Guardian Capital Group Ltd
Annual Report 2012

Plain-text annual report

2012 ANNUAL REPORT GUARDIAN CAPITAL GROUP LIMITED 2002 19621963 1964 1965 19661967 1968 1969 1970 1971 19721973 1974 19751976 1977 197819801981198219831984 198519861987 1988 1989 1990 1991 1992 1993 1995 94 1996 199719981999 2000 20012004 2011 2005 200620072008 2009 2010 1979 2003 TABLE OF CONTENTS 3 Message from the Chairman of the Board 4 To our Shareholders 6 Guardian Capital’s 50 Years 7 Financial Highlights 8 Review of Operations 12 Management’s Discussion and Analysis 20 Ten Year Review 21 Management’s Statement on Financial Reporting 22 Independent Auditors’ Report 23 Consolidated Financial Statements 28 Notes to Consolidated Financial Statements 49 Directors and Principal Executives 51 Corporate Information Guardian Capital Group Limited Message from the Chairman of the Board Dear Fellow Shareholders, On behalf of your Board of Directors, I am pleased to report to you that your company completed its 50th anniversary year with much success. This achievement did not take place overnight, but has been the culmination of planning, patience and execution with excellent leadership. Of particular note, during 2012 the company returned to its shareholders $13.2 million, consisting of dividends of $5.4 million and share repurchases of $7.8 million. Additionally, we invested $7.4 million to build upon our profitable life insurance agency business. In relation to the fiscal year 2012, we have declared a $0.20 per share dividend, payable in March, a 17.6% increase from the $0.17 paid last year. The Board has also decided to transition the Company’s dividend policy from an annual payment to a quarterly payment schedule, beginning with the first quarterly dividend, which is anticipated to be made payable in July, 2013. Your Board of Directors is confident in the strength and resilience of Guardian’s business model, and the team which continues to build upon the brand. This remarkable team, headed by George Mavroudis, President and Chief Executive Officer, exemplifies our company’s values of Trustworthiness, Integrity and Stability, together with care for our business and clients. The Directors have approved Management’s updated Strategic Plan for the company, which is based upon its vision of being the most respected independent investment management firm in Canada. Peter Stormonth Darling has been a dedicated member of our Board for 15 years, but has advised us that he will not be standing for re-election to the Board at the upcoming Annual Meeting. We wish to thank Peter for his generous counsel and contributions to Guardian. I also thank the other members of the Board for their counsel and efforts throughout the past year. Additionally, we wish to recognize and thank the management and associates of each of our subsidiary companies for an outstanding year. On behalf of the Board, we thank you for your continued support and trust, and look forward to discussing our progress further with you at our 2013 Annual Meeting, and continuing to work on your behalf in the year ahead. Respectfully, James Anas Chairman of the Board March 1, 2013 2012 Annual Report 3 2012 Annual ReportTo Our Shareholders Dear Shareholder, This past year marked a significant milestone for Guardian Capital, as we celebrated our 50th year in business. Associates across the company exhibit a great sense of pride knowing they are part of a successful independent financial institution, steeped in the history of serving the best interests of our clients, associates and shareholders. The total commitment of our associates, and the privileges bestowed by our clients, has allowed Guardian, in its 50th year in business, to set historical highs for such key financial metrics as assets under management, assets under administration, net revenues, operating earnings, cash flow from operations and shareholders’ equity. Guardian’s investment management business grew assets under management by more than 18%, or approximately $2.9 billion, to $18.8 billion at year end, compared to $15.9 billion at the end of 2011. Worldsource Wealth Management, our financial advisory business serving independent advisors across Canada, also experienced double digit growth, with assets under administration ending the year at $9.9 billion, compared to $8.7 billion at the end of 2011. The growth in assets under management and administration, in itself, is impressive. However, it is important to highlight some of the key drivers to this success. Over the last few years, we have had a strategic focus on improving our relations with the investment consultant community and with key personnel at pension, endowment, foundation and financial intermediary institutions, as well as expanding our geographical coverage. In 2012, our focus on these business development efforts led to historical highs in requests for proposals, finalist pitches and new client wins, across both our institutional pension and financial intermediary distribution channels. The success in new client acquisition was a major driver to growth in assets under management for the year. The foundation supporting our strong net new sales has been our continued success in fostering a stable environment for our investment professionals, allowing them to pursue the ultimate goal of adding value above our clients’ goals and benchmarks. Several of our equity and fixed income strategies delivered relatively strong performance over the year and, more importantly, over 3, 5 and 10-year investment horizons ending in 2012. The company’s broad range of investment solutions, with multi-year track records available across domestic and global equities, fixed income and balanced mandates, positions our institutional investment management business for continued growth in the years ahead. Guardian Capital Advisors LP, our private wealth management business, has been a steady and growing part of the company’s investment management business. In 2012, our private wealth business unit grew the number of clients we serve by more than 12% to over 700 families, with total assets under management of $1.4 billion. Through patient organic growth, Guardian has built one of the largest independent private wealth management 4 Guardian Capital Group Limitedfirms, representing clients across Canada, and with a growing list of referring advisors who value our partnership in serving their high net worth clients. Worldsource Wealth Management, our financial advisory business, continues to develop improved efficiencies and revenue growth, which have led to more than a $2 million reduction in operating losses in 2012, and position the business to contribute to Guardian’s profitability in 2013. A large part of this success is due to our leading position as a Managing General Agency (MGA), serving the needs of top independent insurance advisors selling life insurance, critical illness insurance and segregated funds. In November, 2012, we completed the acquisition of Strategic Brokerage Services, a strong regional MGA in Western Canada, which strengthens significantly the firm’s national presence. We expect to see continued consolidation in the MGA sector, and believe we are well positioned to play a leading role in that consolidation. As we have stated in recent years, we are focused on converting the scale of both our investment management and financial advisory businesses into operating businesses that generate meaningful and repeatable operating profits. In 2012, we began to see the potential growth in profitability from these operating businesses, and will be increasingly supportive toward reallocating portions of our corporate investment portfolio into investments that will aid the growth in these operating businesses. The improved results of our operating businesses generated net earnings available to shareholders in 2012 of $0.71 per share, diluted, compared with $0.31 per share, diluted in 2011. We believe there are other meaningful financial measures of our progress. Our operating earnings in 2012 were $20.1 million, $3.0 million greater than in 2011 and steadily growing since the lows of 2008, and adjusted cash flow from operations available to shareholders, which returned $0.66 per share in 2012, diluted, versus $0.60 in 2011. In 2013, we look forward to building on the gains made over the past year, and have a strategy in place to generate meaningful operating profits that are repeatable. The trust which clients place in our services, and the hard work, passion and loyalty of our associates, are sincerely appreciated, as is the patience of our shareholders, to allow us the time to build a successful independent financial institution. Warmest regards, George Mavroudis, President and Chief Executive Officer March 1, 2013 T O O U R S H A R E H O L D E R S 5 2012 Annual Report 1960s 1970s 1980s 1990s 2000s Gdn. Management Ltd. is renamed Guardian Capital Group Limited. John Christodoulou joins Guardian’s Board of Directors. Norman Short, Alan Grieve and Ralph Horner launched Guardian in 1962, as Gdn. Management Ltd., to serve as the management company for Guardian Growth Fund Limited, which had been formed two years earlier. Guardian Growth Fund, with a “Free-to-Roam” mandate, becomes one of the top-performing Canadian mutual funds in the 1960’s. Norman Short & Associates Ltd. is formed, planting the seeds for the group’s invest- ment management business. Later renamed Guardian Capital Investment Counsel Ltd. (GCIC), it is the direct predecessor to today’s Guardian Capital LP (GCLP). Other senior executives were Hunter Thompson and Gurston Rosenfeld. Hunter builds Guardian’s outstanding col- lection of Canadian aboriginal art; Gurston is instrumental in Guardian’s financing of movies, including “The Terry Fox Story”. Guardian occupies offices at 48 Yonge Street in Toronto for most of its first quarter century. Guardian forms pooled funds to serve smaller pension clients, and takes over other public mutual fund groups, broadening its invest- ment offering to include Canadian and US Equity and Fixed Income mandates. Jim Cole joins GCIC as a senior executive and investment manager, holding senior posi- tions with GCIC and the parent company for over 25 years. Tyndall-Guardian, a joint venture between Guardian and Tyndall, a UK firm, builds a mutual fund management firm in Bermuda. Gdn. Management Ltd. completes its IPO, and begins trading on the Toronto Stock Exchange. Vern Christensen joins Guardian, in charge of legal and finance, and is involved with the devel- opment of the mutual fund and financial advisory businesses, continuing as Chief Financial Officer today. All of Guardian’s domestic mutual fund administration brought in-house, and Guardian Group of Funds Limited (GGOFL) formed. Fund offering broadened to include World Equities, Money Market and International Fixed Income, among others. Through mergers with two other firms, Ruggles & Crysdale and Fiscal Consultants, broader mandates and significant AUM added to Guardian’s investment counseling business. Guardian has public offerings of specialty closed-end funds, including Precious Metals, Pacific Rim and specialty Fixed Income, listed on the Toronto Stock Exchange, using in-house expertise and partnerships with international specialists. Sale of Tyndall-Guardian to Guardian’s joint venture partner provides Guardian with the start of its corporate investment portfolio. Norman Short retires as President and CEO of Guardian, and is replaced by John Christodoulou, who had been taking on more senior positions with Guardian. Former closed-end funds now all merged into current open-end funds. Broad range of mutual funds results in asset growth to over $2 billion. GGOFL forms mutual fund dealer Worldsource Financial, sponsoring life insurance sales force as mutual fund agents. Alexandria Bancorp formed as bank, mutual fund manager, trust and corporate administrator in Cayman Islands. Later added Alexandria Trust in Barbados. GGOFL sold to Bank of Montreal for $180 million in BMO shares, adding to corporate portfolio of securities. Guardian continues to sub-advise significant assets for the funds. Worldsource financial advisory business is expanded to include a securities dealer, with the launch of Worldsource Securities Inc. The purchase of Trowbridge Financial results in the forma- tion of Worldsource Insurance Network (WIN), a life insurance managing general agent located in Vancouver. Private Wealth investment manager formed, predecessor to Guardian Capital Advisors, which eventually expands to Calgary and Vancouver. Guardian Ethical Management, a Socially-Responsible Investment joint venture, founded. John Christodoulou passes away, and George Mavroudis, who joined Guardian several years earlier, is appointed President and CEO of Guardian, and a member of the Board of Directors. Guardian Capital LP builds an in-house Global investment management division, with client assets greater than $1 billion. Through purchase of IDC in Eastern Canada, and SBS in Alberta and BC, WIN builds a national presence as IDC Worldsource. Guardian Capital celebrates the 50th Anniversary of its founding, with its total AUM at almost $19 billion and its total AUA at almost $10 billion. Merged Worldsource Financial with Capital Management Group, to form CMG-Worldsource Financial Services, in Markham, Ontario. AUM reaches $10 billion, and AUA at Worldsource reaches $2 billion. Financial Highlights 2012 2011 2010 2009 2008 2012 2011 2010 2009 2008 2012 2011 2010 2009 2008 2012 2011 2010 2009 2008 2012 2011 2010 2009 2008 2012 2011 2010 2009 2008 18,832 15,928 16,266 13,986 11,764 9,918 8,654 7,783 7,074 6,005 11.99 11.17 11.57 10.49 6.69 20,138 17,133 13,539 8,728 8,253 0.71 0.69 0.31 0.41 0.19 0.66 0.60 0.55 0.42 0.37 F I N A N C I A L H I G H L I G H T S 12% ▴ Increase in productivity rates up. Economy slows in Q2 YoY 68M Increase in productivity rates up. Economy slows in Q2 YoY Assets Under Management As at December 31 ($ in millions) Assets under management increased in 2012, largely as a result of net new monies received from new and existing institutional clients. Assets Under Administration As at December 31 ($ in millions) Assets under administration (AUA) increased significantly in 2012, as a result of additional insurance AUA provided by the purchase of a Western Canada MGA, plus additional mutual fund AUA provided by new advisor teams joining the Company. Fair Value of the Company’s Securities, per share, diluted1,2 As at December 31 (in $) The fair value of the Company’s Securities per share increased in 2012, reflecting the growth in the fair value of the Company’s investments, substantially the Bank of Montreal shares. Operating Earnings1,2 For the years ended December 31 ($ in thousands) 8 7 6 5 4 3 2 1 0 Operating Earnings improved significantly in 2012, reflecting a full year’s contribution from a 2011 Financial Advisory purchase, plus continuing improvements in the Company’s Investment Management business. Increase in productivity rates up. Economy slows in Q2 YoY Net Earnings available to shareholders, per share, diluted1,2 For the years ended December 31 (in $) Net earnings per share increased dramatically in 2012, reflecting improved Operating Earnings and significant Gains on Securities Held For Sale. Adjusted Cash Flow From Operations available to shareholders, per share, diluted1,2 For the years ended December 31 (in $) Adjusted cash flow from operations increased in 2012, reflecting improved Operating Earnings. (1) 2010 to 2012 numbers are in accordance with IFRS; 2009 and previous years are as reported under previous Canadian GAAP. (2) Numbers for 2010 and 2011 have been amended retrospectively to reflect the 2012 adoption of new IFRS standards, as disclosed in note 3a to the 2012 Consolidated Financial Statements. Guardian Capital Group Limited 7 2012 Annual Report Review of Operations Institutional Investment Management Institutional investment management services are provided by Guardian Capital LP (“GCLP”), which serves pension plan sponsors, broker dealer third- party platforms, closed-end funds and mutual funds, operating and endowment funds, and foundations. GCLP’s capabilities span a range of asset classes, geographic regions, and specialty mandates. GCLP, one of the largest, independent investment management firms in Canada, is the successor to our investment management business, which was founded in 1962, and celebrated its 50th anniversary in 2012. Assets under management (“AUM”) in GCLP were $17.3 billion at the end of 2012, up from $14.5 billion at the end of 2011. The increase in assets under management was due mainly to strong net new monies from clients across both the institutional and retail intermediary client base. The S&P/TSX Composite benchmark rose 8.2% and provided the balance of growth in AUM for 2012. Relative to many of our peers, GCLP experienced a strong year of growth due to strong relative performance across several asset classes, continued stability in the investment team and organization, and strong client service and business development efforts. Canadian Equity In 2012, most of our Canadian equity strategies experienced strong returns, which will provide support for further growth in 2013. As indicated last year, we experience continued investor interest in our Canadian Growth Equity strategy, to the point of having to decline new client appointments starting in 2013. With over $3 billion in this strategy, we felt that it was in the best interests of our existing clients to limit future growth in assets to the investment needs of those clients. We have also witnessed a growing trend among institutional investors to seek strategies that are biased toward income generation and lower portfolio volatility. This speaks to Guardian’s leading expertise in managing such strategies for well over 15 years, and resulted in significant new appointments for our Equity Income and Growth & Income strategies. We believe this theme will continue to remain popular with both institutions and retail investors, and should support further growth in 2013. At times when many institutional investors are shrinking their allocation to Canadian equities, we are proud to have experienced continued growth in this area, and intend to continue providing the solutions that investors desire. Finally, at the end of 2012, we added to our investment bench strength with the hire of a senior analyst, who has extensive experience focused on Canadian companies. Guardian has one of the deepest Canadian Equity investment teams in the industry, with nine investment professionals who have an average of 27 years of experience overseeing a total of approximately $10 billion in assets under management. Global Equity As we reported in last year’s review of operations, the strong 5 year performance history of our Global Dividend Equity strategy at the end of 2011 provided us with strong cash inflow momentum into 2012, and was a large contributor to the growth in assets under management for the global equity team this past year. This Global Dividend Equity strategy surpassed $750 million under management by year end. The team reached an important milestone in our building of the global equity platform, reporting total global equity AUM of over $1 billion, representing growth of over 100% during the year. We continue to expand the firm’s product offering, with the launch of similar regional lower-volatility strategies for International and Emerging Equity Markets. The early performance results for these strategies are encouraging, and provide the seed for further growth in the years to come. In addition to our product development initiatives in this area, we continued our investment in personnel by adding to our investment team at the end of 2012, with the hire of a Senior Research Director/Portfolio Manager, who joined Guardian with more than 20 years of quantitative investing experience. This brings the total number of investment professionals within our global equity team to eight, which represents roughly one-third of our investment professional staff in GCLP. As investors gain greater confidence in the equity markets, stronger equity markets bring the risk that our “lower-volatility” strategies may lag the general markets. However, we believe that the structural needs for income by investors will support the long- term demand for our strategies which, by design, generate above-market dividend yield for their investors at below-market risk. Fixed Income Again, in 2012, the fixed income team produced solid, consistent investment returns across the spectrum of strategies it manages on behalf of clients, ranging from core bond to high yield bond strategies. Our conservative style of management continues to appeal to investors