Guardian Capital Group Ltd
Annual Report 2013

Plain-text annual report

20132013 Annual Report GUARDIAN CAPITAL GROUP LIMITED TABLE OF CONTENTS Message from the Chairman of the Board... p.3 Message from the President and Chief Executive Officer... p.4 Financial Highlights... p.5 Review of Operations... p.6 Management’s Discussion and Analysis... p.10 Ten Year Review... p.21 Management’s Statement on Financial Reporting... p.22 Independent Auditors’ Report... p.23 Consolidated Financial Statements... p.24 Notes to Consolidated Financial Statements... p.29 Directors and Principal Executives... p.48 Corporate Information... p.49 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 Guardian enjoyed another successful year in 2013. During the year, your Board approved the transition from annual to quarterly dividend payments, starting in July, initially at an annual rate of 20 cents, an increase of 17.6% over the 2012 rate of 17 cents. In the first quarter of 2014, the dividend was again raised by 10% to 5.5 cents per quarter. Guardian returned to its shareholders $17.1 million in 2013, made up of dividends of $9.2 million and share purchases of $7.9 million. The Board has confidence that Guardian’s leadership and strategy will enable its businesses to continue the high level of performance that has been evidenced. Most of all, I want to recognize the dedicated efforts of Guardian’s Associates across all of our businesses, who have contributed to our successes. We congratulate all of them for their outstanding efforts and commitment. Michel Sales has served your Board of Directors for almost 22 years, and has recently advised us that he will not be standing for re-election at the upcoming Annual Meeting of Shareholders. We wish to thank Michel for his wisdom, dedication and guidance to Guardian and the Board. We are very pleased to recommend to the shareholders the election of a new member to the Board, Mr. Hans-Joerg Rudloff, who has several decades of experience as a senior global financial serices executive and recently retired as the Chairman of Barclays Capital. Additional information about Mr. Rudloff is included in the Management Information Circular pertaining to the 2014 Annual Meeting, which will be available shortly. I also thank the other members of your Board of Directors for their counsel throughout the year. On behalf of the Board, we thank you for your ongoing support and trust. We look forward to reviewing our progress further with you at the Annual Meeting. Respectfully, James Anas Chairman of the Board February 27, 2014 TABLE OF CONTENTS Message from the Chairman of the Board... p.3 Message from the President and Chief Executive Officer... p.4 Financial Highlights... p.5 Review of Operations... p.6 Management’s Discussion and Analysis... p.10 Ten Year Review... p.21 Management’s Statement on Financial Reporting... p.22 Independent Auditors’ Report... p.23 Consolidated Financial Statements... p.24 Notes to Consolidated Financial Statements... p.29 Directors and Principal Executives... p.48 Corporate Information... p.49 Message from the President and Chief Executive Officer Dear Shareholders, I am pleased to report that 2013 was another successful year of growth for Guardian Capital. For the second consecutive year, we have set new 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. This annual report will highlight key financial results, which provide evidence of the many areas in which we have achieved success throughout the year. I would like to take just a short moment in this letter to provide some qualitative narrative on the journey we have taken to accomplish these results. Guardian has always been a company that invests for future growth, by sprinkling seeds across the various business segments in which it operates. The serial yet conservative entrepreneur in Guardian prefers organic growth, but this often requires patience and resolve, as it normally takes lon- ger than most realize to build critical scale and deliver profitability. An important requirement with this approach is that the shareholders understand the balance needed between striving for maximum current earnings and investing for improved future earnings. The last few years of success have been in the making for years, with significant investment across the various disciplines of our core institutional asset manage- ment business. Through the recruitment and retention of the highest calibre of investment professional teams, we have created competitive track records in a diversified offering of asset classes and investment solutions. Additionally, by building the business development resources that focus on targeted client seg- ments, we have provided an improved ability to prospect and acquire new clients. Our investment has, however, extended beyond the core institutional asset management business, including our constant com- mitment to invest in our private client and independent dealership services so that scale and efficiencies would make us competitive. All of these areas, for the first time in our firm’s history, have been positive con- tributors to the overall financial success this year. More importantly, the company is now more diversified and better able to compete in the future. We plan to largely continue with our preferred philosophy of organic growth. However, we have shown a willingness to, and will continue to, accelerate some of these strategic plans by re-allocating some of our cap- ital invested in securities to acquire operating businesses that will assist in accelerating the growth we wish to achieve. Over the past year, we have initiated a number of new investment capabilities which we believe with time will be additional contributors to our earnings, including our efforts to build a private real estate capability, and our recent announcement related to acquiring an emerging markets equity team in London, UK. With this new presence in a key financial centre such as London, we will be searching to selectively attract other investment professionals to the organization, so that they will further broaden our investment offerings at Guardian. As we work on diversifying our businesses, there will be periods, as has been the case in the past, when growth in earnings may be slower than in the past couple of years. This should be expected when increased expenditures are required in areas of strategic importance which may weigh on earnings in the short term but, from a strategic management perspective, are necessary investments for future growth. As we succeed in our execution of building our organization, we plan to share the rewards with our share- holders, in the form of sustainable and growing dividend payments. This past year, we have successfully transitioned from an annual dividend to quarterly dividends, and raised the dividend by an additional 10% over the past year to $0.055/share per quarter, effective in January, 2014. We are always thankful to the many clients who have honoured us with the responsibility to manage or administer their assets, and never assume this privilege lightly. Shareholders have our assurances that the entire management and associates at the Company are completely dedicated to making Guardian a success- ful, independent and diversified financial services company. Our values of Trustworthiness, Integrity and Stability are embodied by all, who serve with the best intentions our clients and shareholders. Warmest regards, George Mavroudis, President and Chief Executive Officer 4 February 27, 2014 Guardian Capital Group Limited Financial Highlights 8 2 2 , 2 2 3 1 0 2 2 3 8 , 8 1 8 2 9 , 5 1 6 6 2 , 6 1 6 8 9 , 3 1 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 Assets Under Management As at December 31 ($ in millions) Assets under management increased 18% in 2013, as a result of a combination of the overall positive performance of the financial markets and net new monies received from new and existing clients. 6 2 . 4 1 3 1 0 2 9 9 . 1 1 7 1 . 1 1 7 5 . 1 1 9 4 0 1 . Value of the Company’s Corporate Holdings of Securities, per share, diluted1 As at December 31 (in $) The fair value of the Company’s Corporate Holdings of Securities, per share increased 18% in 2013, reflecting the growth in the fair value of the Company’s investments, sub- stantially the Bank of Montreal shares. 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 9 5 5 , 1 1 3 1 0 2 8 1 9 9 , 4 5 6 , 8 3 8 7 , 7 4 7 0 , 7 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 7 1 . 3 1 3 1 0 2 6 1 . 1 1 0 9 9 . 1 0 0 1 . 9 1 . 9 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 Assets Under Administration As at December 31 ($ in millions) Assets under administration increased 17% in 2013, as a result of market performance, the recruitment of new advisors, and additional assets provided by clients, with the additions coming from each of the three financial advisory subsidiaries. Shareholders’ Equity, per share, diluted1 As at December 31 (in $) The Company’s Shareholders’ Equity per share increased 17% in 2013, providing a broad reflection of the growth in the net value of all of the Company’s recorded assets and liabilities, reflecting both the increase in the value of its Securities Holdings and the profitable operations, net of amounts returned to shareholders during the year. F I N A N C I A L H I G H L I G H T S 1 3 9 6 2 , 3 1 0 2 8 3 1 , 0 2 3 3 1 , 7 1 9 3 5 , 3 1 8 2 7 , 8 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 Operating Earnings1 For the years ended December 31 ($ in thousands) Operating Earnings increased 34% in 2013, reflecting substantial improvements in the Company’s Investment Management and Financial Advisory businesses. 1 1 . 1 3 1 0 2 1 7 . 0 9 6 0 . 1 4 0 . 1 3 . 0 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 Net Earnings available to shareholders, per share, diluted1 For the years ended December 31 (in $) Net Earnings per share increased 53% in 2013, reflecting the improved Operating Earnings and significant Net Gains on the sale of Securities. 9 8 . 0 3 1 0 2 6 6 0 . 0 6 0 . 5 5 . 0 2 4 0 . 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 Adjusted Cash Flow From Operations available to shareholders, per share, diluted1 For the years ended December 31 (in $) Adjusted Cash Flow from Operations increased 35% in 2013, reflecting the improvements in Operating Earnings. 4 0 . 1 3 1 0 2 8 7 . 0 6 6 0 . 5 5 . 0 1 4 0 . 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 EBITDA available to shareholders, per share, diluted1 For the years ended December 31 (in $) EBITDA Available to Shareholders increased 33% in 2013, reflecting the improvements in the Company’s operations during the year. (1) 2010 to 2013 numbers are in accordance with IFRS; 2009 is as reported under previous Canadian GAAP. 2013 Annual Report 5 R E V I E W O F O P E R A T I O N S $20.4B 3 9 3 , 0 2 6 4 3 , 7 1 9 8 4 , 4 1 0 1 9 , 4 1 5 2 8 , 2 1 3 1 0 2 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 Institutional Assets Under Management as at Dec. 31 ($ mil) 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. Assets under management (“AUM”) in GCLP were $20.4 billion at the end of 2013, up from $17.3 billion at the end of 2012. The increase in assets under management was due both to strong net new monies from clients across the institutional and retail intermediary client base, and overall positive growth in equity markets. The S&P/TSX Composite benchmark, in which a majority of our assets under management are invested, rose 13.0% and provided a healthy balance of growth in AUM. In addition, continued stability in the investment team and organization, and strong client service and business development efforts, set the stage for overall growth. Canadian Equity In 2013, all of our Canadian equity strategies added value relative to the main S&P/TSX Composite benchmark, and this should continue to provide support for further growth in 2014. We have experienced continued investor interest in our Canadian Growth Equity strategy, to the point of having to decline new client appointments in 2013. At the commencement of 2013, we had just over $3 billion in this strategy, and 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. With strong flows of new money from existing clients throughout the year into the strategy and performance of more than 20% in 2013, we now have $4 billion in total assets under management and are close to imposing a hard capacity limit for any new monies. Client demand for strategies with a bias toward income generation continued to prove to be strong in 2013, particularly among the retail investors. Our leading expertise in managing Equity Income and Growth & Income strategies for well over 15 years and our partnership with several leading retail intermediaries resulted in significant net new monies from our retail partners. We believe this theme will continue to remain popular with retail investors, and should support further growth in 2014. 