<<
Peter Brown, Chairman & CEO, announces
Paul Reynolds as President and Mark Maybank as COO;
Record first quarter revenue up 108.2% with net income up 134.2%
(All dollar amounts are stated in Canadian dollars unless otherwise
indicated)
>>
VANCOUVER, Aug. 4 /CNW/ - Peter M. Brown, the Chairman of the Board &
Chief Executive Officer of Canaccord Capital Inc. (TSX & AIM: CCI) ("CCI" or
the "Company") announced today the Board has appointed Paul Reynolds as
President and Mark Maybank as Chief Operating Officer of Canaccord Capital
Inc. In addition, Peter Brown announced the resignation of Michael G.
Greenwood as Director and President & Chief Operating Officer of CCI.
Paul Reynolds remains a director of CCI and Global Head of Canaccord
Adams and, for regulatory purposes, President & Chief Operating Officer of
Canaccord Adams Limited (CCI's UK operating subsidiary). Mark Maybank
continues as Deputy Head of Canaccord Adams and Global Head of Research &
Operations. In addition, Mark Maybank has been nominated as the President &
Chief Operating Officer of Canaccord Capital Corporation (the Company's
Canadian operating subsidiary), subject to regulatory approval.
"I am confident in Paul's and Mark's abilities to take on the reigns of
these key leadership roles, and to carry forward Canaccord's entrepreneurial,
consensus-driven culture," said Peter Brown. "We are fortunate to have a deep,
diverse, global pool of talent that has allowed us to develop the next
generation of leadership internally and I look forward to working with Paul
and Mark to continue our tradition of generating sustainable growth."
To support the transition period, Michael Greenwood has entered into a
twelve-month consulting arrangement with Canaccord. Peter Brown stated, "Mike
leaves a great many friends behind at Canaccord, and his strategic leadership
and contribution to our growth over the last 14 years has been integral to our
success. We wish him every success in the future." Also, he added "On a
personal note, I, more than anyone else in the company, have worked with Mike
on a daily basis and I will miss the benefit of his forward thinking,
dedication and drive for perfection in every area of our business."
CCI's Fiscal Q1/07 Results
Canaccord Capital Inc. announced that revenue for its first quarter of
fiscal 2007, ended June 30, 2006, was a first quarter record of
$206.1 million, up $107.1 million, or 108.2%, from $99.0 million for the same
period a year ago. Net income of $25.9 million was also a first quarter
record, up $14.9 million, or 134.2%, from $11.1 million for the first quarter
of fiscal 2006, and diluted earnings per share (EPS) were a first quarter
record of $0.54, up $0.30, or 125.0%, from $0.24 for the same period a year
ago.
"Strong global markets for the first part of the quarter played a
significant role in our record first quarter results," added Brad Kotush,
Executive VP & CFO. "We are proud of the hard work and client focus
demonstrated by all of our partners".
<<
Highlights of the first quarter fiscal 2007 results (three months ended
June 30, 2006) compared to the first quarter fiscal 2006 results (three
months ended June 30, 2005):
- Revenue of $206.1 million, up 108.2%, or $107.1 million, from
$99.0 million
- Expenses of $167.0 million, up 99.7%, or $83.4 million, from
$83.6 million
- Net income of $25.9 million, up 134.2%, or $14.9 million, from
$11.1 million
- Diluted EPS of $0.54, up 125.0%, or $0.30, from $0.24
- Return on equity (ROE) of 34.7%, up from 19.8%
- Book value per common share at the period end increased to $6.51, up
32.6%, or $1.60, from $4.91
- The Board approved a common share dividend of $0.08 per share on
August 3, 2006, payable on September 8, 2006, with a record date of
August 25, 2006
- 47,827,350 total issued common shares outstanding on a diluted basis
as of August 3, 2006
Highlights of Operations:
- During Q1/07, our international capital markets team, Canaccord
Adams, led the following equity transactions:
- $200 million in a TSX financing for Yamana Gold Inc. (TSX: YRI)
- $178 million in an AIM placing for European Nickel plc
(AIM: ENK)
- $175 million in a bought deal for First Calgary Petroleums Ltd.
(TSX: FCP/AIM: FPL)
- $125 million in a TSX financing for Corriente Resources Inc.
(TSX: CTQ)
- $55 million in a bought deal for Royal Laser Corp. (TSX: RLC)
- $30 million in a TSX firm commitment for Westfield Real Estate
Investment Trust (TSX: WFD.DB.C)
- Revenue from Private Client Services' business increased by 82.4%
over the same period a year ago to $72.3 million from $39.6 million.
- During Q1/07, we experienced growth in market share in our Canadian
trading operations. Canaccord's market share was 3.83% in terms of
TSX-traded volume, up from 3.32% for the same period a year ago.
- Canaccord ranked 4th, in Thomson Financial's Canada equity &
equity-related league table (January to June 2006), raising
US$951.3 million in proceeds for our clients serving as bookrunner
on 15 deals - above all other independents. Canaccord also ranked
2nd in the Canada Secondary Offerings category, up from 6th place
last year.
- Our liquidity remains strong as working capital increased by 18.7%
from $208.4 million a year ago, to $247.3 million.
>>
ANNUAL GENERAL MEETING:
The Annual General Meeting of shareholders will be held on Friday, August
4, 2006, at 2:00 p.m. (Pacific Time (PDT)) at the Four Seasons Hotel, 791
West Georgia Street, Vancouver, BC, Canada. The Annual General Meeting will
also be simultaneously broadcast through a live Internet Webcast on August 4,
2006. This Webcast will be archived for viewing after the event. Please visit
the Webcast events page at www.canaccord.com for more information and a direct
link.
ACCESS TO QUARTERLY RESULTS INFORMATION:
Interested investors, the media and others may review this quarterly
earnings release and supplementary financial information at
www.canaccord.com/investor/financialreports.
QUARTERLY CONFERENCE CALL AND WEBCAST PRESENTATION:
Interested parties can listen to our first quarter fiscal 2007 results
conference call with analysts and institutional investors live and archived,
via the Internet and a toll free number. The conference call is scheduled for
Friday, August 4, 2006, at 10:00 a.m. (Pacific Time (PDT)), 1:00 p.m. (Eastern
Time (EDT)), and 6:00 p.m. (UK Time (BST)). At that time, senior executives
will comment on the results for the first quarter fiscal 2007 and respond to
questions from analysts and institutional investors.
The conference call may be accessed live and archived on a listen-only
basis via the Internet at: www.canaccord.com/investor/webcast
Analysts and institutional investors can call in via telephone at:
- 416-644-3416 (within Toronto)
- 1-800-814-4941 (toll free outside Toronto)
- 00-800-0000-2288 (toll free from the United Kingdom)
A replay of the conference call can be accessed after 12:00 p.m. (PDT),
3:00 p.m. (EDT) and 8:00 p.m. (BST) on August 4, 2006, until 12:00 a.m. (PDT),
3:00 a.m. (EDT) and 8:00 a.m. (BST) Sunday, August 27, 2006, at 416-640-1917
or 1-877-289-8525 by entering passcode 21195104 followed by the number sign.
ABOUT CANACCORD CAPITAL INC.:
Through its principal subsidiaries, Canaccord Capital Inc.
(TSX & AIM: CCI) is a leading independent full service investment dealer in
Canada with capital markets operations in the United Kingdom and the United
States of America. Canaccord is publicly traded on both the Toronto Stock
Exchange and AIM, a market operated by the London Stock Exchange. Canaccord
has operations in two of the principal segments of the securities industry:
private client services and capital markets. Together, these operations offer
a wide range of complementary investment products, brokerage services and
investment banking services to Canaccord's private, institutional and
corporate clients. Canaccord has approximately 1,530 employees worldwide in 31
offices, including 25 Private Client Services offices located across Canada.
Canaccord Adams, the international capital markets division, has operations in
Toronto, London, Boston, Vancouver, New York, Calgary, Montreal, San Francisco
and Houston.
FOR FURTHER INFORMATION, CONTACT:
North America Media:
Scott Davidson
Managing Director, Global Head of Marketing & Communications
Phone: 416-869-3875, email: scott_davidson(at)canaccord.com
London Media:
Bobby Morse or Ben Willey
Buchanan Communications (London)
Phone: +44-(0)-207-466-5000, email: bobbym(at)buchanan.uk.co
For investor relations inquiries contact:
Katherine Young
Vice President, Investor Relations
Phone: 604-643-7013, email: katherine_young(at)canaccord.com
-------------------------------------------------------------------------
None of the information on Canaccord's Web site www.canaccord.com should
be considered incorporated herein by reference.
-------------------------------------------------------------------------
Message from the Chairman and CEO
This past quarter was a period of significant volatility for the broader
capital markets. Strength in the first half of the quarter was followed by
sharp swings in value of global indices and commodity prices. Even with these
challenges, Q1 of fiscal 2007 was our second most successful quarter in the
firm's history and a record first quarter. This performance comes on the heels
of our record financial performance in fiscal 2006. Revenue of $206.1 million
and net income of $25.9 million represents triple-digit revenue growth of
108.2%, net income growth of 134.2% and diluted EPS growth of 125.0% relative
to Q1 of last year. Our achievements in Q1/07 demonstrate the strength
provided by our different business lines and our geographical diversity.
Our Culture of Ideas supported by Management Transition
We credit our success to our idea-driven culture, and are proud that
Canaccord is an environment that demands contribution and facilitates success
for all our partners. Our client focus is evident in every area of our
business. The global structure of our management team is designed to maintain
and enhance this culture and further our growth, improve our client service
and create value for our shareholders. We are fortunate to have a deep,
diverse, global pool of talent that has allowed us to develop the next
generation of leadership internally, in line with our values and goals.
The leaders that are stepping forward share all of our common goals and
values. Paul Reynolds and Mark Maybank have made significant contributions to
Canaccord's growth and proven their ability to lead a global investment firm.
Working with the rest of our management team, they will continue to execute
our business plan in a consensus-based, idea-driven environment.
Unfortunately, Mike Greenwood, upon reflection, has decided that this is
a good time to resign his role as Director, President & Chief Operating
Officer of Canaccord Capital Inc. to pursue other interests. Mike joined
Canaccord in 1992 and shared with me the vision to convert a West Coast
transaction firm into Canada's largest independent full service investment
dealer with important international operations. Since that first vision, Mike
has played an integral role in our achievements and has led many of the key
initiatives that helped develop the great firm we are today. Mike leaves a
great many friends behind at Canaccord, and his strategic leadership and
contribution to our growth over the last 14 years has been integral to our
success. We wish him every success in the future. On a personal note, I, more
than anyone else in the company, have worked with Mike on a daily basis and I
will miss the benefit of his forward thinking, dedication and drive for
perfection in every area of our business.
Among our core values, we remain committed to a continued high level of
employee ownership of the firm. During fiscal 2007, we will consider a variety
of different programs designed to maintain the high level of employee
ownership in the firm.
