CI Financial
Annual Report 2005

Plain-text annual report

CI Financial 2 0 0 5 A N N U A L R E P O RT 4 Message to Shareholders 12 Historical Financial Highlights 14 Operating Review 14 CI Investments Inc. 22 Assante Corporation 28 Skylon Advisors Inc. 32 Management’s Discussion and Analysis 54 Consolidated Financial Statements 60 Notes to Consolidated Financial Statements 75 Corporate Directory 76 Corporate Information CI Financial CI Financial is a diversified wealth management firm and Canada’s third- largest investment fund company. Independent and Canadian-owned, CI provides a comprehensive and innovative selection of top-quality investment products and services. CI has two million clients and more than $70 billion in fee-earning assets (at August 31, 2005). The company operates primarily through subsidiaries CI Investments Inc., which offers the industry’s broadest selection of investment funds; Assante Corporation, which provides financial advisory services through a national network of 1,050 advisors; and Skylon Advisors Inc., a manager of structured products. CI has been listed on the Toronto Stock Exchange under the symbol CIX since June 1994 and is a member of the S&P/TSX Composite Index. F I N A N C I A L H I G H L I G H T S F O R T H E Y E A R S E N D E D M AY 3 1 , (millions of dollars, except share and per share amounts) 2005 2004 % change Total fee-earning assets, end of year Net sales of funds Management fees Total revenues Net selling, general and administrative Trailer fees Net income Operating cash flow* Earnings per share Operating cash flow* per share EBITDA* per share Dividends per share 68,053 1,734 881.8 1,082.3 215.3 250.7 284.7 389.7 0.97 1.33 1.81 0.68 61,343 920 710.9 844.6 147.0 197.8 221.1 368.5 0.82 1.37 1.65 0.41 Shareholders’ equity, end of year 1,472.8 1,533.9 Shares outstanding, end of year 286,643,091 295,199,027 +11 +88 +24 +28 +46 +27 +29 +6 +18 -3 +10 +66 -4 -3 *EBITDA (Earnings before interest, taxes, depreciation and amortization) and operating cash flow are non-GAAP (generally accepted accounting principals) earnings measures; however, management believes that most of its shareholders, creditors, other stakeholders and investment analysts prefer to include the use of these performance measures in analyzing CI’s results. Fee-earning Assets ■ years ended May 31; $billions 68.1 61.3 26.7 26.8 25.7 33.1 4.4 5.5 6.5 8.3 9.7 '95 '96 '97 '98 '99 '00 '01 '02 '03 ‘04 '05 CIX vs S&P/TSX Composite Index Total Return ■ years ended May 31; June 1994 = 100 979 | | | | 241 1,079 | | | | 215 923 | | | | 214 942 | | | | 195 1,339 | | 1,468 | CIX S&P/TSX Composite Index | 284 | | 244 99 | | 109 121 | | | | 131 289 | | | | 192 206 | | | | 159 368 | | | | 175 '95 '96 '97 '98 '99 '00 '01 '02 '03 ‘04 '05 Dear Shareholders, Fiscal 2005 was a very successful year, one in which your company achieved record levels of assets, revenues and profitability. It was a year in which we built on the acquisitions we have made over the past two years to solidify our position within the top tier of our industry. Our principal operating companies, each a leader in its segment, performed well during the year. CI Investments Inc. led the independent fund companies in net sales and posted strong results across its lineup. 4 WILLIAM T. HOLLAND Chief Executive Officer CI Financial Assante Wealth Management, one of the largest Financial Achievements full-service financial planning firms in Canada, has restructured its business and established a strong platform for growth. Our position in this segment was bolstered in fiscal 2005 with the acquisition of IQON Financial Management Inc. and Synera Financial Services Inc. Skylon Advisors Inc., known for its innovation in structured products, enjoyed particular success in developing and marketing fund-linked notes in co- operation with CI Investments. We have been making progress at a time when our industry is facing new challenges. Although Canadian mutual fund assets hit an all-time high of $530 billion in June 2005, it is an industry that shows all the signs of being mature. While net sales have improved since the slump of 2002-2003, reaching $13 billion in the first six months of 2005, they are still far below the peak net sales of $52 billion reached in 1997. Despite this, CI has grown dramatically and consider- ably advanced its competitive position within the industry. Since 1998, we have increased our fee- earning assets by 750% from $8 billion to $68 billion. We have moved from being the number 15 mutual fund company to the third-largest player in our industry, with a wide range of products. Our results for fiscal 2005 reflect this steady growth. We ended the fiscal year with $68.1 billion in fee- earning assets, an 11% increase year over year that resulted from healthy net sales, the acquisition of IQON and excellent performance by our funds. Our managed retail assets also grew by 11%, to $49.2 billion. This was enough to boost our share in that market slightly, to 8.9% at May 31, 2005. Our net sales at CI Investments and Assante rose 215% in fiscal 2005 to $1.64 billion – making CI the top-selling independent fund company at a time when the banks, with their huge branch networks, are dominating the net new sales figures. CI’s annual revenues surpassed the billion-dollar mark for the first time, rising 28% to $1.1 billion. Net income was $284.7 million, up 29% from $221.0 million in fiscal 2004. Earnings per share rose 18% to $0.97. CI’s operating cash flow increased 6% to $389.7 million. Investors who are familiar with us have come to understand our focus on building the value of the company. Our share price at May 31, 2005, was $17.30, which represents a 9.6% return for the year including dividends. CI stock has been a top per- former over the longer term as well. From June 1994, when CI went public, to May 31, 2005, CI shares posted a total return of 1,368% – making it the eighth-best-performing stock on the entire S&P/TSX Composite Index. 6 Shareholders have benefited from the tremendous the last five or more consecutive growth in CI’s free cash flow over the years. Given years. In July, we announced a our maturing industry, CI produces more cash than it further 20% increase in the divi- needs to finance its growth. We have returned cash to dend, to $0.72 per share a year. shareholders through share buybacks and dividends. In fiscal 2005, CI repurchased 8.6 million shares at companies apart from income trusts to pay its divi- In January 2005, CI became one of the first Canadian an average price of $17.24. Over the past 10 years, we have bought back $520 million worth of shares at an average price of $9.58 – certainly one of the best investments we have ever made. dend on a monthly basis. We took this step to help the growing number of investors who rely on their investments to provide a consistent income. Operational Achievements CI’s dividend during the fiscal year of $0.675 repre- Underlying these impressive financial results were sents an increase of 67% from the prior year and operational achievements across our organization. 133% from fiscal 2003. This record was enough to We would like to mention just a few highlights. place us at the top of a Globe and Mail survey pub- You can read more in the following sections of this lished in November 2004, which found that CI had Annual Report. the highest dividend growth rate over three and five years of all companies listed on the S&P/TSX Index. We have already made note of the strong sales at CI was also named a “Mergent Canadian Dividend CI Investments during the year. It’s worthwhile Achiever,” which recognizes companies that have mentioning that sales were well diversified among increased their regular annual dividend payments for funds, product types and portfolio management groups. CIX Share Price and Dividends Per Share ■ years ended May 31 (adjusted for stock splits) : $ 17.30 | CIX Share Price Dividends Per Share | 0.675 16.44 | | | | 0.405 14.10 | | 12.83 | | | | 0.025 | | 0.025 11.90 | | | | 0.29 12.00 | | | | 0.06 1.36 | | | | 0.01 1.63 | | | | 0.02 2.75 | | | | 0.02 3.84 | | | | 0.02 4.84 | | | | 0.025 '95 '96 '97 '98 '99 '00 '01 '02 '03 ‘04 '05 7 Much has been made of the fact that industry sales On the dealership side of the Assante business, we have been dominated by income and balanced prod- have updated and consolidated the back office ucts, but CI also has several equity funds among procedures and systems – providing the base for its top sellers. One product that was particularly increased efficiency and a higher level of service to successful in fiscal 2005 was fund-linked notes, advisors and clients. We also expanded our support which were developed in conjunction with Skylon. to advisors by offering a wider range of insurance A number of these notes raised $597 million during products, additional access to tax, legal, insurance the year. and estate planning experts, and increased opportu- nities for professional and business development. One of the key drivers of sales at CI Investments has been its strong ties with a variety of distribution Perhaps one of our most important operational channels. While CI has enhanced and strengthened achievements is our continued focus on efficiency all of these ties over the past year, our relationship and cost control throughout our organization. This with Sun Life Financial’s 4,000 Clarica agents and discipline not only benefits our shareholders, but the managers has become increasingly productive. Under investors in the CI and Assante funds. As a result of this alliance, which was established in 2002, CI is a our increasingly efficient fund administration, we preferred supplier of wealth management products have steadily reduced the operating expenses of our to the Clarica sales force. funds over the past decade. In fiscal 2005, operating expenses as a percentage of assets were just 24.5 Another key driver of sales is, of course, fund basis points, down from 39.6 basis points in 1999. performance. CI Investments has enjoyed strong performance overall, and one of the best measures We believe that CI has the industry’s lowest operating of this quality is Morningstar Canada’s five-star costs, and we will tell you more later about how we ratings. At May 31, 2005, CI Investments led the are capitalizing on this competitive advantage. industry with 54 funds with the top rating, while the second-place firm had 18. At Assante, the asset management business enjoyed decent growth in fiscal 2005, with respectable net sales and performance within its own managed portfolio programs. Over the past year, we made significant improvements to those programs through various portfolio management changes and by trans- ferring their administration to the CI system from a third-party service provider, which led to substantial reductions in their operating costs. 8 A Strategy for Today and the Future CI’s strategy has been consistent over many years and it has guided the company’s continued growth through both the “boom” years and the difficult years of the extended bear market. This strategy has four defining elements: the achievement of scale; a diverse lineup of products and portfolio managers; multiple distribution channels; and operational excellence. By achieving scale, CI has gained an important Operational excellence refers not only to our consid- competitive advantage. We are able to devote more erable expertise and efficiency in fund administration, resources to all aspects of our business, while bene- but to the excellence we achieved in all of our opera- fiting enormously from economies of scale. Our funds’ tions, including fund performance, our high level of low operating expenses are but one example of this customer service and the strength of our brand. principle at work. CI’s product lineup is extensive in its variety, as it includes mutual and segregated funds, hedge funds, fund-linked notes, closed-end funds, and asset allocation services and portfolio products, such as Portfolio Series and Assante’s Optima Strategy and Artisan Portfolios. Within those products, we offer a wide range of leading portfolio managers represent- ing the full spectrum of investment approaches. In the wealth planning business, Assante provides a full slate of services. This diversity has attracted advisors’ support, as it makes it easier for them to meet their clients’ needs in one place. It has ensured that CI is not reliant on any one product or portfolio manager for its sales, and it has meant that CI has products available to meet investors’ preferences as they change. CI views multiple distribution channels as being critical to the company’s future. We have developed new avenues for growth through, for example, our successful participation in third-party fund programs at other financial institutions and our rewarding relationship with Clarica. With the acquisitions of Assante and IQON, CI gained a significant presence in this segment of the business. Our Plans for Fiscal 2006 CI is beginning fiscal 2006 in its strongest position in six years. In the first two months of the year, net sales have been strong and our fee-earning assets hit a new high. We continue to execute our strategy, enhancing CI’s growth, profitability and competitiveness. As an example, we are implementing a ground-break- ing proposal to establish fixed operating expenses for our CI and Assante mutual funds. This is significant for the industry because operating costs vary widely between funds and companies, and are not known by investors until after the fact. Our investors will know in advance what they are paying. In addition, we are setting the operating expenses at levels that are significantly lower than the funds’ actual average operating expenses for calendar year 2004. We believe that our operating expenses are the lowest in the industry and that most of our competitors will be unable to match our efficiency. As part of this, we have taken a leadership position in the industry in highlighting the pernicious effects of the GST, which the federal government charges on the operation of mutual funds. It is, in effect, a tax on Canadians’ retirement savings. 9 WILLIAM T. HOLLAND Chief Executive Officer CI Financial STEPHEN A. MACPHAIL President and Chief Operating Officer CI Financial We are also introducing new products and services In closing, we extend our sincere thanks to our to meet the changing needs of our clients. While a employees for their dedication and hard work, to our number of initiatives are underway at CI Investments, shareholders for their encouragement and support Assante and Skylon, we would make note of the and, most importantly, to our clients for entrusting us July launch of Assante’s Institutional Managed Port- with their savings. WILLIAM T. HOLLAND Chief Executive Officer STEPHEN A. MACPHAIL President and Chief Operating Officer folios, an advanced investment program for affluent investors. It’s an important step in strengthening Assante’s product lineup. CI is well positioned for continued growth. We will also acquire other companies if the combination makes sense. As we have said in the past, our ability to quickly integrate acquired companies is an impor- tant competitive advantage. Ultimately, CI only achieves success when our clients achieve success. We are very serious about our fiduciary duty to the investors in our funds and to our wealth planning clients. This is what drives our ongoing efforts to enhance our portfolio man- agement expertise, upgrade our technology and our administrative processes, expand our services and improve our operations across the board. Finally, you will have noticed from the cover of this report that we have adopted the name CI Financial. This name reflects a new stage in CI’s evolution – our development into a diversified wealth management firm and a holding company for a varied range of financial services businesses. 1 1 H I S T O R I C A L F I N A N C I A L H I G H L I G H T S (millions of dollars, except share and per share amounts) 2005 Y E A R S E N D E D M AY 3 1 , Total fee-earning assets, end of year Net sales of funds (cid:1) REVENUE Management fees and other income Redemption fees Performance fees Total revenues (cid:1) EXPENSES Net selling, general and administrative 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* Earnings per share before amortization of goodwill Operating cash flow* per share EBITDA* per share Dividends** per share Shareholders’ equity, end of year Shares outstanding, end of year** 68,053 1,734 1,035.1 47.1 0.1 1,082.3 215.3 250.7 4.4 55.2 108.8 634.4 163.2 284.7 284.7 389.7 2004 61,343 920 798.4 43.4 2.8 844.6 147.0 197.8 5.6 34.0 68.5 452.9 170.7 221.0 221.0 368.5 2003 33,084 (596) 525.9 50.3 0.1 576.2 111.1 147.4 6.8 169.9 21.0 456.2 49.0 71.0 71.0 245.6 2002 25,713 481 407.0 41.1 1.1 449.2 56.3 97.8 10.6 201.6 24.1 390.4 22.0 36.8 (61.4) 222.8 0.97 1.33 1.81 0.68 1,472.8 286,643,091 0.82 1.37 1.65 0.41 1,533.9 295,199,027 0.32 1.09 1.32 0.29 632.7 235,525,648 0.21 1.27 1.51 0.06 56.8 170,785,428 *EBITDA (Earnings before interest, taxes, depreciation and amortization) and operating cash flow are non-GAAP (generally accepted accounting principles) earnings measures, however, management believes that most of its shareholders, creditors, other stakeholders and investment analysts prefer to include the use of these performance measures in analyzing CI’s results. Fee-earning Assets years ended May 31 : $billions 1 . 8 6 3 . 1 6 Net Sales years ended May 31 : $billions Net Operating Margin years ended May 31 : % of average AUM 8 . 5 5 . 3 9 1 . 1 6 1 . 1 2 1 . 1 2 1 . 1 0 1 . 51 0 . 1 8 9 . 0 8 9 . 0 2 0 . 1 0 0 . 1 9 8 . 0 1 . 3 3 7 . 6 2 8 . 6 2 7 . 5 2 7 . 9 3 . 8 5 . 5 5 . 6 4 . 4 4 . 1 2 . 1 9 . 0 5 . 0 5 . 0 7 . 1 9 . 0 5 . 0 6 . 