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. Guardian has one of the deepest Canadian Equity investment teams in the industry, with eleven investment professionals who have an average of 25 years of experience overseeing a total of approximately $12.6 billion in assets under management. Global Equity The longer-term performance history of our Global Dividend Equity strategy was instrumental in placing us on several key retail intermediary platforms over the past two years. This acquired shelf space, along with a demand by retail investors for strategies with a bias toward income generation and lower volatility, continued to provide us with strong cash inflow momentum in 2013, and was a large contributor to the growth in AUM for the global equity team this past year. As a result of these strong cash inflows for the Global Dividend Equity strategy, the team at the end of 2013 is reporting total global equity AUM of $1.7 billion, representing growth of over 70% during the year. Relative performance for several of our global equity products trailed the strong performance of the main MSCI World Composite this past year, affecting the relative short to medium- term performance history of these products. A return to strong relative value-added performance will be important to regain the confidence within the consultant and institutional client channels. Despite this relative underperformance for the team, we expect to continue benefiting from retail investors’ increased appetite for global equities, through the various retail intermediaries who offer our strategies. As investors gain greater confidence in the equity markets, stronger markets may 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 2013, 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 products. 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 continued growth in our high yield bond strategies. However, we expect 6 6 Guardian Capital Group Limited R E V I E W O F O P E R A T I O N S R E V I E W O F O P E R A T I O N S $4.5B 9 4 5 , 4 0 9 4 , 3 9 5 2 , 2 9 1 5 , 1 1 9 0 , 1 3 1 0 2 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 Wrap Assets Under Management as at Dec. 31 ($ mil) bond yields to rise eventually, and therefore the prospects of adding significant absolute returns from core bond investments will be limited. 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 over the last couple of years, including a short-duration bond strategy focusing on high-quality corporate issues, and a variation on this strategy incorporating an allocation to high yield bonds. Earlier in the year, we also launched a more benchmark-free fixed income product, with a focus on producing a reliable income payout of 5.75% per annum, while also attempting to preserve capital in a changing rate environment by allowing the portfolio manager to roam between high yield, investment grade and government bonds, as well as having the ability to both lever and short any of these credits. Early performance has been excellent through some difficult bond markets, and we believe such a strategy will be a compelling choice for investors. The product is being offered through an offering memorandum, and represents our initial efforts to carve a niche in alternative fixed income strategy. 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 over the past two years. 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 continued to add balanced fund clients in 2013, and expect to continue the momentum in 2014, particularly with smaller endowments, foundations and First Nations accounts. 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 includes 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 2013 calendar year, as we finished the year with more than $4.5 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 our 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. In 2011 and 2012 we experienced our highest levels of requests for proposals and finalist opportunities for any two year period. Over the past year, we received fewer requests for proposals, partly attributable to a general trend experienced by the overall market and partly because searches that were in demand were in areas that we currently do not serve, such as a host of private assets in equity and infrastructure searches. Search activity also tends to be slower in a relatively strong market environment, as investors are less inclined or pressured to initiate changes in their lists of managers. Much of our growth in institutional assets over the past year came from existing clients, who continue to add net new inflows to their existing mandates with us. We remain committed to serving the institutional pension market and their consultants, as this channel requires a constant connection with the key decision- makers, so that when certain needs arise we are a familiar alternative to meet their needs. Our broad strength in relative performance for our domestic equities is an area where we continue to have respect as a top manager for consideration by the consultant community. Unfortunately, barring any major competitor setbacks, this is an asset class that involves taking away market share from others, rather than a segment of the market that is experiencing overall growth. Global equity searches continue to be an area where we can see overall market demand and growth, once there is a return to strong relative value-added performance. 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. To this end, in 2013 we successfully launched 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. The initial capital raised in the first closing should be substantially invested by the end of Q1 2014, and we plan to target the institutional market for a second round of capital this year, as we are focused on succeeding to build a niche real estate asset management business. This asset class, unlike the domestic equity market, is highly in demand and a growing proportion of institutional investors’ asset allocations. In addition to direct real estate, we also announced in late 2013 that we have reached agreement to purchase an emerging markets equity team in London, UK, which we plan to market heavily upon closing in 2014. Despite the headline headwinds in developing markets, this asset class is very much in demand by institutional investors, and is an asset class for which investors have experienced challenges in finding managers with adequate capacity to serve their 2013 Annual Report 7 R E V I E W O F O P E R A T I O N S $1.8B 3 6 7 , 1 8 1 4 , 1 1 3 3 , 1 0 3 2 , 1 0 5 0 , 1 3 1 0 2 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 Private Wealth Assets Under Management as at Dec. 31 ($ mil) demands. Our institutional business development team and the key decision makers within the consultant community appear to be excited with our foray into this asset class. 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 to private wealth clients, foundations and endowments within Canada and abroad. We assist our private clients to achieve their investment objectives, by constructing tax- efficient, fully-discretionary segregated or investment fund solutions that are tailored to the individual client. Our investment process combines a proprietary global equity screening process with the experience of dedicated private wealth client portfolio managers. We work not only with the clients themselves, but also with their financial, legal, accounting and other advisors, to ensure that the services we provide are properly integrated 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 the vast intellectual resources of the firm, to construct custom-designed solutions for each client. A strong administrative and support team ensures that client requirements are met in a timely manner. GCA’s assets under management and supervision were $1.8 billion at the end of 2013, compared to $1.4 billion at the end of 2012. 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, divided almost equally between Eastern and Western Canada. Our business development efforts will continue to focus on promoting awareness in the legal, accounting, family office and financial advisory communities. INTERNATIONAL PRIVATE BANKING As an extension of our Private Wealth Management business, our International Private Banking subsidiaries service the wealth management needs of our international clients. Alexandria Trust Corporation (“ATC”) is a licensed and regulated domestic trust company based in Barbados, which provides fiduciary and corporate administration services to international clients. Over the past year, we acquired the net operating assets and client relationships of a corporate management services business, to increase our presence on the island and solidify our offerings to existing and new clients. With enhanced commitment to provide corporate and trust management services to international clients in Barbados, we expect to see immediate gains in new clients who have historically refrained from retaining us due to our limited presence. 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 2014, in coordination with our expanded offering in Barbados through ATC, ABL plans to continue to strengthen its international referral network and to improve its pooled investment alternatives. 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”) were $11.6 billion at December 31, 2013, compared to $9.9 billion at the end of 2012. 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 $7.7 billion at December 31, 2013, compared to $6.7 billion at the end of 2012. The increase in assets was attributable to successful recruiting programs and higher client portfolio valuations due largely to market appreciation in equities. WFM’s sales commission revenues continue to trend lower in 2013, due to a general move by advisors away from deferred sales charge “rear-load” funds to lower 8 8 Guardian Capital Group Limited IDC Worldsource Insurance Network Inc. (“IDC WIN”) is a Managing General Agency (“MGA”), which is 79% owned by Worldsource and which provides sales, marketing and administrative support to licensed insurance advisors nationwide. IDC WIN experienced strong growth in 2013, including the first full year of results from the 2012 acquisition of Strategic Brokerage Services (“SBS”), a strong regional MGA in Western Canada, giving the firm a national footprint, with offices in Western, Central and Eastern Canada, 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 was $2.5 billion as of December 31, 2013, up from $2.2 billion as of the end of 2012. Led by the growth in premiums on life insurance policies sold, IDC WIN has generated more than 60% of the net commission revenue at Worldsource in 2013, with net revenue of $14.1 million, compared to $10.4 million in 2012 and only $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 2014. In addition, with the successful completion of the integration of SBS this past year, we also feel that further con- solidation opportunities may be considered going forward, to extend our leading position as an MGA and leverage the benefits of our current economies of scale. sales 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. We believe that the move toward greater trailer fee revenue better aligns the advisors’ business with the clients’ interests. It also improves the advisors’ 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 significant 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 we set out to have WFM work closely with its independent advisors, to create an investment solu- tions program where Guardian’s in-depth investment management capabilities will be leveraged to convert more Worldsource AUA into Guardian AUM. We expect with the recent launch of a dedicated competi- tive management fee share series, the “W” series, for the family of Guardian funds sold by WFM advisors, and the delivery of customized portfolio solutions for its advisors, will improve our efforts to convert more AUA into AUM and grow both the dealership and the advisors’ revenues, as they improve their produc- tivity 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 more independence than traditionally afforded. WSI is focused on providing the highest possible level of technological and administrative support to its branch network. In 2013, WSI continued to attract new financial advisors, adding new branches and finishing the year with $1.4 billion in AUA. In 2014, management expects that WSI will continue its success in recruiting advisors and adding new branches to its growing network of brokers across the country. As with WFM, an additional strategic focus will be to improve the opportunities to assist the advisors with managed solutions which enable a greater degree of conversion of AUA into AUM. In 2013, we launched a managed solution for our investment advisors in WSI, which offers a variety of Guardian managed investments, and plan to continue to work with our advisors to expand this offering going forward. $11.6B 9 5 5 , 1 1 8 1 9 9 , 4 5 6 , 8 3 8 7 , 7 4 7 0 , 7 R E V I E W O F O P E R A T I O N S 3 1 0 2 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 Total Assets Under Administration as at Dec. 31 ($ mil) $2.5B 2 6 4 , 2 7 2 2 , 2 3 3 6 , 1 3 2 7 9 1 4 3 1 0 2 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 Insurance Assets Under Administration as at Dec. 31 ($ mil) $38.5M 5 . 