portfolio management expertise. Marketing and Distribution By July 2002, the equity bear market was in its 28th month, and major indexes had posted losses of nearly 50% from their March 2000 peaks. This naturally affected mutual fund sales, with the industry registering net redemptions by April 2002. Year-over-year net sales were flat for the 12 months ending May 31, 2002, though net sales of long-term funds (excluding money market) fell by 8%, according to Investment Funds Institute of Canada data. CI posted gross sales of $3.64 billion and net sales of $481 million in fiscal 2002, ranking it ninth among independent mutual fund companies. The decline from net sales of $3.47 billion a year earlier reflected the poor equity markets and the especially difficult environment for growth-oriented stocks. This affected some of CI’s most popular funds from previous years, such as CI Global and BPI Global Equity, and industry funds such as CI Global Telecommunications. At the same time, there were strong sales of CI’s top-performing value-oriented Canadian funds, including the Harbour Funds family and Signature Select Canadian, along with income-oriented funds such as Signature Dividend Income, Signature Dividend and Signature High Income – demonstrating the benefits of CI’s diverse lineup. The Harbour Funds had net sales of $411 million in fiscal 2002, and these four Signature funds posted net sales of $319 million. m a n a g e m e n t , marketing, distribution and administration of m utu 19 OPERATING REVI EW May 31, 2002 It’s also important to note that while gross sales declined during the year, redemptions increased only slightly. CI’s redemption rate – redemptions as a percentage of average net assets excluding money market funds – rose from 10.1% in fiscal 2001 to 11.9% in May 2002, which is still below the IFIC average of 13.1% for the period. Clearly, investor confidence has been battered by market declines and corporate scandal, and the appetite for mutual funds – especially equity funds – has diminished. A rebound in net sales for CI and the industry will depend on stable markets and a more positive outlook. CI has not allowed market uncertainty to undermine its commitment to sales and marketing. The focus of these efforts continues to be more than 40,000 individual financial advisers across Canada who distribute CI funds. To service and support these advisers, CI maintains one of the industry’s largest sales forces, backed by a highly trained client services department. CI sales representatives consistently build the one-on-one relationships that are critical to gaining support in the fund industry. In 1997, CI adopted a strategy of increasing its penetration of the life insurance channel through additional contact with life insurance agents. This was comple- mented by the launch that year of the CI Segregated Funds, which made CI the first mutual fund company to offer a line up of segregated funds. CI expanded its presence in this market with the February 1999 launch of the CI Guaranteed Investment Funds, a larger lineup of segregated funds with more attractive features. CI has since expanded the CI GIF program to 27 funds, making it one of the larger segregated fund families available. At May 31, 2002, segregated funds accounted for $1.2 billion in assets. The acquisition of the Clarica and SunWise segregated funds has boosted CI’s segregated fund assets to $2.8 billion and heightened the importance of the insurance channel to CI. In particular, CI’s status as a preferred supplier to more than 4,000 Clarica agents – a sales force that outnumbers any other dedicated sales force in Canada, including Investors Group representatives – presents a very attractive opportunity for growth that’s not available to competitors. CI has also been active in developing alternative distribution channels with financial institutions such as banks, insurance companies, mutual fund dealers and brokers. These clients distribute CI funds directly, include them in their own programs such as wraps or segregated funds, or re-sell them under their own name. For the past three years, CI has supported this channel with a dedicated Institutional Business Development team within CI’s marketing department. The success of these efforts speaks for itself. In each of the past two fiscal years, CI has gained another 10 institutional partners, bringing the total to over 35. Institutional clients contributed $302.4 million in net sales in fiscal 2002, and now have a total of $1.4 billion in assets in CI funds. CI intends to continue to pursue relationships with the top financial institutions in Canada as a way to expand the channels through which CI products are distributed. m m a n a g e m e n t , marketing, distribution and administration of m ut 20 OPERATING REVI EW May 31, 2002 Underlying all of these sales and marketing activities are initiatives to build the CI brand. The most direct of these are advertising, such as CI’s successful bill- board campaign, and sponsorships, which provide invaluable public exposure in connection with prominent sporting and cultural events. CI’s sponsorships include the Bell Canadian Open, the most prestigious golf tournament in Canada, and the National Ballet of Canada’s The Nutcracker. CI also sponsors numerous other events and charities across Canada in co-operation with financial advisers and other partners. These actions serve to build CI’s brand, strengthening the company’s reputation and raising its profile with distributors, investors and the public. Operations CI is recognized as one of the most cost-efficient organizations in the industry and CI believes this is a significant competitive advantage. CI differs from other mutual fund companies in that this drive for efficiency is ingrained in CI’s corporate culture. Employees at all levels share in this philosophy of financial prudence. As a result, CI has achieved that rare combination of being able to provide one of the industry’s highest levels of service while also being one of its lowest-cost operators. This combination is unmatched by its competitors. A key measure of this efficiency is that CI operates with one of the highest ratios of assets to employees in the fund industry. At May 31, 2002, CI had $51 million in fee-earning assets per employee, and at August 31, 2002, following the Spectrum/Clarica acquisition, CI had approximately $58 million in fee-earning assets per employee. CI’s fund unitholders benefit from this efficiency and from the effects of economies of scale through lower fund operating expenses. In fiscal 2002, CI successfully maintained its efficiency by reducing both its corporate expenses and the operating expenses of the funds to keep them in line with reduced asset levels. (Please see Management’s Discussion and Analysis for more details.) In addition, CI has become more efficient by adopting new technology m a n a g e m e n t , marketing, distribution and administration of m utu 21 OPERATING REVI EW May 31, 2002 and by using the Web to make information easily accessible. In fiscal 2001, CI introduced e- CISS, an innovative Web-based service that allows advisers to see extensive information about their clients’ accounts at CI. In fiscal 2002, CI built on this service with the e-Service Centre, which allows unitholders to view their account information, statements, confirmations and tax receipts. They also have the option of receiving this information electronically instead of by mail, saving the expense of printing and mailing these documents. Acquisition of Spectrum Investments and Clarica Diversico On July 25, CI completed the acquisition of Spectrum Investment Management Limited, Clarica Diversico Ltd., the segregated fund business of Clarica Life, and the SunWise segregated funds. CI received $11.7 billion in assets and issued shares worth $652 million – representing a purchase price of 5.6% of assets under management. The acquisition has not only significantly improved CI’s current competitive position, but it creates a number of opportunities to exploit economies of scale and to fuel future growth. CI’s fee-earning assets have grown by 43% and mutual fund assets by 48%, making CI the sixth-largest mutual fund company in Canada. At July 31, 2002, CI’s market share (of IFIC assets) was 7.14%, up from 4.56% at May 31, 2002. This compares to market share of 2.67% just three years earlier. The larger size puts CI in a better position to preserve its “shelf space” with financial advisers and other clients. It allows CI to provide more products as well as better support and service. Along the same line, it allows CI to benefit greatly from increased scale. CI is able to add the Spectrum and Clarica assets – and additional growth – to its existing infrastructure, without a commensurate increase in staff, equipment and other expenses. Therefore, CI is able to take advantage of many synergies as it integrates the Spectrum and Clarica funds. Fee-earning assets per employee years ended May 31 : $millions 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 51.2 47.3 44.3 34.3 33.3 31.9 28.3 24.4 23.1 16.5 Fund operating expenses basis points 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 30.5 31.1 34.4 39.6 40.2 46.5 46.0 52.8 54.2 69.0 m m a n a g e m e n t , marketing, distribution and administration of m ut 22 OPERATING REVI EW May 31, 2002 Furthermore, the acquisition gives CI the opportunity to consolidate funds, making them larger and more efficient and concentrating assets in the hands of CI’s select managers. At the same time, it still allows CI to offer a wider choice of funds, along with a wider choice of highly rated portfolio managers. The deal also provides CI with a new distribution channel in the form of preferred access to the 4,000-member Clarica sales force, as discussed above. With its large, experienced group of wholesalers, CI will be building relationships with these advisers and fostering new business. All of these benefits serve to reinforce CI’s existing competitive advantages – demonstrating how the acquisition fits with CI’s overall strategy of fostering growth while maintaining financial efficiency. Indeed, at the time of writing, CI has already realized many of the synergies involved in the acquisition. With the integration of the Spectrum and CI back-office operations, which was completed in early September, the majority of the costs of running Spectrum have been eliminated. The integration was also carried out less than six weeks following the close of the acquisition. In comparison, the integration of BPI Financial’s operations took eight months in 1999-2000. By early September, CI had also announced a series of portfolio adviser changes, as well as proposals to merge 33 CI and Spectrum funds into other CI funds. CI expects to integrate the Clarica fund operations by the