Canaccord Adams leverages its global platform
Canaccord Adams' consolidated revenue increased 129.7%, from
$54.5 million in Q1/06, to $125.1 million in Q1/07. Broken down
geographically, revenue in the UK increased 114.1%, from $22.8 million to
$48.9 million; revenue in Canada increased 69.5%, from $31.6 million to $53.6
million; and revenue in the US was $22.6 million reflecting the contribution
from our recent acquisition.
Much of this growth was driven by higher market share in Canada and the
UK as well as increased overall capital markets activity year over year.
Canaccord Adams was ranked fourth in lead underwritings by Thomson Financial
in its Canadian equity and equity-related statistics. Significantly, market
share in terms of proceeds raised from Canadian transactions increased to 7.8%
for the six months ended June 30, 2006, up from 4.1% for the same period in
2005. Operating highlights include leading a $200 million equity offering on
the TSX for Yamana Gold Inc. We also led a $178 million placement for European
Nickel plc on AIM and a $175 million bought deal for First Calgary Petroleums
Ltd. Although resource sector transactions revenue was relatively high, 64.7%
of our total transactions this quarter were for non-resource companies,
demonstrating our sector diversity despite a commodities boom. An example of
this diversity and focus on balance is that we are breaking new ground in the
creation and development of innovative small-to mid-cap Canadian REITs.
We continue to make solid progress integrating our new US group since the
close of our acquisition of Adams Harkness Financial Group, Inc. in January.
The development and evolution of our US operation is focused on adding
talented professionals to our existing team, broadening our capabilities, and
providing our clients with superior, money-making ideas. To support this plan,
we will continue to expand our San Francisco-based technology practice, and
further diversify our sector mix in the US through the expansion of our
current energy practice in Houston, as well as building out our New York
facilities in order to solidify our growing presence in a key US financial
centre.
Growth in Assets Supports Private Client Services' Revenue Growth
Private Client Services' revenue for the quarter was $72.3 million, up
82.4% from a year ago. This increase is due to both market share gains as well
as strong activity in the North American equity markets. Our assets under
management (AUM) were $649 million, experiencing growth of 58.3% year over
year. Despite tougher markets during May and June, AUM increased by 5.9% from
March 31, 2006.
Assets under administration (AUA) were up 40.1% to $13.9 billion from
last year, and were down 2.6% from March 31, 2006 versus the S&P/TSX index
decline of 4.1% during fiscal Q1. Year-over-year AUA growth reflects market
value increases in North American equity markets, asset transfers with new
Investment Advisors (IA) and additional assets added to our existing client
accounts. As at June 30, 2006, there were 430 IAs, a net increase of 12 from a
year ago.
We continue to improve the products and services we offer to our private
clients. To this end, in July 2006 we added Connor, Clark & Lunn Financial
Group and Dixon Mitchell Investment Counsel Inc. to our Alliance program,
bringing the total to six portfolio managers. Additional high value managers
will be added to our managed accounts platform as we find appropriate firms
with which to partner.
Outlook for the Remainder of Fiscal 2007
Our business is cyclical and, as such, revenue and net income vary from
quarter to quarter and year to year. Normally, Canaccord experiences the
traditional seasonal fluctuations of the financial industry with the first
half of each fiscal year contributing approximately 35% to 40% of our annual
revenue. While the capital markets performed better during the first quarter
of fiscal 2007, compared to the same quarter in previous years, we expect the
remaining quarters of this year to reflect historical seasonality patterns.
Capital markets globally experienced a sharp drop in performance in May, which
has continued into the summer, and we expect Q2/07 performance to be more in
line with previous fiscal second quarters.
We would like to congratulate and thank our employees and partners for
their continued commitment and dedication. These contributions enable
Canaccord to successfully continue with carrying out our long term strategy.
We look forward to discussing our progress with you over the remaining
quarters of this year.
"signed"
Peter M. Brown
Chairman & Chief Executive Officer
Management's Discussion and Analysis
First quarter fiscal 2007 for the three months ended June 30, 2006 - this
document is dated August 4, 2006
The following discussion of the financial condition and results of
operations for Canaccord Capital Inc. (Canaccord) is provided to enable the
reader to assess material changes in such condition and results for the
three-month period ended June 30, 2006, compared to the corresponding period
in the preceding fiscal year, with an emphasis on the most recent three-month
period. Canaccord's fiscal year end is March 31. Canaccord's first quarter
fiscal 2007 was the three-month period ended June 30, 2006, and is also
referred to as first quarter 2007 and as Q1/07 in the following discussion.
This discussion should be read in conjunction with the unaudited interim
consolidated financial statements for the three-month period ended June 30,
2006, beginning on page 21 of this report, the 2006 annual Management's
Discussion and Analysis (MD&A), our Annual Information Form dated June 26,
2006, and the audited consolidated financial statements for the fiscal year
ended March 31, 2006, in Canaccord's Annual Report dated June 26, 2006 (the
Annual Report). There has been no material change to the information contained
in the annual MD&A for fiscal 2006 except as disclosed in this MD&A.
Canaccord's financial information is expressed in Canadian dollars unless
otherwise specified. This document is prepared in accordance with Canadian
generally accepted accounting principles (GAAP) with reconciliation to
international financial reporting standards (IFRS). All the financial data
below is unaudited except for the full fiscal year 2006 data.
Caution regarding forward-looking statements
This document may contain certain forward-looking statements. These
statements relate to future events or future performance and reflect
management's expectations or beliefs regarding future events including
business and economic conditions and Canaccord's growth, results of
operations, performance and business prospects and opportunities. Such
forward-looking statements reflect management's current beliefs and are based
on information currently available to management. In some cases,
forward-looking statements can be identified by terminology such as "may",
"will", "should", "expect", "plan", "anticipate", "believe", "estimate",
"predict", "potential", "continue", "target", "intend" or the negative of
these terms or other comparable terminology. By their very nature,
forward-looking statements involve inherent risks and uncertainties, both
general and specific, and a number of factors could cause actual events or
results to differ materially from the results discussed in the forward-looking
statements. In evaluating these statements, readers should specifically
consider various factors which may cause actual results to differ materially
from any forward-looking statement. These factors include, but are not limited
to, market and general economic conditions, the nature of the financial
services industry and the risks and uncertainties detailed from time to time
in Canaccord's interim and annual consolidated financial statements and its
Annual Report and Annual Information Form filed on www.sedar.com. These
forward-looking statements are made as of the date of this document, and
Canaccord assumes no obligation to update or revise them to reflect new events
or circumstances.
Non-GAAP measures
Certain non-GAAP measures are utilized by Canaccord as measures of
financial performance. Non-GAAP measures do not have any standardized meaning
prescribed by GAAP and are therefore unlikely to be comparable to similar
measures presented by other companies.
Canaccord's capital is represented by common shareholders' equity and,
therefore, management uses return on average common equity (ROE) as a
performance measure.
Assets under administration (AUA) and assets under management (AUM) are
non-GAAP measures of client assets that are common to the wealth management
aspects of the private client services industry. AUA is the market value of
client assets administered by Canaccord in respect of which Canaccord earns
commissions or fees. This measure includes funds held in client accounts as
well as the aggregate market value of long and short security positions.
Canaccord's method of calculating AUA may differ from the methods used by
other companies and therefore may not be comparable to other companies.
Management uses this measure to assess operational performance of the Private
Client Services business segment. AUM is the market value of assets that are
beneficially owned by clients and are discretionarily managed by Canaccord as
part of our Independence Accounts program. Services provided include the
selection of investments and the provision of investment advice. AUM are also
administered by Canaccord and are included in AUA.
Overview
Business environment
Canaccord's business is cyclical and experiences considerable variations
in revenue and income from quarter to quarter and year to year due to factors
beyond Canaccord's control and, accordingly, revenue and net income are
expected to fluctuate as they have historically. Our business is subject to
the overall condition of the North American and the European equity markets,
including the seasonal variance in these markets. In general, North American
capital markets are slower during the first half of our fiscal year, during
which we typically generate approximately 35% to 40% of our annual revenue.
During the second half of our fiscal year, we typically generate 60% to 65% of
our annual revenue. However, during the first quarter of fiscal 2007, global
capital markets performed better compared to the same quarter in previous
years. Capital markets' activity dropped sharply in late May with no
significant improvement to date. We expect, therefore, that fiscal Q2/07
performance will be more reflective of our historical seasonality pattern. We
continue, however, to have a pipeline of potential transactions available for
completion subject to market activity improvement.
We expect that Japan's efforts to normalize its economy will have a net
effect of causing a rise in global interest rates, resulting in slower
economic growth on a global scale. This effect has started to be felt in the
US as its growth slowed to 3.5% in the second quarter of calendar 2006, in
response to past monetary tightening, a cooling housing market, and the
expectation of further interest rate increases in the second half of 2006.
Similarly, growth in Canada levelled off at 3.3%, and Canadian capital markets
experienced a considerable drop in activity in May 2006 as measured by the
volume of equity traded. For the second half of calendar 2006, the Canadian
dollar may continue its rise against the US dollar, therefore challenging
exports and affecting our net trading balance. As a result, Canadian interest
rates remained stable in July and further increases are expected to be
limited.
European confidence levels plunged in June as inflation and interest
rates continued to rise. Economic activity in Europe slowed considerably
during fiscal Q1/07, which is expected to continue in Q2 of fiscal 2007.
Household expenditure is still lacking solid support from labour market
fundamentals and is expected to rise by only 0.5% by the end of Q3 calendar
2006.
About Canaccord's operations
Canaccord Capital Inc.'s operations are divided into three segments: The
first two, Private Client Services and Canaccord Adams, are principally
operating segments, while the third, Other, is mainly an administrative
segment.
Private Client Services provides brokerage services and investment advice
to retail or private clients primarily in Canada, and to a lesser degree, in
the US and internationally. Canaccord Adams (formerly known as Canaccord's
Global Capital Markets) includes investment banking, research and trading
activities on behalf of corporate, institutional and government clients as
well as principal trading activities in Canada, the UK and the US.
Canaccord acquired 100% of Adams Harkness Financial Group, Inc. (engaged
primarily in capital markets activities in the US), on January 3, 2006. As a
result of this acquisition, the Adams Harkness Financial Group, Inc.'s
operating subsidiary was renamed Canaccord Adams Inc. and Canaccord's Global
Capital Markets (Canada, UK and US) was re-branded globally as Canaccord
Adams. Canaccord Adams Inc. together with Canaccord Capital Corporation (USA),
Inc., which includes US Private Client Services and Other operations in the
US, constitute Canaccord's US geographic segment.
In addition, Canaccord Adams Limited (engaged in capital markets
activities in the United Kingdom) constitutes Canaccord's UK geographic
segment.
The division of Canaccord Capital Corporation, our principal Canadian
operating subsidiary, that is engaged in capital markets activities in Canada
was branded as Canaccord Adams, and together with Canadian Private Client
Services and Other operations, they constitute Canaccord's Canadian geographic
segment.
Other includes correspondent brokerage services, interest and foreign
exchange revenue and expenses not specifically allocable to Private Client
Services and Canaccord Adams.