8 3 . 9 6 3 . 0 0 2 2 . 6 6 . 5 3 1 0 2 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 Premiums on Life Insurance Policies Sold for the years ended Dec. 31 ($ mil) 2013 Annual Report 9 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 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, 2013, with comparatives for the year 2012. Readers are encouraged to refer to the discussions and analyses contained in the 2013 Annual Report and the First, Second and Third Quarter 2013 Reports. This discussion and analysis has been prepared as of February 27, 2014. 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, which includes a mutual fund dealer, securi- ties dealer and an insurance managing general agency (“MGA”); and corporate activities and investments. As at December 31, 2013, Guardian had $22.2 billion of assets under management (“AUM”) and $11.6 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 $449 million at the end of the year. KEY EVENTS Changes to executives In August, 2013, Donald Yi, who had served as Guardian’s Risk Management Officer since 2006, was appointed to the position of Chief Financial Officer. Vern Christensen, who had served as the Chief Financial Officer of Guardian since 2001, continues to serve as the Senior Vice-President and Secretary of Guardian. Changes to securities holdings During the year, Guardian disposed of 160,000 common shares of Bank of Montreal for net proceeds of $10.8 million, the first disposition by Guardian of its Bank of Montreal investment. The disposition of this investment resulted in the recording of net gains of $5.0 million and a tax expense of $0.2 million. The net proceeds were used to partially fund Guardian’s $12.1 million investment in a real estate fund managed by a subsidiary. Acquisition of an Emerging Markets Equity investment management firm On November 25, 2013, Guardian entered into an agreement to acquire all of the shares of Zephyr Management (UK) Ltd. an emerging markets equity investment management firm, based in London, UK. This transaction is expected to provide Guardian with approximately $110 million US in additional AUM, and provide a bridge into new markets. Guardian will pay $1 million US upon closing, and make a second payment 4 years after closing, calculated based on the level of AUM then achieved, to a maximum of $2.8 million US. The transaction is expected to close in the first quarter of 2014, subject to certain term and conditions. USE OF NON-IFRS MEASURES Guardian’s management uses certain measures to evaluate and assess the performance of its business. Two of the measures that Guardian uses, adjusted cash flow from operations available to shareholders and EBITDA available to shareholders, are not in accordance with IFRS. Non-IFRS measures do not have standardized meanings prescribed by IFRS, and are therefore unlikely to be strictly comparable to similar measures presented by other companies. However, Guardian’s management believes that most shareholders, creditors, other stakeholders and investment analysts prefer to include the use of these measures in analyzing Guardian’s results. 10 Guardian Capital Group Limited Adjusted cash flow from operations available to shareholders Adjusted cash flow from operations available to shareholders is used by management to indicate the amount of cash either provided by or used in Guardian’s operating activities which is available to shareholders, and many companies similar to Guardian use this measure in a similar manner. The most comparable IFRS measure is “Net cash from operating activities”, which is disclosed in Guardian’s Consolidated Statements of Cash Flow. The following is a reconciliation of this non-IFRS measure to this IFRS measure: For the years ended December 31 ($ 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 2013 30,669 (2,631) 28,038 (416) 27,622 $ $ 2012 23,900 (1,697) 22,203 (923) 21,280 $ $ EBITDA available to shareholders Guardian defines EBITDA as net earnings before interest, income tax, amortization, stock-based compensation, and any net gains or losses. We believe this is an important measure, as it allows us to assess the operating profitability of our business and to compare it with other investment management companies, without the distortion caused by the impact of non-core business items, different financing methods, levels of income taxes, and capital expenditures. The most comparable IFRS measure is “Net earnings”, which is disclosed in Guardian’s Consolidated Statements of Operations. The following is a reconciliation of this non-IFRS measure to this IFRS measure: For the years ended December 31 ($ in thousands) Net earnings, as reported Add (deduct): Net losses (gains) on securities held for sale Income tax expense Net (gains) Stock-based compensation Interest expense Amortization EBITDA Less: Available to non-controlling interests EBITDA available to shareholders 2013 2012 $ 34,743 $ 22,759 58 3,767 (11,637) 1,247 1,130 3,706 33,014 707 32,307 (4,559) 3,275 (1,337) 1,145 1,283 3,478 26,044 861 25,183 $ $ 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 2013 Annual Report 11 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 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 Available to shareholders Net earnings EBITDA Adjusted cash flow from operations Available to shareholders, per share, diluted Net earnings EBITDA Adjusted cash flow from operations As at December 31 ($ in millions, except per share amounts) Assets under management Assets under administration Value of corporate holdings of securities Shareholders’ equity Per share, diluted Value of corporate holdings of securities Shareholders’ equity 2013 101,278 74,347 26,931 11,637 38,568 3,767 34,801 (58) 34,743 34,432 32,307 27,622 1.11 1.04 0.89 22,228 11,559 449 415 14.26 13.17 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2012 % change $ $ $ $ $ $ $ $ $ $ $ $ $ $ 86,360 66,222 20,138 1,337 21,475 3,275 18,200 4,559 22,759 22,556 25,183 21,280 0.71 0.78 0.66 18,832 9,918 380 354 11.99 11.16 17 % + 12 % + + 34 % + 770 % + 80 % 15 % + + 91 % - 101 % 53 % + + 53 % + 28 % + 30 % + + + + + + + + + 56 % 33 % 35 % 18 % 17 % 18 % 17 % 19 % 18 % The operating earnings for 2013 were $26.9 million, compared to $20.1 million in 2012, a 34% increase. Each operating unit contributed positively to the increase in Guardian’s operating earnings. A more detailed discussion is provided under “Revenues and Expenses” below. Net earnings available to shareholders for 2013 were $34.4 million, compared to $22.6 million in 2012, a 53% increase. The higher net earnings available to shareholders is largely due to significantly higher operating earnings and net gains in 2013, offset by the reduction in net gains on securities held for sale. The net gains for the year increased significantly, with approximately one-half of the net gains being from the sale of a portion of the Bank of Montreal shares. Higher income tax expense in 2013 was the result of higher operating income and higher net gains realized during the year, compared to 2012. The reduction in net gains on securities held for sale was due to a reclassification of certain mutual funds from the held for sale category to securities holdings during the year. This resulted in subsequent changes in unrealized gains or losses being recorded in other comprehensive income, rather than as net gains from securities held for sale. EBITDA available to shareholders for 2013 was $32.3 million, compared to $25.2 in 2012, a 28% increase. The increase was caused by improvement in operating results from all of Guardian’s operating segments. Adjusted cash flow from operations available to shareholders for the year amounted to $27.6 million, compared to $21.3 million in 2012. The differences between net earnings and adjusted cash flow from operations available to shareholders arise primarily due to the impact of future income taxes, amortization expenses and stock-based compensation, as well as the exclusion of gains or losses from the calculation of cash flow from operations. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S . 9 6 2 1 . 0 2 1 . 7 1 5 . 3 1 7 . 8 3 1 0 2 2 1 0 2 1 1 0 2 0 1 0 2 9 0 0 2 Operating Earnings for the years ended Dec. 31 ($ mil)1 1) Note: results for 2010 to 2013 are in accordance with IFRS; 2009 is as reported under previous Canadian GAAP. 12 Guardian Capital Group Limited 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 REVENUES AND EXPENSES Investment Management Revenues The largest source of revenue at Guardian is manage- ment fees received from clients, which vary as a result of changes in the amounts of client 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 from clients during year Market appreciation Assets under management, end of year Composed of: Institutional Private client International Total Institutional AUM is composed of: Canadian equities Global equities Fixed Income Total institutional AUM 2013 18,832 1,699 1,697 22,228 20,393 1,763 72 22,228 12,556 1,720 6,117 20,393 $ $ $ $ $ $ 2012 15,928 1,855 1,049 18,832 17,346 1,418 68 18,832 10,317 1,009 6,020 17,346 $ $ $ $ $ $ Guardian’s total AUM was $22.2 billion at December 31, compared to $18.8 billion in the prior year, an 18% increase. The increase in AUM was due to a combination of continued success in attracting new inflows of client assets and market appreciation. Management fees, net of referral fees paid, for the year 2013 were $50.9 million, 20% higher than the $42.4 million for 2012. Institutional management fees increased 22% to $40.3 million in 2013 from $33.0 million in 2012, as a result of increases in AUM and the continuing growth in higher-margin AUM, offset by a reduction of $1.2 million in performance fees. Private client management fees, net of referral fees paid, increased 18% during the year to $8.2 million from $6.9 million in 2012, reflecting the continuing increase in AUM in this area. Management fees earned from international clients during the year, at $2.4 million, were substantially unchanged from the $2.5 million a year earlier. Financial Advisory Commission Revenues Net commission revenue earned from the financial advisory business is generated from the sale of mutual funds, other securities and life insurance products, as well as from continuing fees related to AUA and life insurance policies, net of commissions paid to advisors. Total AUA at Guardian at the end of 2013 amounted to $11.6 billion, 17% higher than the $9.9 billion at the end of 2012. The increase in AUA was due to successes in recruiting new advisors into the financial advisory subsidiaries, together with the positive effects of market performance. The total premiums on life insurance policies sold in 2013 by the life insurance MGA subsidiary were $38.5 million, compared to $36.9 million in 2012. The policies sold generate sales commissions in the year they are sold, and add continuing service fees in subsequent years. Net sales commission revenue amounted to $23.1 million in 2013, 22% higher than the $18.9 million in 2012. This increase is due to the inclusion of the full year’s results of SBS Brokerage Services LP (“SBS”), which was acquired in November of 2012, successful recruitment efforts in the mutual fund and securities dealers and continued growth from our existing advisors. Administrative Services Income Administrative services income in 2013 was composed of $6.2 million of registered plan and other fees earned in the financial advisory area, $2.0 million in fund administration revenue earned from Guardian’s proprietary mutual funds and $1.5 million of trust, corporate administration and other fees earned mainly in the international area, for a total of $9.7 million, compared with $8.5 million in 2012. The increase resulted from growth in the number of client accounts in the financial advisory area and in the AUM in our mutual funds, offset by a reduction in client activities offshore. 