Canaccord Capital Inc. reports fiscal second quarter 2010 results
Reporting profitable quarter and reinstatement of dividend
(All dollar amounts are stated in Canadian dollars unless otherwise indicated)
Second quarter 2010 vs. second quarter 2009
- Revenue of $123.7 million, up 11.6% or $12.9 million from $110.8
million
- Expenses of $115.9 million, up 0.1% or $0.1 million from $115.8
million
- Net income of $6.7 million compared to net loss of $5.4 million
- Annualized return on equity (ROE) of 6.9%, up from (5.0)%
- Diluted EPS of $0.12 compared to diluted loss per share of $0.11
Second quarter 2010 vs. first quarter 2010
- Revenue of $123.7 million, down 10.0% or $13.8 million from $137.5
million
- Expenses of $115.9 million, down 4.6% or $5.6 million from $121.5
million
- Net income of $6.7 million compared to net income of $9.1 million
- Annualized ROE of 6.9%, down from 9.7%
- Diluted EPS of $0.12 compared to diluted EPS of $0.16 in the first
quarter of 2010
First-half of fiscal 2010 (six months ended September 30, 2009) vs.
first-half of fiscal 2009 (six months ended September 30, 2008)
- Revenue of $261.2 million, down 7.9% or $22.3 million from $283.5
million
- Expenses of $237.4 million, down 10.4% or $27.6 million from $265.0
million
- Net income of $15.9 million compared to net income of $11.1 million
- Annualized ROE of 8.3%, up from 5.3%
- Diluted EPS of $0.28 compared to diluted EPS of $0.21 in the first
half of fiscal 2009
Financial condition at end of second quarter 2010 vs. second quarter 2009
- Cash and cash equivalents balance of $709.5 million, up $188.2
million from $521.3 million
- Working capital of $307.2 million, down $1.2 million from $308.4
million
- Total shareholders' equity of $388.2 million, down $26.1 million from
$414.3 million
- Book value per diluted common share for the period end was $6.78,
down 5.2% or $0.37 from $7.15
- On November 4, 2009 the Board of Directors considered the dividend
policy and approved a quarterly dividend of $0.05 per share payable
on December 10, 2009 with a record date of November 20, 2009. The
reinstatement of the quarterly dividend is an indication of the
Board's confidence in Canaccord's improved business environment.
Highlights of Operations:
- Canaccord Adams led or co-led 33 transactions globally to raise total
proceeds of $735.6 million(2) during fiscal Q2/10.
- Canaccord Adams participated in a total of 77 transactions globally
to raise total proceeds of $9.1 billion(1) during fiscal Q2/10.
- During Q2/10, Canaccord Adams led or co-led the following equity
fundraising transactions:
- US$336.0 million for Green Mountain Coffee Roasters Inc. on the
NASDAQ
- C$125.1 million for Aura Minerals on the TSX
- C$105.0 million for Bayou Bend Petroleum Ltd. on the TSX Venture
- US$86.3 million for Orexigen Therapeutics, Inc. on the NASDAQ
- US$84.5 million for Horsehead Holding Corp. on the NASDAQ
- (pnds stlg) 35.0 million for Xchanging Plc. on the LSE.
- Canaccord continued to rank first in Canada for block trading market
share on the TSX Venture, with 15.4% of market share in Q2/10, up
from 6.5% in Q2/09.(3)
- Canaccord Adams completed four Private Investment in Public Equity
(PIPE) transactions in the U.S. that raised US$202.4 million in
proceeds during fiscal Q2/10.(4)
- Assets under administration of $11.4 billion, down 1.7% from $11.6
billion at the end of Q2/09, and up 10.1% from $10.3 billion at the
end of Q1/10.
- Assets under management of $453 million, down 25.6% from $609 million
at the end of Q2/09, and up 2.3% from $443 million at the end of
Q1/10.
- At the end of fiscal Q2/10 (September 30, 2009), Canaccord had 334
Advisory Teams(4), down 7 from 341 Advisory Teams as of September 30,
2008, and down one Advisory Team from 335 teams as of June 30, 2009.
The decrease is largely due to a strategic review of our Wealth
Management division.
- On September 23, 2009, Canaccord Adams Limited (Canaccord's UK
subsidiary) announced the acquisition of Intelli Partners Limited and
its wholly owned subsidiary, Intelli Corporate Finance Limited - a
corporate advisory and broking boutique focused on investment
companies and the asset management sector. As a result of this
acquisition, which closed October 1, Canaccord Adams now has an
office in Edinburgh, Scotland.
- On September 29, 2009, Canaccord Capital Inc. announced the Company's
Board of Directors approved the change of its name to Canaccord
Financial Inc., effective December 1, 2009. This new company name
better reflects the broad scope and diversity of Canaccord's
operations and positions our brand to accommodate future growth.
Subsequent to September 30, 2009:
- On October 2, 2009, Canaccord announced the rebranding of the Private
Client Services division as Canaccord Wealth Management. This new
brand more accurately describes the scope and focus of Canaccord's
offerings for individual investors.
- Canaccord Wealth Management welcomed three new branches operating
under the Independent Wealth Management(5) operating model: Gatineau,
Quebec; Eglinton (Toronto), Ontario; and a second branch in Prince
George, B.C.. Additional branches are in the process of joining
Canaccord Wealth Management under this model.
------------------------------
(1) Source: FPinfomart and Company information
(2) Source: Canada Equity. Market share by trade volume
(3) Source: Placement Tracker.
(4) Advisory Teams are normally comprised of one or more Investment
Advisors (IAs) and their assistants and associates, who together
manage a shared set of client accounts. Advisory Teams that are led
by, or only include, an IA who has been licenced for less than three
years are not included in our Advisory Team count, as it typically
takes a new IA approximately three years to build an average-sized
book.
(5) Independent Wealth Management is a strategically complementary
segment of Canaccord's Wealth Management division that enables
advisors to operate as agents of Canaccord, while running their
offices independently.
LETTER TO SHAREHOLDERS
I am pleased to report another profitable quarter for Canaccord. We achieved this good result despite decreased market activity during the summer months, and finished the second quarter of fiscal 2010 with growing momentum in both our businesses. Our confidence in Canaccord's financial strength, even in challenging market conditions, encouraged the Board to reinstate the Company's quarterly dividend at
Financial overview
Revenue for the three months ended
Net income for the three months was
With this quarter's results, we are enhancing the transparency of Canaccord's Supplementary Financial Information by disclosing the impact of allocated costing on each division's income. This is intended to provide a broader view of our operating performance to all Canaccord employees and shareholders. The outcome of this evolving supplemental financial reporting is that our Capital Markets operations were profitable in the second quarter while Wealth Management was not profitable after intersegment cost allocations from Corporate and Other.
Canaccord Adams
Our capital markets and trading teams combined to deliver solid results for the three months ending
In
European markets have yet to recover with the same energy as those in
Canaccord Adams had a terrific quarter in the US, with strong business volumes through most of the three months. As a result, the unit turned in its best-ever quarterly performance, beating prior year revenue by nearly 70%. Canaccord Adams was the lead advisor on a significant joint venture between Metagenics and Alticor, two leaders in the branded supplement and medical food sector. We also co-led a US$336 million equity deal for Green Mountain Coffee. Both assignments indicate the growing diversification of our business beyond sectors Canaccord has traditionally served and the strength of our relationships and expertise in the US market. These and other transactions listed in the quarterly highlights added substantially to Canaccord Adams' income for the quarter.
Canaccord Wealth Management
We are committed to ensuring that Canaccord Wealth Management becomes a consistently profitable, value-creating division within the Canaccord family; admittedly, we are not there yet. Revenue for the three months ended
We are continuing to make investments in our quality improvement strategy at Canaccord Wealth Management.
The new Complete Canaccord platform is our commitment to both our clients and our Investment Advisors to deliver tailored investment products and solutions that help achieve their goals for wealth creation, management and transfer. Along with enhancing our in-house wealth management expertise, we are also ensuring that IAs have an opportunity to deepen their own knowledge at Canaccord University through programs in areas such as practice management, product knowledge, and tools and technology.
While assets under administration (AUA) declined marginally year-over-year, compared to the first three months of the current fiscal year AUA advanced 10% to
Looking ahead
At the end of the quarter, the Board approved a new name for our Company - Canaccord Financial Inc. The rebranding better reflects the broad scope of our operations, now and in the future, and it is an important step in the continual evolution of the firm. Evolution is a key concept at Canaccord. All of the initiatives currently underway - our growing share in the US, the expansion of our UK platform, the strategic realignment of our wealth management business, our undiminished focus on controlling costs - speak to Canaccord's commitment to evolve to serve the needs of our clients and to meet the expectations of our shareholders. We are optimistic about the direction of these changes and about Canaccord's ability to be a strong competitor in each of the markets and sectors we serve. And we are grateful to the dedicated men and women of Canaccord who are driving this evolution forward. It is only through their continuing efforts that we can sustain the very real gains that we are beginning to see.
Paul D. Reynolds
President & Chief Executive Officer
ACCESS TO QUARTERLY RESULTS INFORMATION:
Interested investors, the media and others may review this quarterly earnings release and supplementary financial information at canaccordfinancial.com.