seeking safety in their bond allocations. As well, the ongoing investor appetite for higher-yielding securities supported $17.3B 2012 Institutional AUM 6 4 3 , 7 1 0 1 9 , 4 1 9 8 4 , 4 1 5 2 8 , 2 1 2009 2010 2011 2012 Institutional Assets Under Management as at Dec. 31 ($ mil) R E V I E W O F O P E R A T I O N S 8 Guardian Capital Group Limited continued growth in our high yield bond strategies. This resulted in a 25% growth in fixed income AUM in 2012. Looking ahead, we expect bond yields to rise eventually. This will be a challenging environment for many strategies that have performed well over the last 20 to 30 years. As a result, we have initiated new strategies in 2012, including a short-duration bond strategy focusing on high-quality corporate issues, and a variation of this strategy incorporating an allocation to high yield bonds. We continue to investigate new approaches to fixed income management for the next decade, and will introduce additional new strategies in 2013. We intend to be well-prepared to meet investor needs in a changing fixed income landscape. Balanced Funds Balanced strategies have historically been a relatively small component of our AUM, but have witnessed increased momentum in 2012. Investors have started recognizing Guardian’s ability to customize balanced funds by selecting strategies from its wide range of Canadian and foreign equity solutions, combined with a solid fixed income offering. We have acquired eight balanced fund clients in 2012, and expect the momentum to remain strong in 2013. Investment Client Distribution The composition of our client base remains broadly diversified, with approximately 50% of assets from institutional corporate and pension accounts, and 50% from retail intermediary clients. Retail intermediary include sub-advisory relationships with mutual funds and closed-end funds, and our leading position in the separately-managed wrap account programs with the top broker dealers in the country. The separately- managed wrap account assets continued to deliver excellent growth in net new assets over the 2012 calendar year, as we finished the year with more than $3 billion in AUM in this channel. Many of our existing broker dealer partners, in particular the big six Canadian banks, consider us as a preferred provider of core investment solutions on their managed account platforms. Our independence as a wholesaler of diversified investment solutions that deliver consistent returns and strong investment team continuity, coupled with our excellence in servicing the advisors in these large broker dealer distribution channels, positions us as a strong partner for their fast-growing managed fee-based programs. Building on our positive momentum in institutional pension and endowment searches in 2011, we experienced our highest levels of requests for proposals and finalist opportunities in a single calendar year in 2012. We improved on our closure rate in finalist presentations, along with expanding our client base beyond Canada with mandates secured from an international sovereign wealth client and a major US pension plan. We look to maintain this momentum in 2013, through continued strong relative investment returns across the spectrum of equity and fixed income solutions, and building on our relationships and communications with the investment consulting community. Success in the institutional investment market still relies heavily on winning over that community, as they are involved in some shape or form in greater than 80% of the institutional searches and placements. Among them, awareness of our capabilities is strong, and our expanded coverage over the last couple of years from the top tier consultant community to the regional and smaller consultants across Canada and into the US, will position us well going into fiscal 2013. Growth prospects across Guardian Capital LP’s existing investment capabilities are good. However, we have historically demonstrated that long term relevance as an investment management firm comes from the ability to constantly foster new investment products and re-invest in existing and new investment professional teams. We have done both over the past year. In addition to our recent hires and the launches of new strategies for the Canadian and global equity investment teams, we have also attracted an experienced and talented investment team to lead our effort in building a direct real estate offering. In early 2013, we expect to launch a core balanced direct real estate fund, using a combination of Guardian Capital’s corporate funds and funds allocated by a select group of third party clients. Fostering a stable investment environment for professionals to meet their value-added targets over full cycles is of paramount importance. We shall complement this effort with our ongoing search to deepen our investment teams and diversify our strategies, so as to meet our goal of building a stable but growing pool of assets and revenues. Private Wealth Management Guardian Capital Advisors LP (“GCA”) provides portfolio management services across Canada and beyond to private wealth clients, foundations and endowments. We are focused on assisting private wealth clients in achieving their investment objectives, by constructing tailored and tax-efficient investment solutions through fully-discretionary segregated accounts and investment funds. Our investment process combines a proprietary global equity screening process with the experience of dedicated private wealth client portfolio managers. GCA provides comprehensive portfolio management services to meet clients’ individual investment needs. Through the dedicated assignment of an experienced portfolio manager, we bring the vast intellectual resources of the firm to construct custom-designed solutions for each client. We work not only with the clients themselves, but also with their legal, accounting and other advisors, R E V I E W O F O P E R A T I O N S 9 220% GROWTH in Wrap assets since 2009 0 9 4 , 3 9 5 2 , 2 9 1 5 , 1 1 9 0 , 1 2009 2010 2011 2012 Wrap Assets Under Management as at Dec. 31 ($ mil) $1.4 B 2012 Private Wealth AUM 8 1 4 , 1 1 3 3 , 1 0 3 2 , 1 0 5 0 , 1 2009 2010 2011 2012 Private Wealth Assets Under Management as at Dec. 31 ($ mil) 2012 Annual Report R E V I E W O F O P E R A T I O N S 10 $9.9B 2012 AUA 8 1 9 9 , 4 5 6 , 8 3 8 7 , 7 4 7 0 , 7 2009 2010 2011 2012 Total Assets Under Administration as at Dec. 31 ($ mil) to ensure that the services we provide properly integrate with the overall financial objectives of our clients. Through offices in Vancouver, Calgary and Toronto, clients and their advisors have local direct access to experienced investment professionals, supported by a strong administrative team. GCA’s assets under management and supervision were $1.4 billion at the end of 2012, compared to $1.3 billion at the end of 2011. We believe that a focus on risk management, as well as on enhanced returns over the long term, will provide the desired benefits to our client base, which are protection against short-term volatility, long-term growth and tax-efficient cash flows. GCA continues to attract new clients, both directly and through referrals from financial advisors. The majority of our client base arises from domestic clients, split roughly equally between Eastern and Western Canada. In 2012, we added staff to expand our portfolio management and administrative capabilities in order to prepare for future growth. Our business development efforts will continue to focus on delivering awareness in the legal, accounting, family office and financial advisory communities. Financial Advisory Worldsource Wealth Management Inc. (“Worldsource”) is an integrated financial advisory platform, with independent financial advisors offering mutual funds, securities and life insurance products to Canadians from coast to coast. Assets under administration (“AUA”) totaled $9.9 billion at December 31, 2012, compared to $8.7 billion at the end of 2011. Worldsource is committed to being an independent dealership platform for financial advisors who sell a variety of financial products. Worldsource promotes an open architecture, and thus provides advisors with the independence to choose the best available solutions for their clients. The advisors are further supported with quality reporting and administration, and a professional approach to sales compliance and product suitability. Worldsource Financial Management Inc. (“WFM”) is a national mutual fund dealer with AUA of $6.7 billion at December 31, 2012, compared to $6.1 billion at the end of 2011. The increase in assets was attributable to successful recruiting programs, including the recruitment of the advisors from the Independent Accountants’ Investment Group, and higher client portfolio valuations due to market appreciation for both equities and bonds. WFM’s commission revenues continue to trend lower in 2012, due to a general move by advisors away from deferred sales charge (“rear-load”) funds to lower initial commission rate “front-load” funds. The lower commission rate funds generally have higher continuing or “trailer” fees, so that future periods will benefit from the build-up of these continuing commissions. Additionally, the increase in continuing commissions was offset by some movement toward lower commission products such as fixed income or balanced income strategies, rather than the higher commissions generated from long-term equity strategies. We believe that the move toward greater trailer fee revenue better aligns the advisor’s business with the client’s interests. It also improves the advisor’s and the dealership’s business models, by providing for recurring revenue as opposed to the historical reliance on active sales commission activity. Despite a significant recovery in the equity markets since the lows of 2009, WFM advisors and their clients remain cautious, as they continue to allocate a disproportionate amount of their investments into cash equivalent, fixed income and balanced income strategies. As investor sentiment becomes more confident, we expect to see an increase in commission and trailer revenues, with higher allocations toward equity products. In 2013, WFM plans to work closely with its independent advisors, to create an investment solutions program where Guardian’s in-depth investment management capabilities will be leveraged to convert more AUA into AUM. WFM believes that developing best practice management programs and customized portfolio solutions for its advisors can grow both the dealership and the advisor’s revenues, as they improve their productivity in servicing the needs of their clients and in building their books of business. Worldsource Securities Inc. (“WSI”) is Worldsource’s investment dealer or securities brokerage. WSI operates its branch network on the Agency Model, under which investment advisors are permitted a higher degree of independence than traditionally afforded. WSI is focused on providing the highest possible level of technological and administrative support to its branch network. In 2012, WSI continued to attract new financial advisors, adding branches in Toronto, Calgary and Moncton, and finishing the year with greater than $1 billion in AUA. In 2013, management expects that WSI will continue its success in recruiting advisors and adding new branches to its growing network of brokers across the country. IDC Worldsource Insurance Network Inc. (“IDC WIN”) is a Managing General Agency (“MGA”), which is 67% owned by Worldsource and which provides sales, marketing and administrative support to licensed insurance advisors nationwide. IDC WIN experienced strong growth in 2012, including the completion, near the end of the year, of the acquisition of Strategic Brokerage Services (“SBS”), a strong regional MGA in Western Canada, which gives the firm a national footprint, with offices in Guardian Capital Group Limited Western, Central and Eastern Canada available to provide local service to its advisors. IDC WIN is a leader in the MGA market in Canada, and has a significant competitive advantage for meaningful growth and profitability, as the industry continues to consolidate. Segregated fund and accumulation annuity AUA surpassed $2.2 billion as of December 31, 2012, up from $1.6 billion as of the end of 2011, largely driven by the SBS purchase. The growth in the IDC WIN business in the past two years has increased its insurance commission revenue to $10.4 million in 2012, from $2.3 million in 2010. IDC WIN will continue to build on the strong practice management and recognition programs it offers to its advisors, and focus on sales growth through selective advisor recruitment and increasing advisor productivity in 2013. International Private Banking Alexandria Trust Corporation (“ATC”) is a licensed and regulated domestic trust company based in Barbados. ATC provides fiduciary and corporate administration services to international clients. Alexandria Bancorp Limited (“ABL”) is a private bank based in the Cayman Islands, which was established in 1990. ABL is licensed and regulated by the Cayman Islands Monetary Authority to provide investment management, fiduciary and banking services to international clients. ABL has substantial investment management capabilities, both through its own Alexandria Fund and its managed segregated account platform. In 2012, administrative services income improved due to higher banking transaction activity and increased referral activity with regional centers of influence. In 2013, ABL plans to continue to strengthen its international referral network and to improve its pooled investment alternatives. R E V I E W O F O P E R A T I O N S 7 2 2 , 2 3 3 6 , 1 3 2 7 9 1 4 2009 2010 2011 2012 Insurance Assets Under Administration as at Dec. 31 ($ mil) . 4 0 1 1 . 6 9 . 1 3 . 2 2009 2010 2011 2012 Insurance Commission Revenue for the years ended Dec. 31 ($ mil)1 1) Note: results for 2010 to 2012 are in accordance with IFRS; 2009 is as reported under previous Canadian GAAP. 11 2012 Annual Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 12 Management’s Discussion and Analysis In accordance with securities regulatory requirements, the discussion and analysis which follows for Guardian Capital Group Limited (“Guardian”) pertains to the year ended December 31, 2012, with comparatives for the year 2011 and, in some cases, the year 2010. Readers are encouraged to refer to the discussions and analyses contained in the 2011 Annual Report and the First, Second and Third Quarter 2012 Reports. This discussion and analysis has been prepared as of March 1, 2013. Additional information relating to Guardian and its business, including Guardian’s Annual Information Form, is available on “SEDAR” at www.sedar.com. Caution Concerning Forward-Looking Statements Guardian may, from time to time, make “forward- looking statements” in annual and quarterly reports, and in other documents prepared for shareholders or filed with securities regulators. These statements, characterized by such words as “goal”, “outlook”, “intends”, “expects”, “plan”, “prospects”, “are confident”, “believe” and “anticipate”, are intended to reflect Guardian’s objectives, plans, expectations, estimates, beliefs and intentions. By their nature, forward-looking statements involve risks and uncertainties. There is a risk that these forward-looking statements will not be achieved. Undue reliance should not be placed on these statements, as a number of factors could cause actual results to differ from Guardian’s objectives, plans, expectations and estimates reflected in the forward- looking statements. Overview of Guardian’s Business Guardian is a diversified financial services company, which serves the wealth management needs of a range of clients through its various business segments. The areas in which Guardian operates are: institutional and private client investment management; financial advisory; and corporate activities and investments. As at December 31, 2012, Guardian had $18.8 billion of assets under management (“AUM”) and $9.9 billion of assets under administration (“AUA”). In addition, Guardian has a diversified portfolio of securities which, together with its investment in Bank of Montreal shares, had a fair value of approximately $380 million at the end of the year. Material Events Acquisition of Managing General Agency Business Effective November 30, 2012, Guardian’s subsidiary IDC Worldsource Insurance Network Inc. (“IDC WIN”), a life insurance managing general agency (“MGA”), acquired the business of Strategic Brokerage Services Limited Partnership (“SBS”) for a purchase price of $5.3 million. The transaction will enhance Guardian’s presence in the Prairie Provinces as it continues the strong growth of its MGA business. As a result of this transaction, Guardian’s life insurance AUA has increased to over $2.2 billion by year end. IDCWIN ended the year with $10.4 million in insurance revenues for 2012. It is expected that the acquisition will increase the insurance revenues to over $13 million in 2013. Changes in accounting policies As disclosed in note 3a to the Consolidated Financial Statements contained in Guardian’s 2012 Annual Report, on a retrospective basis, during the year Guardian “early adopted” the following International Financial Reporting Standards (“IFRS”): IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, and IFRS 12, Disclosure of Interest in Other Entities. The adoption of IFRS 10 requires Guardian to consolidate certain mutual funds which it is deemed to control. However, Guardian has not consolidated these mutual funds, as they meet the criteria to be classified as assets held for sale. As a result, Guardian has recorded these mutual funds as Securities held for sale on its Consolidated Balance Sheets and has recorded the changes in the fair value of those mutual funds in its net earnings for the current and comparative periods. As a result of the adoption of IFRS 11, Guardian has changed its accounting for its investment in a joint venture, from proportionate consolidation to the equity method, for the current and comparative periods. The effects of those changes in accounting policies on Guardian’s Statements of Operations and Balance Sheets are disclosed in note 3a to Guardian’s 2012 Consolidated Financial Statements. Where appropriate, such effects are also described in this discussion and analysis, and all comparative figures have been amended accordingly. Use of Non-IFRS Measures Guardian’s management uses certain measures to evaluate and assess the performance of its business. One of the measures that Guardian uses is not in accordance with IFRS. Non-IFRS measures do not have standardized meanings prescribed by IFRS, and are therefore unlikely to be strictly comparable Guardian Capital Group Limited to similar measures presented by other companies. However, Guardian’s management believes that most shareholders, creditors, other stakeholders and investment analysts prefer to include the use of this measure in analyzing Guardian’s results. Guardian management measures the performance of Guardian’s business by using “Adjusted cash flow from operations available to shareholders”, which is disclosed in the table under “Consolidated Financial Results”, below. This non-IFRS measure is used by management to indicate the amount of cash either provided by or used in Guardian’s operating activities which is available to shareholders, and many companies similar to Guardian use this measure in a similar manner. The most comparable IFRS measure is “Net cash from operating activities”, which is disclosed on Guardian’s Statements of Cash Flows. The following is a reconciliation of this non-IFRS measure to the IFRS measure: For the years ended December 31 ($ in thousands) Net cash from operating activities, as reported Net change in non-cash working capital items Cash flow from operations before changes in non-cash working capital items Less: Available to non-controlling interests Adjusted cash flow from operations available to shareholders 2012 2011 (amended) $ $ 23,900 (1,697) 22,203 (923) 21,280 $ $ 21,201 (929) 20,272 (933) 19,339 Consolidated Financial Results The comparative financial results of Guardian on a consolidated basis are summarized in the following table: For the years ended December 31 ($ in thousands, except per share amounts) Net revenue Expenses Operating earnings Net gains (losses) Earnings before income taxes and gains (losses) on securities held for sale Income tax expense Net earnings before net gains (losses) on securities held for sale Net gains (losses) on securities held for sale Net earnings Net earnings available to shareholders Adjusted cash flow from operations available to shareholders Diluted per share amounts Net earnings available to shareholders Adjusted cash flow from operations available to shareholders As at December 31 ($ in millions, except per share amounts) Assets under management Assets under administration Value of corporate holdings of securities Value of corporate holdings of securities per share, diluted The increase of $3 million in operating earnings in 2012 compared to 2011 is largely due to an increase in net revenue, partially offset by an increase in expenses. A more detailed discussion is provided under “Revenues and Expenses” below. The net gains of $1.3 million recorded in 2012 substantially resulted from the $1.0 million gain on the repayment of the promissory note by the 1 . 