<<
Consolidated operating results
First quarter fiscal 2007 summary data(1)
-------------------------------------------------------------------------
Year-
(C$ thousands, except per Three months ended June 30 over-year
share, employee and % amounts) 2006 2005 increase
-------------------------------------------------------------------------
Canaccord Capital Inc.
Revenue(2)
Commission $ 78,054 $ 40,811 91.3%
Investment banking 102,840 49,505 107.7%
Principal trading 7,784 (1,741) n.m.
Interest 13,638 8,243 65.4%
Other 3,811 2,199 73.3%
------------------------------------
Total Revenue $ 206,127 $ 99,017 108.2%
Expenses
Incentive compensation $ 104,955 $ 48,650 115.7%
Salaries and benefits 12,493 9,226 35.4%
Other overhead expenses(3) 49,504 25,711 92.5%
------------------------------------
Total Expenses $ 166,952 $ 83,587 99.7%
Income before income taxes 39,175 15,430 153.9%
Net income 25,942 11,078 134.2%
Earnings per share (EPS) - diluted 0.54 0.24 125.0%
Return on average common equity (ROE) 34.7% 19.8% 14.9p.p.
Book value per share - period end $ 6.51 $ 4.91 32.6%
Number of employees 1,534 1,288 19.1%
-------------------------------------------------------------------------
US geographic segment(4)
Revenue $ 23,985 - n.m.
Expenses - n.m.
Incentive compensation 12,902 - n.m.
Salaries and benefits 1,754 - n.m.
Other overhead expenses(3) 7,141 - n.m.
------------------------------------
Total Expenses $ 21,797 - n.m.
Income before income taxes 2,188 - n.m.
Net income 1,648 - n.m.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Canaccord Capital Inc., excluding
US geographic segment
Revenue $ 182,142 $ 99,017 84.0%
Expenses
Incentive compensation $ 92,053 $ 48,650 89.2%
Salaries and benefits 10,739 9,226 16.4%
Other overhead expenses(3) 42,363 25,711 64.8%
------------------------------------
Total Expenses $ 145,155 $ 83,587 73.7%
Income before income taxes 36,987 15,430 139.7%
Net income 24,294 11,078 119.3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Some of this data is considered to be non-GAAP.
(2) To enhance our disclosure and to facilitate comparison with other
companies in the industry, consolidated revenue has been changed from
"revenue by business segment" to "revenue by activity". For revenue
by business segment information, please refer to the Results of
Operations section on page 12.
(3) Consists of trading costs, premises and equipment, communication and
technology, interest, general and administrative, amortization,
development costs and gain on disposal of investment.
(4) Starting on January 3, 2006, revenues and expenses for Canaccord
Capital Corporation (USA), Inc. and Canaccord Adams Inc. are
disclosed together under the US geographic segment. Therefore, US
geographic segment results are not to be interpreted as generated
exclusively from Canaccord Adams Inc. or as a result of the
acquisition of Adams Harkness Financial Group, Inc.
n.m.: not meaningful
p.p.: percentage points
Geographic distribution of revenue for first quarter fiscal 2007
-------------------------------------------------------------------------
Year-
Three months ended June 30 over-year
(C$ thousands, except % amount) 2006 2005 increase
-------------------------------------------------------------------------
Canada(1) $ 133,250 $ 76,184 74.9%
UK(2) 48,892 22,833 114.1%
US(3) 23,985 - n.m.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Canada geographic segment includes operations for Private Client
Services, Canaccord Adams (a division of Canaccord Capital
Corporation) and Other business segments.
(2) UK geographic segment includes operations for Canaccord Adams
Limited.
(3) Commencing on January 3, 2006, as a result of the acquisition of
Adams Harkness Financial Group, Inc., the US geographic segment
includes operations for Canaccord Adams Inc. and Canaccord Capital
Corporation (USA), Inc., which also includes operations from Private
Client Services and Other business segments in the US.
n.m.: not meaningful
>>
Three-month summary
Revenue was a first quarter record of $206.1 million, up $107.1 million,
or 108.2%, compared to the same period a year ago. Revenue increased across
all lines of business due to Canaccord's higher market share in its key
Canadian and UK market sectors, which also experienced higher activity during
the quarter compared to the same period a year ago. Also, the momentum from
our growth initiatives and expanded sector participation created during Q4/06
contributed to the increase in revenue during Q1/07. On a consolidated basis,
revenue is generated through five activities: commissions, investment banking,
principal trading, interest, and other. Overall, first quarter fiscal 2007
revenue would have been $182.1 million, up $83.1 million, or 84.0%, compared
to first quarter fiscal 2006, excluding the contribution of the US geographic
segment (see footnote (4) of first quarter fiscal 2007 summary data table
above).
Revenue generated from commissions for the first quarter of fiscal 2007
was $78.1 million, up $37.2 million, or 91.3%, from the same period a year
ago, in part due to higher transaction volumes, growth in client assets,
improved market share in Canada, and the addition of Canaccord Adams Inc. in
the US.
Investment banking revenue was $102.8 million, up $53.3 million, or
107.7%, mainly due to greater contributions from larger financing
transactions, including secondary offerings, private placements, and initial
public offerings; an increase in proceeds from the sale of fee shares received
as compensation for investment banking transactions; and the added
contribution of Canaccord Adams Inc. in the US.
Revenue derived from principal trading activity was $7.8 million, up
$9.5 million, compared to a loss of $1.7 million in Q1/06 mainly due to
favourable market conditions and increased activity in Canaccord Adams. In
addition to traditional sales and trading activities for clients, Canaccord
Adams trades as principal and is a market maker for a number of equity
securities.
Interest revenue was $13.6 million, up $5.4 million, or 65.4%, mainly due
to an increase in the number and size of margin accounts and the increase in
interest rates in Canada since Q1/06.
Other revenue was $3.8 million, up $1.6 million, or 73.3%, mainly due to
increases in foreign exchange gains.
First quarter revenue in Canada increased to $133.3 million, up
$57.1 million, or 74.9%, from a year ago, reflecting increased market share in
corporate finance and trading that benefited from the robust market activity
in Canadian equity markets, largely due to rising global demand for
commodities and related equities. Similarly, revenue in the UK increased to
$48.9 million, up $26.1 million, or 114.1%, as the result of Canaccord's
leading market share on AIM, which benefited from high levels of activity,
resulting in increased corporate finance revenue.
First quarter fiscal 2007 consolidated revenue in the US was
$24.0 million and includes revenue generated by Canaccord Capital Corporation
(USA), Inc. ($2.6 million) and Canaccord Adams Inc. ($21.4 million), as a
result of the acquisition of Adams Harkness Financial Group, Inc., on
January 3, 2006. Consequently, our US operations became a reportable segment
for the first time in Q4/06.
<<
-------------------------------------------------------------------------
Expenses as a percentage of revenue Year-
over-year
Increase (decrease) in Three months ended June 30 increase
percentage points 2006 2005 (decrease)
-------------------------------------------------------------------------
Incentive compensation 50.9% 49.1% 1.8p.p.
Salaries and benefits 6.1% 9.3% (3.2)p.p.
Other overhead expenses(1) 24.0% 26.0% (2.0)p.p.
------------------------------------
Total 81.0% 84.4% (3.4)p.p.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Consists of trading costs, premises and equipment, communication and
technology, interest, general and administrative, amortization,
development costs and gain on disposal of investment.
p.p.: percentage points
>>
Expenses were $167.0 million, up $83.4 million, or 99.7%, from a year
ago. In addition to the $21.8 million of expenses incurred by the US
geographic segment, the overall increase is largely due to a rise in incentive
compensation, trading costs, and general and administrative expense, which
collectively increased at a slower pace than revenue. During Q1/06, Canaccord
realized a one time pre-tax gain of $1.6 million from the disposal of an
investment in the Bourse de MontrDeal. Had Canaccord not realized such gain in
Q1/06, the expense to revenue ratio would have been 86.1% compared to 81.0%
for Q1/07. Overall, first quarter fiscal 2007 expenses would have been
$145.2 million, up $61.6 million, or 73.7%, compared to Q1/06 excluding the
expenses incurred by the US geographic segment.
For the quarter, incentive compensation expense was $105.0 million, up
$56.3 million, or 115.7%, largely due to the increase in fiscal first quarter
revenue posted by the Private Client Services and Canaccord Adams divisions.
However, incentive compensation as a percentage of revenue increased to 50.9%
compared to 49.1% for the same quarter a year ago. Investment Advisors are
individually earning higher revenue and are therefore receiving higher payouts
that are based on a sliding revenue scale. Compensation expense includes a 3%
National Health Insurance (NHI) tax applicable for UK-based employees.
Salaries and benefits expense increased by $3.3 million for the first
quarter of fiscal 2007, compared to the same quarter a year ago due to our
increased levels of activity and the addition of salaries and benefits
expenses associated with Canaccord Adams Inc. in the US. The total
compensation payout as a percentage of consolidated revenue for Q1/07 was
57.0%, down from 58.5% in Q1/06 due to the leverage achieved from our fixed
level of salaries and benefits expense.
<<
-------------------------------------------------------------------------
Other overhead expenses Year-
Three months ended June 30 over-year
(C$ thousands, except % amount) 2006 2005 increase
-------------------------------------------------------------------------
Trading costs 8,559 4,312 98.5%
Premises and equipment 5,937 3,626 63.7%
Communication and technology 5,063 3,690 37.2%
Interest 4,982 2,491 100.0%
General and administrative 19,107 10,016 90.8%
Amortization 1,989 1,118 77.9%
Development costs 3,867 2,091 84.9%
Gain on disposal of investment - (1,633) n.m.
------------------------------------
Total other overhead expenses 49,504 25,711 92.5%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
n.m.: not meaningful
>>
Other overhead expenses increased by $23.8 million for the first quarter
of fiscal 2007, compared to the same quarter a year ago. This increase is
largely attributable to the increase in trading costs, up $4.2 million mainly
due to the increase in activity in our commission revenue and the contribution
associated with our new US platform; interest, up by $2.5 million due to
higher interest rates compared to Q1/06; and general and administrative
expense, up $9.1 million.
General and administrative expense was $19.1 million, up $9.1 million, or
90.8%, from a year ago partly due to the increase in business activity during
the quarter, and the addition of Adams Harkness in Q4/06. The largest
increases in general and administrative expense were in reserves, up
$1.1 million related to increased trading activity; promotion and travel, up
$3.1 million, largely attributable to the increase in the geographic span of
our business; and client expenses, up $1.3 million, reflecting an increased
provision related to client activity.
<<
-------------------------------------------------------------------------
Development costs Year-
Three months ended June 30 over-year
(C$ thousands, except % amount) 2006 2005 increase
-------------------------------------------------------------------------
Hiring incentives 2,698 1,009 167.4%
Systems development 1,169 1,082 8.0%
------------------------------------
Total 3,867 2,091 84.9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Development costs are also included as a component of other overhead
expenses and include hiring incentives and systems development costs. Hiring
incentives are one of our tools to recruit new Investment Advisors (IAs) and
capital markets professionals. The increase in hiring incentives in Q1/07 is
mainly due to the costs associated with the hiring of Private Client Services
employees in Canada and the costs associated with retaining Adams Harkness'
employees. Systems development costs are expenditures that Canaccord has made
related to enhancing its information technology platform.