end of 2002, and to take additional steps to streamline the combined fund lineup in early 2003. Outlook CI believes that consolidation will continue in the Canadian fund industry, given its maturity and the heightened competition from other investment products, especially proprietary funds and wrap accounts offered by brokers and dealers. Since the acquisition of Spectrum and Clarica Diversico was announced in May, two other small fund companies have bowed to competitive pressures and announced agreements to be acquired. CI believes it is well placed to benefit from a consolidating industry, and it will continue to consider strategic opportunities as they arise. CI’s priorities are to strengthen its existing relationships and to accelerate growth in its new distribution channels -- institutional clients and the Clarica agents. In addition, CI will launch new products and new ways of offering its funds to meet the changing needs of investors, while continuing to integrate the acquired companies and to streamline its lineup of funds. CI has improved its operations across the board and built on its leadership and its competitive advantages. It has boosted its standing in the industry and moved quickly to realize the benefits of the acquisition. While market conditions remain uncertain, CI is in a superior position to take advantage of a turnaround. m a n a g e m e n t , marketing, distribution and administration of m utu 23 MANAGEMENT’S DISCUSSION AND ANALYSIS m a n a g e m e n t marketing distribution administration of m utual funds m a n a g e m e n t marketing distribution administration of m utual funds m a n a g e m e n t marketing distribution administration of m utual funds m a n a g e m e n t 0 SUMMARY OF FINANCIAL HIGHLIGHTS Years ended May 31 [millions of dollars except per share amounts] 2002 2001 % change 2002 2001 % change ASSET MANAGEMENT DATA Average mutual fund assets under management Total fee-earning assets, end of year Mutual fund assets, end of year Total gross sales Total redemptions Total net sales 20,858 25,713 20,422 3,641 3,160 481 23,649 26,834 22,361 6,402 2,933 3,468 -12 -4 -9 -43 +8 -86 INCOME STATEMENT DATA Revenue Management fees Administration fees and other income Redemption fees Performance fees Expenses recovered from 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 Minority interest Income taxes Income before amortization of goodwill Net income (loss) Earnings per share before amortization of goodwill Operating cash flow Operating cash flow per share EBITDA* EBITDA* per share Shareholders’ equity, end of year Shares outstanding, end of year 383.0 24.0 41.1 1.1 63.5 512.7 80.0 39.8 97.8 0.4 10.6 201.6 18.5 5.2 22.0 36.8 (61.4) 0.21 222.8 1.27 265.5 1.51 56.8 170.8 464.5 45.8 28.7 2.6 73.5 615.1 99.7 41.5 115.6 4.2 16.2 183.9 20.0 9.6 34.3 90.1 11.5 0.49 291.9 1.60 319.9 1.75 260.8 180.7 -18 -48 +43 -58 -14 -17 -20 -4 -15 -90 -35 +10 -8 -46 -36 -59 -634 -57 -24 -21 -17 -14 -78 -5 012345678901234567890123456789012345678901234567890123456789012345 25 *EBITDA (Earnings before interest, taxes, depreciation and amortization) is a non-GAAP (generally accepted accounting principles) earnings measure, however, management believes that most of its shareholders, creditors, other stakeholders and investment analysts prefer to analyze the company’s results based on this performance measure. SELECTED QUARTERLY INFORMATION Years ended May 31 [millions of dollars except per share amounts] 2002 2001 2002 2001 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Income Statement Data Revenue Management fees Administration fees and other income Redemption fees Performance fees Expenses recovered from mutual funds 96.6 7.2 11.1 0.0 16.2 Operating Expenses Selling, general and administrative 93.9 92.0 100.5 107.4 113.7 122.4 121.1 Investment adviser fees 5.8 9.8 0.0 16.3 5.2 10.7 0.7 15.5 5.8 9.5 0.4 15.5 6.5 9.1 0.0 21.5 12.3 7.3 1.2 6.4 0.0 5.5 5.9 1.3 Trailer fees Commission Related Expenses 18.8 20.0 17.1 17.6 Net fees paid to securitization Total revenues 131.1 125.8 124.1 131.7 141.8 163.6 158.3 151.3 Distribution fees to limited partnerships 20.0 9.9 24.9 0.0 2.5 20.6 9.2 24.1 19.5 10.2 23.2 19.9 10.5 25.5 23.4 10.2 26.4 27.7 11.5 28.8 23.9 10.7 30.3 24.5 9.1 30.1 0.0 2.4 0.0 2.6 0.4 3.0 1.0 3.3 1.1 3.8 0.5 4.3 1.6 4.9 Amortization of deferred sales commissions 49.4 51.0 50.9 50.3 47.2 47.7 45.8 43.2 Other items Minority interest Income taxes Income before amortization of goodwill Net income (loss) Earnings per share before amortization of goodwill 8.1 1.2 5.5 9.8 3.5 1.3 4.4 9.2 3.4 1.4 5.4 3.7 1.4 6.7 7.5 10.3 (14.8) (15.3) (17.1) (14.3) 4.9 1.5 (0.2) 5.9 1.9 7.8 4.8 2.8 4.4 3.5 12.8 13.9 24.0 4.4 27.6 8.0 22.3 2.7 16.1 (3.5) 0.06 0.05 0.04 0.06 0.13 0.15 0.12 0.09 Earnings per share Fully diluted earnings (loss) per share (0.09) (0.09) (0.09) (0.09) (0.10) (0.10) (0.08) (0.08) EBITDA* EBITDA* per share Average mutual fund 65.7 0.38 65.7 0.38 65.1 0.37 68.9 0.38 0.02 0.02 75.0 0.41 0.04 0.04 85.3 0.47 0.02 0.01 (0.02) (0.02) 83.5 0.46 76.2 0.42 assets under management 20,992 20,827 20,220 21,384 22,103 23,515 24,831 24,156 *EBITDA (Earnings before interest, taxes, depreciation and amortization) is a non-GAAP (generally accepted accounting principles) earnings measure, however, management believes that most of its shareholders, creditors, other stakeholders and investment analysts prefer to analyze the company’s results based on this performance measure. 012345678901234567890123456789012345678901234567890123456789012345 m 26 MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 Overview of CI’s Business The principal business of C.I. Fund Management Inc. is the management, marketing, distribution and administration of mutual funds and other fee-earning investment products for Canadian investors through its wholly-owned subsidiary CI Mutual Funds Inc. (“CI”). In addition, through its money management subsidiaries, CI manages institutional assets for clients on a global basis. At May 31, 2002, fee-earning assets totalled $25.7 billion, represented by $20.4 billion in mutual funds, $789 million in labour-sponsored funds, $245 million in closed-end and other funds and $4.3 billion in institutional assets (through BPI Global Asset Management LLP and Trilogy Advisors, LLC). CI markets its funds to Canadian retail investors through over 40,000 financial advisers representing over one million retail investment accounts owning CI mutual funds. CI’s share of total Canadian mutual fund assets as reported by the Investment Funds Institute of Canada was 4.71% at May 31, 2002. There are four critical components to CI’s business: 1. 2. 3. 4. Investment Products Investment Management Investment Product Distribution Investment Product Administration Investment Products CI believes that in order to attract and maintain investor interest in its products, it is essential to offer a wide range of investment products and continually develop new products to adapt to changing investor preferences. CI’s product line encompasses a broad range of global and domestic funds offering a variety of investment styles. In addition, CI has consistently developed new products for investors such as sector-specific funds, portfolio-based funds, fee-based portfolio management services, closed- end funds, segregated funds, 100% RSP-eligible foreign funds and hedge funds. In fiscal 2002, CI launched a number of new funds to broaden its lineup of value-based funds, hedge funds, RSP-eligible funds, sector funds and portfolio funds. In June 2001, CI created CI Global Focus Value Sector Fund and CI Global Focus Value RSP Fund. These funds are managed by Altrinsic Advisors, LLC under portfolio manager John Hock. In July 2001, CI launched CI American Value Sector Fund and CI American Value RSP Fund. These funds are managed by Steinberg Priest & Sloane Capital Management, LLC under portfolio manager Bill Priest. CI also expanded its lineup in July 2001 by offering new versions of existing funds with the launch of CI European RSP Fund, CI Latin American RSP Fund, CI Global m a n a g e m e n t , marketing, distribution and administration of m utu 27 MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 Value RSP Fund, CI International Balanced Sector Fund, CI International Value RSP Fund, CI International Sector Fund, CI Short-Term US$ Sector Fund, Landmark Canadian Sector Fund, Signature Canadian Resource Sector Fund and Signature Select Canadian Sector Fund. In August 2001, CI launched Landmark Global Opportunities Fund, which is a hedge fund managed by Webb Capital Management LLP under portfolio manager Derek Webb. In September 2001, CI launched a family of portfolio funds within the CI Guaranteed Investment Funds (GIFs), CI’s key segregated fund product. These combine a number of CI funds in predeter- mined portfolios designed to meet differing investor preferences and to simplify the overall investment process. New funds created under this program were CI Aggressive Growth GIF Portfolio, CI Growth GIF Portfolio, CI Moderate GIF Portfolio and CI Conservative GIF Portfolio. In December 2001, CI created portfolio funds for its mutual fund lineup. They are CI Conservative Portfolio, CI Conservative RSP Portfolio, CI Balanced Portfolio, CI Balanced RSP Portfolio, CI Growth Portfolio, CI Growth RSP Portfolio, CI Maximum Growth Portfolio and CI Maximum Growth RSP Portfolio. In December 2001, Trilogy Global Opportunities Fund was launched. This is a hedge fund managed by Trilogy Advisors, LLC, the sister company to CI Global Advisors LLP. The fund’s portfolio manager is Robert Beckwitt. In January 2002, CI enhanced its lineup of hedge funds by launching RSP versions of BPI American Opportunities Fund, BPI Global Opportunities III Fund, Landmark Global Opportunities Fund, Trident Global Opportunities Fund and Trilogy Global Opportunities Fund. In March 2002, CI launched Altrinsic Opportunities Fund, a hedge fund managed by Altrinsic Advisors, LLC under the direction of John Hock. In March, CI also launched CI Multi-Manager Opportunities Fund, a fund-of-fund structure that utilizes five of CI’s hedge funds to provide additional diversification by manager and investment style. Investment adviser fees years ended May 31 : % of average assets under management 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 0.19 0.18 0.18 0.22 0.23 0.23 0.23 0.27 0.35 0.45 Management fees years ended May 31 : % of average assets under management 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1.84 1.96 1.97 1.91 1.96 1.96 1.97 1.97 1.94 1.89 m m a n a g e m e n t , marketing, distribution and administration of m utu 28 MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 In May 2002, CI launched Harbour Foreign Equity Sector Fund and Harbour Foreign Equity RSP Fund managed by Gerald Coleman of CI’s in-house Harbour Funds management team. Net operating margin years ended May 31 : % of average assets under management In addition to launching new funds, CI has modified existing products to make them more attractive for inclusion in new investment structures such as fee-based accounts and proprietary funds offered by investment dealers, mutual fund dealers, banks and insurance companies. Investment Management In order to offer a broad range of investment products, CI retains the services of a number of investment advisers. CI uses three structures to ensure it can attract and maintain the investment management expertise CI believes is necessary to meet investors’ needs: 1. CI maintains sub-advisory agreements with independent investment managers who are compen- sated on the basis of assets under management. At May 31, 2002, CI had sub-advisory agreements with J. Zechner Associates Inc. of Toronto (which managed $541.5 million in bond funds), Trident Investment Management, LLC of New York (which managed $570.9 million in several equity mutual funds focusing on specific geographic regions, two globally oriented hedge funds and a multi-manager fund) and Steinberg Priest & Sloane Capital Management, LLC (which managed $96.6 million in a value-oriented equity fund and in two multi-manager funds). 