0 2 1 . 7 1 5 . 3 1 7 . 8 2009 2010 2011 2012 Operating Earnings for the years ended Dec.31 ($ mil)1 2012 85,030 64,892 20,138 1,337 21,475 3,275 18,200 4,559 22,759 22,556 21,280 0.71 0.66 18,832 9,918 380 11.99 $ $ $ $ $ $ $ $ $ $ 2011 (amended) % change $ $ $ $ $ $ $ $ $ 73,693 56,560 17,133 (131) 17,002 774 16,228 (5,493) 10,735 10,003 19,339 0.31 0.60 15,928 8,654 364 11.17 15 % + 15 % + 18 % + + – % + 26 % + 323 % 12 % + + – % + 112 % + 125 % 10 % + + 129 % 10 % + + + + + 18 % 15 % 4 % 7 % issuer, plus gains of $0.2 million realized on the repayments of partially-amortized intangible assets. In 2011, the net loss of $0.1 million was composed of realized losses on both directly-held securities and consolidated mutual funds, partially offset by a gain of $0.7 million on a debt restructuring by the issuer. The higher income tax expense in 2012 is the result of legislative changes which increased the provincial 1) Note: results for 2010 to 2012 are in accordance with IFRS; 2009 is as reported under previous Canadian GAAP. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 13 2012 Annual Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 2 3 8 , 8 1 6 6 2 , 6 1 8 2 9 , 5 1 6 8 9 , 3 1 2009 2010 2011 2012 Total Assets Under Management as at Dec. 31 ($ mil) 4 . 2 4 2 . 7 3 3 . 3 3 2 . 0 3 2009 2010 2011 2012 Management Fee Income, net for the years ended Dec. 31 ($ mil)1 1) Note: results for 2010 to 2012 are in accordance with IFRS; 2009 is as reported under previous Canadian GAAP. 14 tax rates applicable to future periods, plus the income taxes on the increased operating earnings. The net earnings before net gains (losses) on securities held for sale, which are comparable to the net earnings reported in previous years, were approximately $18.2 million in 2012, $2.0 million higher than in 2011. With the exception of the effect of the additional deferred taxes referred to above, Guardian’s management believes that this is a more directly comparable measure of the historical representation of Guardian’s operating results than net earnings, which include the effect of the changes in the fair values of the mutual funds classified as held for sale. The net gains (losses) on securities held for sale represent the net changes in the fair value and the net realized gains (losses) on those securities during each year. These securities held for sale are the result of the changes in the accounting policies and adoption of new accounting standards, as previously described under “Changes in accounting policies” above. Net gains on these securities in 2012, compared to significant net losses in 2011, contributed to the increase in net earnings for the year to $22.8 million, from $10.7 million in 2011. Adjusted cash flow from operations for the year amounted to $21.3 million, compared to $19.3 million in 2011. The differences between earnings per share and cash flow per share arise primarily due to the impact of future income taxes, amortization expenses and stock-based compensation, as well as the exclusion of gains or losses on securities from the calculation of cash flow from operations. Revenues and Expenses Investment Management Revenues The largest source of revenue at Guardian is management fees received from clients, which vary as a result of changes in the amounts of assets managed, and variations in the rates of management fees charged. The following is a summary of the assets under management: Years ended December 31 ($ in millions) Assets under management, beginning of year Net additions (reductions) from clients during year Market appreciation (depreciation) Assets under management, end of year Composed of: Institutional Private client International Total Guardian’s total AUM was $18.8 billion at December 31, compared to $15.9 billion in the prior year, an 18% increase. The increase in AUM was largely due to successful marketing efforts which resulted in new monies from new and existing institutional clients. Management fees, net of referral fees paid, for the year 2012 were $42.4 million, 14% higher than the $37.2 million for 2011. Institutional management fees increased 17% to $33.0 million in 2012 from $28.3 million in 2011, as a result of increases in AUM and the continuing conversion to higher-margin AUM. A performance fee of $1.4 million was included in the 2012 fees, whereas a performance fee of $0.4 million was earned in 2011. Private client management fees, net of referral fees paid, increased 10% during the year to $6.9 million from $6.3 million in 2011, reflecting the continuing increase in the actual and average AUM in this area. Management fees earned from international clients during the year, at $2.5 million, were substantially unchanged from the $2.6 million a year earlier. 2012 15,928 1,855 1,049 18,832 17,346 1,418 68 18,832 $ $ $ $ 2011 16,266 (57) (281) 15,928 14,489 1,331 108 15,928 $ $ $ $ Financial Advisory Commission Revenues Total AUA at Guardian at the end of 2012 amounted to $9.9 billion, 15% higher than the $8.7 billion at the end of 2011. The increase in AUA was largely due to the addition of segregated fund AUA from the acquisition of the SBS managing general agency in November, plus successes in recruiting other new advisors into the financial advisory subsidiaries. Net sales commission revenue earned from the financial advisory business is generated from the sale of mutual funds, other securities and insurance, as well as from continuing fees related to AUA and in force life insurance policies, net of commissions paid to advisors. This revenue amounted to $18.9 million in 2012, 36% higher than the $13.8 million in 2011. This increase is largely due to the inclusion of the full year’s results of IDC Financial, which was acquired in July of 2011, and successful recruitment efforts in the mutual fund and securities dealers. Guardian Capital Group Limited Administrative Services Income Administrative services income in 2012 was composed of $5.4 million of registered plan and other fees earned in the financial advisory area, and $1.8 million of trust, corporate administration and other fees earned mainly in the international area, for a total of $7.2 million, compared with $5.4 million in 2011. The increase resulted from planned rate increases in the financial advisory area, and fees from additional client activities in the international area. These fees are not directly impacted by fluctuations in the financial markets. Dividend and Interest Income The following is a summary of Guardian’s dividend and interest income: For the years ended December 31 ($ in thousands) Dividend income Interest income Total dividend and interest income 2012 $ $ 15,292 1,315 16,607 2011 (amended) $ $ 15,879 1,412 17,291 % change – – – 4 % 7 % 4 % Dividend income decreased by 4% in the year compared to the year 2011, due to the non-consolidation of certain mutual funds in 2012, which had been consolidated in the prior year. Interest income decreased from 2011, as a result of the investment in promissory notes being fully repaid by the issuer in the third quarter of 2012. Expenses Guardian’s operating expenses, excluding commissions, referral fees, amortization and interest, were $60.1 million in 2012, compared with $52.1 million in 2011, an increase of 15%. Included in the expenses for 2012 were approximately $2.9 million of additional expenses due to the inclusion of the full year of expenses relating to the IDC Financial business acquired in 2011, compared to only six months included in 2011. Excluding this variance, the increase in these expenses in 2012 would have been 10%. The increase in amortization in 2012, from $3.0 million to $3.5 million, was largely a result of the full year’s amortization of the intangible assets acquired as part of the IDC business compared to only six months in 2011. Interest expense reduced to $1.3 million in 2012, compared to $1.4 million in 2011, a reduction of 7%, as a result of lower interest rates renegotiated during the year. The net income tax expense recorded in 2012 was $3.3 million, compared with $0.8 million in 2011. The increase was due in part to the recording of $1.1 million of deferred income taxes during the year, resulting from an increase in the provincial income tax rate enacted during the year, and the income tax expense on the increase in the operating earnings in Guardian’s subsidiaries. Liquidity and Capital Resources The strength of Guardian’s balance sheet has enabled Guardian to attract Associates, provide clients with a high comfort level, make appropriate use of borrowings, and develop its businesses. It has also allowed Guardian to maintain the appropriate levels of working capital in each of its areas of operations. The strong cash flow enables Guardian to meet all of its financial commitments, to finance the expansion of its businesses and to purchase the capital assets necessary for the development of those businesses. During the year, Guardian made payments totalling $7.4 million, which were due on the purchases of MGA businesses in 2011 and 2012. Additionally, under its Issuer Bid, Guardian purchased and cancelled 0.8 million of its Class A shares, for a total cost of $7.8 million. As well, Guardian’s dividend payment amounted to $5.4 million in 2012. In 2012, Guardian renegotiated its borrowings with its major bank lender, to increase the amounts available for general corporate purposes to $50 million, and the amount available to the EPSP Trust to $20 million, both of which may be availed under bankers’ acceptances at attractive rates. With the operating line of credit of $11 million also available, the total amounts available under Guardian’s credit arrangements were increased to $81 million from $66 million. The total amounts borrowed under these arrangements at the end of the year amounted to $52.2 million, compared with $45.5 million at the end of 2011. We are confident that the strength of Guardian’s balance sheet will continue to provide benefits in the future. Guardian’s holdings of securities as at December 31, 2012 had a fair value of $380 million, or $11.99 per share, diluted, compared with $364.2 million, or $11.17 per share, diluted, as at December 31, 2011. The increase in the fair value of the securities holdings was primarily due to the increase in the market value of the shares of the Bank of Montreal during the year. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 15 2012 Annual Report The following is a summary of Guardian’s securities holdings: Securities Holdings As at December 31 ($ in thousands, except per share amounts) Securities at fair value: Short-term securities Bonds Mutual funds Bank of Montreal common shares Other equity securities Total securities at fair value Promissory notes at amortized cost Total securities holdings Securities held for sale Total securities Total securities per share, diluted 2012 2011 (amended) $ 2,187 2,007 8,729 301,626 39,389 353,938 – 353,938 26,018 $ 379,956 11.99 $ $ $ $ 3,166 – 13,355 276,925 22,530 315,976 2,366 318,342 45,840 364,182 11.17 Contractual Obligations Guardian has contractual commitments for the payment of certain obligations over a period of time. A summary of those commitments, including a summary of the periods during which they are payable, is shown in the following table: As at December 31, 2012 ($ in thousands) Bank loans and borrowings Client deposits Accounts payable and other Payable to clients Operating lease obligations Total contractual obligations Total 52,235 3,884 21,821 36,820 16,645 131,405 $ $ Payments due by period One to three years Within one year $ $ 52,235 3,884 21,821 36,820 1,897 116,657 $ $ – – – – 2,890 2,890 Three to five years After five years $ $ – – – – 2,298 2,298 $ – – – – 9,060 $ 9,060 Guardian’s contractual commitments are supported by its strong financial position, including its securities holdings, referred to above under the heading “Liquidity and Capital Resources”. The Payable to Clients, in Guardian’s securities dealer subsidiary, is offset by the Receivable from Clients and Broker, and the Client Deposits, in the offshore banking subsidiary, are supported by the Interest- Bearing Deposits with Banks. Selected Annual Information Years ended December 31 ($ in thousands, except per share amounts) Net revenue Net earnings available to shareholders Per share Net earnings Basic Diluted Dividends paid 2012 2011 (amended) 2010 (amended) $ $ $ $ 85,030 22,556 0.72 0.71 0.17 73,693 10,003 $ 64,928 23,015 0.31 0.31 0.16 $ 0.70 0.69 0.15 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 16 Guardian Capital Group Limited As at December 31 Total assets 2012 2011 (amended) 2010 (amended) $ 510,752 $ 469,508 $ 467,250 The fluctuations in Total Assets over the past two years substantially reflect the changes in the value of the corporate holdings of securities, and the additional assets received on the purchases of MGAs in 2011 and 2012. Summary of Quarterly Results The following table summarizes Guardian’s financial results for the past eight quarters. Quarters ended ($ in thousands) Dec.31, 2012 Sep 30, 2012 Jun 30, 2012 (amended) Mar 31, 2012 (amended) Dec.31, 2011 (amended) Sep 30, 2011 (amended) Jun 30, 2011 (amended) Mar 31, 2011 (amended) Net revenue Operating earnings Net gains (losses) Net earnings before net gains (losses) on securities held for sale Net gains (losses) on securities $ 23,799 $ 20,858 $ 20,251 $ 20,122 $ 19,824 $ 18,871 $ 17,431 $ 17,567 4,148 784 4,344 (2,013) 4,860 (548) 4,840 (16) 4,647 2,045 3,317 (478) 5,791 (144) 5,324 1,576 4,938 6,045 2,838 4,379 6,658 2,136 2,802 4,632 held for sale 1,084 2,849 (2,961) 3,587 2,236 (8,410) (576) 1,257 Net earnings (loss) available to shareholders Shareholders’ equity (in $) Per average Class A and Common Share Net earnings before net gains (losses) on securities held for sale: - Basic - Diluted Net earnings (loss): - Basic - Diluted Shareholders’ equity - Basic - Diluted 5,915 353,756 8,750 336,362 (114) 323,690 8,005 340,096 7,745 322,618 (5,876) 331,718 2,280 344,374 5,854 351,998 $ $ $ 0.16 $ 0.15 0.19 $ 0.09 $ 0.19 0.09 0.14 $ 0.14 0.17 $ 0.08 $ 0.09 $ 0.14 0.14 0.17 0.09 0.08 0.19 $ 0.28 $ 0.19 0.27 (0.00) $ (0.00) 0.25 $ 0.25 0.24 $ 0.24 (0.18) $ 0.07 $ 0.18 0.18 0.07 (0.18) 11.44 $ 10.78 $ 10.29 $ 11.16 10.06 10.54 10.72 $ 10.48 10.12 $ 10.40 $ 10.67 $ 10.85 10.63 9.90 10.45 10.18 Management fees earned in the investment management segment are generally not subject to seasonal fluctuations. There is a degree of seasonality in the financial advisory segment, with some concentration of commission revenue in the first quarter of each year, relating to the traditional “RSP season”. However, the increase in net revenue in the second half of 2011 and in 2012 came in part from the additional net revenue earned from the IDC WIN subsidiary, as a result of aquisitions of MGAs completed in July, 2011 and November, 2012. Additionally, increases in management fees have occurred, including the earning of a performance fee of $1.4 million in December, 2012. The net earnings available to shareholders for the quarter ended June 30, 2012 were reduced because of the net losses on securities held for sale, and the increase in deferred income taxes resulting from increased Ontario income taxes substantively enacted in June, 2012. This increase in taxes amounted to $1.1 million ($0.03 per share, diluted). The quarterly fluctuations in shareholders’ equity shown above have been largely caused by changes in the value of Guardian’s investment in the Bank of Montreal common shares, less this provision for future income taxes. Since gains and losses are recorded on disposal of available for sale securities or other assets when realized, and on changes in the value of held for trading securities, and such amounts can vary from quarter to quarter, the amounts included in “Net gains (losses)” each quarter can fluctuate, as shown in the quarterly results shown above. The significant net gains recorded in the third quarter of 2012 and M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 17 2012 Annual Report the fourth quarter of 2011 were largely responsible for the increases in “Net earnings before net gains (losses) on securities held for sale” in those quarters. The net gains recorded in the third quarter of 2012 include a one-time gain of $1.0 million on the repayment to Guardian of the full face value of the investment in promissory notes. The “Net gains (losses) on securities held for sale” reflect changes in the fair value of investments in mutual funds which are categorized as held for sale, and are directly related to movements in the financial markets. Risk Factors Guardian applies many of the same risk management principles to its business as a whole, as it does to the management of risks on behalf of its clients. One of the principles is that risk can pose challenges, as well as provide opportunities, depending upon the effectiveness of the way in which it is managed. Readers are encouraged to refer to note 21 to the Consolidated Financial Statements, contained in Guardian’s 2012 Annual Report, for additional information on financial risk management. Market Risk Market fluctuations can have a significant effect on the value of both clients’ portfolios and our earnings, since management fees are generally based on market values. Additionally, market fluctuations have a significant impact on the amounts being invested by the clients of our financial advisory businesses, increasing or reducing our commission revenues. We manage the risk of market fluctuations by having a diversified client base with different investment needs, and by having a variety of products and services, which may be attractive in different market environments and which have different correlations to equity and other financial markets and to each other. Guardian’s holdings of securities are managed independently of clients’ assets, except for those of our assets that are invested in Guardian’s investment funds. Portfolio Value and Concentration Risk Guardian’s corporate holdings of securities are subject to price fluctuation risk. Guardian manages this risk through professional third-party portfolio managers or in-house expertise, each of whom takes a disciplined approach to investment management. All securities are held by well-known independent custodians chosen by Guardian. With the exception of the investment of $301.6 (2011 - $276.9) million in the Bank of Montreal shares, which is a significant portion of Guardian’s securities holdings, the holdings are diversified, from both an asset class and a geographical perspective. Guardian has accepted the concentration risk associated with its holding of Bank of Montreal shares, as the bank is a diversified company, with a history of steady dividend payments. Foreign Currency Risk Guardian’s investments in its foreign subsidiaries are subject to the risk of foreign currency exchange rate fluctuations. The effects of changes in foreign currency exchange rates on the values of these investments are not included in Net Earnings, but are recorded as changes in the “Foreign Currency Translation Adjustment” in Guardian’s Statements of Comprehensive Income, and the cumulative effect is included in Accumulated Other Comprehensive Income in the Shareholders’ Equity section of the Consolidated Balance Sheets. This foreign currency exposure is not actively managed, due to the long-term nature of these investments, but is closely monitored by the Company. Credit Risk Guardian’s credit risk is generally considered to be low. Because of the nature of Guardian’s business, receivables are mainly from large institutions, which are considered to pose a relatively low credit risk, or from individuals, which are secured by marketable securities. On an ongoing basis, Guardian reviews the financial strength of all of its counterparties, and reduces its exposure where appropriate. Interest Rate Risk Guardian manages interest rate risk in its international banking operations, through matching the interest rates and maturity dates of client deposit liabilities with the