0 - '95 '96 '97 '98 '99 '00 '01 '02 '03 ‘04 '05 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 1 2 2001 26,834 3,468 510.3 28.7 2.6 541.6 67.7 115.6 16.2 183.9 33.8 417.2 34.3 90.1 11.5 291.9 2000 26,678 5,843 353.4 22.5 21.4 397.3 54.8 79.1 16.4 117.8 21.1 289.2 51.3 56.8 (2.1) 230.0 1999 9,700 1,369 158.0 14.4 — 172.4 34.3 37.0 9.6 67.3 3.0 151.2 12.4 8.8 8.7 89.8 1998 8,302 1,189 143.9 8.4 — 152.3 33.9 34.9 11.3 47.3 8.5 135.9 7.7 8.6 8.6 64.4 1997 6,516 461 114.5 4.1 — 118.6 27.0 28.9 11.4 26.4 7.4 101.1 8.0 9.5 9.5 45.1 1996 5,469 537 97.6 1.4 — 99.0 23.6 24.0 12.9 11.8 7.7 80.0 8.5 10.5 10.5 37.4 1995 4,394 909 87.6 0.1 — 87.8 24.5 19.9 12.7 1.2 10.2 68.5 8.8 10.5 10.5 20.9 0.49 1.60 1.75 0.025 260.8 180,684,728 0.33 1.34 1.38 0.025 292.1 182,829,928 0.06 0.63 0.64 0.025 126.6 144,220,460 0.06 0.45 0.46 0.02 140.2 147,486,888 0.07 0.34 0.35 0.02 55.8 131,139,160 0.08 0.28 0.25 0.02 50.8 131,838,104 0.08 0.16 0.17 0.01 43.1 131,882,104 **Adjusted for two-for-one stock splits in April 1998, January 2000 and November 2000. Total Revenues years ended May 31 : $millions 3 . 2 8 0 , 1 6 . 4 4 8 2 . 6 7 5 6 . 1 4 5 2 . 9 4 4 3 . 7 9 3 4 . 2 7 1 3 . 2 5 1 6 . 8 1 1 8 . 7 8 0 . 9 9 Income Before Amortization of Goodwill years ended May 31 : $millions 7 . 4 8 2 0 . 1 2 2 EBITDA* Per Share years ended May 31 : 5 7 . 1 1 8 . 1 5 6 . 1 8 3 . 1 1 5 . 1 2 3 . 1 1 . 0 9 8 . 6 5 0 . 1 7 8 . 6 3 5 . 0 1 5 . 0 1 5 . 9 6 . 8 8 . 8 4 6 . 0 6 4 . 0 5 3 . 0 5 2 . 0 7 1 . 0 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 1 3 PETER W. ANDERSON President and Chief Executive Officer CI Investments Our Company CI Investments is one of Canada’s largest investment management companies, with more than $40 billion in assets under management (as of August 31, 2005). We began managing money in 1965, and have a successful track record of anticipating and responding to the changing needs of Canadian investors. We offer a wide selection of leading portfolio management teams and we make their expertise available through a broad range of products and services, including mutual funds, segregated funds, structured products, alternative investments and asset allocation programs. We have the industry’s broadest selection of investment funds, marketed under the CI, Harbour, Signature, Synergy, Portfolio Series and SunWise brands. In June 2005, we changed our name to CI Investments Inc. from CI Mutual Funds Inc. to better reflect our diverse lineup of investment options and our continuing commitment to providing Canadians with innovative and high-quality investments that will help them meet their financial goals. 1 5 Our Strategy Highlights of Fiscal 2005 CI Investments’ strategy, which follows the overall Growing Sales Momentum strategy of CI Financial as highlighted in the Message to Shareholders, is to build on these key competitive advantages: (cid:1) A broad lineup of the best available portfolio managers offering strong performance and representing all investment approaches from value to growth. (cid:1) A well-diversified selection of products and services. (cid:1) Multiple distribution channels. We have significantly expanded our distribution beyond the “traditional” channels of brokers and financial planners. (cid:1) Scale, which provides for economies of scale while allowing us to offer a comprehensive selection of products and services. (cid:1) Operational excellence, of which two important components are administrative efficiency and strength in sales and marketing. The following highlights demonstrate the success of this strategy in fiscal 2005 and the priorities we are pursuing in fiscal 2006. In fiscal 2005, CI Investments had gross sales of $7.2 billion and net sales of $1.3 billion, which represents a market share of approximately 10% of industry net sales of $12.9 billion (as reported by the Investment Funds Institute of Canada). Assets in our retail mutual and segregated funds stood at $39.2 billion at May 31, 2005, up approximately 12% over the year. Our sales momentum improved in the latter half of the year, and we were the top independent fund company for net sales from January to June and number three overall. Our improving sales and market share can be attrib- uted to our diverse product lineup, the strength of that lineup and to our strong relationships with our distribution channels. Whereas overall industry sales were dominated by income and balanced funds, CI’s sales were well diversified among asset classes and product groups. For sure, income and balanced funds such as Signature High Income Fund, Harbour Growth & Income Fund and Signature Income & Growth Fund were well represented on our list of top sellers. However, our best-selling funds also included the Canadian equity funds CI Canadian Investment Fund and Harbour Fund. 1 6 Top-selling product groups included Portfolio Series, a Performance and Portfolio Management family of strategic asset allocation funds. Assets in Portfolio Series grew by 64% over the fiscal year, climbing from $1.1 billion to $1.8 billion as a result of net sales and performance. We have done well in the market for segregated funds, which combine mutual funds with insurance contracts. CI Investments is one of the top three companies for segregated fund sales and assets and is the top firm that is not an insurance company. We were the first mutual fund company to enter the segregated fund market in 1997 and segregated funds now account for approximately 12% of our net sales and 16% of our assets, or $6.6 billion. Our best- selling segregated fund product is SunWise, and its assets exceed $2.1 billion, up from $1.2 billion at the end of fiscal 2004. We also capitalized on the growing demand for fund-linked notes, which typically offer a principal guarantee and returns linked to the performance of one or more mutual funds. From August 2004 to July 2005, CI Investments, in conjunction with Skylon Advisors, issued nine fund-linked notes, raising $737 million and dominating sales in this burgeoning market. In particular, the CI C.A.P.I.T.A.L. Deposit Notes™ struck a chord with investors, with sales of over $500 million in the first three series. At the root of our sales success is the strong per- formance across our lineup of funds and portfolio management teams. The overall quality of our funds is recognized by Morningstar Canada, a leading independent provider of fund research and analysis. As of June 30, 2005, CI Investments led the industry with 49 funds with Morningstar Canada’s top five-star rating – three times as many as the second-place firm. CI has held the top spot in the Morningstar Canada five-star rankings since January 2005 and has been either number one or number two every month over the past three years. Two of our funds were singled out for recognition at the Canadian Investment Awards in December 2004, as CI Canadian Investment Fund was named Canadian Equity Fund of the Year and Signature High Income Fund received the award for Canadian Income Trust Fund of the Year. 1 7 To achieve these results, we use a mix of in-house Expanding Distribution Channels teams and outside firms retained as sub-advisors. Our in-house teams are Harbour Advisors, which man- aged over $6 billion at May 31, 2005, and Signature Advisors, which managed approximately $15 billion. Signature manages more assets for us than any other team or firm on our roster. In fiscal 2005, we made various changes to our portfolio management lineup to support our strategy of providing a clear choice of leading managers representing the full spectrum of investment approaches. These changes included terminating our contract with Webb Capital Management LLP in June 2004 and transferring those assets to Synergy Asset Management, which uses a similar investment approach. In addition, BPI Global Asset Management LLP, a former subsidiary, was combined with Trilogy Advisors, LLC, and the management of the BPI mutual fund portfolios was transferred to Trilogy. Again, both firms use a growth approach to selecting global equities. CI Investments has grown through its close relation- ships with individual brokers and financial planners and their firms, the distributors of our products. We maintain these relationships through one of the largest sales and client services teams in the industry. This highly trained team provides strong service and support to financial advisors – a key to the success of CI Investments. Over the past number of years, we have pursued a strategy of expanding the distribution channels for our products and this strategy met with continuing success in fiscal 2005. Two channels that have become increasingly important are Sun Life Financial’s Clarica sales force and third-party programs offered by other financial institutions. CI Investments is the preferred supplier of wealth products to Clarica managers and agents and this relationship, which was established in 2002, has been marked by growing co-operation. As an example, we developed two fund-linked notes exclusively for Clarica. Currently, the Clarica channel accounts for approximately 19% of our gross sales. 1 8 CI participates in third-party investment programs Another notable project designed to support our offered by banks, insurance companies and other financial advisor partners was the development of investment dealers that want to add the CI brand Advising the Client, a Web-based training resource name and our portfolio management expertise to where advisors can receive continuing education their product lineup. An Institutional Business team credits in a self-study environment. Advising the within our Sales and Marketing Department develops Client not only assists advisors with continuing and maintains these relationships. In fiscal 2005, this education, but also provides them with information team established three new relationships, while total on how our products can be used as solutions to third-party net sales for the fiscal year were in excess real-life financial planning issues. of $600 million. Total assets in third-party programs increased by 35% year over year to $3.4 billion at Operating Efficiency May 31, 2005. This institutional business has had a significant impact in boosting our sales, gaining access to distribution channels that are not typically available to independent fund companies and heightening awareness of the CI brand through third parties. Our overall sales efforts during the year were sup- ported by a wide range of marketing initiatives. Of note was a radio advertising campaign in the key markets of Toronto and Vancouver that was success- ful in raising our profile and building on the strength of our brand. As part of our brand-building efforts, we have been using the terms Experience, Strength and Diversity in our advertising and marketing materials. These terms emphasize CI Investments’ long history of managing money, its financial strength and its broad selection of investments. Maintaining a comprehensive yet clear lineup of effi- ciently operated, high-quality funds remains a priority for CI Investments. Our acquisitions over the years dramatically expanded the number of funds we offer, and we have been consistent in streamlining our lineup by merging funds. This not only simplifies our lineup, but it creates funds that are more efficient, as their operating expenses are spread over a larger asset base. We completed the merger of 20 funds in fiscal 2005, as well as the amalgamation of our Synergy global corporate class structure into CI Corporate Class. In July and August 2005, we completed another 17 fund mergers and terminated 39 RSP funds. The RSP funds, which were foreign funds that were 100% eligible for registered plans, were no longer necessary once the federal government eliminated the foreign property rule. One result of these mergers was that we are no longer using the Clarica brand name on any of our mutual funds. 1 9 In our administration and operations, we achieved Fund Governance new levels of efficiency in fiscal 2005. In the area of fund operations, we reduced the average operating expenses of our funds to 21.5 basis points (as a per- centage of assets under management) – a reduction of 22% from 27.5 basis points the previous year. We believe that our overall operating expenses are the lowest in the industry. Our efficiency in this area is significant because these savings improve the performance of the funds, directly benefiting their investors. The lower costs also make our funds more attractive relative to those offered by our primary competitors. As a result, our efficiency constitutes a competitive advantage that we intend to exploit as the industry becomes more competitive and investors increasingly focus on fees. Please see the section “Our Plans for Fiscal 2006” for details on our move to establish fixed operating expenses for our mutual funds. In fiscal 2005, CI Investments continued to work with regulators on their investigation into trading activities within the Canadian mutual fund industry. During the year, CI Investments and four other fund compa- nies reached settlements with the Ontario Securities Commission in which the companies agreed to compensate investors in a number of their funds who may have been affected by frequent trading market timing trades by certain other investors. CI Investments’ current measures are effective in detecting and preventing market timing and frequent trading by investors in our funds. In fiscal 2005, we continued to enhance our policies and procedures to ensure that the interests of the investors in our funds are placed first. An example is the CI Investments Board of Governors, which acts as an independent governance body of the funds, pro- viding impartial judgment on conflicts of interest with a view to the best interests of the funds and their investors. The Board of Governors adopted a new mandate that already meets the requirements of the latest proposals from securities regulators, published in May 2005, for independent review committees for all mutual funds. This reflects the commitment of CI Investments and the Board of Governors to meeting our fiduciary duties to our clients. 2 0 Other key plans for 2006 include several new products, including an enhanced strategic asset allocation program that will build on the success of Portfolio Series to be called Portfolio Select Series, and a new segregated fund program called SunWise Elite. Fiscal 2005 was a successful year for CI Investments, marked by growing sales, impressive fund perform- ance and a stronger position in our industry and our marketplace. We intend to build on our competitive advantages in all areas in the coming year and we are confident we can continue to deliver excellent products and services – and excellent results. Our Plans for Fiscal 2006 One our key initiatives in fiscal 2006 focuses on the area of operating efficiency. Our plan to set fixed operating expenses for our mutual funds, which was overwhelmingly approved by investors in August 2005, will result in lower costs and greater transparency for investors. The fixed expenses, to be called administration fees, are being set at 17 to 22 basis points, depending on the fund category – a level that is 36% lower on average than the funds’ actual operating expenses for calendar year 2004. Just as important is the certainty created for investors. Currently, operating expenses in the fund industry are not known ahead of time and they can vary widely from fund to fund and from company to company. At CI Investments, investors will know exactly what they will pay to invest in a fund and that it will remain at that level. This measure is a first for our industry and offers significant benefits to investors. We are setting a new benchmark that many competitors will be unable to reach. 2 1 JOSEPH C. CANAVAN Chairman and Chief Executive Officer Assante Corporation STEVEN J. DONALD President and Chief Operating Officer Assante Corporation Our Company Assante Corporation is a fully integrated wealth management company. It operates through subsidiaries that include United Financial Corporation (formerly Assante Asset Management Ltd.), Assante Capital Management Ltd., Assante Financial Management Ltd., IQON Financial Management Inc., and Assante Estate and Insurance Services Inc. We are one of the largest independent networks of advisors with more than 1,050 advisors in 400 locations across the country. We have more than $24 billion in assets under administration (at August 31, 2005), including $9 billion in assets under management, and serve over 250,000 Canadians. Assante brings together the extensive experience of our advisors and wealth management professionals from multiple disciplines to offer our clients customized strategies for building and preserving their wealth. Our range of services includes investment advice, retirement planning, tax planning, insurance and estate planning. 