2. CI employs money managers directly. At May 31, 2002, CI managed $8,382.1 million in a diversified mix of funds using value and growth-oriented investment approaches. CI’s in-house investment teams operate under the Harbour Funds, Signature Funds and CI Funds brands and include well-known money managers such as Gerry Coleman, Eric Bushell, Robert Lyon, Andrew Waight and Ben Cheng. 3. CI has partnership agreements with investment advisers whereby CI owns a controlling interest or has a significant economic interest in the partnership. This structure gives the investment 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1.10 1.19 1.16 1.02 1.00 0.98 0.98 0.89 0.58 0.40 Operating cash flow per share years ended May 31 : $ 1.27 1.34 1.60 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 0.63 0.45 0.35 0.29 0.16 0.06 0.01 m a n a g e m e n t , marketing, distribution and administration of m utu u 29 MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 adviser, through direct equity participation in the partnership, an incentive to grow the assets under management and attract money from sources other than CI. An equity stake in the part- nership also encourages the advisers to stay with CI over the long term. CI has four investment advisory partnerships of this type: • CI Global Advisors LLP (“CI Global Advisors”) of New York, established in November 1999, is 55% owned by CI and 45% owned by Trilogy Advisors, LLC (“Trilogy Advisors”). CI also has a 45% interest in Trilogy Advisors. CI Global Advisors had mutual fund assets under management at May 31, 2002, of $6,651.4 million in a number of growth-oriented funds, industry-specific funds, a multi-manager fund, and a hedge fund. Trilogy Advisors had $140.6 million in institutional assets and a hedge fund. • BPI Global Asset Management LLP (“BPI Global Asset Management”) of Orlando, Florida, formed in March 1997, is 66% owned by CI and 34% owned by JBS Advisors, Inc. At May 31, 2002, it had $2,692 million of growth-oriented mutual fund assets under management, includ- ing a portion of two multi-manager funds and $675.2 million of retail hedge funds, and institu- tional assets of $4,117 million (including $172.2 million of institutional hedge funds). • Webb Capital Management LLP (“Webb Capital Management”) of San Francisco, California, formed in June 2000, is 55% owned by CI and 45% owned by Webb Capital Investors LLC. At May 31, 2002, it had assets under management of $703.5 million in several momentum- based growth funds, a multi-manager fund and a hedge fund (which had assets totalling $40.6 million). CI also has a 25% interest in Webb Capital Partners, LLC of San Francisco, formed in August 2001, which manages Augury Partners L.P., an institutional hedge fund that was launched on June 5, 2002. • Altrinsic Advisors, LLC (“Altrinsic Advisors”), a value-oriented investment team established in December 2000 and based in Old Greenwich, Connecticut, is 49% owned by CI. It had assets under management of $779.8 million at May 31, 2002, in several globally oriented funds, two multi-manager funds and a hedge fund. CI also has a 25% profit participation in Altrinsic Net SG&A years ended May 31 : % of average assets under management 0.08 0.11 0.15 0.20 0.24 0.24 0.25 0.32 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 0.56 0.64 Trailer fees years ended May 31 : % of average assets under management 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 0.47 0.49 0.48 0.46 0.49 0.50 0.50 0.49 0.45 0.41 a n a g e m e n t , marketing, distribution and administration of m utu 30 m MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 Global Advisors, LLC, which had $7.8 million in assets under management at May 31, 2002, in an institutional hedge fund. Cash and marketable securities years ended May 31 : $millions During the year no changes were made to the sub-advisory responsibilities for CI’s funds. Investment Product Distribution CI distributes its investment products through investment dealers, mutual fund dealers, insurance agents and banks. In order to support these distribution channels, CI ensures it has an extensive number of knowledgeable and experienced staff members, including CI representatives who deal directly with the distributors of CI’s funds, and in-house fund support personnel, who have access to detailed records of distributors’ fund assets and transactions with CI. In addition, CI provides distributors with extensive information about its funds and investment advisers through the Internet, various publications and through appearances and presentations by the funds’ advisers. A key element of CI’s product distribution strategy has been to be adaptive and responsive to changes in investor demand for new financial products. CI has the broadest range of funds available in Canada – a lineup that encompasses numerous styles and fund mandates. CI believes this strategy is critical to maintaining shelf space with mutual fund distributors, as they have reduced the number of fund families they are willing to support and promote, resulting in a limited number of fund companies dominating Canadian mutual fund sales. During CI’s most recent fiscal year, its gross sales of mutual funds totalled $3.641 billion and were ranked sixth among the inde- pendent mutual fund companies (i.e. non-bank owned). In the prior year, CI ranked fifth for gross sales of its mutual funds. CI’s net sales of mutual funds (gross sales less redemptions) ranked ninth among all independent mutual fund companies in Canada during the most recent fiscal year. In fiscal 2001, CI ranked second in net sales. 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 9.9 9.6 20.9 12.1 19.1 34.2 9.3 5.0 45.5 67.9 Portfolio value of redemption fees years ended May 31 : $millions 640 663 552 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 253 202 102 62 20 n/a n/a m a n a g e m e n t , marketing, distribution and administration of m utu 31 MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 Investment Product Administration DSC financed years ended May 31 : $millions Providing investors and distributors of CI funds with accurate and timely information on purchases, redemptions, transfers, switches and holdings requires a highly efficient administrative operation. CI has made extensive investments in technology to ensure its clients receive information quickly and in a cost-efficient manner. In fiscal 2001, CI introduced its electronic client account information system (eCISS) and made it available to fund distributors over the Internet. It allows them to easily access detailed and up-to-date client account information and gives them the ability to print trade confirma- tions, fund annual reports, duplicate account statements and tax receipts. In fiscal 2002, this service was extended to investors through CI's e-Service Centre. This, in combination with other efficiency- based system enhancements, has ensured that CI continues to focus on being among the most efficient fund administrators in the industry. This is reflected in the fact that the costs CI incurs to administer its funds are among the lowest in the industry as a percentage of assets. A key strength of CI has been its ability to quickly provide administrative capacity for new products. In recent years, CI has successfully launched numerous new products, including institutional class funds, portfolio funds, segregated funds, 100% RSP-eligible foreign funds, hedge funds, closed-end funds and a wrap program. These new products have had the appropriate administrative support to achieve market penetration and have contributed significantly to CI’s assets under management. Overview of CI’s Revenues and Expenses The majority of CI’s revenues are earned from the management services it provides as fund manager. The key determinant of CI’s revenue is its level of assets under management, which is determined by both market returns and net sales of the funds. Management fees charged by CI to the funds range up to 2.25% of the average net asset value of the funds. CI focuses on offering retail funds (known as Class A funds) – especially equity funds, which earn management fees ranging from 2.00% to 2.25%. Approximately 82% of CI’s mutual fund assets are in equity funds. CI also offers funds with lower management fees that are designed to be included in fee-based products or fund-of-fund products. 