assets, interest-bearing deposits with banks. Liquidity Risk Guardian manages liquidity risk through the monitoring and managing of cash flows from various segments of the business, and by establishing sufficient cash borrowing facilities with major Canadian banks, which currently total $81 million through three credit facilities. The maturities of Guardian’s contractual commitments are outlined under “Contractual Commitments” in this discussion and analysis. The combination of the cash flows from operations and the borrowing facilities provides sufficient cash resources to manage its liquidity risk. Regulatory Change Risk Changes to government regulations, including those related to income taxes, can have an effect on Guardian’s business. Examples are the changes in future income tax rates, which have had significant effects on Guardian’s income tax expense, and net earnings, in 2006, 2007, 2009 and 2012. Because there had been a downward trend in income tax rates prior to 2012, the effects on earnings in earlier years had been positive, but they were negative in 2012, and further negative effects could result if tax rates increase again in the future. Another area in which regulation affects Guardian’s business is in the regulatory requirements of the government and self-regulatory agencies under which our regulated M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 18 Guardian Capital Group Limited subsidiaries operate. Through a combination of in-house expertise and external advisors, when appropriate, these subsidiaries are able to react to changes in these regulatory requirements. Performance Risk Product performance presents another risk. It is a relative, as well as an absolute measure, because the risk is that we will not perform as well as the market, our peers, or in line with our clients’ expectations. We manage this risk by having a disciplined approach to investment management, and by ensuring that our compliance capabilities are strong. With respect to clients’ expectations, we also ensure that we are fully aware of all of those expectations, and that we properly communicate with our clients to develop, report on and comply with client mandates on a continuous basis. Financial Advisory Risk Because of the number of agents who publicly represent each of the Worldsource operating entities, there are risks associated in their dealings with their clients. These risks are mitigated by the strong compliance and product review capabilities of the Worldsource organization, significant management oversight and insurance coverage carried by both Worldsource and the agents. Competition Risk Another risk is competition. Our ability to compete is enhanced by the high quality of our management team, the substantial depth in personnel and resources and a strong balance sheet, which provide us with the flexibility to make the changes necessary to be competitive. In addition, we manage competition risk by tailoring our product and service offerings to market conditions and client needs. Internal Control Over Financial Reporting and Disclosure Controls Management is responsible for establishing and maintaining adequate 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 IFRS. There have been no changes in Guardian’s internal control over financial reporting during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, Guardian’s internal control over financial reporting. Management of Guardian has evaluated the effectiveness of its disclosure controls and procedures and internal controls over financial reporting (as defined under National Instrument 52-109) as of December 31, 2012, under the supervision of the Chief Executive Officer and the Senior Vice-President, Finance, who is the Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the design and operation of those disclosure controls and procedures and internal controls over financial reporting were effective. Outlook Over the past year, equity markets continued to oscillate with no clear directional trend, caught in a tug-of-war between, on the one hand, European fears, perceived weakness in China and concern about a slowing U.S. recovery, and, on the other hand, inexpensive markets, in both historical terms and relative to interest rates, and favourable monetary ease on a global basis. We believe that, despite these global macro and geopolitical concerns, the overall trend for the equity markets will be toward the upside, as investors continue to accept greater equity risk allocation in their portfolios. Guardian’s assets under management increased over the past year by almost three billion dollars, ending the year with approximately $18.8 billion, due in part to the positive Canadian and global equity markets and our relative value add across several of our equity and fixed income strategies. Even more significantly, in the past year we witnessed strong growth from very large net new client inflows from both institutional and retail intermediary distribution channels. The pipeline of new business opportunities in the year ahead remains promising, as we look to continue the success of attracting new assets across various mandates managed by Guardian. Guardian’s financial advisory business, through its subsidiary Worldsource Wealth Management, reduced operating losses over the prior year by greater than $2 million, due to strong commission growth from new life insurance sales at its Managing General Agency, and better revenue and expense management in its Mutual Fund and Securities dealerships. We expect to continue our efforts toward improving operating earnings from our financial advisory business, with the delivery of strong life insurance net sales, and the recruitment of additional independent advisors across our Worldsource platform. The improvements in the day to day operations of our financial advisory business, coupled with greater equity risk appetite from the retail investor, are expected to result in the financial advisory business turning an operating profit in 2013. We will continue to focus our efforts on creating more meaningful and repeatable operating profits from both our investment management and financial advisory businesses. A successful improvement in operating profits will be instrumental in the company’s efforts to deliver consistent growth in dividends and shareholders’ equity. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 19 2012 Annual Report M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 20 Ten Year Review Notes 1, 7, 8 ($ in millions) 2012 2011 2010 (amended) (amended) 2009 2008 2007 2006 2005 2004 2003 Assets under management Assets under administration 18,832 9,918 15,928 8,654 16,266 7,783 13,986 7,074 11,764 6,005 16,885 6,303 17,305 5,677 18,444 4,837 16,085 3,708 13,444 2,731 ($ in thousands) Net revenue Operating expenses2 Operating earnings Net gains (losses) Net gains (losses) on securities held for sale Net earnings available to shareholders Shareholders’s equity5 Securities holdings (at fair value) (In dollars) Per average common and Class A share Net earnings available to shareholders for the year Basic Diluted Per common and Class A share Dividends paid Shareholders’ equity5 Basic Diluted Share prices Common high low high low Class A (In thousands) Year end common and Class A shares outstanding Basic Diluted 85,030 64,892 20,138 1,337 73,693 56,560 17,133 (131) 64,928 51,389 13,539 2,982 61,147 52,419 8,728 1,217 66,918 58,665 8,253 (4,484) 69,607 51,617 17,990 4,215 66,247 48,159 18,088 4,134 58,908 44,162 14,746 1,597 49,585 38,930 10,655 1,236 38,323 32,971 5,352 (120) 4,559 (5,493) 6,443 – – – – – – – 22,5566 353,756 379,956 10,003 322,618 364,182 23,015 331,856 383,604 14,2743 317,784 362,512 7,2994 26,4923 204,051 334,696 380,433 241,549 22,9593 12,821 212,016 192,240 407,117 443,108 10,559 196,273 364,318 6,653 192,332 335,205 0.726 0.716 0.31 0.31 0.70 0.69 0.413 0.413 0.194 0.194 0.693 0.683 0.603 0.583 0.33 0.32 0.27 0.26 0.17 0.17 0.17 0.16 0.150 0.150 0.150 0.135 0.120 0.105 0.0875 0.075 11.44 11.16 11.65 9.41 10.55 9.00 10.12 9.90 12.75 9.49 11.63 8.70 10.16 10.01 9.75 7.90 9.00 7.35 9.37 9.19 9.97 4.65 8.25 3.00 5.69 5.65 11.10 4.26 11.02 3.02 8.79 8.67 15.50 10.65 13.50 10.33 5.48 5.36 14.00 11.25 13.13 10.12 5.04 4.87 13.00 9.63 12.13 9.00 4.98 4.89 11.01 7.37 12.00 6.75 4.86 4.78 8.00 5.70 7.25 5.15 30,917 31,696 31,890 32,604 32,652 33,162 33,932 34,563 35,874 36,104 38,095 38,605 38,669 39,576 38,149 39,492 39,552 40,538 39,568 40,284 NOTES: 1 Comparative figures reflect the May, 2006 2-for-1 stock split. 2 Excluding commissions paid, referral fees and income taxes. 3 Net earnings available to shareholders reflect a reduction in future income taxes, resulting from the reduced income tax rates enacted during the year, as follows: 2009 - $2.0 million, $0.06 per share diluted; 2007 - $6.6 million, $0.16 per share diluted; 2006 - $3.3 million, $0.08 per share diluted. 4 Net earnings available to shareholders in 2008 reflect a $1.3 million ($0.03 per share) reduction in future income taxes, resulting from the reversal of future income taxes relating to Guardian’s foreign subsidiaries, as well as the recording of restructuring costs of $2.3 million ($0.06 per share). 5 Shareholders’ equity in 2007 and subsequent years reflects the recording of the corporate holdings of securities at fair value, in accordance with required new accounting policies adopted effective January 1, 2007. 6 Net earnings available to shareholders in 2012 reflect a $1.1 million ($0.03 per share) increase in future income taxes, resulting from increased income tax rates enacted during the year. 7 Results in 2010 to 2012 are in accordance with IFRS; 2009 and previous years are as reported under previous Canadian GAAP. 8 Comparative figures in 2011 and 2010 have been amended to reflect the 2012 adoption of new IFRS standards, as disclosed in note 3a to the Consolidated Financial Statements contained in Guardian’s 2012 Annual Report. 2009 and previous years are as reported under previous Canadian GAAP. Guardian Capital Group Limited Management’s Statement on Financial Reporting The following financial statements, which consolidate the financial results of Guardian Capital Group Limited, its subsidiaries and other controlled entities, and the Company’s interest in a joint venture, and all other information in this annual report, are the responsibility of management. The financial statements have been prepared in accordance with International Financial Reporting Standards. Financial information presented elsewhere in this annual report is consistent with that in the financial statements. In management’s opinion, the financial statements have been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized on pages 28 to 32. Management maintains a system of internal controls over the financial reporting process designed to provide reasonable assurance that relevant and reliable financial information is produced. Management also administers a program of ethical business conduct compliance. KPMG LLP, the Company’s independent auditors, have audited the accompanying financial statements. Their report follows. The Audit Committee of the Board of Directors, composed of independent directors, meets regularly with management and KPMG LLP to review their activities and to discuss the external audit process, internal controls, accounting policies and financial reporting matters. KPMG LLP has unrestricted access to the Company, the Audit Committee and the Board of Directors. The Audit Committee has reviewed the financial statements and Management’s Discussion and Analysis and recommended their approval to the Board of Directors. Based on this recommendation, the financial statements and Management’s Discussion and Analysis have been approved by the Board of Directors. George Mavroudis, President and Chief Executive Officer C. Verner Christensen, Senior Vice-President, Finance March 1, 2013 M A N A G E M E N T ’ S S T A T E M E N T O N F I N A N C I A L R E P O R T I N G 21 2012 Annual Report Independent Auditors’ Report To the Shareholders of Guardian Capital Group Limited We have audited the accompanying consolidated financial statements of Guardian Capital Group Limited, which comprise the consolidated balance sheets as at December 31, 2012, December 31, 2011 and January 1, 2011, the consolidated statements of operations, comprehensive income, equity and cash flow for the years ended December 31, 2012 and December 31, 2011, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Guardian Capital Group Limited as at December 31, 2012, December 31, 2011 and January 1, 2011, and its consolidated financial performance and its consolidated cash flow for the years ended December 31, 2012 and December 31, 2011 in accordance with International Financial Reporting Standards. Chartered Accountants, Toronto, Canada Licensed Public Accountants March 1, 2013 I N D E P E N D E N T A U D I T O R S ’ R E P O R T 22 Guardian Capital Group Limited Consolidated Balance Sheets As at ($ in thousands) December 31, 2012 December 31, 2011 (note 3a) January 1, 2011 (note 3a) Assets Current Assets Cash Interest-bearing deposits with banks Accounts receivables and other Loans receivable Receivables from clients and broker Prepaid expenses Securities (note 4) Securities holdings Securities held for sale Other Assets Deferred tax assets (note 11c) Intangible assets (note 5) Equipment (note 6) Goodwill (note 7) Investment in associate (note 23d) Other Total Assets Liabilities Current liabilities Bank loans and borrowings (note 8) Client deposits Accounts payable and other Income taxes payable Payable to clients Due on securities sold short Other liabilities Deferred tax liabilities (note 11c) Total Liabilities Equity Shareholders’ Equity Capital stock (note 12) Treasury stock (note 13a) Contributed surplus Retained earnings Accumulated other comprehensive income Non-Controlling Interests Total Equity Total Liabilities and Equity See accompanying notes to consolidated financial statements. $ $ $ $ 26,993 3,884 23,547 – 36,820 1,419 92,663 353,938 26,018 379,956 3,835 19,594 2,464 11,111 333 796 38,133 510,752 52,235 3,884 21,821 818 36,820 – 115,578 37,424 153,002 22,113 (17,750) 8,636 231,040 109,717 353,756 3,994 357,750 510,752 $ $ $ $ 5,514 8,033 19,141 6,410 32,044 1,128 72,270 318,342 45,840 364,182 3,480 15,297 2,068 11,111 333 767 33,056 469,508 45,467 7,432 24,390 773 32,044 – 110,106 32,394 142,500 22,717 (16,063) 7,491 221,053 87,420 322,618 4,390 327,008 469,508 $ $ $ $ 4,492 12,356 15,448 6,462 27,676 1,133 67,567 334,243 49,361 383,604 3,105 5,521 1,869 5,249 335 – 16,079 467,250 46,500 11,984 15,487 127 27,676 664 102,438 31,920 134,358 22,934 (11,443) 6,549 216,157 97,659 331,856 1,036 332,892 467,250 On behalf of the Board: Barry J. Myers, Director George Mavroudis, Director F I N A N C I A L S T A T E M E N T S 23 2012 Annual Report Consolidated Statements of Operations For the years ended December 31 ($ in thousands, except per share amounts) Revenue Gross commission revenue Commissions paid to advisors Management fee income, net (note 14) Administrative services income Dividend and interest income (note 15) Net revenue Expenses Employee compensation and benefits (note 16) Amortization Interest Other expenses Operating earnings Net gains (losses) (note 17) Earnings before income taxes and net gains (losses) on securities held for sale Income tax expense (note 11a) Net earnings before net gains (losses) on securities held for sale Net gains (losses) on securities held for sale (note 17) Net earnings Net earnings before net gains (losses) on securities held for sale, available to: Shareholders Non-controlling interest Net earnings before net gains (losses) on securities held for sale Net earnings before net gains (losses) on securities held for sale, available to shareholders per Class A and Common share (note 18): Basic Diluted Net earnings available to: Shareholders Non-controlling interest Net earnings Net earnings available to shareholders per Class A and Common share (note 18): Basic Diluted See accompanying notes to consolidated financial statements. 2012 71,926 (53,071) 18,855 42,397 7,171 16,607 85,030 41,912 3,478 1,283 18,219 64,892 20,138 1,337 21,475 3,275 18,200 4,559 22,759 17,997 203 18,200 0.57 0.57 22,556 203 22,759 0.72 0.71 $ $ $ $ $ $ $ $ 2011 (note 3a) $ 67,906 (54,086) 13,820 37,212 5,370 17,291 73,693 35,771 3,039 1,432 16,318 56,560 17,133 (131) 17,002 774 16,228 (5,493) 10,735 15,496 732 16,228 0.48 0.48 10,003 732 10,735 0.31 0.31 $ $ $ $ $ $ $ F I N A N C I A L S T A T E M E N T S 24 Guardian Capital Group Limited Consolidated Statements of Operations Consolidated Statements of Comprehensive Income For the years ended December 31 ($ in thousands) Net earnings Other comprehensive income Available for sale securities: Net change in fair value Income tax provision (recovery) Transfer to net earnings of unrealized losses (gains) upon disposal Reversal of income taxes Changes in foreign currency translation adjustment on foreign subsidiary Other comprehensive income (loss) Comprehensive income Comprehensive income (loss) available to: Shareholders Non-controlling interests Comprehensive income See accompanying notes to consolidated financial statements. 2012 2011 (note 3a) $ 22,759 $ 10,735 28,475 4,148 24,327 (546) 134 (412) 23,915 (1,618) 22,297 45,056 44,853 203 45,056 $ $ $ (11,831) (1,129) (10,702) 40 9 49 (10,653) 414 (10,239) 496 (236) 732 496 $ $ $ F I N A N C I A L S T A T E M E N T S 25 2012 Annual Report Consolidated Statements of Equity For the years ended December 31 ($ in thousands) Total equity, beginning of year Shareholders’ equity, beginning of year Capital stock Balance, beginning of year Acquired and cancelled Capital stock, end of year Treasury stock Balance, beginning of year Acquired Treasury stock, end of year Contributed surplus Balance, beginning of year Stock-based compensation expense Contributed surplus, end of year Retained earnings Balance, beginning of year Net earnings available to shareholders Dividends declared and paid Excess of purchase price over issue price of Company’s capital stock acquired (note 12c) Excess of fair value over carrying value of interest in subsidiary transferred to non-controlling interests (note 24b) Retained earnings, end of year Accumulated other comprehensive income Balance, beginning of year Unrealized gains on available for sale securities, net of income taxes Balance, beginning of year Net change during year Balance, end of year Foreign currency translation adjustment on a self-sustaining foreign subsidiary Balance, beginning of year Net change during year Balance, end of year Accumulated other comprehensive income, end of year Shareholders’ equity, end of year Non-controlling interests Balance, beginning of year Net earnings available to non-controlling interests Net subscriptions to mutual fund subsidiaries De-consolidation of mutual fund subsidiaries Increase in non-controlling interests due to an acquisition of a subsidiary Non-controlling interests, end of year Total equity, end of year $ See accompanying notes to consolidated financial statements. 2012 2011 (note 3a) $ 327,008 $ 332,892 322,618 331,856 22,717 (604) 22,113 (16,063) (1,687) (17,750) 7,491 1,145 8,636 221,053 22,556 (5,392) (7,177) – 231,040 87,420 91,157 23,915 115,072 (3,737) (1,618) (5,355) 109,717 353,756 4,390 203 108 (707) – 3,994 357,750 22,934 (217) 22,717 (11,443) (4,620) (16,063) 6,549 942 7,491 216,157 10,003 (5,202) (2,595) 2,690 221,053 97,659 101,810 (10,653) 91,157 (4,151) 414 (3,737) 87,420 322,618 1,036 732 9,243 (10,196) 3,575 4,390 327,008 $ F I N A N C I A L S T A T E M E N T S 26 Guardian Capital Group Limited Consolidated Statements of Cash Flow For the years ended December 31 ($ in thousands) Operating activities Net earnings Adjustments for: Income taxes (paid) Income tax expense Net (gains) losses Amortization of intangible assets Amortization of equipment Stock-based compensation Net change in non-cash working capital items (note 20) Net cash from operating activities Investing activities Acquisition of securities Proceeds from sale of securities Acquisition of securities held for sale Proceeds from sale of securities held for sale Acquisition of intangible assets Proceeds from disposition of intangible assets Acquisition of equipment Acquisition of subsidiaries (note 24) Net cash from (used in) investing activities Financing activities Dividends Acquisition of capital stock Acquisition of treasury stock Proceeds of bank loans and borrowings Net subscriptions from non-controlling interests in mutual fund subsidiaries Disposition of mutual fund subsidiary Net cash (used in) financing activities Foreign exchange Net effect of foreign exchange rate on changes on cash balances Net change in net cash Net cash, beginning of year Net cash, end of year Net cash represented by: Cash Bank indebtedness See accompanying notes to consolidated financial statements. 