Overall hiring incentives increased by $1.7 million from a year ago.
Private Client Services' Q1 fiscal 2007 hiring incentives were $1.5 million,
up $0.7 million, compared to the same period a year ago. Similarly, hiring
incentives for Canaccord Adams were $1.2 million, up $1.0 million. The
increase in hiring incentives is due to the recruitment of professionals for
both Private Client Services and Canaccord Adams, and the retention costs
associated with Adams Harkness' employees, as a result of the acquisition on
January 3, 2006.
Net income was a first quarter record of $25.9 million, up by
$14.9 million, or 134.2%, from a year ago. Diluted EPS was $0.54, up by $0.30,
or 125.0%, and ROE was 34.7% compared to a ROE of 19.8% a year ago. The lower
increase in EPS and ROE compared to the increase in net income is partially
associated with the issuance of 691,940 shares under the incentive plan for
recruiting purposes and the issuance of 1,420,342 common shares in connection
with acquisitions during fiscal 2006. Book value per common share increased by
32.6% to $6.51, up $1.60 from $4.91 a year ago, reflecting an increase in
retained earnings and share capital.
The US geographic segment generated quarterly net income of $1.6 million,
equivalent to 6.4% of Canaccord's overall net income of $25.9 million.
Income taxes were $13.2 million for the quarter, reflecting an effective
tax rate of 33.8% compared to 28.2% a year ago. The increase in the effective
tax rate in Q1/07 relative to Q1/06 is related to the geographical composition
of Canaccord's net income and the preferential tax treatment a year ago due to
the capital gain from the disposal of an investment in the Bourse de MontrDeal.
Had Canaccord not realized such gain, the effective tax rate in Q1/06 would
have been 30.1%. Our effective tax rate will vary depending on the geographic
composition of our operating activities.
<<
Results of operations
Private Client Services
-------------------------------------------------------------------------
(C$ thousands, except assets
under administration and assets
under management, which are in
C$ millions, employees, Year-
Investment Advisors and % Three months ended June 30 over-year
amounts) 2006 2005 increase
-------------------------------------------------------------------------
Revenue $ 72,286 39,630 82.4%
Expenses
Incentive compensation 33,368 17,581 89.8%
Salaries and benefits 3,430 3,036 13.0%
Other overhead expenses 18,419 10,403 77.1%
------------------------------------
Total Expenses $ 55,217 31,020 78.0%
Income before income taxes 17,069 8,610 98.2%
Assets under management (AUM) 649 410 58.3%
Assets under administration (AUA) 13,942 9,954 40.1%
Number of Investment Advisors (IAs) 430 418 2.9%
Number of employees 710 667 6.4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
Revenue from Private Client Services is generated through traditional
commission-based brokerage services; the sale of fee-based products and
services; client-related interest; and fees and commissions earned by IAs in
respect to corporate finance and venture capital transactions by private
clients.
Three months ended June 30, 2006, compared with three months ended
June 30, 2005
Revenue from Private Client Services was $72.3 million, up $32.7 million,
or 82.4%, from a year ago due to strong activity in the North American equity
markets, particularly in Canada within the resource sectors during the first
two months of fiscal Q1/07. Parallel to this revenue growth was a $4.0 billion
increase in assets under administration (AUA) to a total of $13.9 billion. The
40.1% increase in AUA since fiscal Q1/06 reflects the strong increase in
market values in North American equity markets, the addition of assets through
transfers with newly hired IAs and additional assets added to existing
accounts since Q1/06. There were 430 IAs at the end of the first quarter of
fiscal 2007, a net increase of 12 from a year ago in an extremely competitive
recruiting environment. Fee-related revenue as a percentage of total Private
Client Services' revenue decreased 4.2 percentage points to 20.0% compared to
the same period a year ago.
Expenses for Q1/07 were $55.2 million, up $24.2 million, or 78.0%. The
largest increases in expenses were recorded in incentive compensation expense,
up $15.8 million, or 89.8%, due to the increase in revenue for the quarter.
Other overhead expenses included interest, up $3.0 million, or 231.1%; and
general and administrative expense, up $3.2 million, or 113.1%. The largest
components of general and administrative expense were client expenses, up $1.3
million due to increased provisions related to client activity; promotion and
travel, up $0.7 million, which was required to support the overall increase in
business activity due to corporate expansion, and other expenses, up
$1.1 million, pertaining to regulatory expenses.
Income before income taxes for the quarter was $17.1 million, up 98.2%
from the same period a year ago.
<<
Canaccord Adams
-------------------------------------------------------------------------
Year-
(C$ thousands, except employees Three months ended June 30 over-year
and % amounts) 2006 2005 increase
-------------------------------------------------------------------------
Canaccord Adams(1)
Revenue $ 125,106 54,457 129.7%
Expenses
Incentive compensation 65,948 28,781 129.1%
Salaries and benefits 3,188 1,287 147.7%
Other overhead expenses 22,386 9,396 138.3%
------------------------------------
Total Expenses $ 91,522 39,464 131.9%
Income before income taxes 33,584 14,993 124.0%
Number of employees 481 293 64.2%
-------------------------------------------------------------------------
US geographic segment(2)
Revenue $ 22,625 - n.m.
Expenses - n.m.
Incentive compensation 12,303 - n.m.
Salaries and benefits 1,754 - n.m.
Other overhead expenses 7,144 - n.m.
------------------------------------
Total Expenses $ 21,201 - n.m.
Income before income taxes 1,424 - n.m.
Number of employees 154 - n.m.
-------------------------------------------------------------------------
Canaccord Adams, excluding the
US geographic segment
Revenue $ 102,481 54,457 88.2%
Expenses
Incentive compensation 53,645 28,781 86.4%
Salaries and benefits 1,434 1,287 11.4%
Other overhead expenses 15,242 9,396 62.2%
------------------------------------
Total Expenses $ 70,321 39,464 78.2%
Income before income taxes 32,160 14,993 114.5%
Number of employees 327 293 11.6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes the global capital markets division of Canaccord Capital
Corporation in Canada; Canaccord Adams Limited in the UK; and
Canaccord Adams Inc. and Canaccord Capital Corporation (USA), Inc. in
the US.
(2) US geographic segment includes the operations of Canaccord Adams Inc.
and Canaccord Capital Corporation (USA), Inc.'s capital markets
activities only.
n.m.: not meaningful
>>
Revenue in this business segment is generated from commissions and fees
earned in connection with investment banking transactions and institutional
sales and trading activity as well as trading gains and losses from
Canaccord's principal and international trading operations. Contribution to
Canaccord Adams' revenue comes from three regions: Canada, the UK, and most
recently, from the US through the acquisition of Adams Harkness Financial
Group, Inc.
Three months ended June 30, 2006, compared with three months ended
June 30, 2005
Revenue from Canaccord Adams in Q1/07 was a quarterly record of
$125.1 million, up $70.6 million, or 129.7%, compared to the same quarter a
year ago due to increases in market share that also benefited from strong
capital markets activity in Canada, the US, and the UK. Excluding the
contribution of the US geographic segment, Q1/07 revenue would have been
$102.5 million, up $48.0 million, or 88.2%, compared to Q1/06.
Revenue from Canadian operations
Canaccord Adams in Canada generated a fiscal first quarter record revenue
of $53.6 million that was derived from four divisions: Capital Markets
($42.8 million, up $16.9 million, or 65.5%); International Trading ($7.4
million, up $4.0 million, or 115.6%); Registered Traders ($1.6 million, up
$1.1 million, or 205.3%); and Fixed Income $1.8 million, same as Q1/06. The
increase in this sector is primarily due to benefits from increased market
share in corporate finance and trading as a result of an increase in market
activity in the Canadian equity markets during Q1/07, largely due to rising
global demand for commodities and Canadian equities.
Revenue from UK operations
Operations related to Canaccord Adams Limited in the UK include
institutional sales and trading, corporate finance, and research teams.
Revenue in this business was an all-time quarterly record of $48.9 million, up
$26.1 million, or 114.1%, from Q1/06. This increase is a result of Canaccord
Adams' leadership position as a Nominated Advisor/Broker on AIM, increasing
liquidity and international interest in that market, and the successful
expansion of our global securities distribution platform.
Revenue from US operations
The US geographic segment's results reflect the contribution of Canaccord
Capital Corporation (USA), Inc. and Canaccord Adams Inc. (formerly the
operating subsidiary of Adams Harkness Financial Group, Inc., acquired on
January 3, 2006). Operational results for this new geographic segment are
being reported separately as of January 3, 2006, and therefore, have no fiscal
Q1 historical data for comparative purposes. Q1/07 revenue for Canaccord Adams
in the US was $22.6 million, representing 11.0% of Canaccord's total revenue.
Expenses for Q1/07 were $91.5 million, up $52.1 million, or 131.9%.
Excluding expenses from Canaccord Adams' US geographic segment, expenses would
have been $70.3 million, up $30.9 million, or 78.2%. The largest increases in
non-compensation expenses were in trading costs, up $3.6 million, reflecting
the addition of Canaccord Adams Inc.; general and administrative expense, up
$4.8 million related to higher business activity; and hiring incentives, up
$1.0 million, related to ongoing hiring costs and the retention costs
associated with the acquisitions of Adams Harkness Financial Group, Inc. and
Enermarket Solutions Ltd.
The increase in incentive compensation for the quarter of $37.2 million,
or 129.1%, is largely attributed to the 129.7% increase in revenue, which
resulted in higher payouts for the period. Also contributing to this increase
was the introduction of Canaccord's Employee Stock Incentive Plan (ESIP) in
Q2/06, which was primarily offered to key Canaccord Adams' employees. Salary
and benefits expense for the quarter increased by 147.7% compared to a year
ago, due to the fact that the US geographic segment added $1.4 million in new
salaries and benefits for the quarter. For the quarter, the total compensation
expense payout as a percentage of revenue was 55.3%, up 0.1 percentage points
compared to 55.2% for the same period a year ago.
The largest components of other non-compensation overhead expenses were
general and administrative expenses, up $4.8 million; premises and equipment,
up $1.7 million; and communication and technology, up $2.4 million related to
expansion and upgrades of our premises globally. The largest increase in
general and administrative expenses was promotion and travel, up $2.0 million,
to support the overall increase in business activity due to corporate
expansion. General and administrative expenses incurred by Canaccord Adams
Inc. in the US were $2.1 million, or 24.1%, of Canaccord Adams' overall
general and administrative expenses. Excluding Canaccord Adams Inc.'s
operations in the US during Q1/07, general and administrative expenses for
Canaccord Adams would have been $6.7 million, up $2.8 million, or 71.8%,
compared to Q1/06.
Income before income taxes for the quarter was $33.6 million, up
$18.6 million, or 124.0%, compared to the same quarter a year ago.