2013 Annual Report 13 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S Dividend and Interest Income The following is a summary of Guardian’s dividend and interest income: For the years ended December 31 ($ in thousands) Dividend income Interest income Total dividend and interest income 2013 16,720 840 17,560 $ $ 2012 % change $ $ 15,292 1,315 16,607 + - + 9 % 36 % 6 % Dividend income increased by 9% in the year, due to increased investments in the corporate portfolio of securities and the effects of the increased dividend rates on the Bank of Montreal shares. The decrease in interest income resulted from the disposition of promissory notes during the second half of 2012. Expenses Guardian’s operating expenses, excluding commissions, referral fees, amortization and interest, were $69.5 million in 2013, compared with $61.5 million in 2012, an increase of 13%. Included in the increased expenses for 2013 were $1.8 million of additional expenses due to the inclusion of the full year of expenses relating to the SBS acquisition in late 2012. Excluding the expenses related to SBS, the increase in the operating expenses in 2013 would have been 10%. Increased operating expenses also resulted from additional business development costs incurred in bringing on the additional AUM during the year and additional investment professionals added, to provide for the management and servicing of this additional AUM. The increase in amortization in 2013, from $3.5 million to $3.7 million, was largely a result of the full year’s amortization of the intangible assets acquired as part of the SBS aquisition, offset by certain intangible assets being fully amortized in the second quarter of 2013. Interest expense reduced to $1.1 million in 2013, com- pared to $1.3 million in 2012, a reduction of 12%, as a result of lower interest rates renegotiated in late 2012. NET GAINS For the years ended December 31 ($ in thousands) Net gains (losses) in consolidated mutual funds Net gains on securities directly held Net gains on repayment of promissory notes Net gains on securities Net gains on disposal of intangible assets Net foreign exchange (losses) gains Net gains Net gains (losses) on securities held for sale 2013 137 11,939 – 12,076 312 (751) 11,637 (58) $ $ $ 2012 $ (196) 348 963 1,115 189 33 $ 1,337 $ 4,559 Net gains in 2013 increased significantly compared to 2012, with approximately one-half of the gains for the year realized on the sale of 160,000 of the Bank of Montreal shares. The net losses on foreign exchange mainly relate to exchange losses on Canadian dollars held by the international subsidiary whose functional currency is the US dollar. On translation of this subsidiary’s results to Canadian dollars upon consolidation, Guardian recorded equal but offsetting gains in other comprehensive income. 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 operation. 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. Guardian’s total bank borrowings at December 31, 2013 amounted to $55.9 million, compared with $52.2 million at December 31, 2012. The bulk of the bank borrowings have been converted to bankers’ acceptances at attractive borrowing rates. The total credit available, under three borrowing arrangements, amounts to $81 million. As mentioned under “Key Events” above, during the year, Guardian disposed of 160,000 common shares of 14 Guardian Capital Group Limited 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 Bank of Montreal for net proceeds of $10.8 million. These proceeds funded the bulk of the $12.1 mil- lion investment in a real estate fund managed by a subsidiary. Guardian’s borrowing facilities plus its strong cash flow from operations allowed Guardian, during 2013, to repurchase shares under its issuer bid for $7.9 million, make its annual and two quar- terly dividend payments in the total amount of $9.2 million, purchase additional shares in a subsidiary for $4.3 million, and make payments on other busi- ness acquisitions of $2.4 million. 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, 2013 had a fair value of $449 million, or $14.26 per share, diluted, compared with $380 million, or $11.99 per share, diluted, as at December 31, 2012. The following is a summary of Guardian’s securities holdings: SECURITIES HOLDINGS As at December 31 ($ in thousands, except per share amounts) 2013 2012 Securities at fair value: Short-term securities Bonds Mutual funds Bank of Montreal common shares Other equity securities Real estate funds Total securities holdings Securities held for sale Total securities Total securities per share, diluted $ 1,850 1,030 34,441 339,754 54,187 12,492 443,754 5,425 $ 449,179 14.26 $ $ 2,187 2,007 8,729 301,626 39,037 352 353,938 26,018 $ 379,956 11.99 $ CONTRACTUAL OBLIGATIONS Guardian has contractual commitments for the payment of certain obligations over a period of time. A summary of those commitments, including a As at December 31, 2013 ($ in thousands) Bank loans and borrowings Client deposits Accounts payable and other Payable to clients Investment commitment – real estate fund Operating lease obligations Total contractual obligations $ $ Total 55,929 57,312 28,500 42,215 12,864 18,027 214,847 summary of the periods during which they are payable, is shown in the following table: Within one year 55,929 57,312 28,500 42,215 12,864 1,683 198,503 $ $ Payments due by period One to three years $ $ – – – – – 3,905 3,905 Three to five years – – – – – 2,992 2,992 $ $ After five years $ – – – – – 9,447 $ 9,447 Guardian’s contractual commitments are supported by its strong financial position, including its securi- ties holdings, referred to above under the heading “Liquidity and Capital Resources”. The Payable to clients, in Guardian’s securities dealer subsidiary, which can fluctuate with client activities, is offset by the Receivable from clients and broker. Client deposits, which grew by $53 million in the past year from new banking clients in the offshore banking subsidiary, are supported by Interest-bearing deposits with banks. Guardian has committed to invest $25 million into a real estate limited partnership which is managed by a subsidiary, of which $12.1 million has been invested to date. The balance is expected to be invested as appro- priate real estate product becomes available to the limited partnership, at which time Guardian’s man- agement will decide on the appropriate strategy for funding this commitment. Not included in the above table is a conditional commitment of $1 million US to make the initial payment on the purchase of a London, UK-based investment management company, as described under “Key Events”. 2013 Annual Report 15 SELECTED ANNUAL INFORMATION Years ended December 31 ($ in thousands, except per share amounts) Net revenue Net earnings available to shareholders Per share Net earnings Basic Diluted Dividends paid As at December 31 Total assets $ $ $ $ 2013 101,278 34,432 1.13 1.11 0.30 2013 2012 86,360 22,556 2011 $ 73,693 10,003 0.72 0.71 0.17 2012 $ 0.31 0.31 0.16 2011 $ 645,060 $ 510,752 $ 469,508 The increases in Total assets over the past two years substantially reflect the changes in the value of the corporate holdings of securities, increases in interest-bearing deposits and the additional assets received on the purchase of an MGA in 2012. SUMMARY OF QUARTERLY RESULTS The following table summarizes Guardian’s financial results for the past eight quarters. Quarters ended ($ in thousands) Dec.31, 2013 Sep 30, 2013 Jun 30, 2013 Mar 31, 2013 Dec.31, 2012 Sep 30, 2012 Jun 30, 2012 Mar 31, 2012 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 Net revenue Operating earnings Net gains Net earnings before net gains (losses) on securities held for sale Net gains (losses) on securities held for sale Net earnings (loss) available $ 27,907 $ 25,173 $ 25,041 $ 23,157 $ 24,146 $ 21,370 $ 20,415 $ 20,429 4,840 8,564 (16) 7,218 4,860 (548) 6,390 666 4,647 2,045 6,898 3,183 5,079 570 5,791 (144) 14,879 8,602 6,255 5,065 4,938 6,045 2,838 4,379 238 432 (1,243) 515 1,084 2,849 (2,961) 3,587 to shareholders Shareholders’ equity (in $) Per average Class A and Common Share Net earnings before net gains 14,980 414,985 8,946 393,670 4,963 354,622 5,543 366,519 5,915 353,756 8,750 336,362 (114) 323,690 8,005 340,096 (losses) on securities held for sale: - Basic - Diluted $ Net earnings (loss) available to shareholders: 0.48 $ 0.28 $ 0.20 $ 0.47 0.20 0.27 0.16 $ 0.16 0.16 $ 0.15 0.19 $ 0.09 $ 0.14 0.14 0.09 0.18 - Basic - Diluted Shareholders’ equity - Basic - Diluted $ $ 0.49 $ 0.29 $ 0.48 0.29 0.16 $ 0.16 0.18 $ 0.18 0.19 $ 0.19 0.28 $ (0.00) $ 0.25 0.25 (0.00) 0.27 13.68 $ 12.94 $ 13.17 12.51 11.64 $ 11.27 11.97 $ 11.59 11.44 $ 10.78 $ 10.29 $ 10.72 10.48 11.16 10.06 10.54 Management fees earned in the investment management segment are highly correlated to the growth in AUM and generally not subject to seasonal fluctuations. The seasonality which in the past existed in the financial advisory segment, with some concentration of commissions in the traditional “RSP season” in the first quarter of each year, has now largely dissipated. This change is due to the overriding influence of worldwide market movements, which can affect client and advisor behavior throughout the year, together with the increasing significance of life insurance sales in Guardian’s financial advisory business, and the continuing move toward “trailer” fees and away from “front-load” commissions. 16 Guardian Capital Group Limited 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 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 The steady increase in net revenue during the periods shown above have generally resulted from two influences. Firstly, reflecting the growth in AUM, management fees in the investment management business have increased steadily and substantially throughout 2012 and 2013, including the earning of a performance fee of $1.4 million in December, 2012. Secondly, there has been significant growth in commissions earned in the financial advisory business, as a result of the life insurance MGA business purchases made in 2011 and 2012, together with continuing growth in the traditional mutual fund and securities dealerships. 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” and “Net gains (losses) on securities held for sale” each quarter have fluctuated, as shown in the quarterly results above. The significant net gains and net gains on securities held for sale recorded in the first and third quarters of 2012, and the third and fourth quarters of 2013 were largely responsible for the increases in Net earnings in those quarters. 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 caused largely by changes in the value of Guardian’s investment in the Bank of Montreal com- mon shares, less this provision for future income taxes. 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 2013 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 in-house investment management expertise, which 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 $339.8 (2012 - $301.6) 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, which use US dollars as their functional currency, 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. From time to time, the foreign subsidiaries hold unhedged Canadian dollars, which can result in foreign exchange gains or losses being recorded by the subsidiaries. Upon translation of their results on consolidation, Guardian recognizes equal and offsetting gains or losses in Other comprehensive income. This is not considered to be a currency risk as there is no economic risk to Guardian. 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. 