2012 2011 (note 3a) $ 22,759 $ 10,735 (2,558) 3,275 (5,896) 2,826 652 1,145 22,203 1,697 23,900 (86,378) 80,211 (2,640) 25,247 (2,825) 1,040 (956) (7,388) 6,311 (5,392) (7,781) (1,687) 500 108 (707) (14,959) (41) 15,211 3,010 18,221 26,993 (8,772) 18,221 $ $ $ (842) 774 5,624 2,448 591 942 20,272 929 21,201 (130,953) 123,736 (5,749) 3,740 (1,986) - (297) (4,271) (15,780) (5,202) (2,812) (4,620) 1,487 9,243 – (1,904) 57 3,574 (564) 3,010 5,514 (2,504) 3,010 $ $ $ F I N A N C I A L S T A T E M E N T S 27 2012 Annual Report Notes to Consolidated Financial Statements 1. Reporting Entity These consolidated financial statements include the accounts of Guardian Capital Group Limited and its subsidiaries (the “Company”). The Company is incorporated under the laws of the Province of Ontario, and its principal business office is located at Suite 3100, 199 Bay Street, Toronto, Ontario. The Company provides investment management and financial advisory services to a wide range of clients in Canada and abroad, and maintains and manages a proprietary investment portfolio. 2. Significant Accounting Policies (a) Basis of preparation These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), which comprises standards and interpretations approved by either the International Accounting Standards Board (“IASB”), the IFRS Interpretations Committee or their predecessors. These financial statements were authorized for issuance by the Board of Directors of the Company on March 1, 2013. (b) Basis of presentation These consolidated financial statements have been prepared on a going concern basis and the historical cost basis, except for certain financial instru- ments that have been measured at fair value. These financial statements are presented in Canadian dollars, which is the Company’s functional currency. In these notes, all dollar amounts and num- bers of shares are stated in thousands. Per share amounts and option exercise prices are stated in dollars and cents. (c) Estimates and judgments The preparation of these consolidated financial statements necessitates the use of judgments, estimates and assumptions, which affect the reported amounts of assets, liabilities, revenue and expenses. Actual results may differ from these estimates. Management believes that the significant areas where judgment is necessarily applied are those which relate to the: (i) Determination of when control of another entity exists; (ii) Valuation of certain securities that do not have quoted market prices; (iii) Assessment of goodwill and available for sale securities for impairments; (iv) Assessment of provisions; and (v) Measurement of share-based payments. (d) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power to govern the financial and operating policies of the other entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Company. The Company considers several factors in determining whether it has power over another entity which it will be able to use to obtain benefits. When voting rights are relevant in determining power over an entity, the Company considers its: existing voting rights; potential voting rights that are currently exercisable and have no substantive barriers to exercise; agreements with other vote holders; rights from other contractual arrangements; eco- nomic interests; or a combination of the foregoing. Offsetting these factors, the Company considers matters which prevent it from the exercise of power. When voting rights are not relevant in determining power over an entity the Company considers: evidence of its practical ability to direct the activities of the entity for the Company’s benefit; indications of a special relationship between it and the entity; and whether it has a significant exposure to variability of returns. In evaluating these three factors, the Company gives greater weight to evidence of its ability to direct the activities of the entity. The Company from time to time has seed capital investments in a number of funds where it controls those funds. These funds are consolidated unless they meet the criteria set out in the accounting policy in respect of non-current assets held for sale to be categorized as being held for sale, in which case they are classified and accounted for in accordance with that policy. (ii) Transactions eliminated on consolidation All inter-company transactions, balances, income and expenses between the consolidated entities are eliminated on consolidation. Non-controlling inter- ests in the equity of subsidiaries are shown as a component of the equity section of the consolidated balance sheet. 28 NOTES TO FINANCIAL STATEMENTSGuardian Capital Group Limited (e) Joint ventures Joint ventures are those entities over which the Company has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. Joint ventures are accounted for using the equity method. The investments are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Company’s share of the net assets of the joint venture. (f) Foreign currency translation Amounts denominated in foreign currencies included in these consolidated financial statements are translated into Canadian dollars as follows: (i) Foreign currency denominated monetary items and non-monetary items measured at fair value are translated at the reporting date exchange rates, and purchases and sales of securities and revenues and expenses are translated at the rates of exchange prevailing on the respective dates of such trans- actions. Foreign exchange gains and losses, if any, resulting from the foregoing, are included in the statements of operations. (ii) The accounts of certain subsidiaries of the Company are maintained in foreign currencies. Assets and liabilities have been translated into Canadian dollars at exchange rates prevailing at the reporting date and revenues and expenses at average monthly rates. Adjustments resulting from the exchange gains and losses on the translation of balance sheets of the Company’s foreign operations are recorded as a foreign currency translation adjustment in the statements of comprehensive income, and the cumulative balance is included in accumulated other comprehensive income in the shareholders’ equity section of the consolidated balance sheets. (g) Financial instruments The Company’s financial assets may be classified as held-for-trading (“Held for Trading”), available for sale (“Available for Sale”) or loans and receiv- ables (“Loans & Receivables”). Financial liabilities are classified as either Held for Trading or other financial liabilities (“Other Financial Liabilities”). (i) Measurement of financial instruments All of the Company’s financial instruments are initially measured at fair value. Subsequent to initial recognition, financial instruments classified as Held for Trading or Available for Sale are measured: a. at fair value using quoted market prices in an active market; b. where there is no active market, but the fair value can be reliably measured, the fair value is determined using valuation techniques; or c. otherwise, they are measured at cost. (ii) Changes in fair value During each reporting period, changes in the fair value of financial assets classified as Available for Sale are reflected in other comprehensive income, and changes in fair value of financial assets classified as Held for Trading are reflected in net earnings. All other financial instruments, which include Loans & Receivables and Other Financial Liabilities, are measured at amortized cost using the effective interest rate method. (iii) Classification of the Company’s financial instruments The Company’s financial instruments are classified as follows: a. Interest-bearing deposits with banks, accounts receivable and other, loans receivable, receivables from clients and broker and securities at amor- tized cost are classified as Loans & Receivables. b. Substantially all of the securities holdings are classified as Available for Sale. c. Cash, equity and debt securities held by mutual funds which are consolidated, due on securities sold short by consolidated mutual funds, securi- ties meeting the criteria of non-current assets held for sale, and derivative contracts, if any, held directly by the Company, are classified as Held for Trading. d. Bank loans and borrowings, client deposits, accounts payable and other, and payable to clients are classified as Other Financial Liabilities. (iv) Fair value hierarchy Financial assets and liabilities measured at fair value are classed using a fair value hierarchy which reflects the significance of the inputs used in making the fair value measurements. The fair value hierarchy is as follows: a. Level 1 – Quoted market prices: financial instruments with quoted prices for identical instruments in active markets. b. Level 2 – Valuation technique using observable inputs: financial instruments with quoted prices or similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are observable. c. Level 3 – Valuation technique with significant unobservable inputs: financial instruments valued using valuation techniques where one or more significant inputs are unobservable. (v) Offsetting financial assets and financial liabilities Financial assets and financial liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. (h) Non-current assets held for sale Non-current assets are classified as held for sale if their carrying amount will be recovered through a sale or deemed sale transaction, rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its pres- ent condition. The Company must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of the classification, except for circumstances beyond management’s control. Non-current are classified as held for sale and measured at the lower of their carrying value and fair value less costs to sell. (i) Impairment of securities and other financial assets For securities and other financial assets other than those classified as Held for Trading, an assessment is made each period by management as to whether there is any objective evidence of impairment. Factors considered in determining whether an objective evidence of impairment exists include the length of time and the extent of unrealized loss, the financial condition and near-term prospects of the issuer and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. If it is determined that the security is impaired, the carrying value of the security is written down to its fair value, and any cumulative loss amount recognized in other comprehensive income is reclassified to net income. 29 NOTES TO FINANCIAL STATEMENTS2012 Annual Report For securities and other financial assets carried at amortized cost, if, in subsequent periods, the amount of the loss decreases and the decrease can be objectively related to an event occurring after the impairment was recognized, the loss is reversed in the statement of operations. The reversal is limited to what the amortized amount of the security or financial asset would have been if no impairment loss had been recognized in a prior period. (j) Intangible assets Intangible assets represent new business costs (costs pertaining to new advisors and branches joining the Company’s mutual fund dealer and securi- ties dealer subsidiaries, and account transfer costs), computer software and the Company’s rights to future revenues (substantially in the Company’s life insurance managing general agency subsidiary). Intangible assets are carried at cost less accumulated amortization and accumulated impairment losses. They are amortized on a straight-line basis over their estimated useful lives, as outlined below: (i) New business costs – Where there is a commitment by advisors to stay with the Company for a specified number of years, they are amortized over that number of years, which is generally three to five years; (ii) Computer software – The initial cost of the main computer processing system used by the mutual fund dealer subsidiary is amortized over ten years, with subsequent improvements to this system being amortized over five years, and other computer software being amortized over three to five years; and (iii) Rights to future revenues – These are amortized over fifteen years. Amortization methods and useful lives of the intangible assets are reviewed annually and adjusted, if appropriate. Intangible assets are derecognized upon disposal or when they are fully amortized and no longer in use. (k) Equipment Equipment is carried at cost less accumulated amortization, and accumulated impairment losses, and is amortized over its expected useful life, as outlined below: (i) Computer hardware – The majority of computer hardware is amortized on a straight-line basis over three years; (ii) Furniture and equipment – The majority of furniture and equipment is amortized on a diminishing balance basis at a rate of 20% per annum, and works of art included within furniture and equipment are not amortized; and (iii) Leasehold improvements – Leasehold improvements are amortized on a straight-line basis over the remaining terms of the leases. Amortization rates and the useful life of equipment is reviewed annually and adjusted, if appropriate. Equipment is derecognized upon disposal or when it no longer has any residual value. (l) Goodwill Goodwill represents the excess of the cost of acquisition of a consolidated entity over the fair value of the net identifiable tangible and intangible assets of the subsidiary at the date of acquisition. Goodwill is not amortized, but is carried at cost less accumulated impairment losses. Goodwill is allocated to the appropriate cash-generating units for the purpose of impairment testing. (m) Impairment of non-financial assets The Company reviews non-financial assets, including intangible assets, equipment and goodwill, annually for impairment. If the net carrying amount of an asset which is considered impaired exceeds the estimated recoverable amount, the excess is charged to the statement of operations as an impairment loss. Management also assesses annually whether there is any indication that an impairment loss recognized in a prior period may no longer exist or may have decreased. If such indication exists, the estimated recoverable amount is compared to the carrying amount and, if the recoverable amount exceeds the carrying amount, the prior impairment loss is reversed, to bring the carrying amount to a maximum of the carrying amount that would have been determined (net of amortization) had no impairment loss been recognized in a prior period. (n) Bank loans and borrowings (i) Bank indebtedness Bank indebtedness is a financial liability owed on lines of credit to banks. Bank indebtedness may also consist of bank indebtedness net of cash in bank, when the Company has a legal right of offset and intends to settle on a net basis or realize the asset and settle the liability simultaneously. (ii) Bank loan and bankers’ acceptances payable Bank loan and bankers’ acceptances are financial liabilities and are initially recorded at fair value and subsequently at amortized cost, which approxi- mates fair value. (o) Provisions Provisions are recognized when the Company has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. The amount recognized as a provision is the best estimate of the obligation at the reporting date. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assess- ments of the time value of money and, where appropriate, the risks specific to the liability. Future events that may affect the amount required to settle an obligation are reflected in the amount of a provision where there is sufficient objective evidence that they will occur. Where some or all of the expenditure is expected to be reimbursed by insurance or some other party, and it is virtually certain, the reimbursement is recognized as a separate asset on the bal- ance sheet, and the net amount is recorded in the statements of operations. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of economic benefits will be required to settle the obligation, the provision is reversed. (p) Treasury stock The Company provides stock-based entitlements to certain senior employees through an Employee Profit Sharing Plan Trust (the “EPSP Trust”). The EPSP Trust purchases shares of the Company, which are allocated to senior employees and are financed by a bank loan facility with a major chartered bank, which is secured by the shares held by the EPSP Trust and guaranteed by the Company. The Company consolidates the EPSP Trust in these finan- cial statements, and accounts for the shares owned by the EPSP Trust as treasury stock. 30 NOTES TO FINANCIAL STATEMENTSGuardian Capital Group Limited(q) Revenue Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. The various types of revenues and the associated accounting policies adopted by the Company are as follows: (i) Gross commission revenue earned and commissions paid to advisors are recorded on a trade date basis. (ii) Management fees – The Company provides investment management and investment advisory services to clients, in consideration for manage- ment fees, which are generally calculated based on the fair value of the assets managed, in accordance with the agreements with the clients. The fees are earned over the time during which the assets are managed or advised on by the Company. Certain clients also pay performance fees, if the performance of such clients’ assets under management exceeds that of certain performance benchmarks by an agreed level over a stated time period. Such fees are recorded when the services have been provided, the amount of the fees can be reliably measured, and it is probable that the fees will be received. Management fees are presented net of referral fees paid to third party agents. (iii) Administrative services income – The Company earns income from certain clients and advisors, associated with the maintenance of accounts with the Company, and the provision of general corporate, trust or other services. Such income is recognized, on an accrual basis, as the services continue to be performed on an ongoing basis, all as based on agreements with the clients or advisors. When the Company holds assets or liabilities on a fiduciary basis in providing these services, those assets and liabilities and the income and expenses associated with them are excluded from these consolidated financial statements. (iv) Dividend and interest income is recorded as follows: a. Dividends are recognized when the Company’s right to receive payment is established. b. Interest is recorded as earned over the period of time during which the interest-paying investment is held, on an effective yield basis. (r) Employee compensation and benefits Wages, salaries, profit sharing, bonuses, payroll taxes and levies and paid annual leaves are accrued in the year in which the associated services are ren- dered by employees and when a reliable estimate of the obligation can be made. (s) Stock-based compensation Stock-based compensation is accounted for under the fair value method, under which compensation cost is measured at the fair value of equity instru- ments granted and is expensed over the vesting period of the equity instruments. Fair value is determined on the grant date using appropriate valuation models, taking into account the terms and conditions upon which the equity instruments were granted. Vesting conditions are not taken into account in the initial estimate of the fair value at the grant date. They are taken into account by adjusting the num- ber of equity instruments included in the measurement of the transaction, so that the amount recognized for services received as consideration for the equity instruments granted is based on the estimated number of equity instruments that eventually vest. Where a grant has been modified, as a minimum the expense of the original grant continues to be recognized as if it had not been modified. Where the effect of the modification is to increase the fair value of a grant or increase the number of equity instruments, the incremental fair value of the grant or incremental fair value of the additional equity instruments is recognized in addition to the value of the original grant, measured at the date of the modifi- cation, over the modified vesting period. (t) Interest expense Interest expense comprises interest payable on borrowings recognized using the effective interest rate method. (u) Pensions The Company operates a defined contribution pension plan and a group registered retirement savings plan. Payments to the plans are charged as expenses as they are incurred. The Company has no legal or constructive obligation to pay further contributions if the plans do not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. (v) Net gains or losses Gains or losses include any gains or losses related to changes in the fair value of Held for Trading securities, or on disposal of Available for Sale securi- ties or other assets, and adjustments to record any impairment in value, recognized on a trade date basis. (w) Income tax Income tax on net earnings for the year comprises current tax and deferred tax. Income tax is recognized in the statements of operations, except to the extent that it relates to items recognized in other comprehensive income or directly in equity, in which case it is also recognized in other comprehensive income or directly in equity. Current tax is the tax expected to be payable on the taxable net earnings for the year, calculated using tax rates enacted or substantively enacted by the reporting date, and any adjustment to tax payable in respect of previous years. Current tax assets and liabilities are offset when the Company intends to settle on a net basis and the legal right of offset exists. Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the balance sheet and the amount attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilized. Deferred tax is calculated using the tax rates expected to apply in the periods in which assets will be realized or the liabilities settled. Deferred tax assets and liabilities are offset when they arise in the same tax reporting entities, relate to income taxes levied by the same taxation authority and a legal right to set off exists. (x) Earnings per share The calculation of basic earnings per share is based on the weighted average of Class A and common shares outstanding during the year and on earnings available to the holders of the Class A and common shares. Diluted earnings per share are calculated by adjusting for the effect of outstanding dilutive instruments, such as stock options or stock-based entitlements, using the treasury stock method. 31 NOTES TO FINANCIAL STATEMENTS2012 Annual Report(y) Related parties For the purposes of these financial statements, a party is considered related to the Company if such party or the Company has the ability to, directly or indirectly, control or exercise significant influence over the other entity’s financial and operating decisions, or if the Company and such party are subject to common significant influence. Related parties may be individuals or other entities. All material transactions with related parties are recorded at fair value. 3. Changes In Accounting Policies A number of new standards, and amendments to existing standards, have been issued by IASB, which are effective for the Company’s consolidated financial statements either in the current year or in certain future periods. The following is a description of these new standards and amendments, with indications of how they may affect the Company’s consolidated financial statements. (a) Current changes in accounting policies In May, 2011, the IASB issued IFRS 10, Consolidated Financial Statements (“IFRS 10”), IFRS 11, Joint Arrangements (“IFRS 11”) and IFRS 12, Disclosure of Interest in Other Entities (“IFRS 12”), all of which were required to come into effect for the Company’s financial year beginning on January 1, 2013, but with early adoption allowed. Upon early adoption of any of these standards, contemporaneous adoption of the others was required. IFRS 10 (i) IFRS 10 replaced the current consolidation standards in IAS 27, Consolidated and Separate Financial Statements and SIC 12, Consolidation – Special Purpose Entities, and introduces a single, principle-based, control model where control is deemed to exist when an investor has: power over an investee; exposure to variable returns from the investee; and the ability to use its power to affect its returns from the investee. The Company has opted to early adopt this standard in the current year. In conjunction with the adoption of IFRS 10, the Company has also amended its policy on non-current assets held for sale, to incorporate the provisions of IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations. Under the amended policy, the Company does not consolidate entities which it controls, or is deemed to control, provided they meet certain criteria set out in the policy, allowing them to be classified as “held for sale”, in which case they are classified and accounted for in accordance with that policy. The most significant of these criteria are the following: i) the carrying value of the entity is expected to be recovered through a sale transaction, rather than through continuing use: ii) the sale is highly probable and the asset is avail- able for immediate sale in its present condition; iii) management is committed to the sale; and iv) the sale is expected to be completed within one year of the date of classification, except for certain conditions beyond management’s control. In applying the new consolidation policy retrospectively, the Company determined that it controls certain mutual funds, which it manages and in which it invests, which were not previously consolidated. However, the Company has a committed plan in place to reduce its ownership level sufficiently to not be deemed to have control of the mutual funds. Accordingly, the Company has retrospectively reclassified the investment in these mutual funds from “available for sale” securities to “held for sale” securities. The accumulated changes in the fair value of these investments, which had previously been recognized in Accumulated Other Comprehensive Income, have therefore been transferred to Retained Earnings. The effects of these changes have been reflected, as appropriate, in these financial statements, and the resulting balance sheet as at January 1, 2011 has been provided. The following table summarizes the effects of adoption of IFRS 10 and the new policies on the Company’s consolidated financial statements: As at December 31, 2012 December 31, 2011 January 1, 2011 Increase (decrease) in previously reported amounts and effect in current period: Consolidated balance sheets Retained earnings Accumulated other comprehensive income Shareholders’ equity For the periods ended December 31 Increase (decrease) to previously reported amounts and effect in current period: Consolidated statements of operations Net gains (losses) Net earnings before net gains (losses) on securities held for sale Net gains (losses) on securities held for sale Net earnings (loss) available to shareholders Net earnings available to shareholders per class A and Common shares: Basic Diluted Consolidated statements of comprehensive income Other comprehensive income Comprehensive income (loss) Comprehensive income available to shareholders $ $ 17,055 (17,055) – $ $ $ $ $ 24,324 (24,324) – 2012 (11,828) (11,828) 4,559 (7,269) (0.23) (0.23) 7,269 Nil Nil $ $ $ $ $ 30,778 (30,778) – 2011 (960) (960) (5,494) (6,454) (0.20) (0.19) 6,454 Nil Nil 32 NOTES TO FINANCIAL STATEMENTSGuardian Capital Group Limited IFRS 11 (ii) IFRS 11 replaces IAS 31, Interests in Joint Ventures (“IAS 31”), and the Company early adopted this standard during the year. IFRS 11 eliminates propor- tionate consolidation as one of the alternatives for accounting for Joint ventures. As a result, during the year, the Company changed its accounting for its investment in a joint venture from proportionate consolidation to the equity method, on a retrospective basis. The following table summarizes the effects of IFRS 11 on the Company’s consolidated financial statements: As at December 31 2012 December 31 2011 January 1 2011 Increase (decrease) to previously reported amounts and effect in current period: Consolidated balance sheets Investment in associate Assets, excluding investment in associate Current and total liabilities Shareholders’ equity For the periods ended December 31 Increase (decrease) to previously reported amounts and effect in current period: Consolidated statements of operations Net revenue Expenses Net earnings (loss) Net earnings (loss) available to shareholders $ $ 333 (871) (538) Nil $ $ $ $ $ 333 (948) (615) Nil 2012 (244) (244) Nil Nil $ $ $ $ $ 335 (1,087) (752) Nil 2011 (468) (468) Nil Nil (iii) IFRS 12 IFRS 12 combines in a single standard the disclosure requirements for interests in subsidiaries, associates and joint arrangements, as well as uncon- solidated structured entities, and the Company early adopted this standard in the current year. The Company has incorporated the requirements of IFRS 12 in its annual disclosures in these financial statements. (b) Future changes in accounting policies (i) Fair value measurement IFRS 13, Fair Value Measurement (“IFRS 13”) was issued by IASB in May 2011, and establishes a framework for measuring fair value and sets out related disclosure requirements when fair value measurement is required or permitted under other standards. IFRS 13 will be effective for annual periods beginning on or after January 1, 2013. The Company is currently evaluating the impact of IFRS 13 on the fair value measurements in its consolidated financial statements. (ii) Financial instruments The initial installments of IFRS 9, Financial Instruments (“IFRS 9”) were issued by IASB in November, 2009 and October, 2010. These installments represent the first phase in IASB’s planned phased replacement of IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”) with an improved standard for financial instruments that is principle-based and less complex. The main changes to the requirements of IAS 39 that may have an effect on the Company’s consolidated financial statements are as follows: • • • All financial assets that are currently within the scope of IAS 39 will be classified as either amortized cost or fair value. The Available for Sale and Loans & Receivables categories will no longer exist. The above classification will be based on an entity’s business model for managing the financial assets and the contractual cash flow character- istics of the financial assets. Reclassifications between amortized cost and fair value will be prohibited, unless there is a change in the entity’s business model. Changes in the fair value of financial assets classified at fair value are recorded in net earnings, except that an entity may choose to designate certain equity securities at fair value to be recorded in other comprehensive income. If this option is chosen, all subsequent changes in those securities must be recorded in other comprehensive income, and no transfer to net earnings of gains or losses on disposal will be permitted. The next phases in IASB’s project is expected to address the impairment of financial assets measured at amortized cost, and hedge accounting. IFRS 9 is expected to be effective for annual periods beginning on or after January 1, 2015, with early adoption permitted. The Company is currently evaluating the impact of IFRS 9 on its consolidated financial statements, particularly with regard to the recording of its securities. 33 NOTES TO FINANCIAL STATEMENTS2012 Annual Report 4. Securities An analysis of the Company’s securities is as follows: As at December 31 Securities holdings Available for sale securities Short-term securities (a) Bonds Mutual funds Bank of Montreal common shares Other equity securities Held for trading securities Equity securities (b) Total securities holdings at fair value Securities at amortized cost (c) Total securities holdings Securities held for sale (d) Total securities 2012 2011 (note 3a) $ 2,187 2,007 8,729 301,626 38,389 352,938 1,000 353,938 – 353,938 26,018 $ 3,166 – 13,355 276,925 16,980 310,426 5,550 315,976 2,366 318,342 45,840 $ 379,956 $ 364,182 (a) Short-term securities shown above include securities of non-controlled mutual funds that hold short-term securities, as well as directly held short-term secu- rities that are continually reinvested by the Company and therefore are included in securities holdings. (b) Held for trading equity securities consist of securities held by consolidated mutual funds which meet the criteria for this classification. Changes in fair value are included in net gains. (c) The securities at amortized cost were comprised of promissory notes, which resulted from the restructuring of existing debt securities in 2011, and the rec- ognition of a gain of $731 in that year. During the current year, the issuer of the promissory notes exercised its option and repaid the full face value of the notes, resulting in the recognition of an additional gain of $963. (d) Securities held for sale are the Company’s interest in mutual funds which the Company controls but does not consolidate, as it intends to dispose of control through either sale or dilution within 12 months. These securities are carried at fair value, with subsequent changes in fair value recognized in the consolidated statements of operations. (e) The Company’s securities have been categorized based upon a fair value hierarchy, as follows: As at December 31 Level 1 Level 2 Level 3 Total securities at fair value Securities at amortized cost Total securities An analysis of the movement in Level 3 securities is as follows: For the years ended December 31 Level 3 securities, beginning of year Additions Increase (decrease) in estimated fair value, recognized in other comprehensive income Level 3 securities, end of year During 2012 and 2011, there have been no transfers between Levels 1 and 3 securities. $ 2012 375,865 – 4,091 379,956 – $ 2011 (note 3a) 358,439 – 3,377 361,816 2,366 $ 379,956 $ 364,182 $ 2012 3,377 30 684 2011 (note 3a) $ 3,952 107 (682) $ 4,091 $ 3,377 34 NOTES TO FINANCIAL STATEMENTSGuardian Capital Group Limited 5. Intangible Assets For the years ended December 31 2012 2011 New business costs Computer software Rights to future revenue New business costs Computer software Rights to future revenue Total Cost: Balance, beginning of year Purchases Arising on acquisition of subsidiaries (note 24) Reclassifications (a) Disposals Foreign exchange translation adjustments Balance, end of year Accumulated amortization: Balance, beginning of year Amortization expense Reclassifications (a) Disposals Foreign exchange translation adjustments Balance, end of year $ 7,533 531 – – – – 8,064 $ 2,865 487 – – – (1) 3,351 $ 13,978 1,807 5,150 – (935) – 20,000 $ 24,376 2,825 5,150 – (935) (1) 31,415 $ 7,798 964 – (1,229) – – 7,533 $ 2,095 768 – – – 2 2,865 4,904 1,419 – – – 6,323 1,479 421 – – (1) 1,899 2,696 986 – (83) – 3,599 9,079 2,826 – (83) (1) 11,821 4,119 1,417 (632) – – 4,904 1,198 279 – – 2 1,479 $ 2,257 254 10,238 1,229 – – 13,978 1,312 752 632 – – 2,696 Total $ 12,150 1,986 10,238 – – 2 24,376 6,629 2,448 – – 2 9,079 Carrying value, end of year $ 1,741 $ 1,452 $ 16,401 $ 19,594 $ 2,629 $ 1,386 $ 11,282 $ 15,297 (a) In conjunction with the 2011 acquisition of the Managing General Agency subsidiary as described in note 24b, the Company reassessed certain new business costs held by its existing subsidiary. As a result of this reassessment, it was determined that these costs qualify as rights to future revenues, and their cost and accumulated amortization were therefore reclassified accordingly, as of the date of the acquisition. As a result of this reclassifica- tion, amortization expense in the year 2012 was reduced by $186 (2011 - $131). 6. Equipment For the years ended December 31 Cost: Balance, beginning of year Purchases Arising on acquisition of subsidiaries (note 24) Foreign exchange translation adjustments Balance, end of year Accumulated amortization: Balance, beginning of year Amortization expense Foreign exchange translation adjustments Balance, end of year 2012 2011 Office equipment Leasehold improvements Total Office equipment Leasehold improvements $ 4,968 795 102 (18) 5,847 $ 1,668 161 – (2) 1,827 3,353 409 (8) 3,754 1,215 243 (2) 1,456 $ 6,636 956 102 (20) 7,674 4,568 652 (10) 5,210 $ 4,563 197 191 17 4,968 2,947 399 7 3,353 $ 1,274 100 292 2 1,668 1,021 192 2 1,215 Total $ 5,837 297 483 19 6,636 3,968 591 9 4,568 Carrying value, end of year $ 2,093 $ 371 $ 2,464 $ 1,615 $ 453 $ 2,068 7. Goodwill For the years ended December 31 Balance, beginning of year Arising on acquisition Balance, end of year 2012 11,111 – 11,111 $ $ 2011 5,249 5,862 11,111 $ $ 35 NOTES TO FINANCIAL STATEMENTS2012 Annual Report Goodwill acquired in a business acquisition is allocated to the cash generating units (“CGUs”) that are expected to benefit from that business acquisi- tion. The carrying amount of goodwill has been allocated to the relevant CGUs as follows: As at December 31 Financial advisory: Mutual fund distributor Managing general agency Total goodwill 2012 4,227 6,884 11,111 $ $ 2011 4,227 6,884 11,111 $ $ Goodwill is not amortized, but is subject to annual impairment testing, as described below. Impairment tests were performed upon the goodwill associated with each CGU in 2012 and 2011, in each year based upon each of the CGU’s estimated fair value, less estimated costs to sell. Management used a multi-factor model to determine fair value, with the principal assumptions being values assigned as multiples of key business analytics pertaining to each CGU. Management considers that the key business analytics are client assets under administration in both CGUs and annual net service fees and net first year commissions in the Life Insurance Managing General Agent CGU. It is management’s opinion that estimating fair value based on these analytics is in accordance with established industry practice, and that the multiples used are consistent with mar- ket transactions. Based on the results of this testing, there were no indications that the goodwill was impaired in 2012 or 2011. The most sensitive assumptions used in the above testing were: As at December 31 Mutual fund distributor: Multiple of assets under administration Managing general agency: Multiple of annual net service fee revenue 2012 2011 1.25% 6 1.25% 6 The following table shows for each CGU the amount by which the fair value less the estimated costs to sell referred to above exceeds its carrying value. As at December 31 Mutual fund distributor Managing general agency 2012 2011 $ 69,849 10,688 $ 62,294 7,905 The following table shows the percentage that the most sensitive assumption in each test would be required to change individually in order for the estimated fair value less costs to sell to be equal to the carrying amount of the CGU. As at December 31 Mutual fund distributor: Multiple of assets under administration Managing general agency: Multiple of annual net service fee revenue 8. Bank Loans and Borrowings As at December 31 Bank indebtedness (a) Bank loan (b) Bankers’ acceptances payable (b) Total bank loans and borrowings 2012 2011 (90)% (50)% (87)% (44)% 2012 8,772 14,963 28,500 52,235 $ $ 2011 2,504 14,963 28,000 45,467 $ $ (a) Bank indebtedness Bank indebtedness consists of overdraft borrowing under a line of credit from a major Canadian chartered bank, which is available to a maximum of $11,000 (2011 - $11,000), due on demand, secured by a General Security Agreement and securities valued at $48,648 (2011 - $44,644), and bearing interest at the bank prime rate plus 0.25%. (b) Bank loan and bankers’ acceptances payable Under written loan agreements, the Company has $70,000 (2011 - $55,000) in lending facilities from a major Canadian chartered bank. Borrowings under these facilities may be in the form of either demand loans bearing a rate of bank prime plus 0.25% (2011 – 0.25%) or bankers’ acceptances for periods ranging from 30 to 270 days, at rates negotiated in the bankers’ acceptance market plus 0.50% (2011 – 0.75%). These facilities are secured by the deposit of treasury stock held by the EPSP Trust valued at $22,113 at December 31, 2012 (2011 - $18,766), and other securities valued at $77,536 at December 31, 2012 (2011 - $8,207). 36 NOTES TO FINANCIAL STATEMENTSGuardian Capital Group Limited 9. Provisions From time to time in connection with its operations, the Company is named as a defendant in actions for damages and costs allegedly sustained by the plaintiffs. While it is often not possible to estimate the outcome of the various proceedings at any time, the Company has made provisions, where possible, for the estimated outcome of such proceedings. As at December 31, 2012 and 2011, there were no material provisions recorded. Should any additional loss result from the resolution of such claims, such loss will be accounted for as a charge to income in the year in which it is identified. 