<<
Other segment
-------------------------------------------------------------------------
Year-
(C$ thousands, except employees Three months ended June 30 over-year
and % amounts) 2006 2005 increase
-------------------------------------------------------------------------
Revenue 8,735 4,930 77.2%
Expenses
Incentive compensation 5,639 2,288 146.5%
Salaries and benefits 5,875 4,903 19.8%
Other overhead expenses 8,699 5,912 47.1%
------------------------------------
Total Expenses 20,213 13,103 54.3%
(Loss) before income taxes (11,478) (8,173) 40.4%
Number of employees 343 328 4.6%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
>>
The Other segment includes correspondent brokerage services, interest,
foreign exchange revenue and expenses not specifically allocable to the
Private Client Services and Canaccord Adams divisions. Also included in this
segment are Canaccord's operations and support services, which are responsible
for front and back office information technology systems, compliance and risk
management, operations, finance, and all administrative functions.
Three months ended June 30, 2006, compared with three months ended
June 30, 2005
Revenue for the three months ended June 30, 2006, was $8.7 million, up
$3.8 million, or 77.2%, compared to the same quarter a year ago, and is
primarily attributed to an increase in foreign exchange revenue, bank interest
and security rebate revenue.
Expenses for Q1/07 were $20.2 million, up $7.1 million, or 54.3%. The
largest increases in expenses were recorded in incentive compensation, up $3.4
million; salaries and benefits, up $1.0 million; and general and
administrative expense, up $1.1 million, mainly attributable to increases in
promotion and travel, up $0.4 million.
Loss before income taxes was $11.5 million in the first quarter of fiscal
2007, up $3.3 million, or 40.4%, compared to a loss of $8.2 million in the
same quarter a year ago. This is mainly due to a one time pre-tax gain of $1.6
million from the disposal of an investment in the Bourse de MontrDeal in
Q1/06. Had Canaccord not realized such gain in Q1/06, loss before income taxes
in Q1/07 would have increased by $1.7 million, or 17.1%. Another contributing
factor to the increase in loss is due to higher incentive compensation
expenses related to higher profitability.
Financial conditions
Below are specific changes in selected balance sheet items.
Accounts receivable
Client security purchases are entered into either on a cash or margin
basis. When securities are purchased on margin, Canaccord extends a loan to
the client for the purchase of securities, using securities purchased and/or
securities in the client's account as collateral. Therefore, the clients'
accounts receivable balance of $428.0 million may vary significantly on a
day-to-day basis and is based on trading volumes and market activity. As at
June 30, 2006, total accounts receivable were $1,154.5 million compared to
$1,540.0 million as at March 31, 2006. Also included in total accounts
receivable are receivables from brokers and investment dealers totalling
$368.3 million; $306.6 million in RRSP cash balances held in trust; and other
receivables totalling $51.5 million.
Cash and cash equivalents
Cash and cash equivalents were $377.0 million as of June 30, 2006,
compared to $370.5 million as of March 31, 2006. Significant sources of cash
include net income of $25.9 million and securities sold short of
$72.8 million. Uses of cash include a decrease in accounts receivable of
$388.1 million; a decrease in securities owned of $9.0 million; the payment of
dividends of $3.8 million; income taxes payable of $6.9 million; and the
decrease in accounts payable of $474.4 million.
Call loans
Loan facilities utilized by the company may vary significantly on a
day-to-day basis and depend on securities trading activity. Amounts borrowed
pursuant to these call loan facilities, at June 30, 2006, totalled
$0.6 million.
Off-balance sheet arrangements
On June 30, 2006, Canaccord had an irrevocable standby letter of credit
from one of its banks in the amount of $1.3 million as a rent guarantee for
our leased premises in the UK. Canaccord Adams has also entered into
irrevocable standby letters of credit from a financial institution totalling
$1.6 million as rent guarantees for its leased premises in Boston, New York
and San Francisco. As of June 30, 2006, the total outstanding balances were
zero.
Liquidity and capital resources
Canaccord has a capital structure underpinned by shareholders' equity,
which is comprised of share capital, retained earnings and cumulative foreign
currency translation adjustments. On June 30, 2006, cash and cash equivalents
net of call loans were $376.4 million, up $10.6 million from $365.8 million as
of March 31, 2006. During the first quarter fiscal 2007 ended June 30, 2006,
financing activities used cash in the amount of $2.8 million, which was
primarily due to payment of dividends of $3.8 million, and offset by a
$1.0 million for the decrease in unvested common share purchase loans(1)
related to Canaccord's ESIP and other stock plans. Investing activities used
cash in the amount of $0.4 million for the purchase of equipment and leasehold
improvement. A further reduction in cash of $1.1 million was attributed to the
effect of foreign exchange on cash balances. Operating activities provided
cash in the amount of $14.9 million, which was due to net changes in non-cash
working capital items, net income and items not affecting cash.
Canaccord's business requires capital for operating and regulatory
purposes. The current assets reflected on Canaccord's balance sheet are highly
liquid. The majority of the positions held as securities owned are readily
marketable and all are recorded at their market value. The market value of
these securities fluctuates daily as factors such as changes in market
conditions, economic conditions and investor outlook affect market prices.
Client receivables are secured by readily marketable securities and are
reviewed daily for impairment in value and collectibility. Receivables and
payables from brokers and dealers represent the following: current open
transactions which generally settle within the normal three-day settlement
cycle; collateralized securities that are borrowed and/or loaned in
transactions that can be closed within a few days on demand; and balances due
to introducing brokers representing net balances in connection with their
client accounts.
In fiscal Q1/07, Canaccord entered into a new tenancy agreement for its
premises in London, England.
The following table summarizes Canaccord's consolidated long-term
contractual obligations as of June 30, 2006.
<<
Contractual obligations payments due by period
-----------------------------------------------
Less than 1-3 4-5 After
(C$ in thousands) Total 1 year years years 5 years
-------------------------------------------------------------------------
Premises and equipment
operating leases 187,305 18,894 39,278 37,177 91,956
-------------------------------------------------------------------------
>>
Credit facilities
Canaccord has credit facilities with Canadian, US and UK banks in an
aggregate amount of $342.3 million. These credit facilities, consisting of
call loans, letters of credit and daylight overdraft facilities, are
collateralized by either unpaid securities and/or securities owned by
Canaccord.
<<
Outstanding share data
-------------------------------------------------------------------------
Outstanding shares as of June 30
2006 2005
-------------------------------------------------------------------------
Issued shares outstanding - basic(1) 45,906,368 45,413,175
Issued shares outstanding - diluted(2) 47,827,350 46,116,268
Average shares outstanding - basic 45,906,368 45,426,032
Average shares outstanding - diluted 47,998,175 46,129,125
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes 703,093 unvested shares that are outstanding relating to
share purchase loans for recruitment and retention programs.
(2) Includes 703,093 shares related to share purchase loans referred to
in footnote (1) above.
>>
As of June 30, 2006, Canaccord had 47,827,350 common shares issued and
outstanding on a diluted basis, up 1,711,082 common shares from June 30, 2005,
comprising 1,420,342 common shares issued in connection with acquisitions,
691,940 common shares issued as part of the employee treasury stock purchase
plan offset by a reduction of 401,200 common shares, which were purchased and
cancelled during fiscal year 2006 through the normal course issuer bid (NCIB).
On December 22, 2005, Canaccord renewed its NCIB for one year commencing
on December 29, 2005, and ending on December 28, 2006. The NCIB allows for
purchases of up to 5% of Canaccord's issued and outstanding shares at the time
of the renewal. As of August 4, 2006, there are 2,324,233 common shares
available for purchase under the NCIB. Canaccord has agreed with the relevant
regulators to update its shareholders at a minimum rate of every two weeks if
purchases are made, and will update shareholders immediately if more than 1%
of its outstanding shares are purchased in one day. Going forward and from
time to time, Canaccord may purchase its common shares for the purpose of
resale or cancellation.
On January 3, 2006, Canaccord closed the acquisition of Adams Harkness
Financial Group, Inc., which was a privately held Boston, Massachusetts-based
institutional investment bank. The consideration consisted of US$8 million in
cash and the issuance of 1,342,696 common shares from treasury valued at US$12
million. These shares will be held in escrow, with annual releases of
one-third per year, beginning on June 30, 2006, and ending on June 30, 2008.
In connection with the acquisition of Adams Harkness Financial Group,
Inc., a retention plan was established, which provides for the issuance of up
to 1,118,952 shares after a three-year vesting period. The total number of
shares to be vested is also based on revenue earned by Canaccord Adams Inc.
subsequent to the date of acquisition. The aggregate number of common shares
that will vest and will therefore be issued at the end of the vesting period
will be that number, which is equal to the revenue earned by Canaccord Adams
Inc. during the vesting period divided by US$250.0 million multiplied by
1,118,952, subject to the maximum of 1,118,952 common shares adjusted for
forfeitures and cancellations. As such revenue levels are achieved during the
vesting period, the associated proportion of the retention payment will be
recorded as development costs, and the applicable number of retention shares
will be included in weighted average diluted common shares outstanding.
As of August 3, 2006, Canaccord had 47,827,350 common shares outstanding
on a diluted basis.
International financial centres
Canaccord is a member of the International Financial Centres of both
British Columbia and QuDebec, which provide certain tax and financial benefits
pursuant to the International Financial Activity Act of British Columbia and
the Act Respecting International Financial Centres of QuDebec. As such,
Canaccord's overall income tax rate is less than the rate that would otherwise
be applicable.
Foreign exchange
Canaccord manages its foreign exchange risk by periodically hedging
pending settlements in foreign currencies. Realized and unrealized gains and
losses related to those contracts are recognized in income during the year. As
of June 30, 2006, forward contracts outstanding to sell US dollars had a
notional amount of US$8.5 million, down $3.8 million from a year ago. Forward
contracts outstanding to buy US dollars had a notional amount of
US$14.5 million, up US$6.3 million compared to a year ago. The fair value of
these contracts was nominal. A certain number of Canaccord's operations in
London, England, are conducted in British pounds sterling; however, any
foreign exchange risk in respect of these transactions is generally limited as
pending settlements on both sides of the transaction are typically in British
pounds sterling.
Critical accounting estimates
The following is a summary of Canaccord's critical accounting estimates.
Canaccord's accounting policies are in accordance with Canadian GAAP and are
described in Note 1 to the audited consolidated financial statements for the
year ended March 31, 2006. The accounting policies described below require
estimates and assumptions that affect the amounts of assets, liabilities,
revenues and expenses recorded in the financial statements. Because of their
nature, estimates require judgement based on available information. Actual
results or amounts could differ from estimates, and the difference could have
a material impact on the financial statements.
Revenue recognition and valuation of securities
Securities held, including share purchase warrants and options, are
recorded at market value and, accordingly, the interim consolidated financial
statements reflect unrealized gains and losses associated with such
securities. In the case of publicly traded securities, market value is
determined on the basis of market prices from independent sources such as
listed exchange prices or dealer price quotations. Adjustments to market
prices are made for liquidity relative to the size of the position and holding
periods and other resale restrictions, if applicable. Investments in illiquid
or non-publicly traded securities are valued on a basis determined by
management using information available and prevailing market prices of
securities with similar qualities and characteristics, if known.
