• Improved investment performance contributes to AUM increase across all lines of business
• Diluted EPS of $0.12

TORONTO, June 29, 2016 /CNW/ - AGF Management Limited ("AGF" or "the Company") today announced financial results for the second quarter ended May 31, 2016. Total assets under management (AUM) increased 6% to $33.7 billion, compared to $31.7 billion as at February 29, 2016. Total AUM as at May 31, 2015 was $36.0 billion. The increase in AUM was broad and covered each of our lines of business including retail, institutional, private client and alternative assets. In addition to improved investment performance, the trend of lower retail redemptions contributed to AUM levels. Total retail fund AUM was $17.5 billion as at May 31, 2016, compared to $16.9 billion as at February 29, 2016 and $19.4 billion as at May 31, 2015. Institutional and sub-advisory AUM was $11.1 billion as at May 31, 2016, compared to $10.4 billion as at February 29, 2016, and $11.7 billion as at May 31, 2015. Private client AUM was $4.6 billion, compared to $4.2 billion as at February 29, 2016, and consistent with the same period in 2015. AUM related to the alternative asset management platform increased to $0.5 billion as InstarAGF Inc. (InstarAGF) announced its first close of the Essential Infrastructure Fund, with total commitments of $372.0 million.

"I am pleased with the momentum in our retail business, as results continue to improve," said Blake C. Goldring, Chairman and Chief Executive Officer, AGF Management Limited. "Our focus on delivering strong investment performance, relevant products and strong client service is contributing to our success."

For the one-year period ended May 31, 2016, 50% of ranked AUM performed above median, compared with 47% for the one-year period ended May 31, 2015. For the three-year period ended May 31, 2016, 54% of ranked AUM performed above median, compared with 45% for the three-year period ended May 31, 2015.

"We continue to see improvement in our investment performance and remain focused on consistently delivering our stated target of 50% and 60% of our AUM above median for the one- and three- year periods, respectively," said Kevin McCreadie, President and Chief Investment Officer, AGF Investments Inc. "Our focus on the client will drive development in the product area as we continue to look at new solutions and structures to meet the needs of our clients."

During the second quarter of 2016, income from continuing operations was $111.1 million, compared to $117.1 million for the three months ended May 31, 2015, reflecting lower average retail AUM levels and a strategic reduction in management fees across 17 retail products. Offsetting this was revenue earned from the internalization of our fund administration business. Earnings before interest, taxes, depreciation and amortization (EBITDA) from continuing operations was $26.2 million, compared to $36.0 million in the second quarter of 2015. Diluted earnings per share (EPS) from continuing operations was $0.12 compared to $0.17 for the three months ended May 31, 2015. During the second quarter of 2016, we recognized $1.5 million of one-time fund custody and accounting transition costs. Excluding these costs, adjusted diluted EPS from continuing operations was $0.13 and $0.26 for the three and six months ended May 31, 2016. Free cash flow from operations increased to $16.4 million for the three and six months ended May 31, 2016, compared to $11.1 million for the three months ended February 29, 2016 and remained stable as compared to the prior year.

For the three months ended May 31, 2016, AGF declared an eight cent per share dividend on Class A Voting common shares and Class B Non-Voting shares, payable July 18, 2016 to shareholders on record as at July 8, 2016.

Conference Call

AGF will host a conference call to review its earnings results today at 11 a.m. ET. The live audio webcast with supporting materials will be available in the Investor Relations section of AGF's website at www.agf.com or at http://edge.media-server.com/m/p/u5kkjv9r Alternatively, the call can be accessed toll-free in North America by dialing 1-800-708-4540 (Passcode #: 42747587).

A complete archive of this discussion along with supporting materials will be available at the same webcast address within 24 hours of the end of the conference call.

ABOUT AGF MANAGEMENT LIMITED

AGF Management Limited is one of Canada's premier independent investment management firms with offices across Canada and subsidiaries around the world. AGF's products include a diversified family of mutual funds, mutual fund wrap programs, pooled funds and an alternative asset management platform. AGF also manages assets on behalf of institutional investors including pension plans, sovereign wealth funds, foundations and endowments as well as for private clients. With approximately $34 billion in total assets under management, AGF serves more than one million investors. AGF trades on the Toronto Stock Exchange under the symbol AGF.B.

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 income, 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, pipeline, competitive fee levels for investment management products and administration, and competitive dealer compensation levels and cost efficiency in our investment management 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 the 2015 Annual MD&A.

Summary of Quarterly Results
(from continuing operations)

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management's Discussion and Analysis (MD&A) is as of June 28, 2016, and presents an analysis of the financial condition of AGF and its subsidiaries for the three- and six-month period ended May 31, 2016, compared to the three- and six-month period ended May 31, 2015. The MD&A should be read in conjunction with our unaudited Condensed Consolidated Interim Financial Statements for the three and six months ended May 31, 2016 and our 2015 Annual Report. The financial statements for the three and six months ended May 31, 2016, including required comparative information, have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) applicable to the preparation of interim financial statements, including International Accounting Standard 34 (IAS 34), Interim Financial Reporting, unless otherwise noted.

We also utilize non-IFRS financial measures to assess our overall performance. Details of non-IFRS measures used are outlined in the 'Key Performance Indicators, Additional IFRS and Non-IFRS Measures' section, which provides calculations of the non-IFRS measures.

All dollar amounts are in Canadian dollars unless otherwise indicated. Throughout this discussion, percentage changes are calculated based on numbers rounded to the decimals that appear in this MD&A. Results, except per share information, are presented in millions of dollars. Certain totals, subtotals and percentages may not reconcile due to rounding.

There have been no material changes to the information discussed in the following sections of the 2015 Annual MD&A: 'Risk Factors and Management of Risk,' 'Contractual Obligations' and 'Intercompany and Related Party Transactions.'

Our Business and Strategy

AGF Management Limited (AGF or the Company), with $33.7 billion in assets under management (AUM) as at May 31, 2016, is one of the largest independent Canadian-based investment management firms, with operations and investments in Canada, the United States, the United Kingdom, Ireland and Asia. The origin of our Company dates back to 1957 with the introduction of the American Growth Fund, the first mutual fund available to Canadians seeking to invest in the United States.

We believe that superior investment performance and product innovation are key to our success. Our target is to consistently have 50% of our ranked AUM above median over any one year and 60% above median over three years. For the one-year period ended May 31, 2016, 50% of ranked AUM performed above median, compared with 47% in 2015. For the three-year period ended May 31, 2016, 54% of ranked AUM performed above median, compared with 45% in 2015.

We also believe in diversification, both in terms of investment styles and product solutions offered to our clients in each of the segments in which we operate. AGF offers individuals and institutions a broad array of investment strategies and solutions across four investment management platforms:

• Fundamental Active Management
• Quantitative Solutions
• Private Client
• Alternative Assets

Fundamental Active Management
AGF's fundamental actively managed platform includes a broad range of equity and fixed income strategies, managing total AUM of $24.1 billion. Within this platform, we have a number of centres of excellence, including our Global, North American, Fixed Income teams and our Asset Allocation committee, located in Toronto, Dublin and Singapore. This platform delivers products to retail, institutional investors and strategic partners.