200 252 97 86 84 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 46 41 17 n/a n/a Percentage of assets self-financed years ended May 31 : % 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 8 n/a n/a 66 64 65 60 61 35 24 m a n a g e m e n t , marketing, distribution and administration of m utu m 32 MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 These funds, known as Class F and Class I funds, have management fees that are at levels approximately 1% or more below CI’s Class A funds. In return for lower management fees, Class I and Class F funds do not pay trailer fees, and Class I funds are provided service at an efficient cost due to their larger average account size. At May 31, 2002, there were $75.3 million and $524.0 million in Class F and Class I funds, respectively, compared with $28.7 million and nil on May 31, 2001. Income potential from sources other than management fees has also become significant. CI manages a number of hedge funds that provide performance fees. In general, the fees amount to 20% of returns in excess of certain thresholds, with CI receiving approximately 40% and the investment adviser and the fund distributor receiving the remainder. At May 31, 2002, CI managed $798 million of hedge fund assets that could potentially earn performance fees. CI’s ownership stakes in Trilogy Advisors, BPI Global Asset Management, Altrinsic Global Advisors and Webb Capital Partners position CI to benefit from the growth in revenues and profits on assets these firms manage for organizations other than CI. At May 31, 2002, BPI Global Asset Management had $4.1 billion in institutional assets ($2.7 billion at May 31, 2001) and Trilogy Advisors had $141 million in institutional assets ($532 million at May 31, 2001). Income related to institutional assets is reported under administration fees and other income. CI also earns revenues from redemption fees. Investors pay redemption fees when mutual funds are purchased on a deferred sales charge basis and the investment is redeemed within seven years. Redemption fees, which have rates that start at 5.5% and decline to zero after seven years, are calculated as a percentage of the initial value of the funds sold. CI is responsible for the administration of the funds and incurs expenses on behalf of the funds. CI recovers most operating expenses by charging an administration fee to the funds based on actual expenses incurred in the operation of the funds. Expenses CI incurs certain key expenses in the management, marketing and distribution of the funds. These expenses – which constitute the majority of its expenses outside those operational expenses incurred on behalf of and recovered from the funds – include investment management expenses, marketing expenses, and trailer fees and selling commissions paid to financial advisers. Operating expenses, net of those recovered from the funds (referred to as net selling, general and administrative expenses), are primarily marketing expenses. In general, marketing expenses are managed in proportion to CI’s assets under management. u m a n a g e m e n t , marketing, distribution and administration of m utu 33 MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 Advisory fees paid to investment advisers, other than those employed directly by CI, are generally paid on the basis of a percentage of assets under management. CI’s advisers have different fee agreements and therefore the mix of funds will affect the overall expense level. In addition, BPI Global Asset Management, CI Global Advisors, Webb Capital Management and Altrinsic Advisors will generally become more profitable as their assets under management increase. CI, through its equity ownership, participates in the profitability of these companies, effectively reducing its investment advisory expenses as a percentage of assets under management. Expenses related to institutional assets are reported under other expenses. Trailer fees are paid out to investment and mutual fund dealers and life insurance agents to assist them in providing ongoing support to investors in CI funds. Trailer fees are calculated as a percentage of average assets and vary with overall assets under management. Trailer fees are not paid on Class F and Class I mutual funds and institutional assets. CI monitors its operating profitability by measuring the operating margin calculated as a percentage of average mutual fund assets under management. CI’s operating profit margin is defined as management fees from CI’s funds less investment adviser fees, trailer fees, and selling, general and administrative expenses net of expenses recovered from the funds, calculated as a percentage of average mutual fund assets under management. Although operating profit margin is a non-GAAP (generally accepted account- ing principles) earnings measure that does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers, management believes that most shareholders, creditors, other stakeholders and investment analysts prefer to analyze the company’s results based on this performance measure. This allows CI to manage profitability when changes in the market value of assets under management affect revenue flows and permits adjustments to discretionary expenditures in order for CI to maintain its margins. Commissions paid from CI’s cash resources on the sale of funds on a deferred sales charge basis are, for financial reporting purposes, amortized evenly over the 36 months imme- diately following the sale of the funds. Commissions incurred on certain of CI’s assets were financed historically by limited partnerships or securitization vehicles. The expenses for commissions financed by limited partnerships are reported as distribution fees paid to limited partnerships and are calculated as a percentage of the assets. The effective amortization period for commissions financed by limited partnerships is the life of the CI Master Limited Partnership, which will terminate by 2016. The expense for commissions financed by securitization are reported as net fees paid to securitization and reflect an effective amortization period equal to the life of the securitization vehicle. In June 1998, CI repurchased all of the outstanding notes issued by one of CI’s securitization vehicles. The remaining effective unamortized commissions financed by this securitization vehicle were amortized over the period ending February 28, 2001, and are included in the amortization of CI’s deferred sales m m a n a g e m e n t , marketing, distribution and administration of m utu 34 MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 commissions. In July 2001, CI repurchased all of the obligations of BPI (1995) Fees Partnership. The remaining effective unamortized commissions were amortized over the period ending May 31, 2002, and are included in the amortization of CI’s deferred sales commissions. Year ended May 31, 2002 compared with year ended May 31, 2001 Total fee-earning assets (which includes mutual fund assets as well as Covington Funds, DDJ Canadian High Yield Fund, Insight Program, Keystone Fund, BPI Global Asset Management and Trilogy Advisors institutional accounts, VenGrowth Investment Fund I Inc. and ENSIS Growth Fund Inc.) at May 31, 2002, were $25.7 billion, down 4.1% from $26.8 billion at May 31, 2001. Average mutual fund assets under management were $20.9 billion in fiscal 2002, a decrease of 11.4% from $23.6 billion in fiscal 2001. As most of CI’s revenues and expenses are based on assets throughout the year, average asset levels are critical to the analysis of CI’s financial results. The decline in CI’s assets was directly attributable to the decline of all major equity markets around the world. As CI’s assets are generally equity funds, any decline in equi- ty markets will have a comparable effect on CI’s assets. Gross sales of the funds were $3.641 billion for the year ended May 31, 2002, compared with $6.402 billion for the same period in 2001. Net sales (gross sales less redemptions) were $481 million for the year ended May 31, 2002 – compared with $3.468 billion for the same period in 2001. The decrease in CI’s net sales from 2001 reflected the effects of a significant downturn in equity markets especially in the area of growth stocks. In turn, this affected flows into equity mutual funds, especially several broad-based and indus- try-specific funds that had been best-sellers for CI in fiscal 2001. Redemptions of CI’s funds were $3.160 billion in fiscal 2002, compared with $2.933 billion in fiscal 2001. Total revenues decreased to $512.8 million for the year ended May 31, 2002, from $615.1 million for the same period in 2001. Revenues from management fees were $383.0 million for the year ended May 31, 2002, down from $464.5 million in 2001. The decrease was primarily attributable to declines in asset levels but also to changes in asset mix, including a higher proportion of Class I and Class F funds that have lower management fees. As a percentage of average mutual fund assets under manage- ment, management fees were 1.84% for fiscal 2002, down from 1.96% in fiscal 2001. Performance fees totalled $1.1 million for the year ended May 31, 2002, versus $2.6 million in 2001, as the performance of CI’s hedge fund assets were generally below the levels required to generate performance fees. Administration fees and other income (which includes investment income, revenues from investment management subsidiaries, administrative fees, interest, and gain on sale of marketable securities) decreased from $45.8 million to $24.0 million. The primary contribution to the decrease was the $22.6 million in gains on marketable securities realized in 2001. In fiscal 2002, the largest contributor to administrative fees and other income was revenue from institutional business at BPI Global Asset Management and Trilogy Advisors of $15.6 million, up slightly from $15.5 million in 2001. Revenues from third-party processing were $6.1 million in fiscal 2002, compared with $5.5 million in the prior year. Redemption fees rose from $28.7 million in fiscal 2001 to $41.1 million in fiscal 2002 as a result of increased redemptions of assets financed from CI’s cash resources. m a n a g e m e n t , marketing, distribution and administration of m utu u 35 MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 Net fees paid to securitization vehicles were $0.4 million for the year ended May 31, 2002, compared with $4.2 million for the year ended May 31, 2001. The decrease reflects the repurchase of the BPI securitization in July 2001. No fees were paid to securitization vehicles after the repurchase in July 2001. Expenses incurred but recovered as operating expenses of the mutual funds fell to $63.5 million for the year ended May 31, 2002, down 13.6% from $73.5 million in 2001. As a percentage of assets under management, expenses charged to mutual funds declined 3.2% from 0.31% in fiscal 2001 to 0.30% in fiscal 2002. The decline in expenses resulted from improved operating efficiencies combined with cuts in general expenses achieved through reductions in staff numbers and in variable costs. Total selling, general and administrative expenses were $80.0 million in fiscal 2002, down 19.8% from $99.7 million in fiscal 2001. This compares favourably to the decline of 11.4% in average mutual fund assets. Selling, general and administrative expenses (net of expenses recovered from the mutual funds for activities carried out in support of the funds) were $16.5 million, down 37.0% from $26.2 million in the prior fiscal year – reflecting CI’s stringent cost controls implemented to offset in part the effects of market declines. As a percentage of assets under management, the net selling, general and administrative expenses declined 27.3% to 0.08% in fiscal 2002 from 0.11% in fiscal 2001. Investment adviser fees decreased 4.1% from $41.5 million in fiscal 2001 to $39.8 million in fiscal 2002 due to lower levels of assets under management. As a percentage of average assets under management, investment adviser fees were 