2013 Annual Report 17 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 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 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 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 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 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, substantial depth in personnel and resources and a strong balance sheet, which provides 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. As a result of this risk related to its clients, Guardian has the risk of a reduction in its revenue due to the possible loss of clients, including the possible loss of Worldsource advisors, who could bring their clients to another mutual fund or securities dealer. This risk is managed by having strong marketing efforts to replace lost revenue with new client revenues, and by continuing to offer competitive benefits to advisors. CRITICAL ACCOUNTING ESTIMATES The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions which affect the reported amounts of assets, liabilities, contingencies, revenues and expenses. These estimates and assumptions are listed in note 2 (c) to Guardian’s 2013 Consolidated Financial Statements. The most significant accounting estimates are related to the annual impairment assessment of goodwill and the determination of fair value of securities classified as level 3 within the fair value hierarchy. The annual impairment assessment of goodwill includes a comparison of the carrying value and the recoverable amount of each business unit to verify that the recoverable amount of the business unit is greater than its carrying value. In 2013 and 2012, the recover- able amounts were estimated using the fair value less cost method for each of the business units. Guardian used valuation approaches based on a multiple of AUA and a multiple of annual service fee revenues to determine fair value. These multiples are developed by management based on recent transactions and research reports by independent research analysts. These valuation approaches are most sensitive to the levels of AUA and annual service fees. A financial instrument is classified as level 3 when the fair value of the instrument is determined using valuation techniques based on inputs which are not observable in the market. The fair values of securities classified as level 3 in note 4 (e) to Guardian’s 2013 Consolidated Financial Statements were based on a valuation approach using a multiple of AUM. The multiple was developed based on recent research reports by independent research analysts for similar types of business. This valuation approach is most sensitive to the level of AUM. 18 Guardian Capital Group Limited 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 CHANGES IN ACCOUNTING POLICIES As disclosed in note 3 to the Consolidated Financial Statements contained in Guardian’s 2013 Annual Report, Guardian has adopted IFRS 13, Fair Value Measurement (“IFRS 13”), which establishes a framework for measuring fair value, sets out related disclosure requirements when fair value measurement is required or permitted under other standards, and replaces the requirements which had been previously contained in several other standards. IFRS 13 is effective for annual periods beginning on or after January 1, 2013. Guardian has incorporated the measurement requirements of IFRS 13 in the 2013 Consolidated Financial Statements. The measurement requirements of IFRS 13 did not have a significant effect on its Consolidated Financial Statements. INTERNAL CONTOL OVER FINANCIAL REPORTING AND DISCLOSURE CONTROL 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, 2013 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, 2013, under the supervision of the Chief Executive Officer and 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 In last year’s annual report, we indicated that we believed that, despite global macro and geopolitical concerns, the overall trend for equity markets in 2013 would be toward the upside, as investors would continue to accept greater equity risk allocation in their portfolios. As it turned out, in 2013 equity markets did deliver broadly positive returns, due largely to the continued program of bond buying by the Federal Reserve. This quantitative easing continued at a slightly slower pace in the fourth quarter as the Fed attempted to prepare the markets for an eventual withdrawal of these purchases. However, we don’t see a complete withdrawal occurring until 2015. Developing markets delivered solid results in 2013, with investors moving back into risk assets. The major economies of the developed world – the U.S., Euro-zone, Japan and the U.K. – all appear to be experiencing some level of growth, while emerging economies appear to be facing some headwinds. All in all, this is good news for the global economy. There is definitely still a lot of fragility in the system – U.S. growth is weak by historical standards; the Euro-zone is hardly growing and exposed to potential derailment from weak countries on the periphery; Japan’s growth is the result of massive liquidity injection and could be short-lived; and China continues to have its structural issues. Markets overall have nevertheless welcomed the subtle economic improvements, even if they are humble and fragile. In 2014, we expect global monetary easing to continue, although a continuously improving economy in the U.S. will limit the need for the relatively high levels of accommodating quantitative easing by the Fed, and there will eventually be calls for greater level of tightening by the Fed. The rest of the developed world’s growth is still too low for other large central banks to quickly follow suit. The only significant tightening activity currently taking place is limited to some emerging economies that are fighting the flight of capital triggered by rising yields in the U.S. and the depreciation pressure on their currencies. With global central banks continuing their coordinated commitment to further monetary easing in the near term, and any interest rate increases likely to take longer to materialize, investors are likely to continue increasing their equity risk appetites, and thus we expect positive support for global equity markets. Guardian is highly geared toward the equity markets, across its main business segments and its corporate investment portfolio. An environment which will reward greater equity risk will be positive for Guardian’s overall performance, as our largest revenue sources, commission revenue and management fees, are aligned toward higher levels of AUM and AUA. Guardian’s AUM increased over the past year by $3.4 billion dollars, ending the year with approximately $22.2 billion, due in part to the positive Canadian and global equity markets and our relative value-added performance across several of our equity and fixed income strategies. We continued to witness strong growth with very large net client inflows from both institutional and retail intermediary distribution channels. The year ahead may prove to be more challenging regarding strong growth from client net inflows, as one of our most successful strategies, Canadian Growth Equity, is no longer taking any new monies from new clients and is getting closer to limiting all new inflows from existing clients. Although relative returns in 2013 were strong across our equity strategies, there 2013 Annual Report 19 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 is one exception with our systematic equity team, where several of the global and international equity strategies lagged their benchmarks. This may limit near-term new business opportunities, particularly in the institutional segment. However, we still believe that asset inflows will be positive in 2014 for these strategies, as our success in being included in certain retail intermediary shelf space provides us the opportunity to capture some increased flows into this asset class. Guardian’s financial advisory business, through its subsidiary Worldsource Wealth Management, reported its first annual positive contribution to operating earnings in 2013, with a positive total of $1.7 million, compared to the prior year’s operating loss of $0.9 million. The improved operating earnings were due to continued strong commission growth from new life insurance sales in its Managing General Agency, particularly in the second half of the year, and multi-year efforts to improve 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 continued delivery of strong life insurance sales and the recruitment of additional independent advisors across our Worldsource platform. The improved synergies we have driven among our various financial advisory businesses, coupled with greater equity risk appetite from the retail investor, are expected to result in further improvements to operating profits in 2014. We are pleased to have delivered more meaningful overall operating profits in the past year. However, in order to improve the likelihood of repeatable improved operating earnings, we expect to continue to invest in new initiatives, which will be a trade- off by management of some current earnings for expected greater future earnings. We are planning to continue to invest in the development of our Real Estate investment team, as we gather more assets under management and a greater number of properties to be acquired and managed. As such, this unit will likely be operating at a loss for the near term. The same can be said for our efforts to build out broader investment capabilities in our new presence in the UK, the purchase of which is expected to close in the first quarter of 2014. It is important, with the stronger operating platform that Guardian has achieved over the past few years, that we leverage our positive momentum to attract new talent and capabilities where we expect client demand to be structurally strong in the future. A successful execution of these growth plans will be instrumental to Guardian’s efforts to deliver consistent growth in dividends and shareholders’ equity. 20 Guardian Capital Group Limited Ten Year Review Notes (a), (g) ($ in millions) 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 Assets under management Assets under administration 22,228 11,559 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 ($ in thousands) Net revenue Operating expenses (b) Operating earnings Net gains (losses) Net gains (losses) on securities held for sale Net earnings available to shareholders Shareholders’ equity (e) Securities holdings (at fair value) (In dollars) 101,278 74,347 26,931 11,637 86,360 66,222 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 (58) 4,559 (5,493) 6,443 – – – – – – 34,432 414,985 449,179 22,556(f) 10,003 322,618 353,756 364,182 379,956 23,015 331,856 383,604 14,274(c) 317,784 204,051 334,696 380,433 241,549 362,512 7,299(d) 26,492(c) 22,959(c) 12,821 212,016 192,240 407,117 443,108 10,559 196,273 364,318 T E N Y E A R R E V I E W 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’ equity(e) Basic Diluted Share prices Common high low high low Class A (In thousands) Year end common and Class A shares outstanding Basic Diluted NOTES: 1.13 1.11 0.72(f) 0.71(f) 0.31 0.31 0.70 0.69 0.41(c) 0.41(c) 0.19(d) 0.19(d) 0.69(c) 0.68(c) 0.60(c) 0.58(c) 0.33 0.32 0.27 0.26 0.300 0.170 0.160 0.150 0.150 0.150 0.135 0.120 0.105 0.0875 13.68 13.17 18.00 11.50 16.82 10.40 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 30,333 31,510 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 (a) Comparative figures reflect the May, 2006 2-for-1 stock split. (b) Excluding commissions paid, referral fees and income taxes. (c) 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. (d) 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). (e) 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. (f) 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. (g) Results in 2010 to 2013 are in accordance with IFRS; 2009 and previous years are as reported under previous Canadian GAAP. 2013 Annual Report 21 F I N A N C I A L S T A T E M E N T S 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 29 to 33. 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 Donald Yi, Chief Financial Officer February 27, 2014 22 Guardian Capital Group Limited F I N A N C I A L S T A T E M E N T S 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, 2013 and December 31, 2012, the consolidated statements of operations, comprehensive income, equity and cash flow for the years ended December 31, 2013 and December 31, 2012, 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’ RESPONIBILITY 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, 2013 and December 31, 2012, and its consolidated financial performance and its consolidated cash flow for the years ended December 31, 2013 and December 31, 2012 in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants, Toronto, Canada February 27, 2014 2013 Annual Report 23 F I N A N C I A L S T A T E M E N T S Consolidated Balance Sheets As at December 31 ($ in thousands) Assets Current Assets Cash Interest-bearing deposits with banks Accounts receivable and other 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 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 2013 2012 $ 28,446 57,285 25,986 42,215 1,577 155,509 443,754 5,425 449,179 3,757 20,611 3,674 11,111 333 886 40,372 $ 645,060 $ 55,929 57,312 27,408 1,092 42,215 183,956 43,316 227,272 21,679 (18,700) 9,583 245,961 156,462 414,985 2,803 417,788 $ 645,060 $ $ $ $ 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 See accompanying notes to consolidated financial statements. On behalf of the Board: Barry J. Myers, Director George Mavroudis, Director 24 Guardian Capital Group Limited F I N A N C I A L S T A T E M E N T S Consolidated Statements of Operations For the years ended December 31 ($ in thousands, except per share amounts) 2013 2012 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 (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. $ 84,824 (61,735) 23,089 50,940 9,689 17,560 101,278 $ 71,926 (53,071) 18,855 42,397 8,501 16,607 86,360 46,758 3,706 1,130 22,753 74,347 26,931 11,637 38,568 3,767 34,801 (58) 34,743 34,490 311 34,801 1.13 1.11 34,432 311 34,743 1.13 1.11 $ $ $ $ $ $ $ 41,912 3,478 1,283 19,549 66,222 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 $ $ $ $ $ $ $ 2013 Annual Report 25 F I N A N C I A L S T A T E M E N T S Consolidated Statements of Comprehensive Income For the years ended December 31 ($ in thousands) 2013 2012 Net earnings Other comprehensive income Available for sale securities: Net change in fair value Income tax provision Transfer to net earnings of unrealized (gains) upon disposal Reversal of income taxes Changes in foreign currency translation adjustment on foreign subsidiary Other comprehensive income Comprehensive income Comprehensive income available to: Shareholders Non-controlling interests Comprehensive income See accompanying notes to consolidated financial statements. $ 34,743 $ 22,759 57,660 6,478 51,182 (10,793) 150 (10,643) 40,539 6,206 46,745 81,488 81,177 311 81,488 $ $ $ 28,475 4,148 24,327 (546) 134 (412) 23,915 (1,618) 22,297 45,056 44,853 203 45,056 $ $ $ 26 Guardian Capital Group Limited F I N A N C I A L S T A T E M E N T S 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 (note 12c) Capital stock, end of year Treasury stock Balance, beginning of year Acquired Disposed Treasury stock, end of year Contributed surplus Balance, beginning of year Stock-based compensation expense Equity-based entitlements redeemed Contributed surplus, end of year Retained earnings Balance, beginning of year Net earnings available to shareholders Dividends declared and paid (note 12e) Capital stock acquired and cancelled (note 12c) Acquisition of non-controlling interests (note 25) Other 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 Acquisition of non-controlling interests (note 25) Non-controlling interests, end of year Total equity, end of year See accompanying notes to consolidated financial statements. 