Investors Group Inc.
Summary of Consolidated Operating Results

Net income attributable to common shareholders for the year ended December 31, 2003, excluding the items noted below, was $533.5 million compared to $491.1 million in 2002. Earnings per share on this basis were $2.01 compared with $1.85 in 2002, an increase of 8.6%. Net income excludes:

• A dilution gain of $14.8 million recorded in the third quarter resulting from the reduction in the Company’s percentage ownership of Great-West Lifeco Inc. (GWL) related to their acquisition of Canada Life.
• The reversal of $24.8 million ($15.6 million after tax) of restructuring costs related to the acquisition of Mackenzie Financial Corporation (Mackenzie) recorded in the fourth quarter of 2003.
• A non-cash income tax charge of $24.8 million recorded in the fourth quarter of 2003 arising from increases in Ontario income tax rates and their effect on the future income tax liability related to indefinite life intangible assets.

Net income attributable to common shareholders in accordance with Canadian generally accepted accounting principles (GAAP) for the year ended December 31, 2003, which includes the dilution gain, the reversal of restructuring costs, and the non-cash income tax charge noted above, was $539.1 million and earnings per share were $2.03. This compares with net income attributable to common shareholders of $491.1 million and earnings per share of $1.85 in 2002.

Shareholders’ equity was $3.22 billion as at December 31, 2003, up from $2.95 billion at December 31, 2002. Return on average common equity was 18.9%, compared with 19.2% in 2002. The quarterly dividend per common share was increased to 25.5 cents in 2003.

NON-GAAP FINANCIAL MEASURES

Net income, diluted earnings per share (EPS) and return on common equity (ROE) for the year ended December 31, 2003 excludes a dilution gain, a reversal of restructuring costs and a non-cash income tax charge related to increases in Ontario tax rates. Net income, EPS and ROE for the year ended December 31, 2001 excludes goodwill amortization and restructuring costs related to the Mackenzie acquisition. Non-GAAP financial measures are used to provide management and investors with additional measures to assess earnings performance. These non-GAAP financial measures do not have standard meanings and are not directly comparable to similar measures used by other companies. Table 1 reconciles non-GAAP results to reported results in accordance with GAAP for net income and earnings per share.

Earnings before interest, taxes, depreciation and amortization (EBITDA) is also a non-GAAP financial measure. EBITDA is an alternative measure of performance utilized by management, investors and investment analysts to evaluate and analyze the Company’s results. EBITDA is discussed further on page 42 of the MD&A. This non-GAAP financial measure does not have a standard meaning and is not directly comparable to any GAAP measure or to similar measures used by other companies.

REPORTABLE SEGMENTS

The Company’s reportable segments, which reflect the current organizational structure, are:

• Investors Group
• Mackenzie
• Corporate and Other

Management measures and evaluates the performance of these segments based on earnings before interest and taxes as shown in Table 2.

Discussion of segment operations for Investors Group and Mackenzie is contained on pages 27 to 40.

Earnings before interest and taxes for Corporate and Other, the segment which represents net investment income earned on unallocated investments and other income reflected higher levels of net investment income and other in 2003 compared to 2002. In addition, 2002 included a $12.2 million charge to income related to the writedown of the Company’s investments in mutual funds, in accordance with its accounting policy on securities.

Certain items reflected in Table 2 are not allocated to segments:

• Restructuring reversal – following the acquisition of Mackenzie by the Company in the second quarter of 2001, a plan was developed to restructure and exit certain operations of Mackenzie. A restructuring provision of $95.6 million ($56.0 million after tax or $0.22 per share) was recorded in that quarter. In the fourth quarter of 2003 the Company changed its estimate for the restructuring provision required to complete remaining restructuring activities. This change resulted in a $24.8 million ($15.6 million after tax or $0.06 per share) reversal of the restructuring provision in the fourth quarter of 2003.
  