0.19% in fiscal 2002, up from 0.18% in fiscal 2001. This increase is a reflection of the fact that CI’s investment adviser subsidiaries have minimum cost levels necessary to maintain the integrity of the money management function. Trailer fees decreased from $115.6 million to $97.8 million in fiscal 2002. As a percentage of average assets, trailer fees were 0.47% in fiscal 2002, compared with 0.49% in the prior fiscal year. This decrease resulted from an increase in the percentage of CI’s mutual fund assets purchased in Class F and Class I funds that do not pay trailer fees, and from the 11.4% decrease in average mutual fund assets. CI’s operating margin, as a percentage of average mutual fund assets under management, was 1.10%, down from 1.19% in the prior fiscal year. The decrease resulted from lower management fees offset in part by lower net selling, general and administrative expenses and trailer fees. Distribution fees to limited partnerships totalled $10.6 million, down from $16.2 million in fiscal 2001. As a percentage of average assets, distribution fees to limited partner- ships declined from 0.07% to 0.05%, reflecting a lower percentage of CI’s overall assets under management having been financed by limited partnerships. Amortization of deferred sales commissions represented CI’s largest expense increase, rising from $183.9 million in fiscal 2001 to $201.6 million in fiscal 2002. The increase was a direct result of the “lag effect” of CI’s industry-record sales in fiscal 2000 and continued strong sales in fiscal 2001, combined with additional amortization from the m m a n a g e m e n t , marketing, distribution and administration of m utu 36 MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 inclusion of $11.9 million in unamortized deferred sales commissions from BPI (1995) Fees Partnership. Amortization of goodwill from the acquisition of BPI Financial Corporation in August 1999 totalled $98.3 million in fiscal 2002 ($78.6 million in 2001), reflecting full amortization of all remaining goodwill from that acquisition. Other expenses rose from $13.6 million in fiscal 2001 to $15.3 million in fiscal 2002 in conjunction with revenues recognized under administration fees and other income of $24.0 million. The primary contributors to the increase were expenses associated with CI’s institutional business, which rose from $7.7 million in fiscal 2001 to $8.9 million in fiscal 2002. Expenses attributable to CI’s third-party back-office processing were $2.4 million in fiscal 2002, compared with $2.7 million in the prior year. In addition, CI incurred expenses of $3.6 million related to general corporate expenses. Minority interest in CI’s earnings was $5.2 million for the year ended May 31, 2002, compared with $9.6 million in 2001. This reflects the 45% interest of Trilogy Advisors in CI Global Advisors and the 34% interest of JBS Advisors, Inc. in BPI Global Asset Management. In addition, the provision for future income taxes decreased by $21.8 million during the year, as a result of reductions in future statutory tax rates, and the reversal of timing differences related to sales commissions. Income before amortization of goodwill for the year ended May 31, 2002, was $36.8 million ($0.21 per share or $0.20 per diluted share), compared with $90.1 million ($0.49 per share or $0.47 per diluted share) in 2001. The decline reflects CI’s lower assets under management, which reduced operating profitability, combined with the $17.7 million increase in amortization of deferred sales commissions. After amortization of goodwill, CI had a net loss of $61.4 million for the year ended May 31, 2002, compared with a net income of $11.5 million for the year ended May 31, 2001. For the year ended May 31, 2002, earnings before interest, taxes, depreciation and amortization (EBITDA) totalled $265.5 million ($1.51 per share or $1.46 per diluted share). This compares with $319.9 million ($1.75 per share or $1.68 per diluted share) in the prior fiscal year. Although EBITDA is a non-GAAP earnings measure that does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers, management believes that most shareholders, creditors, other stakeholders and investment analysts prefer to analyze the company’s results based on this performance measure. In fiscal 2002, CI granted 1.4 million stock options to employees and directors of the company. The total cost of the options issued over their five year life was approxi- mately $4.1 million or 1.6% of fiscal 2002 EBITDA. In calculating the options’ value, CI projected the average option life and corresponding stock volatility along with current dividend and interest rate assumptions. m a n a g e m e n t , marketing, distribution and administration of m utu u 37 MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 Financing and Liquidity CI’s capital requirements are primarily to finance commissions arising from the sale of funds on a deferred sales charge basis. In fiscal 2002, CI financed $97.2 million in sales commissions with its own cash resources, down from $199.6 million in fiscal 2001. In addition, during fiscal 2002, CI used $139.3 million to repurchase 11.9 million common shares of C.I. Fund Management Inc. at an average price of $11.66 per share. This compares with $47.4 million used to repurchase 3.6 million common shares at an average price of $13.02 per share in fiscal 2001. On May 31, 2002, the closing price of C.I. Fund Management Inc. was $12.00 per common share. In July 2001, CI repurchased BPI (1995) Fees Partnership for $12.2 million, thereby relieving CI of any future obligations towards this securitization. CI also had net purchases of marketable securities in the amount of $35.8 million, representing investments in new hedge funds launched by CI’s money management subsidiaries and certain other strategic investments. At May 31, 2002, these investments had an unrealized gain of $5.6 million. In fiscal 2002, CI also paid $10.6 million in dividends to holders of CI common shares. These funding requirements were met by cash, short-term investments and marketable securities of $5.9 million at May 31, 2001, operating cash flow in fiscal 2002 of $222.8 million (down from $291.9 million in 2001), the issuance of 2.0 million common shares of C.I. Fund Management Inc. from the exercise of stock options at an average price of $3.57 per share for total gross proceeds of $7.3 million, and the use of CI’s $250-million line of credit with a Canadian chartered bank. At May 31, 2002, CI had cash and marketable securities totalling $45.5 million, and $167.5 million available under the $250-million line of credit. At May 31, 2002, 65.6% of CI’s mutual fund assets had been financed with CI’s internal cash resources. These assets had a current redemption value of $640 million ($3.75 per share) at May 31, 2002, compared with $663 million ($3.67 per share) at May 31, 2001. At May 31, 2002, 8.0 % of CI’s assets were financed by limited partnerships, down from 10.5% at May 31, 2001. At May 31, 2002, none of CI’s assets were financed from securitization, down from 2.0% at May 31, 2001. The front- end-load sales assets at May 31, 2002, were 26.4% of mutual fund assets under management, up from 23.7% in the prior year. Capital expenditures incurred during the year ended May 31, 2002, were primarily for computer hardware and software related to the improvement of systems technology and to support new systems for portfolio trading, reporting and compliance. In fiscal 2001, capital assets for use in the operations of CI’s funds were leased with such pay- ments recovered over time through expenses recovered from the funds. Future payments are included under Note 10 – “Lease Commitments” in the Notes to the Consolidated Financial Statements. No additional fixed assets were leased in fiscal 2002. m m a n a g e m e n t , marketing, distribution and administration of m utu 38 MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 CI’s business does not require the use of any financial instruments for hedging risk other than to hedge the currency risk associated with seed capital investments in the U.S. dollar-denominated hedge funds of CI money management subsidiaries. At May 31, 2002, CI had a U.S. $12.5 million currency hedge in place at a forward rate of $1.5613. At May 31, 2002, the spot rate for U.S. dollars was $1.5279 resulting in an unrealized gain of $0.4 million. Debt outstanding is borrowed on the basis of a floating interest rate. Levels of interest paid are significantly below CI’s cash flow and the potential impact of increased interest costs due to an increase in interest rates is minimal and therefore the exposure is not hedged. Should CI’s view on its exposure to rising interest rates change, the existing loan agreement provides CI with the option of fixing interest rates. Quarter ended May 31, 2002 compared with quarter ended May 31, 2001 Total revenues for the quarter ended May 31, 2002, were $131.1 million compared with $141.8 million in the prior year. The change was primarily a result of the decline in management fee revenue from $107.4 million to $96.6 million for the quarter ended May 31, 2002. The primary contributors to this decline were changes in CI’s asset mix, reduced fees from non-mutual fund assets such as labour-sponsored funds and lower average assets under management as a result of market-related declines. Expenses recovered from mutual funds declined by 13.8% to $16.2 million in fiscal 2002 from $18.8 million in fiscal 2001, as CI reduced fund operating expenses to reflect current market conditions. Selling, general and administrative expenses fell 14.5% from $23.4 million in fiscal 2001 to $20.0 million in fiscal 2002, reflecting the effect of stringent cost controls in the overall operations of CI. Net selling, general and administrative expenses fell from $4.6 million in fiscal 2001 to $3.8 million in fiscal 2002, a decline of 17.4%. Investment adviser fees fell from $10.2 million to $9.9 million for the quarter ended May 31, 2002, reflecting lower assets under management. Trailer fees declined slightly from $26.4 million to $ 24.9 million in the quarter ended May 31, 2002, reflecting the change in mutual fund assets under management including an increased proportion of Class I funds and Class F funds that do not pay trailer fees. Overall, CI’s operating profit margin, defined as management fees less selling, general and administrative (net of expenses recovered from mutual funds), investment adviser fees and trailer fees, calculated as a percentage of average mutual fund assets under management, was 1.10% for the quarter ended May 31, 2002, compared with 1.19% for the quarter ended May 31, 2001. The change was primarily a result of lower management fees, offset partly by lower net selling, general and administrative expenses and lower trailer