2013 2012 $ 357,750 $ 327,008 353,756 322,618 22,113 (434) 21,679 (17,750) (1,644) 694 (18,700) 8,636 1,247 (300) 9,583 231,040 34,432 (9,211) (7,464) (2,831) (5) 245,961 109,717 115,072 40,539 155,611 (5,355) 6,206 851 156,462 414,985 3,994 311 – – (1,502) 2,803 417,788 $ 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 $ 2013 Annual Report 27 F I N A N C I A L S T A T E M E N T S Consolidated Statements of Cash Flow For the years ended December 31 ($ in thousands) 2013 2012 Operating activities Net earnings Adjustments for: Income taxes paid Income tax expense Net gains Net loss (gains) on securities held for sale 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 Net acquisition 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 Business acquisitions (note 24) Net cash from (used in) investing activities Financing activities Dividends Acquisition of capital stock Acquisition of treasury stock Disposition of treasury stock Net proceeds of bank loans and borrowings Acquisition of non-controlling interest (note 25) 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 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. $ 34,743 $ 22,759 (3,966) 3,767 (11,637) 178 2,819 887 1,247 28,038 2,631 30,669 (371) (9,970) 4,126 (4,378) 1,798 (2,109) (356) (11,260) (9,211) (7,898) (1,644) 760 11,737 (4,333) – – (10,589) 676 9,496 18,221 27,717 28,446 (729) 27,717 $ $ $ (2,558) 3,275 (1,337) (4,559) 2,826 652 1,145 22,203 1,697 23,900 (6,167) (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 $ $ $ 28 Guardian Capital Group Limited N O T E S T O F I N A N C I A L S T A T E M E N T S F I N A N C I A L S T A T E M E N T S 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 com- prises 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 February 27, 2014. (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. Certain reclassifications have been made to the 2012 comparative financial information in order to conform to the current year’s presentation. (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 state- ments 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 cur- rently exercisable and have no substantive barriers to exercise; agreements with other vote holders; rights from other contractual arrangements; economic 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 vari- ability 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 interests in the equity of subsidiaries are shown as a component of the equity section of the consolidated balance sheet. 2013 Annual Report 29 N O T E S T O F I N A N C I A L S T A T E M E N T S (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 transactions. 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 bid 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 amortized 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, securities 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 classified 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 of 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 present 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 assets 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. 30 Guardian Capital Group Limited N O T E S T O F I N A N C I A L S T A T E M E N T S 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 lim- ited 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 mainly to new advisors and branches joining the Company’s mutual fund dealer and securities 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 – They are amortized over a number of years, ranging from three to ten 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 – They are amortized over fifteen years. Amortization methods and useful lives of the intangible assets are reviewed annually and adjusted, if appropriate. Intangible assets are derecog- nized 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 to five 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 impair- ment 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 approximates 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 out- flow 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 assessments 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 balance 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 obliga- tion, 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 2013 Annual Report 31 N O T E S T O F I N A N C I A L S T A T E M E N T S 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 financial statements, and accounts for the shares owned by the EPSP Trust as treasury stock. (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, 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 rendered 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 instruments 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 number 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 modification, 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 secu- rities 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 comprehen- sive 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 attrib- uted 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. 32 Guardian Capital Group Limited (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 earn- ings 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. (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 Fair Value Measurements IFRS 13, Fair Value Measurements, (“IFRS 13”) as issued by IASB, establishes a framework for measuring fair value, sets out related disclosure requirements when fair value measurement is required or permitted under other standards, and replaces the requirements which had been previously contained in several other standards. IFRS 13 is effective for annual periods beginning on or after January 1, 2013. The Company has incorporated the measurement and disclosure requirements of IFRS 13 in these consolidated financial statements. The measurement requirements of IFRS 13 did not have a significant effect on these consolidated financial statements. (b) Future changes in accounting policies Financial instruments The IASB has issued several installments of IFRS 9, Financial Instruments (“IFRS 9”). IFRS 9 is to replace 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 issued installments of IFRS 9 do not currently have a mandatory effective date. When the entire IFRS 9 project is closer to completion, the IASB will decide on a mandatory effective which will allow entities sufficient time to prepare to apply the new standard. The Company continues to evaluate the impact of IFRS 9 on its consolidated financial statements, particularly with regard to the recording of its securities. N O T E S T O F I N A N C I A L S T A T E M E N T S 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 Real estate funds (b) Held for trading securities Equity securities (c) Total securities holdings Securities held for sale (d) Total securities (e) 2013 2012 $ 1,850 1,030 34,441 339,754 52,931 12,492 442,498 1,256 443,754 5,425 449,179 $ 2,187 2,007 8,729 301,626 38,037 352 352,938 1,000 353,938 26,018 379,956 (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 securities that are continually reinvested by the Company and therefore are included in securities holdings. 2013 Annual Report 33 N O T E S T O F I N A N C I A L S T A T E M E N T S (b) During the year, the Company made a commitment to invest $25,000 in real estate, through a real estate limited partnership managed by a subsid- iary of the Company. As at December 31, 2013, the Company had invested $12,136. (c) 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. (d) Certain of the securities of mutual funds, which were previously deemed to be controlled by the Company, had been classified as securities held for sale. During the year, the Company reassessed its investment in these securities and concluded that it no longer controls certain of these mutual funds. As a result, these securities have been reclassified from securities held for sale to securities holdings. (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 During 2013 and 2012, there have been no transfers of securities between Levels. 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 in estimated fair value, recognized in other comprehensive income 2013 $ $ 431,133 12,136 5,910 449,179 $ 2013 4,091 – 1,819 $ $ $ 2012 375,865 – 4,091 379,956 2012 3,377 30 684 Level 3 securities, end of year $ 5,910 $ 4,091 The valuation methods the Company uses and the factors incorporated into those methods are the same methods and factors that market participants would use in valuing the various securities. The Company reviews and updates the methods and factors for new information on at least an annual basis. 5. INTANGIBLE ASSETS For the years ended December 31 2013 2012 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 (note 24) Disposals Foreign exchange translation adjustments Balance, end of year $ $ 8,064 1,740 863 (158) 40 10,549 Accumulated amortization: Balance, beginning of year Amortization expense Disposals Foreign exchange translation adjustments Balance, end of year 6,323 1,068 (10) 2 7,383 3,351 304 – – 4 3,659 1,899 470 – 4 2,373 $ 20,000 2,334 – (1,540) – 20,794 $ 31,415 4,378 863 (1,698) 44 35,002 $ 7,533 531 – – – 8,064 $ 2,865 487 – – (1) 3,351 $ 13,978 1,807 5,150 (935) – 20,000 Total $ 24,376 2,825 5,150 (935) (1) 31,415 3,599 1,281 (245) – 4,635 11,821 2,819 (255) 6 14,391 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 Carrying value, end of year $ 3,166 $ 1,286 $ 16,159 $ 20,611 $ 1,741 $ 1,452 $ 16,401 $ 19,594 34 Guardian Capital Group Limited N O T E S T O F I N A N C I A L S T A T E M E N T S 6. EQUIPMENT For the years ended December 31 Cost: Balance, beginning of year Purchases Arising on acquisition of subsidiaries (note 24) Disposals Foreign exchange translation adjustments Balance, end of year Accumulated amortization: Balance, beginning of year Amortization expense Disposals Foreign exchange translation adjustments Balance, end of year 2013 2012 Office equipment Leasehold improvements Total Office equipment Leasehold improvements Total $ $ 5,847 548 – (143) 57 6,309 3,754 712 (117) 26 4,375 1,827 1,561 – (310) 5 3,083 1,456 175 (293) 5 1,343 $ 7,647 2,109 – (453) 62 9,392 $ 4,968 795 102 – (18) 5,847 $ 1,668 161 – – (2) 1,827 5,210 887 (410) 31 5,718 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 Carrying value, end of year $ 1,934 $ 1,740 $ 3,674 $ 2,093 $ 371 $ 2,464 7. GOODWILL For the years ended December 31 Balance, beginning and end of year 2013 2012 $ 11,111 $ 11,111 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 Life insurance managing general agency Total goodwill 2013 4,227 6,884 11,111 $ $ 2012 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 both 2013 and 2012, in each year based upon each of the CGU’s esti- mated fair value, less estimated cost 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 agency CGU. It is man- agement’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 market transactions. Based on the results of this testing, there were no indications that the goodwill was impaired in 2013 or 2012. The most sensitive assumptions used in the above testing were: As at December 31 Mutual fund distributor: Multiple of assets under administration Life insurance managing general agency: Multiple of annual net service fee revenue 2013 2012 1.00% 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 Life insurance managing general agency 2013 63,445 23,727 $ 2012 $ 69,849 10,688 The fair value estimated above would be considered to be Level 3 under the fair value hierachy as defined in accounting policy note 2 (g)(iv). Management believes that a reasonable possible change in key assumptions would not cause the carrying value in either CGUs to exceed its estimated fair value. 