We have strong capability and performance within the global space and we intend to leverage this strength as part of our growth strategy. Our marketing efforts are focused on promoting this team and their capabilities to investors.

Our Asset Allocation team has been instrumental in delivering superior performance within our balanced products, in particular, AGF Elements, which continues to produce strong net sales for the Company.

We continually review our product offering with an aim to provide our advisors and clients a product platform that offers innovative solutions around specific needs, ultimately resulting in organic AUM growth for the Company and superior, consistent investment returns to our clients. In May 2016, we completed several fund mergers with the goal of streamlining our product lineup and providing greater focus on our key strategies and capabilities. During the quarter, we also implemented management fee reductions on select funds across the equity, fixed income, balanced and managed solutions lineup effective April 1, 2016.

Quantitative Solutions
Our quantitative solutions platform includes Highstreet Asset Management Inc. (Highstreet), located in London, Ontario, and FFCM, LLC (FFCM), located in Boston, with a total of 22 investment professionals managing AUM of approximately $4.5 billion.

Highstreet's investment foundation is empirically based research and the combination of quantitative and fundamental investing. All of its research and analysis is done internally, backed by an investment team with a diverse skill set ranging from scientists to academics to traditional fundamental analysts. 

In November 2015, we acquired a majority interest in FFCM, a U.S.-based advisor that manages factor-based exchange traded funds (ETF) and ETF solutions. FFCM has the capability to manage the Investment Company Act of 1940 registered products, separately managed accounts, and hedge funds in direct or sub-advisory relationship models and have obtained ETF Securities and Exchange Commission (SEC) exemptive relief. FFCM provides us with a complete trading infrastructure to support ETFs and related mutual fund products. Beyond trading capabilities, FFCM has developed and launched five ETFs into the market with performance success and offers ETF solutions. With our expertise and capabilities within Highstreet and FFCM, we believe that there will be opportunities to launch risk-oriented solutions in Canada and the United States to address increasing investor demand in the low volatility and factor-based investing styles.

Private Client
The private client industry in Canada includes bank-owned firms, as well as large independent firms and boutiques, who continue to retain a significant portion of market share. Our private client platform, which includes Cypress Capital Management Limited (Cypress), located in Vancouver, Doherty & Associates Ltd. (Doherty), with offices in Ottawa and Montreal, and Highstreet, provides solutions for high-net-worth individuals, endowments, and foundations in key markets across Canada. These businesses manage total private client AUM of approximately $4.6 billion, representing growth over the past five years of 31.4%.

Alternative Assets
Global economic uncertainty in recent years is driving increasing demand from institutional and individual investors for more stable and sustainable long-term investment returns, including allocating to alternative asset classes such as real assets. These assets, which are physical or tangible in nature, have historically demonstrated a low correlation to the public markets.

In 2014, as part of our capital reallocation strategy, we formed InstarAGF Asset Management Inc. (InstarAGF), a joint venture with Instar Group Inc. (Instar) to develop an alternative asset management platform. AGF holds a 50.0% economic interest in InstarAGF and has also committed equity of $150.0 million to this platform. As alternative assets continue to grow in prominence and represent a greater proportion of institutional portfolios, AGF is well positioned to deliver the long-duration, risk-adjusted solutions institutional, retail and high-net-worth investors are seeking to generate predictable cash flow and meet long-dated liabilities.

InstarAGF is an independent alternative asset management firm with an emphasis on real assets, including infrastructure investments, in the North American middle market. InstarAGF's long-term objective is to develop and manage diversified alternative investment products for institutional and individual investors, which, in addition to infrastructure, could include timber or agriculture and other private equity investments, among others. InstarAGF's team of professionals has more than 100 years of combined investment and asset management expertise in the private capital industry, including infrastructure, private equity and real estate investments.

AGF's $150.0 million of committed equity includes a $100.0 million commitment in the flagship InstarAGF Essential Infrastructure Fund (EIF), which invests in power, utilities, civil and social infrastructure assets in Canada and the United States, and a $50.0 million commitment to a Canadian midstream oil and gas fund managed by Stream Asset Financial Management LP (SAFMLP).

Through its ownership interest in InstarAGF and its 100.0% economic interest in SAFMLP, AGF will earn recurring management fees on these entities' assets under management along with a share of net profit as the alternatives platform achieves scale. Through its investment as a limited partner in the various funds managed by InstarAGF and SAFMLP, AGF expects to earn attractive risk-adjusted returns comprising income and capital appreciation.

On March 2, 2016, InstarAGF and AGF achieved the first close of EIF with a number of institutional and high-net-worth investors from Canada, Europe, the United Kingdom and the United States. These cornerstone investors, including AGF, committed aggregate equity of $372.0 million to the fund and have the ability to upsize their capital commitment to $422.0 million prior to EIF's final close, which is currently expected to occur by the end of 2016 with a targeted fund size of $750.0 million. Following the first close, AGF received net cash of $73.6 million, net of a capital call of $9.6 million, which aligned AGF's invested capital to its proportionate share of total commitments to the fund.

Other Businesses
In addition to our investment management platforms outlined above, we hold a 32.5% interest in Smith & Williamson Holdings Limited (S&WHL), a leading independent private client investment management, financial advisory and accounting group based in the U.K.. S&WHL is one of the top 10 largest firms of accountants in the U.K. and its investment management business has over $30.8 billion (£16.2 billion) of funds under management and advice as at May 31, 2016.

On February 16, 2016, AGF internalized the Company's fund administration function. The fund administration business provides services to the AGF mutual funds.

Our Distribution Channels
Retail
Our sales teams manage advisor and strategic account relationships for our retail business, which provides investment management products to the retail and strategic sub-advisory channel. We have regional sales offices across Canada. AGF's wholesaler teams cover over 35,000 external advisors and 200 investment dealers in support of our retail products. We have a number of key partnerships that provide us with a large and robust distribution channel in which to deliver our products to investors. During the three months ended May 31, 2016, retail fund net redemptions improved 25.0% to $0.3 billion compared to net redemptions of $0.4 billion for the same period last year.

Institutional
We have a global network of salespeople covering North America, Europe and Asia. Our Boston office is dedicated to business development in the institutional space in the United States, while our representative office in London, U.K. is dedicated to institutional sales efforts in the U.K.. AGF also participates in an investment consultant relations program and has earned buy ratings from a number of major firms. Investment consultants act as gatekeepers in the industry, and advise their clients on issues such as asset allocation and manager selection. This constituency is important as a buy rating from a major consultant can lead to an increased number of request for proposal (RFP) searches, which in turn enhances the chance of winning new business. Our key competencies in global equities are aligned with market trends, namely the need for reducing home country bias and investing globally. We also distribute products managed by our alternative platform within InstarAGF to North American and international financial institutions and asset managers through this channel.