2 3 We’re a proud sponsor of Raise-a-Reader® Assante is proud to be a sponsor of CanWest Raise-a-Reader®, a unique program designed to increase awareness and raise money and books for family literacy programs across Canada. In today’s knowledge-based econo- my, strong literacy skills—the ability to read, write, think critically and solve problems— are the foundation for success throughout life and are a key to our wealth and prosperity as a nation. In 2000, the International Adult Literacy Survey found that more than 40% of Canadian adults do not have strong literacy skills. Addressing basic language and literacy education needs early in life and increased parental involvement can help reverse these statistics. Advisory services are offered through Assante Capital Management, an investment dealer, and Assante Financial Management, a mutual fund dealer, which together operate under the brand name Assante Wealth Management. IQON Financial, a mutual fund dealer and wholly owned subsidiary, provides advisory serv- ices under the IQON brand. Assante Estate and Insurance Services offers comprehensive insurance advice and sophisticated insurance-based business and estate planning solu- tions that are designed to protect our clients’ wealth and meet specific financial planning objectives. United Financial manages our investment products – Artisan Portfolios, Institutional Managed Portfolios and Optima Strategy, which are offered exclusively through Assante advisors. They allow advisors to provide clients with portfolios that are diversified by asset class, portfolio manager and investment style within a single investment program. Portfolio man- agement is provided by a range of outside money management firms. United Financial also provides investment management services to high net worth individuals and institutional clients through Private Client Managed Portfolios. United Financial has $8.8 billion under management. Our Strategy The foundation of our strategy is integrated wealth management, which combines traditional investment advice with insurance, tax and estate planning to look at a client’s entire financial situation. We believe this business model best serves the increasingly complex needs of clients, and is the key for successful and focused on moving to a new administrative platform sustainable advisory practices over the long term. at CI Investments, improving our existing products through reductions in their operating expenses and Our operations and future growth plans continue to through portfolio management changes, and launching be focused on our advisors, whose business success new products. These changes provide a foundation has the biggest impact on our profitability. We plan to for strong net sales in the next 12 months. grow our business three ways: (cid:1) By helping our advisors increase their assets In our advisory business, assets under administration and manage their businesses more efficiently; rose by 24% over the year from $19.4 billion to $24.0 (cid:1) By bringing experienced advisors to the firm billion, driven in large part by the acquisition of through a targeted recruitment program; IQON at the beginning of the year. Looking at each (cid:1) Through strategic acquisitions as opportunities company individually, assets under administration arise. grew during the year to $19.7 billion from $19.4 billion at Assante Wealth Management, and to $4.3 We believe that the advisor is the centre of the client billion from $4.2 billion at IQON. The number of relationship. A key part of our strategy is providing our advisors at Assante increased from approximately 750 advisors with the services and products they need to to 1,050, primarily because of the addition of IQON combine all of the components of wealth planning into with more than 300 advisors. There was also contin- their business. This will allow them to focus on the needs ued consolidation of advisors within Assante in 2005, of their clients, provide more comprehensive advice and which resulted in a stronger overall advisor base, as service, and ultimately increase their profitability. higher average assets under administration produce Highlights of Fiscal 2005 Growth in Assets In fiscal 2005, assets under management rose by 7.7% to $8.7 billion. The majority of this increase occurred in the Optima Strategy and Private Client programs, which saw assets rise from $7.4 billion to $8.0 billion, while Artisan assets remained steady at $760 million. The increase in assets was due to solid performance and net sales of $301 million, which represents a slight decline from the previous year. During the year, our asset management operations more stable income levels. The average assets per advisor at Assante Wealth Management have increased from $23 million to $26 million – among the highest in the Canadian financial planning industry. Operational Achievements In 2005, we completed the restructuring phase that began when CI acquired Assante in November 2003. This involved revising and enhancing our administra- tive processes, integrating our technology platform with CI, and improving our service offerings for greater efficiency. We also redefined and repositioned many of our corporate functions to better reflect our business model as a wealth management company. 2 5 We introduced a new brand by adopting the business In the advisory business, we provided advisors with name Assante Wealth Management and our position- greater support, adding to our team of insurance and ing statement, “Be well-advised.” Our goal is to estate professionals, and offering advisors access to strengthen our brand in the marketplace as a leader in-depth expertise through our team of estate, tax and in wealth management, and we continue to dedicate legal experts. resources to help our advisors fulfil this promise to clients. This year, we made a major commitment to the training and development of our advisors through In early 2005, we entered into a refinement phase, our business partnership program. This program is fine-tuning the changes to our processes and systems, designed to identify opportunities for advisors to and providing more value-added services and support grow their business, and operate it more efficiently to our advisors. Our goals are to help our advisors: and profitably. The program is in addition to regular, (cid:1) Deliver better service to clients; ongoing professional development sessions. (cid:1) Meet the needs of clients by increasing the breadth and depth of our products; We also overhauled our approach to compliance, (cid:1) Maximize efficiency and profitability; (cid:1) Protect their business from liability. strengthened our relationships with regulators and put regional compliance managers in place to help advisors stay up to date on regulatory developments We continued leveraging the strength and resources and to resolve issues. of CI’s infrastructure to help achieve these goals. In our asset management business, this included consolidating four funds with similar mandates, eliminating three RSP clone funds as a result of the elimination of the foreign content rule, modifying the Artisan Portfolios, reducing fees on the Artisan Portfolios and Optima Strategy, and replacing sub- advisors in both programs to make them more competitive and attractive to our advisors and clients, who can choose from a wide array of external investment management products in addition to our own managed portfolios. We also implemented a comprehensive administration system for our Private Client business. Our Plans for Fiscal 2006 We are poised to begin a new phase of growth at Assante. In June, we announced our strategy for integrating our advisory businesses. Under the plan, IQON, with its 300 advisors, will join a common administrative platform, and corporate functions will be consolidated with the rest of Assante’s operations, which support the 750 advisors at Assante Wealth Management. IQON advisors will continue to operate independently under the IQON brand. 2 6 In addition, Assante is entering into a partnership Also in July, we expanded our lineup of managed with selected professional staff and advisors, subject portfolio products with the launch of Institutional to regulatory approval. The new firm, Stonegate Managed Portfolios. This innovative investment Private Counsel LP, will provide wealth planning and management program brings together some of the other inter-generational services to high net worth world’s best-performing institutional investment individuals and their families. Initially, the firm is managers to provide sophisticated investors with expected to have approximately $1 billion of assets advanced portfolio management. We are planning to under administration. It will operate from Toronto further expand our lineup of wealth management and Montreal with plans to open in major centres products and services so that our advisors can offer across Canada. additional customized solutions to meet the unique and diverse needs of their clients, and to make it Through Assante Wealth Management, IQON Financial easier for clients to consolidate their business and Stonegate Private Counsel, advisors have a choice with Assante. of affiliations and business models, based on how they run their businesses and the needs of their clients. Reducing costs – both corporate expenses and the A common administrative platform will support all operating expenses of our investment management channels, increasing operating efficiencies by leverag- programs – continues to be a key priority. In early ing CI’s expertise and infrastructure. 2005, we reduced the cost of investing in a typical Optima Strategy portfolio by approximately 36 basis In July, we changed the name of our asset manage- points and in each Artisan Portfolio by approximate- ment division from Assante Asset Management Ltd. ly 34 basis points, representing reductions of up to to United Financial Corporation, and the name of 54% on the expenses of operating the portfolios. the Assante Pools, the investment pools within the Effective September 1, all of our investment funds Optima Strategy and Private Client programs, to the have fixed administration fees. Fund expenses have United Pools. This distinguishes our investment been set at 17 to 22 basis points, depending on the management business from our advisory business portfolio or fund, resulting in a further reduction in and allows for increased growth through our three operating expenses of up to 22% for investors. This distinct distribution channels. represents an important commitment to our advisors and clients, and will result in lower costs, greater transparency for investors and the certainty of knowing what they are paying to invest, now and in the future. 2 7 DAVID R. M CB AIN President and Chief Executive Officer Skylon Advisors Inc . Our Company Skylon Advisors markets and manages the VentureLink Family of Labour-Sponsored Funds and structured products – closed-end funds, which trade on the stock exchange, and equity-linked notes, which offer returns linked to mutual funds, stocks or other securities. Skylon had approximately $1.4 billion in assets under management at August 31, 2005. Our Strategy CI Financial acquired Skylon in November 2003 to spearhead CI’s participation in the structured products market, which has grown rapidly in recent years. Skylon has allowed CI to further diversify its product lineup and expand its distribution channels. Many structured products focus on investors’ need for regular income or principal protection. Skylon strives to differentiate its products by combining these benefits with innovative structures and features and access to leading investment managers, such as CI’s Signature Advisors, Pacific Investment Management Company LLC (PIMCO) and Marret Asset Management Inc. 2 9 Highlights of Fiscal 2005 We launched several structured products in fiscal 2005, raising $234 million: Skylon worked with CI Investments in jointly developing and marketing several fund-linked notes, including the highly successful CI C.A.P.I.T.A.L. Deposit Notes™, which recorded sales of more than (cid:1) Skylon All Asset Trust, which offers investors $500 million through the first three series. exposure to the returns of PIMCO All Asset Fund, raised $125 million. PIMCO is one of the world’s largest and most successful portfolio managers of fixed-income securities. (cid:1) Yield Advantage Income Trust raised $66 million. The success of the offering confirmed the value of the Trust’s unique method of distribution. It VentureLink assets increased 5% to $188 million at May 31, 2005. Our marketing efforts focused on the VentureLink Diversified Income Fund and the VentureLink Financial Services Innovation Fund. These funds posted positive results and were first quartile in the labour-sponsored category for the 12- was the first investment trust of its kind to be month period. distributed without a formal syndicate of selling agents, which resulted in cost savings for investors. The underlying portfolio of income trusts, high- yield debt and other securities is managed by Eric Bushell and Matt Shandro of Signature Advisors, which demonstrates how we can leverage our relationship with other CI companies. (cid:1) Skylon Y.I.E.L.D. Notes™, Series 1 and Series 2, raised a combined total of $43 million. These notes are linked to the price performance of a diversified basket of equally weighted securities of 10 Canadian issuers that are leaders in their respective sectors. In an effort to further differentiate VentureLink, those two funds paid a dividend in November 2004 to Class A unitholders of certain series, making them the first labour-sponsored funds in Ontario to pay a dividend to individual shareholders. The ability to pay a divi- dend was a result of the funds’ positive performance and their focus on investing in debt issued by more mature companies rather than start-ups. 3 0 Our experience, the backing of CI, our strong rela- tionships with advisors and our contacts within the financial industry will allow us to package innovative products with the money management skills of world-class managers – and maintain our leading position in this market. Our Plans for Fiscal 2006 In the structured products area, sales success depends on consistently offering new products with features that appeal to advisors and investors. Our intention is to make a note or a closed-end fund available throughout the year, to maintain a presence in the market and generate steady sales. We launched two new notes in July 2005 – the Skylon Pro-Tracker Deposit Notes™, Series 1, and the Skylon Pro-Tracker R.O.C. (Return of Capital) Deposit Notes™, Series 1. The notes provide exposure to a basket of income trusts, regular distributions and principal protection. Also in July and August, Skylon and CI launched new versions of the popular CI C.A.P.I.T.A.L. Deposit Notes™, including the R.O.C. Enhanced Yield Class, Series 1, and the Enhanced Yield Class, Series 4. 3 1 Management’s Discussion and Analysis This Management’s Discussion and Analysis (“MD&A”) presents commentary on CI Fund Management Inc. and its subsidiaries (“CI”) as at and for the year ended May 31, 2005 and is as of July 7, 2005. Financial information, except where noted otherwise, is presented in accordance with Canadian generally accepted accounting principles (“GAAP”) and amounts are expressed in Canadian dollars. The principal subsidiaries referenced herein include CI Investments Inc. (“CI Investments”) (formerly CI Mutual Funds Inc.), Skylon Advisors Inc. (“Skylon”), Assante Asset Management Ltd. (“AAM”), Assante Advisory Services Ltd. (“AAS”) and IQON Financial Management Inc. (“IQON”). The Asset Management segment of the business includes CI Investments, Skylon and AAM, while the Asset Administration segment consists of AAS and its subsidiaries, other than AAM, and IQON. The MD&A contains forward-looking statements with respect to expected financial perform- ance, strategy and business conditions. These statements involve risks and uncertainties, are based on assumptions and estimates, and therefore actual results may differ materially from those expressed or implied by CI. Factors which may cause such differences include, but are not limited to, general economic and market conditions including interest and foreign exchange rates, global financial markets, legislative and regulatory changes, industry competition, technological developments and catastrophic events. The reader is cautioned against undue reliance on these forward-looking statements. Further information on CI can be found in its Consolidated Financial Statements, which are available on SEDAR at www.sedar.com. (cid:1) OV E R A L L P E R F O R M A N C E consideration of the above items, net income would CI reported net income for the year ended May 31, 2005 of $284.7 million, an increase of 29% over the $221.0 million for the year ended May 31, 2004. On a per share basis, CI earned $0.97, up 18% from $0.82 in the prior year. The results for 2005 were impacted by a $53 million ($33.9 million after-tax) charge to earnings for com- pensation to unitholders of CI Investments and $6.7 million in capital gains ($5.5 million after-tax). In 2004, CI recorded a non-cash charge of $30.2 million relating to future income taxes. In addition, stock- based compensation impacted earnings by $4.8 mil- lion ($3.1 million after-tax) in fiscal 2005 and $29.7 million ($18.3 million after-tax) in fiscal 2004. After have been $316.2 million in fiscal 2005, versus $269.5 million in the prior year. The inclusion of results for a full fiscal year in 2005 of businesses acquired mid-way through fiscal 2004 helped propel CI’s average assets under management higher year over year, which increased revenues and overall operating profitability. This is shown in the selected annual information shown below. The growth in CI’s business between 2003 and 2005 is primarily due to the acquisition of Assante Corp- oration (“Assante”), Synergy Asset Management Inc. (“Synergy”) and Skylon in the second quarter of fiscal 2004. S E L E C T E D A N N U A L I N F O R M AT I O N (millions, except per share amounts) Total revenues Total expenses Income before income taxes Income taxes Net income Earnings per share Dividends per share Total assets Total long-term debt Common shares outstanding Average common shares outstanding 2005 $1,082.3 634.4 447.9 163.2 $284.7 $0.97 $0.675 $2,664.1 $390.9 286.643 293.297 2004 $844.7 453.0 391.7 170.7 $221.0 $0.82 $0.405 $2,493.8 $245.2 295.199 268.103 2003 $576.2 456.2 120.0 49.0 $71.0 $0.32 $0.290 $1,025.7 $144.0 235.526 224.850 3 3 MANAGEMENT’S DISCUSSION AND ANALYSIS EBITDA, operating profit margin and free cash flow, option expense was $534.3 million or $1.82 per share, as defined below, are non-GAAP earnings measures compared with $471.9 million or $1.76 per share in that do not have any standardized meaning pre- fiscal 2004. scribed by GAAP. They are therefore unlikely to be comparable to similar measures presented by other Income before income taxes was $447.9 million for issuers. However, management believes that most fiscal 2005, an increase of 14% from $391.7 million in shareholders, creditors, other stakeholders and the prior year. The income tax provision decreased investment analysts prefer to include the use of these from $170.7 million to $163.2 million in fiscal 2005, performance measures in analyzing CI’s results. of which $109.1 million was represented by current taxes and $54.1 million by future taxes. The provision For the year ended May 31, 2005, earnings before for income taxes for the year ended May 31, 2005 interest, taxes, depreciation and amortization (EBIT- reflects an effective tax rate of 36.4%, versus 43.6% DA) totalled $529.5 million or $1.81 per share, as set in the prior year. The prior year income tax provision out in the table below which reconciles EBITDA to was negatively impacted by the elimination of previ- net income. This compares with $442.2 million or ously legislated decreases to future income tax rates, $1.65 per share in the prior fiscal year. EBITDA in resulting in a $30.2 million non-cash charge to future fiscal 2005 adjusted to eliminate the effect of the income taxes. R E C O N C I L I AT I O N O F E B I T D A T O N E T I N C O M E (millions, except per share amounts) Net income Add: Interest expense Income tax expense Amortization of DSC and fund contracts Amortization of other EBITDA per share 3 4 2005 $284.7 9.8 163.2 58.2 13.6 244.8 $529.5 $1.81 2004 $221.0 8.6 170.7 35.4 6.5 221.2 $442.2 $1.65 Fourth Quarter Net income and earnings per share were steady at $81 million and $0.28 per share, respectively, in the fourth quarter of fiscal 2005 compared to the third quarter. While stock-based compensation recorded in the quarter resulted in a reversal of $3.8 million ($2.4 million after-tax), several expense items increased during the quarter in conjunction with the increase in revenues. Total revenue climbed to $281.1 million from $278.7 million last quarter. The third quarter included a gain on sale of marketable securities of $7.4 million ($6.1 million after-tax). There were no other significant variations to the fourth quarter results. S U M M A R Y O F Q U A R T E R LY R E S U LT S (millions of dollars, except per share amounts) 2005 2004 INCOME STATEMENT DATA Q 4 Q 3 Q 2 Q 1 Q 4 Q 3 Q 2 Q 1 Management fees Administration fees Other revenues Total revenues 232.1 221.9 213.3 214.5 217.3 205.8 151.8 136.0 30.9 18.1 28.9 27.9 25.9 19.6 28.8 20.4 25.5 21.1 26.5 22.7 4.9 16.7 1.2 15.1 281.1 278.7 258.8 263.7 263.9 255.0 173.4 152.3 Net selling, general and administrative Trailer fees Investment dealer fees Amortization of deferred sales commissions Other expenses Total expenses 38.6 68.7 22.4 16.1 5.9 48.0 63.9 20.9 14.2 7.0 91.8 60.2 18.5 13.0 7.3 37.0 57.9 20.3 12.0 7.5 51.8 57.4 18.1 11.0 7.5 31.1 55.8 18.8 7.5 8.0 39.0 45.3 2.8 8.8 6.2 25.0 39.3 0.0 6.7 7.3 151.7 154.0 190.8 134.7 145.8 121.2 102.1 78.3 Minority interest 0.0 0.7 1.2 1.2 1.4 1.5 1.1 1.3 Income before income taxes Income taxes Net income 129.4 124.0 48.5 80.8 42.8 81.2 66.8 25.3 41.5 127.8 116.7 132.3 46.5 81.3 41.3 75.4 45.3 87.0 70.1 54.9 15.2 72.7 29.2 43.5 Earnings per share 0.28 0.28 0.14 0.28 0.26 0.29 0.06 0.19 Dividends per share 0.15 0.25 0.15 0.125 0.125 0.10 0.10 0.08 3 5 MANAGEMENT’S DISCUSSION AND ANALYSIS Fee-Earning Assets and Sales Total fee-earning assets, which includes mutual and segregated funds, Assante funds, managed labour- sponsored funds and structured products (collective- ly managed retail assets), administered /other funds and Assante assets under administration (net of Assante funds) at May 31, 2005, were $68.1 billion, up 11% from $61.3 billion at May 31, 2004. CI’s assets as reported by the Investment Funds Institute of Canada (“IFIC”) were $45.9 billion at May 31, 2005. This fig- ure is $3.3 billion below CI’s actual $49.2 billion in managed retail assets because IFIC uses a narrow def- inition of assets under management that does not include the $1.9 billion of segregated funds, hedge funds, and pooled funds, $0.2 billion in managed labour-sponsored funds and $1.2 billion of structured products. As such, CI’s assets as reported by IFIC should not be used when determining overall assets under management, product sales or conducting financial analysis of CI. Average total managed retail assets were $46.085 bil- lion in fiscal 2005, an increase of 24% from $37.236 billion in fiscal 2004. As most of CI’s revenues and M A N AG E D R E TA I L A S S E TS (billions) Assets at May 31, 2004 Gross Sales Redemptions Net Sales Market Performance Assets at May 31, 2005 $44.4 8.6 6.9 1.7 3.1 $49.2 3 6 expenses are based on assets throughout the year, average asset levels are critical to the analysis of CI’s financial results. The increase in CI’s average assets was directly attributable to the addition of $9.0 billion in assets from the Assante, Skylon and Synergy acqui- sitions and the increase in the market value of CI’s funds resulting from the increase in equity markets in fiscal 2005. Gross sales of CI’s managed retail funds were $8.6 bil- lion for the year ended May 31, 2005, compared with $6.9 billion for the same period in 2004. Net sales (gross sales less redemptions) were $1.7 billion for the year ended May 31, 2005, compared with $920 million for the same period in 2004. The significant increase in CI’s net sales from 2004 is due primarily to stronger sales at CI Investments, as net sales from AAM and Skylon declined slightly year over year. Strong fund performance and the benefits of expand- ed distribution contributed to the increase in sales of CI funds. At June 30, 2005, fee-earning assets totalled $68.8 billion, as shown in the chart on the next page, rep- resented by $39.7 billion in mutual and segregated funds, $8.8 billion in managed assets through Assante, $0.2 billion in managed labour-sponsored funds, $1.2 billion in structured products, $3.7 billion in administered/other assets such as labour-sponsored funds, and $15.2 billion in Assante and IQON assets under administration (net of Assante-managed assets described above). Market Review Global equity markets were relatively strong in the 12-month period ended May 31, 2005 when measured F E E - E A R N I N G A S S E T P R O F I L E A S AT J U N E 3 0 (billions) Mutual/segregated funds Assante funds Managed labour-sponsored funds Structured products Total managed retail assets Administered/other funds Assante/IQON assets under administration (net of Assante funds) Total fee-earning assets 2005 $39.7 8.8 0.2 1.2 $49.9 3.7 15.2 $68.8 2004 $35.3 8.1 0.2 1.1 $44.7 5.8 15.5 $66.0 % change 12 9 0 9 12 -36 -2 4 in local currencies. However, the 8.6% appreciation not give a comprehensive view of CI’s sales and of the Canadian dollar against the U.S. dollar reduced assets, they are helpful as an indicator of trends foreign returns to Canadian investors. affecting a significant portion of CI’s business. For fiscal 2005, the S&P/TSX Composite Index rose Acquisition Highlights 16.2% on the strength of commodity prices and a generally healthy economy. In Canadian dollar terms, the S&P 500 Index fell 0.7%, the Dow Jones Industrial Average fell 3.6%, the Nasdaq Composite Index fell 3.9% and the MSCI World Index rose 2.9%. The pos- itive performance of the S&P/TSX Composite Index encouraged sales into CI’s Canadian equity funds. Industry net sales of mutual funds as reported by IFIC were positive, with $12.9 billion in net sales for the year ended May 31, 2005. This compared with indus- try net sales of $14.8 billion for the year ended May 31, 2004. Though sales and assets reported by IFIC do CI’s operating and financial results for fiscal 2005 include IQON Financial Management Inc. and Synera Financial Services Inc., the acquisitions of which closed on June 3, 2004. CI paid a total of $38.5 mil- lion in cash to Sun Life Assurance Company of Canada (“Sun Life”) for the two companies, which have networks of financial and insurance advisors with $3.6 billion in assets under administration. For details of the accounting treatment of these acquisitions, reference is made to Note 4 – “Business Acquisitions” of the Consolidated Financial Statements for the year ended May 31, 2005. 3 7 MANAGEMENT’S DISCUSSION AND ANALYSIS (cid:1) L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S CI’s main capital requirements are to finance com- missions arising from the sale of funds on a deferred sales charge basis, to pay dividends on its common shares, to purchase marketable securities and to fund capital expenditures. In fiscal 2005, CI financed $150.8 million in sales commissions with its own cash resources, up from $125.9 million in fiscal 2004. The increase resulted from CI financing the commission on an additional $500 million in gross sales this year, which is a component of the $1.7 billion increase in gross sales discussed above. In fiscal 2005, CI paid $198.3 million in dividends to holders of CI common shares, equivalent to $0.675 per share. CI also had net purchases of marketable securities in the amount of $40.6 million in fiscal 2005, resulting in total marketable securities of $77.2 million at May 31, 2005. Marketable securities are comprised of seed capital investments and other portfolio investments. Capital expenditures incurred during the year ended May 31, 2005 of $7.2 million were primarily for computer hardware and software related to the improvement of systems technology within the Asset Administration segment and continued upgrading of portfolio trading, reporting and compliance functions. In fiscal 2005, as in prior years, a portion of the capital assets for use in the operation of CI’s funds 3 8 were leased with such payments recovered over time through expenses recovered from the funds. Future payments are included below under Contractual Obligations. In addition, CI used $147.7 million to repurchase 8.6 million of its common shares at an average price of $17.24 per share. This compares with $21.4 million used to repurchase 1.7 million common shares at an average price of $12.74 per share in fiscal 2004. On May 31, 2005, the closing price of CI was $17.30 per common share, and on July 7, 2005, it was $18.50 per common share. As discussed earlier, in fiscal 2005, CI acquired IQON and Synera for total cash consideration of $38.5 mil- lion. Included in IQON’s net assets was cash of $1.2 million. All of the above funding requirements were met by cash provided by operating activities in fiscal 2005 of $441.5 million and an increase of $145.8 million in the amount drawn on CI’s line of credit with a Canadian chartered bank. The line of credit stood at $500 million at May 31, 2005 and was increased to $650 million on July 7, 2005. At fiscal year-end, CI had drawn $390.9 million bearing an average rate of 2.90%, compared with $245.2 million drawn at an average rate of 2.31% at the end of the prior year. Net of marketable securities, debt was $313.8 million in fiscal 2005 versus $216.3 million in 2004. Interest expense was $9.8 million, up from $8.6 million in fiscal 2004, reflecting higher average debt levels, but still quite modest compared to levels of cash flow. Principal repayments would only be required under the facility should the bank decide not to renew the In fiscal 2005, CI granted 1.679 million stock options to facility on its anniversary each December, in which employees of the company. An estimate of the value of case the principal would be repaid in 48 equal month- the options issued, based on a projection of the aver- ly installments. These payments are set out below age option life, corresponding stock volatility, current under Contractual Obligations. dividend and interest rate assumptions is approxi- mately $2.9 million or 0.6% of fiscal 2005 EBITDA. Free cash flow (cash flow from operations before net This estimate of $2.9 million is not reflected in the change in working capital less sales commissions and financial statements. As CI accounts for its stock minority interest for the year) was $235.8 million, rel- options as a liability, reflecting their cash-settlement atively unchanged from $237.2 million in fiscal 2004, feature, the actual expense will be determined by the as the increased level of sales commissions paid offset price at exercise less the strike price, which may be the growth in operating cash flow. This level of free more or less than $2.9 million. If option holders elect cash flow exceeded the dividends paid during the a cash payment for their options, the payment will be year by $37.5 million. Based on this, CI currently has deductible for tax purposes based on current applica- sufficient cash flow to meet anticipated capital ex- ble tax laws. penditures, deferred sales commissions and dividends. At May 31, 2005, CI’s managed retail assets had a cur- outside members of its Board of Directors as part of rent redemption value of $789.1 million or $2.75 per their compensation. CI also issued 5,500 common share at May 31, 2005, compared with $817 million or shares on the exercise of options where the holder $2.77 per share at May 31, 2004. requested to settle for stock. For full details on the In addition, CI issued 7,264 common shares to the share capital of CI, refer to Note 9 – “Share Capital” in the Notes to the Consolidated Financial Statements. C O N T R A C T U A L O B L I G AT I O N S PAY M E N T S D U E B Y P E R I O D (millions) Long-term debt Operating leases Total $390.9 49.8 Less than 1 year $40.7 11.3 2 $97.7 10.9 3 $97.7 10.0 4 $97.7 4.7 Total $440.7 $52.0 $108.6 $107.7 $102.4 5 or more years $57.1 12.9 $70.0 3 9 MANAGEMENT’S DISCUSSION AND ANALYSIS (cid:1) O F F - B A L A N C E S H E E T A R R A N G E M E N T S CI uses derivative contracts to mitigate its equity mar- ket exposure on its stock-based compensation. CI has entered into a total return share swap transaction agreement with a Canadian chartered bank. This is intended to hedge CI’s exposure to fluctuations in the price of its common shares as it records its stock- based compensation liability. all administrative and management services to Sun Life’s Clarica and SunWise segregated funds. These activities are in the normal course of business for CI and Sun Life is compensated at normal commercial rates as a distributor of fund products as disclosed in the funds’ prospectus or other offering document. These payments are in the form of commissions on sales of funds on a deferred sales charge basis ($42.3 million versus $32.0 million in fiscal 2004) and trailer fees ($71.0 million versus $58.5 million in fiscal 2004). CI also uses derivative contracts to hedge the currency risk associated with seed capital invest- ments in U.S. dollar-denominated hedge funds. On May 31, 2005, CI had an $8 million U.S. currency for- ward contract outstanding to offset its U.S. invest- (cid:1) C R I T I C A L AC C O U N T I N G E S T I M AT E S Goodwill and Intangible Assets ment in a hedge fund. On July 7,2005, this contract At the time of acquisition, intangible assets are deter- was closed out with a realized gain of $0.3 million. mined using estimates of fair value and goodwill is recorded as the excess of purchase price over identifi- Debt outstanding is borrowed at a floating interest rate. able assets acquired. CI performs impairment tests for The existing credit facility provides CI with the option goodwill and indefinite life intangible assets at least of fixing interest rates, should CI change its view on its annually. The tests also involve estimates and exposure to rising interest rates. (cid:1) R E L AT E D PA RT Y T R A N S AC T I O N S Sun Life is a related party as a result of its 35% owner- ship of CI’s outstanding common shares. In fiscal 2003, assumptions. At May 31, 2005 there was no impair- ment to the carrying amounts nor would a reasonably likely change to material assumptions result in impairment. Income Taxes in conjunction with the acquisition of Spectrum The current and future income tax assets and Investment Management Limited and Clarica Diversico liabilities are recorded based on interpretation of tax Ltd., CI and Sun Life entered into an arrangement legislation and assumptions about the realization and whereby, among other things, Sun Life would distribute timing of future benefits and costs. A difference in inter- CI’s funds through Sun Life’s Clarica sales force on a pretation by tax authorities or a change in timing or preferred basis and that CI would perform essentially realization of reversals could result in higher or lower tax provisions. 4 0 Deferred Sales Commissions The commissions paid on sales of deferred load or back-end products are deferred and amortized over 84 months. This estimate matches the period over which redemption fees are payable by the investor in this type of product. The sum of these potential redemption fees, the terminal redemption value, is sig- to be appropriate. These include the identification, documentation, designation and effectiveness of hedges. The adoption of this policy had no material impact on CI’s financial statements. (cid:1) F I N A N C I A L I N S T R U M E N T S nificantly greater than the balance of unamortized The fair value of certain financial instruments approx- deferred sales commissions. (cid:1) C H A N G E I N imates carrying value. This is the case for cash, accounts receivable and prepaid expenses, accounts payable and long-term debt. Marketable securities AC C O U N T I N G P O L I C I E S have a fair value based on quoted market prices for CI adopted a new accounting policy on Hedging Relationships in fiscal 2005. This requires that certain circumstances be met in order for hedge accounting portfolio investments and seed capital. The table below sets out the relative carrying and fair values for each financial instrument. F I N A N C I A L I N S T R U M E N T S A S AT M AY 3 1 , (millions) 2 0 0 5 2 0 0 4 Cash Marketable securities Accounts receivable and prepaid expenses Accounts payable Long-term debt Off Balance Carrying Value $28.3 77.2 94.2 $199.7 $165.8 390.9 $556.7 Fair Value $28.3 79.1 94.2 $201.6 $165.8 390.9 $556.7 Carrying Value $25.1 28.8 93.6 $147.5 $116.1 245.2 $361.3 Fair Value $25.1 29.3 93.6 $148.0 $116.1 245.2 $361.3 Sheet Arrangements $ Nil $ (0.1) $ Nil $ 0.2 4 1 MANAGEMENT’S DISCUSSION AND ANALYSIS (cid:1) D I S C L O S U R E C O N T R O L S closed-end funds, segregated funds, hedge funds and Pursuant to Multilateral Instrument 52-109, manage- ment has assessed the effectiveness of CI’s disclosure controls and procedures as at May 31, 2005 and found them to exceed required standards. (cid:1) A S S E T M A N AG E M E N T S E G M E N T Business Review The principal business of CI is the management, mar- keting, distribution and administration of mutual funds, segregated funds, structured products and other fee- earning investment products for Canadian investors through brokers, independent financial planners and insurance advisors, including Assante, Clarica and IQON financial advisors. The Asset Management segment pro- vides the majority of CI’s income and includes the structured products. In fiscal 2005, CI launched a number of new products. In August 2004, CI launched FULPAY PLUSTM CI Funds-Linked Deposit Notes, Series 1, a unique investment that provides principal protection while locking in the best cumulative performance each year out of a diverse portfolio of leading CI funds. In October 2004, CI launched Skylon All Asset Trust, providing investors with access to the expertise of Pacific Investment Management Company LLC and Research Affiliates, LLC who will seek maximum inflation-adjusted returns consistent with preservation of capital and tax-efficient quarterly distributions. In January 2005, CI launched Yield Advantage Income Trust, a closed-end fund designed to distribute 7% annually through exposure to an actively managed operating results and net assets of its wholly owned portfolio of income trusts, high yield debt and other subsidiaries CI Investments, Skylon and AAM which securities. derive their revenues principally from the fees earned on the management of several families of mutual, In March 2005, CI completed the launch of CI segregated, pooled and closed-end funds, structured C.A.P.I.T.A.L. Deposit NotesTM, Enhanced Yield Class, products and discretionary accounts. Investment Products CI believes that in order to attract and maintain investor interest, it is essential to offer a wide range of investment products and continually review its product lineup to adapt to changing investor preferences. CI’s product line encompasses a broad range of global and Series 1, which offer investors principal protection and a monthly distribution, along with the potential for 200% exposure to Signature High Income Fund. Series 2 and Series 3 were completed in May 2005 and July 2005, respectively. In March 2005, CI completed the launch of CI C.A.P.I.T.A.L. Deposit NotesTM, Callable Class, Series 1, which offer investors principal protection and a yield domestic funds offering a variety of investment styles. of 8% over two and one-half years if redeemed or the In addition, CI has consistently developed new prod- full return of two CI funds if held for the five-year ucts, such as sector-specific funds, portfolio-based term. Series 2 and Series 3 were completed in April funds, fee-based portfolio management services, 2005 and July 2005, respectively. 4 2 In April 2005, CI launched Skylon Y.I.E.L.D. Notes, eliminate duplication arising from recent acquisitions. Series 1, a 6.6 year note paying a 5% coupon at the Terminated sub-advisors included Howson Tattersall end of 2005 and has the potential to pay an annual Investment Counsel Ltd. and Altamira Investment variable coupon of up to 11% over the remaining six Services. years of the notes. Series 2 was launched in May 2005. In April 2005, CI announced that it was changing the name of CI Sector Fund Limited to CI Corporate Class Limited to more accurately describe the structure of the funds and the tax-efficient strategies they offer investors. As a result of the many acquisitions by CI over the past several years, CI’s lineup of funds had expanded significantly. In order to streamline its lineup and improve the cost efficiencies in operating the funds, CI eliminated 15 funds in September 2004 by merging them into other funds with similar mandates. Similarly, CI eliminated a further eight funds in November 2004 and announced in May 2005 that a further 16 funds would be eliminated in August 2005. In order to offer a broad range of investment products, CI retains the services of a significant number of inves- tment managers. CI uses both external sub-advisors and internal portfolio managers to ensure it can attract and maintain the investment management expertise CI believes is necessary to meet investors’ needs. CI maintains sub-advisory agreements with independent CI also employs portfolio managers directly. At May 31, 2005, CI managed $21.0 billion in a diversified mix of funds using value and growth- oriented investment approaches. CI’s in-house invest- ment teams operate under the Harbour Funds, Signature Funds and CI Funds brands and include well-known money managers such as Gerry Coleman, Eric Bushell and Robert Lyon. Effective June 2004, CI terminated its equity ownership in Webb Capital Management LLP (“Webb”), in which CI had a 55% ownership. A decision was made to not extend the sub-advisory contract with Webb and a return of CI’s ownership in Webb was negotiated in conjunction with the termination of the contract. Effective February 2005, CI restructured its 66% ownership in BPI Global Asset Management LLP (“BGAM”) such that CI gave up all future economic benefits of ownership in exchange for a 32% part- icipation in the net revenue earned on BGAM’s institutional assets. investment managers who are compensated on the Effective November 2004, CI terminated its 49% equity basis of assets under management, as detailed in the ownership in Altrinsic Advisors, LLC. CI maintains a chart on the next page. 25% profit participation in Altrinsic Global Advisors, LLC, whose mandate is to pursue institutional hedge During the year, CI terminated relationships with fund assets. certain sub-advisors in conjunction with efforts to 4 3 MANAGEMENT’S DISCUSSION AND ANALYSIS C I I N V E S T M E N T S & A S SA N T E S U B - A DV I S O R S A S S E T S AT M AY 3 1 , 2 0 0 5 (millions) AGF Funds Inc. AIC Limited AIM Funds Management Inc. Alliance Capital Management LP Altrinsic Global Advisors, LLC Brandes Investment Partners & Co. Cohen & Steers Capital Management Inc. Connor, Clark & Lunn Investment Management Ltd. Deutsche Investment Management Americas Inc. Dimensional Fund Advisors Inc. Dynamic Mutual Funds Inc. Epoch Investment Partners, Inc. Fidelity Investments Canada Limited Franklin Templeton Investments Corp. Legg Mason Capital Management Mackenzie Financial Corporation MFC Global Investment Management (Canada) Picton Mahoney Asset Management Sanford C. Bernstein & Co., LLC Sionna Investment Managers Inc. TD Asset Management Inc. Tetrem Capital Partners Ltd. Trident Investment Management, LLC Trilogy Advisors, LLC UBS Global Asset Management (Canada) Co. Waterfall Investments Inc. Wellington Management Company, LLP Total 4 4 $407 25 836 203 1,573 30 711 148 1,125 818 53 1,135 692 152 1,255 55 84 1,917 287 4,815 20 1,642 247 6,194 546 257 94 $25,321 Investment Product Distribution Over the past three years, CI has taken extensive CI distributes its investment products through invest- ment dealers, mutual fund dealers, insurance agents, banks, and its preferred distribution arrangement with Clarica advisors and managers and through Assante financial advisors. In order to support these distribu- tion 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 sup- port personnel who provide product information and who have access to detailed records of distributors’ fund assets and transactions with CI. CI also provides distributors with extensive information about its funds through the Internet, through various publications and through appearances and presentations by the funds’ advisors. AAM has its own suite of proprietary products known as the Optima Strategy Pools and the Artisan Portfolios distributed exclusively through Assante financial advisors. These products allow Assante advisors to provide their clients with a comprehensive investment program that includes strategic asset allocation, portfolio monitoring and rebalancing and effective reporting. Distribution of these funds are supported by an extensive number of staff specific to the Assante operations whose experience includes all aspects of fund support, as well as knowledge in dealership, compliance, estate, trust, tax and insurance matters. AAM also offers its exclusive Assante Private Client discretionary account management service to high net worth investors and their families. measures to broaden its distribution of financial products: 1. It maintains a broad range of funds that encompass numerous styles and fund mandates to ensure financial advisors have the widest choice within CI. 2. It has expanded its asset base significantly through acquisition. This ensures that CI is one of the largest investment product complexes in Canada, thereby increasing the likelihood of maintaining shelf space with distributors of financial products, as they have reduced the number of fund families they are will- ing to support and promote. 3. In July 2002, in conjunction with the purchase of Spectrum and Diversico, CI entered into a distribu- tion arrangement with Sun Life, a related party, that covers approximately 4,000 Clarica advisors and managers. The arrangement provides that CI’s funds will be the predominant wealth management products offered by Clarica advisors and managers. 4. In November 2003, CI purchased Skylon to use as a base to expand CI’s manufacturing and distribution of structured products such as closed-end funds, which have become increasingly popular among certain financial advisors. 5. In November 2003, CI purchased the Canadian operations of Assante, which currently has app- roximately 900 financial advisors that distribute proprietary Assante products and services and 4 5 MANAGEMENT’S DISCUSSION AND ANALYSIS third-party funds, including CI funds. The acqui- ating costs will become a competitive advantage in sition ensures CI maintains a relationship with the future. The table below depicts the reduction in these advisors. costs CI has achieved over the past six years in the administration of CI funds. (Note that this table does 6. In June 2004, CI purchased IQON, which currently not include the operating costs of the funds of com- has approximately 360 financial advisors that panies acquired by CI until those funds have been distribute third-party funds, including CI funds. integrated into CI and therefore have operating costs The acquisition ensures CI maintains a relationship consistent with CI funds). with these advisors. Investment Product Administration ability to consolidate fund operations onto its admin- CI believes that it holds a competitive advantage in its 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 enable its clients to receive information quickly and in a cost-efficient manner, ensuring that CI continues to be one of the most efficient fund administrators in the industry. CI believes that the costs it incurs to administer its funds are among the lowest in the industry as a percentage of assets and that low oper- F U N D O P E R AT I N G E X P E N S E S istrative platform and achieve significant cost savings in the administration of financial products. In fiscal 2003, CI consolidated the Spectrum fund administra- tion onto CI’s administrative platform within six weeks of the acquisition. The consolidation of the Clarica Diversico fund administration function, including all segregated funds, was completed by January 2003. In fiscal 2004, CI consolidated the administration of the Synergy and Skylon fund assets onto CI’s platform within four weeks of the acquisi- tion of these firms. This has resulted in significant cost savings in the operations of these funds, which directly benefits their investors. In fiscal 2005, CI converted the Assante funds onto CI’s operating platform, which resulted in significant Year 1999 2000 2001 2002 2003 2004 2005 as a % of assets (in basis points) cost savings and enhanced service for the Assante 39.6 34.4 31.1 30.5 31.4 27.5 21.5 products. A key strength of CI is its ability to quickly provide administrative capacity for new products in a cost- effective manner. In recent years, CI has successfully launched numerous new products that have had the appropriate administrative support to achieve market 4 6 penetration and have contributed significantly to CI’s Revenues from management fees were $881.8 million assets under management. for the year ended May 31, 2005, up 24% from $711.0 Financial Review The Asset Management segment had income before income taxes of $452.2 million, an increase of $55.8 million from $396.4 million in the prior year. Revenues The majority of CI’s revenues is earned from the management services it provides as fund manager to the CI funds and Assante proprietary products and is reported as management fees. The key determinant of CI’s management fee revenue is its managed retail assets, which is determined by both market returns and net sales of these funds. CI focuses on offering retail funds – especially equity funds, which earn man- agement fees of approximately 2.00%. Approximately 75% of CI’s managed retail assets are in retail equity funds. CI also offers funds with lower management fees that are designed for fee-based products or fund- of-fund products. These funds, known as Class F, and Class I funds, have management fees that are at levels approximately one percentage point or more below CI’s basic retail or Class A fund. In return for lower management fees, CI does not pay trailer fees on Class I and Class F funds. CI is able to provide cost-efficient service to Class I funds because of the large size of these accounts. At May 31, 2005, there were $354 million and $3,086 million in Class F and Class I funds, respectively, compared with $261 million and $1,870 million on May 31, 2004. million in 2004. The increase was mainly attributable to higher average managed assets in fiscal 2005, which included a full year of the assets acquired in the Assante/Synergy/Skylon transactions completed mid-way through fiscal 2004. A higher proportion of Class I and Class F funds, which have lower manage- ment fees, offset positive market performance of the funds. As a percentage of average managed retail assets, management fees were 1.91% for fiscal 2005, unchanged from fiscal 2004. Other revenue was $78.6 million for fiscal 2005, up 8% from $72.6 million in fiscal 2004. The largest component of other revenue was redemption fees. Investors pay redemption fees when funds are purchased on a deferred sales charge basis and the investment is redeemed within the applicable redemption period, generally seven years. Redemption fees, which have rates that start as high as 5.5% and decrease to zero over the redemption period, are calculated as a percentage of the initial value of the funds sold. Redemption fees increased from $43.4 million in fiscal 2004 to $47.1 million in fiscal 2005 as a result of higher overall redemptions, including a full year’s redemptions at Assante. This was partially offset by a decreased level of assets that are subject to redemption fees, and the aging of assets, which results in lower applicable redemption fees. 4 7 MANAGEMENT’S DISCUSSION AND ANALYSIS CI earned income from BGAM’s institutional business Net SG&A expenses are primarily marketing expenses of $13.1 million, down 31% from $19.1 million in incurred to support the funds and portfolio manage- fiscal 2004, reflecting CI’s reduced share of that ment expenses. In general, marketing expenses are business in the fourth quarter. managed in proportion to assets under management. Net SG&A expenses relative to assets are higher for CI may earn revenue or incur losses on investments the Assante operations due to the more extensive in seed capital in its hedge funds or other strategic support provided to the Assante products and servic- investments such as investments in potential candi- es. Portfolio management expenses were disclosed dates for acquisition. CI incurred a gain on the sale of separately in previous years; however, management marketable securities of $6.7 million in fiscal 2005, has determined that such detailed reporting may be compared with a gain in fiscal 2004 of $0.7 million. contrary to CI’s best interests by providing informa- The gain in fiscal 2005 arose primarily from the sale tion to competitors. of marketable securities representing strategic invest- ments. In addition, AAM contributed other income of Total SG&A expenses were $283.6 million in fiscal $7.8 million ($4.2 million in fiscal 2004), which is 2005, compared with $238.7 million in fiscal 2004. primarily made up of custody and other fees from The single largest reason for the increase is the Assante’s Private Client Business. $53 million in compensation to unitholders of CI Expenses CI incurs two distinct types of expenses: expenses incurred on behalf of the funds it administers that are generally recovered from the funds; and all other expenses incurred in the management of the business that are not recovered from the funds. Expenses incurred on behalf of the funds are reflect- ed in CI’s overall selling, general and administrative (“SG&A”) expenses. The amount of expenses recov- ered from funds is reported as a reduction of total SG&A expenses. The SG&A expenses remaining after deducting the expenses recovered from funds is disclosed as net SG&A. Investments’ funds, as described in Note 13 - “Commitments and Contingencies” in the Notes to the Consolidated Financial Statements. Included in total SG&A expenses in fiscal 2005 is $13.3 million ($40.0 million in fiscal 2004) of com- pensation expense. At May 31, 2004, based on the price of CI shares of $16.44 per share, the potential payment on all options outstanding, including a por- tion of unvested amounts, was $46.1 million. At May 31, 2005, based on the price of CI shares of $17.30 per share, the potential payment on all options outstanding, including a portion of unvested amounts, has decreased by $17.4 million to $28.7 million. As a result, CI has recorded an expense in fiscal 2005 of $13.3 million, of which $30.7 million was from option holders electing cash settlement, $0.1 million from 4 8 option holders electing share settlement and $17.4 along with asset growth, resulted in significant reduc- million representing the change in liability reported at tions in the operating expenses of the Assante funds May 31, 2005 for outstanding vested options and for in fiscal 2005. a portion of unvested options. Though CI acknowl- edges that the option expense is clearly a cost of busi- Net SG&A expenses were $170.8 million, up ness that is tied to the performance of CI’s common from $128.9 million in the prior fiscal year. As share price, the financial results presented below both explained above, fiscal 2005 included $13.3 million in include and exclude the expense to aid the reader in option-related expenses, compared with $40.0 million conducting a comparative analysis. in fiscal 2004. As a percentage of managed retail assets, net SG&A expenses increased to 0.37% in Net of the expense related to options and the com- fiscal 2005 from 0.35% in fiscal 2004. Excluding pensation to unitholders, total SG&A expenses were the option-related expense and compensation to $217.3 million, up 9% from $198.7 million in fiscal unitholders, net SG&A expenses were $113.0 million or 2004. The increase in SG&A expenses is attributable 0.25% of assets under management in fiscal 2005, to the inclusion of a full year of Assante’s expenses. compared with $99.2 million or 0.27% in fiscal 2004. These costs represent a combination of fund operat- The majority of the increase in net SG&A expenses ing expenses and general operating expenses as was due to SG&A expenses of the acquired Assante described below. operations. Assante’s asset management activities require significantly more support than do CI’s fund Expenses incurred but recovered as operating expens- operations, and fiscal 2005 was the first time that es of the funds rose 3% to $112.8 million for the year Assante’s expenses were included for the full year. ended May 31, 2005, compared with $109.8 million in 2004. As a percentage of assets under management, Trailer fees are paid to investment and mutual fund expenses charged to mutual funds decreased 17% dealers and life insurance agents to assist them in from 0.30% in fiscal 2004 to 0.25% in fiscal 2005. providing ongoing support to investors in CI funds. The decrease in overall expenses resulted from the Trailer fees are also paid to Assante financial advisors integration of the Assante funds into the CI opera- on Assante funds for a similar reason. Trailer fees are tional platform, which led to improved operating effi- calculated as a percentage of average assets and vary ciencies, and from cuts in general expenses achieved with overall assets under management. Trailer fees through reductions in staff numbers and in variable are not paid on Class F and Class I mutual funds and costs. Further improvement in efficiencies resulted institutional assets. from the increase in asset levels generated by net sales and positive equity markets, as costs were being Trailer fees increased from $204.2 million to $265.0 allocated over a larger asset base. These measures, million in fiscal 2005. Net of intersegment amounts, 4 9 MANAGEMENT’S DISCUSSION AND ANALYSIS this expense was up from $197.8 million in fiscal funds. The actual cash payment in any period is 2004 to $250.7 million in 2005. The overall increase reported in the Consolidated Statements of Cash resulted from increased assets under management Flows under Investing Activities as sales commis- due to the acquisitions in fiscal 2004 and from the sions. Amortization of deferred sales commissions market appreciation of the funds, partly offset by an rose from $34.0 million in fiscal 2004 to $55.2 million increase in the percentage of CI’s mutual fund assets in fiscal 2005. The increase is consistent with the in Class F and Class I funds, on which CI does not pay increase in sales commissions paid in the last two trailer fees. As a percentage of average assets, trailer fiscal years and the change in amortization period fees were 0.54% in fiscal 2005, compared with 0.53% from 36 to 84 months at the beginning of fiscal 2004. in the prior fiscal year. Commissions incurred on certain CI assets were CI monitors its operating profitability on assets under financed historically by limited partnerships. The management by measuring the operating margin expenses for commissions financed by limited part- calculated as a percentage of average managed retail nerships are reported as other expenses and are assets. CI’s operating profit margin is defined as calculated as a percentage of the assets. The effective management fees from funds less trailer fees and amortization period for commissions financed by net SG&A expenses, calculated as a percentage of limited partnerships is the life of the CI Master average managed retail assets. CI uses this measure Limited Partnership, which will terminate by 2016. to manage profitability so that when changes in the market value of assets under management affect rev- Other expenses dropped from $19.1 million in fiscal enue flows, CI will adjust discretionary expenditures 2004 to $14.6 million in fiscal 2005. Other expenses to maintain its margins. should be viewed in conjunction with revenues rec- ognized under other income of $24.9 million in fiscal CI’s operating margin on the Asset Management 2005 and $28.5 million in fiscal 2004. The primary con- segment, as a percentage of average managed retail tributors to other expenses were expenses associated assets and adjusted for the $4.8 million option with CI’s institutional business, which fell from $10.3 expense and $53 million unitholder compensation million in fiscal 2004 to $6.8 million in fiscal 2005. expense as discussed above, was 1.12%, unchanged from 1.12% in the prior fiscal year. The increase in Distribution fees to limited partnerships totalled $4.4 trailer fees was offset by lower net selling, general million, down from $5.6 million in fiscal 2004. As a and administrative expenses. percentage of average managed retail assets, distribu- Commissions paid from CI’s cash resources on the to 1.0%, reflecting a lower percentage of CI’s overall sale of funds on a deferred sales charge basis are, for assets under management that have been financed by tion fees to limited partnerships decreased from 1.5% financial reporting purposes, amortized evenly over limited partnerships. the 84 months immediately following the sale of the 5 0 For full details on the segmented results of CI, refer to cial advisory services by Assante and IQON financial Note 12 – “Segmented Information” in the Notes to the advisors, CI’s focus is on providing services such Consolidated Financial Statements. as compliance oversight, support for tax and legal (cid:1) A S S E T A D M I N I S T R AT I O N review of third-party products, a centralized dealer- services, portfolio management services, product S E G M E N T Business Review The Asset Administration segment includes the operating results and net assets of Assante Advisory Services Ltd. and most of its subsidiaries, including Assante Capital Management Ltd. and Assante Financial Management Ltd. These companies derive their revenues principally from commissions and fees earned on the sale of mutual funds and other financial products, and ongoing service to clients. Investment Advisory Services CI provides financial advisory services to clients through financial advisors at Assante and IQON. The level of services provided range from offering basic financial advisory services focusing on products such as mutual funds, segregated funds and other insur- ance products to a full suite of financial advisory services, including portfolio management, investment advice, distribution of securities, insurance products, ship administrative operation, product design, insur- ance administration, marketing support, educational support, financing and other related services. Income potential from sources other than man- agement fees has also become significant. CI earns administration fees predominately on assets under administration at Assante and at IQON. Administra- tion fees should be considered in conjunction with investment dealer fees, which represent payments to investment advisors on assets under administration. Payments are determined according to a grid that provides payments at higher percentages as the indi- vidual advisor’s assets under administration increase. Financial Review The Asset Administration segment had income before income taxes of $14.3 million, up from $12.7 million in the prior year. Revenues banking products and financial, tax, succession, Administration fees are fees earned on assets under wealth and estate planning. administration in the Assante business and fees earned from certain labour-sponsored funds and the At June 30, 2005, Assante and IQON had 1,055 finan- administration of third-party business. These have cial advisors with a total of $24.0 billion in assets increased from $108.5 million last year to $219.2 under administration, resulting in average assets million this year. The primary contribution to the under administration of $22.7 million per financial increase was the revenues earned by Assante on advisor. In order to support the distribution of finan- assets under administration for a full fiscal year, 5 1 MANAGEMENT’S DISCUSSION AND ANALYSIS following the acquisition in November 2003. In operating expenses. For 2005, gross margin was $53.3 addition, in fiscal 2005, administration fees include million or 24.3%. In fiscal 2004, investment dealer fees earned on IQON assets under administration. fees were $80.1 million on revenue of $108.5 million, Administration fees should be considered in conjunc- for a margin of $28.4 million or 26.2%. tion with investment dealer fees. Net of intersegment eliminations, administration fee revenue was $114.5 (cid:1) O U T L O O K million this year, versus $58.0 million last year. Other revenues earned by the Asset Administration segment totalled $7.3 million, up from $3.1 million in the prior year. These amounts are mainly interest income on cash balances and custody fees. Expenses The sales momentum experienced by CI during the RSP season has continued with net retail sales of $111 million, $131 million and $150 million for April, May and June, respectively – traditionally very slow months for the industry. This is in part attributable to the performance of CI’s funds, which continues to be strong as demonstrated by CI leading the industry in Morningstar 5-star rated funds. Market apprecia- Selling, general and administrative costs for the seg- tion of CI’s funds has reflected the general increase in ment were $44.5 million in fiscal 2005, up from $18.1 equity markets, with assets under management million in fiscal 2004. While the figures for 2005 totalling $50.4 billion at July 7, 2005, up $1.6 billion reflect a full year of operations for this segment, or 3% from the fourth quarter average, and up $4.3 SG&A costs were also greater as integration activities billion or 9% from the fiscal 2005 average. continued. CI anticipates that the relative cost of the Assante and IQON operations will decrease over the CI has steadily increased its dividend over the past next few years as economies of scale are achieved and several fiscal years, from $0.29 per share in fiscal changes to operating technology are implemented to 2003 and $0.405 in fiscal 2004 to $0.675 in fiscal improve efficiency. 2005. As well, CI introduced monthly dividends in January 2005 in order to provide shareholders with Investment dealer fees are the direct costs attributa- monthly income on their investment. These moves ble to the operation of the Assante and IQON dealer- are a result of the stability and growth of CI’s free ships, including payments to financial advisors based cash flow and the desire to return excess cash to on the revenues generated from assets under admin- shareholders. On July 20, 2005, CI expects to increase istration. These fees were $165.9 million in fiscal its dividend from $0.05 per share per month to $0.06 2005, and should be viewed in conjunction with per share for the monthly dividend payable August administrative fee revenue of $219.2 million as 15, 2005, reflecting the growth in its operations and described above when calculating the gross contribu- the amount of free cash flow available to be returned tion of the dealership operation before general and to shareholders. 5 2 On June 23, 2005, CI announced a proposal to estab- business from Amvescap PLC (“Amvescap”), a lish a fixed administration fee for its mutual funds. London-based fund manager. Amvescap then issued The proposal would have CI bear all operating a news release stating that it had received such an expenses of the funds (other than taxes and new gov- indicative approach from CI, but that its Board of ernmental fees) in return for fixed administration Directors had considered and unanimously concluded fees. These fees are, on average, 36% lower than the that the approach was not in the best interests of funds’ operating expenses for calendar 2004. This shareholders. CI confirmed, in media interviews, that plan effectively caps the funds’ management expense it had sent letters to Amvescap outlining its interest in ratios as CI will absorb any operating expenses that acquiring AIM/Trimark and possibly Amvescap. exceed the fixed administration rate. Securityholders AIM/Trimark manages approximately $44 billion and will vote on the proposal in late August 2005. If is the fourth-largest retail fund company in Canada, passed, the fixed administration fee would come into making it slightly smaller than CI. Amvescap has a effect September 1, 2005. CI’s proposal has been market capitalization of over $7 billion, about one- unanimously approved by the CI funds’ Board of third larger than CI. Governors, a governance body of the funds composed entirely of governors who are unrelated to CI man- The agreements between CI and Sun Life relating to agement, as being in the best interests of the funds’ the acquisition of the Spectrum and Diversico assets securityholders. The proposal is intended to provide contain certain provisions that will expire on July 25, transparency of costs to securityholders of CI’s funds 2005. Sun Life has been limited to a 34% ownership at attractive levels relative to competitors’ funds, in stake in CI, which can only be exceeded by CI buying turn enhancing the appeal of CI’s products. back its common shares. Sun Life had the right to maintain its 34% proportionate interest in the event On June 27, 2005, CI announced that it has adopted CI issued shares that would have resulted in dilution the name CI Financial and would seek to change its of Sun Life’s share position. Sun Life also had the legal name from CI Fund Management Inc. to CI right to nominate two individuals for election as Financial Inc. upon approval from shareholders at its members of the Board of Directors. At the expiry of next annual meeting. CI also announced that its these provisions, it is expected that these rights and wholly owned subsidiary, CI Mutual Funds Inc. had obligations will be terminated, although CI will still changed its name to CI Investments Inc. to better permit Sun Life to nominate two individuals for elec- reflect the composition of CI’s business. tion to its Board of Directors. Any Sun Life purchases of CI common shares will only be subject to normal On July 6, 2005, a news story was published takeover rules as set out by securities laws. suggesting that CI had made an indicative approach to purchase the AIM/Trimark Canadian mutual fund 5 3 MANAGEMENT’S DISCUSSION AND ANALYSIS Consolidated Financial Statements M A N A G E M E N T ’ S R E P O R T T O S H A R E H O L D E R S Management of CI 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 Canadian 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 appropriate authorization, and that accounting records may be relied upon to properly reflect the Corporation’s business transactions. The Audit Committee of the Board of Directors is composed of outside directors who meet periodically and independently with management and the auditors to discuss the Corporation’s financial reporting and internal control. The Audit Committee reviews the results of the audit by the auditors and their audit report prior to submitting the consolidated financial statements to the Board of Directors for approval. The external auditors have unrestricted access to the Audit Committee. Management recognizes its responsibility to conduct the Corporation’s affairs in the best interests of its shareholders. William T. Holland Chief Executive Officer Douglas J. Jamieson Chief Financial Officer July 7, 2005 5 5 CONSOLIDATED FINANCIAL STATEMENTS A U D I T O R ’ S R E P O R T To the Shareholders of CI Fund Management Inc. We have audited the consolidated balance sheets of CI Fund Management Inc. [“CI”] as at May 31, 2005 and 2004 and the consolidated statements of income and deficit and cash flows for the years then ended. These financial statements are the responsibility of CI'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 presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of CI as at May 31, 2005 and 2004 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Toronto, Canada, July 7, 2005. Chartered Accountants 5 6 C O N S O L I D AT E D B A L A N C E S H E E T S A S AT M AY 3 1 , (thousands of dollars) 2005 2004 (cid:1) ASSETS Current Cash Client and trust funds on deposit [note 2] Marketable securities [note 3] Accounts receivable and prepaid expenses [note 9(c)] Income taxes recoverable Future income taxes [note 11] Total current assets Capital assets [note 6] Deferred sales commissions, net of accumulated amortization of $322,163 (2004 - $266,919) [note 10] Fund contracts [notes 4 and 5] Goodwill [note 4] Other assets [note 7] (cid:1) LIABILITIES AND SHAREHOLDERS’ EQUITY Current Accounts payable and accrued liabilities [notes 10 and 13] Client and trust funds payable [note 2] Income taxes payable Stock-based compensation [note 9(b)] Deferred revenue Current portion of long-term debt [note 8] Total current liabilities Deferred lease inducements Long-term debt [note 8] Future income taxes [note 11] Total liabilities Minority interest Shareholders’ equity Share capital [note 9(a)] Deficit Total shareholders’ equity (see accompanying notes) On behalf of the Board: 28,305 93,099 77,154 94,222 1,923 16,006 310,709 21,276 349,395 1,012,778 951,026 18,886 2,664,070 165,830 93,099 20,537 28,726 4,037 40,722 352,951 2,211 350,212 485,934 1,191,308 – 1,690,663 (217,901) 1,472,762 2,664,070 25,117 89,966 28,829 93,604 6,881 27,865 272,262 26,085 253,867 1,010,682 919,203 11,663 2,493,762 116,068 89,966 11,396 46,127 4,272 25,538 293,367 2,712 219,627 442,765 958,471 1,422 1,740,983 (207,114) 1,533,869 2,493,762 _______________________ William T. Holland Director _______________________ G. Raymond Chang Director 5 7 CONSOLIDATED FINANCIAL STATEMENTS C O N S O L I D AT E D S TAT E M E N T S O F I N C O M E A N D D E F I C I T Y E A R S E N D E D M AY 3 1 , (thousands of dollars, except per share amounts) 2005 2004 (cid:1) REVENUE Management fees Administration fees Redemption fees Gain on sale of marketable securities Other income [note 7] (cid:1) EXPENSES Selling, general and administrative [notes 9(b) and 13] Less: expenses recovered from funds Net selling, general and administrative Trailer fees [note 10] Investment dealer fees Amortization of deferred sales commissions and fund contracts Interest [note 8] Other [note 7] Minority interest Income before income taxes Provision for income taxes [note 11] Current Future Net income for the year Deficit, beginning of year Cost of shares repurchased in excess of stated value [note 9(a)] Dividends declared Deficit, end of year 881,817 114,516 47,081 6,706 32,158 1,082,278 328,089 112,780 215,309 250,695 82,162 58,248 9,785 14,976 631,175 3,188 447,915 109,092 54,074 163,166 284,749 (207,114 ) (97,206 ) (198,330 ) (217,901 ) 710,950 58,037 43,375 690 31,621 844,673 256,757 109,782 146,975 197,766 39,710 35,388 8,588 19,112 447,539 5,390 391,744 86,314 84,386 170,700 221,044 (305,932) (13,457) (108,769) (207,114) Earnings per share [note 9(d)] 0.97 0.82 (see accompanying notes) 5 8 C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S Y E A R S E N D E D M AY 3 1 , (thousands of dollars) 2005 2004 (cid:1) OPERATING ACTIVITIES Net income for the year Add (deduct) items not involving cash Gain on sale of marketable securities Stock-based compensation Amortization of deferred sales commissions and fund contracts Amortization of other Minority interest Future income taxes Net change in non-cash working capital balances related to operations Cash provided by operating activities (cid:1) INVESTING ACTIVITIES Purchase of marketable securities Proceeds on sale of marketable securities Additions to capital assets Deferred sales commissions paid Additions to other assets Cash paid on acquisitions, including transaction costs and cash acquired [note 4] Cash used in investing activities (cid:1) FINANCING ACTIVITIES Long-term debt [note 8] Repurchase of share capital [note 9(a)] Issuance of share capital [notes 4 and 9(a)] Distributions to minority interest Dividends paid to shareholders Cash provided by (used in) financing activities Net increase in cash during the year Cash, beginning of year Cash, end of year (cid:1) SUPPLEMENTAL CASH FLOW INFORMATION Interest paid Income taxes paid (see accompanying notes) 284,749 221,044 (6,706) (17,338) 58,248 13,529 3,188 54,074 389,744 51,731 441,475 (106,154) 65,593 (7,213) (150,772) – (37,259) (235,805) 145,769 (147,745) 219 (2,395) (198,330) (202,482) 3,188 25,117 28,305 (690) 16,479 35,388 6,510 5,390 84,386 368,507 1,036 369,543 (50,450) 18,052 (7,390) (125,879) (325) (412,133) (578,125) 101,165 (21,392) 265,948 (5,026) (108,769) 231,926 23,344 1,773 25,117 10,265 104,424 7,334 86,458 5 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S M AY 3 1 , 2 0 0 5 A N D 2 0 0 4 ( I N T H O U S A N D S O F D O L L A R S , E X C E P T P E R S H A R E A M O U N T S ) CI Fund Management Inc. [“CI”] is incorporated under the laws of Ontario. CI's primary business is the management and distribution of a broad range of financial products and services, including mutual funds, segregated funds, financial planning, insurance, investment advice, wealth management and estate and succession planning. 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 CI, CI Investments Inc. [“CI Investments”] [formerly CI Mutual Funds Inc.], Assante Corporation [“Assante”] and Skylon Advisors Inc. [“Skylon”] [formerly Skylon Capital Corp.] and their subsidiaries. Hereinafter, CI and its subsidiaries are referred to as CI. During fiscal 2005, CI restructured its 66% investment in BPI Global Asset Management LLP [“BGAM”] such that CI gave up all future economic benefits of ownership in exchange for a 32% participation in the net revenue earned on BGAM’s institutional assets. As a result, the accounts of BGAM are no longer included in the consolidated financial statements from the date of disposition. During fiscal 2004, CI disposed of its investment in Trilogy Advisors, LLC. Revenue recognition Management fees are based upon the net asset value of the respective funds and are recognized on an accrual basis. Management fees received in advance of amounts earned are disclosed separately as deferred revenue. Administration fees and other income are recognized as services are provided under contractual arrangements. Administration fees include commission revenue, which is recorded on a trade date basis. Redemption fees payable by unitholders of deferred sales charge mutual funds, the sales commission of which was financed by CI, are recognized as revenue on the trade date of the redemption of the applicable mutual fund securities. Performance fees are recognized when performance thresholds have been satisfied and management is assured of their realization. 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. 6 0 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Capital assets Capital assets are recorded at cost less accumulated amortization. These assets are amortized over their estimated useful lives as follows: Computer hardware 30% declining balance or straight-line over three to four years Computer software Straight-line over two to four years Office equipment 20% declining balance or straight-line over five years Leasehold improvements Straight-line over the term of the lease Property Straight-line over twenty-five years Deferred sales commissions Commissions paid on sales of deferred sales charge mutual funds represent commissions paid by CI 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 on a straight-line basis over 84 months from the date recorded. Fund contracts Fund contracts are recorded net of any write-down for impairment. CI evaluates the carrying value of fund contracts for potential impairment based on estimated discounted future cash flows. These evaluations are performed on an annual basis, or more frequently if events or changes in circumstances indicate a potential impairment. Any impairment would be written off to income. Fund administration contracts are amortized on a straight-line basis over twenty-five years. Fund management contracts with a finite lives are amortized on a straight-line basis over eight years. Fund management contracts with indefinite life are not amortized. Goodwill Goodwill is recorded as the excess of purchase price over identifiable assets acquired. CI evaluates the carrying value of goodwill for each segment for potential impairment based on comparison to the allocated market capitalization by segment. If this test indicates a potential impairment for any segment, the carrying value of goodwill is evaluated against estimated discounted future cash flows for that segment. These evaluations are performed on an annual basis, or more frequently if events or changes in circumstances indicate a potential impairment. Any impairment would be written off to income. Stock-based compensation CI has a stock-based compensation plan, which includes a cash settlement option. Compensation expense is recognized and recorded as a liability based upon the intrinsic value of outstanding stock options as at the balance sheet date and the proportion of their vesting periods that have elapsed. On the exercise of stock options for shares, the liability record- ed with respect to the options and consideration paid by the employees are credited to share capital. 6 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Deferred lease inducements Lease inducements are deferred and amortized on a straight-line basis over the term of the lease. 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 per share The treasury stock method is used in the calculation of per share amounts. Basic per share amounts are determined by dividing net income by the weighted average number of shares outstanding during the year. There is no dilutive effect on earnings per share as CI accounts for its stock options as a liability. Derivative financial instruments Derivative financial instruments are used to mitigate equity market and foreign exchange exposures. CI has entered into a total return share swap to manage its equity market exposure related to its stock-based compen- sation. The total return share swap is measured at fair value and any resulting gains or losses are recognized in income. CI has entered into forward contracts to manage its foreign exchange exposure related to its investments in U.S. dollar denominated hedge funds. Forward contracts are measured at fair value and any resulting gains or losses are recog- nized in income. Included in income are foreign exchange losses of $1,037 [2004 - foreign exchange gains of $62]. Effective June 1, 2004, CI adopted the recommendations of CICA Accounting Guideline 13 - Hedging Relationships on a prospective basis. These recommendations require that certain circumstances be met in order for hedge accounting to be appropriate, including the identification, documentation, designation and effectiveness of hedges. The adoption of this policy did not have a material impact on the consolidated financial statements. Foreign currency translation Foreign currency denominated items are translated into Canadian dollars as follows: Integrated foreign subsidiaries are financially or operationally dependent on CI. 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. 6 2 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Other foreign currency transactions are translated into Canadian dollars using the exchange rate in effect on the trans- action 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. Business acquisitions The purchase method of accounting is used for business acquisitions and the results of operations are consolidated from the date of acquisition. Use of estimates The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting prin- ciples requires management to make estimates and assumptions that affect the reported amounts of assets and liabili- ties at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting year. Actual results could differ from those estimates. 2. CLIENT AND TRUST FUNDS Included in client and trust funds on deposit are amounts representing cash held in trust with Canadian financial insti- tutions for clients in respect of self-administered Registered Retirement Savings Plans and Registered Retirement Income Funds, and amounts received from clients for which the settlement date on the purchase of securities has not occurred or accounts in which the clients maintain a cash balance. The corresponding liabilities are included in client and trust funds payable. 3. FINANCIAL INSTRUMENTS As at May 31, 2005, the fair value of marketable securities was $79,128 [2004 - $29,276]. As at July 7, 2005, the fair value of marketable securities was $91,472. CI had a forward contract outstanding as at May 31, 2005 to sell US$8,000 at a forward rate of $1.2484 on July 7, 2005. As at May 31, 2005, the fair value of this contract approximates its carrying amount of nil. CI had a forward contract outstanding as at May 31, 2004 to sell US $9,500 at a forward rate of $1.3803 on October 26, 2004. The contract was settled on June 30, 2004 and CI realized a gain of $339. The estimated fair values of all other financial instruments approximate their carrying amounts in the consolidated bal- ance sheets. 6 3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 4. BUSINESS ACQUISITIONS Year ended May 31, 2005 On June 3, 2004, CI completed its acquisition of all of the outstanding shares of IQON Financial Management Inc. and Synera Financial Services Inc. from Sun Life Assurance Company of Canada [“Sun Life”], a related party, which have networks of financial and insurance advisors. As consideration, CI paid $38,500 in cash. Details of the net assets acquired, at fair value, are as follows: Cash Client and trust funds on deposit Accounts receivable and prepaid expenses Capital assets Marketable securities Fund administration contracts Other assets Accounts payable and accrued liabilities Client and trust funds payable Future income taxes Other liabilities Goodwill on acquisition $ 1,241 92 1,996 717 1,053 5,100 335 (2,175 ) (92 ) (954 ) (636 ) 31,823 38,500 Year ended May 31, 2004 On October 6, 2003, CI completed its acquisition of all of the outstanding shares of Synergy Asset Management Inc. ["Synergy"], manager of the Synergy mutual funds. As consideration, CI paid $94,283 in cash and issued 1,655,874 common shares of CI. On November 7, 2003, CI completed its acquisition of all of the outstanding shares of Skylon, manager of the VentureLink Group of Funds and a series of retail structured products. As consideration, CI paid $33,817 in cash, and must pay a portion of future performance fees, where earned on certain funds, which will be netted against perform- ance fees earned in that period. On November 14, 2003, CI completed its acquisition of the Canadian operations of Assante under a Plan of Arrangement through which it acquired all of the outstanding common shares of Assante, consisting of an investment management business and a network of financial advisors. As consideration, CI paid $309,942 in cash and issued 38,846,974 common shares of CI. In conjunction with the above three transactions, Sun Life purchased 20,698,368 common shares of CI from treasury for $265,336 in order to maintain its proportionate share of ownership of CI. 6 4 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S In addition, CI issued 932,576 stock appreciation rights with a strike price of $13.34 that expire in 2007. Details of the net assets acquired, at fair value, are as follows: Skylon Synergy Asset Advisors Inc. Management Inc. $ $ Cash Client and trust funds on deposit Accounts receivable and prepaid expenses Capital assets Deferred sales commissions Fund administration contracts Fund management contracts Other assets Accounts payable and accrued liabilities Client and trust funds payable Future income taxes Other liabilities Goodwill on acquisition 1,188 – 2,957 – – – 17,000 – (1,216 ) – (6,120 ) – 20,351 34,160 1,802 – 1,259 378 5,600 – 35,000 485 (3,619) – 5,255 – 70,406 116,566 Details of the consideration given, at fair value, are as follows: Skylon Synergy Asset Advisors Inc. Management Inc. $ $ Cash CI common shares Assante Corporation shares already owned Transaction costs 33,817 – – 343 34,160 94,283 22,189 – 94 Assante Corporation $ 24,387 91,988 45,586 19,855 10,500 32,500 495,000 6,192 (60,927) (91,988) (169,928) (14,876) 498,766 887,055 Assante Corporation $ 309,942 520,549 55,533 1,031 Total $ 27,377 91,988 49,802 20,233 16,100 32,500 547,000 6,677 (65,762 ) (91,988 ) (170,793 ) (14,876 ) 589,523 1,037,781 Total $ 438,042 542,738 55,533 1,468 116,566 887,055 1,037,781 The common shares of CI issued as consideration were valued at $13.40 per share, the closing price immediately prior to the announcement date of the three acquisitions on August 22, 2003. The goodwill on acquisition is not deductible for income tax purposes. $485,623 of the balance relates to the Asset Management segment and $103,900 relates to the Asset Administration segment. 6 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Immediately following the Synergy acquisition, Synergy was amalgamated into CI Investments. Included in other liabilities at the date of acquisition are accruals for severance and exit costs of $10,000 related to the three acquisitions, of which the entire amount has been paid as at May 31, 2005 [2004 - $5,600]. 5. FUND CONTRACTS Fund contracts consist of the following: Fund administration contracts Fund management contracts Finite life Indefinite life Less accumulated amortization Net book value 6. CAPITAL ASSETS Capital assets consist of the following: Computer hardware and software Office equipment Leasehold improvements Property Less accumulated amortization Net book value Cost $ 37,600 12,000 967,582 1,017,182 4,404 1,012,778 Cost $ 36,001 4,059 5,629 – 45,689 24,413 21,276 2 0 0 5 Accumulated amortization $ 2,154 2,250 – 4,404 – 2 0 0 5 Accumulated amortization $ 18,503 3,245 2,665 – 24,413 6 6 2 0 0 4 Accumulated amortization $ 650 750 – 1,400 – 2 0 0 4 Accumulated amortization $ 20,377 5,006 4,027 126 29,536 Cost $ 32,500 12,000 967,582 1,012,082 1,400 1,010,682 Cost $ 38,453 7,511 9,312 345 55,621 29,536 26,085 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 7. OTHER ASSETS, INCOME AND EXPENSES Other assets consist mainly of an investment in a limited partnership, long-term accounts receivable and prepaid expenses and deferred charges. Other income consists mainly of institutional management fees, custody fees, equity income and interest income. Other expenses consist mainly of institutional management expenses, distribution fees to limited partnerships and capital taxes. 8. LONG-TERM DEBT CI has arranged a revolving credit facility with a Canadian chartered bank for general corporate purposes for $500,000. Amounts may be borrowed under this facility in Canadian dollars through prime rate loans, which bear interest at the greater of the bank's prime rate and one month bankers’ acceptance rates plus 0.75%, or bankers' acceptances, which bear interest at bankers' acceptance rates plus 0.30%. Amounts may also be borrowed in U.S. dollars through base rate loans, which bear interest at the greater of the bank's reference rate for loans made by it in Canada in U.S. funds and the federal funds overnight rate plus 0.75%, or LIBOR loans which bear interest at LIBOR plus 0.30%. CI may also borrow under this facility in the form of letters of credit, which bear a fee of 0.30% on any undrawn portion. At May 31, 2005, CI had accessed $56,936 [2004 - $1,409] by way of letters of credit. Loans are made by the bank under a 364-day revolving credit facility, the term of which may be extended annually at the bank's option. If the bank elects not to extend the term, the outstanding principal amount shall be repaid in equal monthly installments over the following four years. The facility is collateralized by a registered general security agreement from CI and certain subsidiaries of CI, assignment of the shares in CI Investments, Assante, certain subsidiaries of Assante and Skylon, and assignment of the management agreements and redemption fees of CI Investments and certain subsidiaries of Assante. The facility also requires CI to meet certain financial ratios on a quarterly basis. As at May 31, 2005, $333,073 [2004 - $245,165] has been drawn on this facility in the form of bankers’ acceptances at an effective interest rate of 2.82% [2004 - 2.31%]. In addition, $57,861 [2004 - nil] has been drawn in the form of LIBOR loans at an effective interest rate of 3.41%. Interest expense attributable to the long-term debt for the year ended May 31, 2005 was $7,912 [2004 - $6,554]. On July 7, 2005, the revolving credit facility was amended to increase the total amount that may be borrowed under the facility to $650,000. 6 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 9. SHARE CAPITAL (a) Details with respect to share capital are as follows: (thousands of dollars) Authorized Unlimited preference shares Unlimited common shares Issued May 31, 2003 Issuance of share capital [note 4] Share repurchase Exercise of stock options May 31, 2004 Issuance of share capital Share repurchase Exercise of stock options May 31, 2005 Common shares Number of shares Stated value 235,526 61,203 (1,680 ) 150 295,199 7 (8,569 ) 6 286,643 938,657 808,074 (7,935 ) 2,187 1,740,983 121 (50,539 ) 98 1,690,663 For shares issued on the exercise of stock options, the liabilities at the dates on which the stock options were exercised amounted to $62 [2004 - $1,575] and were included in the stated value of the shares issued. During fiscal 2005, 8,568,700 common shares [2004 - 1,679,700] were repurchased under a normal course issuer bid at an average cost of $17.24 per share [2004 - $12.74] for a total consideration of $147,745 [2004 - $21,392]. Deficit was increased by $97,206 [2004 - $13,457] for the cost of the shares repurchased in excess of their stated value. (b) Employee incentive stock option plan CI has an employee incentive stock option plan [the “Plan”] for the executives and key employees of CI. The maximum number of common shares that may be issued under the Plan is 41,722,566. As at May 31, 2005, there are 8,399,280 common shares [2004 - 9,685,799] reserved for issuance on exercise of stock options. These options vest over periods of up to five years, may be exercised at prices ranging from $4.73 to $17.04 per common share with a total intrinsic value of $33,024 as at May 31, 2005 and expire at dates up to 2010. On April 12, 2005, CI entered into a total return share swap transaction agreement [the “Agreement”] with a Canadian chartered bank. The Agreement is intended to mitigate CI’s exposure to fluctuations in the price of its common shares, and is for a maximum of 8,600,000 shares or an aggregate purchase amount of $144,000. Under the Agreement, the bank will accumulate shares of CI through purchases on the Toronto Stock Exchange and will pay CI the total return, if positive, on the stock and CI will pay the bank the total return, if negative. In addition, CI will pay the bank interest on the aggregate purchase amount at bankers’ acceptance rates. 6 8 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S At May 31, 2005, a total of 1,695,900 common shares were subject to the Agreement and had an average purchase price of $16.78, which reduced the liability under the Plan and stock-based compensation expense by $874. The total stock-based compensation expense for the year ended May 31, 2005 of $13,329 [2004 - $39,988] has been included in selling, general and administrative expenses. Details of the Plan activity and status for the years ended May 31 are as follows: 2 0 0 5 2 0 0 4 Number Weighted average exercise price $ of options (in thousands) Number Weighted average exercise price $ of options (in thousands) Options outstanding, beginning of year Options granted Options exercised Options cancelled Options outstanding, end of year 9,686 1,679 (2,874 ) (92 ) 8,399 Options exercisable, end of year 4,348 10.81 17.02 6.83 14.45 13.37 11.76 10,072 2,273 (2,601 ) (58 ) 9,686 8.27 15.59 5.15 10.94 10.81 4,060 9.22 Details of the Plan options outstanding and exercisable as at May 31, 2005 are as follows: Exercise price $ 4.73 10.51 11.00 11.27 12.01 15.59 15.67 15.86 17.04 4.73 to 17.04 Number of options outstanding (in thousands) Weighted average remaining contractual life (years) Number of options exercisable (in thousands) 138 1,633 599 1,037 1,127 2,187 15 15 1,648 8,399 0.4 2.9 0.8 1.8 2.0 3.9 4.4 4.1 5.0 3.1 138 1,024 599 732 1,127 728 – – – 4,348 6 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S (c) Employee share purchase loans CI has an employee share purchase loan program for key employees. These loans are renewable yearly and bear interest at prescribed rates. As at May 31, 2005, the carrying amount of employee share purchase loans is $6,430 [2004 - $7,259] 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, 2005, the shares held as collateral have a market value of approximately $20,175 [2004 - $21,309]. (d) Earnings per share The weighted average number of shares outstanding for the years ended May 31 is as follows: (in thousands) Basic and diluted (e) Stock appreciation rights 2005 293,297 2004 268,103 In conjunction with the acquisition of Assante, CI has issued share appreciation rights to certain former option holders. The intrinsic value of these rights at the date of grant was included as a liability in the fair value of net assets acquired. These rights may only be settled for cash. (f) Maximum share dilution The following table presents the maximum number of shares that would be outstanding if all of the outstanding options as at June 30, 2005 were exercised: (in thousands) Common shares outstanding at June 30, 2005 Options to purchase common shares 286,177 8,061 294,238 10. RELATED PARTY TRANSACTIONS CI enters into transactions related to the advisory and distribution of the Funds with Sun Life, a shareholder of CI, and its subsidiaries. These transactions are in the normal course of operations and have been recorded at the agreed upon exchange amounts. During the year ended May 31, 2005, CI incurred charges for deferred sales commissions of $42,287 [2004 - $31,976], portfolio management fees of nil [2004 - $379] and trailer fees of $70,983 [2004 - $58,511] to Sun Life. The balance payable to Sun Life as at May 31, 2005 of $6,761 [2004 - $6,085] is included in accounts payable and accrued liabilities. 11. 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 CI’s future income tax liabilities and assets as at May 31 are as follows: 7 0 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Future income tax liabilities Fund contracts Deferred sales commissions Other Total future income tax liabilities Future income tax assets Stock-based compensation Non-capital loss carry forwards Acquisition related costs Other Total future income tax assets Net future income tax liabilities 2005 $ 357,041 122,917 22,920 502,878 10,376 11,098 5,630 5,846 32,950 469,928 The net future income tax liabilities are classified in the consolidated balance sheets as follows: Current future income tax assets Non-current future income tax liabilities 2005 $ 16,006 485,934 The following is a reconciliation between CI’s statutory and effective income tax rates: Combined Canadian federal and provincial income tax rate Increase (decrease) in taxes resulting from: Compensation expense on share settled options Non-taxable portion of capital losses gains Impact of rate changes on future income taxes Other, net 2005 % 36.1 – (0.3 ) – 0.6 36.4 2004 $ 353,316 91,242 18,668 463,226 16,661 16,803 11,204 3,658 48,326 414,900 2004 $ 27,865 442,765 2004 % 36.4 0.1 – (7.3) (0.2) 43.6 12. SEGMENTED INFORMATION CI has two reportable segments: Asset Management and Asset Administration. These segments reflect CI’s internal financial reporting and performance measurement. CI has realigned its internal financial reporting with the result that the former segment called Other is now combined with the Asset Management segment. 7 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S The Asset Management segment includes the operating results and net assets of CI Investments, Skylon and Assante Asset Management Ltd., which derive their revenues principally from the fees earned on the management of several families of mutual and segregated funds. The Asset Administration segment includes the operating results and net assets of Assante Advisory Services Ltd. and most of its subsidiaries, including Assante Capital Management Ltd., Assante Financial Management Ltd. and IQON Financial Management Inc. These companies derive their revenues principally from commissions and fees earned on the sale of mutual funds and other financial products, and ongoing service to clients. Segmented information for the year ended May 31, 2005 is as follows: Asset Management $ 881,817 – 78,642 960,459 170,813 265,037 – 57,770 14,649 508,269 Asset Administration $ – 219,183 7,303 226,486 44,496 – 165,895 1,504 327 212,222 Elimination $ – (104,667 ) – Intersegment Total $ 881,817 114,516 85,945 (104,667 ) 1,082,278 – (14,342 ) (83,733 ) (1,026 ) – (99,101 ) 215,309 250,695 82,162 58,248 14,976 621,390 Management fees Administration fees Other revenue Total revenue Net selling, general and administrative Trailer fees Investment dealer fees Amortization of deferred sales commissions and fund contracts Other expenses Total expenses Income before income taxes and non-segmented items 452,190 14,264 (5,566 ) 460,888 Interest expense Minority interest Provision for income taxes Net income for the year Identifiable assets Goodwill Total assets 1,544,212 815,303 2,359,515 176,229 135,723 311,952 (7,397 ) – (7,397 ) 9,785 3,188 163,166 284,749 1,713,044 951,026 2,664,070 7 2 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Segmented information for the year ended May 31, 2004 is as follows: Asset Management $ 710,950 – 72,583 783,533 128,910 204,164 – 35,002 19,054 387,130 Asset Administration $ – 108,495 3,103 111,598 18,065 – 80,076 650 58 Elimination $ – (50,458 ) – (50,458 ) – (6,398 ) (40,366 ) (264 ) – 98,849 (47,028 ) Intersegment Total $ 710,950 58,037 75,686 844,673 146,975 197,766 39,710 35,388 19,112 438,951 Management fees Administration fees Other revenue Total revenue Net selling, general and administrative Trailer fees Investment dealer fees Amortization of deferred sales commissions and fund contracts Other expenses Total expenses Income before income taxes and non-segmented items 396,403 12,749 (5,566 ) 405,722 Interest expense Minority interest Provision for income taxes Net income for the year Identifiable assets Goodwill Total assets 1,405,150 815,303 2,220,453 172,839 103,900 276,739 (3,430 ) – (3,430 ) 8,588 5,390 170,700 221,044 1,574,559 919,203 2,493,762 13. COMMITMENTS AND CONTINGENCIES Lease commitments CI 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: 2006 2007 2008 2009 2010 2011 and thereafter $ 11,277 10,938 9,972 4,736 4,313 8,636 7 3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Shareholder advisor agreements CI is a party to shareholder advisor agreements, which provide that the shareholder advisor has the option to require CI to purchase a practice that cannot otherwise be transitioned to a qualified buyer. The purchase price would be in accordance with a pre-determined formula contained in the shareholder advisor agreement. Indemnities CI has agreed to indemnify its directors and officers, and certain of its employees in accordance with CI’s by-laws. CI maintains insurance policies that may provide coverage against certain claims. Litigation CI is engaged in litigation arising in the ordinary course of business. None of this litigation is expected to have a material adverse effect on the consolidated financial position of CI. Settlement with the Ontario Securities Commission On December 10, 2004, CI Investments reached a settlement with the Ontario Securities Commission relating to concerns raised with respect to certain trading by a small number of institutional investors in certain of CI Investments’ mutual funds. Under the settlement agreement, CI Investments agreed to make a payment of $49,300, plus interest at the rate of 5% per annum from the date of settlement to the approval of the plan of distribution, which occurred on June 30, 2005, to investors in its mutual funds that were affected by this trading. This payment is secured by a letter of credit. CI recorded a $33,900 after-tax charge to income to reflect the settlement and related costs. 14. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 2005 consolidated financial statements. 15. SUBSEQUENT EVENT On June 27, 2005, CI announced that it had adopted the name CI Financial, effective immediately, and would seek shareholder approval to change its legal name from CI Fund Management Inc. to CI Financial Inc. Effective June 16, 2005, CI Mutual Funds Inc. changed its legal name to CI Investments Inc. 7 4 Corporate Directory CI Financial Directors Ronald D. Besse President, Besseco Holdings Inc.; Lead Director G. Raymond Chang President, G. Raymond Chang Ltd.; Director and Chairman of the Board (non-executive) Paul W. Derksen Executive Vice-President and Chief Financial Officer, Sun Life Financial Inc.; Director William T. Holland Chief Executive Officer, CI Financial; Director Toronto, Ontario Toronto, Ontario Mississauga, Ontario Toronto, Ontario A.Winn Oughtred Partner, Borden Ladner Gervais LLP; Director George W. Oughtred President, Privatbanken Holdings Inc.; Director C. James Prieur President and Chief Operating Officer, Sun Life Financial Inc.; Director David J. Riddle President, C-Max Capital Inc.; Director Toronto, Ontario Calgary, Alberta Toronto, Ontario Vancouver, B.C. Stephen A. MacPhail President and Chief Operating Officer Peter W. Anderson Executive Vice-President Michael J. Killeen Senior Vice-President, General Counsel and Corporate Secretary Douglas J. Jamieson Chief Financial Officer David C. Pauli Executive Vice-President and Chief Operating Officer Munir T. Issa Executive Vice-President and Chief Technology Officer Officers William T. Holland Chief Executive Officer Douglas J. Jamieson Senior Vice-President and Chief Financial Officer CI Investments Executives Peter W. Anderson President and Chief Executive Officer Assante Executives Joseph C. Canavan Chairman and Chief Executive Officer Steven J. Donald President and Chief Operating Officer 7 5 Corporate Information Head Office 2 Queen Street East, Twentieth Floor Toronto, Ontario M5C 3G7 Telephone: 416-364-1145 Toll Free: 1 800 268-9374 www.ci.com Investor Relations Contact: Stephen A. MacPhail, President and Chief Operating Officer Telephone: 416-364-1145 Toll Free: 1 800 268-9374 E-mail: investorrelations@ci.com Trading Symbol CI Financial trades on the Toronto Stock Exchange under the symbol “CIX”. Auditors Ernst & Young LLP Chartered Accountants 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 Telephone: 1 800 564-6253 E-mail: caregistry@computershare.com Digital Report This Annual Report can be downloaded from CI’s website at www.ci.com under “Corporate”. This Annual Report contains forward-looking statements with respect to CI, including its business operations and strategy and financial performance and condition. Although management believes that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially from expectations include, among other things, general economic and market factors, including interest rates, business competition, changes in government regulations or in tax laws, and other factors discussed in materials filed with applicable securities regulatory authorities from time to time. 7 6 . s k n i d e s a b - e b a t e g e v l g n i s u r e p a p d e l c y c e r n o a d a n a C n i d e t n i r P . L I M : t n i r P & s s e r p e r P . t n e m t r a p e D s e c v r e S i e v i t a e r C s t n e m t s e v n I I C : n o i t c u d o r P & n g i s e D CI Financial 

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