2013 Annual Report 35 N O T E S T O F I N A N C I A L S T A T E M E N T S 8. BANK LOANS AND BORROWINGS As at December 31 Bank indebtedness (a) Bankers’ acceptances payable (b) Bank loan (b) Total bank loans and borrowings 2013 729 55,100 100 55,929 $ $ 2012 8,772 28,500 14,963 52,235 $ $ (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 (2012 - $11,000), due on demand, secured by a General Security Agreement and securities valued at $56,624 (2012 - $48,648), 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 (2012 - $70,000) 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 (2012 – bank prime) or bankers’ acceptances for periods ranging from 30 to 270 days, at rates negotiated in the bankers’ acceptance market plus 0.50% (2012 – 0.50%). These facilities are secured by the deposit of treasury stock held by the EPSP Trust valued at $33,043 at December 31, 2013 (2012 - $22,113), and other securities valued at $90,174 at December 31, 2013 (2012 - $77,536). 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, 2013 and 2012, 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 2013 1,683 6,897 9,447 18,027 $ $ 2012 1,897 5,688 9,060 16,645 $ $ During the year ended December 31, 2013, the Company recognized $2,043 (2012 - $1,597) 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 2013 4,190 (28) 4,162 (370) (27) 2 (395) 3,767 $ $ 2012 2,599 15 2,614 (454) 28 1,087 661 3,275 $ $ (b) The income tax expense in the consolidated statements of operations is less than the combined Federal and Provincial statutory income tax rates of 26.5% (2012 – 26.50%) of the current year for the following reasons: 36 Guardian Capital Group Limited N O T E S T O F I N A N C I A L S T A T E M E N T S 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 gains Non-deductible expenses Change in future periods’ income tax rates Other Income tax expense 2013 2012 $ 10,221 $ 5,691 (3,880) (1,313) 2 (1,271) 254 – (246) 3,767 $ (3,699) (250) (2) (83) 387 1,087 144 3,275 $ The combined statutory income tax rate is the aggregate of the Federal income tax rate of 15.0% (2012 – 15.0%) and the Provincial income tax rate of 11.5% (2012 – 11.5%). 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 11.5%. (c) Deferred tax assets and liabilities are recognized as follows: For the year ended December 31, 2013 Securities Bank of Montreal shares Capital loss carryforwards Non-capital loss carryforwards Equipment and intangibles Other temporary differences Other Total Deferred tax assets Balance at beginning of year Recognized in net earnings Balance at end of year Deferred tax liabilities Balance at beginning of year Recognized in net earnings Recognized in other comprehensive income Balance at end of year $ $ – – – $ 36,371 – 6,298 $ 42,669 $ $ $ $ – – – 187 (50) 30 167 $ $ $ $ – – – $ 2,968 92 $ 3,060 $ $ 491 16 507 $ $ 376 (186) 190 $ $ 3,835 (78) 3,757 (227) 9 – (218) $ $ (13) – – (13) $ 2,130 (208) – 1,922 $ $ (1,024) (187) – (1,211) $ $ 37,424 (436) 6,328 $ 43,316 For the year ended December 31, 2012 Securities Bank of Montreal shares Capital loss carryforwards Non-capital loss carryforwards Equipment and intangibles Other temporary differences Other Total Deferred tax assets Balance at beginning of year Recognized in net earnings Balance at end of year Deferred tax liabilities Balance at beginning of year Recognized in net earnings Recognized in other comprehensive income Balance at end of year $ $ $ $ – – – 31,224 1,220 3,927 36,371 $ $ $ $ – – – 30 70 87 187 $ $ $ $ – – – $ 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 (d) Analysis of tax recognized on securities held for sale: For the years ended December 31 Net gains (losses) on securities held for sale before tax Current tax expense Deferred tax expense Net gains (losses) on securities held for sale after tax 2013 28 49 37 (58) 2012 4,559 – – 4,559 $ $ $ $ The difference between the Company’s statutory income tax rate and the effective tax rate on securities held for sale in the current year is due to the combination of the non-taxable portion of net gains and the lower average tax rate applicable to foreign subsidiaries and in the prior year entirely due to the lower average tax rate applicable to foreign subsidiaries. 2013 Annual Report 37 N O T E S T O F I N A N C I A L S T A T E M E N T S e) The aggregate amount of temporary differences between costs for accounting purposes and costs for income tax purposes because of earnings accumulated in certain subsidiaries is $105,204 (2012 - $84,370), 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. 12. CAPITAL STOCK (a) Authorized i) Unlimited preferred shares, without par value, may be issued in an unlimited number of series, the designation, rights, privileges, conditions and 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 ii) Common shares Outstanding, beginning of year Converted from Common Outstanding, end of year Total outstanding, end of year (c) Issuer Bid A summary of the Company’s activity under its Normal Course Issuer Bid is as follows: For the years ended December 31 Class A shares purchased and cancelled Consideration paid Average issue price, charged to share capital Excess consideration charged to retained earnings 2013 2012 Shares Amount Shares Amount 28,072 (574) 36 27,534 $ 20,913 (434) 8 20,487 28,872 (800) – 28,072 $ 21,517 (604) – 20,913 4,971 (36) 4,935 1,200 (8) 1,192 4,971 – 4,971 1,200 – 1,200 32,469 $ 21,679 33,043 $ 22,113 2013 574 7,898 434 7,464 $ $ 2012 800 7,781 604 7,177 $ $ (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 2013 Weighted average exercise price 2012 Weighted average exercise price Number of options Number of options – – – $ $ – – – 36 (36) – $ $ 10.50 10.50 – 38 Guardian Capital Group Limited N O T E S T O F I N A N C I A L S T A T E M E N T S (e) Dividends During the year, dividends of $0.30 per share (2012 - $0.17 per share) were declared and paid on the common and class A shares outstanding. The Company also declared dividends of $0.055 per share payable on January 17, 2014 on the common and class A shares outstanding. This dividend, which will be recognized on the record date, has not been reflected in these financial statements. 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 Disposed Balance, end of year 2013 2012 Shares Amount Shares Amount 2,126 121 (111) 2,136 $ 17,750 1,644 (694) $ 18,700 1,954 172 – 2,126 $ 16,063 1,687 – $ 17,750 During the year the Company disposed of 81 (2012 – nil) of its class A shares and 30 (2012 – nil) of its common shares, for net proceeds of $760 (2012 - nil). The shares disposed of had a total cost of $694 (2012 – nil), and the excess has been credited to retained earnings. As at December 31, 2013, the treasury stock was composed of 63 common shares (2012 – 63) and 2,073 class A shares (2012 – 2,063 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. A summary of the changes in the option-like entitlements is as follows: For the years ended December 31 2013 2012 Option-like entitlements, beginning of year Entitlements provided Entitlements exercised Option-like entitlements, end of year Weighted average exercise price $ $ 8.86 – 6.50 8.95 Number of shares 1,402 150 – 1,552 Weighted average exercise price $ $ 8.76 9.78 – 8.86 Number of shares 1,552 – 55 1,497 As at December 31, 2013, there were outstanding option-like entitlements for 33 common shares (2012 – 63) and 1,464 class A shares (2012 – 1,489). Option-like entitlements provided during 2012 had a fair value of $420. 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 compensation 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 year 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 2012 9.78 5.00 10.00 2.45% 23.17% 0.17 $ $ 2013 Annual Report 39 The following table summarizes information about option-like entitlements outstanding. As at December 31, 2013 $5.01 - $7.50 $7.51 - $10.00 $10.01 - $12.50 As at December 31, 2012 $2.51 - $5.00 $5.01 - $7.50 $7.51 - $10.00 $10.01 - $12.50 Weighted average exercise Number of price shares vested Weighted average exercise price Number of shares 355 878 264 1,497 20 355 913 264 1,552 $ $ $ $ 6.15 9.35 11.36 8.95 2.62 6.15 9.33 11.36 8.86 344 471 265 1,080 20 339 363 246 968 $ $ $ $ 6.17 9.10 11.36 8.72 2.62 6.18 8.92 11.31 8.43 ii) Equity-based entitlements 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 Entitlements exercised Entitlements forfeited Equity-based entitlements, end of year 2013 574 121 (47) (9) 639 2012 552 22 – – 574 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, 2013 had a fair value of $1,644 (2012 - $220). 14. MANAGEMENT FEE INCOME, NET Management fee income is presented net of referral fees which are paid to referring agents, amounting to $2,549 for the year ended December 31, 2013 (2012 - $2,078). 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 2013 16,720 840 17,560 2013 44,937 574 1,247 46,758 $ $ $ $ 2012 15,292 1,315 16,607 2012 40,257 510 1,145 41,912 $ $ $ $ Guardian Capital Group Limited N O T E S T O F I N A N C I A L S T A T E M E N T S 40 N O T E S T O F I N A N C I A L S T A T E M E N T S 17. NET GAINS Net gains are composed of the following: For the years ended December 31 Held for trading securities (a) Foreign exchange (b) Available for sale securities (c) Securities at amortized cost (d) Net gains on securities Gains on disposition of equipment and intangible assets Net gains 2013 137 (751) 11,939 – 11,325 312 11,637 $ $ 2012 (196) 33 348 963 1,148 189 1,337 $ $ (a) Net gains (losses) on held for trading securities include net gains or losses on securities both owned by consolidated mutual funds. (b) Net losses on foreign exchange in the current year mainly relates to exchange losses on Canadian dollars held by the international banking subsid- iary which uses US dollars as its functional currency. On translation of this subsidiary results to Canadian dollars for the purpose of consolidating it to the Company’s results an equal and offsetting gain is recorded in other comprehensive income. (c) Included in net gains on available for sale securities are gains of $5,049 from the sale of 160 shares of Bank of Montreal. A tax expense of $188 was recorded in income tax expenses in the Consolidated statements of operations. (d) During 2012, 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. Net gains (losses) on securities held for sale are composed of the following: For the years ended December 31 Net increase (decrease) in fair value Other income Income tax expense Net gains (losses) on securities held for sale 2013 (178) 206 86 (58) 2012 4,559 – – 4,559 $ $ $ $ Net gains (losses) on securities held for sale include the net change in fair value of those securities, income and expenses from the mutual funds held in this category. 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 2013 2012 30,532 1,050 31,582 31,496 713 32,209 $ $ 34,432 494 34,926 $ $ 22,556 317 22,873 The effects of 1,111 (2012 -1,388) 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 management 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 allocation 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: 2013 Annual Report 41 For the years end December 31 2013 2012 2013 2012 2013 2012 2013 2012 Investment Management Financial Advisory Corporate Activities and Investments Consolidated N O T E S T O F I N A N C I A L S T A T E M E N T S Revenue Gross commission revenue Commissions paid to advisors Management fee income, net Administrative services income Dividend and interest income Net revenue Expenses Employee compensation and benefits Amortization Interest Other expenses Operating earnings Net gains Earnings before income taxes and net gains (losses) on securities held for sale Income tax expense Net gains (losses) on securities held for sale Net earnings (loss) Net earnings available to: Shareholders Non-controlling interests Capital expenditures on segment assets: Intangible assets Equipment As at December 31 Segment assets and liabilities: Assets Liabilities $ – $ – – 50,940 3,509 – 54,449 – $ 84,824 $ 71,926 $ – – 42,397 3,119 154 45,670 (53,071) 18,855 – 5,382 507 24,744 (61,735) 23,089 – 6,180 715 29,984 – $ – – – – 16,845 16,845 – $ 84,824 $ 71,926 (53,071) – 18,855 – 42,397 – 8,501 – 16,607 15,946 86,360 15,946 (61,735) 23,089 50,940 9,689 17,560 101,278 25,810 213 282 14,621 40,926 13,523 – 22,975 104 281 11,900 35,260 10,410 – 13,786 2,744 163 11,575 28,268 1,716 312 12,184 2,945 74 10,429 25,632 (888) 189 7,162 749 685 (3,443) 5,153 11,692 11,325 6,753 429 928 (2,780) 5,330 10,616 1,148 46,758 3,706 1.130 22,753 74,347 26,931 11,637 41,912 3,478 1,283 19,549 66,222 20,138 1,337 13,523 3,076 10,447 – 10,410 2,416 7,994 – $ 10,447 $ 7,994 2,028 553 1,475 – (699) 7 (706) – $ 1,475 $ (706) 23,017 138 22,879 (58) 11,764 852 10,912 4,559 $ 22,821 $ 15,471 38,568 3,767 34,801 (58) 21,475 3,275 18,200 4,559 $ 34,743 $ 22,759 $ 10,447 $ 7,994 – $ 10,447 $ 7,994 – $ 1,164 $ (1,032) $ 22,821 $ 15,594 $ 34,432 $ 22,556 203 $ 1,475 $ (706) $ 22,821 $ 15,471 $ 34,743 $ 22,759 (123) 326 311 311 – $ 821 $ 18 – $ 4,267 $ 7,688 $ 8 1,970 287 174 $ 121 287 $ 5,262 $ 7,975 1,067 772 2,109 $ 102,292 68,654 $ 43,538 $ 97,494 $ 85,652 $ 445,274 $ 381,562 $ 645,060 $ 510,752 153,002 102,774 25,987 77,196 49,819 55,844 227,272 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 2013 2012 Rest of the World 2012 2013 Consolidated 2013 2012 $ 96,007 $ 81,157 $ 5,271 $ 5,203 $ 101,278 $ 86,360 $ 19,778 3,219 11,111 $ 19,593 1,995 11,111 $ 833 455 – $ 1 469 – $ 20,611 3,674 11,111 $ 19,594 2,464 11,111 42 Guardian Capital Group Limited N O T E S T O F I N A N C I A L S T A T E M E N T S 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 21. FINANCIAL RISKS MANAGEMENT 2013 2012 $ $ (51,311) (2,158) – (5,395) (200) 51,344 4,956 5,395 2,631 $ $ 4,027 (4,422) 6,349 (4,776) (281) (3,523) (453) 4,776 1,697 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 17 to 18 of the Company’s 2013 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 $339,754 (2012 - $301,626) 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 $33,975 (2012 - $30,163) 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 trad- ing 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 indicates 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: As at December 31, 2013 Canada United States Rest of the World As at December 31, 2012 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 $ $ $ $ 6,682 – – 6,682 5,905 4,458 16,655 27,018 ±$ ±$ ±$ ±$ 668 – – 668 590 446 1,666 2,702 $ $ $ $ 28,046 11,222 60,596 99,864 4,838 3,579 38,701 47,118 ±$ ±$ ±$ ±$ 2,805 1,122 6,059 9,986 484 358 3,870 4,712 (ii) Currency Risk The Company’s main exposure to currency risk is on its investments in its foreign subsidiaries, amounting to $97,688 as at December 31, 2013 (2012 - $82,096). 