Summary of Key Financial and AUM Results for the Second Quarter of 2016:

• Total AUM was $33.7 billion at May 31, 2016, increasing $2.0 billion from February 29, 2016 due to improved flows and positive markets.
• Income from continuing operations was $111.1 million, compared to $117.1 million in the same period of 2015, reflecting lower average retail AUM levels offset by higher fund administration revenue.
• EBITDA from continuing operations was $26.2 million, compared to $36.0 million in 2015.
• Diluted EPS from continuing operations for the three months ended May 31, 2016 was $0.12 per share, compared to diluted EPS of $0.17 per share in 2015.
• During the quarter, we incurred one-time costs of $1.5 million related to the transfer of our custody and fund accounting operations. Excluding one-time costs, adjusted diluted EPS from continuing operations was $0.13 and $0.26 for the three and six months ended May 31, 2016.
• On March 2, 2016, InstarAGF achieved the first close of EIF. Following the first close, AGF received net cash of $73.6 million, net of a capital call of $9.6 million, which aligned AGF's invested capital to its proportionate share of total commitments to the fund. As at May 31, 2016, we had invested $61.8 million in EIF and have a remaining commitment of $38.2 million.
• We delivered value directly to our shareholders through dividend payments. During the second quarter of 2016, we paid dividends of $0.08 per share (2015 – $0.08 per share). Dividends paid, including dividends reinvested, on Class A Voting common shares and Class B Non-Voting shares were $6.3 million in the second quarter of 2016, compared to $6.6 million in the same period of 2015.

Assets Under Management 

 

Institutional Pipeline
The following represents forward-looking information. We define the institutional pipeline as client commitments to fund or redeem a portion or all of their account. As at the date of this MD&A, AGF had a net redemptions pipeline of $309.0 million. The majority of the pipeline is a single redemption from one of our clients driven by a reorganization, offset by committed subscriptions from one of our existing clients. Commitments are not necessarily contractual obligations. Actual amounts funded or redeemed may vary. 

Consolidated Operating Results

 

One-time Adjustments

 

Income
For the three and six months ended May 31, 2016, income decreased by 5.1% and 6.3% over the previous year, with changes in the categories as follows:

Management, Advisory and Administration Fees
Management and advisory fees are directly related to our AUM levels. For the three months ended May 31, 2016, a 10.6% decline in average daily retail fund AUM and 5.6% decline in institutional and sub-advisory accounts AUM contributed to a decrease of 13.0% and 10.2% in management and advisory fees revenue for the three and six months ended May 31, 2016 compared to 2015. This was offset by $7.4 million of fund administration revenue as a result of the internalization of this function. Fund administration revenue is directly related to the number of client accounts and transactions incurred and is recognized on an accrual basis.

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 1.5% to 5.5%, 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 six 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 revenue remained stable for the three months ended May 31, 2016 and decreased by 6.0% for the six months ended May 31, 2016 as compared to 2015, reflecting a 19.1% decline in redemptions offset by the redemption of an increased proportion of new higher-yielding DSC assets.

Share of Profit of Associate and Joint Ventures
Share of profit of associate and joint ventures increased 7.0% and 6.1% to $4.6 million and $8.7 million for the three and six months ended May 31, 2016, compared to $4.3 million and $8.2 million during the same period in 2015. Earnings in S&WHL's business increased 4.8% and 5.1% during the three and six months ended May 31, 2016.

Share of profit of joint venture represents earnings related to our ownership in the joint venture which manages our infrastructure funds, which is accounted for under the equity method. For the three and six months ended May 31, 2016, we recorded $0.2 million and $0.4 million (2015 – $0.1 million and $0.3 million) related to earnings from this joint venture. For additional information see Note 5 of the condensed consolidated interim financial statements.

A breakdown of the share of profit of associate and joint ventures is as follows:

 

Fair Value Adjustments and Other Income
Long-term investments includes the investment in Stream and InstarAGF Essential Infrastructure Fund, which is accounted for at fair value through profit or loss. During the three and six months ended May 31, 2016, we recorded $1.2 million and $4.0 million (2015 – $2.3 million and $3.6 million) as fair value adjustments and income distributions related to the investments in our alternative asset management platform.

 

Expenses
For the three and six months ended May 31, 2016, expenses increased 4.7% and 1.3% from the same periods in 2015. Changes in specific categories are described in the discussion that follows:

Selling, General and Administrative Expenses (SG&A)
SG&A increased by $7.4 million and $8.0 million, or 15.9% and 8.8% for the three and six months ended May 31, 2016, compared to the same period in 2015, primarily as a result of the internalization of our fund administration function and the acquisition of FFCM. Excluding one-time fund custody and accounting transition costs, SG&A increased $5.9 million and $6.5 million, or 12.7% and 7.1% for the three and six months ended May 31, 2016, compared to the same period in 2015. A breakdown of the increase is as follows:

 

The following explains expense changes in the three and six months ended May 31, 2016, compared to the same period in the prior year:

• Salaries and benefits increased $2.9 million and $3.9 million for the three and six months ended May 31, 2016, compared to the same period in 2015, as a result of the acquisition of FFCM and internalization of the fund administration function through AGF CustomerFirst Inc.
• Stock-based compensation was flat and decreased $0.9 million for the three and six months ended May 31, 2016, compared to the same period in 2015, primarily due to a lower grant share price.
• Sales and marketing expenses decreased $0.9 million and $1.1 million for the three and six months ended May 31, 2016, compared to the same period in 2015, as a result of cost-saving initiatives and timing of expenditures.
• Professional fees increased $0.5 million and $1.2 million for the three and six months ended May 31, 2016, due to an increase in consulting fees related to acquisitions and costs related to the internalization of the fund administration function.
• Absorption and other fund costs expense increased $1.6 million and $0.1 million for the three and six months ended compared to the same period in 2015, as a result of FFCM fund-related expenses and fund merger costs. During the six months ended May 31, 2016, absorption and other fund costs expense were comparable to prior period.
• Information technology and facilities increased $1.6 million and $3.2 million for the three and six months ended May 31, 2016, due to the internalization of the fund administration function and the acquisition of FFCM.
• One-time costs of $1.5 million related to the transfer of our custody and fund accounting operations were incurred during the three and six months ended May 31, 2016.

Trailing Commissions
Trailing commissions paid to distributors 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. Annualized trailing commissions as a percentage of average daily retail fund AUM were 0.69% and 0.69% for the three and six-months ended May 31, 2016, compared to 0.69% and 0.67% for the same period in 2015, reflecting an increase in the six month period due to an increase in weighting toward higher-rate mature assets.

EBITDA, EBITDA Margin and EBITDA per Share (Non-IFRS Measures)
EBITDA from continuing operations were $26.2 million and $53.5 million for the three and six months ended May 31, 2016, compared to $36.0 million and $69.9 million for the same period of 2015. EBITDA margin was 23.6% and 25.0% for the three and six months ended May 31, 2016, compared to 30.7% and 30.6% in the corresponding period in 2015. Diluted EBITDA per share from continuing operations for the three and six months ended May 31, 2016 was $0.33 and $0.67, compared to $0.42 and $0.82 for the three and six months ended May 31, 2015.

Amortization and Interest Expense
The category represents amortization of deferred selling commissions, customer contracts, other intangible assets, property, equipment, and computer software and interest expense. Deferred selling commissions amortization represents the most significant category of amortization. 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. Unamortized deferred selling commissions related to units redeemed prior to the end of the schedule are immediately expensed. Amortization expense related to deferred selling commissions was $9.3 million and $18.6 million for the three and six months ended May 31, 2016, compared to $10.3 million and $20.7 million for the same period in 2015. During the three and six months ended May 31, 2016, we paid $8.8 million and $17.4 million in selling commissions, compared to $10.8 million and $20.4 million in the same period of 2015, reflecting a trend toward front-end sales, which do not pay a DSC commission. As at May 31, 2016, the unamortized balance of deferred selling commissions financed was $98.1 million (November 30, 2015 – $99.3 million).