There is inherent uncertainty and imprecision in estimating the factors
which can affect value and in estimating values generally. The extent to which
valuation estimates differ from actual results will affect the amount of
revenue or loss recorded for a particular security position in any particular
period. With Canaccord's security holdings consisting primarily of publicly
traded securities, its procedures for obtaining market prices from independent
sources, the validation of estimates through actual settlement of transactions
and the consistent application of its approach from period to period,
Canaccord believes that the estimates of market value recorded are reasonable.
Provisions
Canaccord records provisions related to pending or outstanding legal
matters and doubtful accounts related to client receivables, loans, advances
and other receivables. Provisions in connection with legal matters are
determined on the basis of management's judgement in consultation with legal
counsel considering such factors as the amount of the claim, the validity of
the claim, the possibility of wrongdoing by an employee of Canaccord and
precedents. Client receivables are generally collateralized by securities and,
therefore, any impairment is generally measured after considering the market
value of the collateral. Provisions in connection with other doubtful accounts
are generally based on management's assessment as to the likelihood of
collection and the recoverable amount. Provisions are also recorded utilizing
discount factors in connection with syndicate participation.
Tax
Accruals for income tax liabilities require management to make estimates
and judgements with respect to the ultimate outcome of tax filings and
assessments. Actual results could vary from these estimates. Canaccord
operates within different tax jurisdictions and is subject to assessment in
these different jurisdictions. Tax filings can involve complex issues, which
may require an extended period of time to resolve in the event of a dispute or
re-assessment by tax authorities. Canaccord believes that adequate provisions
for income taxes have been made for all years.
Goodwill and other intangible assets
As a result of the acquisitions of Adams Harkness Financial Group, Inc.
and Enermarket Solutions Ltd., Canaccord acquired goodwill and other
intangible assets. Goodwill is the cost of the acquired companies in excess of
the fair value of their net assets, including other intangible assets, at the
acquisition date. The identification and valuation of other intangible assets
required management to use estimates and make assumptions. Goodwill will be
assessed for impairment at least annually, or whenever a potential impairment
may arise as a result of an event or change in circumstances, to ensure that
the fair value of the reporting unit to which goodwill has been allocated is
greater than or at least equal to its original value. Fair value will be
determined using valuation models that take into account such factors as
projected earnings, earnings multiples, discount rates, other available
external information and market comparables. The determination of fair value
will require management to apply judgement in selecting the valuation models
and assumptions and estimates to be used in such models and value
determinations. These judgements will affect the determination of fair value
and any resulting impairment changes.
Other intangible assets are amortized over their estimated useful lives
and tested for impairment periodically or whenever a potential impairment may
arise as a result of an event or change in circumstances. Management must
exercise judgement and make use of estimates and assumptions in determining
the estimated useful lives of other intangible assets and in periodic
determinations of value.
Stock-based compensation
In connection with the acquisition of Adams Harkness Financial Group,
Inc., Canaccord agreed to issue common shares to certain key employees of
Adams Harkness upon the expiry of a three-year vesting period, with the number
of common shares to be adjusted in the event that certain revenue targets are
not achieved. Canaccord uses the fair-value method of accounting for these
payments, which includes making estimates in respect of forfeiture rates.
Under this method the compensation expense is recognized over the relevant
vesting period on a pro-rata basis as revenue targets are achieved. The fair
value of the stock-based compensation was determined as of the grant date.
Related party transactions
Security trades executed by Canaccord for employees, officers and
shareholders of Canaccord are conducted in accordance with terms and
conditions applicable to all clients of Canaccord. Commission income on such
transactions in the aggregate is not material in relation to the overall
operations of Canaccord.
Dividend policy
Although dividends are expected to be declared and paid quarterly, the
Board of Directors, in its sole discretion, will determine the amount and
timing of any dividends. All dividend payments will depend on general business
conditions, Canaccord's financial condition, results of operations and capital
requirements and such other factors as the Board determines to be relevant.
Canaccord intends to continue to pay a $0.08 regular quarterly common share
dividend in respect of Q1/07 and for each quarter in fiscal year 2007.
Dividend declaration
For the first quarter of fiscal 2007, the Board of Directors declared a
common share dividend of $0.08 per share, which is payable on September 8,
2006, to shareholders of record on August 25, 2006. The common share dividend
payment to common shareholders will total approximately $3.8 million or
approximately 14.7% of first quarter net income.
Financial instruments
In the normal course of business Canaccord utilizes certain financial
instruments to manage its exposure to credit risk, market risk and foreign
exchange risk as mentioned above.
Historical quarterly information
Canaccord's revenue from an underwriting transaction is recorded only
when the transaction has closed. Consequently, the timing of revenue
recognition can materially affect Canaccord's quarterly results. The expense
structure of Canaccord's operations is geared towards providing service and
coverage in the current market environment. If general capital markets
activity were to drop significantly, Canaccord could experience losses.
The following table provides selected quarterly financial information for
the nine most recently completed financial quarters ended June 30, 2006. This
information is unaudited, but reflects all adjustments of a recurring nature,
which are, in the opinion of management, necessary to present a fair statement
of the results of operations for the periods presented. Quarter-to-quarter
comparisons of financial results are not necessarily meaningful and should not
be relied upon as an indication of future performance.
<<
Fiscal 2007 Fiscal 2006
(C$ thousands, except ----------- -----------
per share amounts) Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue
Private Client Services 72,286 78,422 54,731 52,411 39,630
Canaccord Adams 125,106 120,243 98,918 60,048 54,457
Other 8,735 8,409 5,021 6,195 4,930
--------------------------------------------
Total Revenue 206,127 207,074 158,670 118,654 99,017
Net income 25,942 30,070 24,248 15,754 11,078
EPS - basic 0.57 0.66 0.55 0.35 0.24
EPS - diluted 0.54 0.63 0.52 0.34 0.24
Fiscal 2005
(C$ thousands, except -----------
per share amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------
Revenue
Private Client Services 56,391 46,964 36,499 38,322
Canaccord Adams 81,444 72,368 46,671 39,171
Other 5,094 4,351 2,431 3,072
-----------------------------------
Total Revenue 142,929 123,683 85,601 80,565
Net income 17,307 16,743 6,123 8,406
EPS - basic 0.38 0.37 0.14 0.28
EPS - diluted 0.38 0.36 0.13 0.23
>>
Risks
The securities industry and Canaccord's activities are by their very
nature subject to a number of inherent risks. Economic conditions, competition
and market factors such as volatility in the Canadian and international
markets, interest rates, commodity prices, market prices, trading volumes and
liquidity will have a significant impact on Canaccord's profitability. An
investment in the common shares of Canaccord involves a number of risks,
including market, liquidity, credit, operational, legal and regulatory risks,
which could be substantial and are inherent in Canaccord's business. Private
Client Services' revenue is dependent on trading volumes and, as such, is
dependent on the level of market activity and investor confidence. Canaccord
Adams' revenue is dependent on financing activity by corporate issuers and the
willingness of institutional clients to actively trade and participate in
capital markets transactions. There may also be a lag between market
fluctuations and changes in business conditions and the level of Canaccord's
market activity and the impact that these factors have on Canaccord's
operating results and financial position. Furthermore, Canaccord may not
achieve its growth plans associated with the acquisition and integration of
Adams Harkness Financial Group, Inc. In addition to the risks previously
mentioned above, other risks have not changed substantially from those set out
in the Annual Report of June 26, 2006.
Additional information
A comprehensive discussion of our business, strategies, objectives and
risks is available in the Management's Discussion and Analysis, Annual
Information Form and audited annual financial statements in Canaccord's 2006
Annual Report, which are available on our Web site at
www.canaccord.com/investor and on SEDAR at www.sedar.com.
Additional information relating to Canaccord, including Canaccord's
Annual Information Form and interim filings can also be found on our Web site
and on SEDAR at www.sedar.com.
<<
-------------------
(1) These are forgivable loans granted to key employees in connection to
the purchase of common stock in the open market under the ESIP and
other incentive plans.
Interim Consolidated Financial Statements
Canaccord Capital Inc.
Unaudited
For the three months ended June 30, 2006
(Expressed in Canadian dollars)
Canaccord Capital Inc.
INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands of dollars)
As at June 30, March 31, June 30,
2006 2006 2005
$ $ $
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents 376,986 370,507 282,485
Securities owned, at market (note 2) 194,061 203,020 122,745
Accounts receivable (notes 4 and 8) 1,154,454 1,539,998 855,730
Income taxes recoverable - - 1,222
-------------------------------------------------------------------------
Total current assets 1,725,501 2,113,525 1,262,182
Equipment and leasehold improvements 24,449 25,750 14,131
Notes receivable - - 42,731
Future income taxes 11,872 10,769 4,109
Goodwill and other intangible assets
(note 5) 27,575 27,929 -
-------------------------------------------------------------------------
1,789,397 2,177,973 1,323,153
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Call loans 556 4,684 819
Securities sold short, at market
(note 2) 109,923 37,169 49,180
Accounts payable and accrued
liabilities (notes 4 and 8) 1,359,198 1,832,956 1,003,765
Income taxes payable 8,522 15,334 -
-------------------------------------------------------------------------
Total current liabilities 1,478,199 1,890,143 1,053,764
Notes payable - - 42,731
-------------------------------------------------------------------------
Total liabilities 1,478,199 1,890,143 1,096,495
-------------------------------------------------------------------------
Commitments and contingencies (note 10)
Shareholders' equity
Share capital (note 6) 158,718 157,644 151,100
Cumulative foreign currency
translation adjustment (6,099) (6,277) (3,010)
Retained earnings 158,579 136,463 78,568
-------------------------------------------------------------------------
Total shareholders' equity 311,198 287,830 226,658
-------------------------------------------------------------------------
1,789,397 2,177,973 1,323,153
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Canaccord Capital Inc.