CONFERENCE CALL AND WEBCAST PRESENTATION:
Interested parties can listen to our fiscal second quarter 2010 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
The conference call may be accessed live and archived on a listen-only basis via the Internet at: www.canaccordfinancial.com
Analysts and institutional investors can call in via telephone at:
- 416-646-3096 (within Toronto)
- 1-800-731-6941 (toll free outside Toronto)
- 0800-358-0857 (toll free from the United Kingdom)
A replay of the conference call can be accessed after
ABOUT CANACCORD FINANCIAL INC.:
An evolution of our Company
On
Through its principal subsidiaries, Canaccord Capital Inc. (CCI) is a leading independent, full-service financial services firm, with operations in two principal segments of the securities industry: wealth management and global capital markets. Since its establishment in 1950, Canaccord has been driven by an unwavering commitment to building lasting client relationships. We achieve this by generating value through comprehensive investment solutions, brokerage services and investment banking services for our individual, institutional and corporate clients. Canaccord has 32 offices worldwide, including 24 Wealth Management offices located across
FOR FURTHER INFORMATION, CONTACT:
North American media:
Scott Davidson
Managing Director, Global Head of Marketing & Communications
Phone: 416-869-3875
Email: [email protected]
London media:
Bobby Morse or Ben Willey
Buchanan Communications (London)
Phone: +44 (0) 207 466 5000
Email: [email protected]
Investor relations inquiries:
Joy Fenney
Vice President,
Investor Relations
Phone: 416-869-3515
Email: [email protected]
Nominated Adviser and Broker:
Marc Milmo or Jonny Franklin-Adams
Fox-Pitt, Kelton Limited
Phone: +44 (0) 207 663 6000
Email: [email protected]
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None of the information on Canaccord's Web site at canaccord.com should
be considered incorporated herein by reference.
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Management's Discussion and Analysis
Fiscal second quarter 2010 for the three months and six months ended
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 our financial condition and to assess results for the three- and six-month periods ended
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 that 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 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. Non-GAAP measures included are return on average common equity (ROE), assets under administration (AUA), assets under management (AUM), expenses as a % of revenue, and book value per diluted share.
Canaccord's capital is represented by shareholders' equity and, therefore, management uses ROE as a performance measure.
AUA and 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 from 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 Wealth Management business segment. AUM includes all assets managed on a discretionary basis under our programs generally described as or known as the Complete Canaccord Investment Counseling Program and Complete Canaccord Managed Accounts(1). Services provided include the selection of investments and the provision of investment advice. AUM are also administered by Canaccord and are included in AUA.
------------------------------
(1) Previously known as Canaccord's Alliance Accounts and Private
Investment Management.
BUSINESS OVERVIEW
Through its principal subsidiaries, Canaccord Capital Inc. (TSX & AIM: CCI) is a leading independent, full-service investment dealer in
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. Our business is affected by the overall condition of the North American and European equity markets, including seasonal fluctuations.
Business environment
The profit-taking retreat in both the commodity and global equity prices of late June to early July was sharply reversed by the many positive earnings surprises and a resumption of US dollar weakness. A very strong relationship developed throughout the quarter, as a weak US dollar equalled higher commodity and equity prices to aggressive traders.
Consumer spending, especially in the US, remained an ongoing concern as the job picture showed only mild improvement. Corporations were able to raise record debt at very cheap interest levels in September, leading to renewed M&A activity. Many US corporations saw earnings benefit from severe job cuts and foreign currency gains; however, the real challenge was revenue growth.
The advance of many markets and sustained low interest rate levels were a result of the massive liquidity injected by central banks and governments. Risk tolerance was raised and credit markets returned to near normalcy. As more news on the US economy emerged, investors and the media focused on more positive future outcomes. The consensus view was that the worst was over for the economy and the markets. By mid-August, markets had so vigorously advanced that many markets experienced a pull-back.
The economies of many emerging nations recovered during the quarter, and in the case of
Market Data
The TSX, TSX Venture, and AIM all experienced year-over-year gains in trading volumes during fiscal Q2/10; however volume on the NASDAQ fell by 24.1%. Compared to the previous quarter, the TSX Venture and AIM recorded an increase in trading volumes; however, the TSX and NASDAQ experienced a decline.
Financing values were up significantly on the TSX and TSX Venture and the NASDAQ compared to the same quarter last year, with increases of 268.5% and 240.0%, respectively. Compared to the previous quarter, financing values for the TSX and TSX-Venture were up 37.2%, while the NASDAQ was up 70%. The AIM also experienced increases in financings compared to both the previous quarter and the same quarter last year.
Trading volume by exchange (billions of shares)
-------------------------------------------------------------------------
July August September Fiscal Change Change
09 09 09 Q2/10 from from
fiscal fiscal
Q2/09 Q1/10
-------------------------------------------------------------------------
TSX 8.7 8.6 11.0 28.3 10.1% (14.5)%
TSX Venture 3.2 3.9 5.3 12.4 55.0% 11.7%
AIM 13.9 17.5 28.4 59.8 100.7% 8.1%
NASDAQ 15.2 13.5 15.1 43.8 (24.1)% (9.7)%
-------------------------------------------------------------------------
Source: TSX Statistics, LSE AIM Statistics, Thomson One
Total financing value by exchange
-------------------------------------------------------------------------
July August September Fiscal Change Change
09 09 09 Q2/10 from from
fiscal fiscal
Q2/09 Q1/10
-------------------------------------------------------------------------
TSX and TSX
Venture
(C$ billions) 5.5 3.0 11.4 19.9 268.5% 37.2%
AIM ((pnds stlg)
billions) 0.9 0.2 0.4 1.5 66.7% 36.4%
NASDAQ
(US$ billions) 2.9 5.9 11.6 20.4 240.0% 70.0%
-------------------------------------------------------------------------
Source: TSX Statistics, LSE AIM Statistics, Equidesk
Financing value for relevant AIM industry sectors
-------------------------------------------------------------------------
((pnds stlg) July August September Fiscal Change Change
millions, 09 09 09 Q2/10 from from
except for fiscal fiscal
percentage Q2/09 Q1/10
amounts)
-------------------------------------------------------------------------
Oil and gas 121.9 54.1 149.7 325.7 21.3% 15.9%
Mining 105.1 20.1 82.9 208.1 149.2% 75.6%
Pharmaceutical
and Biotech 23.0 6.9 0.9 30.8 104.0% (52.3)%
Media 35.4 14.1 3.2 52.7 n.m. 126.2%
Technology 15.3 18.4 4.2 37.9 3.6% (34.3)%
----------------------------------------------------------
Total (of
relevant
sectors) 300.7 113.6 240.9 655.2 61.5% 20.2%
-------------------------------------------------------------------------
Source: LSE AIM Statistics
n.m.: not meaningful
Financing value for relevant TSX and TSX Venture industry sectors
-------------------------------------------------------------------------
($ millions, July August September Fiscal Change Change
except for 09 09 09 Q2/10 from from
percentage fiscal fiscal
amounts) Q2/09 Q1/10
-------------------------------------------------------------------------
Oil and gas 948.5 558.3 762.9 2,269.7 115.1% (0.8)%
Mining 363.1 267.1 5,816.5 6,446.7 n.m. n.m.
Biotech 4.1 - - 4.1 (89.5)% 100.0%
Media - 57.5 - 57.5 100.0% 100.0%
Technology 20.2 2.9 6.8 29.9 70.9% (28.6)%
----------------------------------------------------------
Total (of
relevant
sectors) 1,335.9 885.8 6,586.2 8,807.9 n.m. 72.1%
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Source: FPinfomart
n.m.: not meaningful
ABOUT CANACCORD FINANCIAL INC.
An evolution of our Company
On
Through its principal subsidiaries, Canaccord Capital Inc. (CCI) is a leading independent, full-service financial services firm, with operations in two principal segments of the securities industry: wealth management and global capital markets. Since the establishment of its business in 1950, Canaccord has been driven by an unwavering commitment to building lasting client relationships. We achieve this by generating value through comprehensive investment solutions, brokerage services and investment banking services for our individual, institutional and corporate clients. Canaccord has 32 offices worldwide, including 24 Wealth Management offices located across
Canaccord Adams
Canaccord Adams offers mid-market corporations and institutional investors around the world an integrated platform for equity research, sales and trading, and investment banking services that is built on extensive operations in
- Canaccord's research analysts have deep knowledge of more than 600
companies across eight primary focus sectors: Mining and Metals,
Energy, Technology, Life Sciences, Consumer, Real Estate,
Infrastructure and Sustainability.
- Our Sales and Trading desk executes timely transactions for more than
1,500 institutional relationships around the world, operating as an
integrated team.
- With more than 65 skilled investment bankers, Canaccord Adams
provides clients with sector expertise, intimate knowledge and
insight, and broad equity transaction and M&A advisory experience.
- Our Fixed Income Operations in Canada and the UK cover a wide range
of money market instruments, federal crown corporations, strips,
euros, US Pays, gilts and structured products, as well as federal,
provincial and municipal bonds.
Revenue from Canaccord Adams 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.
Canaccord Wealth Management
On
Canaccord Wealth Management also continued to deliver on its committment to providing superior training and education to Investment Advisors. A new personal and professional development platform, Canaccord University, was launched to support skill-building initiatives in the areas of products, technology and tools, and practice management. Advisors at Canaccord Wealth Management participate in both external and internal training opportunities to continually equip themselves to best serve our clients' financial needs. Many Canaccord Investment Advisors have completed the training required for advanced industry designations such as Chartered Financial Analyst or Certified Investment Manager.
Revenue from Canaccord Wealth Management 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 Advisory Teams in respect of investment banking and venture capital transactions by Wealth Management clients.
Corporate and Other
This segment, described as Corporate and Other, includes correspondent brokerage services, bank and other interest revenue, foreign exchange gains and losses, and expenses not specifically allocable to either the Canaccord Adams or Canaccord Wealth Management 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.