10. Operating Leases The Company has non-cancellable operating leases for premises and equipment with initial terms in excess of one year and which expire on various dates after year end. Future minimum payments required under these non-cancellable operating leases are as follows: As at December 31 Payable within one year Payable after one year and within five years Payable after five years Total lease obligations 2012 1,897 5,688 9,060 16,645 $ $ 2011 1,347 1,404 – 2,751 $ $ During the year ended December 31, 2012, the Company recognized $1,597 (2011 - $1,242) of base rental costs in respect of these non-cancellable leases. 11. Income Taxes (a) The components of the income tax expense are as follows: For the years ended December 31 Current tax expense Tax on profits for the current year Adjustments in respect of prior periods Deferred tax expense Origination and reversal of temporary differences Adjustments in respect of prior periods Change in future periods’ income tax rates Income tax expense 2012 2,599 15 2,614 (454) 28 1,087 661 3,275 $ $ 2011 1,656 139 1,795 (1,058) 37 – (1,021) 774 $ $ (b) The income tax expense in the consolidated statements of operations is less than the combined Federal and Provincial statutory income tax rates of 26.50% (2011 – 28.25%) of the current year for the following reasons: For the years ended December 31 Tax at the combined Federal and Provincial statutory income tax rate for the current year Increase (decrease) in the expense due to: Tax exempt income from securities Lower average tax rate applicable to foreign subsidiaries Adjustments to deferred tax assets and liabilities for changes in temporary differences Non-taxable portion of capital losses (gains) Non-deductible expenses Change in future periods’ income tax rates Other Income tax expense 2012 2011 $ 5,691 $ 4,803 (3,699) (250) (2) (83) 387 1,087 144 3,275 $ (4,293) (135) (259) 5 423 – 230 774 $ The combined statutory income tax rate is the aggregate of the Federal income tax rate of 15.00% (2011 – 16.50%) and the Provincial income tax rate of 11.50% (2011 – 11.75%). During 2012, the province of Ontario enacted legislation which reversed previously enacted rate reductions and set the income tax rate applicable to future periods at 11.50%. 37 NOTES TO FINANCIAL STATEMENTS2012 Annual Report (c) Deferred tax assets and liabilities are recognized as follows: For the year ended December 31 2012 Deferred tax assets Balance at beginning of year Recognized in operating earnings Balance at end of year Deferred tax liabilities Balance at beginning of year Recognized in operating earnings Recognized in other comprehensive income Balance at end of year Capital losses carryforwards Non-capital loss carryforwards Equipment and intangibles Other temporary differences Total $ $ $ $ – – – $ 2,559 409 $ 2,968 $ $ 597 (106) 491 $ $ 324 52 376 $ 3,480 355 3,835 $ (156) (71) – (227) $ $ – (13) – (13) $ 2,199 (69) – $ 2,130 $ (903) (121) – $ (1,024) $ 32,394 1,016 4,014 $ 37,424 Securities $ $ – – – $ 31,254 1,290 4,014 $ 36,558 For the year ended December 31 2011 Deferred tax assets Balance at beginning of year Recognized in operating earnings Balance at end of year Deferred tax liabilities Balance at beginning of year Recognized in operating earnings Recognized in other comprehensive income Arising on business combinations Balance at end of year Capital losses carryforwards Non-capital loss carryforwards Equipment and intangibles Other temporary differences Total $ $ $ $ – – – $ 1,770 789 $ 2,559 $ $ 1,115 (518) 597 (47) (109) – – (156) $ $ – – – – – $ 206 (265) – 2,258 $ 2,199 $ $ $ $ 220 104 324 $ 3,105 375 $ 3,480 (722) (181) – – (903) $ 31,920 (646) (1,138) 2,258 $ 32,394 Securities $ $ – – – $ 32,483 (91) (1,138) – $ 31,254 (d) The aggregate amount of temporary differences between costs for accounting purposes and costs for income tax purposes because of earnings accumu- lated in certain subsidiaries is $84,370 (2011 - $74,112), which amount may be subject to income tax if such subsidiaries are disposed of or the earnings are otherwise distributed. Deferred tax has not been provided on these temporary differences, as the Company does not intend to dispose of such subsidiaries or distribute such earnings. Unlimited preferred shares, without par value, may be issued in an unlimited number of series, the designation, rights, privileges, conditions and 12. Capital Stock (a) Authorized i) other provisions of which are to be determined by the Board of Directors. ii) Unlimited Class A non-voting shares without par value, convertible into common shares on a one-for-one basis, under certain terms and conditions, the highlights of which are as follows: if any person other than an insider of the Company acquires ownership, control or direction over in excess of 50% of the common shares, or makes an offer to all common shareholders to buy common shares, the Class A shares may be converted into common shares, unless holders of over 50% of the outstanding common shares do not accept the offer, or an equivalent offer is made to the holders of Class A shares. iii) Unlimited common shares, without par value, convertible on a one-for-one basis into Class A non-voting shares. (b) Issued and Outstanding For the years ended December 31 i) Class A shares Outstanding, beginning of year Acquired and cancelled Converted from Common Outstanding, end of year 38 2012 2011 Shares Amount Shares Amount 28,872 (800) – 28,072 $ 21,517 (604) – 20,913 28,815 (288) 345 28,872 $ 21,650 (217) 84 21,517 NOTES TO FINANCIAL STATEMENTSGuardian Capital Group Limited ii) Common shares Outstanding, beginning of year Converted from Common Outstanding, end of year Total outstanding, end of year 4,971 – 4,971 1,200 – 1,200 5,316 (345) 4,971 1,284 (84) 1,200 33,043 $ 22,113 33,843 $ 22,717 (c) Issuer Bid Under its Normal Course Issuer Bid, the Company purchased 800 (2011 – 288) of its class A shares for $7,781 (2011 – $2,812) of which $7,177 (2011 - $2,595), the excess of the purchase price over the average issue price, was charged directly to retained earnings. (d) Stock Option Plan The Company maintains a Stock Option Plan for designated officers, directors and employees. Each stock option entitles the holder to purchase one class A share, subject to certain predetermined vesting arrangements and other conditions. A summary of the changes in the Company’s outstanding stock options is as follows: For the years ended December 31 Outstanding, beginning of year Expired Outstanding, end of year The following table summarizes information about options outstanding. Range of purchase prices As at December 31, 2011 2012 2011 Weighted average exercise price $ 10.50 10.50 – $ Number of options 36 – 36 Weighted average exercise price $ 10.50 – 10.50 Number of options 36 (36) – Number of options outstanding Weighted average remaining contractual life (years) Weighted average exercise price Number of options vested Weighted average exercise price 36 0.10 $ 10.50 36 $ 10.50 (e) Dividends During the year 2012, dividends of $0.17 per share (2011 - $0.16 per share) were declared and paid on the common and class A shares outstanding. Subsequent to year end, a dividend of $0.20 per share was declared, payable in 2013 on the outstanding common and class A shares. 13. Treasury Stock The Company purchases and holds shares in its capital stock through the EPSP Trust, which are accounted for as treasury stock. These shares are deposited as collateral against a bank loan, which is used to finance the purchase of the shares. (a) A summary of the changes in the Company’s treasury stock is as follows: For the years ended December 31 Balance, beginning of year Acquired Balance, end of year 2012 2011 Shares Amount Shares Amount 1,954 172 2,126 $ 16,063 1,687 $ 17,750 1,479 475 1,954 $ 11,443 4,620 $ 16,063 As at December 31, 2012, the treasury stock was composed of 63 common shares (2011 – 63) and 2,063 class A shares (2011 – 1,891 shares). (b) EPSP Trust – Stock-based entitlements The stock-based entitlements provided by the Company to certain employees through the EPSP Trust are in the form of either an option-like entitle- ment or an equity-based entitlement, as described below. i) Option-like entitlements The option-like entitlements allow the employees to purchase shares from the EPSP Trust at prices equal to the amount of the bank loan per share pertaining to those shares, subject to predetermined vesting arrangements and other conditions. Due to the nature of these entitlements and the con- ditions attached to them, the contractual life of the entitlement is indeterminable. 39 NOTES TO FINANCIAL STATEMENTS2012 Annual Report A summary of the changes in the option-like entitlements is as follows: For the years ended December 31 2012 2011 Option-like entitlements, beginning of year Entitlements provided Option-like entitlements, end of year Weighted average exercise price $ $ 8.76 9.78 8.86 Number of shares 954 448 1,402 Weighted average exercise price $ $ 8.32 9.71 8.76 Number of shares 1,402 150 1,552 As at December 31, 2012, there were outstanding option-like entitlements for 63 common shares (2011 – 63) and 1,489 class A shares (2011 – 1,339). Option-like entitlements provided during the year had a fair value of $420 (2011 - $1,697). Because these entitlements have option-like characteristics, they are accounted for as options and valued using the Black-Scholes option pricing model. The value of the entitlements provided is recorded as compensa- tion cost over the vesting period of the entitlements, and is credited to contributed surplus. On exercise of an entitlement, treasury stock is reduced for the value of the entitlement exercised. The following are the key assumptions used in the valuation of the entitlements granted during the year: For the years ended December 31 Average purchase price per share Vesting period in years Average expected term to exercise in years Risk-free interest rate Expected price volatility Expected dividends per share, per annum The following table summarizes information about option-like entitlements outstanding. As at December 31, 2012 $2.51 - $5.00 $5.01 - $7.50 $7.51 - $10.00 $10.01 - $12.50 As at December 31, 2011 $2.51 - $5.00 $5.01 - $7.50 $7.51 - $10.00 $10.01 - $12.50 2012 9.78 5.00 10.00 2.45% 23.17% 0.17 $ $ $ $ Number of shares Weighted average exercise Number of price shares vested 20 355 913 264 1,552 20 355 763 264 1,402 $ $ $ $ 2.62 6.15 9.33 11.36 8.86 2.62 6.15 9.24 11.36 8.76 20 339 363 246 968 20 334 253 226 833 2011 9.71 5.00 10.00 3.41% 26.09% 0.16 Weighted average exercise price $ $ $ $ 2.62 6.18 8.92 11.31 8.43 2.62 6.19 8.71 11.25 8.24 Equity-based entitlements ii) Equity-based entitlements allow the employees to purchase shares from the EPSP Trust at zero cost, subject to predetermined vesting arrangements and other conditions. When such purchases by employees occur, the Company pays to the EPSP Trust the amount of the bank loan attributable to the shares purchased. Due to the nature of these entitlements and the conditions attached to them, the contractual life of the entitlement is indeterminable. A summary of the changes in the number of shares under equity-based entitlements is as follows: For the years ended December 31 Equity-based entitlements, beginning of year Entitlements provided Equity-based entitlements, end of year 2012 552 22 574 2011 525 27 552 Equity-based entitlements are valued at the fair market value of the shares purchased by the EPSP Trust on the date of the provision of the entitlement. This value is recorded by the Company as compensation cost over the vesting period, and is credited to contributed surplus. On exercise of an entitle- ment, treasury stock and contributed surplus are reduced for the value of the entitlement exercised. Equity-based entitlements provided during the year ended December 31, 2012 had a fair value of $220 (2011 - $266). 40 NOTES TO FINANCIAL STATEMENTSGuardian Capital Group Limited 14. Management Fee Income, Net Management fee income is presented net of referral fees which are paid to referring agents, amounting to $2,078 for the year ended December 31, 2012 (2011 - $1,695). 15. Dividend and Interest Income Dividend and interest income is composed of the following: For the years ended December 31 Dividend income Interest income Total dividend and interest income 16. Employee Compensation and Benefits Employee compensation and benefits are composed of the following: For the years ended December 31 Salaries and other compensation, payroll taxes and benefits Contributions to defined contribution pensions plans Stock-based compensation 17. Net Gains (Losses) Net gains (losses) are composed of the following: For the years ended December 31 Held for trading securities (a) Available for sale securities Securities at amortized cost (b) Net gains (losses) on securities Gains on disposition of intangible assets Net gains (losses) Net gains (losses) on securities held for sale (c) 2012 15,292 1,315 16,607 2012 40,257 510 1,145 41,912 2012 (163) 348 963 1,148 189 1,337 4,559 $ $ $ $ $ $ $ 2011 15,879 1,412 17,291 2011 34,429 400 942 35,771 2011 (305) (557) 731 (131) – (131) (5,493) $ $ $ $ $ $ $ (a) Net losses on held for trading securities include net gains or losses on securities both owned and sold short by consolidated mutual funds. (b) During the year, the issuer of the promissory notes recorded at amortized cost exercised its option and repaid the full face value of the notes, which resulted in the recognition of a gain. (c) Net gains (losses) on securities held for sale are the net changes in the fair value of the Company’s investment in mutual funds which the Company controls but does not consolidate, as it intends to dispose of control through either sale or dilution. 18. Net earnings per share The calculations of net earnings per share are based on the following number of shares and net earnings. For the years ended December 31 Weighted average number of class A and common shares outstanding Basic Effect of outstanding entitlements and options from stock based compensation plans Diluted Net earnings available to shareholders of class A and common shares Basic Effect of outstanding entitlements and options from stock based compensation plans Diluted 2012 2011 31,496 713 32,209 32,278 204 32,482 $ $ 22,556 317 22,873 $ $ 10,003 30 10,033 41 NOTES TO FINANCIAL STATEMENTS2012 Annual Report The effects of 1,388 (2011 – 1,584) entitlements and options from the Company’s stock based compensation arrangements were excluded from the calcu- lation of the diluted number of shares, as those entitlements and options were anti-dilutive. 19. Business Segments The Company operates in the following three main business segments: a) the investment management segment, which involves the earning of man- agement fees relating to investment management services provided to clients; b) the financial advisory segment which relates to the earning of sales commissions and administrative services revenue from assets under administration; and c) the corporate activities and investments segment, which relates substantially to the investment of the Company’s securities holdings, as well as corporate management and development activities. The alloca- tion of costs to individual business segments is undertaken to provide management information on the cost of providing services and a tool to manage and control expenditures. The Company’s business segments do not have any material intra-segment revenues. The following table discloses certain information about these segments: For the years end December 31 2012 2011 2012 2011 2012 2011 2012 2011 Investment Management Financial Advisory Corporate Activities and Investments Consolidated $ – $ – – 42,397 1,789 154 44,340 – $ 71,926 $ 67,906 $ – – 37,212 1,369 357 38,938 (54,086) 13,820 – 4,001 482 18,303 (53,071) 18,855 – 5,382 507 24,744 – $ – – – – 15,946 15,946 – $ 71,926 $ 67,906 (54,086) – 13,820 – 37,212 – 5,370 – 17,291 16,452 73,693 16,452 (53,071) 18,855 42,397 7,171 16,607 85,030 22,975 104 281 10,570 33,930 10,410 – 18,659 112 207 9,914 28,892 10,046 – 12,184 2,945 74 10,429 25,632 (888) 189 9,821 2,610 69 8,821 21,321 (3,018) – 6,753 429 928 (2,780) 5,330 10,616 1,148 7,291 317 1,156 (2,417) 6,347 10,105 (131) 41,912 3,478 1,283 18,219 64,892 20,138 1,337 35,771 3,039 1,432 16,318 56,560 17,133 (131) 10,410 2,416 7,994 – $ 7,994 10,046 2,398 7,648 – $ 7,648 (699) 7 (706) – (3,018) (476) (2,542) – (706) $ (2,542) 11,764 852 10,912 4,559 $ 15,471 9,974 (1,148) 11,122 (5,493) $ 5,629 17,002 21,475 774 3,275 16,228 18,200 4,559 (5,493) $ 22,759 $ 10,735 $ $ 7,994 – $ 7,648 – $ 7,994 $ 7,648 $ (1,032) $ (2,635) $ 15,594 $ 4,990 $ 22,556 $ 10,003 732 $ 5,629 $ 22,759 $ 10,735 326 (123) 93 (706) $ (2,542) $ 15,471 203 639 $ $ – $ 8 – – $ 7,688 $ 11,806 $ 47 – 582 5,862 287 – 287 $ 772 – 418 $ 7,975 $ 12,224 780 151 5,862 – 1,067 – $ 43,538 $ 29,896 $ 85,652 $ 76,319 $ 381,562 $ 363,293 $ 510,752 $ 469,508 142,500 25,987 77,196 74,527 39,579 49,819 28,394 153,002 Revenue Gross commission revenue Commissions paid to advisors Management fee income, net Adminstrative services income Dividend and interest income Net revenue Expenses Employee compensation and benefits Amortization Interest Other expenses Operating earnings Net gains (losses) Earnings before income taxes and net gains (losses) on securities held for sale Income tax expense (recovery) Net gains (losses) on securities held for sale Net earnings Net earnings available to: Shareholders Non-controlling interests Capital expenditures on segment assets: Intangible assets Equipment Goodwill As at December 31 Segment assets and liabilities: Assets Liabilities 42 NOTES TO FINANCIAL STATEMENTSGuardian Capital Group Limited The following table discloses certain information about the Company’s activities, segmented geographically For the years end December 31 Net revenue As at December 31 Segment non-current assets Intangible assets Equipment Goodwill Canada 2012 2011 Rest of the World 2011 2012 Consolidated 2012 2011 $ 79,827 $ 68,480 $ 5,203 $ 5,213 $ 85,030 $ 73,693 $ 19,593 1,995 11,111 $ 15,269 1,567 11,111 $ 1 469 – $ 28 501 – $ 19,594 2,464 11,111 $ 15,297 2,068 11,111 20. Net Change in Non-Cash Working Capital Items For the years ended December 31 Decrease (increase) in non-cash working capital assets Interest-bearing deposits with banks Accounts receivable and other Loan receivable Receivables from clients and broker Prepaid expenses Increase (decrease) in non-cash working capital liabilities Client deposits Accounts payable and other Payable to clients Net change 2012 2011 $ $ 4,027 (4,422) 6,349 (4,776) (281) (3,523) (453) 4,776 1,697 $ $ 4,121 (3,670) 205 (4,367) 9 (4,357) 4,621 4,367 929 21. Financial Risks Management The Company’s goal in managing financial risk is to evaluate the risks being taken against the benefits that are targeted to be achieved and, where those risks are deemed acceptable, to mitigate those risks, where practicable. A discussion on the Company’s risk management practices is included under the heading “Risk Factors” in the Management’s Discussion and Analysis, on pages 18 and 19 of the Company’s 2012 Annual Report. The follow- ing are the more significant risks associated with financial instruments to which the Company is subject: (a) Concentration Risk The Company is exposed to concentration risk associated with the $301,626 (2011 - $276,925) investment in the Bank of Montreal shares, which is a significant portion of the Company’s securities holdings. The Company monitors the investment in the Bank of Montreal shares on a continuous basis. A change in the price of the Bank of Montreal shares by 10% would result in an unrealized gain or loss of $30,163 (2011 - $27,693) being recorded in other comprehensive income. (b) Market Risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: price risk, currency risk, and interest rate risk. (i) Price Risk The Company is exposed to price risk with its securities. Unrealized changes in the values of its securities are recognized in net earnings (for held for trading securities and securities held for sale) and in other comprehensive income (for available for sale securities). This risk is managed through the use of professional in-house portfolio management expertise, which takes a disciplined approach to investment management. The securities holdings, excluding the Bank of Montreal shares, are also diversified by asset class and, as shown in the chart below, by geographical region. The chart also indi- cates the gain or loss which would be recognized in net earnings and other comprehensive income as a result of a 10% change in the market prices: 43 NOTES TO FINANCIAL STATEMENTS2012 Annual Report As at December 31, 2012 Canada United States Rest of the World As at December 31, 2011 Canada United States Rest of the World Fair value of held for trading securities and securities held for sale Unrealized gain or loss recognized in net earnings from 10% market change in region Fair value of available for