Customer contracts amortization and derecognition decreased $0.7 million and $0.7 million for the three and six months ended May 31, 2016, as a result of a lower carrying value. Customer contracts are immediately expensed upon redemption of the AUM.

Other intangibles amortization and derecognition decreased $0.2 million and $0.3 million for the three and six months ended May 31, 2016.

Depreciation increased $0.2 million and $0.5 million for the three and six months ended May 31, 2016, reflecting the investment related to the internalization of the fund administration function.

Interest expense decreased as a result of lower average debt levels.

Income Tax Expense  
Income tax expense for the three and six months ended May 31, 2016 was $2.5 million and $5.3 million, as compared to $4.9 million and $9.4 million in the corresponding period in 2015. The estimated effective tax rate for the six months ended May 31, 2016 was 21.6% (2015 – 25.0%).

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 judgement in interpreting tax rules and regulations. The Company's tax filings are subject to audits, which could materially change the amount of the current and deferred income tax assets and liabilities, and could, in certain circumstances, result in the assessment of interest and penalties.

The Company has several ongoing disputes with the Canada Revenue Agency (CRA), of which the final result of the audit and appeals process may vary and may be materially different compared to the estimates and assumptions used by management in determining the Company's consolidated income tax provision and in determining the amounts of its income tax assets and liabilities.

(a) CRA Audit – Transfer Pricing

During the period November 30, 2013 to May 31, 2016, the Company has received a number of notices of reassessment (NOR) from the CRA for its 2005 through 2010 fiscal years relating to the transfer pricing and allocation of income between one of the Company's Canadian legal entities and a foreign subsidiary. Including the NOR received during the second quarter of 2016 for the 2010 fiscal year, the reassessments would increase the Company's taxes payable from its original tax filings by $61.1 million (before the application of interest and penalties of $32.2 million).

The Company strongly disagrees with the CRA's position and filed various objections to the NOR for the taxation years 2005 to 2009. The Company will also object to the NOR for 2010 in the third quarter of 2016. In connection with the filing of an objection to the NORs for the applicable periods 2005 through 2010, the Company has paid approximately $62.1 million of which $8.1 million was paid (including interest and penalties) during the six months ended May 31, 2016 in relation to the 2009 and 2010 NORs.

In consultation with its external advisors, the Company believes that its transfer pricing methodology was reasonable and the Company is contesting the CRA's position and any related transfer pricing penalty. The Company believes it is likely that the CRA will reassess its taxes for subsequent years on a similar basis and that these may result in future cash payments on receipt of the reassessments. During the six months ended May 31, 2016, the Company has recorded a tax expense of $1.1 million (2015 – $0.8 million) in relation to this transfer pricing audit. The amount of tax provision recorded on the consolidated interim statement of financial position reflects management's best estimate on the ultimate resolution of this matter and includes any related estimated interest and penalties for the 2005 to 2016 fiscal years.

Further to the Company's objection to the NOR, the Company is also seeking Competent Authority relief from double taxation under the applicable tax treaty. The Company's provision, which reflects its best estimate of the ultimate resolution of this matter, includes an expected recovery of approximately $14.8 million for the tax years 2005 through 2010. Any relief from double taxation should be granted at the completion of the mutual agreement procedures (MAP) under the applicable tax treaty.

In 2013, the Company was accepted by the CRA into a Bilateral Advance Pricing Arrangement (BAPA) between Canada and the relevant tax authorities to establish the appropriate transfer pricing methodologies for the tax years 2011 through 2016. Under a BAPA, the taxpayer will receive certainty as to its transfer pricing arrangements for the years under consideration, will not be assessed transfer pricing penalties, and can avoid double taxation on transactions covered by the BAPA according to the provision of the income tax treaty between Canada and the foreign country.

(b) CRA Audit – Foreign Accrual Property Income

In May 2015, the Company received a proposal letter from the CRA relating to foreign accrual property income (FAPI) earned by its foreign subsidiaries for the 2007 to 2012 fiscal years. The 2007 fiscal year has since been statute-barred and in September 2015, as a result of further review, the CRA has withdrawn its proposal on this issue for the 2008 to 2012 fiscal years. Despite the withdrawal of the proposal letter, the audit for the 2008 to 2012 fiscal years continues. The Company continues to believe that its tax position is correct and has not recorded a provision for this issue.

(c) CRA Audit – Acquisition of Tax-related Benefits

In July 2015, the Company received a NOR from the CRA denying $30.5 million of tax-related benefits acquired and utilized by the Company in the 2005 fiscal year. The NOR would increase the Company's taxes payable from its original tax filings by $10.9 million (before the application of interest and penalties of $9.7 million). The Company strongly disagrees with the CRA's position and has filed an objection to the NOR. As a result of receiving the NOR, the Company has paid $13.5 million (including interest and penalties) during the year ended November 30, 2015, which was recorded as income tax receivable on the consolidated interim statement of financial position. In consultation with its external advisors, the Company believes that its tax position is probable of being sustained and, as a result, has not recorded a provision in relation to this matter.

Net Income
The impact of the above income and expense items resulted in net income from continuing operations attributable to the equity owners of the Company of $9.6 million and $19.8 million for the three and six months ended May 31, 2016, as compared to net income from continuing operations attributable to the equity owners of the company of $14.7 million and $28.2 million in the corresponding period in 2015.

Earnings per Share
Diluted earnings per share from continuing operations was $0.12 and $0.25 per share for the three and six months ended May 31, 2016, as compared to earnings of $0.17 and $0.33 per share in the corresponding period of 2015.

Liquidity and Capital Resources 

As at May 31, 2016, the Company had total cash and cash equivalents of $32.1 million. Free cash flow, as defined on page 17, generated from continuing operating activities was $16.4 million and $27.4 million for the three and six months ended May 31, 2016, compared to $16.8 million and $32.2 million in the prior period. During the six months ended May 31, 2016, we used $16.5 million (2015 – $214.3 million) in cash to fund the following:

 

During the quarter, following the first close of the EIF, AGF received net cash of $73.6 million, net of a capital call of $9.6 million, which aligned AGF's invested capital to its proportionate share of total commitments to the fund.

Total long-term debt outstanding at May 31, 2016 was $228.9 million (November 30, 2015 – $268.8 million). On November 20, 2015, the Company, through its subsidiary AGF Investments Inc., amended and restated its loan agreement. The amended unsecured revolving credit facility has a maximum aggregate principal amount of $320.0 million and includes a $10.0 million swingline facility commitment. As at May 31, 2016, $84.9 million was available to be drawn. The loan facility will be available to meet future operational and investment needs. We anticipate that cash balances and cash flow from operations, together with the available loan facility, will be sufficient in the foreseeable future to implement our business plan, fund our alternative asset management platform commitments, finance selling commissions, satisfy regulatory and tax requirements, service debt repayment obligations, pay quarterly dividends, and fund any future share buybacks.