fees. Distribution fees to limited partnerships were $2.5 million for the quarter ended May 31, 2002, compared with $3.3 million in the prior year. The reduction reflects the lower level of the assets financed by limited partnerships. m a n a g e m e n t , marketing, distribution and administration of m utu u 39 MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 Amortization of deferred sales commissions was $49.4 million for the quarter, up from $47.2 million in the prior year, reflecting the inclusion of additional deferred sales commissions from the repurchase of BPI (1995) Fees Partnership. Income taxes for the quarter were $5.5 million, compared with $(0.2) million in the prior year. In the fourth quarter of fiscal 2001, lower statutory tax rates were enacted, so no provision for income taxes was required due to the higher provisions made in the first three quarters. This had a positive effect on net income of approximately $9.5 million in fiscal 2001. Income before amortization of goodwill was $9.8 million ($0.06 per share and $0.06 per diluted share) for the quarter ended May 31, 2001, compared with $24.0 million ($0.13 per share and $0.13 per diluted share) in the prior year. Net loss for the quarter was $14.8 million ($0.09 per share and $0.09 per diluted share), compared with net income of $4.4 million ($0.02 per share and $0.02 per diluted share) in the prior year. During the quarter ended May 31, 2002, earnings before interest, taxes, depreciation and amortization (EBITDA) totalled $65.7 million ($0.38 per share or $0.37 per diluted share), compared with $75.0 million ($0.41 per share or $0.40 per diluted share) in the prior year. Sales commissions paid for the quarter totalled $25.8 million compared with $34.5 million in the prior year. Net sales for the quarter ended May 31, 2002, were $56.3 million, compared with $446.8 million in the prior year. The decline in sales reflected an overall decline in sales of equity mutual funds in the industry due to continued unsettled market conditions, especially in growth-oriented sectors and certain industry sectors such as telecommunications and technology. CI’s average mutual fund assets totalled $21.0 billion for the quarter ended May 31, 2002, compared with $22.1 billion in the prior year. Outlook On May 22, 2002, CI entered into an agreement to acquire Spectrum Investment Management Limited (“Spectrum”), the mutual fund subsidiary of Sun Life Assurance Company of Canada, and Clarica Diversico Ltd. (“Diversico”), the mutual fund subsidiary of Clarica Life Insurance Company, from Sun Life Assurance and Clarica. In exchange, Sun Life Assurance received approximately 71.2 million common shares of CI, which represented 30% of CI based on CI shares outstanding at July 25, 2002, the time the transaction was completed. Based on a weighted average share price of $9.15 on July 25, 2002, the transaction was valued at $652 million. m m a n a g e m e n t , marketing, distribution and administration of m utu 40 MANAGEMENT’S DISCUSSION AND ANALYSIS May 31, 2002 and 2001 Under the agreement, CI acquired mutual fund and segregated fund businesses with approximately $11.7 billion in assets under management (as at July 25, 2002). CI also receives preferred access for its products to more than 4,000 Clarica agents and managers. The transaction also includes a standstill period under which Sun Life Assurance will not increase its stake in CI beyond 34% for three years, subject to certain exceptions. Sun Life Assurance also entered into a shareholders’ agreement with certain management shareholders which, among other things, provided Sun Life Assurance with representation on CI’s board. The transaction closed on July 25, 2002, following the required notification to unitholders of the Spectrum and Clarica funds. On completion, CI had $34.7 billion in fee-earning assets, including approximately $29.7 billion in mutual and segregated funds. The effect of the transaction will be a significant increase in the overall revenues, profitability and cash flow of CI due to the addition of approximately $11.7 billion in assets under management and as synergies are achieved in the merger of the three companies’ operations. In other developments, equity markets have declined considerably since May 31, 2002. CI’s revenues are directly related to the level of assets under management, which in turn are affected by general levels of equity markets. Since May 2002, CI experienced net redemptions of mutual funds for the first time in over 12 years in reaction to con- tinued declines in overall equity markets. Though a number of CI’s products currently have top-quartile performance and/or five-star ratings from Morningstar Canada, it is uncertain as to when overall equity markets will improve and investor interest in mutual funds will return. Though CI continues to exercise a high degree of discipline in con- trolling expenses, ultimately growth in income is dependent on favourable equity markets. m a n a g e m e n t , marketing, distribution and administration of m utu u 41 0123456 789012345 678901234 56789 0123456 789012345 6789 012345 6789012345 123456789 0123 456789012 345 6789 0123456 789012345 6789 01234567 89012 CONSOLIDATED FINANCIAL STATEMENTS 0 MANAGEMENT’S REPORT TO SHAREHOLDERS AUDITORS’ REPORT 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 judgment. 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 appro- priate 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. 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, 2002 and 2001 and the consolidated statements of income (loss) and deficit and cash flows 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 Canadian 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 pres- entation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at May 31, 2002 and 2001 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. William T. Holland President and Chief Executive Officer Toronto, Canada, June 28, 2002 Chartered Accountants Stephen A. MacPhail Executive Vice-President, Chief Operating Officer and Chief Financial Officer June 28, 2002 012345678901234567890123456789012345678901234567890123456789012345 43 CONSOLIDATED BALANCE SHEETS As at May 31 ASSETS Current Cash Marketable securities Accounts receivable and prepaid expenses [note 8(c)] Total current assets Capital assets [note 5] Deferred sales commissions, net of accumulated 2002 $ 2001 $ 3,108,213 42,437,124 16,959,402 62,504,739 2,627,477 40,561 5,860,877 16,987,611 22,889,049 4,125,078 amortization of $323,507,788 [2001 - $235,695,402] 221,892,159 326,202,963 Goodwill, net of accumulated amortization of $235,819,424 [2001 - $137,548,975] Other assets [note 6] — 3,717,211 98,270,449 5,516,284 LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and accrued liabilities Income taxes payable Total current liabilities Deferred lease inducement Long-term debt [note 7] Future income taxes [note 9] Total liabilities Minority interest Shareholders' equity See accompanying notes On behalf of the Board: 290,741,586 457,003,823 Share capital [note 8(a)] Deficit Total shareholders' equity Director Director 2002 $ 2001 $ 32,486,690 36,520,643 69,007,333 1,656,425 82,500,000 77,643,569 29,092,929 1,065,351 30,158,280 1,976,586 61,000,000 99,453,191 230,807,327 192,588,057 3,174,090 3,581,944 293,449,762 306,533,632 (236,689,593) (45,699,810 ) 56,760,169 290,741,586 260,833,822 457,003,823 012345678901234567890123456789012345678901234567890123456789012345 44 0 CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND DEFICIT Years ended May 31 2002 $ 2001 $ (61,444,588) (45,699,810) (118,914,427) (10,630,768) (236,689,593) 11,498,937 (11,386,906 ) (41,227,411 ) (4,584,430 ) (45,699,810 ) 0.21 0.20 (0.35) (0.35) 0.49 0.47 0.06 0.06 REVENUE Management fees Administration fees and other income Redemption fees Performance fees Expenses recovered from mutual funds 2002 $ 2001 $ 382,991,534 464,541,841 Deficit, beginning of year Net income (loss) for the year 23,991,112 41,118,274 1,115,281 63,535,689 45,771,073 28,708,962 2,552,083 73,481,520 Cost of shares repurchased in excess of stated value [note 8(a)] Dividends declared Deficit, end of year 512,751,890 615,055,479 Earnings per share before amortization of goodwill Net fees paid to securitization vehicles [note 4] (408,361) (4,156,630 ) Diluted earnings per share before amortization of goodwill [note 8(d)] Earnings (loss) per share Diluted earnings (loss) per share [note 8(d)] See accompanying notes EXPENSES Selling, general and administrative Investment adviser fees Trailer fees Distribution fees to limited partnerships [note 3] Amortization of deferred sales commissions Interest [note 7] Other Minority interest Income before income taxes and amortization of goodwill Provision for income taxes Current Future Income before amortization of goodwill Amortization of goodwill Net income (loss) for the year 5 512,343,529 610,898,849 80,043,551 39,790,637 97,772,685 10,558,014 201,554,618 3,334,278 15,308,436 99,659,799 41,497,122 115,608,991 16,213,665 183,948,576 6,461,191 13,572,460 448,362,219 476,961,804 5,198,447 58,782,863 9,602,389 124,334,656 43,766,624 (21,809,622) 21,957,002 36,825,861 98,270,449 (61,444,588) 8,487,328 25,784,698 34,272,026 90,062,630 78,563,693 11,498,937 012345678901234567890123456789012345678901234567890123456789012345 45 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended May 31 OPERATING ACTIVITIES Net income (loss) for the year Add (deduct) items not involving cash Depreciation and amortization Future income taxes Amortization of deferred sales commissions Gain on sale of marketable securities Minority interest Other Net change in non-cash working capital balances related to operations Cash provided by operating activities INVESTING ACTIVITIES Additions to capital assets Dispositions of capital assets Purchase of marketable securities Proceeds on sale of marketable securities Sales commissions Dispositions of other assets Cash used in investing activities 2002 $ 2001 $ (61,444,588) 11,498,937 Long-term debt [note 7] FINANCING ACTIVITIES 100,126,519 (21,809,622) 201,554,618 (805,607) 5,198,447 — 83,490,865 25,784,698 183,948,576 (22,628,722) 9,602,389 240,000 Repurchase of share capital [note 8(a)] Issuance of share capital [note 8(a)] Distributions to minority interest Dividends paid to shareholders Cash used in financing activities Net increase (decrease) in cash during the year 222,819,767 291,936,743 Cash, beginning of year Cash, end of year 39,517,370 262,337,137 (9,381,438) 282,555,305 (666,684) — (2,922,469) 2,024,438 (65,910,415) (67,150,702) 30,139,775 90,162,059 (97,243,814) (199,612,481) 1,146,423 4,029,749 (132,534,715) (173,469,406) Operating cash flow per share Diluted operating cash flow per share [note 8(d)] Supplemental cash flow information Interest paid Income taxes paid See accompanying notes 2002 $ 2001 $ 21,500,000 (139,289,860) 7,291,563 (5,605,705) (10,630,768) (57,000,000) (47,376,185) 5,586,128 (9,383,109) (4,584,430) (126,734,770) (112,757,596) 3,067,652 40,561 3,108,213 1.27 1.22 (3,671,697) 3,712,258 40,561 1.60 1.53 3,009,295 6,249,789 6,821,228 8,863,177 012345678901234567890123456789012345678901234567890123456789012345 0 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2002 and 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. Basis of presentation The consolidated financial statements include the accounts of C.I. Fund Management Inc. [the “Corporation”], CI Mutual Funds Inc. [“CIMF”] and its wholly-owned subsidiaries, InfoWise Inc., CI GP Limited, CI Fund Services Inc., CI Capital Management Inc., CI FEES Trust, CI Global Holdings Inc. and CI Global Holdings USA Inc. The accounts of partially-owned subsidiaries, BPI Global Asset Management LLP [“BGAM”], CI Global Advisors LLP and Webb Capital Management LLP, are also included in the consolidated financial statements. Hereinafter, the Corporation and its subsidiaries are referred to as the Corporation. The Corporation’s investment in Trilogy Advisors, LLC, Altus Hedge Partners International Inc. and Altrinsic Global Advisors, LLC are accounted for using the equity method. Accordingly, the Corporation’s proportionate share of earnings is included in income. 