INTERIM CONSOLIDATED STATEMENTS OF
OPERATIONS AND RETAINED EARNINGS (Unaudited)
(in thousands of dollars,
except per share amounts)
For the three months ended
--------------------------
June 30, June 30,
2006 2005
$ $
-------------------------------------------------------------------------
REVENUE
Commission 78,054 40,811
Investment banking 102,840 49,505
Principal trading 7,784 (1,741)
Interest 13,638 8,243
Other 3,811 2,199
-------------------------------------------------------------------------
206,127 99,017
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EXPENSES
Incentive compensation 104,955 48,650
Salaries and benefits 12,493 9,226
Trading costs 8,559 4,312
Premises and equipment 5,937 3,626
Communication and technology 5,063 3,690
Interest 4,982 2,491
General and administrative 19,107 10,016
Amortization 1,989 1,118
Development costs 3,867 2,091
Gain on disposal of investment (note 11) - (1,633)
-------------------------------------------------------------------------
166,952 83,587
-------------------------------------------------------------------------
Income before income taxes 39,175 15,430
Income tax expense (recovery)
Current 14,336 4,469
Future (1,103) (117)
-------------------------------------------------------------------------
Net income for the period 25,942 11,078
Retained earnings, beginning of period 136,463 72,564
Cash dividends (3,826) (5,074)
-------------------------------------------------------------------------
Retained earnings, end of period 158,579 78,568
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per share (note 6 (vi)) 0.57 0.24
Diluted earnings per share (note 6 (vi)) 0.54 0.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Canaccord Capital Inc.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands of dollars)
For the three months ended
--------------------------
June 30, June 30,
2006 2005
$ $
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income for the period 25,942 11,078
Items not affecting cash
Amortization 1,377 1,205
Future income tax recovery (1,103) (117)
Gain on disposal of investment - (1,633)
Changes in non-cash working capital
Decrease in securities owned 9,035 37,181
Decrease in accounts receivable 388,138 205,844
Increase in income taxes recoverable - (997)
Increase (decrease) in securities sold short 72,766 (56,348)
Decrease in accounts payable and accrued
liabilities (474,398) (249,330)
Decrease in income taxes payable (6,868) (6,737)
-------------------------------------------------------------------------
Cash provided by (used in) operating activities 14,889 (59,854)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in notes payable - 1,113
Decrease in unvested common share purchase loans 1,074 187
Redemption of share capital - (117)
Dividends paid (3,826) (5,074)
-------------------------------------------------------------------------
Cash used in financing activities (2,752) (3,891)
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of equipment and leasehold improvements (446) (1,571)
Increase in notes receivable - (1,113)
Proceeds on disposal of investment - 1,639
-------------------------------------------------------------------------
Cash used in investing activities (446) (1,045)
-------------------------------------------------------------------------
Effect of foreign exchange on cash balances (1,084) (3,244)
-------------------------------------------------------------------------
Increase (decrease) in cash position 10,607 (68,034)
Cash position, beginning of period 365,823 349,700
-------------------------------------------------------------------------
Cash position, end of period 376,430 281,666
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash position is comprised of:
Cash and cash equivalents 376,986 282,485
Call loans (556) (819)
-------------------------------------------------------------------------
376,430 281,666
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental cash flow information
Interest paid 4,939 1,685
Income taxes paid 21,614 12,622
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Canaccord Capital Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the three months ended June 30, 2006
(in thousands of dollars, except per share amounts)
Canaccord Capital Inc. (the "Company") is an independent full service
investment dealer. The Company has operations in each of the two
principal segments of the securities industry: private client services
and capital markets. Together these operations offer a wide range of
complementary investment products, brokerage services and investment
banking services to the Company's retail, institutional and corporate
clients.
Historically, the Company's operating results are characterized by a
seasonal pattern and it earns the majority of its revenue in the last two
quarters of its fiscal year. However, during the first quarter of fiscal
2007, the Company generated unusually strong revenue from North American
operations, and therefore, the traditional seasonality variances may be
less pronounced this fiscal year.
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
These interim unaudited consolidated financial statements have been
prepared by the Company in accordance with Canadian generally accepted
accounting principles ("GAAP") with respect to interim financial
statements, applied on a consistent basis. These interim unaudited
consolidated financial statements follow the same accounting principles
and methods of application as those disclosed in Note 1 to the Company's
audited consolidated financial statements as at and for the year ended
March 31, 2006 ("Audited Annual Consolidated Financial Statements").
Accordingly, they do not include all the information and footnotes
required for compliance with Canadian GAAP for annual financial
statements. These interim unaudited consolidated financial statements and
notes thereon should be read in conjunction with the Audited Annual
Consolidated Financial Statements.
The preparation of these interim unaudited consolidated financial
statements and the accompanying notes requires management to make
estimates and assumptions that affect the amounts reported. In the
opinion of management, these interim unaudited consolidated financial
statements reflect all adjustments (which include only normal, recurring
adjustments) necessary to state fairly the results for the periods
presented. Actual results could vary from these estimates and the
operating results for the interim periods presented are not necessarily
indicative of results that may be expected for the full year.
2. SECURITIES OWNED AND SECURITIES SOLD SHORT
June 30, 2006 March 31, 2006
------------- --------------
Securities Securities Securities Securities
owned sold short owned sold short
$ $ $ $
-------------------------------------------------------------------------
Corporate and government
debt 116,317 88,710 40,784 14,319
Equities and convertible
debentures 77,744 21,213 162,236 22,850
-------------------------------------------------------------------------
194,061 109,923 203,020 37,169
-------------------------------------------------------------------------
-------------------------------------------------------------------------
June 30, 2005
-------------
Securities Securities
owned sold short
$ $
-------------------------------------------------
Corporate and government
debt 66,822 29,592
Equities and convertible
debentures 55,923 19,588
-------------------------------------------------
122,745 49,180
-------------------------------------------------
-------------------------------------------------
As at June 30, 2006, corporate and government debt maturities range from
2006 to 2053 (March 31, 2006 - 2006 to 2053 and June 30, 2005 - 2005 to
2053) and bear interest ranging from 2.55% to 14.00% (March 31, 2006 and
June 30, 2005 - 2.05% to 14.00%).
3. FINANCIAL INSTRUMENTS
Foreign exchange risk
Foreign exchange risk arises from the possibility that changes in the
price of foreign currencies will result in losses. The Company
periodically trades certain foreign exchange contracts to manage and
hedge foreign exchange risk on pending settlements in foreign currencies.
Realized and unrealized gains and losses related to these contracts are
recognized in income during the year.
Forward contracts outstanding at June 30, 2006:
Notional amounts Average price Fair value
(millions of USD) (CAD/USD) Maturity (millions of USD)
-------------------------------------------------------------------------
To sell
US dollars $ 8.50 1.11 July 5, 2006 $0.1
To buy
US dollars $14.50 1.11 July 5, 2006 ($0.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Forward contracts outstanding at March 31, 2006:
Notional amounts Average price Fair value
(millions of USD) (CAD/USD) Maturity (millions of USD)
-------------------------------------------------------------------------
To sell
US dollars $90.85 $1.16 April 5, 2006 $0.1
To buy
US dollars $ 7.00 $1.16 April 3, 2006 ($0.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Forward contracts outstanding at June 30, 2005:
Notional amounts Average price Fair value
(millions of USD) (CAD/USD) Maturity (millions of USD)
-------------------------------------------------------------------------
To sell
US dollars $12.25 $1.23 July 5, 2005 $0.1
To buy
US dollars $ 8.25 $1.23 July 6, 2005 ($0.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts receivable
June 30, March 31, June 30,
2006 2006 2005
$ $ $
-------------------------------------------------------------------------
Brokers and investment dealers 368,262 567,308 238,507
Clients 428,005 607,118 346,098
RRSP cash balances held in trust 306,648 320,766 252,731
Other 51,539 44,806 18,394
-------------------------------------------------------------------------
1,154,454 1,539,998 855,730
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts payable and accrued liabilities
June 30, March 31, June 30,
2006 2006 2005
$ $ $
-------------------------------------------------------------------------
Brokers and investment dealers 300,774 397,733 283,279
Clients 919,481 1,172,511 621,693
Other 138,943 262,712 98,793
-------------------------------------------------------------------------
1,359,198 1,832,956 1,003,765
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts payable to clients include $306.6 million (March 31, 2006 -
$320.8 million and June 30, 2005 - $252.7 million) payable to clients for
RRSP cash balances held in trust.
Client security purchases are entered into on either a cash or margin
basis. In the case of a margin account, the Company extends a loan to a
client for the purchase of securities, using securities purchased and/or
other securities in the client's account as collateral. Amounts loaned to
any client are limited by margin regulations of the Investment Dealers
Association of Canada and other regulatory authorities and are subject to
the Company's credit review and daily monitoring procedures.
Amounts due from and to clients are due by the settlement date of the
trade transaction. Margin loans are due on demand and are collateralized
by the assets in the client accounts. Interest on margin loans and
amounts due to clients is based on a floating rate (June 30, 2006 - 8.00%
and 3.00%, respectively, March 31, 2006 - 7.50% and 2.50%, respectively,
and June 30, 2005 - 6.25% and 1.25%, respectively).
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill and other intangible
assets are as follows:
June 30, March 31, June 30,
2006 2006 2005
$ $ $
-------------------------------------------------------------------------
Goodwill 22,653 22,653 -
-------------------------------------------------------------------------
Other intangible assets
Balance at beginning of period 5,276 - -
Acquisitions - 5,650 -
Amortization 354 374 -
-------------------------------------------------------------------------
Balance at end of period 4,922 5,276 -
-------------------------------------------------------------------------
27,575 27,929 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other intangible assets reflect assigned values related to acquired brand
names, customer relationships and technology and are amortized on a
straight-line basis over their estimated useful life of four years.
Goodwill and other intangible assets relate to the Canaccord Adams
operating segment.
6. SHARE CAPITAL
June 30, March 31, June 30,
2006 2006 2005
$ $ $
-------------------------------------------------------------------------
Issued and fully paid
Share capital
Common shares 173,282 173,282 153,018
Unvested share purchase loans (20,202) (20,577) (2,958)
Contributed surplus 5,638 4,939 1,040
-------------------------------------------------------------------------
158,718 157,644 151,100
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Share capital of Canaccord Capital Inc. is comprised of the following:
(i) Authorized
Unlimited common shares without par value
Unlimited preferred shares without par value
(ii) Issued and fully paid
Common shares
No. of Amount
shares $
-------------------------------------------------------------
Balance, March 31, 2005 46,129,268 153,061
Shares cancelled (13,000) (43)
-------------------------------------------------------------
Balance, June 30, 2005 46,116,268 153,018
Shares issued for cash 691,940 6,574
Shares issued in connection
with acquisitions 1,420,342 15,022
Shares cancelled (401,200) (1,332)
-------------------------------------------------------------
Balance, June 30 and March 31, 2006 47,827,350 173,282
-------------------------------------------------------------
-------------------------------------------------------------
Pursuant to the Company's normal course issuer bid ("NCIB"), as approved
by the Toronto Stock Exchange, the Company was entitled to acquire up to
2,306,463, or 5.0%, of its shares from December 29, 2004 to December 28,
2005. Under the NCIB, the Company purchased for resale a total of 222,548
common shares between December 29, 2004 and March 31, 2005 and purchased
for cancellation 414,200 common shares during the twelve months ended
March 31, 2006 with a book value of $1.3 million for aggregate cash
consideration of $4.6 million. The excess has been recorded to
contributed surplus and retained earnings.
The Company renewed its NCIB and is currently entitled to acquire from
December 29, 2005 to December 28, 2006, up to 2,324,233 of its shares,
which represents 5% of its shares outstanding as of December 20, 2005.
There were no share transactions under the NCIB between December 20, 2005
and June 30, 2006.