CONSOLIDATED OPERATING RESULTS
Second quarter and first-half fiscal 2010 summary data(1)
-------------------------------------------------------------------------
(C$ thousands, Three months Six months
except ended Quarter- ended
per share, September 30 over- September 30 YTD-
employee and ------------------- quarter ------------------- over-YTD
% amounts) 2009 2008 change 2009 2008 change
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Canaccord
Capital Inc.
Revenue
Commission $56,628 $60,630 (6.6)% 112,084 132,626 (15.5)%
Investment
banking 47,620 34,024 40.0% 103,506 110,171 (6.0)%
Principal
trading 11,589 87 n.m. 23,059 5,998 n.m.
Interest 3,121 11,734 (73.4)% 6,597 24,063 (72.6)%
Other 4,786 4,354 9.9% 15,961 10,679 49.5%
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Total revenue $123,744 $110,829 11.6% $261,207 $283,537 (7.9)%
Expenses
Incentive
compensation 63,966 50,977 25.5% 132,429 133,704 (1.0)%
Salaries and
benefits 13,983 14,195 (1.5)% 27,785 29,638 (6.3)%
Other
overhead
expenses(2) 37,934 50,633 (25.1)% 77,137 101,642 (24.1)%
-------------------------------------------------------------------------
Total
expenses $115,883 $115,805 0.1% $237,351 $264,984 (10.4)%
Income (loss)
before income
taxes 7,861 (4,976) n.m. 23,856 18,553 28.6%
Net income
(loss) 6,746 (5,398) n.m. 15,858 11,061 43.4%
Earnings
(loss) per
share -
diluted 0.12 (0.11) n.m. 0.28 0.21 33.3%
Return on
average
common equity 6.9% (5.0)% 11.9p.p. 8.3% 5.3% 3.0p.p.
Book value
per share -
period end 6.78 7.15 (5.2)%
Number of
employees 1,539 1,688 (8.8)%
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(1) Data is considered to be GAAP except for ROE, book value per share
and number of employees.
(2) Consists of trading costs, premises and equipment, communication and
technology, interest, general and administrative, amortization and
development costs.
p.p.: percentage points
n.m.: not meaningful
Geographic distribution of revenue for the second quarter of fiscal
2010(1)
-------------------------------------------------------------------------
Three months Six months
ended Quarter- ended
(C$ thousands, September 30 over- September 30 YTD-
except quarter over-YTD
% amounts) 2009 2008 change 2009 2008 change
-------------------------------------------------------------------------
Canada $ 79,190 $ 80,775 (2.0)% $167,124 $189,673 (11.9)%
UK 13,774 13,096 5.2% 34,700 46,815 (25.9)%
US 30,137 18,284 64.8% 57,316 43,905 30.5%
Other
Foreign
Location 643 (1,326) (148.5)% 2,067 3,144 (34.3)%
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Total $123,744 $110,829 11.6% $261,207 $283,537 (7.9)%
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(1) For a business description of Canaccord's geographic distribution
please refer to the "About Canaccord Financial Inc." section on page
12.
Second quarter 2010 vs. second quarter 2009
On a consolidated basis, revenue is generated through five activities: commissions and fees associated with agency trading and private client wealth management activity, investment banking, principal trading, interest and other. Revenue for the three months ended
For the second quarter of fiscal 2010, revenue generated from commissions decreased by
Investment banking revenue was
Interest revenue was
Other revenue was
Second quarter revenue in
Revenue in the UK was
Revenue in the US was
First-half fiscal year 2010 vs. first-half fiscal year 2009
Revenue for the six months ended
Investment banking revenue was
Principal trading experienced an increase of
Year-to-date revenue in
Expenses as a percentage of revenue
-------------------------------------------------------------------------
Three months Six months
ended Quarter- ended
in September 30 over- September 30 YTD-
percentage quarter over-YTD
points 2009 2008 change 2009 2008 change
-------------------------------------------------------------------------
Incentive
compensation 51.7% 46.0% 5.7p.p. 50.7% 47.2% 3.5p.p.
Salaries and
benefits 11.3% 12.8% (1.5)p.p. 10.6% 10.4% 0.2p.p.
Other overhead
expenses(1) 30.7% 45.7% (15.0)p.p. 29.5% 35.8% (6.3)p.p.
-------------------------------------------------------------------------
Total 93.7% 104.5% (10.8)p.p. 90.8% 93.4% (2.6)p.p.
-------------------------------------------------------------------------
(1) Consists of trading costs, premises and equipment, communication and
technology, interest, general and administrative, amortization and
development costs.
p.p.: percentage points
Second quarter 2010 vs. second quarter 2009
Expenses for the three months ended
Incentive compensation expense was
The total compensation (incentive compensation plus salaries) payout as a percentage of consolidated revenue for Q2/10 was 63.0%, an increase of 4.2 percentage points from 58.8% in Q2/09. This was mainly due to a decreased proportion of non-incentive-based revenue in consolidated revenue.
First-half fiscal year 2010 vs. first-half fiscal year 2009
Expenses for the six months ended
Salaries and benefits expense was
Other overhead expenses
-------------------------------------------------------------------------
Three months Six months
ended Quarter- ended
(C$ thousands, September 30 over- September 30 YTD-
except quarter over-YTD
% amounts) 2009 2008 change 2009 2008 change
-------------------------------------------------------------------------
Trading
costs $ 7,002 $ 6,717 4.2% $ 14,326 $ 13,038 9.9%
Premises and
equipment 6,104 5,957 2.5% 11,986 11,742 2.1%
Communication
and
technology 5,245 6,539 (19.8)% 10,734 12,702 (15.5)%
Interest 492 3,354 (85.3)% 1,337 7,313 (81.7)%
General and
adminis-
trative 11,698 19,611 (40.3)% 23,586 38,888 (39.3)%
Amortization 1,906 2,072 (8.0)% 3,827 4,114 (7.0)%
Development
costs 5,487 6,383 (14.0)% 11,341 13,845 (18.1)%
-------------------------------------------------------------------------
Total other
overhead
expenses $ 37,934 $ 50,633 (25.1)% $ 77,137 $101,642 (24.1)%
-------------------------------------------------------------------------
Second quarter 2010 vs. second quarter 2009
Other overhead expenses decreased by 25.1% or
General and administrative expense declined due to lower expenses in promotion and travel, professional fees, and reserve expense. Promotion and travel expenses decreased by
Interest expense decreased by
Net income for Q2/10 was
The effective tax rate for this quarter was 14.2% compared to (8.5)% in the same quarter last year and 43.0% last quarter. The increase from a year ago was due primarily to the reduction of previously recorded valuation allowances. The decrease from Q1/10 was due to a charge taken in the last quarter for adjustments to future tax assets to reflect tax rate reductions netted against the utilization of tax losses carried forward.
First-half fiscal year 2010 vs. first-half fiscal year 2009
Other overhead expenses for the six months ended
The remaining decrease in overhead expenses was due to interest expense, which dropped 81.7% or
Net income for the first half of fiscal 2010 was
Income tax expense was
RESULTS OF OPERATIONS
Canaccord Adams(1)
-------------------------------------------------------------------------
Three months Six months
(C$ thousands, ended Quarter- ended
except September 30 over- September 30 YTD-
employees and quarter over-YTD
% amounts) 2009 2008 change 2009 2008 change
-------------------------------------------------------------------------
Canaccord Adams
Revenue $ 78,475 $ 58,336 34.5% $163,972 $163,129 0.5%
Expenses
Incentive
compen-
sation 42,761 29,998 42.5% 87,992 82,527 6.6%
Salaries
and
benefits 3,376 3,919 (13.9)% 6,780 8,142 (16.7)%
Other
overhead
expenses 17,881 29,233 (38.8)% 38,378 57,501 (33.3)%
-------------------------------------------------------------------------
Total
expenses $ 64,018 $ 63,150 1.4% 133,150 $148,170 (10.1)%
Income before
income
taxes(2) 14,457 (4,814) n.m. 30,822 14,959 106.0%
Number of
employees 482 551 (12.5)%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for number of employees.
(2) See "Intersegment Allocated Costs".
n.m.: not meaningful
Revenue from Canaccord Adams 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.
Second quarter 2010 vs. second quarter 2009
Revenue for Canaccord Adams in Q2/10 was
Revenue from Canadian operations
Canaccord Adams in
Revenue from UK and Other Foreign Location
Canaccord Adams' operations in the UK and
Revenue from US operations
The US operations reflect the capital markets activities of Canaccord Adams Inc. Second quarter 2010 revenue for Canaccord Adams in the US was
Expenses
Expenses for Q2/10 were
General and administrative expense was
Income before income taxes for the quarter was
First-half fiscal year 2010 vs. first-half fiscal year 2009
Revenue for Canaccord Adams for the first half of fiscal 2010 was
Revenue from Canadian operations
In
Revenue from UK and Other Foreign Location operations
Our UK and Other Foreign Location revenue was
Revenue from US operations
The US operations experienced a significant increase in revenue during the first half of fiscal 2010, mainly due to the improvements in the equity markets, changes in the competitive landscape and increased activity in respect of both public and private offerings as well as increased advisory fees. Revenue was
Expenses
Expenses for the first half of fiscal 2010 were
Salary and benefits expense for the first half of fiscal 2010 declined by
Overhead expenses were
Income before income taxes for the period was
Canaccord Wealth Management(1)
-------------------------------------------------------------------------
(C$ thousands,
except AUM
and AUA,
which are in
C$ millions; Three months Six months
employees; ended Quarter- ended
Advisory September 30 over- September 30 YTD-
Teams, and quarter over-YTD
% amounts) 2009 2008 change 2009 2008 change
-------------------------------------------------------------------------
Revenue $ 40,138 $ 43,844 (8.5)% $ 80,323 $101,697 (21.0)%
Expenses
Incentive
compensation 19,368 20,116 (3.7)% 38,011 47,066 (19.2)%
Salaries and
benefits 4,360 3,477 25.4% 8,606 7,258 18.6%
Other
overhead
expenses 11,485 12,318 (6.8)% 23,764 26,270 (9.5)%
-------------------------------------------------------------------------
Total
expenses $ 35,213 $ 35,911 (1.9)% $ 70,381 $ 80,594 (12.7)%
Income before
income
taxes(2) 4,925 7,933 (37.9)% 9,942 21,103 (52.9)%
Assets under
management 453 609 (25.6)%
Assets under
administration 11,386 11,584 (1.7)%
Number of
Advisory Teams 334 341 (2.1)%
Number of
employees 698 744 (6.2)%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for AUM, AUA, number of Advisory
Teams, and number of employees.