sale securities, excluding Bank of Montreal shares, short-term securities and bonds Unrealized gain or loss recognized in other comprehensive income from 10% market change in region $ $ $ $ 5,905 4,458 16,655 27,018 18,653 6,347 26,390 51,390 ±$ ±$ ±$ ±$ 590 446 1,666 2,702 1,865 635 2,639 5,139 $ $ $ $ 4,838 3,579 38,701 47,118 7,480 2,916 19,939 30,335 ±$ ±$ ±$ ±$ 484 358 3,870 4,712 748 292 1,994 3,034 (ii) Currency Risk The Company’s main exposure to currency risk is on its investments in its foreign subsidiaries, amounting to $82,096 as at December 31, 2012 (2011 - $73,832). Changes in the values of these investments caused by changes in the US dollar exchange rate are reflected in other comprehensive income in the period in which the change occurs. (iii) Interest Rate Risk The Company is exposed to interest rate risk through its bank loans and borrowings of $52,235 (2011 - $45,467). The interest rates on these borrowings are short-term and, if short-term rates increase, the Company’s interest expense would increase and net earnings would decrease. If interest rates had been 2% higher throughout 2012, with all other variables held constant, the Company’s interest expense would have increased by approximately $1,020 (2011 - $969). The Company is also exposed to interest rate risk in its international banking operation, through the assets interest-bearing deposits with banks of $3,884 (2011 - $8,033), and the client deposits liability of $3,884 (2011 – $7,432). This risk is low, as it is managed through the matching of interest rates and maturities on these balances. (c) Credit Risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Company’s total credit risk exposure, without consideration of any collateral or other credit enhancements, is as outlined below: As at December 31 Cash Interest-bearing deposits with banks Accounts receivable and other Loan receivable Receivable from clients and broker Securities at amortized cost – promissory notes Short-term securities Bonds Loan guarantee 2012 26,993 3,884 23,547 – 36,820 – 2,187 2,007 482 95,920 $ $ 2011 5,514 8,033 19,141 6,410 32,044 2,366 3,166 – 482 77,156 $ $ The Company considers its credit risk to be low. The interest-bearing deposits with banks and the majority of the accounts receivable are due from major institutions. The Company reviews the credit worthiness of any banks with which it places deposits, and does not deal with a bank if it is not satisfied with the bank’s financial strength. The credit exposure on receivables from clients and loan receivable is offset with securities, which are held in the client margin accounts of the securities dealer subsidiary, and by the offshore bank subsidiary, respectively. There are controls on the amounts that these clients may borrow, depending upon the securities that are pledged. The short-term securities and bonds are short-duration investment quality securities. Offsetting the credit exposure on the loan guarantee are marketable securities pledged by the borrower, the market values of which the Company actively monitors on a continuous basis. (d) Liquidity Risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities, which are substantially all due within one year. The Company manages this financial risk by maintaining a portfolio of securities, and by arranging for significant borrowing facilities with major Canadian banks, at attractive rates. 44 NOTES TO FINANCIAL STATEMENTSGuardian Capital Group Limited 22. Capital Management The Company considers the following to be its capital: capital stock, contributed surplus, retained earnings, accumulated other comprehensive income and bankers’ acceptances payable. The Company’s objectives in managing its capital are to: (a) maintain a strong capital base to provide investor, creditor, regulator and client confidence; and (b) provide returns to shareholders by the payment of dividends, the repurchase of the Company’s shares, and the enhancement of long-term value. The allocation of capital to, and the return from, the Company’s businesses are monitored by senior management. Certain of the Company’s operating subsidiaries are subject to various types of capital requirements imposed by the regulatory authorities to which they report. During the year, and at year end, the subsidiaries complied with those requirements. As at December 31, 2012, the Company’s regulated businesses had total regulatory capi- tal amounting to $92,461 (2011 - $64,823). These amounts are, in all cases, in excess of the regulatory requirements, and are adjusted by the Company as necessary from time to time. The Company’s borrowing facility, through which bankers’ acceptances are issued, is subject to certain terms and con- ditions. During the year, and at year end, the Company complied with those terms and conditions. 23. Related Parties (a) Parent company Minic Investments Limited (“Minic”) is a corporation of which A. Michael Christodoulou, a director and officer of the Company, is currently President. Minic is owned by The Christodoulou 2004 Family Trust, a discretionary trust of which the children of the late John Christodoulou are possible ben- eficiaries. As at December 31, 2012, Minic beneficially owned 48.2% (2011 – 48.2%) of the Company’s outstanding common shares. In 2012 and 2011, there were no transactions between Minic and the Company. (b) Key management personnel Key management personnel are persons having authority and responsibility for planning, directing and controlling the activities of the Company, either directly or indirectly. The Company has determined that its key management personnel include the Board of Directors of the Company and certain senior executives of the Company. The following summarizes transactions with key management personnel: For the years ended December 31 Short-term employment benefits Post-employment benefits Stock-based compensation $ 2012 2,929 14 501 3,444 $ 2011 2,969 10 280 3,259 The Company provides investment management services to key management personnel at reduced fee rates, which are available to all employees of the Company. The following is a summary of the fees paid for these services. For the years ended December 31 Investment management services (c) The Company’s significant subsidiaries are as follows: As at December 31 Guardian Capital LP Guardian Capital Advisors LP Guardian Capital Enterprises Ltd. Worldsource Wealth Management Inc. Worldsource Financial Management Inc. Worldsource Securities Inc. IDC Worldsource Insurance Network Inc.(i) Guardian Capital International Ltd. Alexandria Bancorp Ltd. Alexandria Global Investment Management Ltd. Alexandria Trust Corporation Guardian Capital Group Limited Employee Profit Sharing Plan (ii) Guardian Canadian Value Equity Fund (iii) Guardian Global Dividend Growth Fund (iii) Guardian Growth & Income Fund The Alexandria Fund Ltd.(iv) 2012 $ 32 $ 2011 41 Country of organization 2012 2011 Voting ownership interest Canada Canada Canada Canada Canada Canada Canada Bermuda Cayman Islands Cayman Islands Barbados Canada Canada Canada Canada Cayman Islands 100% 100% 100% 100% 100% 100% 67% 100% 100% 100% 100% 0% n/a 7% 100% 40% 100% 100% 100% 100% 100% 100% 67% 100% 100% 100% 100% 0% 87% 40% n/a 40% 45 NOTES TO FINANCIAL STATEMENTS2012 Annual Report (i) The principal place of business for IDC Worldsource Insurance Network Inc. (“IDC WIN”), the Company’s primary managing general agency subsidiary, is located at Suite 700, 625 Cochrane Drive, Markham, Ontario. The non-controlling interests have a 33% ownership and voting interests in IDC WIN. The accumulated non-controlling interest in the Company’s accounts related to IDC WIN is as follows: For the years ended December 31 Non-controlling interest, beginning of year Arising on acquisition Net earnings available to non-controlling interests Non-controlling interest, end of year The following is summarized financial information about IDC WIN before consolidation adjustments: As at December 31 Cash Other current assets Intangible assets Other non-current assets Current liabilities For the year ended December 31, 2012 and the six months ended December 31, 2011 Revenue Net earnings Comprehensive income $ $ $ $ $ $ 2012 3,668 – 326 3,994 2012 482 1,689 8,548 906 11,625 6,244 2012 11,567 1,905 1,905 $ $ $ $ $ $ 2011 – 3,575 93 3,668 2011 184 1,474 2,299 1,192 5,149 1,672 2011 5,237 584 584 (ii) The Company does not hold any ownership interest in Guardian Capital Group Limited Employee Profit Sharing Plan (the “EPSP Trust”). However, the EPSP Trust is consolidated because the Company has power over the activities of the EPSP Trust, which are conducted on behalf of the Company, and the Company remains exposed to the risks of the EPSP Trust, which are described in note 8, Bank Loans and Borrowings, and note 13, Treasury Stock. (iii) The Company disposed of its interest in Guardian Canadian Value Equity Fund during the year. The Company ceased to consolidate Guardian Global Dividend Growth Fund effective December 31, 2011, as new business commitments sufficiently diluted the Company’s interest. The Company did not recognize a gain or loss as a consequence of losing control of either of these subsidiaries. (iv) The Company does not control The Alexandria Fund Ltd., as the Company intends to dispose of control of the fund either through a sale or dilution transac- tion, which meets the criteria as established under its policy for Non-current assets held for sale. As at December 31, 2012, the Company’s holdings in the fund, through investments in certain of its sub-funds, were valued at $26,018 (2011 – $45,580) and the fund’s total net asset value was $68,455 (2011 – $106,313). (d) The Company’s significant joint venture is as follows: As at December 31 Guardian Ethical Management Inc. Country of organization Canada 2012 Voting ownership interest 2011 50% 50% Guardian Ethical Management Inc. (“GEM”) is an investment fund manager specializing in socially responsible investing mandates, which comple- ments the Company’s existing investment management businesses. Management of GEM is shared equally with the other partner in the joint venture. The Company accounts for its investment in GEM using the equity method. The following is summarized financial information about GEM: As at December 31 Cash Other current assets Current liabilities For the years ended December 31 Net revenue Net earnings Comprehensive income 46 2012 1,167 574 1,741 1,077 2012 2,140 – – 2011 1,693 739 2,432 1,769 2011 2,793 – – $ $ $ $ $ $ $ $ $ $ NOTES TO FINANCIAL STATEMENTSGuardian Capital Group Limited (e) Interest in unconsolidated structured entities The Company sponsors and manages a number of collective investment vehicles for the purpose of efficiently investing monies on behalf of the Company’s clients, who are the primary investors in these vehicles. These collective investment vehicles, which are separate legal entities, are financed by investments made by clients and, to a limited extent, the Company. The Company is paid for the investment management services it provides to the vehicles either directly from the vehicles or from the investors. The following tables summarize the size of the unconsolidated collective investment vehicles managed by the Company, and the Company’s interests in and transactions with those collective investment vehicles: As at December 31 Net assets of unconsolidated collective investment vehicles Company’s interests in unconsolidated investment vehicles Securities holdings Securities held for sale 2012 2011 $ 1,156,885 $ 979,829 $ $ 8,331 26,019 34,350 $ $ 12,991 45,840 58,831 For the years ended December 31 2012 2011 Net revenues earned directly from unconsolidated collective investment vehicles $ 986 $ 1,187 The Company’s maximum exposure to loss from its interest in these collective investment vehicles is limited to the amount of its investment. 24. Acquisitions (a) Strategic Brokerage Services LP (“SBS”) On November 30, 2012, the Company acquired the operating net assets of the life insurance Managing General Agency (an “MGA”) business of SBS through its MGA subsidiary, IDC Worldsource Insurance Network Inc. (“IDC WIN”). The acquisition of SBS augments IDC WIN’s existing business by providing greater scale and strengthening its presence in Western Canada. The cash consideration paid by the Company for the acquisition is $5,261, $3,157 on closing and the balance due over a period of one year after closing. The accounting for the consideration paid for the acquisition is as follows: Fair value of consideration paid: Cash on closing Cash to be paid over a period of one year after closing Total consideration paid Fair value of identifiable net assets acquired: Intangible assets, rights to future revenue Equipment Other Net value of net assets acquired Goodwill $ $ 3,157 2,104 5,261 5,150 102 9 5,261 Nil Subsequent to its acquisition, SBS has contributed net revenue of $302 and net earnings of $87 to the Company’s 2012 results. If the acquisition had occurred on January 1, 2012, management estimates that SBS would have earned net revenue of $2,800 and net earnings of $330 and, as a result, the Company’s reported net revenue and net earnings for the year ended December 31, 2012 would have been approximately $87,830 and $23,089, respectively. In determining these amounts, management has assumed that the fair value adjustments determined above, which arose on the date of acquisition, would have been the same if the acquisition had occurred on January 1, 2012. Management has also assumed the amortization of intan- gible assets of $340 and a provision for income taxes of $130 for the year 2012. (b) IDC Financial Inc. (“IDC”) On July 1, 2011, the Company acquired a 67% interest in IDC, a life insurance MGA, through an amalgamation of IDC with the Company’s existing MGA subsidiary, Worldsource Insurance Network Inc. (“WIN”), to form IDC WIN, and a subsequent share purchase. The consideration paid by the Company to the vendors consisted of a 33% of the ownership of WIN and $8,558, $4,271 on closing and the balance due over a period of one year after closing. The acquisition of IDC increased the operating leverage of, and created a national presence for, the Company’s MGA business. Goodwill, which is not expected to be deductible for income tax purposes, represents expectations that IDC WIN will be able to maximize the value of the contracts with major insurance carriers, and that synergies will be able to be achieved, to maximize the profitability of the combined entity. 47 NOTES TO FINANCIAL STATEMENTS2012 Annual Report The accounting for the consideration paid for the acquisition was as follows: Fair value of consideration: Cash on closing Cash paid over a period of one year after closing Ownership interest of WIN Total consideration paid Fair value of identifiable net assets acquired: Intangible assets, rights to future revenue Accounts receivable and other Equipment Accounts payable and other liabilities Bank loans and borrowings Deferred tax liability Less: fair value of identifiable net assets retained by non-controlling interests Net value of net assets acquired Goodwill $ $ 4,271 4,287 3,308 11,866 10,238 1,671 483 (1,140) (33) (2,258) 8,961 (2,957) 6,004 5,862 The non-controlling interests in IDC WIN are measured at their proportionate share of the fair value of the net identifiable assets of the acquired busi- ness. In addition, the carrying value of the 33% interest in WIN which was transferred to the vendors was credited to non-controlling interests. As a result, non-controlling interests in the Company’s subsidiaries changed as follows: Ownership interest in fair value of IDC Ownership interest in carrying value of WIN transferred to non-controlling interests Increase in non-controlling interests due to the acquisition of IDC As a result of this transaction, the Company’s retained earnings were increased as follows: Fair value of ownership interest in WIN transferred to non-controlling interests Less: Carrying value of ownership interests transferred Excess of fair value over carrying value, credited to retained earnings $ $ $ $ 2,957 618 3,575 3,308 (618) 2,690 Subsequent to its acquisition, IDC contributed net revenue of $3,383 and net earnings of $280 to the Company’s 2011 results. If the acquisition had occurred on January 1, 2011, management estimates that IDC would have earned net revenue of $6,366 and net earnings of $446 and, as a result, the Company’s reported net revenue and net earnings for the year ended December 31, 2011 would have been approximately $76,676 and $10,901 respectively. In determining these amounts, management has assumed that the fair value adjustments determined above, which arose on the date of acquisition, would have been the same if the acquisition had occurred on January 1, 2011. Management has also assumed the amortization of intan- gible assets of $720 and a provision for income taxes of $235 for the year 2011. 48 NOTES TO FINANCIAL STATEMENTSGuardian Capital Group Limited Directors Principal Executives Guardian Capital Group Limited George Mavroudis President and Chief Executive Officer C. Verner Christensen Senior Vice-President, Finance and Secretary A. Michael Christodoulou Senior Vice-President, Strategic Planning and Development Matthew D. Turner Senior Vice-President and Chief Compliance Officer Leslie Lee Vice-President, Human Resources Donald Yi Risk Management Officer Ernest B. Dunphy Controller Board of Directors James S. Anas •* A. Michael Christodoulou Harold W. Hillier • George Mavroudis Barry J. Myers • Michel Sales • Peter Stormonth Darling • Committees Governance Barry J. Myers • A. Michael Christodoulou Michel Sales •* Compensation James S. Anas • Harold W. Hillier •* Michel Sales • Audit James S. Anas • Harold W. Hillier • Barry J. Myers •* * Chairman • Unrelated Directors Portfolio Managers: Denis Larose Chief Investment Officer Gary M. Chapman Managing Director Kevin R. Hall Managing Director Robert K. Hammill Managing Director Peter A. Hargrove Managing Director Srikanth G. Iyer Managing Director Stephen D. Kearns Managing Director D. Edward Macklin Managing Director John G. Priestman Managing Director Michele J. Robitaille Managing Director Michael P. Weir Managing Director Guardian Capital LP George Marvoudis Chief Executive Officer C. Verner Christensen Senior Vice-President and Secretary Robert G. Broley Senior Vice-President, Investment Services Brian P. Holland Senior Vice-President, Client Service Hugh M. MacFarlane Senior Vice-President, Investment Services Spyro Carayannis Vice-President, Investment Services Greg Chai Vice-President, Client Service Joyce Hum Vice-President, Consultant Relations Patrick Milot-Daignault Vice-President, Investment Services Patrick E. Poulin Vice-President, Investment Services Rocco Vessio Vice-President, Investment Services Chris Winchell Vice-President, Investment Services Darryl M. Workman Vice-President, Operations and Administration Matthew D. Turner Chief Compliance Officer Ernest B. Dunphy Controller 49 2012 Annual ReportAlexandria Bancorp Limited Robert F. Madden General Manager Alexandria Trust Corporation Robert F. Madden Director Worldsource Wealth Management Inc. Paul Brown Managing Director John T. Hunt Managing Director Andy Mitchell Managing Director Linda Kenny Chief Financial Officer Paige Wadden Head of Compliance Areef Samji Controller Guardian Capital Advisors LP J.J. Woolverton Chairman A. Michael Christodoulou Managing Director C. Verner Christensen Vice-President and Secretary Simon Bowers Vice-President, Private Client Trading Steven W. Thode Vice-President, Private Client Services Darryl M. Workman Vice-President, Operations and Administration Matthew D. Turner Chief Compliance Officer Ernest B. Dunphy Controller Private Client Portfolio Managers: Michael E. Barkley Senior Vice-President George E. Crowder Senior Vice-President Douglas G. Farley Senior Vice-President Michael G. Frisby Senior Vice-President J. Matthew Baker Vice-President Thierry Di Nallo Vice-President Christie F. Rose Vice-President 50 Guardian Capital Group Limited Corporate Offices Commerce Court West Suite 3100, P.O. Box 201 Toronto, Ontario M5L 1E8 Telephone: (416) 364-8341 Fax: (416) 364-2067 Website: www.guardiancapital.com Investor Relations George Mavroudis email: info@guardiancapital.com Auditors KPMG LLP Bankers Canadian Imperial Bank of Commerce Bank of Montreal Toronto Stock Exchange Listing Symbol Shares Common GCG Class A GCG.A Annual Meeting May 23, 2013 11:00 a.m. King Gallery, The Suites at One King West 1 King Street West Toronto, Ontario Custodian and Fund Administrator RBC Investor Services Trust Registrar and Transfer Agent Computershare Investor Services Inc. 

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