(iii) Excess on redemption of common shares
The excess on redemption of common shares represents amounts paid to
shareholders, by the Company and its subsidiaries, on redemption of their
shares in excess of the book value of those shares at the time of
redemption. The excess on redemption of common shares has been charged
against contributed surplus.
For the three months ended
--------------------------
June 30, June 30,
2006 2005
$ $
-------------------------------------------------------------------------
Redemption price - 117
Book value - 43
-------------------------------------------------------------------------
Excess on redemption of common shares - 74
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(iv) Common share purchase loans
The Company provides forgivable common share purchase loans to employees
in order to purchase common shares. The unvested balance of forgivable
common share purchase loans is presented as a deduction from share
capital. The forgivable common share purchase loans are amortized over a
vesting period of three years. Contributed surplus represents the
amortization of unvested forgivable common share purchase loans.
(v) Distribution of acquired common shares
On November 24, 2005, the Company repurchased 132,000 common shares from
departed employees at cost for total cash consideration of $0.5 million.
These shares were subsequently distributed to existing employees at an
average market price of $14.00 per share for total cash proceeds of
$1.8 million. This excess on distribution of $1.3 million has been
credited to contributed surplus.
Contributed Surplus
$
-------------------------------------------------------------------------
Balance, March 31, 2005 898
Unvested share purchase loans 216
Excess on redemption of common shares (74)
-------------------------------------------------------------------------
Balance, June 30, 2005 1,040
Unvested share purchase loans and stock compensation plans 2,970
Excess on redemption of common shares (386)
Excess on distribution of acquired common shares 1,315
-------------------------------------------------------------------------
Balance, March 31, 2006 4,939
Unvested share purchase loans and stock compensation plans 699
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance, June 30, 2006 5,638
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(vi) Earnings per share
For the three months ended
--------------------------
June 30, June 30,
2006 2005
$ $
-------------------------------------------------------------------------
Basic earnings per share
Net income for the period 25,942 11,078
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number of common
shares (number) 45,906,368 45,426,032
Basic earnings per share 0.57 0.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings per share
Net income for the period 25,942 11,078
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number of common
shares (number) 45,906,368 45,426,032
Dilutive effect of unvested shares (number) 1,644,206 703,093
Dilutive effect of stock-based compensation
plans (number) (note 7) 447,601 -
-------------------------------------------------------------------------
Adjusted weighted average number of common
shares (number) 47,998,175 46,129,125
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings per share 0.54 0.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. STOCK-BASED COMPENSATION PLANS
Retention Plans
As described in the Audited Annual Consolidated Financial Statements, the
Company established two retention plans in connection with the
acquisitions of Enermarket and Adams Harkness.
The plan for Enermarket consists of the issuance of up to 25,210 common
shares of the Company which will be paid after a two-year vesting period.
The plan for Adams Harkness provides for the issuance of up to 1,118,952
common shares of the Company after a three-year vesting period. The
total number of shares which will vest is also based on revenue earned by
Canaccord Adams Inc. during the vesting period. The aggregate number of
common shares which vest will be that number which is equal to the
revenue earned by Canaccord Adams Inc. during the vesting period divided
by US$250.0 million multiplied by 1,118,952 subject to the maximum of
1,118,952 common shares adjusted for forfeitures and cancellations. As
such revenue levels are achieved during the vesting period, the
associated proportion of the retention payment will be recorded as a
development cost and the applicable number of retention shares will be
included in diluted common shares outstanding (Note 6(vi)).
Employee Treasury Stock Purchase Plan
In August 2005, the Company established an employee treasury stock
purchase plan under which the Company made a forgivable loan to an
employee for the purpose of paying 40% of the aggregate purchase price of
common shares of the Company issued from treasury. A repayable loan in
the amount of 35% of the aggregate purchase price of the common shares
was also made to the employee. Subject to continued employment, one-third
of the number of common shares purchased utilizing the forgivable loan
portion of the aggregate purchase will vest on each anniversary of the
date of the purchase and the forgivable loan portion related to amounts
vested will be forgiven. The applicable number of shares under this
employee treasury stock purchase plan will be included in diluted common
shares outstanding (Note 6(vi)).
The following table details the activity under the Company's retention
plans and employee treasury stock purchase plan:
For the three months ended
June 30, June 30,
2006 2005
--------------------------
Number of common shares subject to the
Enermarket retention plan:
Beginning of period 25,210 -
Grants - -
-------------------------------------------------------------------------
End of period 25,210 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common shares subject to the
Adams Harkness retention plan:
Beginning of period 1,046,219 -
Grants 72,733 -
Forfeitures (2,308) -
-------------------------------------------------------------------------
End of period 1,116,644 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common shares subject to the
employee treasury stock purchase plan:
Beginning of period 276,776 -
Issued - -
-------------------------------------------------------------------------
End of period 276,776 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Under the fair value method, the aggregate cost of the grants made under
the retention plans are estimated to be $12.0 million - $0.3 million
relating to Enermarket and $11.7 million (US$10.0 million) for Adams
Harkness. The cost of the retention plans will be recognized in the
financial statements of the Company in accordance with the vesting terms
of the respective plans.
The forgivable loan amount in respect of the common shares issued under
the employee treasury stock purchase plan is $2.6 million. This amount
will be recognized in the financial statements of the Company over the
vesting period on a straight-line basis.
8. RELATED PARTY TRANSACTIONS
Security trades executed by the Company for employees, officers and
directors are transacted in accordance with the terms and conditions
applicable to all clients. Commission income on such transactions in the
aggregate is not material in relation to the overall operations of the
Company.
Accounts receivable and accounts payable and accrued liabilities include
the following balances with related parties:
June 30, March 31, June 30,
2006 2006 2005
$ $ $
-------------------------------------------------------------------------
Accounts receivable 35,815 34,582 30,762
Accounts payable and accrued
liabilities 86,745 88,506 64,111
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. SEGMENTED INFORMATION
The Company has two operating segments:
Private Client Services - provides brokerage services and investment
advice to retail or private clients.
Canaccord Adams - includes investment banking, research and trading
activities on behalf of corporate, institutional and government clients
as well as principal trading activities in Canada, the United Kingdom
and the United States of America.
The Corporate and Other segment includes correspondent brokerage
services, interest and foreign exchange revenue and expenses not
specifically allocable to Private Client Services and Canaccord Adams.
The Company's industry segments are managed separately because each
business offers different services and requires different personnel and
marketing strategies. The Company evaluates the performance of each
business based on income (loss) before income taxes.
The Company does not allocate total assets or equipment and leasehold
improvements to the segments. Amortization is allocated to the segments
based on square footage occupied. There are no significant inter-segment
revenues.
For the three months ended June 30,
2006
-----------------------------------------------
Private Corporate
Client Canaccord and
Services Adams Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenues 72,286 125,106 8,735 206,127
Expenses 53,286 89,285 18,525 161,096
Amortization 410 950 629 1,989
Development, restructuring
and other costs 1,521 1,287 1,059 3,867
-------------------------------------------------------------------------
Income (loss) before
income taxes 17,069 33,584 (11,478) 39,175
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2005
-----------------------------------------------
Private Corporate
Client Canaccord and
Services Adams Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenues 39,630 54,457 4,930 99,017
Expenses 29,758 38,864 11,756 80,378
Amortization 380 445 293 1,118
Development, restructuring
and other costs 882 155 1,054 2,091
-------------------------------------------------------------------------
Income (loss) before
income taxes 8,610 14,993 (8,173) 15,430
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company's business operations are grouped into three geographic
segments as follows:
For the three months ended
--------------------------
June 30, June 30,
2006 2005
$ $
-------------------------------------------------------------------------
Canada
Revenue 133,250 76,184
Net income 13,103 5,960
Equipment and leasehold improvements 20,950 12,428
Goodwill and other intangible assets 4,521 -
United States
Revenue 23,985 -
Net income 1,648 -
Equipment and leasehold improvements 2,351 -
Goodwill and other intangible assets 23,054 -
United Kingdom
Revenue 48,892 22,833
Net income 11,191 5,118
Equipment and leasehold improvements 1,148 1,703
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES
Commitments
Subsidiaries of the Company are committed to approximate minimum lease
payments for premises and equipment over the next five years and
thereafter as follows:
$
-------------------------------------------------------------------------
2007 14,282
2008 18,798
2009 20,189
2010 18,978
2011 18,495
Thereafter 96,563
-------------------------------------------------------------------------
187,305
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contingencies
During the period, there have been no material changes to the Company's
contingencies from those described in Note 17 of the March 31, 2006
Audited Annual Consolidated Financial Statements.
11. GAIN ON DISPOSAL OF INVESTMENT
During the three months ended June 30, 2005, the Company recognized a
gain of $1,633 from the sale of its investment in shares of the Bourse de
MontrDeal.
12. SUBSEQUENT EVENT
Dividend
On August 3, 2006, the Board of Directors declared a common share
dividend of $0.08 per share payable on September 8, 2006, with a record
date of August 25, 2006.
13. CANADIAN AND INTERNATIONAL FINANCIAL REPORTING STANDARDS DIFFERENCES
These consolidated financial statements have been prepared in accordance
with Canadian GAAP with respect to interim financial statements. In
certain respects, International Financial Reporting Standards ("IFRS")
adopted by the International Accounting Standards Board differ from those
applied in Canada.
If IFRS were employed, there would be no material adjustment to net
income or earnings per share and consolidated shareholders' equity of the
Company for the three months ended June 30, 2006 and 2005.
The area of material difference between GAAP and IFRS and its impact on
the consolidated financial statements of the Company is in the
consolidated statement of changes in shareholders' equity. IFRS requires
the inclusion of a consolidated statement of changes in shareholders'
equity for each statement of income year, as follows:
June 30, June 30,
2006 2005
$ $
-------------------------------------------------------------------------
ISSUED AND PAID SHARE CAPITAL
Common shares
Balance at the beginning of the period 173,282 153,061
Shares cancelled - (43)
-------------------------------------------------------------------------
Balance at the end of the year 173,282 153,018
-------------------------------------------------------------------------
Unvested share purchase loans
Balance at the beginning of the period (20,577) (2,929)
Movements during the period 375 (29)
-------------------------------------------------------------------------
Balance at the end of the period (20,202) (2,958)
-------------------------------------------------------------------------
Contributed surplus
Balance at the beginning of the period 4,939 898
Movements during the period 699 142
-------------------------------------------------------------------------
Balance at the end of the period 5,638 1,040
-------------------------------------------------------------------------
158,718 151,100
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at the beginning of the period (6,277) (1,383)
Movements during the period 178 (1,627)
-------------------------------------------------------------------------
Balance at the end of the period (6,099) (3,010)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RETAINED EARNINGS
Balance at the beginning of the period 136,463 72,564
Net income for the period 25,942 11,078
Cash dividends (3,826) (5,074)
-------------------------------------------------------------------------
Balance at the end of the period 158,579 78,568
-------------------------------------------------------------------------
-------------------------------------------------------------------------
14. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the
fiscal 2006 annual financial statement presentation.
>>
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Canaccord Capital Inc. implements management transition and posts record first quarter fiscal 2007 results
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