(2) See "Intersegment Allocated Costs".
Revenue from Canaccord Wealth Management is generated through traditional commission-based brokerage services; the sale of fee-based products and services; margin interest; and fees and commissions earned in respect of investment banking and venture capital transactions by private clients.
Second quarter 2010 vs. second quarter 2009
Revenue from Canaccord Wealth Management was
Expenses for Q2/10 were
Income before income taxes for the quarter was
First-half fiscal year 2010 vs. first-half fiscal year 2009
Revenue from Canaccord Wealth Management was
Expenses for the six months ended
The decrease in expenses was offset by an increase in development costs of
Income before income taxes for the first half of fiscal 2010 was
Corporate and Other(1)
-------------------------------------------------------------------------
Three months Six months
(C$ thousands, ended Quarter- ended
except September 30 over- September 30 YTD-
employees and quarter over-YTD
% amounts) 2009 2008 change 2009 2008 change
-------------------------------------------------------------------------
Revenue $ 5,131 $ 8,649 (40.7)% 16,912 18,711 (9.6)%
Expenses
Incentive
compensation 1,837 863 112.9% 6,426 4,111 56.3%
Salaries and
benefits 6,247 6,799 (8.1)% 12,399 14,238 (12.9)%
Other
overhead
expenses 8,568 9,082 (5.7)% 14,995 17,871 (16.1)%
-------------------------------------------------------------------------
Total
expenses $ 16,652 $ 16,744 (0.5)% 33,820 36,220 (6.6)%
Loss before
income
taxes(2) (11,521) (8,095) 42.3% (16,908) (17,509) (3.4)%
Number of
employees 359 393 (8.7)%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for number of employees.
(2) See "Intersegment Allocated Costs".
This segment, described as Corporate and Other, includes correspondent brokerage services, bank and other interest revenue, foreign exchange gains and losses and expenses not specifically allocable to either the Canaccord Adams or Canaccord Wealth Management 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.
Second quarter 2010 vs. second quarter 2009
Revenue for the three months ended
Expenses for Q2/10 were
Overall, loss before income taxes was
First-half fiscal year 2010 vs. first-half fiscal year 2009
Revenue was
Expenses for the first half of fiscal 2010 were
Overall, loss before income taxes was
Intersegment allocated costs
Included in the Corporate and Other segment are certain trade processing, support services, research, and other expenses that have been incurred to support the activities within the Canaccord Adams and Canaccord Wealth Management segments. Excluding executive incentive compensation and certain administrative support, foreign exchange gains and losses and net interest, management has determined that allocable costs from Corporate and Other to Canaccord Wealth Management were
FINANCIAL CONDITION
Below are specific changes in selected balance sheet items.
Assets
Cash and cash equivalents were
Securities owned were
Accounts receivable were
Other assets were
Liabilities
Bank overdrafts and call loan facilities utilized by Canaccord may vary significantly on a day-to-day basis and depend on securities trading activity. At
Accounts payable were
Other liabilities were
OFF-BALANCE SHEET ARRANGEMENTS
A subsidiary of the Company has entered into irrevocable, secured standby letters of credit from a financial institution totalling
LIQUIDITY AND CAPITAL RESOURCES
Canaccord has a capital structure comprised of share capital, retained earnings and accumulated other comprehensive losses. On
Canaccord's business requires capital for operating and regulatory purposes. The majority of 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 fair value. The fair 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 that generally settle within the normal three-day settlement cycle; collateralized securities borrowed and/or loaned in transactions that can be closed within a few days on demand; and balances on behalf of introducing brokers representing net balances in connection with their client accounts.
During the six-month period ended
OUTSTANDING SHARE DATA
-------------------------------------------------------------------------
Outstanding shares as of September 30
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Issued shares excluding unvested shares(1) 48,681,034 48,273,824
Issued shares outstanding(2) 55,359,489 54,552,553
Issued shares outstanding - diluted(3) 57,226,445 57,981,364
Average shares outstanding - basic 48,420,751 48,247,858
Average shares outstanding - diluted 55,444,791 53,956,302
-------------------------------------------------------------------------
(1) Excludes 3,746,523 unvested shares that are outstanding relating to
share purchase loans for recruitment and retention programs, and
2,931,932 unvested shares purchased by the employee benefit trust for
the long term incentive plan (LTIP).
(2) Includes 3,746,523 unvested shares that are outstanding relating to
share purchase loans for recruitment and retention programs, and
2,931,932 unvested shares purchased by the employee benefit trust for
the LTIP.
(3) Includes 1,866,956 of share issuance commitments.
At
The Company renewed its normal course issuer bid (NCIB) and is currently entitled to acquire up to 2,767,974 of its shares from
STOCK-BASED COMPENSATION PLANS
Stock options
The Company granted stock options to purchase common shares of the Company to independent directors and senior managers. The independent directors and senior managers have been granted options to purchase up to an aggregate of 2,449,993 common shares of the Company. The stock options vest over a four- to five-year period and expire seven years after the grant date. The weighted average exercise price of the stock options is
On
Long term incentive plan (LTIP)
Under the LTIP, eligible participants are awarded restricted share units (RSUs) which vest over three years. For employees in
INTERNATIONAL FINANCIAL CENTRE
Canaccord is a member of the International Financial Centre
FOREIGN EXCHANGE
Canaccord manages its foreign exchange risk by periodically hedging pending settlements in foreign currencies. Realized and unrealized gains and losses related to these transactions are recognized in income during the year. On
RELATED PARTY TRANSACTIONS
Security trades executed for employees, officers and directors of Canaccord are transacted in accordance with 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 Canaccord.
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 Annual Consolidated Financial Statements. 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 judgment 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 owned and sold short, including share purchase warrants and options, are categorized as held for trading as per Canadian Institute of Chartered Accountants (CICA) Handbook Section 3855, "Financial Instruments - Recognition and Measurement", and are recorded at fair value with unrealized gains and losses recognized in net income. In the case of publicly traded securities, fair 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, holding periods and other resale restrictions, if applicable. Investments in illiquid or non-publicly traded securities categorized as held for trading are measured at fair value determined by a valuation model. There is inherent uncertainty and imprecision in estimating the factors that can affect value and in estimating values generally. The extent to which valuation estimates differ from actual results will affect the amount of income or loss recorded for a particular security position in any given period. With Canaccord's security holdings consisting primarily of publicly traded securities except as noted below, our procedures for obtaining market prices from independent sources, the validation of estimates through actual settlement of transactions and the consistent application of our approach from period to period, we believe that the estimates of fair value recorded are reasonable.
Asset-backed commercial paper
There is a significant amount of uncertainty in estimating the amount and timing of cash flows associated with the Company's holdings in ABCP. The Company estimates the fair value of its ABCP holdings by discounting expected future cash flows on a probability weighted basis considering the best available data. Since the fair value of the ABCP is based on the Company's assessment of current conditions, amounts reported may change materially in subsequent periods. Refer to Note 7 in the Audited Annual Consolidated Financial Statements for further details.
Provisions
Canaccord records provisions related to pending or outstanding legal matters and doubtful accounts associated with client receivables, loans, advances and other receivables. Provisions in connection with legal matters are determined on the basis of management's judgment in consultation with legal counsel, considering such factors as the amount 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 any collateral.
Provisions in connection with other doubtful accounts are generally based on management's assessment of 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 judgments 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 their individual assessments. 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. Accounting standards require a valuation allowance when it is more likely than not that all or a portion of a future income tax asset will not be realized prior to its expiration. Although realization is not assured, Canaccord believes that, based on all evidence, it is more likely than not that all of the future income tax assets, net of the valuation allowance, will be realized. Canaccord believes that adequate provisions for income taxes have been made for all years.
Consolidation of variable interest entities
The Company consolidates variable interest entities (VIEs) in accordance with the guidance provided by CICA Accounting Guideline 15, "Consolidation of Variable Interest Entities" (AcG-15). AcG-15 defines a VIE as an entity which either does not have sufficient equity at risk to finance its activities without additional subordinated financial support or where the holders of equity at risk lack the characteristics of a controlling financial interest. The enterprise that consolidates a VIE is called the primary beneficiary of the VIE. An enterprise should consolidate a VIE when that enterprise has a variable interest that will absorb a majority of the entity's expected losses or receive a majority of the entity's expected residual returns.
The Company has established an employee benefit trust to fulfill obligations to employees arising from the Company's stock-based compensation plan. The employee benefit trust has been consolidated in accordance with AcG-15 as it meets the definition of a VIE and the Company is the primary beneficiary of the employee benefit trust.