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. Performance fees are recognized when management is assured of their realization. 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. 012345678901234567890123456789012345678901234567890123456789012345 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2002 and 2001 Goodwill Goodwill is recorded at cost less accumulated amortization. Amortization is provided on a straight-line basis over three years. The Corporation evaluates the carrying value of goodwill for potential impairment based on estimated future cash flows. Any impairment would be written off to income. Marketable securities Marketable securities consist of investments in mutual fund units and shares of publicly traded companies. These investments are carried at the lower of cost and market value. 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 Property Foreign currency translation 30% diminishing balance or straight-line over three to four years straight-line over two to four years 20% diminishing balance or straight-line over five years straight-line over the term of the lease straight-line over twenty-five years Foreign currency denominated items are translated into Canadian dollars as follows: Integrated foreign subsidiaries are financially or operationally dependent on the Corporation. Monetary assets and liabilities are translated into Canadian dollars using the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated into Canadian dollars using historical rates. Revenue and expenses are translated at average rates prevailing during the year. Translation exchange gains and losses of integrated foreign subsidiaries are included in income. Other foreign currency transactions are translated into Canadian dollars using the exchange rate in effect on the transaction date. At the balance sheet date, monetary assets and liabilities are translated into Canadian dollars using the exchange rates in effect at that date, revenue and expenses are translated at exchange rates prevailing during the year and the resulting translation exchange gains and losses are included in income. Exchange gains and losses on forward contracts are included in income in the same period as the gains or losses on the items hedged. 012345678901234567890123456789012345678901234567890123456789012345 0 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2002 and 2001 Deferred lease inducement Lease inducements are deferred and amortized over the term of the lease. Incentive stock option plan The Corporation has a stock-based compensation plan, which is described in note 8(b). No compensation expense is recognized for the plan when stock or stock options are issued to employees. Any consideration paid by employees on exercise of stock options or purchase of stock is credited to share capital. Fair value of financial instruments The estimated fair values of all financial instruments approximate their carrying amounts in the consolidated balance sheets except for marketable securities as at May 31, 2002, which had a market value of approximately $47 million. The Corporation has a forward contract outstanding as at May 31, 2002 to sell U.S. $12.5 million at a forward rate of $1.5613 on August 15, 2002. The fair value of this contract is approximately $0.4 million as at May 31, 2002. Income taxes The liability method of tax allocation is used in accounting for income taxes. Under this method, future income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. Earnings and operating cash flow per share The treasury stock method is used in the calculation of per share amounts. Basic per share amounts are determined by dividing income (loss) or operating cash flow, as applicable, by the weighted average number of shares outstanding during the year. Fully diluted per share amounts are determined by adjusting the weighted average number of shares outstanding for the dilutive effect of stock options. In fiscal 2002, the Corporation has changed its accounting policy for earnings and operating cash flow per share, as described in note 8(d). 012345678901234567890123456789012345678901234567890123456789012345 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2002 and 2001 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 CI Mutual Funds [the “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 portfolios 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 limited partnerships and securitization vehicles [notes 3 and 4]. In addition to commissions paid to dealers on the sale of securities of the Funds by the Corporation, certain limited partnerships and securitization vehicles, the Corporation pays fees [“trailer fees”] to dealers to provide ongoing services to investors in the Funds. These trailer fees range up to 1% per annum based on the net asset value of the underlying securities of the Funds and are payable monthly or quarterly. 3. LIMITED PARTNERSHIPS During various periods for certain Funds prior to July 31, 1997, 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 based on 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, 2002, the net asset value of securities of the Funds financed by the limited partnerships was $1,612 million [2001 – $2,340 million]. 012345678901234567890123456789012345678901234567890123456789012345 0 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2002 and 2001 4. SECURITIZATION VEHICLES During the period from July 1, 1994 to December 31, 1994, selling commissions on sales of securities of certain of the Funds under the deferred sales charge method were paid by BPI (1994) Fees Partnership, and the periods from October 1, 1995 to December 31, 1995 and from June 1, 1998 to December 31, 1998 were paid by BPI (1995) Fees Partnership [collectively, the “Fees Partnerships”]. The Fees Partnerships assumed responsibility for providing transfer agency functions and investor reporting services for the securities financed pursuant to Distribution and Administration Agreements. In return, the Fees Partnerships received any redemption fees paid with respect to the financed securities and received annual distribution and administration fees totaling a maximum of 1.70% of the net asset value of the outstanding financed securities. On July 31, 2001, the Corporation repurchased the obligations of the Fees Partnerships for $12,190,807. Of this amount, $290,339 was recorded as a current period expense representing interest charges and closing costs, and $11,900,468 was included in deferred sales commissions and amortized over the period ended May 31, 2002. 5. CAPITAL ASSETS Capital assets consist of the following: Computer hardware and software Office equipment Leasehold improvements Property Less accumulated depreciation and amortization Net book value 2002 Accumulated depreciation and amortization $ 14,215,889 3,503,316 3,050,208 82,365 20,851,778 Cost $ 15,278,599 4,597,457 3,257,827 345,372 23,479,255 20,851,778 2,627,477 2001 Accumulated depreciation and amortization $ 12,723,325 2,926,325 2,977,208 60,635 18,687,493 Cost $ 14,951,373 4,331,515 3,184,311 345,372 22,812,571 18,687,493 4,125,078 Reflected in the accounts of the Corporation for 2001 is additional depreciation and amortization expense of approximately $983,000 as a result of a review of the estimates of the useful life of the capital assets. 012345678901234567890123456789012345678901234567890123456789012345 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2002 and 2001 6. OTHER ASSETS Other assets consist of the following: Investment in limited partnership Investment in securitization vehicles Investment in BGAM-managed funds Contingency fund deposits Other 7. LONG-TERM DEBT 2002 $ 1,672,922 — 1,412,427 30,000 601,862 3,717,211 2001 $ 1,801,473 1,151,316 1,457,732 30,000 1,075,763 5,516,284 The Corporation has arranged a revolving credit facility with a Canadian chartered bank for general corporate purposes for $250 million, which expires on September 22, 2005. Amounts may be borrowed under this facility through prime rate loans, U.S. base rate loans or bankers’ acceptances, which bear interest at bankers’ acceptance rates plus 0.35% to 0.50% depending on the status of a particular financial ratio. The agreement requires the Corporation to meet certain financial ratios on a quarterly basis. The facility is collateralized by a registered general security agreement from the Corporation, hypothecation of the shares of CIMF, and assignment of the management agreements between CIMF and the Funds. As at May 31, 2002, $82.5 million [2001 -- $61 million] has been drawn on this facility in the form of bankers’ acceptances at an effective interest rate of 2.76% [2001 -- 4.89%]. Interest expense attributable to the long-term debt in fiscal 2002 was $2,924,577 [2001 -- $5,990,276]. 012345678901234567890123456789012345678901234567890123456789012345 0 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2002 and 2001 8. SHARE CAPITAL [a] Details with respect to share capital are as follows: Common shares Number of shares # Stated value $ Authorized Unlimited preference shares Unlimited common shares Issued May 31, 2000 Share repurchase Exercise of stock options May 31, 2001 Share repurchase Exercise of stock options May 31, 2002 182,829,928 (3,638,400) 1,493,200 180,684,728 (11,943,900) 2,044,600 170,785,428 307,096,278 (6,148,774) 5,586,128 306,533,632 (20,375,433) 7,291,563 293,449,762 During fiscal 2002, 11,943,900 common shares [2001 -- 3,638,400] were repurchased under a normal course issuer bid at an average cost of $11.66 per share [2001 -- $13.02] for a total consideration of $139,289,860 [2001 -- $47,376,185]. Deficit was increased by $118,914,427 [2001 -- $41,227,411] for the cost of the shares in excess of their stated value. During the period from June 1 to June 28, 2002, the Corporation repurchased an additional 3,149,000 common shares under the normal course issuer bid at an average cost of $11.17 per share for a total consideration of $35,177,584. 