On June 28, 2016, the Board of Directors of AGF declared a quarterly dividend on both the Class A Voting common shares and Class B Non-Voting shares of the Company of $0.08 per share in respect of the three months ended May 31, 2016.

Capital Management Activities from Continuing Operations

We actively manage our capital to maintain a strong and efficient capital base to maximize risk-adjusted returns to shareholders, to 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 and long-term debt. On an annual basis, AGF prepares a five-year plan detailing projected operating budgets and capital requirements. AGF is required to submit this plan 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, Executive Vice-President and CFO, the Executive Vice-President and Chief Operating Officer, and the President and CIO. Once approved by the Finance Committee, the six-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 expansion through organic growth and strategic investments.

Normal Course Issuer Bid
On February 2, 2016, AGF announced that the Toronto Stock Exchange (TSX) had approved AGF's notice of intention to renew its normal course issuer bid (NCIB) in respect of its Class B Non-Voting shares. AGF believes that the purchase for cancellation of Class B Non-Voting shares represents a desirable use of capital when, if in the opinion of management, the value of the Class B Non-Voting shares is attractive relative to the trading price of said shares. Purchase for cancellation by AGF of outstanding Class B Non-Voting shares may also be used to offset the dilutive effect of treasury stock released for the employee benefit trust and of shares issued through the Company's stock option plans and dividend reinvestment plan. AGF relies on an automatic purchase plan during the normal course issuer bid. The automatic purchase plan allows for purchases by AGF of its Class B Non-Voting shares during certain pre-determined black-out periods, subject to certain parameters. Outside of these pre-determined black-out periods, shares will be purchased in accordance with management's discretion. Under its normal course issuer bid, the Class B Non-Voting shares may be repurchased from time to time at prevailing market prices or such other price as may be permitted by the TSX for amounts as follows:

• Between February 4, 2016 and February 3, 2017, up to 4,664,042 Class B Non-Voting shares, or 10% of the public float for such shares, through the facilities of the TSX (or as otherwise permitted by the TSX); and
• Between February 4, 2015 and February 3, 2016, up to 6,707,999 Class B Non-Voting shares, or 10% of the public float for such shares, through the facilities of the TSX (or as otherwise permitted by the TSX).

During the three months ended May 31, 2016, AGF repurchased nil shares under its normal course issuer bid. During the six months ended May 31, 2016, under its normal course issuer bid, AGF repurchased 1,000,000 Class B Non-Voting shares for a total consideration of $5.1 million at an average price of $5.10 per share.

During the three months ended May 31, 2016, AGF purchased nil shares for the employee benefit trust. During the six months ended May 31, 2016, under its normal course issuer bid, AGF purchased 60,000 Class B Non-Voting shares for the employee benefit trust for a total consideration of $0.3 million at an average price of $4.45 per share.

Dividends

The holders of Class B Non-Voting and Class A Voting common 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 Voting common 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 credit 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 TSX during the 10 trading days immediately preceding the record date applicable to such dividend.

The following table sets forth the dividends paid by AGF on Class B Non-Voting shares and Class A Voting common shares for the years indicated:

 

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 dividends paid on April 8, 2016 was $0.08 per share.

Outstanding Share Data
Set out below is our outstanding share data as at May 31, 2016 and 2015. For additional detail, see Notes 9 and 13 of the condensed consolidated interim financial statements.

 

Key Performance Indicators, Additional IFRS and Non-IFRS Measures

We measure the success of our business strategies using a number of key performance indicators (KPI), which are outlined below. With the exception of income, the following KPIs are non-IFRS measures, which are not defined under IFRS. They should not be considered as an alternative to net income attributable to equity owners of the Company or any other measure of performance under IFRS. 

Income
Income is a measurement defined by IFRS and is recorded net of fee rebates and sales taxes. Income is indicative of our potential to deliver cash flow.

We derive our income principally from a combination of:

• management advisory fees based on AUM and from fund administration fees,
• DSC earned from investors when mutual fund securities sold on a DSC basis are redeemed,
• 32.5% equity interest in S&WHL, and
• general partnership interest and long-term investments in the alternative asset management platform.

EBITDA
We define EBITDA as earnings before interest, taxes, depreciation and amortization. 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.

Please see the Consolidated Operating Results section on page 8 of this MD&A for a schedule showing how EBITDA reconciles to our IFRS financial statements.

Free Cash Flow
Free cash flow represents cash available for distribution to our shareholders, share buybacks, investment in our alternative asset management platform and general corporate purposes. We define free cash flow as cash flow from operations before net changes in non-cash balances related to operations less interest paid and adjusted for certain tax items outlined below. Free cash flow is a relevant measure in the investment management business since a substantial amount of cash is spent on upfront commission payments.

 

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 income. We define EBITDA margin as the ratio of EBITDA to income.

 

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 income. We define pre-tax profit margin as the ratio of income before taxes to income.

 

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 from continuing operations by average shareholders' equity.

 

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 period divided by annualized EBITDA for the period.

 

Assets Under Management
The amount of AUM and the related fee rates are important to our business as these are the drivers of our revenue from our mutual fund, institutional and sub-advisory accounts and private client relationships and alternative asset management platform. AUM will fluctuate in value as a result of investment performance, sales and redemptions and crystallization of long-term investments. Mutual fund sales and AUM determine a significant portion of our expenses because we pay upfront commissions on gross sales 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 our 2015 Annual MD&A.

Net Sales (Redemptions)
Gross sales and redemptions are monitored separately and the sum of these two amounts comprises net sales (redemptions). Net sales (redemptions), together with investment performance and fund expenses, determine the level of average daily retail fund AUM, which is the basis on which management fees are charged. The average daily retail fund AUM is equal to the aggregate average daily net asset value of the AGF retail funds. We monitor AUM in our institutional, sub-advisory and private client and alternative businesses separately. We do not compute an average daily retail fund AUM figure for them.

Market Capitalization 

The Company's Class B Non-Voting share price continued to experience downward pressure during 2016. As a result, AGF's market capitalization of $418.4 million remained below its recorded net assets of $909.3 million. In 2015, we utilized independent specialists to determine the fair value of AGF's cash-generating units (CGUs). Based on the result of the assessment, the recoverable amount of each CGU exceeded its carrying value as at November 30, 2015. There have been no significant changes to the recoverable amount of each CGU as at May 31, 2016. Estimating the fair value of CGUs is a subjective process that involves the use of estimates and judgements, particularly related to cash flows, the appropriate discount rates, terminal growth rates and an applicable control premium.

Managing Risk

AGF is subject to a number of risk factors that may impact our operating and financial performance. These risks and the management of these risks are detailed in our 2015 Annual MD&A in the section entitled 'Risk Factors and Management of Risk.' The Company has not identified any material changes to the risk factors affecting its business or in the management of these risks.

Internal Control Over Financial Reporting

The Chief Executive Officer and the Chief Financial Officer have designed or caused the design of the Internal Controls Over Financial Reporting (ICFR) and Disclosure Controls and Procedures. There have been no changes in AGF's internal controls during the six months ended May 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Additional Information

Additional information relating to the Company can be found in the Company's Condensed Consolidated Interim Financial Statements and accompanying notes for the three and six months ended May 31, 2016, the Company's 2015 Annual Information Form (AIF) and Annual Report, and other documents filed with applicable securities regulators in Canada, and may be accessed at www.sedar.com.