Stock-based compensation plans
Stock-based compensation represents the cost related to stock-based awards granted to employees. The Company uses the fair value method to account for such awards. Under this method, the Company measures the fair value of stock-based awards as of the grant date and recognizes the cost as an expense over the applicable vesting period with a corresponding increase in contributed surplus. In the case where vesting is also dependent on performance criteria, the cost is recognized over the vesting period in accordance with the rate at which such performance criteria are achieved (net of estimated forfeitures). Otherwise, the cost is recognized on a graded basis. When stock-based compensation awards vest, contributed surplus is reduced by the applicable amount and share capital is increased by the same amount.
RECENT ACCOUNTING PRONOUNCEMENTS
Business Combinations and Consolidated Financial Statements
In
In addition, the CICA has issued Handbook Section 1601, "Consolidated Financial Statements", and Handbook Section 1602, "Non-controlling Interests", which replace CICA Handbook Section 1600, "Consolidated Financial Statements". CICA Handbook Section 1601 carries forward guidance from CICA Handbook Section 1600 except for the standards relating to the accounting for non-controlling interests, which are addressed separately in Section 1602. Section 1602 harmonizes Canadian standards with amended International Accounting Standard 27, "Consolidated and Separate Financial Statements". This Canadian standard provides guidance on accounting for a non-controlling interest in a subsidiary in the consolidated financial statements subsequent to a business combination. These two standards will be effective for the Company beginning
Early adoption prior to
International Financial Reporting Standards (IFRS)
The Canadian Accounting Standards Board (AcSB) has confirmed that the use of IFRS will be required commencing in 2011 for publicly accountable, profit-oriented enterprises. IFRS will replace Canadian GAAP currently followed by the Company. The purpose of this adoption is to increase the comparability of financial reporting among countries and to improve transparency. The Company will be required to begin reporting under IFRS for its fiscal year ended
The Company is currently in the process of evaluating the potential impact of IFRS on the consolidated financial statements. This is an ongoing process as the International Accounting Standards Board (IASB) and the AcSB continue to issue new standards and recommendations. The Company's consolidated financial performance and financial position as disclosed in the current Canadian GAAP financial statements may differ significantly when presented in accordance with IFRS. Some of the significant differences identified between IFRS and Canadian GAAP may have a material effect on the Company's consolidated financial statements.
In order to prepare for the conversion to IFRS, the Company has developed an IFRS conversion plan, which includes the following activities:
- Identification of accounting differences between existing Canadian
GAAP and IFRS
- Review of presentation of financial statements under IFRS
- Determination of potential business impacts
- Evaluation of the impact on financial systems
- Evaluation of the impact of IFRS on internal controls over financial
reporting and disclosure controls and procedures
- Assessment of training and resource requirements
- Development of a communication plan for both internal and external
stakeholders
Key elements of the plan that are currently in progress include, but are not limited to:
- Evaluation of major accounting differences
- Assessment of the application of IFRS 1 "First time adoption of IFRS"
- Development of ongoing training and education for employees
CHANGES IN ACCOUNTING POLICIES
Goodwill and Intangible Assets
The CICA issued a new accounting standard, CICA Handbook Section 3064, "Goodwill and Intangible Assets", which prescribes when expenditures qualify for recognition as intangible assets and provides increased guidance on the recognition and measurement of internally generated goodwill and intangible assets. The Company adopted Section 3064 effective
Financial Instruments - Disclosures
The AcSB amended CICA Handbook Section 3862, "Financial Instruments - Disclosures", to increase disclosure requirements regarding the fair value measurements of financial instruments. The Company adopted these new amendments during fiscal 2010 and this information is included in Note 4.
ASSET-BACKED COMMERCIAL PAPER
As a result of liquidity issues in the ABCP market, there has been very limited trading of the ABCP since mid-August 2007. On
There has been very limited trading of the restructured ABCP notes since
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
Disclosure controls and procedures
Based on an evaluation performed as of
Changes in internal control over financial reporting
An evaluation of the Company's internal control over financial reporting was performed as of
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, capital requirements and such other factors as the Board determines to be relevant.
Dividend declaration
On
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
-------------------------------------------------------------------------
(C$ thousands,
except per share Fiscal 2010 Fiscal 2009
amounts) ----------- -----------
-------------------------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue
Canaccord Adams $ 78,475 $ 85,497 $ 64,972 $ 49,250 $ 58,336 $104,793
Canaccord Wealth
Management 40,138 40,185 37,255 33,532 43,844 57,853
Corporate and
Other 5,131 11,781 4,769 4,406 8,649 10,062
-------------------------------------------------------------------------
Total revenue 123,744 137,463 106,996 87,188 110,829 172,708
Net income (loss) 6,746 9,112 3,666 (62,378) (5,398) 16,459
EPS - basic 0.14 0.19 0.07 (1.27) (0.11) 0.35
EPS - diluted 0.12 0.16 0.07 (1.27) (0.11) 0.31
-------------------------------------------------------------------------
----------------------------------------------
(C$ thousands,
except per share Fiscal 2008
amounts) -----------
----------------------------------------------
Q4 Q3 Q2
----------------------------------------------
Revenue
Canaccord Adams $ 77,965 $109,583 $ 89,071
Canaccord Wealth
Management 54,463 61,166 57,415
Corporate and
Other 11,018 12,605 12,383
----------------------------------------------
Total revenue 143,446 183,354 158,869
Net income (loss) (35,154) 15,048 12,411
EPS - basic (0.80) 0.34 0.28
EPS - diluted (0.80) 0.31 0.26
----------------------------------------------
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. Canaccord is also directly exposed to market price risk, liquidity risk and volatility risk as a result of its principal trading activities in equity securities and to specific interest rate risk as a result of its principal trading in fixed income securities. Canaccord Wealth Management 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. The Company has a capital management framework to maintain the level of capital that will meet the firm's regulated subsidiaries' target ratios as set out by the respective regulators, fund current and future operations, ensure that the firm is able to meet its financial obligations as they come due, and support the creation of shareholder value. The regulatory bodies that certain of the Company's subsidiaries are subject to are listed in Note 16 of the
ADDITIONAL INFORMATION
A comprehensive discussion of our business, strategies, objectives and risks is available in our Annual Information Form and Management's Discussion and Analysis, including our Audited Annual Consolidated Financial Statements in Canaccord's 2009 Annual Report, which have been posted to shareholders and are available on our website at canaccordfinancial.com and on SEDAR at sedar.com.
Interim Consolidated Financial Statements
Canaccord Capital Inc.
Unaudited
For the three months and six months ended September 30, 2009
(Expressed in Canadian dollars)
Canaccord Capital Inc.
INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands of dollars)
As at September 30, March 31,
2009 2009
$ $
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents 709,455 701,173
Securities owned (note 3) 517,070 133,691
Accounts receivable (notes 5 and 11) 2,085,356 1,061,161
Income taxes receivable 2,107 23,771
Future income taxes 12,019 15,680
-------------------------------------------------------------------------
Total current assets 3,326,007 1,935,476
Investment 5,000 5,000
Investment in asset-backed commercial
paper (note 6) 34,280 35,312
Equipment and leasehold improvements 41,718 46,311
-------------------------------------------------------------------------
3,407,005 2,022,099
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness 85,600 75,600
Securities sold short (note 3) 382,209 79,426
Accounts payable and accrued liabilities
(notes 5 and 11) 2,535,971 1,469,369
Subordinated debt (note 8) 15,000 25,000
-------------------------------------------------------------------------
Total current liabilities 3,018,780 1,649,395
-------------------------------------------------------------------------
Commitments and contingencies (note 13)
Shareholders' equity
Common shares (note 9) 193,291 183,619
Contributed surplus 44,393 44,383
Retained earnings 176,726 160,868
Accumulated other comprehensive losses (26,185) (16,166)
-------------------------------------------------------------------------
Total shareholders' equity 388,225 372,704
-------------------------------------------------------------------------
3,407,005 2,022,099
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Canaccord Capital Inc.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands of dollars,
except per share amounts)
For the For the
three months ended six months ended
----------------------- -----------------------
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
$ $ $ $
------------------------------------------------- -----------------------
REVENUE
Commission 56,628 60,630 112,084 132,626
Investment banking 47,620 34,024 103,506 110,171
Principal trading 11,589 87 23,059 5,998
Interest 3,121 11,734 6,597 24,063
Other 4,786 4,354 15,961 10,679
------------------------------------------------- -----------------------
123,744 110,829 261,207 283,537
------------------------------------------------- -----------------------
EXPENSES
Incentive compensation 63,966 50,977 132,429 133,704
Salaries and benefits 13,983 14,195 27,785 29,638
Trading costs 7,002 6,717 14,326 13,038
Premises and equipment 6,104 5,957 11,986 11,742
Communication and technology 5,245 6,539 10,734 12,702
Interest 492 3,354 1,337 7,313
General and administrative 11,698 19,611 23,586 38,888
Amortization 1,906 2,072 3,827 4,114
Development costs 5,487 6,383 11,341 13,845
------------------------------------------------- -----------------------
115,883 115,805 237,351 264,984
------------------------------------------------- -----------------------
Income (loss) before income
taxes 7,861 (4,976) 23,856 18,553
Income tax expense
(recovery) (note 7)
Current (201) 1,409 4,360 (10,141)
Future 1,316 (987) 3,638 17,633
------------------------------------------------- -----------------------
1,115 422 7,998 7,492
------------------------------------------------- -----------------------
------------------------------------------------- -----------------------
Net income (loss) for
the period 6,746 (5,398) 15,858 11,061
------------------------------------------------- -----------------------
------------------------------------------------- -----------------------