  
• Interest expense – represents the cost of financing the Mackenzie acquisition and totaled $85.3 million in 2003 compared with $79.5 million in 2002. During 2003, the Company refinanced $275 million of the Bankers’ Acceptances related to the Mackenzie acquisition with a portion of the proceeds from the debenture issue in December 2002 and the two debenture issues in 2003. The refinancing resulted in an increase in the effective rate of interest on long-term debt related to the Mackenzie acquisition. However, through this refinancing, the Company solidified a longer term capital structure which increased its financial flexibility. The Company executed this strategy in a low interest rate environment and at a time when corporate issuer spreads were at attractive levels.
  
  
• Dilution gain – in the third quarter of 2003, Investors Group Inc. purchased $100 million of common shares of GWL which were issued as part of the funding of the Canada Life acquisition by GWL. Investors Group’s percentage ownership of GWL was reduced to 4.2%, resulting in a dilution gain of $14.8 million ($0.05 per share).
  
  
• Income taxes – the effective rate of tax in 2003 was 34.8% compared with 38.4% in 2002. The Company benefited from statutory tax rate reductions, excluding Ontario, in 2003 as well as other tax benefits. These benefits were partially offset by a non-cash charge as a result of the announced increase in Ontario tax rates. In connection with the Mackenzie acquisition in the second quarter of 2001, Investors Group Inc. valued the indefinite life intangible assets of Mackenzie and allocated a portion of the purchase price to such assets. A future tax liability associated with the assets was estimated based upon future income tax rates substantively enacted at the time. During the fourth quarter of 2003, the Ontario provincial government increased income tax rates in respect of future years and, as a result, the Company increased the estimate of the future tax liability and recorded a $24.8 million ($0.09 per share) non-cash income tax charge. This charge increased the 2003 effective tax rate by 2.9%.

(table 2: consolidated operating results by segment)

SUMMARY OF CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles in Canada (GAAP) requires management to adopt accounting policies and to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements. In applying these policies, management makes subjective and complex judgements that frequently require estimates about matters that are inherently uncertain. Many of these policies are common in the mutual fund and other financial services industries; others are specific to the Company’s businesses and operations. The Company’s general policies are described in detail in Note 1 of the Consolidated Financial Statements. The major critical accounting estimates and related judgements underlying the Company’s financial statements are summarized below:

• Goodwill and intangible assets – At December 31, 2003, goodwill totaled $2.27 billion and indefinite life intangible assets totaled $860 million as reflected in Note 7 of the Consolidated Financial Statements. Under CICA Section 3062 – Goodwill and Other Intangible Assets, the Company is required to test the fair value of goodwill and indefinite life intangible assets for impairment at least once a year. The Company performs that evaluation during the second quarter each year. These tests involve the use of estimates and assumptions appropriate in the circumstances. The annual impairment testing was completed for 2003 and management determined that no impairment charge was necessary.
  
  
• Income taxes – The recognition of future tax assets depends on management’s assumption that future earnings will be sufficient to realize the future
  benefit. The amount of the asset or liability recorded is based on management’s best estimate of the timing of the realization of the asset or liability.
  
  
• Employee future benefits – Accounting for pension and other post-retirement benefits requires estimates of future returns on plan assets, expected increases in compensation levels, trends in health care costs, as well as the appropriate discount rate for accrued benefit obligations. These estimates are discussed in Note 10 of the Consolidated Financial Statements.

FUTURE ACCOUNTING CHANGES

As discussed in Note 1 of the Consolidated Financial Statements, during 2003:

• CICA Section 3870 – Stock-Based Compensation and Other Stock-Based Payments, effective January 1, 2004, was amended to require expense treatment of all stock-based compensation and payments at grant date.
  
  
• CICA Accounting Guideline 13 (AcG-13) – Hedging Relationships, effective January 1, 2004, established the criteria that must be met in order to apply hedge accounting for derivatives. Changes in the fair value of derivatives that do not qualify for hedge accounting will be recorded in the Consolidated Statements of Income.

These changes are not expected to have a material impact on the financial statements of the Company.

QUARTERLY FINANCIAL INFORMATION

Selected financial information for the eight most recently completed quarters is shown on
page 69 [ PDF: 139 K / 1 page ].