AGF Management Limited
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and six months ended May 31, 2016 and 2015

 

 

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Interim Financial Statements

For the three and six months ended May 31, 2016 and May 31, 2015 (unaudited)

Note 1: General Information

AGF Management Limited (AGF or the Company) is a limited liability company incorporated and domiciled in Canada under the Business Corporations Act (Ontario). The address of its registered office and principal place of business is Toronto-Dominion Bank Tower, 66 Wellington Street West, Toronto, 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. The Company conducts the management and distribution of mutual funds in Canada under the brand names AGF, Elements and Harmony (collectively, AGF Investments). The Company's wholly owned subsidiary AGF CustomerFirst Inc. (AGFC) provides fund administration services to the AGF mutual funds. The Company also holds a controlling interest in FFCM, LLC and investments in an associate, Smith & Williamson Holdings Limited (S&WHL), and in joint ventures InstarAGF Inc. (InstarAGF), Stream Asset Financial Management LP (SAFMLP) and Stream Asset Financial LP (Stream).

These condensed consolidated interim financial statements were authorized for issue by the Board of Directors on June 28, 2016.

Note 2: Basis of Preparation

These condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) applicable to the preparation of interim financial statements, including International Accounting Standard 34 (IAS 34), Interim Financial Reporting. The accounting policies in these condensed consolidated interim financial statements are consistent with those disclosed in the Company's annual consolidated financial statements for the year ended November 30, 2015. The condensed consolidated interim financial statements should be read in conjunction with the Company's annual consolidated financial statements for year ended November 30, 2015, which have been prepared in accordance with IFRS as issued by the IASB.

Certain comparative figures have been reclassified to conform to the consolidated interim financial statement presentation in the current year.

Note 3: Adoption of New and Revised Accounting Standards

The accounting policies adopted in the preparation of these condensed consolidated interim financial statements are consistent with those followed in the preparation of the Company's annual consolidated financial statements for the year ended November 30, 2015. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. 

Note 4: Investments

The following table presents a breakdown of investments:

 

During the three and six months ended May 31, 2016 and 2015, no impairment charges were recognized.

Note 5: Investment in Associate, Joint Ventures and Long-term Investments

(a)   Investment in Associate

The Company holds a 32.5% investment in S&WHL accounted for using the equity method. At May 31, 2016, the carrying value was $105.0 million (November 30, 2015 – $105.3 million). During the three and six months ended May 31, 2016, the Company recognized earnings of $4.4 million and $8.3 million (2015 – $4.2 million and $7.9 million) from S&WHL and received $3.1 million and $3.1 million (2015 – $1.7 million and $1.7 million) in dividends from S&WHL.

(b)   Investment in Joint Ventures

The Company accounts for Stream Asset Financial GP LP (SAF GP), SAFMLP and InstarAGF, a joint venture with Instar Group Inc., using the equity method of accounting. The continuity for the six months ended May 31, 2016 and 2015 is as follows:

 

The Company's share of profit excludes its portion of the estimated carried interest to be distributed to AGF on crystallization. Carried interest will be recognized when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the Company, which is generally subsequent to the return of capital and contractual rate of return provided to investors.

The Company holds a 37.0% interest in SAFMLP. For the three and six months ended May 31, 2016, the Company recognized earnings of $0.2 million and $0.4 million (2015 – $0.2 million and $0.3 million) from SAFMLP.

The Company has recorded losses with respect to its equity investment in InstarAGF only to the extent of its initial investment, which has a carrying value of nil, because it is not contractually obligated to fund the losses. As at May 31, 2016, the Company accumulated unrecognized losses of $0.9 million (November 30, 2015 – $1.3 million) related to its interest in InstarAGF. In addition, AGF has agreed to advance up to $5.0 million to InstarAGF on an as-needed basis as a working capital loan facility. The loan facility is non-interest bearing and is repayable on a priority basis once InstarAGF begins to earn fees from funds under management. As at May 31, 2016, the Company had recorded a receivable of $3.2 million (November 30, 2015 – $3.3 million), included in accounts receivable, prepaid expenses and other assets on the consolidated interim statement of financial position.

As at May 31, 2016, the Company had recorded a $0.6 million promissory note receivable from Instar Group Inc. (November 30, 2015 – $1.0 million). The note bears interest at prime and has been included in accounts receivable, prepaid expenses and other assets on the consolidated interim statement of financial position.

(c)   Investment in Long-term Investments

The continuity for the investment in Stream and InstarAGF Essential Infrastructure Fund (EIF), accounted for at fair value through profit or loss (FVTPL), for the six months ended May 31, 2016 and May 31, 2015 is as follows:

 

The Company has committed a total of $150.0 million to funds and investments associated with the alternative asset management platform. The Company may temporarily provide capital to warehouse investments prior to formation of a fund. Upon closing of a fund with external investors, the Company receives a return of its capital in excess of its proportionate participation in the fund. The Company has designated its long-term investments in the funds at FVTPL.

As at May 31, 2016, of its $150.0 million allocation, the Company had committed $50.0 million (November 30, 2015 –$50.0 million) to Stream, a midstream oil and gas infrastructure fund. As at May 31, 2016, the Company had invested $43.3 million (November 30, 2015 – $38.4 million) with $6.7 million (November 30, 2015 – $11.6 million) remaining committed capital to be invested in the Stream fund.

The Company has committed $100.0 million to EIF. On January 27, 2015, the capital invested by the Company, together with amounts invested by Instar, was deployed to acquire an interest in the passenger terminal at Billy Bishop Toronto City Airport alongside other Canadian and international equity investors. On March 2, 2016, InstarAGF announced the first close of EIF with $372.0 million in firm equity commitments. InstarAGF expects to achieve the final closing of the fund by end of 2016. In connection with the first close, the Company received net cash of $73.6 million, net of a capital call of $9.6 million, which aligned AGF's invested capital to its proportionate share of total commitments to the fund.  

As at May 31, 2016, of its $100.0 million allocation, the Company had invested $61.8 million (November 30, 2015 – $105.1 million) with $38.2 million (November 30, 2015 – nil) remaining to be invested in EIF.

During the three and six months ended May 31, 2016, the Company recognized $1.2 million and $4.0 million (2015 – $2.3 million and $3.6 million) of income, which is included in fair value adjustment and other income in the consolidated interim statement of income.

Note 6: Acquisitions

(a)    Acquisition of FFCM, LLC

On November 16, 2015, the Company acquired 51.0% of FFCM for a cash purchase price of $6.7 million. FFCM is a Boston-based exchange-traded funds (ETF) advisor and asset management firm whose expertise is delivered through a family of alternative and smart-beta ETFs and a number of ETF managed solutions.

In addition, the agreement includes contingent consideration if the annualized advisory revenue of FFCM exceeds certain thresholds in 2018, up to a maximum of $6.7 million. Accordingly, a contingent consideration payable of $2.0 million was recorded upon the acquisition of FFCM. As at May 31, 2016, the fair value of the contingent consideration payable is $2.0 million and is included on the statement of financial position, representing management's best estimate of the fair value thereof. The key assumption used in the analysis was the growth rate in annualized advisory revenue. A 1% increase or decrease in the growth rate would result in an increase or decrease to the undiscounted contingent consideration payable of $0.1 million and $0.3 million, respectively.