Basic earnings (loss)
per share (note 9 (iv)) 0.14 (0.11) 0.33 0.23
Diluted earnings (loss)
per share (note 9 (iv)) 0.12 (0.11) 0.28 0.21
------------------------------------------------- -----------------------
------------------------------------------------- -----------------------
See accompanying notes
Canaccord Capital Inc.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands of dollars)
For the For the
three months ended six months ended
-----------------------------------------------
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
$ $ $ $
-----------------------------------------------
Net income (loss) for the
period 6,746 (5,398) 15,858 11,061
Other comprehensive loss,
net of taxes
Net change in unrealized
losses on translation of
self-sustaining foreign
operations (10,304) (6,332) (10,019) (6,762)
-------------------------------------------------------------------------
Comprehensive income (loss)
for the period (3,558) (11,730) 5,839 4,299
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (Unaudited)
(in thousands of dollars)
As at and for the six months September 30, March 31,
ended September 30, 2009 and 2008 2009 2009
$ $
-------------------------------------------------------------------------
Common shares, opening 183,619 111,142
Shares issued 3,296 68,829
Shares cancelled - (442)
Acquisition of common shares for long term
incentive plan (note 9) (5,237) (13,839)
Release of vested common shares from employee
benefit trust (note 9) 8,880 4,778
Unvested share purchase loans 2,733 (403)
-------------------------------------------------------------------------
Common shares, closing 193,291 170,065
-------------------------------------------------------------------------
Contributed surplus, opening 44,383 34,024
Excess on redemption of common shares - (340)
Stock-based compensation (note 10) (393) 6,261
Unvested share purchase loans 403 1,178
-------------------------------------------------------------------------
Contributed surplus, closing 44,393 41,123
-------------------------------------------------------------------------
Retained earnings, opening 160,868 222,597
Net income for the period 15,858 11,061
Dividends - (13,457)
-------------------------------------------------------------------------
Retained earnings, closing 176,726 220,201
-------------------------------------------------------------------------
Accumulated other comprehensive losses, opening (16,166) (10,319)
Other comprehensive income losses for the period (10,019) (6,762)
-------------------------------------------------------------------------
Accumulated other comprehensive losses, closing (26,185) (17,081)
-------------------------------------------------------------------------
Shareholders' equity 388,225 414,308
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Canaccord Capital Inc.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands of dollars)
For the For the
three months ended six months ended
----------------------- -----------------------
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
$ $ $ $
------------------------------------------------- -----------------------
OPERATING ACTIVITIES
Net income (loss) for
the period 6,746 (5,398) 15,858 11,061
Items not affecting cash
Amortization 1,906 2,072 3,827 4,114
Stock-based compensation
expense 5,807 4,272 11,075 10,580
Future income tax
(recovery) expense 1,316 (987) 3,638 17,633
Changes in non-cash working
capital
(Increase) decrease in
securities owned (349,400) 60,440 (384,189) 36,225
(Increase) decrease in
accounts receivable (830,505) 283,839 (925,543) 181,393
Decrease (increase) in
income taxes receivable 15,623 479 19,354 (8,319)
Increase (decrease) in
securities sold short 326,489 (17,027) 303,167 1,424
Increase (decrease) in
accounts payable and
accrued liabilities 818,244 (337,801) 960,473 (193,981)
------------------------------------------------- -----------------------
Cash provided by (used in)
operating activities (3,774) (10,111) 7,660 60,130
------------------------------------------------- -----------------------
FINANCING ACTIVITIES
Repayment of subordinated
debt - - (10,000) -
Issuance of shares for
cash net of issuance costs - - - 66,462
Purchase and cancellation
of shares - (391) - (782)
Decrease in unvested common
share purchase loans 1,790 208 3,136 775
Acquisition of common
shares for long term
incentive plan (776) (13,049) (5,237) (13,839)
Dividends paid - (13,457) - (13,457)
------------------------------------------------- -----------------------
Cash provided by (used in)
financing activities 1,014 (26,689) (12,101) 39,159
------------------------------------------------- -----------------------
INVESTING ACTIVITIES
Purchase of equipment and
leasehold improvements (113) (2,087) (565) (2,757)
Proceeds on net redemption
of investment in ABCP 867 - 1,761 -
------------------------------------------------- -----------------------
Cash provided by (used in)
investing activities 754 (2,087) 1,196 (2,757)
------------------------------------------------- -----------------------
Effect of foreign exchange
on cash balances (2,619) (1,662) 1,527 (2,675)
------------------------------------------------- -----------------------
(Decrease) increase in
cash position (4,625) (40,549) (1,718) 93,857
Cash position, beginning
of period 628,480 555,017 625,573 420,611
------------------------------------------------- -----------------------
Cash position, end of
period 623,855 514,468 623,855 514,468
------------------------------------------------- -----------------------
------------------------------------------------- -----------------------
Cash position is
comprised of:
Cash and cash
equivalents 709,455 521,322 709,455 521,322
Call loans (85,600) (6,854) (85,600) (6,854)
------------------------------------------------- -----------------------
------------------------------------------------- -----------------------
623,855 514,468 623,855 514,468
------------------------------------------------- -----------------------
------------------------------------------------- -----------------------
Supplemental cash flow
information
Interest paid 436 3,344 1,227 7,267
Income taxes paid 1,179 2,283 2,003 2,836
------------------------------------------------- -----------------------
------------------------------------------------- -----------------------
See accompanying notes
Canaccord Capital Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the three and six months ended September 30, 2009
(in thousands of dollars, except per share amounts)
Through its principal subsidiaries, Canaccord Capital Inc. (the Company)
is a leading independent, full-service investment dealer in Canada with
capital markets operations in the United Kingdom (UK) and the United
States of America (US). The Company has operations in each of the two
principal segments of the securities industry: capital markets and wealth
management services. Together, these operations offer a wide range of
complementary investment products, brokerage services and investment
banking services to the Company's private, institutional and corporate
clients.
The Company's business is cyclical and experiences considerable
variations in revenue and income from quarter to quarter and year to year
due to factors beyond the Company's control. The Company's business is
affected by the overall condition of the North American and European
equity and bond markets, including the seasonal variance in these
markets.
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
These unaudited interim consolidated financial statements have been
prepared by the Company in accordance with Canadian generally accepted
accounting principles (GAAP) with respect to interim financial
statements. 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, 2009 as filed on SEDAR
on May 26, 2009 (Audited Annual Consolidated Financial Statements) except
for the changes in accounting policies as described in Note 2.
Accordingly, they do not include all the information and footnotes
required for compliance with Canadian GAAP for annual financial
statements. These unaudited interim consolidated financial statements and
notes thereon should be read in conjunction with the Audited Annual
Consolidated Financial Statements.
The preparation of these unaudited interim 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 unaudited interim consolidated financial
statements reflect all 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.
Recent accounting pronouncements
Business Combinations and Consolidated Financial Statements
In January 2009, the Canadian Institute of Chartered Accountants (CICA)
issued a new accounting standard, CICA Handbook Section 1582, "Business
Combinations", which replaces the former Section 1581, "Business
Combinations". This standard harmonizes Canadian guidance to the
International Financial Reporting Standard (IFRS) 3, "Business
Combinations". This standard requires additional use of fair value
measurements, transaction costs to be expensed and increased financial
statements note disclosure. It also provides guidance on the recognition
and measurement of goodwill acquired in the business combination. This
standard is to be applied prospectively by the Company for business
combinations for which the acquisition date is on or after April 1, 2011.
In addition, the CICA has issued Handbook Section 1601, "Consolidated
Financial Statements", and Handbook Section 1602, "Non-controlling
Interests", which replace CICA Handbook Section 1600, "Consolidated
Financial Statements". CICA Handbook Section 1601 carries forward
guidance from CICA Handbook Section 1600 except for the standards
relating to the accounting for non-controlling interests, which are
addressed separately in Section 1602. Section 1602 substantially
harmonizes Canadian standards with amended International Accounting
Standard 27 "Consolidated and Separate Financial Statements". This
Canadian standard provides guidance on accounting for non-controlling
interest in a subsidiary in the consolidated financial statements
subsequent to a business combination. These two standards will be
effective for the Company beginning April 1, 2011.
Early adoption prior to April 1, 2011 is permitted, and all three
standards must be adopted concurrently. The impact of adoption of these
standards is not expected to have a material impact on the Company's
consolidated financial statements.
International Financial Reporting Standards
The Canadian Accounting Standards Board (AcSB) has confirmed that the use
of IFRS will be required commencing in 2011 for publicly accountable,
profit- oriented enterprises. IFRS will replace Canadian GAAP currently
followed by the Company. The purpose of this adoption is to increase the
comparability of financial reporting among countries and to improve
transparency. The Company will be required to begin reporting under IFRS
for its fiscal year ended March 31, 2012 and will be required to provide
information that conforms with IFRS for the comparative periods
presented.
The Company is currently in the process of evaluating the potential
impact of IFRS on the consolidated financial statements. This is an
ongoing process as the International Accounting Standards Board (IASB)
and the AcSB continue to issue new standards and recommendations. The
Company's consolidated financial performance and financial position as
disclosed in the current Canadian GAAP financial statements may differ
significantly when presented in accordance with IFRS. Some of the
significant differences identified between IFRS and Canadian GAAP may
have a material impact on the Company's consolidated financial
statements.