012345678901234567890123456789012345678901234567890123456789012345 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2002 and 2001 [b] Incentive stock option plan The Corporation has established an incentive stock option plan [the “Plan”] for the executives, key employees and directors of the Corporation. The maximum number of common shares that may be issued under the Plan is 30,054,360. As at May 31, 2002, there are 12,720,200 [2001 -- 13,522,000] common shares reserved for issuance on exer- cise of stock options. These options vest over periods of up to five years, may be exercised at prices ranging from $1.34 to $15.65 per common share with a total exercisable value of $85,447,287 and expire at dates up to 2007. Details of the Plan activity and status for the years ended May 31, 2002 and 2001 are as follows: Number of options 2002 Weighted average exercise price $ Number of options 2001 Weighted average exercise price $ Options outstanding, beginning of year Options granted Options exercised Options cancelled Options outstanding, end of year Options exercisable, end of year 13,522,000 1,372,300 (2,044,600) (129,500) 12,720,200 5,467,175 5.77 12.00 3.57 13.67 6.72 4.41 13,601,600 1,779,600 (1,493,200) (366,000) 13,522,000 4,186,600 4.77 12.31 3.74 8.76 5.77 3.63 012345678901234567890123456789012345678901234567890123456789012345 0 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2002 and 2001 Details of the Plan options outstanding and exercisable as at May 31, 2002 are as follows: Range of exercise prices $ Number outstanding Weighted average remaining contractual life [years] Weighted average exercise price $ Number exercisable Weighted average exercise price $ Options outstanding Options exercisable 1.34 to 3.00 3.01 to 4.00 4.01 to 5.00 5.01 to 10.00 10.01 to 15.65 1.34 to 15.65 [c] Employee share purchase loans 140,000 4,018,700 4,300,200 72,000 4,189,300 12,720,200 1.8 2.2 3.1 3.6 4.6 3.3 2.71 3.79 4.67 7.78 11.74 6.72 140,000 3,497,775 1,511,300 18,000 300,100 5,467,175 2.71 3.78 4.70 7.78 11.00 4.41 The Corporation has an employee share purchase loan program. These loans are renewable yearly and bear interest at prescribed rates. As at May 31, 2002, the carrying amount of employee share purchase loans is $2,210,492 [2001 -- $3,236,792] and is included in accounts receivable and prepaid expenses. These loans become due immediately upon termination of employment or sale of the shares that are held as collateral. As at May 31, 2002, the shares held as collateral have a market value of approximately $4,620,000 [2001 - $7,995,000]. [d] Earnings and operating cash flow per share and change in accounting policy In fiscal 2002, the Corporation has retroactively adopted, with restatement of prior year amounts, the recommendations of The Canadian Institute of Chartered Accountants’ Handbook Section 3500, Earnings per Share. The recommendations require the application of the treasury stock method for the calculation of the dilutive effect of stock options and other dilutive securities. The change in accounting policy had no effect on earnings (loss) per share and diluted earnings (loss) per share before and after goodwill amortization for the years ended May 31, 2002 and 2001. The change resulted in an increase in diluted operating cash flow per share from $1.19 to $1.22 for the year ended May 31, 2002 and from $1.50 to $1.53 for the year ended May 31, 2001. 012345678901234567890123456789012345678901234567890123456789012345 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2002 and 2001 The weighted average number of shares outstanding for the years ended May 31 were as follows: Basic Diluted 2002 # 176,016,773 182,098,663 2001 # 182,715,753 190,240,501 Diluted loss per share for the year ended May 31, 2002 is calculated using the basic weighted average number of shares outstanding for the year. All other diluted per share amounts are calculated using the diluted weighted average number of shares outstanding, which includes the dilutive effect of stock options. For this purpose, the effect of options for 312,465 shares [2001 — 215,992 shares] have been excluded because such options were not “in the money” during the year. 9. INCOME TAXES Future income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation’s future income tax liabilities and assets as at May 31 are as follows: Future income tax liabilities Deferred sales commissions Other, net Total future income tax liabilities Future income tax assets Book depreciation and amortization in excess of CCA Deferred lease inducement Ontario corporate minimum tax credits Non-capital loss carryforwards Total future income tax assets Net future income tax liabilities 2002 $ 80,071,822 27,532 80,099,354 1,687,762 547,223 220,800 — 2,455,785 77,643,569 2001 $ 123,092,232 761,989 123,854,221 1,715,943 658,262 7,972,834 14,053,991 24,401,030 99,453,191 012345678901234567890123456789012345678901234567890123456789012345 0 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 2002 and 2001 The following is a reconciliation between the Corporation’s statutory and effective income tax rates: Combined Canadian federal and provincial income tax rate Increase (decrease) in taxes resulting from: Large Corporations Tax Non-taxable portion of capital gains Impact of rate changes on future income taxes Other - net 10. LEASE COMMITMENTS 2002 % 40.2 — (0.3) (2.1) (0.4) 37.4 2001 % 42.9 0.3 (3.5) (12.4) 0.3 27.6 The Corporation has entered into leases relating to the rental of office premises and computer equipment. The approximate future minimum annual rental payments under such leases are as follows: 2003 2004 2005 2006 2007 2008 and thereafter 11. BUSINESS ACQUISITION $ 12,951,000 6,515,000 3,791,000 3,583,000 3,112,000 10,529,000 On May 22, 2002, the Corporation entered into a purchase agreement to acquire Spectrum Investment Management Limited, the mutual fund management subsidiary of Sun Life Financial Services of Canada Inc., and Clarica Diversico Ltd., the mutual fund management subsidiary of Clarica Life Insurance Company. As consideration, the Corporation has agreed to issue common shares of the Corporation that will represent 30% of the total number of issued and outstanding common shares of the Corporation immediately following the closing of the transaction. Based upon the number of common shares outstanding as at June 28, 2002, this would represent approximately 71 million common shares. The transaction is scheduled to close on July 25, 2002. 012345678901234567890123456789012345678901234567890123456789012345 57 CORPORATE DIRECTORY August 31, 2002 C.I. Fund Management Inc. Directors and Officers G. Raymond Chang Chairman and Director William T. Holland President, Chief Executive Officer and Director Stephen A. MacPhail Executive Vice-President, Chief Operating Officer and Chief Financial Officer Peter W. Anderson Executive Vice-President Michael J. Killeen Senior Vice-President, General Counsel and Corporate Secretary Robert M. Astley Director Ronald D. Besse Director Paul W. Derksen Director A. Winn Oughtred Director George W. Oughtred Director David J. Riddle Director CI Mutual Funds Inc. Executive Management William T. Holland Chairman, Chief Executive Officer and Director Lorraine P. Blair Senior Vice-President, Human Resources Stephen A. MacPhail Director Peter W. Anderson President and Director G. Raymond Chang Director Kevin Bonello Vice-President Ron Bowes Vice-President Michael Bustard Vice-President, Administration Thomas V. Caswell Senior Vice-President Kathy M. Chan Vice-President, Finance Marcelo A. Donato Vice-President Patrick Flemming Vice-President Mike Gramegna Vice-President Derek J. Green Senior Vice-President Sean Hayes Vice-President Fabio Iannicca Vice-President, Administration Munir T. Issa Senior Vice-President, Information Systems Douglas J. Jamieson Senior Vice-President, Finance and Chief Financial Officer K. Michael Kelly Senior Vice-President Neal Kerr Senior Vice-President Patrick LeFrancois Vice-President Mark MacLeod Vice-President, Client Services Andrew McBain Vice-President David R. McBain Senior Vice-President Carey W. McIntee Senior Vice-President Jeff Nairn Vice-President Karl Palmen Vice-President Michael J. Killeen Senior Vice-President, General Counsel and Corporate Secretary David C. Pauli Senior Vice-President, Fund Operations Pierre Lalonde Vice-President Scott Pehleman Senior Vice-President Jacques Prévost Vice-President Roy Ratnavel Vice-President Sylvain Rivard Senior Vice-President Alain Ruel Senior Vice-President David M. Rupert Senior Vice-President Dean Shales Vice-President, Administration Greg Shin Senior Vice-President, Fund Accounting Philippe Ventura Vice-President Julie A. Warren Vice-President Michael Warus Vice-President Tracey C. Wood Vice-President Portfolio Management Eric B. Bushell Chief Investment Officer and Senior Vice-President, Signature Funds Benedict G. Cheng Vice-President, Signature Funds Joe D’Angelo Vice-President, Signature Funds Robert D. Lyon Vice-President, Signature Funds P. Andrew Waight Vice-President, Signature Funds Gerald Coleman Chief Investment Officer, Harbour Funds Stephen Jenkins Vice-President, Harbour Funds m m a n a g e m e n t , marketing, distribution and administration of m utu 58 CORPORATE INFORMATION May 31, 2002 Head Office Sales Offices CI Place, 151 Yonge Street, Eleventh Floor Toronto, Ontario M5C 2W7 Tel: 416-364-1145 Toll Free: 1-800-268-9374 www.cifunds.com 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 Montréal 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 Investor Relations Contact: Stephen A. MacPhail Head Office Tel: 416-364-1145 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”. Auditors Ernst & Young LLP Toronto-Dominion Centre P.O. Box 251 Toronto, Ontario M5K 1J7 Registrar and Transfer Agent Computershare Trust Company of Canada 9th Floor, 100 University Avenue Toronto, Ontario M5J 2Y1 Tel: 1-800-564-6253 email: caregistryinfor@computershare.com The Annual and Special Meeting of Shareholders will be held on October 29, 2002, at 2:00 pm at the Toronto Hilton, Toronto, Ontario. This Annual Report can be downloaded from CI’s website at www.cifunds.com under “Corporate Information.” m a n a g e m e n t , marketing, distribution and administration of m utu u 59 

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