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. From time to time, the foreign subsidiaries hold unhedged Canadian dollars, which can result in foreign exchange gains or losses being recorded by the subsidiaries. Upon translation of their results on consolidation, the Company recognizes equal and offsetting gains or losses in other comprehensive income. This is not considered to be a currency risk as there is no economic risk to the Company. 2013 Annual Report 43 N O T E S T O F I N A N C I A L S T A T E M E N T S (iii) Interest Rate Risk The Company is exposed to interest rate risk through its bank loans and borrowings of $55,929 (2012 - $52,235). The interest rates on these borrow- ings 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 2013, with all other variables held constant, the Company’s interest expense would have increased by approximately $1,082(2012 - $1,020). The Company is also exposed to interest rate risk in its international banking operation, through the assets interest-bearing deposits with banks of $57,285 (2012 - $3,884), and the client deposits liability of $57,312 (2012 – $3,884). 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 Receivable from clients and broker Short-term securities Bonds Loan guarantee 2013 28,446 57,285 25,986 42,215 1,850 1,030 – 156,812 $ $ 2012 26,993 3,884 23,547 36,820 2,187 2,007 482 95,920 $ $ 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 is offset with securities, which are held in the client margin accounts of the securities dealer subsidiary. 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 bor- rower, 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. 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, 2013, the Company’s regulated businesses had total regulatory capital amounting to $106,925 (2012 - $92,461). 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, 2013, Minic beneficially owned 48.2% (2012 – 48.2%) of the Company’s outstanding common shares. In 2013 and 2012, 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: 44 Guardian Capital Group Limited For the years ended December 31 Short-term employment benefits Post-employment benefits Stock-based compensation $ 2013 3,167 14 575 3,756 $ 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. 2012 2,929 14 501 3,444 2012 32 2013 $ 35 $ 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 Limited Guardian Capital Real Estate Inc. Worldsource Wealth Management Inc. Worldsource Financial Management Inc. Worldsource Securities Inc. IDC Worldsource Insurance Network Inc.(i) Guardian Capital International Limited Alexandria Bancorp Ltd. Alexandria Global Investment Management Ltd. Alexandria Trust Corporation Guardian Capital Group Limited Employee Profit Sharing Plan (ii) Guardian Growth & Income Fund Guardian Strategic Income Fund (iii) The Alexandria Fund Ltd.(iv) Country of organization Voting ownership interest 2013 2012 Canada Canada Canada Canada Canada Canada Canada Canada Bermuda Cayman Islands Cayman Islands Barbados Canada Canada Canada Cayman Islands 100% 100% 100% 75% 100% 100% 100% 79% 100% 100% 100% 100% 0% 97% 63% 40% 100% 100% 100% n/a 100% 100% 100% 67% 100% 100% 100% 100% 0% 100% n/a 40% (i) The principal place of business for IDC Worldsource Insurance Network Inc. (“IDC WIN”), the Company’s managing general agency subsidiary, is located at Suite 700, 625 Cochrane Drive, Markham, Ontario. The non-controlling interests have a 21% ownership and voting interest 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 Acquisition of non-controlling interests 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 years ended December 31 Revenue Net earnings Comprehensive income 2013 Annual Report $ $ $ $ $ $ 2013 3,994 – (1,502) 311 2,803 2013 1,623 2,775 9,590 1,726 15,714 2,559 2013 14,104 2,309 2,309 $ $ $ $ $ $ 2012 3,668 – – 326 3,994 2012 482 1,689 8,548 906 11,625 6,244 2012 11,567 1,905 1,905 N O T E S T O F I N A N C I A L S T A T E M E N T S 45 N O T E S T O F I N A N C I A L S T A T E M E N T S (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. The Company does not control Guardian Strategic Income Fund, as the Company intends to dispose of control of the fund either through a sale or deemed sale transaction, which meets the criteria as established under its policy for Non-current assets held for sale. As at December 31, 2013, the Company’s holdings in the fund, were valued at $5,425 (2012 – $nil) and the fund’s total net asset value was $8,645 (2012 – $nil). The Company disposed of control of The Alexandria Fund Ltd. during the year through a deemed sale transaction. 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 and the fund’s total net asset value was $68,455. (iii) (iv) (d) The Company’s significant joint venture is as follows: As at December 31 Guardian Ethical Management Inc. Country of organization Canada 2013 Voting ownership interest 2012 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 $ $ $ $ 2013 1,123 526 1,649 983 2013 1,819 – – $ $ $ $ 2012 1,167 574 1,741 1,075 2012 2,140 – – (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 2013 2012 $ 1,578,474 $ 1,156,885 $ $ 45,521 5,425 50,946 $ $ 8,331 26,019 34,350 For the years ended December 31 2013 2012 Net revenues earned directly from unconsolidated collective investment vehicles $ 3,215 $ 2,440 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) Purchase of corporate management services business (“ATC”) On March 31, 2013, the Company, through its Barbados subsidiary Alexandria Trust Corporation “ATC”, acquired the net operating assets and client relation- ships of a corporate management services business (the “Acquiree”) located in Barbados. This acquisition provides greater scale to ATC’s existing business and strengthens ATC’s presence as a provider of corporate and trust management services to international clients in Barbados. The consideration paid by the 46 Guardian Capital Group Limited Company for the acquisition was $884, consisting of a cash payment of $356 on closing, with the balance due over a period of five years. The future payments may be reduced based on revenues earned from the client relationships acquired. The Company has determined, based on the nature of the relationships acquired, that the maximum payment will be made. The accounting for the consideration paid for the acquisition is as follows: Fair value of consideration paid: Cash on closing Payment to be made over a period of five years after closing Total consideration paid Fair value of identifiable net assets acquired: Intangible assets Accounts receivable and other Accounts payable and other Net value of net assets acquired Goodwill $ $ 356 528 884 863 29 (8) 884 Nil Subsequent to its acquisition, the Acquiree has contributed net revenue of $310 and net earnings of $125 to the Company’s 2013 results. If the acquisi- tion had occurred on January 1, 2013, management estimates that the Acquiree would have earned net revenue of $407 and net earnings of $160 and, as a result, the Company’s reported net revenue and net earnings for the year ended December 31, 2013 would have been approximately $101,375 and $34,778, 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, 2013. Management has also assumed the amortization of intangible assets of $66 and a provision for income taxes of $nil for the year 2013. (b) 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 augment 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, of which $3,157 was paid on closing and the balance was paid in 2013. The accounting for the consideration paid for the acquisition is as follows: N O T E S T O F I N A N C I A L S T A T E M E N T S Fair value of consideration paid: Cash on closing Cash 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. (c) Zephyr Management UK Ltd. (“Zephyr”) On November 25, 2013, the Company entered into an agreement to acquire all the shares of a London, UK based emerging markets equity investment firm, Zephyr. This transaction is expected to add approximately $110,000 US in AUM and provide a bridge into new markets. The consideration to be paid is expected to be $1,000 US on closing, and a second payment in 4 years after closing, calculated based on the level of AUM achieved then to a maximum of $2,750 US. The transaction is expected to close by the end of the first quarter in 2014, subject to certain terms and conditions. 25. ACQUISITION OF NON-CONTROLLING INTERESTS On April 1, 2013, the Company purchased, for cash consideration of $4,333, a portion of the non-controlling interest in its MGA subsidiary, thereby increas- ing the Company’s interest from 67% to 79.3%. As this transaction is between owners, this payment has been recognized in the equity accounts as follows: Consideration paid Carrying value of non-controlling interests Excess consideration charged to retained earnings $ $ 4,333 1,502 2,831 2013 Annual Report 47 Directors Principal Executives GUARDIAN CAPITAL GROUP LIMITED George Mavroudis President and Chief Executive Officer C. Verner Christensen Senior Vice-President and Secretary A. Michael Christodoulou Senior Vice-President, Strategic Planning and Development Matthew D. Turner Senior Vice-President and Chief Compliance Officer Donald Yi Chief Financial Officer Leslie Lee Vice-President, Human Resources Ernest B. Dunphy Vice -President and Controller 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 Darryl M. Workman Vice-President, Operations and Administration Matthew D. Turner Chief Compliance Officer Ernest B. Dunphy Controller 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 BOARD OF DIRECTORS James S. Anas •* A. Michael Christodoulou Harold W. Hillier • George Mavroudis Barry J. Myers • Michel Sales • Edward T. McDermott • Committees Governance Barry J. Myers • A. Michael Christodoulou Michel Sales •* Edward T. McDermott • Compensation James S. Anas • Harold W. Hillier •* Michel Sales • Edward T. McDermott • Audit James S. Anas • Harold W. Hillier • Barry J. Myers •* * Chairman • Unrelated Directors 48 Guardian Capital Group Limited GUARDIAN CAPITAL ADVISORS LP WORLDSOURCE WEALTH MANAGEMENT INC. ALEXANDRIA BANCORP LIMITED Robert F. Madden General Manager ALEXANDRIA TRUST CORPORATION Robert F. Madden Director A. Michael Christodoulou Managing Director Paul Brown Managing Director C. Verner Christensen Vice-President and Secretary Simon Bowers Vice-President, Private Client Trading Darryl M. Workman Vice-President, Operations and Administration John T. Hunt Managing Director Linda Kenny Chief Financial Officer Paige Wadden Head of Compliance Katharine Baran Vice-President, Head of Operations and Technology Matthew D. Turner Chief Compliance Officer Areef Samji Controller Ronald Madzia President, IDC Worldsource Insurance Network Inc. 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 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 Shares Common GCG Class A GCG.A Symbol Annual Meeting May 22, 2014 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. 2013 Annual Report 49 

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