2. CHANGE IN ACCOUNTING POLICIES
Goodwill and Intangible Assets
The CICA issued a new accounting standard, CICA Handbook Section 3064,
"Goodwill and Intangible Assets", which prescribes when expenditures
qualify for recognition as intangible assets and provides increased
guidance on the recognition and measurement of internally generated
goodwill and intangible assets. The Company adopted Section 3064
effective April 1, 2009. The adoption of this new standard has no impact
on the consolidated financial statements.
Financial Instruments - Disclosures
The AcSB amended CICA Handbook Section 3862 "Financial Instruments -
Disclosures" to increase disclosure requirements regarding the fair value
measurements of financial instruments. The Company adopted these new
amendments during fiscal 2010 and this information is included in Note 4.
3. SECURITIES OWNED AND SECURITIES SOLD SHORT
September 30, 2009 March 31, 2009
------------------------- -----------------------
Securities Securities Securities Securities
owned sold short owned sold short
$ $ $ $
-------------------------------------------------------------------------
Corporate and government
debt 368,250 336,183 86,069 72,315
Equities and convertible
debentures 148,820 46,026 47,622 7,111
-------------------------------------------------------------------------
517,070 382,209 133,691 79,426
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at September 30, 2009, corporate and government debt maturities ranged
from 2009 to 2055 (March 31, 2009 - 2009 to 2049) bearing interest
ranging from 0.75% to 12.00% (March 31, 2009 - 3.00% to 10.75%).
4. FINANCIAL INSTRUMENTS
During the periods, there were no material changes to the risks
associated with the Company's financial instruments from those described
in Note 4 of the Audited Annual Consolidated Financial Statements.
Additional disclosures regarding fair value measurements of financial
instruments as required by new amendments made to CICA Handbook Section
3862 are presented below.
A fair value hierarchy is presented below that distinguishes the
significance of the inputs used in determining the fair value
measurements of various financial instruments. The hierarchy contains the
following levels: Level 1 uses inputs based on quoted prices, Level 2
uses observable inputs other than quoted prices and Level 3 uses inputs
that are not based on observable market data.
Carrying Value Estimated Fair Value
September March 31, September
30, 2009 2009 30, 2009
Level 1 Level 2 Level 3
$ $ $ $ $
-------------------------------------------------------------------------
Held for trading(1)
Cash and cash
equivalents 709,455 701,173 709,455 - -
Securities owned, net
of securities sold
short 134,861 54,265 131,127 3,734 -
Investment in ABCP
(note 6) 34,280 35,312 - - 34,280
Available for sale
financial assets
Investment(2) 5,000 5,000 n/a n/a n/a
Other financial
liabilities
Subordinated debt 15,000 25,000 15,000 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The fair values of the Company's bank indebtedness, accounts
receivable, and accounts payable and accrued liabilities approximate
their carrying values due to their short-term nature.
(2) Investment is classified as available for sale and carried at cost as
the investment does not have a quoted market price. The estimated
fair value of the investment cannot be reliably determined and,
therefore, it is not disclosed in the above table.
5. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts receivable
September 30, March 31,
2009 2009
$ $
-------------------------------------------------------------------------
Brokers and investment dealers 897,534 331,930
Clients 678,598 288,877
RRSP cash balances held in trust 448,435 397,011
Other 60,789 43,343
-------------------------------------------------------------------------
2,085,356 1,061,161
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts payable and accrued liabilities
September 30, March 31,
2009 2009
$ $
-------------------------------------------------------------------------
Brokers and investment dealers 971,068 419,437
Clients 1,195,134 923,902
Other 369,769 126,030
-------------------------------------------------------------------------
2,535,971 1,469,369
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts payable to clients include $448.4 million (March 31, 2009 -
$397.0 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 Industry
Regulatory Organization 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 clients' accounts. Interest on margin loans and
amounts due to clients is based on a floating rate (September 30, 2009 -
5.25%-6.25% and 0.00%-0.05%, respectively; March 31, 2009 - 5.50%-6.25%
and 0.00%-0.20%, respectively).
6. INVESTMENT IN ASSET-BACKED COMMERCIAL PAPER
September 30, March 31,
2009 2009
$ $
-------------------------------------------------------------------------
Investment in asset-backed commercial paper 34,280 35,312
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a result of liquidity issues in the asset-backed commercial paper
(ABCP) market, there has been very limited trading of the ABCP since mid-
August 2007. In January 2009, the Company received restructured ABCP
notes upon the final implementation order issued by the Ontario Superior
Court in a plan of arrangement under the Companies' Creditors Arrangement
Act (Canada) (CCAA) (the Plan). During the quarter ended September 30,
2009, there were no material changes to the accounting treatment of
investment in ABCP. Refer to Note 7 of the Audited Annual Consolidated
Financial Statements for further information.
The Plan as amended provided for a declaratory release that was effective
on implementation of the Plan and that, with the closing of the Canaccord
Relief Program, resulted in the release of all existing and future ABCP-
related claims against the Company.
There is no assurance that the validity or effectiveness of the
declaratory release will not be challenged in actions commenced against
the Company and others. Any determination that the declaratory release is
invalid or ineffective could materially adversely affect the Company's
business, results of operations and financial condition.
There has been very limited trading of the restructured ABCP notes since
January 21, 2009 and, as such, no meaningful market quote is available.
There is a significant amount of uncertainty in estimating the amount and
timing of cash flows associated with the ABCP. The Company estimates the
fair value of its ABCP by discounting expected future cash flows on a
probability weighted basis considering the best available data at the
reporting date.
The assumptions used in the valuation model include:
September 30, March 31,
2009 2009
-------------------------------------------------------------------------
Weighted average interest rate 5.01% 4.72%
Weighted average discount rate 6.06% 6.83%
Maturity of notes 7 to 18 8 to 19
years years
Credit losses 30% to 25% to
100% 100%
The following is a summary of transactions impacting ABCP for the six-
month period September 30, 2009:
Amount
$
-------------------------------------------------------------------------
Balance, March 31, 2009 35,312
Net redemptions (2,108)
Purchases under the client relief program 806
Fair value adjustment 270
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance, September 30, 2009 34,280
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. INCOME TAXES
The Company's income tax expense differs from the amount that would be
computed by applying the combined federal and provincial/state income tax
rates as a result of the following:
For the For the
three months ended six months ended
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
$ $ $ $
-------------------------------------------------------------------------
Income taxes at the
estimated statutory rate 2,330 (1,553) 7,204 5,815
Less: International Finance
Business recovery of
provincial taxes (33) - (181) -
Less: Difference in tax rates
in foreign jurisdictions 265 (265) 55 (912)
Non-deductible items affect-
ing the determination of
taxable income 342 699 674 1,041
Change in valuation allowance
related to US operating
losses (1,879) 1,781 (2,696) 1,766
Change in FIT asset -
reversal period of
temporary differences 90 (240) 2,942 (218)
-------------------------------------------------------------------------
Income tax expense - current
and future 1,115 422 7,998 7,492
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. SUBORDINATED DEBT
September 30, March 31,
2009 2009
$ $
-------------------------------------------------------------------------
Loan payable, interest payable monthly
at prime + 4% per annum, due on demand 15,000 25,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The loan payable is subject to a subordination agreement and may only be
repaid with the prior approval of the Investment Industry Regulatory
Organization of Canada.
9. SHARE CAPITAL
September 30, March 31,
2009 2009
$ $
-------------------------------------------------------------------------
Share capital
Common shares 252,715 249,418
Unvested share purchase loans (28,062) (30,911)
Acquisition of common shares for long
term incentive plan (note 10) (31,362) (34,888)
-------------------------------------------------------------------------
193,291 183,619
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
Number of Amount
shares $
-------------------------------------------------------------------------
Balance, September 30, 2008 54,552,553 $242,309
Shares issued in connection with stock
compensation plans (note 10) 765,363 8,128
Shares cancelled (225,072) (1,019)
-------------------------------------------------------------------------
Balance, March 31, 2009 55,092,844 249,418
Shares issued in connection with stock
compensation plans (note 10) 266,645 3,297
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance, September 30, 2009 55,359,489 252,715
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company renewed its normal course issuer bid (NCIB) and is currently
entitled to acquire up to 2,767,974 of its shares from September 3, 2009
to September 2, 2010; this number represents 5% of its shares outstanding
as of August 28, 2009. There were nil shares purchased through the NCIB
between September 3, 2009 and September 30, 2009.
(iii) 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 up to five years. The difference between the unvested and
unamortized values is included in contributed surplus.
(iv) Earnings per share
For the For the
three months ended six months ended
----------------------- -----------------------
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Basic earnings (loss)
per share
Net income (loss) for
the period $6,746 $(5,398) $15,858 $11,061
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number
of common shares
(number) 48,536,387 49,020,939 48,420,751 48,247,858
Basic earnings (loss)
per share $0.14 $(0.11) $0.33 $0.23
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings (loss)
per share
Net income (loss) for
the period $6,746 $(5,398) $15,858 $11,061
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number
of common shares
(number) 48,536,387 49,020,939 48,420,751 48,247,858
Dilutive effect of un-
vested shares (number) 3,746,523 2,949,931 3,746,523 2,949,931
Dilutive effect of stock
options (number) (note 10) 24,909 811 10,734 3,171
Dilutive effect of share
issuance commitment in
connection with retention
plan (number) (note 10) - 602,366 - 602,366
Dilutive effect of un-
vested shares purchased
by employee benefit trust
(number) (note 10) 3,020,875 2,556,807 3,061,594 2,078,364
Dilutive effect of share
issuance commitment in
connection with long term
incentive plan (number)
(note 10) 261,418 7,716 205,189 74,612
-------------------------------------------------------------------------
Adjusted weighted average
number of common shares
(number) 55,590,112 55,138,570 55,444,791 53,956,302
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings (loss)
per share $0.12 $(0.11) $0.28 $0.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. STOCK-BASED COMPENSATION PLANS
Stock options
The Company granted stock options to purchase common shares of the
Company to independent directors and senior managers. The stock options
vest over a four- to five-year period and expire seven years after the
grant date or 30 days after the participant ceases to be a director. The
exercise price is based on the fair market value of the common shares at
grant date. The weighted average exercise price of the stock options was
$9.91 at September 30, 2009.
During the quarter ended September 30, 2009, the independent directors of
the Company approved the grant of stock options to certain senior
managers of the Company and its subsidiaries. An aggregate of 2,099,993
options were granted at an exercise price of $9.47 per share that vest
over five years. The options expire at the earliest of: (1) seven years
after the grant date, (2) three years after death or any other event of
termination of employment, (3) after any unvested optioned shares held by
the optionee are cancelled for any reason, and (4) in the case of early
retirement, after a determination that the optionee has competed with the
Company or violated any non- competition, non-solicitation or non-
disclosure obligations.
The following is a summary of the Company's stock options to independent
directors and senior managers as at September 30, 2009 and changes during
the year then ended:
Weighted
average
Number of exercise
shares price ($)
-------------------------------------------------------------------------
Balance, September 30, 2008 275,000 15.54
Granted - -
Expired (50,000) 16.31
-------------------------------------------------------------------------
Balance, March 31, 2009 225,000 15.37
Granted 2,224,993 9.34
-------------------------------------------------------------------------
Balance, September 30, 2009 2,449,993 9.91
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The fair value of each stock option grant was estimated on grant date
using the Black-Scholes option pricing model with the following
assumptions:
August May August June
2009 2009 2008 2008
grant grant grant grant
-------------------------------------------------------------------------
Dividend yield 2.00% 2.30% 5.10% 5.10%
Expected volatility 44.00% 44.00% 30.00% 30.00%
Risk-free interest rate 2.45% 2.45% 2.32% 2.32%
Expected life 5 years 5 years 5 years 5 years
Option pricing models require the input of highly subjective assumptions
including the expected price volatility. Changes in the subjective
assumptions can materially affect the fair value estimate and, therefore,
the existing models do not necessarily provide a reliable single measure
of the fair value of the Company's stock options.
Compensation expense of $195 and $257 has been recognized for the three
and six months ended September 30, 2009 ($50 and $101 for the three and
six months ended September 30, 2008).
Long term incentive plan
Under the long term incentive plan (LTIP), eligible participants are
awarded restricted share units (RSUs) which vest over three years. For
employees in Canada, an employee benefit trust (the Trust) has been
established, and either (a) the Company will fund the Trust with cash,
which will be used by a trustee to purchase on the open market common
shares of the Company that will be held in trust by the trustee until
RSUs vest, or (b) the Company will issue common shares from treasury to
participants following vesting of RSUs. For employees in the United
States and the United Kingdom, at the time of each RSU award, the Company
will allot common shares and these shares will be issued from treasury at
the time they vest for each participant.
The costs of the RSUs are amortized over the vesting period of three
years. Compensation expense of $5.6 million and $10.8 million has been
recognized for the three and six months ended September 30, 2009 ($4.0
million and $8.8 million for the three and six months ended September 30,
2008).
For the For the
three months ended six months ended
----------------------- -----------------------
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
----------------------- -----------------------
Awards outstanding,
beginning of period 4,974,663 3,258,398 4,602,385 2,221,578
Grants 995,136 857,105 1,903,460 2,061,975
Vested (522,548) (233,945) (1,058,594) (401,995)
-------------------------------------------------------------------------
Awards outstanding,
end of period 5,447,251 3,881,558 5,447,251 3,881,558
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the For the
three months ended six months ended
----------------------- -----------------------
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
----------------------- -----------------------
Common shares held by
Trust, beginning of
period 3,252,159 1,576,127 3,075,300 1,621,895
Acquired 76,652 1,606,903 648,581 1,706,903
Released on vesting (396,879) (171,975) (791,949) (317,743)
-------------------------------------------------------------------------
Common shares held by
Trust, end of period 2,931,932 3,011,055 2,931,932 3,011,055
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. 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 unaudited interim
consolidated financial statements.
Accounts receivable and accounts payable and accrued liabilities include
the following balances with the related parties described above:
September 30, March 31,
2009 2009
$ $
-------------------------------------------------------------------------
Accounts receivable 42,241 38,733
Accounts payable and accrued liabilities 80,235 77,334
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. SEGMENTED INFORMATION
The Company has two operating segments:
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 UK and
Other Foreign Location, and the US.
Canaccord Wealth Management - provides brokerage services and
investment advice to retail or private clients in Canada and the US.
The Corporate and Other segment includes correspondent brokerage
services, interest and foreign exchange revenue and expenses not
specifically allocable to Canaccord Adams and Canaccord Wealth
Management.
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 operating results.
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 intersegment
revenues.
For the three months ended September 30
2009
----------------------------------------------
Canaccord
Canaccord Wealth Corporate
Adams Management and Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenue 78,475 40,138 5,131 123,744
Expenses 61,305 31,982 15,203 108,490
Amortization 926 618 362 1,906
Development costs 1,787 2,613 1,087 5,487
------------------------------------------------------------------------
Income (loss) before
before income taxes 14,457 4,925 (11,521) 7,861
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008
----------------------------------------------
Canaccord
Canaccord Wealth Corporate
Adams Management and Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenue 58,336 43,844 8,649 110,829
Expenses 58,542 34,122 14,686 107,350
Amortization 926 411 735 2,072
Development costs 3,682 1,378 1,323 6,383
------------------------------------------------------------------------
Income (loss) before
before income taxes (4,814) 7,933 (8,095) (4,976)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months ended September 30
2009
----------------------------------------------
Canaccord
Canaccord Wealth Corporate
Adams Management and Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenue 163,972 80,323 16,912 261,207
Expenses 126,535 64,643 31,005 222,183
Amortization 1,884 1,220 723 3,827
Development costs 4,731 4,518 2,092 11,341
-------------------------------------------------------------------------
Income (loss) before
before income taxes 30,822 9,942 (16,908) 23,856
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008
----------------------------------------------
Canaccord
Canaccord Wealth Corporate
Adams Management and Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenue 163,129 101,697 18,711 283,537
Expenses 138,527 76,830 31,668 247,025
Amortization 1,838 820 1,456 4,114
Development costs 7,805 2,944 3,096 13,845
-------------------------------------------------------------------------
Income (loss) before
before income taxes 14,959 21,103 (17,509) 18,553
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company's business operations are grouped into the following four
geographic segments (revenue is attributed to geographic areas on the
basis of the underlying corporate operating results):
For the For the
three months ended six months ended
-----------------------------------------------
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
$ $ $ $
-------------------------------------------------------------------------
Canada
Revenue 79,190 80,750 167,124 189,628
Equipment and leasehold
improvements 29,533 24,799 29,533 24,799
Goodwill and other
intangible assets - 3,959 - 3,959
United Kingdom
Revenue 13,775 13,096 34,700 46,815
Equipment and leasehold
improvements 5,843 7,411 5,843 7,411
United States
Revenue 30,137 18,309 57,316 43,950
Equipment and leasehold
improvements 6,342 7,044 6,342 7,044
Goodwill and other
intangible assets - 27,856 - 27,856
Other Foreign Location
Revenue 642 (1,326) 2,067 3,144
-------------------------------------------------------------------------
13. COMMITMENTS AND CONTINGENCIES
During the period, there were no material changes, except for the
contingency disclosed below, to the Company's commitments and
contingencies from those described in Note 17 of the Audited Annual
Consolidated Financial Statements.
a) Canaccord Capital Corporation was one of the underwriters of a public
offering of 13% senior secured notes of Redcorp Ventures Ltd. under a
prospectus dated July 5, 2007. The offering was for a total of $142.0
million and Canaccord participated for 12.5% of that amount ($17.8
million). A number of entities have given notice to the underwriters
(including Canaccord) alleging that the statements in the prospectus
describing the security for Redcorp's obligations under the notes
were incorrect and constitute, among other things, negligent
misstatements, which were reasonably relied upon by these entities to
their detriment in deciding to purchase the notes and, as a result,
the underwriters (including Canaccord) are liable to compensate these
entities for all of their losses flowing from the misrepresentations.
The defences to these claims, third party claims and the
quantification of damages are yet to be determined. Canaccord intends
to vigorously defend itself against these claims.
14. SUBSEQUENT EVENTS
a) On October 1, 2009, Canaccord Adams Limited, a wholly owned
subsidiary of the Company, acquired Intelli Partners Limited and its
wholly owned subsidiary, Intelli Corporate Finance Limited, a
corporate advisory and brokerage boutique located in Edinburgh,
Scotland (Intelli) with a net working capital of approximately
$5.3 million, for cash consideration of approximately $7.0 million.
Intelli is focused on investment companies and companies within the
asset management sector.
b) On November 4, 2009, the Board of Directors declared a common share
dividend of $0.05 per share payable on December 10, 2009, with a
record date of November 20, 2009.
For further information: North American media: Scott Davidson, Managing Director, Global Head of Marketing & Communications, Phone: (416) 869-3875, Email: [email protected]; London media: Bobby Morse or Ben Willey, Buchanan Communications (London), Phone: +44 (0) 207 466 5000, Email: [email protected]; Investor relations inquiries: Joy Fenney, Vice President, Investor Relations, