AGF MANAGEMENT LIMITED
Fiscal 2009 Report To Shareholders for the year ended
AGF ends fiscal year 2009 with strong fourth quarter results, higher assets under management and announces dividend increase
Fiscal 2009 net income of
As a result of free cash flow from operations (defined as cash flow from operations before net changes in non-cash balances related to operations less selling commissions paid) of
"Despite extraordinary instability that characterized financial markets in the early part of 2009, our results reflect our growth strategy at AGF. Our total AUM increased by 25.5% since the end of 2008 and we made significant in-roads in the institutional space winning new clients both domestically and internationally. I am also pleased with the results at AGF Trust, a profitable contributor to AGF, as we improved our capital position and reduced our balance sheet risk," said AGF Chairman and Chief Executive Officer Blake C. Goldring. "AGF is well positioned in 2010 as we leverage our world class investment management expertise across target markets in both the retail and institutional space."
Total AUM increased 25.5% to
Consolidated revenue declined 19.2% to
Expenses for the year ended
EBITDA (defined as earnings before interest, taxes, depreciation and amortization, non-controlling interest, impairment of goodwill and customer contracts and impairment of asset available for sale) decreased 30.0% to
During the fourth quarter of 2009, the Company recorded net income of
Consolidated EBITDA increased 32.6% to
Conference Call
AGF will host a conference call to review its earnings results today at
About AGF Management Limited
AGF Management Limited is one of Canada's premier investment management companies with offices across
AGF Management Limited
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the year ended
Management's Discussion and Analysis
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis (MD&A) includes forward-looking statements about the Company, including its business operations, strategy and expected financial performance and condition. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as 'expects', 'anticipates', 'intends', 'plans', 'believes' or negative versions thereof and similar expressions, or future or conditional verbs such as 'may', 'will', 'should', 'would' and 'could'. In addition, any statement that may be made concerning future financial performance (including revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future action on our part, is also a forward-looking statement. Forward-looking statements are based on certain factors and assumptions, including expected growth, results of operations, business prospects, business performance and opportunities. While we consider these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to, among other things, risks, uncertainties and assumptions about our operations, economic factors and the financial services industry generally. They are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied by forward-looking statements made by us due to, but not limited to, important risk factors such as level of assets under our management, volume of sales and redemptions of our investment products, performance of our investment funds and of our investment managers and advisors, competitive fee levels for investment management products and administration, and competitive dealer compensation levels, size and default experience on our loan portfolio and cost efficiency in our loan operations, as well as interest and foreign exchange rates, taxation, changes in government regulations, unexpected judicial or regulatory proceedings, and our ability to complete strategic transactions and integrate acquisitions. We caution that the foregoing list is not exhaustive. The reader is cautioned to consider these and other factors carefully and not place undue reliance on forward-looking statements. Other than specifically required by applicable laws, we are under no obligation (and expressly disclaim any such obligation) to update or alter the forward-looking statements, whether as a result of new information, future events or otherwise. For a more complete discussion of the risk factors that may impact actual results, please refer to the 'Risk Factors and Management of Risk' section of this MD&A.
Consolidated Performance
This Management's Discussion and Analysis (MD&A) presents an analysis of the financial condition of AGF Management Limited (AGF) and its subsidiaries as at
Our Business
With
The origin of our Company dates back to 1957 with the introduction of the American Growth Fund (AGF), the first mutual fund available to Canadians seeking to invest in the
For purposes of this discussion, the operations of AGF and our subsidiary companies are referred to as "we", "us", "our" or "the Company". The financial results relating to the operations have been reported in three segments: Investment Management Operations, Trust Company Operations and Other.
The Investment Management Operations segment includes the results of our retail, institutional and high-net-worth client businesses. The Trust Company Operations segment includes the results of AGF Trust Company, and the Other segment includes our equity interest in Smith and Williamson Holdings Limited (S&WHL).
The principal subsidiaries and associated companies included within each of our reportable segments, collectively referenced to as the AGF Group of Companies (AGF), include:
Investment Management Operations Segment
The Investment Management Operations segment, referred to as AGF Investments, consists of the legal entities listed in the 'Government Regulations' section on page 34 of this MD&A under the section 'Investment Management Operations'. The Investment Management Operations segment dates back to 1957 and in the 52 years of operations, has evolved from a Canadian-based mutual fund operation to a global investment management firm with
Our retail mutual fund business provides investment management and advisory services and is responsible for the sales and marketing of AGF mutual funds. We manage approximately 40 mutual funds, the Harmony managed asset program and the AGF Elements portfolios.
Our institutional business provides investment management services for institutions, corporations, endowments, estates and sovereign wealth funds. We offer a diverse range of investment strategies and have sales and client service offices in
Our high-net-worth business provides investment management and counselling services for high-net-worth clients in local markets. It includes the operations of Cypress Capital Management Limited in
Our multi-disciplined investment management teams have expertise across the balanced, fixed income, equity and speciality asset categories and are located in
Trust Company Operations Segment
AGF Trust Company (AGF Trust) - The Trust Company Operations segment began in 1988. Complementary to our core business of investment management, AGF Trust has
Other Segment
Smith & Williamson Holdings Limited (S&WHL) - is a leading, independent private client investment management, financial advisory and accounting group based in the U.K., with (pnds stlg) 9.1 billion of AUM. We hold a 30.7% interest in this company as at
Our Strategy
AGF Management Limited fosters the development of best-in-class operating segments to provide world-class financial solutions to clients in
Measuring long-term shareholder growth, we look to the following key indicators of achievement: - Revenue growth driven by new sales, market performance and client retention - Earnings before interest, taxes, depreciation, amortization, non- controlling interest, impairment of goodwill and customer contracts and impairment of asset available for sale (EBITDA) growth - Improvement in our EBITDA and pre-tax margins
Our strategy also recognizes that both our investment management and trust businesses will experience cycles related to the global stock markets, credit availability, employment levels and other economic factors. We believe that a successful strategy is founded on the ability of our operations to emerge from downturns positioned to capitalize on the economic upturns.
Year-over-year improvement in these measures is expected to result in improved cash flows as well as improved return on equity. Our objective is the return of a fair share of the annual cash flow to shareholders in the form of dividends and through share buybacks, with the remaining cash flow being invested in a manner intended to support our future growth.
2009 Overview
Global stock markets rallied in 2009 after reaching their lows for the year in March. The appreciating global stock markets positively impacted our AUM and, together with cost management, our corresponding financial results improved steadily as fiscal 2009 progressed. The economic downturn that accelerated in the fall of 2008 presented significant challenges which continued to impact our investment management and trust businesses in fiscal 2009. To conserve capital we limited the amount of new lending business at AGF Trust and saw pressure on loan loss provisions ease in the latter part of 2009 as economic conditions improved. While our AUM has recovered significantly since the end of 2008, they remain well below their highs reached in 2007. The following summarizes the key financial and operational highlights during the year:
- EBITDA for fiscal 2009 was $219.5 million compared with EBITDA of $313.7 in fiscal 2008. Consolidated EBITDA margins were 37.5% in fiscal 2009 compared with 43.2% fiscal 2008. Return on equity declined to 8.7% in fiscal 2009 compared with 11.8% in fiscal 2008. - Cash flow from operations in fiscal 2009 was $206.1 million compared with $278.7 million in fiscal 2008. - There was a marginal increase in our total debt to $156.7 million as at November 30, 2009 compared with $144.9 million as at November 30, 2008. - We brought together our retail, institutional and high-net-worth operations under a new banner 'AGF Investments' to better reflect our core business of investment management, our commitment to clients and our excellence in money management. - We opened a new sales office in Boston to support our business development efforts in the institutional space. - At the 2009 Canadian Investment Awards, AGF Emerging Markets Fund won the Emerging Markets Equity Fund Award for the fourth time. AGF also won three Silver awards and one Bronze, spanning a broad spectrum of investments. - We were honoured with nine recognitions at the 2009 Canadian Lipper Awards including two prestigious group awards - Best Overall Fund Family and Best Mixed Asset Fund Family. - We delivered value directly to our shareholders through dividend payments with the dividend paid in fiscal 2009 increasing 5.3% to $1.00 per share from $0.95 per share in 2008. - We returned 56.9% of our free cash flow to shareholders in the form of cash dividends. We define free cash flow as cash flow from operations before net change in non-cash balances related to operations less selling commissions paid. - Reflective of our stated strategy to ensure that AGF Trust was well capitalized from a regulatory perspective and no funding was required from AGF Management Limited (2008 - $35.0 million), AGF Trust real estate secured loans declined 29.4% over the prior year and investment loans declined 9.9%. AGF Trust now has $3.6 billion in loan assets and remains an important contributor to the financial results of AGF, representing 24.5% of AGF Management Limited's pre-tax income in fiscal 2009. - Our overall balance sheet remains strong with a long-term debt to EBITDA ratio of 65.4% and we have undrawn capacity of $137.9 million on our $300 million credit facility.
Key Performance Indicators and Non-GAAP Measures
We measure the success of our business strategies using a number of key performance indicators (KPIs), which are outlined below. With the exception of revenue, the following KPIs are non-GAAP measures which are not defined under Canadian GAAP. They should not be considered as an alternative to net income or any other measure of performance under Canadian GAAP. Segment discussions include a review of KPIs that are relevant to each segment.
a) Consolidated Operations
Revenue
Revenue is a measurement defined by Canadian GAAP and is recorded net of fee rebates, sales taxes and distribution fees paid to limited partnerships. Revenue is indicative of our potential to deliver cash flow.
We derive our revenue principally from a combination of: - management and advisory fees based on AUM - deferred sales charges (DSC) earned from investors when mutual fund securities sold on a DSC basis are redeemed - net interest income earned on AGF Trust's loan portfolio
EBITDA
We define EBITDA as earnings before interest, taxes, depreciation, amortization, non-controlling interest, impairment of goodwill and customer contracts, and impairment of asset available for sale. EBITDA is a standard measure used in the mutual fund industry by management, investors and investment analysts to understand and compare results. We believe this is an important measure as it allows us to assess our investment management businesses without the impact of non-operational items. EBITDA for the Trust Company Operations segment includes interest expense related to deposits. These deposits fund our investment loan and real estate secured loan programs, and are therefore considered an operating cost directly related to generating interest revenue. We include this interest expense in Trust Company Operations EBITDA to provide a meaningful comparison to our other business segments and our competitors.
Please see the Consolidated Operating Results section on page 19 of this MD&A for a schedule showing how EBITDA reconciles to our GAAP financial statements.
Cash Flow from Operations
We report cash flow from operations before net changes in non-cash balances related to operations. Cash flow from operations helps to assess the ability of the business to generate cash, which is used to pay dividends, repurchase shares, pay down debt and fund other needs.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Net cash provided by operating activities $ 189.5 $ 351.4 Less: net changes in non-cash balances related to operations (16.6) 72.7 ------------------------------------------------------------------------- Cash flow from operations $ 206.1 $ 278.7 ------------------------------------------------------------------------- -------------------------------------------------------------------------
Free Cash Flow from Operations
We define free cash flow as cash flow from operations before net changes in non-cash balances related to operations less selling commissions paid. This is a relevant measure in the investment management business since a substantial amount of cash is spent on upfront commission payments. Free cash flow represents cash available for distribution to our shareholders and for general corporate purposes.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Cash flow from operations (defined above) $ 206.1 $ 278.7 Less: selling commissions paid 54.5 86.8 ------------------------------------------------------------------------- Free cash flow $ 151.6 $ 191.9 ------------------------------------------------------------------------- -------------------------------------------------------------------------
EBITDA Margin
EBITDA margin provides useful information to management and investors as an indicator of our overall operating performance. We believe EBITDA margin is a valuable measure because it assesses the extent we are able to earn profit from each dollar of revenue. We define EBITDA margin as the ratio of EBITDA to revenue.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- EBITDA $ 219.5 $ 313.7 Divided by revenue 586.1 725.6 ------------------------------------------------------------------------- EBITDA margin 37.5% 43.2% ------------------------------------------------------------------------- -------------------------------------------------------------------------
Pre-Tax Profit Margin
Pre-tax profit margin provides useful information to management and investors as an indicator of our overall operating performance. We believe pre-tax profit margin is a valuable measure because it assesses the extent we are able to earn profit from each dollar of revenue. We define pre-tax profit margin as the ratio of income before taxes to revenue.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Net income $ 97.7 $ 128.6 Add: income taxes 18.6 12.7 ------------------------------------------------------------------------- Income before taxes $ 116.3 $ 141.3 Divided by revenue 586.1 725.6 ------------------------------------------------------------------------- Pre-tax profit margin 19.8% 19.5% ------------------------------------------------------------------------- -------------------------------------------------------------------------
Return on Equity (ROE)
We monitor ROE to assess the profitability of the consolidated Company on an annual basis. We calculate ROE by dividing net income by average shareholders' equity.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Net income $ 97.7 $ 128.6 Divided by average shareholders' equity 1,118.9 1,088.2 ------------------------------------------------------------------------- Return on equity 8.7% 11.8% ------------------------------------------------------------------------- -------------------------------------------------------------------------
Long-term Debt to EBITDA Ratio
Long-term debt to EBITDA ratio provides useful information to management and investors as an indicator of our ability to service our long-term debt. We define long-term debt to EBITDA ratio as long-term debt at the end of the year divided by EBITDA for the year.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Long-term debt $ 143.6 $ 123.7 EBITDA 219.5 313.7 ------------------------------------------------------------------------- Long-term debt to EBITDA 65.4% 39.4% ------------------------------------------------------------------------- -------------------------------------------------------------------------
b) Investment Management Operations
Assets Under Management (AUM)
The amount of AUM is critical to our business since these assets generate fees from our mutual fund, institutional, strategic accounts and high-net-worth relationships. AUM will fluctuate in value as a result of investment performance, sales and redemptions. Mutual fund AUM determines a significant portion of our expenses because we pay upfront commissions and trailing commissions to financial advisors as well as investment advisory fees based on the value of AUM.
Investment Performance
Investment performance, which represents market appreciation (depreciation) of fund portfolios and is shown net of management fees received, is a key driver of the level of AUM and is central to the value proposition that we offer advisors and unitholders. Growth in AUM resulting from investment performance increases the wealth of our unitholders, and, in turn, we benefit from higher revenues. Alternatively, poor investment performance will reduce our AUM levels and result in lower management fee revenues. Strong relative investment performance may also contribute to growth in gross sales or reduced levels of redemptions. Conversely, poor relative investment performance may result in lower gross sales and higher levels of redemptions. Refer to the 'Risk Factors and Management of Risk' section of this report for further information.
Net Sales
One of the goals of our mutual fund business is to generate positive net sales on an annual basis, which allows for increasing revenues. Gross sales and redemptions as a percentage of AUM are monitored separately and the sum of these two amounts comprises net sales. Net sales, together with investment performance and fund expenses, determine the level of average daily mutual fund AUM, which is the basis on which management fees are charged. The average daily mutual fund AUM is equal to the aggregate average daily net asset value of the AGF mutual funds.
We monitor inflows and outflows in our high-net-worth and institutional businesses separately. We do not compute an average daily AUM figure for them.
EBITDA Margin - Investment Management
EBITDA margin provides useful information to management and investors as an indicator of our operating performance in our Investment Management Operations segment. We believe EBITDA margin is a valuable measure since it assesses the extent we are able to earn profit from each dollar of revenue. We define EBITDA margin as the ratio of EBITDA to revenue.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- EBITDA $ 181.6 $ 267.6 Divided by revenue 475.4 606.4 ------------------------------------------------------------------------- EBITDA margin 38.2% 44.1% ------------------------------------------------------------------------- -------------------------------------------------------------------------
Pre-Tax Profit Margin - Investment Management
Pre-tax profit margin provides useful information to management and investors as an indicator of our operating performance in our Investment Management Operations segment. We believe pre-tax profit margin is a valuable measure since it assesses the extent we are able to earn profit from each dollar of revenue. We define pre-tax profit margin as the ratio of income before taxes and non-segmented items to revenue.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Income before taxes and non-segmented items $ 87.7 $ 107.8 Divided by revenue 475.4 606.4 ------------------------------------------------------------------------- Pre-tax profit margin 18.4% 17.8% ------------------------------------------------------------------------- -------------------------------------------------------------------------
c) Trust Company Operations
Loan Asset Growth
In the Trust Company Operations segment (AGF Trust), we focus on long-term, profitable growth and credit quality in our investment and real estate secured loans. New originations, net of repayments, drive the outstanding balance of loans on which we charge interest. Loan asset growth increases our revenue and assists with our ability to grow our profits in AGF Trust.
Net Interest Income
Net interest income is a common lending industry performance indicator. We monitor this figure to evaluate the growth of the financial contribution of AGF Trust. The figure is calculated by subtracting interest expense from interest income earned from AGF Trust loan assets.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Interest income $ 226.2 $ 303.0 Less: interest expense 130.0 206.1 ------------------------------------------------------------------------- Net interest income $ 96.2 $ 96.9 ------------------------------------------------------------------------- -------------------------------------------------------------------------
Net Interest Margin
Net interest margin is equal to net interest income for the year divided by the average yearly total loan balance.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Net interest income $ 96.2 $ 96.9 Divided by average yearly total loan balance 4,014.3 4,239.6 ------------------------------------------------------------------------- Net interest margin 2.4% 2.3% ------------------------------------------------------------------------- -------------------------------------------------------------------------
Efficiency Ratio
The efficiency ratio is a financial services industry KPI that measures the efficiency of the organization. We use this ratio to compare expenses and keep them in line from one period to another as the Trust Company grows. The ratio is calculated from AGF Trust results by dividing non-interest expenses by the total of net interest income and non-interest income.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Selling, general and administrative expenses $ 35.2 $ 42.7 Add: amortization expense 2.8 2.8 ------------------------------------------------------------------------- Non-interest expense 38.0 45.5 ------------------------------------------------------------------------- Other revenue $ 8.7 $ 12.3 RSP loan securitization income (loss), net of impairment (0.6) (0.3) ------------------------------------------------------------------------- Non-interest income 8.1 12.0 ------------------------------------------------------------------------- Net interest income $ 96.2 $ 96.9 Add: non-interest income 8.1 12.0 ------------------------------------------------------------------------- Total of net interest income and non-interest income 104.3 108.9 ------------------------------------------------------------------------- Efficiency ratio 36.4% 41.8% ------------------------------------------------------------------------- -------------------------------------------------------------------------
EBITDA Margin - Trust
EBITDA margin provides useful information to management and investors as an indicator of AGF Trust's operating performance. We believe EBITDA margin is a valuable measure because it assesses the extent we are able to earn profit from each dollar of revenue. We define EBITDA margin as the ratio of EBITDA to revenue.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- EBITDA $ 31.5 $ 35.8 Divided by revenue 104.3 108.9 ------------------------------------------------------------------------- EBITDA margin 30.2% 32.9% ------------------------------------------------------------------------- -------------------------------------------------------------------------
Pre-Tax Profit Margin - Trust
Pre-tax profit margin provides useful information to management and investors as an indicator of AGF Trust's operating performance. We believe pre-tax profit margin is a valuable measure because it assesses the extent we are able to earn profit from each dollar of revenue. We define pre-tax profit margin as the ratio of income before taxes and non-segmented items to total revenue.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Income before taxes and non-segmented items $ 28.7 $ 33.0 Divided by revenue 104.3 108.9 ------------------------------------------------------------------------- Pre-tax profit margin 27.5% 30.3% ------------------------------------------------------------------------- -------------------------------------------------------------------------
Assets-to-Capital Multiple
Federally regulated deposit-taking institutions (DTI) are expected to meet an assets-to-capital multiple test. The assets-to-capital multiple is determined by dividing the DTI's total assets by its total regulatory capital, and expresses the extent by which capital is leveraged into the assets of the DTI.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Total assets per OSFI guidelines $ 4,497.4 $ 5,325.9 Divided by adjusted Tier 1 and Tier 2 capital 375.5 354.8 ------------------------------------------------------------------------- Assets-to-capital multiple 12.0 15.0 ------------------------------------------------------------------------- -------------------------------------------------------------------------
Loan-to-Value Ratio
Loan-to-value ratio on our conventional mortgage loans is calculated using outstanding balance of conventional mortgage loans divided by the estimated fair value of the real estate serving as collateral for the conventional mortgage loans as at the date the loans were funded.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Conventional mortgage loans(1) $ 556.5 $ 766.4 Divided by fair value of collateral 851.7 1,153.4 ------------------------------------------------------------------------- Loan-to-value ratio 65.3% 66.4% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Includes loan provision and deferred sales commission of $9.5 million in 2009 and $11.5 million in 2008.
Impaired Loans as a Percentage of Loans Outstanding
Impaired loans as a percentage of loans outstanding is calculated by dividing total impaired loans by total loans outstanding.
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Impaired loans $ 48.9 $ 45.4 Total loans outstanding(1) 3,594.8 4,430.9 ------------------------------------------------------------------------- Impaired loans as a percentage of loans outstanding 1.4% 1.0% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Includes loan provision and deferred sales commission of $34.7 million in 2009 and $27.5 million in 2008.
Significant Accounting Policies
The Consolidated Financial Statements have been prepared in accordance with Canadian GAAP. The Consolidated Financial Statements include the accounts of the Company and its directly and indirectly owned subsidiaries. Intercompany transactions and balances are eliminated on consolidation. For subsidiaries where the Company does not own all of the equity, the minority shareholders' interest is disclosed in the Consolidated Balance Sheet as non-controlling interest and the related income is disclosed as a separate line in the Consolidated Statement of Income. Investments over which the Company is able to exercise significant influence are accounted for by the equity method.
A summary of AGF's significant accounting policies can be found in Note 1 of the Annual Consolidated Financial Statements.
Significant Accounting Estimates
Goodwill and other intangibles are subject to impairment tests on an annual basis or more frequently if events or changes in circumstances indicate that the assets may be impaired. AGF's ongoing review of the valuation of goodwill and other intangibles resulted in a writedown of
Changes in Significant Accounting Policies
a) Goodwill, Intangible Assets and Financial Statement Concepts
Effective
b) Credit Risk and Fair Value
Effective
c) Classification and Impairment of Financial Assets
In
d) Financial Instruments Disclosure
During 2009, CICA "Handbook Section 3862, Financial Instruments - Disclosures", was amended to include enhanced disclosures about inputs to fair value measurement, including their classification within a hierarchy that prioritizes the inputs to fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:
Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and Level 3 Inputs that are not based on observable market data.
If different levels of inputs are used to measure a financial instrument's fair value, the classification within the hierarchy is based on the lowest level input that is significant to the fair value measurement.
The amendment only impacted our disclosures in the financial statements. Refer to Note 22.
Income Taxes
The Company follows the liability method in accounting for income taxes whereby future income tax assets and liabilities reflect the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities and their tax bases. Future income tax assets and liabilities are measured based on the enacted or substantively enacted tax rates which are expected to be in effect when the future income tax assets or liabilities are expected to be realized or settled. The effect on future income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the substantive enactment date. Future income tax assets are recognized to the extent that realization is considered more likely than not.
Deferred Selling Commissions
Selling commissions paid to brokers on mutual fund securities sold on a deferred sales charge (DSC) basis are recorded at cost and are amortized on a straight-line basis over a period that corresponds with the applicable DSC schedule (which ranges from three to seven years). Unamortized deferred selling commissions are written down to the extent that the carrying value exceeds the related expected future cash flows on an undiscounted basis. As at
Property, Equipment and Computer Software
Property, equipment and computer software, which is comprised of furniture and equipment, computer hardware, computer software and leasehold improvements is stated at cost, net of accumulated amortization and impairment, if any. Amortization is calculated using the following methods based on the estimated useful lives of these assets:
Furniture and equipment 20% declining balance Computer hardware 30% declining balance Leasehold improvements straight-line over term of lease Computer software straight-line over 3 years
Customer Contracts
Customer contracts are stated at cost, net of accumulated amortization and impairment, if any. Amortization is computed on a straight-line basis over seven to 15 years based on the estimated useful lives of these assets.
Impairment of Long-lived Assets
Impairment of long-lived assets, which includes property, equipment and computer software and intangible assets with finite useful lives, is recognized when an event or change in circumstance causes the assets' carrying value to exceed the total undiscounted cash flows expected from their use and eventual disposition. The measurement of impairment loss is based on the amount that the carrying value exceeds the fair value.
Goodwill, Management Contracts and Trademarks
The purchase price of acquisitions accounted for under the purchase method and the purchase price of investments accounted for under the equity method are allocated based on the fair values of the net identifiable assets acquired, including management contracts and other identifiable intangible assets. The excess of the purchase price over the values of such assets is recorded as goodwill. Management contracts and trademarks have been determined to have an indefinite life.
Goodwill, management contracts and trademarks are not amortized but are subject to impairment tests on an annual basis or more frequently if events or changes in circumstances indicate that the asset may be impaired. Goodwill is allocated to the reporting units and any impairment is identified by comparing the carrying value of a reporting unit with its fair value. If any impairment is indicated, then it is quantified by comparing the carrying value of goodwill to its fair value, based on the fair value of the assets and liabilities of the reporting unit. Management contracts and trademarks are tested for impairment by comparing their fair value to their carrying amounts. An impairment loss is realized when the carrying amount of the asset exceeds its fair value.
Real Estate Secured Loans and Investment Loans
Real estate secured loans and investment loans are classified as loans and receivables and are recorded at amortized cost using the effective interest rate method and net of an allowance for loan losses. Interest income from loans is recorded on an accrual basis. Accrued but uncollected interest on uninsured real estate secured loans and investment loans is reversed when a loan is identified as impaired. Principal payments on the real estate secured loans and investment loans that are contractually due to the Company in the 12-month period from the balance sheet date are classified as current assets.
Fees that relate to the origination of loans are considered to be adjustments to loan yield and are deferred and amortized to interest income over the expected term of the loans.
Allowance for Loan Losses
The allowance for loan losses consists of both general allowances and specific allowances. General allowances are based on management's assessment of inherent, unidentified losses in the portfolio at the reporting date that have not been captured in the determination of specific allowances. The assessment takes into account portfolio-specific credit factors, general economic factors, geographic exposure, historical loss experience, as well as probability of default (PD) and loss given default (LGD) pairs.
Specific allowances consist of provision for losses on identifiable assets for which the estimated amounts recoverable are less than their carrying value and are designed to provide against the likelihood of losses for loans that are deemed to be impaired.
Specific allowances also include estimated provisions for losses on identifiable assets that are currently 1-90 days in arrears and are likely to become impaired based on a combination of historical average roll rates and LGD for a given loan portfolio.
Impaired Loans
Loans are classified as impaired when, in the opinion of management, there is reasonable doubt as to the collectability, either in whole or in part, of principal or interest, or when principal or interest is 90 days or greater past due, except where the loan is both well-secured and in the process of collection. Loans that are insured by the federal government, an agency thereof, or a third-party insurer are classified as impaired when interest or principal is past due 365 days.
When a loan is identified as impaired, the carrying amount of the loan is reduced to its estimated realizable value. In subsequent periods, recoveries of amounts previously written off and any increase in the carrying value of the loan are credited to the provision for loan losses in the Consolidated Statement of Income. Where a portion of the loan is written off and the remaining balance is restructured, the new loan is carried on an accrual basis when there is no longer any reasonable doubt about the collectability of principal or interest. Interest income is recognized on impaired loans on a cash basis only after the specific allowance for losses has been reversed and provided there is no further doubt as to the collectability of the principal. Full or partial write-offs of loans are recorded when management believes there is no realistic prospect of full recovery.
Stock-based Compensation and Other Stock-based Payments
The Company has stock-based compensation plans as described in Note 15. The Company utilizes the fair-value-based method of accounting for stock-based compensation. The fair value of stock-based compensation, determined using an option pricing model, is recorded over the vesting period as a charge to net earnings with a corresponding credit to contributed surplus.
The Company also has a share purchase plan under which employees can have a percentage of their annual earnings withheld subject to a maximum of 6% to purchase AGF's Class B Non-Voting shares. The Company matches up to 60% of the amounts contributed by the employee. The Company's contribution vests immediately and is recorded as a charge to net income in the period in which the cash contribution is made. All contributions are used by the plan trustee to purchase Class B Non-Voting shares on the open market.
The Company has Restricted Share Unit (RSU) plans for senior employees under which certain employees are granted RSUs of Class B Non-Voting shares. These units vest three years from the grant date. AGF will redeem all of the participants' share units in cash equal to the value of one Class B share for each RSU. Compensation expense and the related liability are recorded equally over the three-year vesting period, taking into account fluctuations in the market price of Class B Non-Voting shares, dividends paid and forfeitures.
The Company has a Performance Share Unit (PSU) plan for senior employees under which certain employees are granted PSUs of Class B Non-Voting shares. Compensation expense and the related liability are recorded equally over the vesting period, taking into account the likelihood of the performance criteria being met, fluctuations in the market price of Class B Non-Voting shares, dividends paid and forfeitures. These units vest three years from the grant date provided employees meet certain performance criteria. AGF will redeem all of the participants' share units in cash equal to the value of one Class B share for each PSU.
The Company has a Deferred Share Unit (DSU) plan for non-employee Directors. The plan enables Directors of the Company to elect to receive their remuneration in DSUs. These units vest immediately and compensation expense and the related liability are charged to net income in the period the DSUs are granted. On termination, AGF will redeem all of the participants' DSUs in cash or shares equal to the value of one Class B share at the termination date for each DSU.
Accounting for Securitizations
The Company has securitized certain registered Retirement Savings Plan (RSP) loans through the sale of these loans to a securitization trust. For a securitization to be treated as a sale, the Company must surrender control over those loans included in the securitization. To surrender control, the securitized assets must be isolated from the Company and its creditors, even in the case of bankruptcy or receivership, and the Company must receive consideration other than the beneficial interest in the transferred assets.
Under terms that transfer control to third parties, the transaction is recognized as a sale and the related loan assets are removed from the Consolidated Balance Sheet. As part of the securitization, certain financial assets are retained. The retained interests, classified as AFS, are carried at fair value, determined using the present value of future expected cash flows. A gain or loss on the sale of loan receivables is recognized immediately in income. In determining the gain or loss on sale, management estimates future cash flows by relying on estimates of the amount of interest that will be collected on the securitized assets, the yield paid to investors, the portion of the securitized assets that will be prepaid before their scheduled maturity, expected credit losses, the cost of servicing the assets and the rate at which to discount these expected future cash flows. Actual cash flows may differ significantly from those estimated by management. If actual cash flows differ from the Company's estimate of future cash flows, the gains on the retained interest are recorded in OCI. Any losses are first recognized in OCI to the extent there is an offsetting gain and any excess is recognized in the Consolidated Statement of Income under RSP loan securitization income (loss), net of impairment.
Servicing fee revenues related to the securitization loan are reported within 'RSP loan securitization income (loss), net of impairment' in the Consolidated Statement of Income. Where a servicing liability is recognized, the amount is recorded in Other Liabilities in the Consolidated Balance Sheet.
Retained interests are tested regularly for other-than-temporary impairment and, if required, the retained interest's carrying value is reduced to fair value by a charge in the Consolidated Statement of Income.
Refer to Note 3 for additional disclosure regarding the securitizations and related balance sheet and income statement impacts.
AGF Elements
In
The Company records in liabilities up to 30 basis points per year of each investor's AUM, adjusted for redemptions, until the end of the three-year measurement period of each investment made by such investor. At that time, if an individual investor's returns match or exceed the corresponding benchmark, the Company will recognize the entire amount as management fee revenue. If an individual investor's actual returns are below the customized benchmark, a corresponding amount will be distributed to the investor in the form of additional units. As of
Future Accounting Changes
Transition to International Financial Reporting Standards
Canadian public companies will be required to prepare their financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), for fiscal years beginning on or after
In order to meet the requirement to transition to IFRS, in 2008 we established an enterprise-wide project. We are following a transition plan comprising three phases: (1) IFRS diagnostic assessment, (2) impact analysis, evaluation and design, and (3) implementation and review. The project remains on track: we have completed the diagnostic assessment, and the impact analysis, evaluation and design phase of our transition is well advanced.
The key elements of the impact analysis, evaluation and design phase include identifying and implementing the necessary changes within our existing financial reporting or data collection processes to address the IFRS differences identified in our diagnostic assessment; developing and executing internal training and awareness programs; and selecting accounting policy options permitted under IFRS.
We are also assessing the exemptions to full restatement that are permitted under IFRS. Generally, with the adoption of IFRS, any change to our existing accounting policies must be applied retroactively and reflected in our opening balance sheet of the comparative period. There are, however, a number of exemptions from full restatement available under IFRS.
The aspects of IFRS that have the potential to be the most impactful to AGF are those that deal with provision for credit losses on loans, hedge accounting, asset securitization, and deferred sales commission. In response to financial reporting issues emerging from the global financial crisis, the IASB plans to make revisions to or to replace existing IFRS standards that address many of these areas. Some of the anticipated changes may be in effect prior to AGF's transition date, such that IFRS may differ at transition date from its current form. However, it is likely that the majority of the changes will be in effect subsequent to AGF's date of transition; with the result that the impact to AGF of adopting IFRS will extend beyond its transitional year.
Replacement of IAS 39 - Financial Instruments
The IASB's project plan reflects the replacement of its existing financial instruments standard in several phases. The first phase was recently completed with the publication of IFRS 9 - Financial Instruments, which addresses the classification and measurement of financial instruments, including securities. This new standard will not be mandatory until fiscal 2014, which is post-IFRS implementation for AGF.
The second phase of the financial instruments replacement is to replace the recognition and measurement requirement for impairment of financial instruments recorded at amortized cost, which includes loans. Based on draft papers issued by the IASB, significant changes to the existing standard are anticipated; however, the IASB indicated that the new standard is unlikely to require adoption until at least fiscal 2014.
The IASB's third phase will deal with hedge accounting. The IASB is scheduled to issue draft papers on this topic sometime in the first half of the 2010 calendar year. It is unclear when adoption will be required.
Derecognition - Replacement of Existing Requirements within IAS 39
The IASB is addressing the derecognition requirements for when a financial asset or financial liability would be removed from an entity's statement of financial position, which could impact whether securitized assets remain off-balance sheet. The IASB has provided a tentative publication date for the latter half of the 2010 calendar year. It is unclear when adoption will be required.
Risk Factors and Management of Risk
Risk is the responsibility of the Executive Committee of AGF Management Limited. The Executive Committee is made up of the Chairman and Chief Executive Officer (CEO), AGF Management Limited, the Senior Vice-President and Chief Financial Officer (CFO), AGF Management Limited, the Executive Vice-President, Chief Operating Officer and General Counsel, AGF Management Limited, the Executive Vice-President, Investments, AGF Management Limited, the Executive Vice-President and Chief Investment Officer of AGF Investments Inc., the Executive Vice-President, Retail Distribution, AGF Investments Inc., and the President and Chief Operating Officer, AGF Trust Company. The Chairman and CEO is directly accountable to the Board of Directors for all risk-related activities. The Executive Committee reviews and discusses significant risk action plans that arise in executing the enterprise-wide strategy and ensures that risk oversight and governance occur at the most senior levels of management. Each of the business units owns and assumes responsibility for managing its risk. They do this by ensuring that policies, processes and internal controls are in place and by escalating significant risk identified in the business units to the Executive Committee.
AGF Management Limited also oversees or operates key functions for each of the business units on a shared services basis. These functions include Finance, Internal Audit, Human Resources, Compensation and Benefits, Information Technology, Fund Oversight, Legal and Compliance. These functions also play a significant role in ensuring consistent risk management practices and standards across the company in areas that are common to the business units.
In addition, AGF Management Limited applies a disciplined approach to risk taking through policy formation, reporting and oversight of the operational units.
AGF's risk governance structure is designed to balance risk and reward and promote business activities consistent with our standards and risk tolerance levels, with the objective of maximizing long-term shareholder value.
As a federally regulated deposit-taking institution, AGF Trust is subject to risk management expectations of its regulators and has responsibilities to its depositors. In 2009, AGF Trust revised its management and governance framework to enhance its ability to identify, characterize and manage risk. Specific changes included the appointment of a Chief Risk Officer and implementing new management committee structures to ensure appropriate oversight and management of key risk areas: credit; operational, distribution channel and asset and liability.
Refer to Note 22 of the Consolidated Financial Statements for risks arising from the use of financial instruments.
Risk Factors that May Affect Future Results
There are many factors that may affect our ability to execute against our strategy. Some of these factors are within our control and others, because of their nature, are beyond our control. These factors apply to our corporate strategy as well as the business-specific strategies, which are included in the segment discussions that follow.
Company-Specific Risk Factors
Investment Management Operations
Demand for our products depends on the ability of our investment management team to deliver value in the form of strong investment returns, as well as the demand for specific investment products. A specific fund manager's style may fall out of favour with the market, resulting in lower sales and/or higher redemptions.
Our future financial performance will be influenced by our ability to successfully execute our strategy and generate net sales. If sales do not materialize as planned or key personnel cannot be retained, margins may erode.
Our strategy includes strategic acquisitions. There is no assurance that we will be able to complete acquisitions on the terms and conditions that satisfy our investment criteria. After transactions are completed, meeting target return objectives is contingent upon many factors, including retaining key employees and growth in AUM of the acquired companies.
Our retail AUM is obtained through third party distribution channels including financial advisors or strategic partners that offer our products to investors along with competing products. AGF's brand and investment performance have contributed to our success in the past; however, our future success is dependent on these factors as well as product mix and offerings and continued access to these distribution channels that are independent of our company.
Trust Company Operations
AGF Trust manages its business to a set of identified key risks: credit; operational; interest rate (non-trading), and funding and liquidity.
Credit Risk is the risk of loss associated with a counterparty's or client's inability to fulfill its payment obligations, after taking into account recovery values and associated costs. AGF Trust is in the business of providing loans and as a result credit risk is the largest risk exposure to the company. Credit risk and review of credit exposures is the responsibility of the President and Chief Risk Officer and reviewed regularly by the Credit Committee of AGF Trust. Credit risk is measured and monitored at the individual client level as well as on a portfolio basis.
Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and systems. Impact can be financial, loss to reputation, loss of competitive position or regulatory or legal sanction. Operational risk and review of operational processes, activities and systems are the responsibility of the Operations Committee of AGF Trust and the methodologies for measuring and monitoring operational risks reside with the Risk Management department of AGF Trust.
Funding and liquidity risk is the risk to earnings and capital if AGF Trust is unable to: i) meet its obligations due to an inability to liquidate assets or obtain adequate funding; or, ii) unwind or offset specific exposures without incurring a loss as a result of inadequate market depth or market disruptions; or iii) obtain funding at costs that are consistent with historical norms from its traditional funding sources. Funding and liquidity risk is monitored by the AGF Trust Treasury department and overseen by the AGF Trust Asset and Liability Committee.
Interest rate (non-trading) risk is the risk of adverse impact to AGF Trust's earnings and economic value due to unexpected changes in interest rates and interest rate volatility. Categories of interest rate risk include: yield curve/gap risk; basis or spread compression risk; commitment or embedded option risk; prepayment risk; and, discretionary. Interest rate (non-trading) risk is monitored by the AGF Trust Treasury department and overseen by the AGF Trust Asset and Liability Committee.
Legal and compliance risk is the risk of legal or regulatory sanctions, material financial loss, or loss to reputation that AGF Trust may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organisation standards, and codes of conduct applicable to AGF Trust's business activities. Legal and compliance risk is managed and monitored on a shared services basis.
Non-Company Risk Factors
Investment Management Operations
A general economic downturn, market volatility and an overall lack of investor confidence could result in lower sales and lower AUM levels. In addition, market uncertainty could result in retail investors avoiding traditional equity funds in favour of money market funds.
The level of competition in the industry is high. Sales and redemptions of mutual funds may be influenced by relative service levels, management fees, attributes of specific products in the marketplace and actions taken by competitors.
We take all reasonable measures to ensure compliance with governing statutes, regulations or regulatory policies. Failure to comply with statutes, regulations or regulatory policies could result in sanctions or fines that could adversely affect earnings and reputation. Changes to laws, statutes, regulations or regulatory policies could affect us by changing certain economic factors in our industry. See the 'Government Regulations' section for further details.
Revenues are generally not subject to significant seasonal swings, but are directly correlated to global stock market volatility. We experience somewhat higher sales during the Retirement Savings Plan (RSP) season; however, the immediate impact of the level of sales on total revenue is not significant. The Selected Quarterly Information table shows key performance statistics for the past eight quarters.
AUM are exposed to various market risks which are detailed in the 'Market Risk in Assets under Management (AUM)' section.
Trust Company Operations
A general economic downturn, increased unemployment rate, declining real estate values, adverse capital market conditions and/or an increase in personal bankruptcy rates could lead to reduced creditworthiness of AGF Trust borrowers and increased loss in the event of default.
A portion of AGF Trust's insured mortgage portfolio is insured by private mortgage insurers. AGF Trust is exposed to losses in the event private mortgage insurers fail to perform in accordance with their obligations under insurance contracts. Changes to laws, statutes, regulations or regulatory policies could affect AGF Trust by changing certain economic factors in our industry or increasing costs of compliance. See the 'Government Regulations' section for further details.
Market Risk in Assets under Management (AUM)
AUM are exposed to various market risks, including changes in equity prices, interest rates and foreign exchange rates. These risks transfer to the Company as our management fee revenue is calculated as a percentage of the average net asset value of each mutual fund or portfolio managed. The Company does not quantify these risks in isolation, however, in general, for every
To provide additional details on the Company's exposure to these market risks, the following provides further information on our mutual fund AUM by asset type:
------------------------------------------------------------------------- Percentage of total mutual fund AUM 2009 2008 ------------------------------------------------------------------------- Domestic equity funds 38.4% 37.2% U.S. and international equity funds 32.9% 33.8% Domestic balanced funds 10.0% 9.5% U.S. and international balanced funds 1.8% 2.3% Domestic fixed income funds 11.4% 10.8% U.S. and International fixed income funds 3.3% 3.2% Domestic money market 2.2% 3.1% U.S. and International money market 0.0% 0.1% ------------------------------------------------------------------------- 100.0% 100.0% ------------------------------------------------------------------------- -------------------------------------------------------------------------
Institutional and high-net-worth AUM are exposed to the same market risks as mutual fund AUM. In general, for every
Foreign Exchange Risk
Our main foreign exchange risk derives from the U.S. and international portfolio securities held in the mutual fund AUM. Change in the value of the Canadian dollar relative to foreign currencies will cause fluctuations in the Canadian-dollar value of non-Canadian AUM upon which our management fees are calculated. This risk is monitored since currency fluctuation may impact the financial results of AGF. However, it is at the discretion of the fund manager to decide whether to enter into foreign exchange contracts to hedge foreign exposure on U.S. and international securities held in funds.
We are subject to foreign exchange risk on our integrated foreign subsidiaries in
The Company is exposed to foreign exchange risks through its 30.7% equity interest in Smith and Williamson Holdings Limited (S&WHL), which is denominated in U.K. pounds. The investment is translated into Canadian dollars at the rate of exchange in effect at the balance sheet date. Unrealized translation gains and losses are reported in other comprehensive income. Based on the carrying value at
Interest Rate Risk
Excluding the AGF Trust operations, we have exposure to the risk related to changes in interest rates on floating-rate debt and cash balances at
For the AGF Trust operations, interest rate risk refers to the treasury book (non-trading) and can have a potentially adverse impact on AGF Trust's earnings and economic value due to unexpected changes in interest rates and interest rate volatility. Categories of interest rate risk include: yield curve/gap risk; basis or spread compression risk; commitment or embedded option risk; prepayment risk; and, discretionary. The impact of a 1% increase in interest rates would result in an increase in annual net interest income of approximately
The foregoing discussion is not an exhaustive list of all risks and uncertainties regarding our ability to execute against our strategy. Readers are cautioned to consider other potential risk factors when assessing our ability to execute against our strategy.
Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by AGF Management Limited in reports filed or submitted under Canadian securities laws is recorded, processed, summarized and reported within the time periods specified under those laws and include controls and procedures that are designed to ensure that information is accumulated and communicated to management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), to allow timely decisions regarding required disclosure.
AGF Management Limited's management, under the direction of the CEO and CFO, has evaluated the effectiveness of AGF Management Limited's disclosure controls and procedures (as defined in National Instrument 52-109 of the Canadian Securities Commission) as at
Internal Control over Financial Reporting
The CEO and CFO have designed, or caused to be designed under their supervision, internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP.
The Company's internal control over financial reporting includes policies and procedures that: - Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of the Company; - Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with Canadian GAAP, and receipts and expenditures of the Company are made only in accordance with authorizations of management and directors of the Company; and - Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be designed effectively can provide only reasonable assurance with respect to financial reporting and financial statement preparation.
Management, under the direction of the CEO and CFO, has evaluated the effectiveness of the Company's internal control over financial reporting as at
Changes in Internal Controls over Financial Reporting
There have been no changes in AGF Management Limited's internal control over financial reporting during the year ended
Changes in Information Technology Systems
During 2009, there were no significant changes to Information Technology Systems.
Consolidated Operating Results
The table below summarizes our consolidated operating results for the years ended
------------------------------------------------------------------------- ($ millions, except per share amounts) Years ended November 30 2009 2008 % change ------------------------------------------------------------------------- Revenue Investment Management Operations $ 475.4 $ 606.4 (21.6%) Trust Company Operations 104.3 108.9 (4.2%) Other 6.4 10.3 (37.9%) ------------------------------------------------------------------------- 586.1 725.6 (19.2%) Expenses Investment Management Operations 293.8 338.8 (13.3%) Trust Company Operations 72.8 73.1 (0.4%) ------------------------------------------------------------------------- 366.6 411.9 (11.0%) EBITDA(1) 219.5 313.7 (30.0%) Amortization 96.7 114.0 (15.2%) Interest expense 6.0 9.3 (35.5%) Impairment of asset available for sale - 2.3 - Impairment of goodwill and customer contracts - 46.3 - Non-controlling interest 0.6 0.6 0.0% Income taxes 18.6 12.7 46.5% ------------------------------------------------------------------------- Net income $ 97.7 $ 128.6 (24.0%) ------------------------------------------------------------------------- Earnings per share - diluted $ 1.09 $ 1.41 (22.7%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) For the definition of EBITDA, see the 'Key Performance Indicators and Non-GAAP Measures' section. The items required to reconcile EBITDA to net income, a defined term under Canadian GAAP, are detailed above.
Results from Operations
Revenue for the year ended
Expenses for the year
The impact of revenue declining at a faster rate than expenses in all segments served to decrease total EBITDA by 30.0% for the year ended
Based on a review of goodwill, intangibles and assets available for sale it was determined for the year ended
Interest expense was
For the year ended
The impact of the above revenue and expense items resulted in net income of
Net Income
Net income for the year ended
For a more detailed discussion of revenue and expense items, please refer to the operating segment discussions. An analysis of the 2009 fourth-quarter results compared with the corresponding period in 2008 is included under the heading 'Fourth Quarter Analysis'.
Return on Equity
Return on equity in 2009 was 8.7% as compared with 11.8% in 2008. The decline was due to reduced earnings in 2009 which were impacted by lower average AUM levels and associated lower revenues in the Investment Management Operations segment.
Outlook
As 2009 progressed, the equity markets improved and mutual fund investors increasingly moved out of money market and into fixed income and balanced fund categories. A sustained equity market rally in fiscal 2010 may reignite the demand for domestic and international equity mutual funds which have always been a primary focus at AGF Investments. A continuation of higher equity markets may also stimulate demand for investment loans offered by AGF Trust. The Bank of
As we enter fiscal 2010, the world is slowly emerging from recession as major economies, including the
Business Segment Performance
We report on three business segments: Investment Management Operations, Trust Company Operations and Other. AGF's reportable segments are strategic business units that offer different products and services. The Investment Management Operations segment provides investment management and advisory services. It is responsible for the management and distribution of AGF investment products and services, including retail mutual fund operations, institutional investment management and high-net-worth client investment counselling services. The Trust Company Operations segment offers a range of products, including GICs, real estate secured loans and investment loans. The 'Other' segment includes the results of S&WHL, which is accounted for by the equity method, as well as interest expense.
Investment Management Operations
Business and Industry Profile
AGF is an established participant within the highly competitive Canadian investment management business. We compete with numerous domestic and foreign players serving the market. We believe our status as an independent investment management firm without distribution channel conflict will benefit us and our shareholders as the industry continues to evolve.
Our Investment Management Operations segment provides products and services across the wealth continuum, including mutual funds, wrap products, institutional investment services and high-net-worth investment management. Our products are delivered through multiple channels, including advisors, financial planners, banks, life insurance companies, brokers and consultants.
We remain focused on the retail mutual fund market in
During AGF's 2009 fiscal year, gross mutual fund sales were negatively impacted by market volatility and lack of investor confidence and as a result we ended the year with
Segment Strategy and Highlights
Over the past several years, we have focused on enhancing the client-centric model in our investment management business, which services the retail mutual fund, institutional and high-net-worth markets. In fiscal 2009, to reflect our core focus on investment management, we streamlined our organization and brought together our retail, institutional and high-net-worth businesses under a new banner: AGF Investments. On the retail side, we continued to maintain a high level of contact with our clients and focused on helping them navigate through the market uncertainty. On the institutional side, we focused on expanding our business globally and leveraging our investment management expertise in the institutional space. Highlights in fiscal 2009 included the following:
- At the 2009 Canadian Investment Awards, AGF Emerging Markets Fund won the Emerging Markets Equity Fund Award for the fourth time and was praised for its consistent long-term high performance. AGF also won three Silver awards and one Bronze, spanning a broad spectrum of investments, including: - AGF Global High Yield Bond Fund won the Silver for the High Yield Fixed Income Fund Award - AGF Canadian Balanced Fund won the Silver for the Canadian Balanced Fund Award - AGF European Equity Class took home the Silver for the European Equity Fund Award, and - AGF Global Resources Class took the Bronze award for the Natural Resources Equity Fund Award. - We were honoured with nine recognitions at the 2009 Canadian Lipper Awards including two prestigious group awards - Best Overall Fund Family and Best Mixed Asset Fund Family. - Three AGF funds - AGF Canada Class, AGF Global Equity Class and AGF Canadian Bond Fund - were included on Manulife Investments Guaranteed Investment Fund (GIF) Select platform. The product is called Manulife AGF Bundle. - We opened a new sales office in Boston to support our business development efforts in the institutional space. - We won several new institutional mandates which contributed to net sales of approximately $4.0 billion on the institutional side and a 47.8% increase in our institutional AUM year-over-year. - The strategic priorities for our investment management operations for 2010 are to: - Continue to focus on excellence in three core activities: investment management, relationship management and product management. - Promote international investment management competency across multiple channels. - Focus on growth in our institutional business. - Improve financial performance.
Focus on Three Core Activities
We are focused on continuing to build excellence in three core areas: investment management, relationship management and product management.
Investment Management
Consistent long-term investment performance is contingent on having the correct complement of people, with the right tools and a strong team approach to fund management. As well, in-depth research, innovative thinking and rigorous fundamental analysis are key investment principles.
We also draw on our presence in international markets to bolster investment performance. In addition to investment professionals in various locations across
Relationship Management
We have a well-established reputation in the advisor channel and continue to regularly engage with and seek feedback from advisors to ensure they have access to the products and services to help their clients make the best investment choices. We are also focused on enhancing relationships with strategic distribution partners including advisor firms, banks and insurance companies.
We opened a new sales offices in
Product Management
Our client-centric approach includes offering a suite of products and solutions designed to meet the needs of our clients. Our product development efforts focus on identifying current and future investment trends and aligning AGF's products to meet prevailing client needs. The launch of our focused funds strategy in fiscal 2009 is an example of us being more responsive to investment trends and investor preferences.
To simplify and improve our product lineup and focus on core mandates, we merged or terminated several mutual funds and internalized the portfolio management and portfolio advisory responsibilities on certain funds. In the fourth quarter of fiscal 2009, three AGF funds - AGF
On the institutional side, we offer a robust platform of 14 investment strategies and our emerging markets, global core, Canadian equity and Canadian balanced strategies have all won institutional mandates.
Assets Under Management
The primary sources of revenue for AGF's Investment Management Operations segment are management and advisory fees. The amount of management and advisory fees depend on the level and composition of AUM. Under the management and investment advisory contracts between AGF and each of the mutual funds, we are entitled to monthly fees. These fees are based on a specified percentage of the average daily net asset value of the respective fund. In addition, we earn fees on our institutional, strategic accounts and high-net-worth client AUM. As a result, the level of AUM has a significant influence on financial results.
The following table illustrates the composition of the changes in total AUM during the years ended
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 % change ------------------------------------------------------------------------- Mutual fund AUM, beginning of year $ 19,761 $ 30,052 (34.2%) Gross sales of mutual funds 2,606 3,578 (27.2%) Redemptions of mutual funds (3,381) (5,159) (34.5%) ------------------------------------------------------------------------- Net mutual fund sales (775) (1,581) (51.0%) Market appreciation (depreciation) of fund portfolios 3,760 (8,710) - ------------------------------------------------------------------------- Mutual fund AUM, end of year $ 22,746 $ 19,761 15.1% Institutional and strategic accounts AUM 18,921 12,802 47.8% High-net-worth AUM 2,951 2,995 (1.5%) ------------------------------------------------------------------------- Total AUM, end of year $ 44,618 $ 35,558 25.5% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average daily mutual fund AUM for the year $ 20,733 $ 26,346 (21.3%) ------------------------------------------------------------------------- -------------------------------------------------------------------------
The recovery in global markets resulted in an increase in mutual fund AUM to
Investment Performance
Stock market performance influences the level of AUM. During the year ended
The impact of the U.S. dollar depreciation relative to the Canadian dollar on the market value of AGF mutual funds for the year ended
Consistent with the increase in the stock market, market appreciation net of management fees increased mutual fund AUM by
The composition of AUM as outlined on page 17 of this MD&A has direct influence on our revenues. Generally, equity funds have higher management fees than fixed income funds and international funds have higher management fees than domestic funds.
Financial and Operational Results
The table below highlights the Investment Management Operations segment results for the years ended
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 % change ------------------------------------------------------------------------- Revenue Management and advisory fees $ 447.8 $ 576.8 (22.4%) Deferred sales charges 21.6 25.6 (15.6%) Investment income and other revenue 6.0 4.0 50.0% ------------------------------------------------------------------------- 475.4 606.4 (21.6%) Expenses Selling, general and administrative 158.4 166.6 (4.9%) Trailing commissions 125.3 157.2 (20.3%) Investment advisory fees 10.1 15.0 (32.7%) ------------------------------------------------------------------------- 293.8 338.8 (13.3%) ------------------------------------------------------------------------- EBITDA(1) 181.6 267.6 (32.1%) Amortization 93.9 111.2 (15.6%) Impairment of asset available for sale - 2.3 - Impairment of goodwill and customer contracts - 46.3 - ------------------------------------------------------------------------- Income before taxes and non-segmented items $ 87.7 $ 107.8 (18.6%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) As previously defined, see the 'Key Performance Indicators and Non GAAP Measures - EBITDA' section.
Revenue
For the year ended
Management and Advisory Fees
Management and advisory fees are directly related to our AUM levels. The 21.3% decline in average daily mutual fund AUM for the year ended
Deferred Sales Charges (DSC)
We receive deferred sales charges upon redemption of securities sold on the contingent DSC or low-load commission basis for which we finance the selling commissions paid to the dealer. The DSC ranges from 2.5% to 5.0%, depending on the commission option, of the original subscription price of the funds purchased if the funds are redeemed within the first two years, and declines to zero after three or seven years. DSC revenue fluctuates based on the level of redemptions, the age of the assets being redeemed and the proportion of redemptions composed of back-end assets. DSC revenues decreased by 15.6% in 2009 compared with 2008, reflecting lower retail mutual fund redemptions of DSC AUM.
Investment Income and Other Revenue
Investment income and other revenue increased by 50.0% in fiscal 2009 over 2008 primarily as a result of the discontinuing of hedge accounting related to stock compensation in 2008, which resulted in a
Expenses
For the year ended
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) decreased by
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 ------------------------------------------------------------------------- Increase (decrease) in severance and restructuring expenses $ 1.7 Increase (decrease) in compensation-related expenses (7.0) Increase (decrease) in other expenses (5.2) Increase (decrease) in fund absorption expenses 2.3 ------------------------------------------------------------------------- ------------------------------------------------------------------------- $ (8.2) ------------------------------------------------------------------------- -------------------------------------------------------------------------
The following explains expense changes in 2009 compared with the prior year:
- Severance and restructuring expenses increased $1.7 million for the year ended November 30, 2009. The increase is as a result of longer-term cost savings initiatives. - Compensation-related expenses decreased primarily due to staff reductions and stock-based compensation expense. Bonus expense in the twelve months ended November 30, 2009 across all groups within the Investment Management Operations segment was up by $2.8 million. - Other expenses decreased $5.2 million due to continued cost savings initiatives in travel, meals and entertainment and other expense categories. - Absorption expense increased by $2.3 million reflecting lower average AUM levels in 2009 as compared to 2008. The aggregate unitholder service costs absorbed and management and advisory fees waived by the company on behalf of the funds were approximately $15.0 million for the year ended November 30, 2009 compared to $12.7 million in 2008. The increase of 18.1% is attributable to lower average year-over-year AUM levels (which were down 21.3%), our desire to maintain expense ratio levels relatively on par with 2008 levels and the fact that, due to the continuing low interest rate environment, absorption on money market and short-term income funds increased in 2009 over 2008.
Trailing Commissions
Trailing commissions paid to distribution depend on total AUM, the proportion of mutual fund AUM sold on a front-end versus back-end commission basis and the proportion of equity fund AUM versus fixed-income fund AUM. Trailing commissions as a percentage of average daily mutual fund AUM were 0.60% for the 12 months ended
Investment Advisory Fees
External investment advisory fees decreased by 32.7% in 2009 as compared to 2008. The decrease relates to the reduced level of AUM combined with repatriation of certain mandates.
EBITDA and EBITDA margin
EBITDA for the Investment Management Operations segment were
EBITDA margins were 38.2% in fiscal 2009 compared with 44.1% in 2008.
Amortization
The most significant component in this category is amortization of deferred selling commissions. The category also represents amortization of property, equipment, customer contracts and other intangible assets. We internally finance all selling commissions paid. These selling commissions are capitalized and amortized on a straight-line basis over a period that corresponds with their applicable DSC schedule. Amortization expense related to deferred selling commissions was
During fiscal 2009, we paid
Pre-Tax Profit Margin
Pre-tax profit margin was relatively unchanged at 18.4% for fiscal 2009 compared with 17.8% in 2008. Pre-tax profit margin in 2008 excluding the impairment charge related to goodwill, intangibles and available for sale assets was 25.8%.
Segment Outlook
There has been a marked improvement in economic and market conditions over the course of 2009 and the recovery is expected to continue in 2010. A continuation of more stable or improving markets combined with near-zero yields on short-term investments will likely stimulate investor demand for equities and equity funds. We expect that, over the longer term, demand for investment products will remain healthy due to factors such as Canada's projected population growth, the significant amount of unused Registered Retirement Savings Plan contribution room, the introduction of the Tax-Free Savings Account in 2009, as well as the large amount of un-invested cash or near-cash holdings that Canadians are reportedly sitting on. Mutual funds remain a very accessible and attractive investment solution for investors. We expect that guaranteed investment products will continue to grow in importance and remain an attractive investment option for conservative investors. We also see growth opportunities in the institutional investment management space, both domestically and abroad.
Trust Company Operations
Business and Industry Profile
Through AGF Trust, we offer financial solutions, including GICs, real estate secured and investment loans.
AGF Trust investment loans consist of secured investment loans and RSP loans distributed through financial advisors who continue to broaden their suite of products to meet the needs of their clients. AGF Trust has a competitive edge in the advisor channel as we leverage AGF's mutual fund wholesaler relationships. Our mutual fund wholesalers have operated successfully in the advisor channel for many years and have a well-established reputation for quality service.
We offer real estate secured loans to Canadians who have sound credit, but whose circumstances may not meet the traditional requirements of Canada's large banks to qualify for their lowest rate real estate secured loan products. Real estate secured loan products are distributed primarily through the mortgage broker channel. Borrowers have chosen to deal with mortgage brokers to take advantage of independent advice and competitive rates. Lenders have provided real estate secured loans in this channel to reduce distribution costs.
Segment Strategy and Highlights
AGF Trust, similar to other financial institutions in
For the year ended
As at
Financial and Operational Results
The Trust Company Operations segment results for the years ended
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 % change ------------------------------------------------------------------------- Interest income Loan interest $ 211.2 $ 270.8 (22.0%) Investment interest 15.0 32.2 (53.4%) ------------------------------------------------------------------------- 226.2 303.0 (25.3%) Interest expense Deposit interest 175.4 200.9 (12.7%) Hedging interest income (68.5) (18.6) 268.3% Other interest expense (income) 23.1 23.8 (2.9%) ------------------------------------------------------------------------- 130.0 206.1 (36.9%) ------------------------------------------------------------------------- Net interest income 96.2 96.9 (0.7%) Other revenue 8.7 12.3 (29.3%) RSP loan securitization income (loss), net of impairment (0.6) (0.3) 100.0% ------------------------------------------------------------------------- Total revenue 104.3 108.9 (4.2%) Expenses Selling, general and administrative 35.2 42.7 (17.6%) Provision for loan losses 37.6 30.4 23.7% ------------------------------------------------------------------------- 72.8 73.1 (0.4%) EBITDA(1) 31.5 35.8 (12.0%) Amortization 2.8 2.8 0.0% ------------------------------------------------------------------------- Income before taxes and non-segmented items $ 28.7 $ 33.0 (13.0%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) For the definition of EBITDA, see the "Key Performance Indicators and Non-GAAP Measures" section. The items required to reconcile EBITDA to net income, a defined term under Canadian GAAP, are detailed above.
Revenue, Net Interest Income and Net Interest Margin
Net interest income, which is expressed net of interest on deposits and other interest expenses, was relatively unchanged compared to 2008. The average net interest margin on lending products was 2.4% in fiscal 2009 (2008 - 2.3%). The change resulted primarily from an increase in the spread between AGF Trust's Prime rate and the Banker's Acceptance rate, offset by an increase in the average cost of funds relative to the BA based swap rate. AGF Trust manages its interest rate risk through the use of interest rate swaps. Interest expense includes hedging interest income of
Securitization Income (Loss), Net of Impairment
As at
Selling, General and Administrative Expenses
SG&A expenses decreased
Provision for Loan Losses
The total provision for loan losses increased to
Based on our analysis of the RSP portfolio, we had approximately
Loan writeoffs, net of recoveries for the twelve months ended
EBITDA and EBITDA margin
A decline in revenue and an increase in the loan loss provision, partly offset by a decline in SG&A costs, contributed to a decline in EBITDA for the fiscal year ended
Pre-Tax Profit Margin
As a result of the factors outlined above, pre-tax margin of 27.5% in 2009 declined from 30.3% in 2008.
Operational Performance
The table below highlights our key operational measures for the segment for the years ended
------------------------------------------------------------------------- ($ millions) Years ended November 30 2009 2008 % change ------------------------------------------------------------------------- Real estate secured loans(1) Insured mortgage loans $ 497.7 $ 618.1 (19.5%) Conventional mortgage loans 556.5 766.4 (27.4%) HELOCs 387.2 656.3 (41.0%) ------------------------------------------------------------------------- 1,441.4 2,040.8 (29.4%) Investment loans(1) Secured investment loans 1,734.0 1,805.4 (4.0%) RSP loans 414.2 573.7 (27.8%) Other loans 5.1 11.1 (54.1%) ------------------------------------------------------------------------- 2,153.3 2,390.2 (9.9%) Other assets 905.6 895.8 1.1% ------------------------------------------------------------------------- Total Assets $ 4,500.3 $ 5,326.8 (15.5%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net interest income $ 96.2 $ 96.9 (0.7%) RSP loan securitization income (loss), net of impairment (0.6) (0.3) 100.0% Other revenue 8.7 12.3 (29.3%) Non-interest expenses(2) (38.0) (45.5) (16.5%) Provision for loan losses (37.6) (30.4) 23.7% ------------------------------------------------------------------------- Income before taxes and non-segmented items $ 28.7 $ 33.0 (13.0%) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Efficiency ratio(3) 36.4% 41.8% Assets-to-capital multiple(3) 12.0 15.0 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Includes loan provision and deferred sales commission. (2) Includes SG&A and amortization expenses. (3) For the definition of efficiency ratio and assets-to-capital multiple, see the "Key Performance Indicators and Non-GAAP Measures" section.
Loan Asset Growth
Loan originations decreased significantly compared to fiscal 2008 as a result of amendments to our lending programs. Real estate secured loan assets decreased by 29.4% year-over-year. Secured investment loans decreased 4.0% to
Efficiency Ratio
The efficiency ratio is defined as non-interest expenses divided by the total of net interest income and non-interest income. It is a key industry performance indicator used to ensure expenses are contained as the Trust business grows. During 2009, the efficiency ratio experienced a favourable change to 36.4% from 41.8% in 2008.
Balance Sheet
Total assets decreased 15.5% to
Loan Portfolio Credit
The credit risk factors considered when assessing the collectability of the various loan portfolios are primarily based on the individuals' ability and willingness to make future loan payments, coupled with the underlying collateral security held for each of the loan categories. The key risk factors considered include:
- Employment rates: higher unemployment rates will likely result in higher default rates as individuals' ability to pay deteriorates. - Residential property prices and sales volume: declining residential property prices and reduced volumes of residential property sales may result in lower resale prices and longer disposal times, therefore, increasing losses incurred on the disposition of the property. - Equity market performance: declining global equity markets present increased risk on the secured investment loan portfolio as the value of the underlying collateral is lower. While the Trust Company has recourse to the personal assets of clients with respect to investment loans, the global macro-economic situation and employment levels may impede the Trust Company's ability to realize on the full value of the loan.
The general allowance for real estate secured loan losses increased to
Segment Outlook
We anticipate that AGF Trust will experience net growth in loans in fiscal 2010 compared to decreased loan originations in 2009 due to the disruptions in financial markets and our desire to conserve capital. Stock market prices influence the levels of lending activities for investment-based loan products, and we believe that a continuation of higher equity markets in 2010 may result in growth in these products. A continuation of relatively low interest rates and stability in housing prices, combined with improving consumer confidence, could positively affect secured real estate loan portfolio performance. A continuation of high rates of unemployment may have a negative impact on this portfolio, as well as our investment loan portfolio by increasing the risk of loan defaults.
In fiscal 2010, we will continue to focus on strengthening client relationships and realizing operational efficiencies through aggressive cost management. AGF Trust uses disciplined underwriting and sound risk management practices, and we are employing the lessons learned during the economic downturn to improve credit quality and profitability of our lending portfolios.
After experiencing decreased loan originations in fiscal 2009, we are focused on "controlled growth" in our lending programs in fiscal 2010. We launched our 2010 RSP loan program late in fiscal 2009, increased our mortgage lending and plan a re-launch of our investment loan program in 2010.
AGF Management Limited
Liquidity and Capital Resources
Consolidated cash flow generated from operating activities, before net change in non-cash balances related to operations, was
In fiscal 2009, we paid
In addition to our free cash flow, the following items impacted our change in cash position and bank indebtedness:
------------------------------------------------------------------------- ($ millions) Source (use) ------------------------ Years ended November 30 2009 2008 ------------------------------------------------------------------------- Net change in non-cash balances related to operations $ (16.6) $ 72.8 Net cash change in Class B Non-Voting shares 2.5 (5.3) Dividends (86.2) (80.2) Acquisition of subsidiaries (19.9) (25.2) Purchase of property, equipment and computer software (2.1) (6.8) Purchase of investments(1) (345.5) (174.8) Trust deposits, net of loans (26.8) (179.8) ------------------------------------------------------------------------- $ (494.6) $ (399.3) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Includes $351.0 million of cash invested by AGF Trust into investments available for sale during the year ended November 30, 2009 (2008 - $ 171.4 million).
During the year ended
We have a three-year prime rate-based revolving term loan facility to a maximum of
Limited Partnership Financing
Prior to 2005, the Company financed certain deferred selling commissions using limited partnerships (LPs). The Company is obligated to pay these LPs an annual fee of 0.45% to 0.90% of the net asset value of DSC securities. This obligation will continue as long as such DSC securities remain outstanding except for certain of the LPs, in which case the obligation terminates at various dates from
The Company is responsible for the management and administration of the LPs. These services are provided in the normal course of operations and are recorded at the amount of consideration agreed to by the parties. The amount of fees received in 2009 was
Contractual Obligations
The table below is a summary of our contractual obligations at
------------------------------------------------------------------------- There- ($ millions) Total 2010 2011-2012 2013-2014 after ------------------------------------------------------------------------- Long-term debt $ 156.7 $ 13.1 $ 143.6 $ - $ - Operating leases 57.3 9.7 17.7 12.8 17.1 Purchase obligations 34.2 12.6 12.5 6.3 2.8 ------------------------------------------------------------------------- Total contractual obligations $ 248.2 $ 35.4 $ 173.8 $ 19.1 $ 19.9 ------------------------------------------------------------------------- -------------------------------------------------------------------------
In addition to the contractual obligations detailed above, the following obligations exist that vary depending upon business volume and other factors:
- AGF Trust is required to pay depositors amounts representing principal and interest on funds on deposit. - A portion of our selling commissions paid on a DSC basis has been financed by LPs held by third-party investors. As at November 30, 2009, the net asset value of DSC securities financed by the LPs was $0.7 billion and amounts paid to these partnerships in 2009 were $3.9 million. - We pay trailing commissions to financial advisors based on AUM of their respective clients. This obligation varies based on fund performance, sales and redemptions, and in 2009 we paid $125.3 million in trailing commissions. - We have committed to 2015 to reimburse Citigroup if minimum levels of services and related fees are not achieved. - In conjunction with the Elements Advantage Commitment on certain Elements portfolios, AGF has committed to investors that if a portfolio does not match or outperform its customized benchmark over a three-year average annualized period, investors will receive up to 90 basis points in new units. Payments related to this began in fiscal 2009 for the applicable funds. AGF capped the AGF Elements Advantage feature on its Elements Products to new purchases effective June 22, 2009. Eligible units purchased prior to June 22, 2009 have been grandfathered.
Intercompany and Related Party Transactions
The Company has entered into certain transactions with entities or senior officers who are directors of the Company. During 2009, total amounts paid by the Company to these related parties aggregated
Capital Management Activities
We actively manage our capital to maintain a strong and efficient capital base to maximize risk-adjusted returns to shareholders, invest in future growth opportunities, including acquisitions, and to ensure that the regulatory capital requirements are met for each of our subsidiary companies.
AGF capital consists of shareholders' equity. On an annual basis, AGF prepares a five-year plan detailing projected operating budgets and capital requirements. Each of AGF's operating segments are required to prepare and submit a five-year operating plan and budget to AGF's Finance Committee for approval prior to seeking Board approval. AGF's Finance Committee consists of the Chairman and CEO, the Vice-Chairman, Senior Vice-President and CFO, and the General Counsel, Executive Vice-President and Chief Operating Officer. Once approved by the Finance Committee, the five-year plans are reviewed and approved by AGF's Board of Directors. These plans become the basis for the payment of dividends to shareholders, the repurchase of Class B Non-Voting shares and, combined with the reasonable use of leverage, the source of funds for acquisitions.
Investment Management Operations - Regulatory Capital
A significant objective of the Capital Management program is to ensure regulatory requirements are met for capital. Our Investment Management businesses, in general, are not subject to significant regulatory capital requirements in each of the jurisdictions in which they are registered and operate. The cumulative amount of minimum regulatory capital across all of our investment management operations is approximately
AGF Trust - Capital Management Framework
AGF Trust's regulatory capital consists primarily of common shareholders' equity, preferred shares and subordinated debentures. Regulatory capital is a factor that allows the AGF Trust Board of Directors (Trust Board) to assess the stability and security in relation to the overall risks inherent in AGF Trust's activities.
AGF Trust actively manages regulatory capital levels in conjunction with management's internal assessment of capital. Consideration is given to many factors including regulatory guidance, strategic planning, shareholder interests, interests of depositors and internally generated target capital ratios. Regulatory capital is set by regulatory authorities. Effective
A key component of AGF Trust's capital framework is its internal capital adequacy assessment process (ICAAP). This process attributes capital for identified risks in proportion to the assessed risk. Risks are assessed using both qualitative and quantitative factors. The process also incorporates a variety of stress testing approaches to evaluation the income and capital impacts of potential stress events.
AGF Trust -
Capital measures at AGF Trust are detailed as follows:
------------------------------------------------------------------------- ($ thousands, except for risk-weighted assets in $ millions) Basel II ------------------------ November 30 2009 2008 ------------------------------------------------------------------------- Risk-weighted assets(1) Credit risk $ 1,754.8 $ 2,244.3 Operational risk 216.6 172.6 ------------------------------------------------------------------------- Total risk-weighted assets 1,971.4 2,416.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Tier 1 capital Common shares $ 82,768 $ 82,768 Contributed surplus 1,476 1,338 Retained earnings 120,646 101,432 Non-cumulative preferred shares 64,000 64,000 Less: securitization and other (11,378) (15,567) ------------------------------------------------------------------------- 257,512 233,971 Tier 2 capital Subordinated debentures 109,500 109,500 General allowances 15,355 19,638 Less: securitization and other (6,902) (8,295) ------------------------------------------------------------------------- 117,953 120,843 ------------------------------------------------------------------------- Total capital $ 375,465 $ 354,814 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) For operational risk, AGF Trust uses the Basic Indicator Approach - calculated as 15% of the previous three-year average of net interest income and other income, excluding gain or loss on investments. The risk-weighted equivalent is determined by multiplying the capital requirement for operational risk by 12.5.
Dividends
The holders of Class B Non-Voting and Class A shares are entitled to receive cash dividends. Dividends are paid in equal amounts per share on all the Class B Non-Voting shares and all the Class A shares at the time outstanding without preference or priority of one share over another. No dividends may be declared in the event that there is a default of a condition of our loan facility or where such payment of dividends would create a default.
Our Board of Directors may determine that Class B Non-Voting shareholders shall have the right to elect to receive part or all of such dividend in the form of a stock dividend. They also determine whether a dividend in Class B Non-Voting shares is substantially equal to a cash dividend. This determination is based on the weighted average price at which the Class B Non-Voting shares traded on the
The following table sets forth the dividends paid by AGF on Class B Non-Voting shares and Class A shares for the years indicated:
------------------------------------------------------------------------- Years ended November 30 2009 2008 2007 2006 2005 ------------------------------------------------------------------------- Per share $ 1.00 $ 0.95 $ 0.78 $ 0.69 $ 0.56 ------------------------------------------------------------------------- Percentage increase 5% 22% 13% 23% 37% ------------------------------------------------------------------------- -------------------------------------------------------------------------
We review our dividend distribution policy on a quarterly basis, taking into account our financial position, profitability, cash flow and other factors considered relevant by our Board of Directors. The quarterly dividend paid on
Normal Course Issuer Bid
In
As at
Outstanding Share Data
Set out below is our outstanding share data as at
------------------------------------------------------------------------- Years ended November 30 2009 2008 ------------------------------------------------------------------------- Shares Class A Voting Common Shares 57,600 57,600 Class B Non-Voting Shares 89,097,400 88,480,104 Stock Options Outstanding options 6,627,398 6,576,948 Exercisable options 3,315,368 2,543,337 ------------------------------------------------------------------------- -------------------------------------------------------------------------
Government Regulations
AGF Management Limited
AGF Management Limited (AGF) is incorporated under the laws of the Province of Ontario and is a reporting issuer in each province and territory of
AGF Mutual Funds
To qualify for continuous distribution, each of the mutual funds managed by AGF Investments Inc. (AGFI) must file each year an annual information form and simplified prospectus in every province and territory of
Each mutual fund is managed by AGFI and as such AGFI is liable for any misrepresentation in the offering documents of the funds. Pursuant to securities legislation in certain of the provinces and territories of
Investment Management Operations
AGF Investments Inc.
During 2009, AGF Funds Inc. and AGF Asset Management Group Limited were amalgamated to form AGF Investments Inc. (AGFI). AGFI is registered with the Ontario Securities Commission (OSC) as a portfolio manager and maintains equivalent registrations in each of the other provinces and territories of
AGF International Advisors Company Limited
AGF International Advisors Company Limited is incorporated under the laws of the Republic of
AGFIA Limited
AGFIA Limited is a private limited company incorporated under the laws of the Republic of
AGF Asset Management (Asia) Limited
Established in 1996, AGF Asset Management (Asia) Limited provides investment research and advisory services on Asian markets for AGF mutual funds and other clients. AGF Asset Management (Asia) Limited is regulated by the Monetary Authority of
AGF Investments America Inc
AGF Investments America Inc. (AGFA) is registered with the U.S. Securities and Exchange Commission as an Adviser and provides investment management services to (U.S.) institutional clients.
AGF Investments Asia Limited
AGF Investments Asia Limited is incorporated as a limited liability company in
Highstreet Asset Management Inc.
Highstreet Asset Management Inc. (Highstreet) is registered with the OSC as a portfolio manager and maintains equivalent registrations in each of the other provinces and territories of
Highstreet Asset Management U.S. Inc.
Highstreet Asset Management U.S. Inc. is a wholly owned subsidiary of Highstreet and is registered with the U.S. Securities Exchange Commission as an Adviser and provides investment management services to (U.S.) institutional clients.
Cypress Capital Management Ltd.
Cypress Capital Management Limited (Cypress) is registered with the British Columbia Securities Commission as a portfolio manager and maintains equivalent registrations in each of the other provinces and territories of
Cypress Capital Management US Limited
Cypress Capital Management US Limited (Cypress US) is a wholly owned subsidiary of Cypress and is registered with the U.S. Securities Exchange Commission as an Adviser. Cypress US provides investment management services to (U.S.) high net worth, corporate, endowment and foundation clients.
Doherty & Associates Limited and Magna Vista Investment Management Limited
Doherty & Associates Limited (Doherty) and Magna Vista Investment Management Limited (Magna) are each registered with the OSC as portfolio managers, and maintain equivalent registrations in each of the other provinces and territories of
Doherty and Magna amalgamated on
AGF Private Investment Advisors Inc.
AGF Private Investment Advisors Inc. (PIA), a wholly owned subsidiary of Magna, is registered as an Investment Advisor with the U.S. Securities and Exchange Commission (SEC).
AGF Securities (
AGF Securities (
AGF Securities Inc.
AGF Securities Inc. is registered as a broker-dealer with the SEC.
Trust Company Operations
AGF Trust Company
AGF Trust Company (AGF Trust) is incorporated under and governed by the federal Trust and Loan Companies Act (
AGF Trust is a member of the Canadian Deposit Insurance Corporation (CDIC), which provides a statutory scheme for the insurance of certain qualifying deposits made and payable in
Fourth Quarter Analysis
Summary of Consolidated Operating Results
The table below highlights our results for the three months ended
------------------------------------------------------------------------- ($ millions, except per share amounts) Three months ended November 30 2009 2008 % change ------------------------------------------------------------------------- Revenue Investment Management Operations $ 132.1 $ 123.1 7.3% Trust Company Operations 23.6 26.6 (11.3%) Other 2.0 2.5 (20.0%) ------------------------------------------------------------------------- 157.7 152.2 3.6% Expenses Investment Management Operations 72.9 67.8 7.5% Trust Company Operations 13.2 30.4 (56.6%) ------------------------------------------------------------------------- 86.1 98.2 (12.3%) EBITDA(1) 71.6 54.0 32.6% Amortization 23.6 27.6 (14.5%) Interest expense 1.3 1.8 (27.8%) Impairment of asset available for sale - 2.3 - Impairment of goodwill and customer contracts - 46.3 - Non-controlling interest 0.2 0.1 100.0% Income taxes 1.1 (4.8) - ------------------------------------------------------------------------- Net income $ 45.5 $ (19.3) - ------------------------------------------------------------------------- Earnings per share - diluted $ 0.50 $ (0.21) - ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) As previously defined, see 'Key Performance Indicators and Non-GAAP Measures - EBITDA'. The items required to reconcile EBITDA to Net Income, a defined term under Canadian GAAP, are detailed above.
Results from Operations
Revenue for the fourth quarter ended
Expenses in the fourth quarter ended
EBITDA for the quarter ended
Our income tax expense, including the impact of tax rate reductions, for the three months ended
The impact of the above revenue and expense items resulted in net income of
On a diluted per share basis, cash flow from operations for the three months ended
Investment Management Operations
Assets Under Management
The following table illustrates the composition of the changes in mutual fund AUM during the three months ended
------------------------------------------------------------------------- ($ millions) Three months ended November 30 2009 2008 % change ------------------------------------------------------------------------- Mutual fund AUM, beginning of period $ 22,142 $ 26,371 (16.0%) Gross sales of mutual funds 676 651 3.8% Redemptions of mutual funds (945) (1,176) (19.6%) ------------------------------------------------------------------------- Net mutual fund sales (269) (525) (48.8%) Market appreciation (depreciation) of fund portfolios 873 (6,085) - ------------------------------------------------------------------------- Mutual fund AUM, end of period $ 22,746 $ 19,761 15.1% Institutional and strategic accounts AUM 18,921 12,802 47.8% High-net-worth AUM 2,951 2,995 (1.5%) ------------------------------------------------------------------------- Total AUM, end of period $ 44,618 $ 35,558 25.5% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average daily mutual fund AUM for the period $ 22,723 $ 21,682 4.8% ------------------------------------------------------------------------- -------------------------------------------------------------------------
During the three months ended
The impact of the U.S. dollar depreciation relative to the Canadian dollar on the market value of AGF mutual funds since
Financial and Operational Results
The table below highlights the Investment Management Operations segment results for the three months ended
------------------------------------------------------------------------- ($ millions) Three months ended November 30 2009 2008 % change ------------------------------------------------------------------------- Revenue Management and advisory fees $ 125.1 $ 119.6 4.6% Deferred sales charges 5.1 7.0 (27.1%) Investment income and other revenue 1.9 (3.5) - ------------------------------------------------------------------------- 132.1 123.1 7.3% Expenses Selling, general and administrative 35.7 31.3 14.1% Trailing commissions 35.0 33.0 6.1% Investment advisory fees 2.2 3.5 (37.1%) ------------------------------------------------------------------------- 72.9 67.8 7.5% ------------------------------------------------------------------------- EBITDA(1) 59.2 55.3 7.1% Amortization 23.0 26.7 (13.9%) Impairment of asset available for sale 0.0 2.3 - Impairment of goodwill and customer contracts 0.0 46.3 - ------------------------------------------------------------------------- Income before taxes and non-segmented items $ 36.2 $ (20.0) - ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) As previously defined, see the 'Key Performance Indicators and Non-GAAP Measures - EBITDA' section.
Revenue
For the three months ended
Management and Advisory Fees
Management and advisory fees are directly related to our AUM levels. The 4.8% increase in average daily mutual fund AUM for the quarter ended
Deferred Sales Charges (DSC)
We receive deferred sales charges upon redemption of securities sold on the contingent DSC or low-load commission basis for which we finance the selling commissions paid to the dealer. The DSC ranges from 2.5% to 5.0% depending on the commission option, of the original subscription price of the funds purchased if the funds are redeemed within the first two years, and declines to zero after three or seven years. DSC revenue fluctuates based on the level of redemptions, the age of the assets being redeemed and the proportion of redemptions composed of back-end assets. DSC revenues decreased by 27.1% to
Investment Income and Other Revenue
Investment income and other revenue was
Expenses
For the three months ended
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) increased by
------------------------------------------------------------------------- ($ millions) Three months ended November 30 2009 ------------------------------------------------------------------------- Increase (decrease) in severance and restructuring expenses $ (2.4) Increase (decrease) in compensation-related expenses 7.5 Increase (decrease) in other expenses (1.2) Increase (decrease) in fund absorption expenses 0.5 ------------------------------------------------------------------------- $ 4.4 -------------------------------------------------------------------------
The following explains expense changes in three months ended
- Severance and restructuring expenses decreased $2.4 million as restructuring activities commenced in late 2008 and were minimal in the fourth quarter of 2009. - Compensation-related expenses increased $7.5 million due to higher bonus amounts in the fourth quarter of 2009 compared to 2008. In the latter half of fiscal 2008 the Company was experiencing down markets whereas in the latter half of 2009 markets were improving. Accordingly bonus amounts were higher on a quarter-over-quarter comparison. - Other expenses decreased $1.2 million due to continued cost savings initiatives. - Absorption expense increased by $0.5 million.
Trailing Commissions
Trailing commissions paid to distribution depend on total AUM, the proportion of mutual fund AUM sold on a front-end versus back-end commission basis and the proportion of equity fund AUM versus fixed-income fund AUM. Trailing commissions as a percentage of average daily mutual fund AUM were 0.62% for the three months ended
Investment Advisory Fees
External investment advisory fees decreased by 37.1% in 2009 as compared to 2008. The decrease relates primarily to repatriation of certain mandates.
EBITDA and EBITDA margin
EBITDA for the Investment Management Operations segment were
EBITDA margins were 44.8% in fiscal 2009 compared with 44.9% in 2008.
Amortization
The most significant component in this category is amortization of deferred selling commissions. The category also represents amortization of property, equipment, customer contracts and other intangible assets. We internally finance all selling commissions paid. These selling commissions are capitalized and amortized on a straight-line basis over a period that corresponds with their applicable DSC schedule. Amortization expense related to deferred selling commissions was
During the fourth quarter of 2009, we paid
Pre-Tax Profit Margin
Pre-tax profit margin was at 27.4% for three months ended
Trust Company Operations
Financial and Operational Results
The table below highlights the results for the three months ended
------------------------------------------------------------------------- ($ millions) Three months ended November 30 2009 2008 % change ------------------------------------------------------------------------- Interest income Loan interest $ 46.1 $ 67.0 (31.2%) Investment interest 2.6 7.0 (62.9%) ------------------------------------------------------------------------- 48.7 74.0 (34.2%) Interest expense Deposit interest 38.3 51.0 (24.9%) Hedging interest income (16.3) (6.6) 147.0% Other interest expense (income) 5.0 6.1 (18.0%) ------------------------------------------------------------------------- 27.0 50.5 (46.5%) ------------------------------------------------------------------------- Net interest income 21.7 23.5 (7.7%) Other revenue 2.1 3.7 (43.2%) RSP loan securitization income (loss), net of impairment (0.2) (0.6) (66.7%) ------------------------------------------------------------------------- Total revenue 23.6 26.6 (11.3%) Expenses Selling, general and administrative 9.2 9.9 (7.1%) Provision for loan losses 4.0 20.5 (80.5%) ------------------------------------------------------------------------- 13.2 30.4 (56.6%) EBITDA(1) 10.4 (3.8) - Amortization 0.6 0.9 (33.3%) ------------------------------------------------------------------------- Income before taxes and non-segmented items $ 9.8 $ (4.7) - ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) As previously defined, see the 'Key Performance Indicators and Non-GAAP Measures - EBITDA' section.
Revenue, Net Interest Income and Net Interest Margin
Net interest income, which is expressed net of interest on deposits and other interest expenses, declined 7.7% compared to the same period in 2008. The average net interest margin on lending products was 2.4% in the fourth quarter of 2009 (2008 - 2.1%). AGF Trust manages its interest rate risk through the use of interest rate swaps. Interest expense includes hedging interest income of
Selling, General and Administrative Expenses
SG&A expenses decreased
Provision for Loan Losses
The total provision for loan losses in the fourth quarter decreased to
Loan writeoffs, net of recoveries for the three months ended
EBITDA and EBITDA margin
A significant decline in the provision for loan losses led to an increase in EBITDA for the three months ended
Pre-Tax Profit Margin
As a result of the factors outlined above, AGF Trust had a pre-tax profit margin of 41.5% in the fourth quarter of 2009. AGF Trust reported a pre-tax loss in the fourth quarter of last year.
Selected Quarterly Information
------------------------------------------------------------------------- ($ millions, except per share amounts) For the three-month Nov. 30, Aug. 31, May 31, Feb. 28, period ended 2009 2009 2009 2009 ------------------------------------------------------------------------- Revenue $ 157.7 $ 146.9 $ 143.5 $ 138.0 Cash flow(1) 65.7 49.0 44.7 46.7 EBITDA(2) 71.6 56.1 49.0 42.8 Pre-tax income 46.6 30.4 23.0 16.3 Net income 45.5 22.8 17.2 12.2 Earnings per share Basic $ 0.51 $ 0.26 $ 0.19 $ 0.14 Diluted $ 0.50 $ 0.25 $ 0.19 $ 0.14 Weighted average basic shares 89,072,123 88,914,200 88,826,605 88,564,160 Weighted average fully diluted shares 90,331,497 89,931,517 89,234,015 88,564,160 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ millions, except per share amounts) For the three-month Nov. 30, Aug. 31, May 31, Feb. 29, period ended 2008 2008 2008 2008 ------------------------------------------------------------------------- Revenue $ 152.2 $ 184.7 $ 194.3 $ 194.3 Cash flow(1) 57.4 66.3 71.5 83.5 EBITDA(2) 54.0 81.5 88.6 89.5 Pre-tax income (24.1) 51.1 57.7 56.5 Net income (19.3) 41.1 44.0 62.7 Earnings per share Basic $ (0.21) $ 0.46 $ 0.49 $ 0.70 Diluted $ (0.21) $ 0.46 $ 0.49 $ 0.70 Weighted average basic shares 89,446,562 89,451,578 89,349,275 89,039,394 Weighted average fully diluted shares 90,679,048 89,870,475 89,785,796 89,807,506 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Cash flow from operations before net change in non-cash balances related to operations. (2) As previously defined, see 'Key Performance Indicators and Non-GAAP Measures - EBITDA' section.
Selected Annual Information
------------------------------------------------------------------------- ($ millions, except per share amounts) Years ended November 30 2009 2008 2007 2006 2005 ------------------------------------------------------------------------- Revenue (continuing operations) $ 586.1 $ 725.6 $ 780.3 $ 607.2 $ 546.6 Cash flow from continuing operations(1) 206.1 278.7 318.9 214.2 219.0 EBITDA (continuing operations)(2) 219.5 313.7 357.2 248.5 246.6 Pre-tax income 116.3 141.3 222.6 113.7 105.8 Net income (continuing operations) 97.7 128.6 175.9 102.1 76.6 Earnings per share (continuing operations) Basic $ 1.10 $ 1.44 $ 1.96 $ 1.15 $ 0.85 Diluted $ 1.09 $ 1.41 $ 1.93 $ 1.14 $ 0.85 Cash flow from continuing operations Basic $ 2.32 $ 3.12 $ 3.55 $ 2.40 $ 2.43 Diluted $ 2.30 $ 3.05 $ 3.49 $ 2.38 $ 2.42 Dividends per share $ 1.00 $ 0.95 $ 0.78 $ 0.69 $ 0.56 Total assets $ 5,675.9 $ 6,534.0 $ 5,876.8 $ 3,919.8 $ 2,709.7 Total long-term debt $ 143.6 $ 123.7 $ 184.5 $ 56.0 $ 17.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Cash flow from operations before net change in non-cash balances related to operations. (2) As previously defined, see 'Key Performance Indicators and Non-GAAP Measures - EBITDA' section.
Additional Information
Additional information relating to the Company can be found in the Company's Consolidated Financial Statements and accompanying notes for year ended
AGF Management Limited
CONSOLIDATED FINANCIAL STATEMENTS
For the year ended
Management's Responsibility for Financial Reporting
The accompanying consolidated financial statements of AGF Management Limited (the Company) were prepared by management, which is responsible for the integrity and fairness of the information presented, including the amounts based on estimates and judgments. These consolidated financial statements were prepared in accordance with Canadian generally accepted accounting principles. Financial information appearing throughout this Annual Report is consistent with these consolidated financial statements.
In discharging its responsibility for the integrity and fairness of the consolidated financial statements and for the accounting systems from which they are derived, management maintains internal controls designed to ensure that transactions are authorized, assets are safeguarded and proper records are maintained. The system of internal controls is supported by a compliance function, which ensures that the Company and its employees comply with securities legislation and conflict of interest rules, and by an internal audit staff, which conducts periodic audits of all aspects of the Company's operations.
The Board of Directors oversees management's responsibilities for financial reporting through an Audit Committee, which is comprised entirely of independent directors. This Committee reviews the consolidated financial statements of the Company and recommends them to the Board for approval.
PricewaterhouseCoopers LLP, independent auditors appointed by the shareholders of the Company upon the recommendation of the Audit Committee, has performed an independent audit of the consolidated financial statements, and its report follows. The shareholders' auditors have full and unrestricted access to the Audit Committee to discuss their audit and related findings.
(signed) Blake C. Goldring, M.S.M., CFA Chairman & Chief Executive Officer (signed) Gregory J. Henderson, CA Senior Vice-President & Chief Financial Officer
Auditors' Report
To the Shareholders of AGF Management Limited:
We have audited the consolidated balance sheet of AGF Management Limited as at
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 the Company as at
(signed) PricewaterhouseCoopers LLP Chartered Accountants, Licensed Public Accountants Toronto, Canada AGF Management Limited Consolidated Balance Sheet ------------------------------------------------------------------------- ($ thousands) November 30 2009 2008 ------------------------------------------------------------------------- Assets Current Assets Cash and cash equivalents $ 274,870 $ 584,168 Investments available for sale (note 2(a)) 550,480 188,435 Accounts receivable, prepaid expenses and other assets 98,745 91,148 Current portion of retained interest from securitization (note 3) 3,550 5,487 Real estate secured and investment loans due within one year (note 6) 537,683 606,844 ------------------------------------------------------------------------- 1,465,328 1,476,082 Retained interest from securitization (note 3) 36,898 39,460 Real estate secured and investment loans (note 6) 3,057,072 3,824,006 Investment in associated company (note 2(b)) 90,447 98,338 Management contracts 504,269 504,269 Customer contracts, net of accumulated amortization (note 7) 14,221 18,783 Goodwill (note 7) 173,708 172,985 Trademarks 1,935 1,935 Deferred selling commissions, net of accumulated amortization 273,959 304,406 Property, equipment and computer software, net of accumulated amortization (note 8) 14,127 19,423 Other assets (note 9) 43,958 74,272 ------------------------------------------------------------------------- Total assets $ 5,675,922 $ 6,533,959 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ thousands) November 30 2009 2008 ------------------------------------------------------------------------- Liabilities and shareholders' equity Current Liabilities Accounts payable and accrued liabilities $ 284,043 $ 302,401 Future income taxes (note 13) 22,190 26,240 Long-term debt due within one year (note 10) 13,083 21,171 Deposits due within one year (note 6(f)) 1,884,235 2,486,635 ------------------------------------------------------------------------- 2,203,551 2,836,447 Deposits (note 6(f)) 2,034,328 2,275,426 Long-term debt (note 10) 143,648 123,740 Future income taxes (note 13) 146,909 171,293 Other long-term liabilities (note 11) 16,675 19,428 ------------------------------------------------------------------------- Total liabilities 4,545,111 5,426,334 ------------------------------------------------------------------------- Non-controlling interest 408 203 Shareholders' equity Capital stock (note 14) 438,612 431,897 Contributed surplus 19,964 17,127 Retained earnings 685,063 676,190 Accumulated other comprehensive income (loss) (13,236) (17,792) ------------------------------------------------------------------------- Total shareholders' equity 1,130,403 1,107,422 ------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 5,675,922 $ 6,533,959 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Commitments (note 24) Guarantees (note 25) Contingent Liabilities (note 26) (The accompanying notes are an integral part of these Consolidated Financial Statements.) Approved by the Board: (signed) (signed) Blake C. Goldring, M.S.M., CFA Douglas L. Derry, FCA Director Director AGF Management Limited Consolidated Statement of Income ------------------------------------------------------------------------- ($ thousands) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Revenue Management and advisory fees (note 17) $ 447,821 $ 576,761 Deferred sales charges 21,647 25,591 RSP loan securitization income (loss), net of impairment (note 3) (585) (279) Investment income and other revenue 20,982 26,624 ------------------------------------------------------------------------- 489,865 628,697 ------------------------------------------------------------------------- AGF Trust interest income (note 20) 226,204 302,981 AGF Trust interest expense (note 20) (129,955) (206,108) ------------------------------------------------------------------------- AGF Trust net interest income 96,249 96,873 ------------------------------------------------------------------------- Total Revenue 586,114 725,570 ------------------------------------------------------------------------- Expenses Selling, general and administrative 193,653 209,326 Trailing commissions 125,257 157,161 Investment advisory fees 10,104 15,034 Amortization of deferred selling commissions 84,719 98,064 Amortization of customer contracts 4,562 7,791 Amortization of property, equipment and computer software 7,421 8,142 Interest expense 5,983 9,252 Provision for AGF Trust loan losses (note 6(e)) 37,562 30,374 Impairment of asset available for sale (note 2(a)) - 2,286 Impairment of goodwill and customer contracts (note 7) - 46,305 ------------------------------------------------------------------------- 469,261 583,735 Income before income taxes and non-controlling interest 116,853 141,835 Income tax expense (recovery) (note 13) Current 49,473 63,504 Future (30,896) (50,818) ------------------------------------------------------------------------- 18,577 12,686 ------------------------------------------------------------------------- Non-controlling interest (note 5) 582 557 ------------------------------------------------------------------------- Net income for the year $ 97,694 $ 128,592 ------------------------------------------------------------------------- Earnings per share (note 16) Basic $ 1.10 $ 1.44 Diluted $ 1.09 $ 1.41 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (The accompanying notes are an integral part of these Consolidated Financial Statements.) AGF Management Limited Consolidated Statement of Changes in Shareholders' Equity ------------------------------------------------------------------------- ($ thousands) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Common shares Balance, beginning of year $ 431,897 $ 421,923 Issued through dividend reinvestment plan 2,627 4,618 Stock options exercised 2,552 5,121 Issued on acquisition of Highstreet Partners Limited (note 5) 1,536 5,116 Purchased for cancellation - (4,881) ------------------------------------------------------------------------- Balance, end of year 438,612 431,897 ------------------------------------------------------------------------- Contributed surplus Balance, beginning of year 17,127 14,948 Stock options 2,837 2,179 ------------------------------------------------------------------------- Balance, end of year 19,964 17,127 ------------------------------------------------------------------------- Retained earnings Balance, beginning of year 676,190 635,369 Net income for the year 97,694 128,592 Dividends on AGF Class A voting common shares and AGF Class B non-voting shares (88,821) (84,860) Excess paid over book value of AGF Class B non-voting shares purchased for cancellation (note 14(c)) - (2,911) ------------------------------------------------------------------------- Balance, end of year 685,063 676,190 ------------------------------------------------------------------------- Accumulated other comprehensive income (loss) Balance, beginning of year (17,792) (3,238) Other comprehensive income (loss) 4,556 (14,554) ------------------------------------------------------------------------- Balance, end of year (13,236) (17,792) ------------------------------------------------------------------------- Total shareholders' equity $ 1,130,403 $ 1,107,422 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (The accompanying notes are an integral part of these Consolidated Financial Statements.) AGF Management Limited Consolidated Statement of Comprehensive Income ------------------------------------------------------------------------- ($ thousands) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Net income for the year $ 97,694 $ 128,592 ------------------------------------------------------------------------- Other comprehensive income (losses), net of tax Foreign currency translation adjustments related to net investments in self-sustaining foreign operations(1) (7,360) (7,188) ------------------------------------------------------------------------- (7,360) (7,188) ------------------------------------------------------------------------- Net unrealized gains (losses) on available for sale securities Unrealized gains (losses)(2) 10,610 (9,428) Reclassification of realized loss or other than temporary impairment to earnings 1,088 2,077 ------------------------------------------------------------------------- 11,698 (7,351) ------------------------------------------------------------------------- Net unrealized gains (losses) on cash flow hedges Unrealized gains (losses)(3) - (945) Reclassification of realized loss on cash flow hedges 218 930 ------------------------------------------------------------------------- 218 (15) ------------------------------------------------------------------------- Total other comprehensive income (loss), net of tax $ 4,556 $ (14,554) ------------------------------------------------------------------------- Comprehensive income $ 102,250 $ 114,038 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Net of income tax recovery of $1.2 million for the year ended November 30, 2009. Net of income tax recovery of $1.2 million for the year ended November 30, 2008. (2) Net of income tax expense of $3.4 million for the year ended November 30, 2009. Net of income tax recovery of $2.1 million for the year ended November 30, 2008. (3) Net of income tax recovery of $0.5 million for the year ended November 30, 2008. (The accompanying notes are an integral part of these Consolidated Financial Statements.) AGF Management Limited Consolidated Statement of Cash Flow ------------------------------------------------------------------------- ($ thousands) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Operating Activities Net income for the year $ 97,694 $ 128,592 Items not affecting cash Amortization 96,702 113,997 Future income taxes (30,896) (50,818) RSP loan securitization income (loss), net of impairment 585 279 Provision for AGF Trust loan losses 37,562 30,374 Impairment of asset available for sale - 2,286 Impairment of goodwill and customer contracts - 46,305 Stock-based compensation 4,810 5,548 Equity investment in S&WHL (6,399) (10,256) Dividends from S&WHL 5,786 6,387 Other 285 5,990 ------------------------------------------------------------------------- 206,129 278,684 Net change in non-cash balances related to operations (note 19) (16,615) 72,719 ------------------------------------------------------------------------- Net cash provided by operating activities 189,514 351,403 ------------------------------------------------------------------------- Financing Activities Purchase of Class B non-voting shares for cancellation - (7,792) Issue of Class B non-voting shares 2,531 2,483 Dividends paid (86,194) (80,242) Increase (decrease) in revolving term loan 32,991 (36,152) Net increase (decrease) in AGF Trust deposits (818,145) 601,574 ------------------------------------------------------------------------- Net cash provided by (used in) financing activities (868,817) 479,871 Investing Activities Deferred selling commissions paid (54,495) (86,791) Proceeds from sale of discontinued operations 702 - Acquisition of subsidiaries, net of cash acquired (19,924) (25,224) Purchase of property, equipment and computer software (2,125) (6,753) Net purchase of investments available for sale (345,514) (174,838) Net decrease (increase) in AGF Trust real estate secured and investment loans 791,361 (781,374) ------------------------------------------------------------------------- Net cash provided by (used in) investing activities 370,005 (1,074,980) ------------------------------------------------------------------------- Decrease in cash and cash equivalents (309,298) (243,706) Balance of cash and cash equivalents, beginning of year 584,168 827,874 ------------------------------------------------------------------------- Balance of cash and cash equivalents, end of year $ 274,870 $ 584,168 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Represented by: Cash and cash equivalents $ 32,569 $ 23,927 AGF Trust cash and cash equivalents 242,301 560,241 ------------------------------------------------------------------------- $ 274,870 $ 584,168 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Refer to Note 19 for supplemental cash flow information. (The accompanying notes are an integral part of these Consolidated Financial Statements.) Notes to Consolidated Financial Statements Years ended November 30, 2009 and 2008 Description of Business AGF Management Limited (AGF or the Company) is incorporated under the Business Corporations Act (Ontario). The Company is an integrated, global wealth management corporation whose principal subsidiaries provide investment management for mutual funds, institutions and corporations, as well as high- net-worth clients; and trust products and services (including real estate secured loans and investment loans and Guaranteed Investment Certificates (GICs)). The Company conducts the management and distribution of mutual funds in Canada under the brand names AGF, Elements and Harmony (collectively, AGF Funds). The Company conducts its trust business under the name AGF Trust Company (AGF Trust). Note 1: Summary of Significant Accounting Policies Basis of Presentation and Consolidation The Consolidated Financial Statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). The Consolidated Financial Statements include the accounts of the Company and its directly and indirectly owned subsidiaries. Intercompany transactions and balances are eliminated on consolidation. For subsidiaries where the Company does not own all of the equity, the minority shareholders' interest is disclosed in the Consolidated Balance Sheet as non- controlling interest and the related income is disclosed as a separate line in the Consolidated Statement of Income. Investments over which the Company is able to exercise significant influence are accounted for by the equity method. Certain comparative amounts in these financial statements have been reclassified to conform with the current year's presentation. The principal subsidiaries of AGF are: AGF Investments Inc. AGF Investments America Inc. AGF International Advisors Company Limited AGFIA Limited AGF Asset Management (Asia) Limited AGF Investments Asia Limited Doherty & Associates Limited Magna Vista Investment Management Limited Cypress Capital Management Limited Highstreet Asset Management Inc. AGF Trust Company AGF Securities (Canada) Limited AGF Securities Inc. 20/20 Financial Corporation In addition, the Company holds a 30.7% interest in Smith & Williamson Holdings Limited (S&WHL), an independent U.K.-based company providing private client investment management, financial advisory and tax and accounting services. This investment is accounted for using the equity method. Significant Accounting Changes Goodwill, Intangible Assets and Financial Statement Concepts Effective December 1, 2008, the CICA's new accounting standard "Handbook Section 3064, Goodwill and Intangible Assets" (Section 3064) was adopted. The standard clarifies that costs can be deferred only when they relate to an item that meets the definition of an asset, and as a result, start- up costs must be expensed as incurred. "Handbook Section 1000, Financial Statements Concepts" was also amended to provide consistency with Section 3064. These standards did not have any impact on the financial position or earnings of the Company. Credit Risk and Fair Value Effective December 1, 2008, EIC-173 "Credit Risk and the Fair Value of Financial Assets and Financial Liabilities" was adopted. EIC-173 requires the Company's own credit risk and the credit risk of the counterparty to be taken into account in determining the fair value of financial assets and financial liabilities, including derivatives. The new guidance did not have a material effect on the financial position or earnings of the Company. Effective Interest Method In June 2009, CICA "Handbook Section 3855, Financial Instruments - Recognition and Measurement" (Section 3855) was amended. The amendment clarified the calculation of the effective interest method which is a method of calculating the amortized cost of financial assets and financial liabilities and of allocating the interest income or interest expense over the relevant period. The impact of the clarification had no material effect on the financial position or earnings of the Company. Classification and Impairment of Financial Assets In August 2009, Section 3855 was amended. The amendment changed the definition of loans and receivables. The new definition allows debt securities not quoted in an active market to be classified as loans and receivables and carried at amortized cost, or permits the Company to designate these instruments as available-for-sale, measured at fair value with unrealized gains and losses recorded through other comprehensive income. The amendment also requires that credit-related impairment charges be recognized in the Consolidated Statement of Income for instruments carried at amortized cost as well as the reversal of impairment charges for debt instruments classified as available for sale. Impairment charges for debt securities classified as loans are recorded through the provision for credit losses. The amendment did not have any impact on the financial position or earnings of the Company. Financial Instruments Disclosure During 2009, CICA "Handbook Section 3862, Financial Instruments - Disclosures" was amended to include enhanced disclosures about inputs to fair value measurement, including their classification within a hierarchy that prioritizes the inputs to fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are: Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and Level 3 Inputs that are not based on observable market data. If different levels of inputs are used to measure a financial instrument's fair value, the classification within the hierarchy is based on the lowest level input that is significant to the fair value measurement. The amendment only impacted our disclosures in the financial statements. Refer to Note 22. Financial Instruments In accordance with Section 3855, financial assets and financial liabilities are initially recognized at fair value. Measurement in subsequent periods is dependent upon the classification of each instrument. The standard requires that all financial assets be classified as either available for sale (AFS), held for trading (HFT), held to maturity (HTM) or loans and receivables. Financial liabilities are classified as trading or other. AFS assets are initially recorded at fair value on the settlement date in the balance sheet and are remeasured at fair value with unrealized gains and losses, including changes in foreign exchange rates, recognized in other comprehensive income (OCI) until the financial asset is disposed of or becomes permanently impaired. Transaction costs related to AFS are capitalized. HFT assets are initially recorded at fair value on the settlement date in the balance sheet and are remeasured at fair value, with the changes in fair value reported in earnings. Transaction costs related to HFT securities are expensed as incurred. The Company has not classified any financial assets as HTM. Loans and receivables and other financial liabilities are measured at amortized cost using the effective interest method. Transaction costs related to loans and receivables, deposits and other financial liabilities are generally capitalized and are then amortized using the effective interest method. Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Actual amounts could differ from these estimates. Key areas of estimation, where management has made difficult, complex or subjective judgments - often about matters that are inherently uncertain - are loan loss provisions, goodwill and intangible assets using estimates of future cash flows, as well as the provision for useful lives of depreciable assets, commitments and contingencies, fund absorption costs, income tax provisions, valuation of retained interest from securitization, stock-based compensation, Elements Advantage commitment, performance share unit plan expense and the recoverability of property, equipment and computer software. The Company has made investments in companies or businesses, some of which have experienced operating losses. Significant changes in the assumptions, including those about future business plans and cash flows, could change the recorded amounts by a material amount. Any further operating losses of these investees could result in impairment of these investments. Assets Under Management The Company manages and provides advisory services in respect of mutual fund and other investment assets owned by clients and third parties that are not reflected on the consolidated balance sheet. Consolidation of Variable Interest Entities CICA AcG 15, "Consolidation of Variable Interest Entities" (VIE) provides guidance for applying consolidation principles to certain entities that are subject to control on a basis other than ownership of voting interests. An entity is a VIE when, by design, one or both of the following conditions exist: (a) total equity investment at risk is insufficient to permit the entity to finance its activities without additional subordinated support from others; (b) as a group, the holders of the equity investment at risk lack certain essential characteristics of a controlling financial interest. The Company has reviewed its relationships, including mutual funds managed, and determined that there are no entities whose financial results would be required to be included or disclosed in the consolidated results for the years ended November 30, 2009 and 2008. Cash and Cash Equivalents Cash represents highly liquid temporary deposits with short-term maturities of less than three months at inception. Cash equivalents are comprised of commercial paper, bank sponsored asset-backed commercial paper (ABCP), bank deposit notes, bankers' acceptances (BAs) and floating-rate notes (FRNs) with short-term maturities of less than three months at inception. Accounting for Securitizations The Company has securitized certain registered Retirement Savings Plan (RSP) loans through the sale of these loans to a securitization trust. For a securitization to be treated as a sale, the Company must surrender control over those loans included in the securitization. To surrender control, the securitized assets must be isolated from the Company and its creditors, even in the case of bankruptcy or receivership, and the Company must receive consideration other than the beneficial interest in the transferred assets. Under terms that transfer control to third parties, the transaction is recognized as a sale and the related loan assets are removed from the Consolidated Balance Sheet. As part of the securitization, certain financial assets are retained. The retained interests, classified as AFS, are carried at fair value, determined using the present value of future expected cash flows. A gain or loss on the sale of loan receivables is recognized immediately in income. In determining the gain or loss on sale, management estimates future cash flows by relying on estimates of the amount of interest that will be collected on the securitized assets, the yield paid to investors, the portion of the securitized assets that will be prepaid before their scheduled maturity, expected credit losses, the cost of servicing the assets and the rate at which to discount these expected future cash flows. Actual cash flows may differ significantly from those estimated by management. If actual cash flows differ from the Company's estimate of future cash flows, the gains on the retained interest are recorded in OCI. Any losses are first recognized in OCI to the extent there is an offsetting gain and any excess is recognized in the Consolidated Statement of Income under RSP loan securitization income (loss), net of impairment. Servicing fee revenues related to the securitization loan are reported within 'RSP loan securitization income (loss), net of impairment' in the Consolidated Statement of Income. Where a servicing liability is recognized, the amount is recorded in Other Liabilities in the Consolidated Balance Sheet. Retained interests are tested regularly for other-than-temporary impairment and, if required, the retained interest's carrying value is reduced to fair value by a charge in the Consolidated Statement of Income. Refer to Note 3 for additional disclosure regarding the securitizations and related balance sheet and income statement impacts. Real Estate Secured Loans and Investment Loans Real estate secured loans and investment loans are classified as loans and receivables and are recorded at amortized cost using the effective interest rate method and net of an allowance for loan losses. Interest income from loans is recorded on an accrual basis. Accrued but uncollected interest on uninsured real estate secured loans and investment loans is reversed when a loan is identified as impaired. Principal payments on the real estate secured loans and investment loans that are contractually due to the Company in the 12-month period from the balance sheet date are classified as current assets. Fees that relate to the origination of loans are considered to be adjustments to loan yield and are deferred and amortized to interest income over the expected term of the loans. Allowance for Loan Losses The allowance for loan losses consists of both general allowances and specific allowances. General allowances are based on management's assessment of inherent, unidentified losses in the portfolio at the reporting date that have not been captured in the determination of specific allowances. The assessment takes into account portfolio-specific credit factors, general economic factors, geographic exposure, historical loss experience, as well as probability of default (PD) and loss given default (LGD) pairs. Specific allowances consist of provision for losses on identifiable assets for which the estimated amounts recoverable are less than their carrying value and are designed to provide against the likelihood of losses for loans that are deemed to be impaired. Specific allowances also include estimated provisions for losses on identifiable assets that are currently 1-90 days in arrears and are likely to become impaired based on a combination of historical average roll rates and LGD for a given loan portfolio. Impaired Loans Loans are classified as impaired when, in the opinion of management, there is reasonable doubt as to the collectability, either in whole or in part, of principal or interest, or when principal or interest is 90 days or greater past due, except where the loan is both well-secured and in the process of collection. Loans that are insured by the federal government, an agency thereof, or a third-party insurer are classified as impaired when interest or principal is past due 365 days. When a loan is identified as impaired, the carrying amount of the loan is reduced to its estimated realizable value. In subsequent periods, recoveries of amounts previously written off and any increase in the carrying value of the loan are credited to the provision for loan losses in the Consolidated Statement of Income. Where a portion of the loan is written off and the remaining balance is restructured, the new loan is carried on an accrual basis when there is no longer any reasonable doubt about the collectability of principal or interest. Interest income is recognized on impaired loans on a cash basis only after the specific allowance for losses has been reversed and provided there is no further doubt as to the collectability of the principal. Full or partial write- offs of loans are recorded when management believes there is no realistic prospect of full recovery. Goodwill, Management Contracts and Trademarks The purchase price of acquisitions accounted for under the purchase method and the purchase price of investments accounted for under the equity method are allocated based on the fair values of the net identifiable assets acquired, including management contracts and other identifiable intangible assets. The excess of the purchase price over the values of such assets is recorded as goodwill. Management contracts and trademarks have been determined to have an indefinite life. Goodwill, management contracts and trademarks are not amortized but are subject to impairment tests on an annual basis or more frequently if events or changes in circumstances indicate that the asset may be impaired. Goodwill is allocated to the reporting units and any impairment is identified by comparing the carrying value of a reporting unit with its fair value. If any impairment is indicated, then it is quantified by comparing the carrying value of goodwill to its fair value, based on the fair value of the assets and liabilities of the reporting unit. Management contracts and trademarks are tested for impairment by comparing their fair value to their carrying amounts. An impairment loss is realized when the carrying amount of the asset exceeds its fair value. Customer Contracts Customer contracts are stated at cost, net of accumulated amortization and impairment, if any. Amortization is computed on a straight-line basis over seven to 15 years based on the estimated useful lives of these assets. Deferred Selling Commissions Selling commissions paid to brokers on mutual fund securities sold on a deferred sales charge (DSC) basis are recorded at cost and are amortized on a straight-line basis over a period that corresponds with the applicable DSC schedule (which ranges from three to seven years). Unamortized deferred selling commissions are written down to the extent that the carrying value exceeds the related expected future cash flows on an undiscounted basis. As at November 30, 2009 and 2008, no impairment losses were required. Property, Equipment and Computer Software Property, equipment and computer software, which is comprised of furniture and equipment, computer hardware, computer software and leasehold improvements is stated at cost, net of accumulated amortization and impairment, if any. Amortization is calculated using the following methods based on the estimated useful lives of these assets: Furniture and equipment 20% declining balance Computer hardware 30% declining balance Leasehold improvements straight-line over term of lease Computer software straight-line over 3 years Impairment of Long-lived Assets Impairment of long-lived assets, which includes property, equipment and computer software and intangible assets with finite useful lives, is recognized when an event or change in circumstance causes the assets' carrying value to exceed the total undiscounted cash flows expected from their use and eventual disposition. The measurement of impairment loss is based on the amount that the carrying value exceeds the fair value. Derivatives Derivative instruments are used to manage the Company's exposure to interest rate risks and to increases in compensation costs arising from certain share-based compensation. The Company does not enter into derivative financial instruments for trading or speculative purposes. When derivative instruments are used, the Company determines whether hedge accounting can be applied. Where hedge accounting is applied, a hedge relationship is designated as a fair value hedge or a cash flow hedge. The hedge is documented at inception, detailing the particular risk management objective and the strategy for undertaking the hedge transaction. The documentation identifies the specific asset or liability being hedged, the risk that is being hedged, the type of derivative used and how effectiveness will be assessed. The derivative instrument must be highly effective in accomplishing the objective of offsetting either changes in the fair value or forecasted cash flows attributable to the risk being hedged both at inception and over the life of the hedge. In accordance with Section 3865, the accumulated ineffectiveness of hedging relationships must be measured, and the ineffective portion of changes in fair value must be recognized in the Consolidated Statement of Income. Where hedge accounting is not applied, changes in fair value are recognized in the Consolidated Statement of income. Fair Value Hedges Fair value hedge transactions predominantly use interest rate swaps to hedge the changes in the fair value of an asset, liability or firm commitment. Derivative financial instruments, held for fair value hedging purposes, are recognized at fair value and the changes in the fair value are recognized in the Consolidated Statement of Income under investment income and other. Changes in the fair value of the hedged items attributable to the hedged risk are also recognized in the Consolidated Statement of Income under Investment Income and Other, with a corresponding adjustment to the carrying amount of the hedged items in the Consolidated Balance Sheet. When the derivative instrument no longer qualifies as an effective hedge or the hedging instrument is sold or terminated prior to maturity, hedge accounting is discontinued prospectively. The cumulative adjustment of the carrying amount of the hedged item related to a hedging relationship that ceases to be effective is recognized in income over the remaining period to maturity on an effective yield basis. Furthermore, if the hedged item is sold or terminated prior to maturity, hedge accounting is discontinued and the cumulative adjustment of the carrying amount of the hedged item is then immediately recognized in investment income and other. Cash Flow Hedges Cash flow hedges are used to hedge the changes in fair value related to certain cash flows related to compensation costs. The effective portion of the change in fair value of the derivative instruments, net of taxes, is recognized in OCI, while the ineffective portion is recognized in net income. Effective September 1, 2008, the Company discontinued hedge accounting on its swaps related to share-based compensation. AGF Elements In November 2005, the Company launched AGF Elements, which consists of five diversified fund-of-fund portfolios. Until June 22, 2009, four of these portfolios included the Elements Advantage Commitment, which is a commitment to investors that if their portfolio does not match or outperform its customized benchmark over a three-year period, AGF will provide each individual investor up to 90 basis points in additional units. This is calculated based on the value of such investment at the end of its related three-year period. As of June 22, 2009, the Company discontinued the Elements Advantage feature on its Elements products. Eligible units purchased prior to June 22, 2009 have been grandfathered and will retain the Elements Advantage feature. The Company records in liabilities up to 30 basis points per year of each investor's AUM, adjusted for redemptions, until the end of the three-year measurement period of each investment made by such investor. At that time, if an individual investor's returns match or exceed the corresponding benchmark, the Company will recognize the entire amount as management fee revenue. If an individual investor's actual returns are below the customized benchmark, a corresponding amount will be distributed to the investor in the form of additional units. As of November 30, 2009, the Company has recorded a liability of $8.8 million (2008 - $7.8 million). Deposits Deposits are primarily comprised of GICs that require the Company to pay a fixed interest rate until the maturity date of the certificate. Deposits are classified as current liabilities and other liabilities, depending on the time to maturity, and are carried at amortized cost using the effective interest method. GICs that mature in the 12-month period following the balance sheet date are classified as current liabilities. Revenue Recognition Management and advisory fees are based on the net asset value of funds under management and are recognized on an accrual basis. These fees are shown net of management fee rebates and distribution fees payable to third-parties and selling-commission financing entities. DSC revenue is received from investors when mutual fund securities sold on a DSC basis are redeemed. DSC revenue is recognized on the trade date of redemption of the applicable mutual fund securities. Net interest income on real estate secured and investment loans, dividends and other investment income earned are recognized on an accrual basis in the period earned. Stock-based Compensation and Other Stock-based Payments The Company has stock-based compensation plans as described in Note 14. The Company utilizes the fair-value-based method of accounting for stock- based compensation. The fair value of stock-based compensation, determined using an option pricing model, is recorded over the vesting period as a charge to net earnings with a corresponding credit to contributed surplus. The Company also has a share purchase plan under which employees can have a percentage of their annual earnings withheld subject to a maximum of 6% to purchase AGF's Class B Non-Voting shares. The Company matches up to 60% of the amounts contributed by the employee. The Company's contribution vests immediately and is recorded as a charge to net income in the period in which the cash contribution is made. All contributions are used by the plan trustee to purchase Class B Non-Voting shares on the open market. The Company has Restricted Share Unit (RSU) plans for senior employees under which certain employees are granted RSUs of Class B Non-Voting shares. These units vest three years from the grant date. AGF will redeem all of the participants' share units in cash equal to the value of one Class B share for each RSU. Compensation expense and the related liability are recorded equally over the three-year vesting period, taking into account fluctuations in the market price of Class B Non-Voting shares, dividends paid and forfeitures. The Company has a Performance Share Unit (PSU) plan for senior employees under which certain employees are granted PSUs of Class B Non-Voting shares. Compensation expense and the related liability are recorded equally over the vesting period, taking into account the likelihood of the performance criteria being met, fluctuations in the market price of Class B Non-Voting shares, dividends paid and forfeitures. These units vest three years from the grant date provided employees meet certain performance criteria. AGF will redeem all of the participants' share units in cash equal to the value of one Class B share for each PSU. The Company has a Deferred Share Unit (DSU) plan for non-employee Directors. The plan enables Directors of the Company to elect to receive their remuneration in DSUs. These units vest immediately and compensation expense and the related liability are charged to net income in the period the DSUs are granted. On termination, AGF will redeem all of the participants' DSUs in cash or shares equal to the value of one Class B share at the termination date for each DSU. Foreign Currency Translation Monetary assets and liabilities denominated in foreign currencies are translated at exchange rates prevailing at the balance sheet date and non-monetary assets and liabilities are translated at historical exchange rates. Foreign currency income and expenses are translated at average exchange rates prevailing throughout the year. Unrealized translation gains and losses and all realized gains and losses are included in other non-operating expenses, except for available for sale securities where unrealized translation gains and losses are recorded in other comprehensive income until the asset is sold or becomes impaired. Financial statements of integrated foreign subsidiaries are translated using the temporal method. Under this method, monetary assets and liabilities are translated into Canadian dollars at the exchange rate in effect at the balance sheet date. Non-monetary assets are translated at historical exchange rates. Revenue and expenses are translated at average exchange rates for the period, except for amortization which is translated on the same basis as the related asset. Translation gains and losses are included in net income. Investments in foreign associated companies are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date. Unrealized translation gains and losses are reported in other comprehensive income. Income Taxes The Company follows the liability method in accounting for income taxes whereby future income tax assets and liabilities reflect the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities and their tax bases. Future income tax assets and liabilities are measured based on the enacted or substantively enacted tax rates which are expected to be in effect when the future income tax assets or liabilities are expected to be realized or settled. The effect on future income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the substantive enactment date. Future income tax assets are recognized to the extent that realization is considered more likely than not. Earnings Per Share Basic earnings per share are calculated by dividing net income applicable to common shares by the daily weighted average number of shares outstanding. Diluted earnings per share are calculated using the daily weighted average number of shares that would have been outstanding during the year had all potential common shares been issued at the beginning of the year, or when other potentially dilutive instruments were granted or issued, if later. The treasury stock method is employed to determine the incremental number of shares that would have been outstanding had the Company used proceeds from the exercise of options to acquire shares. Future Accounting Changes Transition to International Financial Reporting Standards The CICA Accounting Standards Board requires all Canadian publicly accountable enterprises to adopt International Financial Reporting Standards (IFRS) for years beginning on or after January 1, 2011. The Company will adopt IFRS for the fiscal year 2012 starting December 1, 2011. The fiscal 2012 Consolidated Financial Statements will include comparative 2011 financial results under IFRS. The Company will report its financial results for the quarter ended February 29, 2012 on an IFRS basis, including comparative IFRS financial results and an opening balance sheet as at December 1, 2010. The Company's transition to IFRS is on track. However, due to the anticipated changes in IFRS, the Company is in the process of determining the impact of adopting IFRS on its financial statements at this time. Note 2: Investments Available for Sale and Investment in S&WHL (a) The following table presents a breakdown of available for sale investments, excluding retained interest from securitization: ------------------------------------------------------------------------- ($ thousands) November 30 2009 2008 ------------------------------------------------------------------------- Trust: Canadian government debt(1) Federal $ 10,179 $ 10,233 Provincial 350,664 45,767 Deposits with regulated institutions 86,487 83,498 Other securities 83,426 28,992 ------------------------------------------------------------------------- 530,756 168,490 Investment Management: Canadian government debt Federal 297 294 AGF mutual funds and other 12,909 15,013 Equity securities 6,518 4,638 ------------------------------------------------------------------------- 19,724 19,945 ------------------------------------------------------------------------- $ 550,480 $ 188,435 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Includes investments issued and/or guaranteed by the Canadian government The following table presents a breakdown of AGF Trust available for sale investments by maturity, excluding retained interest from securitization: ------------------------------------------------------------------------- Greater ($ thousands) Credit 1 Year or 1 to 5 than November 30, 2009 rating Less years 5 years Total ------------------------------------------------------------------------- Trust: Canadian government debt Federal AAA $ 10,179 $ - $ - $ 10,179 Provincial A to AAA 45,842 264,572 40,250 350,664 Deposits with regulated institutions AA - 86,487 - 86,487 Other securities AA High to 83,426 - - 83,426 AAA ------------------------------------------------------------------------- $ 139,447 $ 351,059 $ 40,250 $ 530,756 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Greater ($ thousands) Credit 1 Year or 1 to 5 than November 30, 2008 rating Less years 5 years Total ------------------------------------------------------------------------- Trust: Canadian government debt Federal AAA $ - $ 10,233 $ - $ 10,233 Provincial A High to - 45,767 - 45,767 AA Low Deposits with regulated institutions AA - 83,498 - 83,498 Other securities AA High 76 28,916 - 28,992 ------------------------------------------------------------------------- $ 76 $ 168,414 $ - $ 168,490 ------------------------------------------------------------------------- ------------------------------------------------------------------------- AGF Trust's available for sale investments include Government of Canada and provincial guaranteed bonds, commercial paper, bank- sponsored ABCP, bank-sponsored asset backed securities (ABSs), bank deposit notes, BAs and FRNs with terms to maturity greater than three months. As at November 30, 2009, $114.7 million (2008 - $111.6 million) of AGF Trust's available for sale investments were floating- rate securities subject to repricing and $416.1 million (2008 - $56.9 million) were fixed-rate securities. Other securities include FRN investments of $29.7 million (2008 - $29.0 million), ABS investments of $28.7 million (2008 - nil), and ABCP investments of $25.0 million 2008 - nil). Investment Management's available for sale investment in Canadian government debt is a fixed-rate treasury bond with a maturity date within one year and a credit rating of AAA. As at November 30, 2009, no impairment charges were required. During the year ended November 30, 2008, the Company determined that a decline in the fair value of an investment in a publicly held company was other than temporary. As a result, the Company recognized an impairment charge of $2.3 million before tax ($2.0 million after tax). (b) The Company holds a 30.7% investment in S&WHL accounted for using the equity method. At November 30, 2009, the carrying value was $90.4 million (2008 - $98.3 million). During the twelve months ended November 30, 2009, the Company recognized $6.4 million (2008 - $10.3 million) in earnings and received $5.8 million in dividends (2008 - $6.4 million) from S&WHL. The decrease in the carrying value of the investment in S&WHL is mainly due to the strength of the Canadian dollar relative to the UK pound. Note 3: Securitization of AGF Trust Loans On March 30, 2007, AGF Trust securitized $263.6 million of RSP loans. Cash flows of $252.9 million were received on the securitization and a gain of $8.0 million was recorded, net of transaction fees of $0.1 million. As at November 30, 2009, $108.3 million (2008 - $166.6 million) of securitized loans were outstanding. When RSP loan receivables are sold in securitization to a securitization trust under terms that transfer control to third parties, the transaction is recognized as a sale and the related loan assets are removed from the Consolidated Balance Sheet. As part of the securitization, certain financial assets are retained. The retained interests are carried at fair value and are determined using the present value of future expected cash flows. A gain or loss on the sale of loan receivables is recognized immediately in income. The amount of the gain or loss is determined by estimating the fair value of future expected cash flows using management's best estimates of key assumptions: excess spread, discount rate on the interest-only strip, expected credit losses, prepayment rates and the expected weighted average life of RSP loans that are commensurate with the risks involved. The current fair value of retained interests is determined using the present value of future expected cash flows as discussed above. During the year ended November 30, 2009, a $4.1 million writedown was booked as an other-than-temporary impairment (2008 - $4.7 million). The Company has recorded retained interests of $40.4 million (2008 - $44.9 million) made up of i) the rights to future excess interest on these RSP loans after investors in the securitization trust have received the return for which they contracted, valued at $6.0 million (2008 - $12.4 million), ii) cash collateral of $12.8 million (2008 - $12.0 million) and iii) over- collateralization of $21.6 million (2008 - $20.5 million). As at November 30, 2009, the impaired loans included in the securitized balances were equal to $0.2 million (2008 - $0.2 million), and during the year ended November 30, 2009, $2.6 million of securitized RSP loans were written off (2008 - $2.8 million). The Company's claim on the retained interests is subordinate to investors' interests. Recourse available to investors and the securitization trust are limited to the retained interests. For the twelve months ended November 30, 2009, cash flows of $5.8 million (2008 - $7.8 million) related to the interest-only strip were received on the securitized loans. The total loss recognized from securitization, net of securitization writedown, during the twelve months ended November 30, 2009, was $0.6 million (2008 - $0.3 million loss). The significant assumptions used to value the retained interests were as follows: ------------------------------------------------------------------------- November 30 2009 2008 ------------------------------------------------------------------------- Excess spread 4.7% - 4.9% 3.7% - 3.9% Discount rate on interest-only strip 7.5% 7.5% Expected credit losses 1.7% - 2.0% 1.0% - 1.2% Prepayment rate 16.3 % - 18.3% 16.3% - 18.3% Expected weighted average life of RSP loans 1.8 years 2 years ------------------------------------------------------------------------- AGF Trust retained servicing responsibilities for the securitized loans. A servicing liability of $0.6 million was recorded as at November 30, 2009 (2008 - $1.1 million). This amount represents the estimated future cost of servicing the securitized loans. The amount amortized related to the servicing liability during the twelve months ended November 30, 2009 was $0.5 million (2008 - $0.7 million). The following table presents key economic assumptions and the sensitivity of the current fair value of retained interests to two adverse changes in each key assumption as at November 30. Since the sensitivity is hypothetical, it should be used with caution. The effect of changes in the fair value of retained interests was calculated using a discounted cash flow analysis. ------------------------------------------------------------------------- ($ thousands) Impact on fair value of retained interests -------------------------- November 30 2009 2008 ------------------------------------------------------------------------- Discount rate +10% $ (37) $ (109) +20% (73) (216) Prepayment rate +10% $ (54) $ (208) +20% (110) (404) Expected credit losses +10% $ (331) $ (328) +20% (663) (657) Excess spread -10% $ (650) $ (997) -20% (1,297) (1,966) ------------------------------------------------------------------------- Note 4: Discontinued Operations On April 30, 2007, AGF sold 100% of Investmaster for $6.8 million recognizing a gain on the sale of $4.7 million. The purchase consideration included $5.0 million in cash and two notes receivable totalling (pnds stlg) 0.8 million or $1.8 million at the time of sale from the buyer. On April 30, 2009, AGF received a payment of (pnds stlg) 0.4 million or $0.7 million related to the first note receivable. The second note receivable for (pnds stlg) 0.4 million is included in accounts receivable and is due on April 30, 2010. Additional contingent consideration will be payable to AGF in 2010 if certain working capital and revenue targets are reached by Investmaster. No contingent consideration was payable to AGF in 2009. Note 5: Acquisition of Highstreet Partners Ltd. On December 1, 2006, AGF acquired 79.9% of Highstreet Partners Limited (Highstreet). The purchase consideration was payable in a combination of cash and the issue of Class B Non-Voting shares. On March 2, 2009, a final payment, excluding contingent consideration, of $21.5 million was paid, consisting of $20.0 million in cash and the issuance of 188,444 Class B Non-Voting shares valued at $1.5 million. The total consideration paid, including acquisition costs and imputed interest, was $65.4 million in cash and the issuance of 629,443 Class B Non-Voting shares valued at $12.3 million. Contingent consideration, based on certain financial profitability targets being achieved by Highstreet, of $0.7 million was recorded as an increase in goodwill. This amount will be paid at the end of February 2010. Note 6: AGF Trust AGF Trust's principal business activities are originating real estate secured loans and investment loans and deposit taking. Details relating to these activities are as follows: ------------------------------------------------------------------------- ($ thousands) Term to contractual repricing ------------------------------------------------------------ Variable 1 year or 1 to 5 November 30 rate less years 2009 2008 ------------------------------------------------------------------------- Mortgage loans $ 1,182 $ 428,431 $ 637,669 $ 1,067,282 $ 1,394,499 Home equity lines of credit (HELOC) 384,774 - - 384,774 651,893 ------------------------------------------------------------------------- Total real estate secured loans 385,956 428,431 637,669 1,452,056 2,046,392 Investment loans 2,172,302 2,758 2,376 2,177,436 2,411,968 ------------------------------------------------------------ Total loans 2,558,258 431,189 640,045 3,629,492 4,458,360 ------------------------------------ Less: allowance for loan losses (39,818) (37,130) Add: net deferred sales commissions and commitment fees 5,081 9,620 ------------------------ 3,594,755 4,430,850 Less: current portion (537,683) (606,844) ------------------------ $ 3,057,072 $ 3,824,006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (a) Real Estate Secured and Investment Loans The table represents the period of contractual repricing of interest rates on outstanding amounts. Principal repayments due on real estate and investment loans due within one year as at November 30, 2009 were $537.7 million (2008 - $606.8 million). As at November 30, 2009, AGF Trust's mortgage portfolio comprises a combination of fixed rate and variable rate residential mortgages with a weighted average term to repricing of 1.8 years (2008 - 2.0 years) and a weighted average yield of 6.6% (2008 - 7.1%). Insured mortgage loans, excluding loan loss allowance, deferred commissions and pending representment, were $501.3 million as at November 30, 2009 (2008 - $616.6 million). HELOCs, which totalled $384.8 million as at November 30, 2009, had an average interest rate of 4.2% (2008 - 4.5%). Investment loans, excluding RSP loans, totaled $1.7 billion as at November 30, 2009, and had an average interest rate (based on the prime interest rate) of 4.0% (2008 - 5.5%). RSP loans totaled $430.8 million as at November 30, 3009, and had an average interest rate of 5.3% (2008 - 6.6%). The average interest rate on all investment loans as at November 30, 2009, was 4.3% (2008 - 5.8%). Mortgage and HELOC loans are secured primarily by residential real estate. Secured investment loans of $1.7 billion (2008 - $1.8 billion) are secured primarily by the investment made using the initial loan proceeds. The market value of this investment loan collateral is approximately $1.4 billion (2008 - $1.2 billion). (b) Loans by Province and by Type The following tables are a breakdown of the total value and total number of loans by province and by type: ------------------------------------------------------------------------- ($ Conven- millions) tional Secured Insured Mort- Invest- HELOC November Mortgage gage ment RSP Receiv- Finance 30, 2009 Loans Loans Loans Loans ables Loans Total ------------------------------------------------------------------------- British Columbia $ 9.9 $ 33.8 $ 326.9 $ 40.2 $ 37.5 $ 0.2 $ 448.5 Alberta 59.5 147.9 208.3 43.7 280.6 1.4 741.4 Ontario 299.7 246.9 848.0 143.3 28.4 0.8 1,567.1 Quebec 132.2 137.4 127.6 166.6 0.2 1.2 565.2 Other - - 230.7 37.0 38.1 1.5 307.3 ------------------------------------------------------------------------- Total value of loans $ 501.3 $ 566.0 $1,741.5 $ 430.8 $ 384.8 $ 5.1 $3,629.5 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Conven- tional Secured Insured Mort- Invest- HELOC November Mortgage gage ment RSP Receiv- Finance 30, 2009 Loans Loans Loans Loans ables Loans Total ------------------------------------------------------------------------- British Columbia 58 141 4,830 4,637 170 148 9,984 Alberta 269 709 3,613 3,867 1,213 649 10,320 Ontario 1,964 1,505 13,551 16,946 168 336 34,470 Quebec 750 935 2,354 16,374 4 552 20,969 Other - - 3,350 3,419 265 837 7,871 ------------------------------------------------------------------------- Total number of loans 3,041 3,290 27,698 45,243 1,820 2,522 83,614 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ Conven- millions) tional Secured Insured Mort- Invest- HELOC November Mortgage gage ment RSP Receiv- Finance 30, 2008 Loans Loans Loans Loans ables Loans Total ------------------------------------------------------------------------- British Columbia $ 12.8 $ 48.2 $ 340.2 $ 57.8 $ 84.7 $ 0.6 $ 544.3 Alberta 68.1 214.6 217.9 59.8 446.0 3.0 1,009.4 Ontario 388.3 335.9 879.9 216.1 60.9 2.0 1,883.1 Quebec 147.4 179.2 132.5 208.1 0.3 2.6 670.1 Other - - 240.1 48.5 60.0 2.9 351.5 ------------------------------------------------------------------------- Total value of loans $ 616.6 $ 777.9 $1,810.6 $ 590.3 $ 651.9 $ 11.1 $4,458.4 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Conven- tional Secured Insured Mort- Invest- HELOC November Mortgage gage ment RSP Receiv- Finance 30, 2008 Loans Loans Loans Loans ables Loans Total ------------------------------------------------------------------------- British Columbia 66 201 4,944 6,985 354 244 12,794 Alberta 327 997 3,735 5,551 1,990 1,020 13,620 Ontario 2,518 2,000 13,930 25,198 327 543 44,516 Quebec 834 1,221 2,411 19,939 5 857 25,267 Other - - 3,452 4,488 407 1,193 9,540 ------------------------------------------------------------------------- Total number of loans 3,745 4,419 28,472 62,161 3,083 3,857 105,737 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (c) Impaired Loans Loans are considered to be past due where repayment of principal or interest is contractually in arrears. Loans are classified as impaired when, in the opinion of management, there is reasonable doubt as to the collectability, either in whole or in part, of principal or interest, or when principal or interest is 90 days past due, except where the loan is both well-secured and in the process of collection. Loans that are insured by the federal government, an agency thereof, or a third-party insurer are classified as impaired when interest or principal is past due 365 days. As at November 30, 2009, impaired loans were $48.9 million (2008 - $45.4 million) and $33.8 million (2008 - $31.3 million) net of the specific allowance for loan losses. ------------------------------------------------------------------------- ($ thousands) November 30 2009 2008 ------------------------------------------------------------------------- Impaired Loans: Insured mortgage loans $ 7,002 $ 5,483 Conventional mortgage loans 35,523 33,628 Secured investment loans 1,619 988 RSP loans 3,840 4,846 HELOC receivables 931 478 ------------------------------------------------------------------------- $ 48,915 $ 45,423 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following table provides an aging of loans: ------------------------------------------------------------------------- ($ thousands) 1 to 29 30 to 60 November 30, 2009 Current days days ------------------------------------------------------------------------- Insured mortgage loans $ 436,177 $ 28,504 $ 6,521 Conventional mortgage loans 479,042 33,173 12,112 Secured investment loans 1,722,616 12,713 3,550 RSP loans 420,096 6,023 1,785 HELOC receivables 377,865 5,398 147 Finance loans 5,134 - - ------------------------------------------------------------------------- $ 3,440,930 $ 85,811 $ 24,115 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ thousands) 61 to 90 Over 90 November 30, 2009 days days Total ------------------------------------------------------------------------- Insured mortgage loans $ 3,204 $ 26,853 $ 501,259 Conventional mortgage loans 6,151 35,545 566,023 Secured investment loans 1,011 1,619 1,741,509 RSP loans 1,329 1,560 430,793 HELOC receivables 403 961 384,774 Finance loans - - 5,134 ------------------------------------------------------------------------- $ 12,098 $ 66,538 $ 3,629,492 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ thousands) 1 to 29 30 to 60 November 30, 2008 Current days days ------------------------------------------------------------------------- Insured mortgage loans $ 551,772 $ 29,567 $ 6,085 Conventional mortgage loans 670,763 53,741 12,176 Secured investment loans 1,790,788 15,284 2,220 RSP loans 574,049 9,958 4,435 HELOC receivables 646,891 3,847 658 Finance loans 11,061 - - ------------------------------------------------------------------------- $ 4,245,324 $ 112,397 $ 25,574 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ thousands) 61 to 90 Over 90 November 30, 2008 days days Total ------------------------------------------------------------------------- Insured mortgage loans $ 3,313 $ 25,878 $ 616,615 Conventional mortgage loans 7,537 33,668 777,885 Secured investment loans 1,510 790 1,810,592 RSP loans 1,120 752 590,314 HELOC receivables - 497 651,893 Finance loans - - 11,061 ------------------------------------------------------------------------- $ 13,480 $ 61,585 $ 4,458,360 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (d) Mortgages in Legal Action The following table provides a summary of conventional mortgages in legal action which includes demand for payment, power of sale and foreclosures. The table details opening mortgages in legal action for the period and related changes to the pool, being additions, discharged mortgages other than sold, proceeds on foreclosed mortgages discharged and related losses, to arrive at the ending balance of mortgages in legal action. ------------------------------------------------------------------------- ($ thousands) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Balance outstanding, beginning of the year $ 44,987 $ 35,070 Additions 59,404 46,140 Discharged mortgages other than sold (27,126) (27,336) Proceeds on foreclosed mortgages discharged (23,117) (7,352) Loss on foreclosed mortgages discharged (3,635) (1,535) ------------------------------------------------------------------------- $ 50,513 $ 44,987 ------------------------------------------------------------------------- ------------------------------------------------------------------------- In addition, there are $33.8 million (2008 - $30.8 million) of insured mortgages in legal action. (e) Allowance for Credit Losses During 2008, as a result of economic and market indicators, the Company refined its loan provision methodology for specific allowances to include loans in arrears of one to 90 days in addition to impaired loans. Refer to Note 1, Allowance for Loan Losses, for further disclosure and for the definition of specific and general allowances. The continuity in the allowance for loan losses is as follows: ------------------------------------------------------------------------- ($ thousands) Specific General Total Years ended November 30 allowances allowances allowances ------------------------------------------------------------------------- Balance, beginning of the year $ 14,163 $ 22,967 $ 37,130 Amounts written off (36,452) - (36,452) Recoveries 1,578 - 1,578 Provision for loan losses 35,775 1,787 37,562 ------------------------------------------------------------------------- $ 15,064 $ 24,754 $ 39,818 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Breakdown by category: Insured mortgage loans $ - $ 4,000 $ 4,000 Conventional mortgage loans 4,694 5,383 10,077 Secured investment loans 3,832 4,354 8,186 RSP loans 6,463 10,102 16,565 HELOCs receivables 75 915 990 ------------------------------------------------------------------------- $ 15,064 $ 24,754 $ 39,818 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ thousands) Specific General Total Years ended November 30 allowances allowances allowances ------------------------------------------------------------------------- Balance, beginning of the year $ 1,860 $ 15,277 $ 17,137 Amounts written off (11,258) - (11,258) Recoveries 877 - 877 Provision for loan losses 22,684 7,690 30,374 ------------------------------------------------------------------------- $ 14,163 $ 22,967 $ 37,130 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Breakdown by category: Conventional mortgage loans $ 5,404 $ 7,640 $ 13,044 Secured investment loans 1,310 4,527 5,837 RSP loans 7,449 9,171 16,620 HELOC receivables - 1,629 1,629 ------------------------------------------------------------------------- $ 14,163 $ 22,967 $ 37,130 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (f) AGF Trust Deposits ------------------------------------------------------------------------- ($ thousands) Term to maturity ----------------------------------------------------------- 1 year or 1 to 5 November 30 Demand less years 2009 2008 ------------------------------------------------------------------------- Deposits $ 4,665 $1,879,571 $2,045,624 $3,929,860 $4,776,511 Less: deferred selling commissions (11,297) (14,450) Less: current portion (1,884,235) (2,486,635) ------------------------------------------------------------------------- Long-term deposits $2,034,328 $2,275,426 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at November 30, 2009, deposits were substantially comprised of GICs with a weighted average term to maturity of 1.4 years (2008 - 1.4 years) and a weighted average interest rate of 3.60% (2008 - 4.22%). Approximately 15.3% (2008 - 11.7%) of deposits mature within 90 days. (g) Interest Rate Swaps To hedge its exposure to fluctuating interest rates, AGF Trust has entered into interest rate swap transactions with four Canadian chartered banks, as noted below. The swap transactions expire between December 2009 and October 2014. They involve the exchange of either the one-month bankers' acceptance (BA) rate or the three-month BA rate to receive fixed interest rates. The swap contracts designated as fair value hedging instruments for deposits are used by AGF Trust for balance sheet matching purposes and to mitigate net interest revenue volatility. As at November 30, 2009, the aggregate notional amount of the swap transactions was $2.3 billion (2008 - $3.2 billion). The aggregate fair value of the swap transactions, which represents the amount that would be received by AGF Trust if the transactions were terminated at November 30, 2009, was $55.7 million (2008 - $85.0 million). During the 12 months ended November 30, 2009, the ineffective portion of accumulated changes in fair value of hedging relationships recognized in the Consolidated Statement of Income amounted to a loss of $0.9 million (2008 - $3.1 million gain), as it relates to fair value hedging relationships. ------------------------------------------------------------------------- Fixed interest Notional amount of swap Fair value Maturity date rate received ------------------------------------------------------------------------- ($ thousands) ($ thousands) 230,000 $ 209 2009 0.70% - 4.22% 985,000 17,545 2010 0.71% - 5.05% 695,000 24,952 2011 0.85% - 5.08% 305,000 11,687 2012 1.60% - 5.01% 35,000 686 2013 2.37% - 2.71% 30,000 573 2014 2.70% - 2.82% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Note 7: Goodwill and Intangibles ------------------------------------------------------------------------- November 30 2009 2008 ------------------------------------------------------------- Opening Closing Opening Closing net net net net book Amorti- book book Amorti- Impair- book ($ thousands) value zation value value zation ment value ------------------------------------------------------------------------- Customer contracts Magna Vista Investment Management Limited $ 1,724 $ 1,724 $ - $ 19,788 $ 2,574 $ 15,490 $ 1,724 Doherty & Associates 1,650 164 1,486 9,618 868 7,100 1,650 Cypress Capital Management Limited 5,115 483 4,632 21,993 1,900 14,978 5,115 ING Investment Management Inc. - - mutual fund assets 1,844 501 1,343 2,270 426 - 1,844 Highstreet Asset Management Inc. 8,450 1,690 6,760 12,136 2,023 1,663 8,450 ------------------------------------------------------------------------- $ 18,783 $ 4,562 $ 14,221 $ 65,805 $ 7,791 $ 39,231 $ 18,783 ------------------------------------------------------------------------- ------------------------------------------------------------------------- During 2008, as a result of depressed values in global equity markets and in accordance with its accounting policies, the Company completed an impairment test for customer contracts. The determination of the customer contracts recoverability was based on an estimate of undiscounted cash flow, and the measurement of impairment loss was based on the amount that the carrying value exceeded the fair value. As part of the impairment test, the Company updated its future cash flow assumptions and estimates, including factors such as customer contracts existing from the date of purchase, margins, market conditions and the useful lives of assets. Based on the test, the Company concluded that intangible assets relating to certain customer contracts were not fully recoverable and therefore recorded an impairment charge of $39.2 million to income ($28.6 million net of tax) during the year ended November 30, 2008. During 2009, the Company determined there were no triggering events to warrant an impairment test on customer contracts. Accordingly, the Company concluded that customer contracts are fully recoverable and no impairment charges were recorded in 2009. ------------------------------------------------------------------------- ($ thousands) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Goodwill Opening Balance $ 172,985 $ 180,058 Impairment related to Magna Vista Investment Management Limited - (7,073) Acquisition of Highstreet Partners Limited (note 5) 723 - ------------------------------------------------------------------------- $ 173,708 $ 172,985 ------------------------------------------------------------------------- ------------------------------------------------------------------------- During 2009, the Company determined that a final payment related to contingent consideration of $0.7 million was payable to Highstreet by the end of February 2010. As a result, goodwill was increased by $0.7 million. During the year ended November 30, 2009, the Company completed an impairment test on management contracts, trademarks and goodwill and determined that no impairment existed. Accordingly, there was no change to the carrying value of management contracts, trademarks and goodwill during the year. During 2008, the Company determined that the carrying value of its Magna Vista Investment Management Limited (Magna Vista) reporting unit exceeded its fair value, indicating an impairment of goodwill. The Company recorded an impairment charge of $7.1 million, based on the difference of the carrying value of goodwill and its fair value, calculated based on the fair value of the assets and liabilities of the reporting unit. Note 8: Property, Equipment and Computer Software ------------------------------------------------------------------------- ($ thousands) Opening Net Closing net book Additions/ Amorti- net book November 30, 2009 value (Disposals) zation value ------------------------------------------------------------------------- Furniture and equipment $ 3,712 $ (277) $ 447 $ 2,988 Leasehold improvements 7,104 386 2,501 4,989 Computer hardware 3,999 409 1,520 2,888 Computer software 4,608 1,607 2,953 3,262 ------------------------------------------------------------------------- $ 19,423 $ 2,125 $ 7,421 $ 14,127 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ thousands) Opening Closing net book Net Amorti- net book November 30, 2008 value Additions zation value ------------------------------------------------------------------------- Furniture and equipment $ 3,595 $ 1,058 $ 941 $ 3,712 Leasehold improvements 6,401 3,187 2,484 7,104 Computer hardware 4,983 597 1,581 3,999 Computer software 5,833 1,911 3,136 4,608 ------------------------------------------------------------------------- $ 20,812 $ 6,753 $ 8,142 $ 19,423 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Note 9: Other Assets ------------------------------------------------------------------------- ($ thousands) November 30 2009 2008 ------------------------------------------------------------------------- Other Assets Long-term portion of derivatives used to manage interest rate exposure $ 40,637 $ 72,352 Other 3,321 1,920 ------------------------------------------------------------------------- $ 43,958 $ 74,272 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The current portion of derivatives used to manage interest rate exposure is included under accounts receivable, prepaid expenses and other assets. As at November 30, 2009, the current portion was $15.0 million (2008 - $12.7 million). Refer to Note 6(g) for details on the derivatives used to manage interest rate exposure. Refer to Note 22 for further details of the Company's derivative instruments. Note 10: Long-term Debt ------------------------------------------------------------------------- ($ thousands) November 30 2009 2008 ------------------------------------------------------------------------- Revolving term loan $ 156,731 $ 123,740 Payment related to acquisition of Highstreet Partners Limited (note 5) - 21,171 ------------------------------------------------------------------------- 156,731 144,911 Less: amount included in current liabilities 13,083 21,171 ------------------------------------------------------------------------- $ 143,648 $ 123,740 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (a) Revolving Term Loan The Company has arranged a three-year prime-rate-based revolving term loan to a maximum of $300.0 million (November 30, 2008 - $300.0 million) with a Canadian chartered bank. Under the loan agreement, AGF is permitted to draw down the revolving term loan by direct advances and/or BAs. The revolving term loan is available at any time for a period of 364 days from commencement of the loan (the commitment period). The expiration of the current commitment period is July 31, 2010. However, AGF may request within 75 to 90 days prior to the end of the commitment period a recommencement of the three- year term at the expiry of the then-current commitment period. Without recommencement, the loan shall be automatically converted to a term loan facility having a term of two years. The loan balance shall be repaid over a period of two years in minimum quarterly installments of one-twelfth of the amount of principal outstanding with the balance payable at the end of the term. As at November 30, 2009, AGF has drawn $156.7 million (November 30, 2008 - $123.7 million) against the facility in the form of seven to 31 day BAs at an effective average interest rate of 2.1% (November 30, 2008 - 2.9%) per annum. Security for the bank loans include a specific claim over the management fees owing from the mutual funds (subject to the existing claims of related limited partnerships) for which AGF acts as manager and a pledge of assets by AGF Management Limited and certain subsidiaries, including AGF Investments Inc. and 20/20 Financial Corporation. (b) Payments Due Related to Acquisition of Highstreet Partners Limited On December 1, 2006, AGF acquired 79.9% of Highstreet (refer to Note 5). On March 2, 2009, a payment of $21.5 million was paid. The payment consisted of $20.0 million in cash and the issuance of 188,444 Class B Non-Voting shares valued at $1.5 million. In addition, a further contingent payment of $0.7 million is due in 2010 as described in Note 5. Note 11: Other Long-term Liabilities ------------------------------------------------------------------------- ($ thousands) November 30 2009 2008 ------------------------------------------------------------------------- Other Long-term Liabilities Long-term portion of derivative used to manage changes in share-based compensation $ 1,498 $ 6,744 Long-term compensation-related liabilities 11,637 8,112 Long-term portion of Elements Advantage 3,487 3,808 Other 53 764 ------------------------------------------------------------------------- $ 16,675 $ 19,428 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The current portion of the derivative used to manage changes in share-based compensation is included under accounts payable and accrued liabilities. As at November 30, 2009, the current portion was $2.4 million (2008 - $1.0 million). On December 3, 2009, the Company settled with its counterparty 91,225 units having a notional value of $2.7 million based on their November 30, 2009 fair value. After including the effect of this transaction, the remaining notional amount of the derivative used to manage share-based compensation as at November 30, 2009, is $6.2 million or 208,731 share units and matures in 2010. Refer to Note 22 for further details on the Company's derivative instruments. The current portion of the Elements Advantage liability is included under accounts payable and accrued liabilities. As at November 30, 2009, the current portion was $5.3 million (2008 - $4.0 million). Note 12: Limited Partnership Financings Prior to 2005, the Company financed certain deferred selling commissions using limited partnerships (LPs). The Company is obligated to pay these LPs an annual fee of 0.45% to 0.90% of the net asset value of DSC securities. This obligation will continue as long as such DSC securities remain outstanding except for certain of the LPs, in which case the obligation terminates at various dates from December 31, 2009 to December 31, 2020. For certain LPs, the obligation is secured by the Company's mutual fund management contracts to the extent of the particular obligation. The Company is responsible for the management and administration of the LPs. These services are provided in the normal course of operations and are recorded at the amount of consideration agreed to by the parties. The amount of fees received in 2009 was $0.3 million (2008 - $0.3 million). As at November 30, 2009, the net asset value of DSC securities financed by the LPs was $0.7 billion (2008 - $0.8 billion). Note 13: Income Taxes (a) The Company's effective income tax rate for continuing operations is comprised as follows: ------------------------------------------------------------------------- Years ended November 30 2009 2008 ------------------------------------------------------------------------- Canadian corporate tax rate 32.8% 33.5% Net tax rate reduction (8.4) (13.8) Rate differential on earnings of subsidiaries (8.3) (12.1) Amortization of customer contracts and relationships 0.2 4.1 Tax exempt investment income (1.2) (2.1) Other 0.8 (0.7) ------------------------------------------------------------------------- Effective income tax rate 15.9% 8.9% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (b) The tax effects of temporary differences which gave rise to future tax liabilities and assets are as follows: ------------------------------------------------------------------------- ($ thousands) November 30 2009 2008 ------------------------------------------------------------------------- Future income tax liability Deferred sales commissions $ (75,427) $ (92,901) Deferred revenue 497 838 Undepreciated capital cost in excess of carrying values 4,969 4,057 Loss carryforwards 10,236 7,928 Expenses deductible or gain to be recognized in future periods 6,026 6,708 Provision for loan losses 6,618 7,188 Securitization of RSP loans (7,819) (7,881) Deferred charges (5,309) (6,732) Goodwill and management contracts (100,145) (117,241) Investments 945 1,493 Other (9,690) (990) ------------------------------------------------------------------------- (169,099) (197,533) Less: current portion 22,190 26,240 ------------------------------------------------------------------------- Future income tax liability - long-term portion $ (146,909) $ (171,293) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (c) As at November 30, 2009, certain subsidiaries of the Company have accumulated aggregate non-capital losses of approximately $27.4 million (2008 - $10.1 million) and $17.3 million (2008 - $15.6 million) of capital loss that may be used to reduce taxable income in the future. These tax loss carry-forwards expire as follows: $27.4 million non-capital loss 2014 to 2029 $17.3 million capital loss no expiry date (d) In November 2009, a reduction of the Ontario corporate income tax rate from 14% to 10% by July 1, 2012 was substantively enacted. Accordingly, during the 12 months ended November 30, 2009, the Company has recognized a $9.8 million net reduction in future income tax liabilities. In December 2007, a reduction of the federal corporate income tax rate from 18.5% to 15.0% by January 1, 2012 was substantively enacted. Accordingly, during the 12 months ended November 30, 2008, the Company has recognized a $19.5 million reduction in future income tax liabilities. In June 2007, a reduction in the federal corporate income tax rate from 19% to 18.5% by January 1, 2011 was considered to be substantively enacted. During the 12 months ended November 30, 2008, the Company recognized a $2.4 million reduction in future income tax liabilities related to this reduction. Note 14: Capital Stock (a) Authorized Capital The authorized capital of AGF consists of an unlimited number of AGF Class B Non-Voting Shares and an unlimited number of AGF Class A voting common shares (Class A shares). The Class B Non-Voting shares are listed for trading on the Toronto Stock Exchange (TSX). (b) Changes During the Year The change in capital stock is summarized as follows: ------------------------------------------------------------------------- Years ended November 30 2009 2008 ----------------------------------------------- ($ thousands, except Stated Stated share amounts) Shares value Shares value ------------------------------------------------------------------------- Class A shares 57,600 $ - 57,600 $ - ------------------------------------------------------------------------- Class B shares Balance, beginning of the year 88,480,104 $ 431,897 88,922,157 $ 421,923 Issued through stock dividend plan 239,352 2,627 211,914 4,618 Stock options exercised 189,500 2,552 130,150 5,121 Issued on acquisition of Highstreet Partners Limited (note 5) 188,444 1,536 215,883 5,116 Purchased for cancellation - - (1,000,000) (4,881) ------------------------------------------------------------------------- Balance, end of the year 89,097,400 $ 438,612 88,480,104 $ 431,897 ------------------------------------------------------------------------- (c) Class B Non-Voting shares Purchased for Cancellation AGF has obtained applicable regulatory approval to purchase for cancellation, from time to time, certain of its Class B Non-Voting shares through the facilities of the TSX (or as otherwise permitted by the TSX). Under its normal course issuer bid, AGF may purchase up to 10% of the public float outstanding on the date of the receipt of regulatory approval or up to 7,108,630 shares through to February 25, 2010. During the year ended November 30, 2008, 1,000,000 Class B Non- Voting shares were purchased at a cost of $7.8 million and the excess paid of $2.9 million over the book value of the shares purchased for cancellation was charged to retained earnings. These shares were traded and settled in November 2008 and subsequently cancelled in December 2008. No shares were repurchased in 2009. Note 15: Stock-based Compensation and Other Stock-based Payments (a) Stock Option Plans AGF has established stock option plans for senior employees under which stock options to purchase an aggregate maximum of 3,854,052 Class B Non-Voting shares could have been granted as at November 30, 2009 (2008 - 4,094,002). The stock options are issued at a price not less than the market price of the Class B Non-Voting shares immediately prior to the grant date. Stock options are vested to the extent of 25% to 33% of the individual's entitlement per annum, or in some instances, vest at the end of the term of the option. The change in stock options during 2009 and 2008 is summarized as follows: ------------------------------------------------------------------------- Years ended November 30 2009 2008 ---------------------------------------------- Weighted Weighted average average exercise exercise Options price Options price ------------------------------------------------------------------------- Class B share options Balance, beginning of year 6,576,948 $ 16.59 4,268,765 $ 22.50 Options granted 797,000 16.82 2,721,000 8.45 Options forefeited/ expired (557,050) 21.04 (282,667) 26.24 Options exercised (189,500) 13.36 (130,150) 19.08 ------------------------------------------------------------------------- Balance, end of year 6,627,398 $ 16.34 6,576,948 $ 16.59 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following summarizes information about stock options outstanding as at November 30, 2009: ------------------------------------------------------------------------- Weighted Weighted Number of Weighted Number of average average options average Range of exercise options remaining exercise exercis- exercise prices outstanding life price able price ------------------------------------------------------------------------- $8.01 to $15.00 2,597,300 5.9 years $ 8.24 623,073 $ 8.24 $15.01 to $25.00 2,778,117 4.0 18.10 1,938,617 18.54 $25.01 to $35.00 1,239,249 4.5 29.16 747,312 28.50 $35.01 to $45.00 12,732 4.3 35.70 6,366 35.70 ------------------------------------------------------------------------- 6,627,398 4.9 $ 16.34 3,315,368 $ 18.88 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The outstanding stock options have expiry dates ranging from December 2009 to November 2016. During 2009, AGF granted 797,000 options (2008 - 2,721,000) and recorded $2.9 million (2008 - $4.8 million) in compensation expense and contributed surplus. The fair value of options granted during 2009 has been estimated at $3.77 per share (2008 - between $0.57 and $3.19 per share) using the Black-Scholes option-pricing model. The following ranges of assumptions were used to determine the fair value of the options granted in 2009: Risk-free interest rate 2.79% Expected dividend yield 5.98% Expected share price volatility 41.30% Option term 5 years (b) Share Purchase Plan The Company's contributions are recorded in payroll costs and amounted to $0.5 million for the year ended November 30, 2009 (2008 - $1.3 million). (c) Restricted Share Unit (RSU) and Performance Share Unit (PSU) Plans The change in share units during 2009 and 2008 is as follows: --------------------------------------------------------------------- Years ended November 30 2009 2008 ----------------------------------------------- Number of share units Number of share units --------------------------------------------------------------------- Outstanding, beginning of year Non-vested 680,889 345,257 Issued Initial allocation 151,886 340,698 In lieu of dividends 55,734 15,858 Settled in cash (59,219) (482) Forfeited and cancelled (143,428) (20,442) --------------------------------------------------------------------- Outstanding, end of year 685,862 680,889 --------------------------------------------------------------------- --------------------------------------------------------------------- Compensation expense for the year ended November 30, 2009 related to these share units was $1.5 million (2008 - $0.7 million). During the year ended November 30, 2008, it was determined that the achievement of certain performance criteria necessary for the PSUs to be paid was unlikely. As a result, the Company reversed a $1.1 million liability related to these units. AGF has entered into a swap agreement to fix the cost of compensation related to certain RSUs and PSUs. As at November 30, 2009, AGF has economically hedged 243,861 (2008 - 91,549) share units at a fixed cost of $29.73 (2008 - $32.35) (d) Deferred Share Unit (DSU) Plan There is no unrecognized compensation expense related to directors' DSUs since these awards vest immediately upon grant. As at November 30, 2009, 43,150 (2008 - 24,394) DSUs were outstanding. Compensation expense related to these DSUs for year ended November 30, 2009 was $0.5 million (2008 - $0.1 million). Note 16: Earnings Per Share The following table sets forth the calculation of both basic and diluted earnings per share and basic earnings per share and diluted earnings per share from continuing operations: ------------------------------------------------------------------------- ($ thousands, except per share amounts) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Numerator Net income for the year $ 97,694 $ 128,592 Denominator Weighted average number of shares - basic 88,845,141 89,321,964 Dilutive effect of employee stock options 815,703 2,011,980 ------------------------------------------------------------------------- Weighted average number of shares - diluted 89,660,844 91,333,944 Earnings per share Basic $ 1.10 $ 1.44 Diluted $ 1.09 $ 1.41 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Note 17: Agreements with Mutual Funds The Company acts as manager for the AGF Funds and receives management and advisory fees from the AGF Funds in accordance with the respective agreements between the Funds and the Company. In return, the Company is responsible for management and investment advisory services and all costs connected with the distribution of securities of the Funds. Substantially all the management and advisory fees the Company earned in 2009 and 2008 were from the AGF Funds. As at November 30, 2009, the Company had $34.6 million (2008 - $35.2 million) receivable from the AGF Funds. The Company also acts as trustee for the AGF Funds that are mutual fund trusts. The aggregate unitholder services costs absorbed and management and advisory fees waived by the Company during the year on behalf of the Funds were approximately $15.0 million (2008 - $12.7 million). Note 18: Related Party Transactions The Company has entered into certain transactions with entities or senior officers who are directors of the Company. During 2009, total amounts paid by the Company to these related parties aggregated $0.1 million (2008 - $0.1 million). Note 19: Supplemental Disclosure of Cash Flow Information (a) Changes in Non-Cash Operating Working Capital Items ------------------------------------------------------------------------- ($ thousands) Years ended November 30 2009 2008 ------------------------------------------------------------------------- (Increase) decrease in accounts receivable $ (7,662) $ 2,212 Decrease in other assets 6,822 16,898 Increase (decrease) in accounts payable and accrued liabilities (21,625) 42,524 Increase in deposits and other liabilities 5,850 11,085 ------------------------------------------------------------------------- $ (16,615) $ 72,719 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (b) Income Taxes and Interest Paid ------------------------------------------------------------------------- ($ thousands) Years ended November 30 2009 2008 ------------------------------------------------------------------------- Income taxes paid $ 54,996 $ 49,758 Interest paid 112,376 190,186 ------------------------------------------------------------------------- $ 167,372 $ 239,944 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Note 20: AGF Trust Net Interest Income The breakdown of net interest income is as follows: ------------------------------------------------------------------------- ($ thousands) Years ended November 30 2009 2008 ------------------------------------------------------------------------- AGF Trust interest income Loan interest $ 211,253 $ 270,762 Investment interest 14,951 32,219 ------------------------------------------------------------------------- 226,204 302,981 AGF Trust interest expense Deposit interest 175,367 200,901 Hedging interest income (68,532) (18,583) Other interest expense 23,120 23,790 ------------------------------------------------------------------------- 129,955 206,108 ------------------------------------------------------------------------- AGF Trust net interest income $ 96,249 $ 96,873 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Note 21: Capital Management The Company's objectives when managing capital are to: - Provide returns for shareholders through the payment of dividends, the repurchase of Class B Non-Voting shares and the reasonable use of leverage. - Ensure that AGF Trust maintains the level of capital to adequately protect depositors and to meet the requirements of its principal regulator, the Office of the Superintendent of Financial Institutions Canada (OSFI). The Company's capital consists of shareholders' equity. The AGF Capital Committee is responsible for the management of capital. The AGF Board of Directors is responsible for overseeing the Company's capital policy and management. The Company reviews its five-year capital plan annually. Our Investment Management businesses, in general, are not subject to significant regulatory capital requirements in each of the jurisdictions in which they are registered and operate. The cumulative amount of minimum regulatory capital across all of our investment management operations is approximately $6.0 million. AGF Trust's regulatory capital requirements are determined in accordance with guidelines issued by OSFI, which are based on a framework of risk- based capital standards developed by the Bank for International Settlements (BIS). Effective January 1, 2008, AGF Trust is monitoring its regulatory capital based on the BIS regulatory risk-based capital framework (Basel II). BIS standards require that AGF Trust maintain minimum Tier 1 and total capital ratios of 4% and 8%. As at November 30, 2009, AGF Trust was in compliance with these regulatory capital requirements. OSFI has also prescribed a maximum asset-to-capital leverage multiple; AGF Trust was in compliance with this threshold at November 30, 2009. A capital plan prepared annually specifies the target capital ratios by taking into account the projected risk-weighted asset levels and expected capital management initiatives. Regulatory capital ratios are reported monthly to management. Regulatory capital ratio monitoring reports are provided on a quarterly basis to AGF Trust's Board of Directors. Regulatory capital for AGF Trust is detailed as follows: ------------------------------------------------------------------------- ($ thousands, except for risk-weighted assets in $ millions) Basel II --------------------------- November 30 2009 2008 ------------------------------------------------------------------------- Risk-weighted assets(1) Credit risk $ 1,754.8 $ 2,244.3 Operational risk 216.6 172.6 ------------------------------------------------------------------------- Total risk-weighted assets 1,971.4 2,416.9 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Tier 1 capital Common shares $ 82,768 $ 82,768 Contributed surplus 1,476 1,338 Retained earnings 120,646 101,432 Non-cumulative preferred shares 64,000 64,000 Less: securitization and other (11,378) (15,567) ------------------------------------------------------------------------- 257,512 233,971 Tier 2 capital Subordinated debentures 109,500 109,500 General allowances 15,355 19,638 Less: securitization and other (6,902) (8,295) ------------------------------------------------------------------------- 117,953 120,843 ------------------------------------------------------------------------- Total capital $ 375,465 $ 354,814 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) For operational risk, AGF Trust uses the Basic Indicator Approach - calculated as 15% of the previous three-year average of net interest income and other income, excluding gain or loss on investments. The risk-weighted equivalent is determined by multiplying the capital requirement for operational risk by 12.5. Note 22: Financial Instruments Financial instruments are classified based on categories according to CICA Handbook "Section 3855 Financial Instruments - Recognition and Measurement" as follows: ------------------------------------------------------------------------- ($ thousands) Carrying amount on balance sheet ---------------------------------------- Fair value Amortized cost ---------------------------------------- Loans and Receivables or Other Available Held for Financial November 30, 2009 for Sale Trading Liabilities ------------------------------------------------------------------------- Cash and cash equivalents $ - $ 274,870 $ - Investments 550,480 - - Retained interest from securitization 40,448 - - Accounts receivable - - 80,968 Real estate secured and investment loans - - 3,594,755 Derivatives - 55,652 - Other assets - - 3,321 ------------------------------------------------------------------------- Total financial assets $ 590,928 $ 330,522 $ 3,679,044 ------------------------------------------------------------------------- Accounts payable and accrued liabilities $ - $ - $ 281,641 Long-term debt - - 156,731 Deposits - - 3,918,563 Derivatives - 3,900 - Other long-term liabilities - - 15,177 ------------------------------------------------------------------------- Total financial liabilities $ - $ 3,900 $ 4,372,112 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ thousands) Carrying amount on balance sheet ---------------------------------------- Fair value Amortized cost ---------------------------------------- Loans and Receivables or Other Available Held for Financial November 30, 2008 for Sale Trading Liabilities ------------------------------------------------------------------------- Cash and cash equivalents $ - $ 584,168 $ - Investments 188,435 - - Retained interest from securitization 44,947 - - Accounts receivable - - 76,316 Real estate secured and investment loans - - 4,430,850 Derivatives - 85,097 - Other assets - - 1,920 ------------------------------------------------------------------------- Total financial assets $ 233,382 $ 669,265 $ 4,509,086 ------------------------------------------------------------------------- Accounts payable and accrued liabilities $ - $ - $ 301,390 Long-term debt - - 144,911 Deposits - - 4,762,061 Derivatives - 7,755 - Other long-term liabilities - - 12,684 ------------------------------------------------------------------------- Total financial liabilities $ - $ 7,755 $ 5,221,046 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Fair value hierarchy Financial Instruments Carried at Fair Value The financial instruments carried at fair value have been categorized under three levels of fair value hierarchy as follows: Quoted Prices in an Active Market (Level 1) This level of the hierarchy includes listed equity securities on major exchanges, investments in AGF mutual funds, highly liquid temporary deposits with Canadian and Irish Banks, as well as term deposits, and bank deposit notes. The fair value of instruments that are quoted in active markets are determined using the quoted prices where they represent those at which regularly and recently occurring transactions take place. Valuation Techniques with Observable Parameters (Level 2) This level of the hierarchy includes derivative instruments with major Canadian chartered banks, as well as investments held by AGF Trust which include commercial paper, bank-sponsored ABCP, and FRNs. These instruments are recorded at fair value on the settlement date. AGF Trust values its investment holdings primarily using counterparty mark to markets provided by the major financial institutions or investment brokerages with which it deals. The fair value of derivatives used to manage interest rate exposure is calculated through discounting future expected cash flows using the BA- based swap curve. Since the BA-based swap curve is an observable input, these financial instruments are considered Level 2. The fair value of the derivative used to manage changes in share-based compensation is calculated as the difference between the initial swap price and the market value of Class B Non-Voting shares on the valuation date, multiplied by the total number of shares outstanding. The initial price is equal to the price agreed to at the onset of the swap agreement, adjusted for dividends that have been reinvested by the equity holder. Since the market value of Class B Non-Voting shares is an observable input, this financial instrument is considered Level 2. Valuation Techniques with Significant Unobservable Parameters (Level 3) This level of the hierarchy includes the retained interest from securitization. Instruments classified in this category have a parameter input or inputs which are unobservable and which have a more than insignificant impact on either the fair value of the instrument or the profit or loss of the instrument. The fair value of the retained interest from securitization is determined using the present value of future expected cash flows. The expected cash flow model incorporates expected credit losses, prepayment rates, discount rate, and excess spread. Expected credit losses and prepayment rates are primarily based on historical portfolio performance, while discount rate and excess spread are based on portfolio performance combined with Management's assessment of the impact of market and economic factors on expected cash flows. The following table classifies the carrying value of the financial instruments held at fair value across the fair value hierarchy as at November 30, 2009: ------------------------------------------------------------------------- ($ thousands) Financial instruments at fair value ------------------------------------------------ November 30, 2009 Level 1 Level 2 Level 3 Total ------------------------------------------------------------------------- Cash and cash equivalents $ 274,870 $ - $ - $ 274,870 Investments 19,724 530,756 - 550,480 Retained interest from securitization - - 40,448 40,448 Derivatives - 55,652 - 55,652 ------------------------------------------------------------------------- Total financial assets $ 294,594 $ 586,408 $ 40,448 $ 921,450 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Derivatives $ - $ 3,900 $ - $ 3,900 ------------------------------------------------------------------------- Total financial liabilities $ - $ 3,900 $ - $ 3,900 ------------------------------------------------------------------------- ------------------------------------------------------------------------- During the year ended November 30, 2009, there were no significant transfers between Level 1 and Level 2 of the fair value hierarchy. The following is a reconciliation of Level 3 fair value measurements from November 30, 2008 to November 30, 2009: ------------------------------------------------------------------------- ($ thousands) Fair value measurements using level 3 inputs ----------------------------------- Retained interest from securitization ------------------------------------------------------------------------- Balance at November 30, 2008 $ 44,947 Accretion income 3,021 Cash receipts, net of writeoffs (3,234) Securitization writedown (4,085) Unrealized losses recognized in OCI (201) ------------------------------------------------------------------------- Balance at November 30, 2009 $ 40,448 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Financial Instruments not Carried at Fair Value The following table presents the estimated fair value of the Company's financial instruments which are not carried at fair value in the balance sheet: ------------------------------------------------------------------------- ($ thousands) 2009 2008 ------------------------------------------------ Carrying Fair Carrying Fair November 30, 2009 value value value value ------------------------------------------------------------------------- Accounts receivable $ 80,968 $ 80,968 $ 76,316 $ 76,316 Real estate secured loans and investment loans 3,594,755 3,611,473 4,430,850 4,467,638 Other assets 3,321 3,321 1,920 1,920 ------------------------------------------------------------------------- Total financial assets $ 3,679,044 $ 3,695,762 $ 4,509,086 $ 4,545,874 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accounts payable and accrued liabilities $ 281,641 $ 281,641 $ 301,390 $ 301,390 Long-term debt 156,731 156,731 144,911 144,911 Deposits 3,918,563 3,963,517 4,762,061 4,757,379 Other long-term liabilities 15,177 15,177 12,684 12,684 ------------------------------------------------------------------------- Total financial liabilities $ 4,372,112 $ 4,417,066 $ 5,221,046 $ 5,216,364 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For accounts receivable, other assets, accounts payable and accrued liabilities, long-term debt and other long-term liabilities, the carrying amount represents a reasonable approximation of fair value. Real estate secured loans, investment loans, RSP loans, HELOC receivables, and finance loans are classified as loans and receivables and are recorded at amortized cost using the effective interest method, net of any allowance for loan losses and related deferred fees and charges. The fair value of mortgage loans and deposits is calculated based on the discounted present value of future cash flows associated with the loans and deposits. The discount rates used reflect prevailing market rates for loans and deposits with similar residual terms to maturity and product characteristics. For all other loan types, the carrying value is considered to be a reasonable approximation of fair value due to the variable interest rate nature of the loan. Risk Management In the normal course of business, the Company manages risks that arise as a result of its use of financial instruments. These risks include market, liquidity and credit risk. Market Risk Market risk is the risk that the fair value of financial instruments will fluctuate due to changes in market factors. Market risk includes fair value risk, interest rate risk and foreign currency risk. The Company is exposed to these risks directly through its financial instruments. Fair Value Risk Fair value risk is the risk of loss due to adverse changes in prices other than from change in interest rates and foreign currency. The Company is exposed to fair value risk on certain of its investments available for sale and certain derivative positions. The Company's investments that have fair value risk include mutual funds managed by the Company and common shares of $19.4 million (2008 - $19.7 million). Any unrealized gains or losses arising from changes in the fair value of these financial instruments available for sale are recorded in other comprehensive income. Based on the carrying value of these investments at November 30, 2009, the effect of a 10% decline or increase in the value of investments would result in a $1.9 million (2008 - $2.0 million) unrealized gain or loss to other comprehensive income. At November 30, 2009, details of the Company's derivative instruments are as follows: ------------------------------------------------------------------------- ($ thousands) Hedging item maximum maturity Notional Fair November 30, 2009 Interest Rate date Value Value ------------------------------------------------------------------------- Derivatives used to manage interest rate exposure 0.70% - 5.08% 2014 2,280,000 55,652 Derivatives used to manage changes in share-based compensation - 2010 8,919 (3,900) ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ thousands) Hedging item maximum maturity Notional Fair November 30, 2008 Interest Rate date amount Value ------------------------------------------------------------------------- Derivatives used to manage interest rate exposure 1.31% - 5.08% 2012 3,167,000 85,097 Derivatives used to manage changes in share-based compensation - 2010 10,275 (7,755) ------------------------------------------------------------------------- ------------------------------------------------------------------------- At November 30, 2009, the effect of a 10% decline or increase in the value of the underlying reference asset of the derivatives used to manage changes in share-based compensation would result in a $0.4 million (2008 - $0.8 million) increase or decrease in income. Interest Rate Risk Interest rate risk, inclusive of credit spread risk, is the risk of loss due to the following: changes in the level, slope and curvature of the yield curve; the volatility of interest rates; mortgage prepayment rates; changes in the market price of credit and the creditworthiness of a particular client. The Company, through AGF Trust, is exposed to interest rate risk primarily through its cash and cash equivalents, investments available for sale, real estate secured and investment loans receivable and deposits, managed and supervised by AGF Trust's Asset and Liability Committee. AGF Trust employs a number of techniques to manage this risk, including the matching of asset and liability terms. AGF Trust also uses interest rate swaps to manage any residual mismatches. At November 30, 2009, a 1% increase in interest rates in the aforementioned financial instruments would result in an increase in annual net interest income of approximately $4.1 million. As a result of current interest rate levels, a sensitivity analysis based on a 1% decrease would not provide meaningful information. At November 30, 2008, a 1% change in interest rates in the aforementioned financial instruments, either up or down, would result in an increase or decrease in annual net interest income of approximately $4.7 million. Refer to Note 3 for the effect of changes to key assumptions on the fair value of retained interests. The Company, excluding AGF Trust, is also exposed to interest rate risk through its floating-rate debt and cash balances. As at November 30, 2009, the effect of a 1% change in the variable interest rates on the average balances for the year would have resulted in an annualized change in interest expense of approximately $1.2 million (2008 - $0.8 million). Foreign Exchange Risk Foreign currency risk is the risk of loss due to changes in spot and forward rates and the volatility of currency exchange rates. The Company is subject to foreign exchange risk on its integrated foreign subsidiaries in Ireland and Singapore, which provide investment advisory services. These subsidiaries retain minimal monetary exposure to the local currency, as the majority of revenues are earned in Canadian dollars and salaries and wages are primarily paid on a monthly basis and represent the majority of the local currency expenses. As such, these foreign subsidiaries have limited use of financial instruments denominated in local currencies, thus resulting in minimal foreign exchange risk. Liquidity Risk Liquidity risk arises from the possibility that the Company cannot meet a demand for cash resources when required or meet its financial obligations. The Company manages its liquidity risk through the management of its capital structure and financial leverage as outlined in Note 10 and 21. In its Investment Management segment, the Company manages its liquidity by monitoring actual and projected cash flows to ensure that it has sufficient liquidity through cash received from operations as well as borrowings under its credit facility. The key liquidity requirements within this segment are the funding of commissions paid on mutual funds and dividends paid to shareholders. The Company is subject to certain financial loan covenants under its credit facility and has met all of these conditions. AGF Trust manages liquidity risk through deposit taking activities and through the securitization of loans. The key liquidity requirements within this segment are the funding of mortgages and loans and the ability to pay out maturing GICs. AGF Trust's overall liquidity risk is managed by its treasury department and is supervised by AGF Trust's Asset and Liability Management Committee in accordance with the policies for management of assets and liabilities, liquidity and loan financing activities. These policies aim to ensure that AGF Trust has sufficient cash resources to meet its current and future financial obligations in the regular course of business and under a variety of conditions. Management monitors cash resources daily to ensure that AGF Trust's liquidity measurements are within the limits established by policies. In addition, management meets regularly to assess the timing of cash inflows and outflows related to loan and deposit maturities, and to review various possible stress scenarios. AGF Trust aims to maintain a prudent reserve of unencumbered liquid assets that are readily available if required. It strives to maintain a stable volume of base deposits that originate from its deposit brokerage clientele. The Government of Canada introduced a short-term guarantee program on debt issuances of deposit-taking institutions. Under that program, which terminates on December 31, 2009, AGF Trust can issue up to $952.9 million of debt with a government backstop and a term of up to three years. The Company's internal audit department reviews the compliance of AGF Trust's liquidity policies. Internal audit reports are presented to the Audit Committee of the Trust Board for review. The following table presents contractual terms to maturity of the financial liabilities owed by the Company at November 30, 2009 and 2008: ------------------------------------------------------------------------- ($ thousands) 1 Year 1 to November 30, 2009 Demand or Less 5 Years ------------------------------------------------------------------------- Accounts payable and accrued liabilities $ - $ 284,043 $ - Long-term debt - 13,083 143,648 Deposits(1) 4,665 1,909,845 2,218,390 Other liabilities - - 16,675 ------------------------------------------------------------------------- Total $ 4,665 $ 2,206,971 $ 2,378,713 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ thousands) 1 Year 1 to November 30, 2008 Demand or Less 5 Years ------------------------------------------------------------------------- Accounts payable and accrued liabilities $ - $ 302,401 $ - Long-term debt - 21,461 124,000 Deposits(1) 6,495 2,532,945 2,532,330 Other liabilities - - 19,428 ------------------------------------------------------------------------- Total $ 6,495 $ 2,856,807 $ 2,675,758 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Excluding deferred commission. Credit Risk Credit risk is the potential of financial loss arising from the failure of a borrower or counterparty to honour its financial or contractual obligations to the Company. The Company's overall credit risk strategy and credit risk policy are developed by senior management and further refined at the business unit level, through the use of policies, processes and internal controls, designed to promote business activities while ensuring these activities are within the standards of risk tolerance levels. As at November 30, 2009, financial assets of $4.6 billion, consisting of cash and cash equivalents, investments, retained interests from securitization, real estate secured loans and investment loans, accounts receivable and other assets, were exposed to credit risk up to the maximum of their respective carrying value. Cash and cash equivalents consist primarily of highly liquid temporary deposits with Canadian and Irish banks, as well as commercial paper, bank-sponsored ABCP, bank deposit notes, reverse re-purchase agreements, BAs and FRNs. Investments subject to credit risk consist primarily of FRNs, senior debt instruments, investments in mutual funds of AGF and other securities. For investing activities done through AGF Trust, policies have been established that identify the types and rating of debt investments in which AGF Trust can invest. These policies also restrict AGF Trust's transactions primarily to major chartered banks and recognized investment dealers who are members of the Investment Industry Regulatory Organization of Canada (IIROC). AGF Trust maintains a list of approved securities dealers and counterparties, which are reviewed at least annually by the Trust Board. AGF Trust uses external credit rating agencies in assessing the credit quality of certain investments in financial assets. The credit rating agencies used include DBRS, S&P and Moody's. Refer to Note 2 for a breakdown of the credit ratings for AGF Trust's investments available for sale. The Company's most significant credit risk is through AGF Trust's real estate secured loans and investment loans. AGF Trust mitigates this risk through stringent credit policies and lending practices. These policies aim to ensure that the authority to approve credit applications is appropriately delegated by senior management of AGF Trust, depending on the risk and the amount of the credit application. The credit policies also provide guidelines for pricing based on risk, for reviewing any collateral pledged for a credit application, monitoring of impaired loans and for establishing and reviewing loan loss provisions to ensure they are adequate. The policies establish risk limits for credit concentration by counterparty, geographic location and other risk factors that would impact AGF Trust's credit risk profile. At November 30, 2009, AGF Trust's loan assets totaled $3.6 billion (2008 - $4.5 billion) and were comprised of mortgage loans, investment loans, RSP loans, finance loans and HELOC receivables. Of this amount, $1.1 billion (2008 - $1.4 billion) was represented by mortgage loans and $0.4 billion (2008 - $0.7 billion) was represented by HELOC receivables, both of which are secured by residential real estate. At November 30, 2009, 47.6% of mortgage loans were insured by Canada Mortgage and Housing Corporation (CMHC) or another insurer. Conventional uninsured mortgages have loan-to-value ratios of less than 80% of the appraised value of the property at the time the mortgage loan was granted. The average loan-to-value ratio of uninsured mortgage loans was 61.3% as at November 30, 2009 (2008 - 66.4%). Residential mortgages represent the largest component of the total mortgage portfolio, comprising 97.0% as at November 30, 2009 (2008 - 97.5%). AGF Trust's credit risk on these loans is also mitigated through the use of collateral, primarily in the form of residential real estate. Under AGF Trust's lending criteria, management reviews all mortgage loans on a regular basis to determine the appropriate allowance for loss required by AGF Trust. Risk is also mitigated through residential mortgage insurance through CMHC or another insurer. As at November 30, 2009, $501.3 million of AGF Trust's residential mortgage portfolio was insured (2008 - $616.6 million). Credit risk for HELOCs and investment loans is mitigated by collateral in the form of residential mortgages and investment funds, respectively. Investment loans, excluding RSP loans, of $1.7 billion, are secured primarily by the investment made using the initial loan proceeds. The market value of this investment loan collateral is approximately $1.4 billion. RSP loans are used by borrowers to purchase assets in a retirement savings plan. The creditworthiness of each borrower is assessed prior to approval of the loan. Predictive scorecards are used to determine the probability of default and bankruptcy of the borrowers. On a regular basis, AGF Trust reviews the credit quality in the portfolio. Loans in arrears are also reviewed regularly to determine the appropriate loan loss reserves. Derivative financial instruments expose AGF Trust to credit risk to the extent that if a counterparty default occurs, market conditions are such that AGF Trust would incur a loss in replacing the defaulted transaction. AGF Trust negotiates derivative master netting agreements with counterparties with which it contracts. These agreements reduce credit risk exposure. AGF Trust assesses the credit worthiness of the counterparties to minimize the risk of counterparty default under the agreements. AGF Trust only uses major Chartered banks as counterparties with a minimum credit rating of AA. Note 23: Segment Information AGF has three reportable segments: Investment Management Operations, Trust Company Operations and Other. The Investment Management Operations segment provides investment management and advisory services and is responsible for the management and distribution of AGF investment products. AGF Trust offers a wide range of trust services including GICs, term deposits, real estate secured loans and investment loans. The results of Smith & Williamson Holdings Limited have been included in Other. The results of the reportable segments are based upon the internal financial reporting systems of AGF. The accounting policies used in these segments are generally consistent with those described in the 'Summary of Significant Accounting Policies' detailed in Note 1. ------------------------------------------------------------------------- ($ thousands) Investment Trust Year ended Management Company November 30, 2009 Operations Operations Other(1) Total ------------------------------------------------------------------------- Revenue $ 475,429 $ 104,286 $ 6,399 $ 586,114 Operating expenses 293,774 72,802 - 366,576 Amortization and other expenses 93,880 2,822 5,983 102,685 ------------------------------------------------------------------------- Segment income before taxes $ 87,775 $ 28,662 $ 416 $ 116,853 Total Assets $ 1,175,612 $ 4,500,310 $ - $ 5,675,922 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ thousands) Investment Trust Year ended Management Company November 30, 2008 Operations Operations Other(1) Total ------------------------------------------------------------------------- Revenue $ 606,396 $ 108,918 $ 10,256 $ 725,570 Operating expenses 338,782 73,113 - 411,895 Amortization and other expenses 159,816 2,772 9,252 171,840 ------------------------------------------------------------------------- Segment income before taxes $ 107,798 $ 33,033 $ 1,004 $ 141,835 Total Assets $ 1,207,142 $ 5,326,817 $ - $ 6,533,959 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Other revenue relates to S&WHL. Note 24: Commitments The Company is committed under operating leases and purchase obligations for office premises and equipment. The Company is also committed for a 10-year period expiring 2015 to reimburse Citigroup Fund Services Inc. (Citigroup) and CitiFinancial should annual revenues derived from AGF fund administration services fall below predetermined levels. The approximate minimum annual cash payments related to the above are as follows: ---------------------------------------- ($ thousands) ---------------------------------------- 2010 $ 22,229 2011 16,813 2012 13,385 2013 11,628 2014 7,523 Thereafter 15,268 ---------------------------------------- ---------------------------------------- AGF Trust has outstanding mortgage commitments of $8.8 million as at November 30, 2009 (2008 - $17.4 million) at rates of interest prevailing at the time the commitments were issued. Any interest rate commitment has a term of less than 60 days. Note 25: Guarantees The Company, under an indemnification agreement with each of the directors of the Company, as well as directors of the mutual fund corporations, has agreed to indemnify the directors against any costs in respect of any action or suit brought against them in respect of the proper execution of their duties. To date, there have been no claims under these indemnities. Note 26: Contingent Liabilities (a) The Company, through its subsidiary AGF Investments Inc., is a party to two class action proceedings alleging inappropriate frequent trading market timing activity in certain funds. These proceedings were instituted in the provinces of Quebec and Ontario in 2004 and 2005, respectively. The authorization motion for the Quebec action was heard in April 2009 and a decision is still pending. The certification motion for the Ontario action was heard in December 2009 and was dismissed. (b) The Company believes that it has adequately provided for income taxes based on all of the information that is currently available. The calculation of income taxes in many cases, however, requires significant judgment in interpreting tax rules and regulations. The Company's tax filings are subject to audits, which could materially change the amount of current and future income tax assets and liabilities, and could, in certain circumstances, result in the assessment of interest and penalties. (c) There are certain claims and potential claims against the Company. None of these claims or potential claims are expected to have a material adverse effect on the consolidated financial position of the Company. Consolidated 10-Year Review ------------------------------------------------------------------------- ($ thousands, except per share amounts) Years ended November 30 2009 2008 2007 2006 2005 ------------------------------------------------------------------------- Operations Total revenue (continuing opera- tions) $ 586,114 $ 725,570 $ 780,320 $ 607,202 $ 546,567 Net income 97,694 128,592 178,687 112,657 91,872 Dividends 88,821 84,860 70,151 61,521 50,522 Financial position Working capital (deficit) $ (738,223) $(1,360,365) $ (735,103) $ (404,223) $ (31,958) Long-term debt 143,648 123,740 184,486 56,000 17,364 Shareholders' equity 1,130,403 1,107,422 1,069,002 979,771 918,326 Return on equity 8.7% 11.8% 17.4% 11.9% 10.0% Per share Net income - basic $ 1.10 $ 1.44 $ 1.99 $ 1.26 $ 1.02 Dividends 1.00 0.95 0.78 0.69 0.56 Book value (continuing operations) 12.72 12.40 12.02 10.99 10.30 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ($ thousands, except per share amounts) Years ended November 30 2004 2003 2002 2001 2000 ------------------------------------------------------------------------- Operations Total revenue (continuing opera- tions) $ 545,393 $ 510,571 $ 637,660 $ 630,525 $ 500,377 Net income 77,287 44,016 119,839 163,754 95,931 Dividends 37,474 27,150 22,967 19,577 14,092 Financial position Working capital (deficit) $ 56,363 $ 62,490 $ 95,287 $ (9,950) $ (86,692) Long-term debt 68,292 112,192 225,403 165,481 278,051 Shareholders' equity 914,366 903,360 887,566 764,707 480,091 Return on equity 8.5% 4.9% 14.5% 26.3% 25.1% Per share Net income - basic $ 0.85 $ 0.48 $ 1.34 $ 1.84 $ 1.12 Dividends 0.41 0.30 0.26 0.22 0.18 Book value (continuing operations) 10.08 9.79 9.74 8.56 5.78 ------------------------------------------------------------------------- ------------------------------------------------------------------------- This report contains forward-looking statements with respect to AGF, including its business operations, strategy, 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 results to differ materially 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.
For further information: AGF Management Limited shareholders and analysts, please contact: Greg Henderson, CA, Senior Vice-President and Chief Financial Officer, (416) 865-4156, [email protected]; Deirdre Neary, Director, Investor Relations, (416) 815-6268, [email protected]; Media, please contact: Lucy Becker, Vice-President, Public Relations & Public Affairs, (416) 865-4284, [email protected]
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