The non-controlling interest was measured based on its proportionate share of FFCM's net identifiable assets.

The preliminary fair value of the net identifiable assets acquired and consideration paid are summarized as follows:

 

(b)   AGF CustomerFirst Inc. (AGFC)

On February 16, 2016, AGF completed the transition to internalize the Company's fund administration function within AGF. The Company did not acquire any significant net assets as a result of the acquisition. The transition included the transfer of 171 employees from Citigroup Fund Services Canada Inc. (CFSC) to AGFC. AGF invested approximately $6.0 million of capital for leaseholds, facilities and technology. As part of this transition agreement, the Company also entered into a four-year service agreement with L&T Infotech Financial Services Technologies Inc. (L&T). The agreement with L&T includes a minimum annual payment commitment of $7.8 million per year for services provided. This commitment expires in 2019.

Note 7: Intangible Assets

Management regularly monitors its intangible assets for indications of potential impairment. There have been no significant changes to the recoverable amounts or indicators for potential impairment of the Company's cash generating units (CGUs) and related inputs from those disclosed in the Company's annual consolidated financial statements for the year ended November 30, 2015. For additional information refer to the Company's annual consolidated financial statements for year ended November 30, 2015.

Note 8: Long-term Debt

(a)   As at May 31, 2016, AGF had drawn $230.0 million (November 30, 2015 – $270.0 million) against the unsecured revolving credit facility (the Facility) in the form of a one-month banker's acceptance (BA) at an effective average interest rate of 3.16% per annum. During the six months ended May 31, 2016, the Company repaid $40.0 million (2015 – $40.0 million) of its revolving credit facility.

(b)   On January 26, 2015, the Company arranged for a seven-day $100.0 million bridge facility through a Canadian chartered bank to fund an alternative asset investment. On January 26, 2015, AGF drew $89.1 million against the bridge facility, which was secured by the Company's term deposits held by the bank. The bridge facility was fully repaid on February 2, 2015. Refer to Note 5(c) for additional information on the investment in long-term investments.

Note 9: 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. The Class B Non-Voting shares are listed for trading on the Toronto Stock Exchange (TSX).

(b)   Changes During the Period

The change in capital stock is summarized as follows:

 

(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). AGF relies on an automatic purchase plan during the normal course issuer bid. The automatic purchase plan allows for purchases by AGF of its Class B Non-Voting shares during certain pre-determined black-out periods, subject to certain parameters. Outside of these pre-determined black-out periods, shares will be purchased in accordance with management's discretion. 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 4,664,042 shares for the period from February 4, 2016 to February 3, 2017 and up to 6,707,999 shares for the period from February 4, 2015 to February 3, 2016. During the three and six months ended May 31, 2016, under AGF's normal course issuer bid, nil and 1,000,000 (2015 – 191,000 and 2,979,040) Class B Non-Voting shares were repurchased at a cost of nil and $5.1 million (2015 – $1.4 million and $23.1 million) and the excess recovered of nil and $1.0 million (2015 – $0.2 million and $5.0 million excess paid) over the recorded capital stock value of the shares repurchased for cancellation was recorded in retained earnings.

(d)   Class B Non-Voting Shares Purchased as Treasury Stock for Employee Benefit Trust

During the three and six months ended May 31, 2016, nil and 60,000 (2015 – 243,506 and 243,506) Class B Non-Voting shares were purchased for the employee benefit trust at a cost of nil and $0.3 million (2015 – $1.9 million and $1.9 million). Shares purchased for the trust are also purchased under the Company's normal course issuer bid and recorded as a reduction to capital stock. During the three and six months ended May 31, 2016, 12,307 and 715,190 (2015 – 7,351 and 380,020) Class B Non-Voting shares purchased as treasury stock were released. As at May 31, 2016, 485,571 (November 30, 2015 – 1,140,761) Class B Non-Voting shares were held as treasury stock.

Note 10: Accumulated Other Comprehensive Income (Loss)

 

Note 11: Fair Value Adjustments and Other Income

 

Note 12: Expenses by Nature

 

Note 13: Stock-based Compensation and Other Stock-based Payments

(a)   Stock Option Plans

Under the Company's stock option plans, an additional maximum of 741,208 Class B Non-Voting shares could have
been granted as at May 31, 2016 (November 30, 2015 – 2,293,337).

The change in stock options during the six months ended May 31, 2016 and May 31, 2015 is summarized as follows:

 

During the three months ended May 31, 2016, nil (2015 – 539,260) stock options were granted and compensation expense and contributed surplus of $0.4 million (2015 – $0.2 million) was recorded. During the six months ended May 31, 2016, 1,610,394 (2015 – 1,735,122) stock options were granted and compensation expense and contributed surplus of $0.8 million (2015 – $0.6 million) was recorded. The fair value of options granted during the six months ended May 31, 2016 has been estimated at $0.52 per option (2015 – $1.32) using the Black-Scholes option-pricing model. The following assumptions were used to determine the fair value of the options granted during the six months ended May 31, 2016 and May 31, 2015:

 

(b)   Other Stock-based Compensation

Other stock-based compensation includes Restricted Share Units (RSUs), Performance Share Units (PSUs), Deferred Share Units (DSUs) and Partners Incentive Plan (PIP). Compensation expense for the three and six months ended May 31, 2016 related to these share units was $1.0 million and $1.7 million (2015 – $1.5 million and $3.4 million). As at May 31, 2016, the Company recorded a liability of $1.6 million (November 30, 2015 – $1.8 million) related to other cash-settled stock-based compensation. As at May 31, 2016, the Company recorded contributed surplus of $6.9 million (November 30, 2015 – $9.4 million), net of tax, related to equity-settled RSUs and PIP.

The change in share units of RSUs, PSUs and DSUs during the six months ended May 31, 2016 and May 31, 2015 is as follows:

 

Note 14: Income Tax Expense 

Income tax expense is recognized based on management's best estimate of weighted average annual income tax rate expected for the full financial year. The estimated effective tax rate for the six months ended May 31, 2016 was 21.6% (2015 – 25.0%).

During the six months ended May 31, 2016, the Company recorded tax contingencies expense of $1.1 million (2015 – $0.8 million) with respect to the Canada Revenue Agency (CRA) transfer pricing audit. Excluding the tax contingencies, the estimated effective tax rate for the six months ended May 31, 2016 was 17.3% (2015 – 22.9%). Refer to Note 19 for additional information on tax contingencies.

Note 15: Earnings per Share

 

Note 16: Dividends

During the three and six months ended May 31, 2016, the Company paid dividends of $0.08 and $0.16 (2015 – $0.08 and $0.35) per share. Total dividends paid, including dividends reinvested, in the three and six months ended May 31, 2016 were $6.3 million and $12.7 million (2015 – $6.6 million and $29.6 million). On June 28, 2016, the Board of Directors of AGF declared a quarterly dividend on both the Class A Voting common shares and Class B Non-Voting shares of the Company of $0.08 per share in respect of the six months ended May 31, 2016, amounting to a total dividend of approximately $6.3 million. These condensed consolidated interim financial statements do not reflect this dividend payable.

Note 17: Related Party Transactions

The Company is controlled by Blake C. Goldring, Chairman and Chief Executive Officer of AGF, through his indirect ownership of all the voting shares of Goldring Capital Corporation, which owns 80% of the Company's Class A Voting common shares. The remaining 20% of the Class A Voting common shares are held by the Vice-Chairman of AGF, who is also a Director.

The remuneration of Directors and other key management personnel of AGF is as follows:

 

Note 18: Fair Value of Financial Instruments

Financial assets are classified as FVTPL, available for sale, or loans and receivables. Financial liabilities are classified as FVTPL, other liabilities, or derivatives used for hedging.

The carrying value of accounts receivable and other assets, accounts payable and accrued liabilities and long-term debt approximate fair value.

The table below analyzes financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

 

The following table presents the group's assets and liabilities that are measured at fair value at May 31, 2016:

 

The following table presents the group's assets and liabilities that were measured at fair value at November 30, 2015:

 

The fair value of financial instruments traded in active markets is determined using the quoted prices where they represent those at which regularly and recently occurring transactions take place.

Level 1 instruments include listed equity securities on major exchanges, investments in AGF mutual funds, highly liquid temporary deposits with an Irish bank and non-Irish banks in Ireland, as well as Singapore bank term deposits.

Level 2 instruments include derivative instruments with major Canadian chartered banks and Canadian federal government debt. The fair value of derivatives used to manage interest rate exposure on deposits and long-term debt 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. Canadian federal government debt is measured at amortized cost and its fair value approximates its carrying value due to its short-term nature.

Level 3 instruments include long-term investments related to the alternative asset management platform and contingent consideration payable. Instruments classified in this category have a parameter input or inputs that are unobservable and that 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 long-term investments is calculated using the Company's percentage ownership and the fair market value of the investment derived from financial information provided by investees. The fair value of the Company's investment in EIF as at May 31, 2016 has been estimated using the net asset value (NAV) as calculated by the asset manager of the fund, adjusted to reflect the Company's agreement to limit its initial return to a specified maximum percentage on the portion of its interest that it expects to be sold to new investors upon the final close of the fund. The fair value of the Company's investment in the Stream fund is determined using NAV as calculated by the asset manager. If the NAV were to increase or decrease by 10%, the fair value of the Company's long-term investment and pre-tax income would increase or decrease by $2.9 million. Refer to Note 5(c) for additional information.

Contingent consideration payable is determined based on the present value of the expected payment to the sellers of FFCM, if the annualized advisory revenue in 2018 exceeds certain thresholds. Refer to Note 6 for additional information.

The following table presents changes in level 3 instruments for the six months ended May 31, 2016:

 

The following table presents changes in level 3 instruments for the six months ended May 31, 2015:

 

There were no transfers into or out of level 1 and level 2 during the six months ended May 31, 2016.

Note 19: Tax Contingencies

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 judgement in interpreting tax rules and regulations. The Company's tax filings are subject to audits, which could materially change the amount of the current and deferred income tax assets and liabilities, and could, in certain circumstances, result in the assessment of interest and penalties.

The Company has several ongoing disputes with the CRA, of which the final result of the audit and appeals process may vary and may be materially different compared to the estimates and assumptions used by management in determining the Company's consolidated income tax provision and in determining the amounts of its income tax assets and liabilities.

(a)   CRA Audit – Transfer Pricing

During the period November 30, 2013 to May 31, 2016, the Company has received a number of notices of reassessment (NOR) from the CRA for its 2005 through 2010 fiscal years relating to the transfer pricing and allocation of income between one of the Company's Canadian legal entities and a foreign subsidiary. Including the NOR received during the second quarter of 2016 for the 2010 fiscal year, the reassessments would increase the Company's taxes payable from its original tax filings by $61.1 million (before the application of interest and penalties of $32.2 million). 

The Company strongly disagrees with the CRA's position and filed various objections to the NOR for the taxation years 2005 to 2009. The Company will also object to the NOR for 2010 in the third quarter of 2016. In connection with the filing of an objection to the NORs for the applicable periods 2005 through 2010, the Company has paid approximately $62.1 million of which $8.1 million was paid (including interest and penalties) during the six months ended May 31, 2016 in relation to the 2009 and 2010 NORs.

In consultation with its external advisors, the Company believes that its transfer pricing methodology was reasonable and the Company is contesting the CRA's position and any related transfer pricing penalty. The Company believes it is likely that the CRA will reassess its taxes for subsequent years on a similar basis and that these may result in future cash payments on receipt of the reassessments. During the six months ended May 31, 2016, the Company has recorded a tax expense of $1.1 million (2015 – $0.8 million) in relation to this transfer pricing audit. The amount of tax provision recorded on the consolidated interim statement of financial position reflects management's best estimate on the ultimate resolution of this matter and includes any related estimated interest and penalties for the 2005 to 2016 fiscal years.

Further to the Company's objection to the NOR, the Company is also seeking Competent Authority relief from double taxation under the applicable tax treaty. The Company's provision, which reflects its best estimate of the ultimate resolution of this matter, includes an expected recovery of approximately $14.8 million for the tax years 2005 through 2010. Any relief from double taxation should be granted at the completion of the mutual agreement procedures (MAP) under the applicable tax treaty.

In 2013, the Company was accepted by the CRA into a Bilateral Advance Pricing Arrangement (BAPA) between Canada and the relevant tax authorities to establish the appropriate transfer pricing methodologies for the tax years 2011 through 2016. Under a BAPA, the taxpayer will receive certainty as to its transfer pricing arrangements for the years under consideration, will not be assessed transfer pricing penalties, and can avoid double taxation on transactions covered by the BAPA according to the provision of the income tax treaty between Canada and the foreign country.

(b)   CRA Audit – Foreign Accrual Property Income

In May 2015, the Company received a proposal letter from the CRA relating to foreign accrual property income (FAPI) earned by its foreign subsidiaries for the 2007 to 2012 fiscal years. The 2007 fiscal year has since been statute-barred and in September 2015, as a result of further review, the CRA has withdrawn its proposal on this issue for the 2008 to 2012 fiscal years. Despite the withdrawal of the proposal letter, the audit for the 2008 to 2012 fiscal years continues. The Company continues to believe that its tax position is correct and has not recorded a provision for this issue.

(c)   CRA Audit – Acquisition of Tax-related Benefits

In July 2015, the Company received a NOR from the CRA denying $30.5 million of tax-related benefits acquired and utilized by the Company in the 2005 fiscal year. The NOR would increase the Company's taxes payable from its original tax filings by $10.9 million (before the application of interest and penalties of $9.7 million). The Company strongly disagrees with the CRA's position and has filed an objection to the NOR. As a result of receiving the NOR, the Company has paid $13.5 million (including interest and penalties) during the year ended November 30, 2015, which was recorded as income tax receivable on the consolidated interim statement of financial position. In consultation with its external advisors, the Company believes that its tax position is probable of being sustained and, as a result, has not recorded a provision in relation to this matter.

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.

SOURCE AGF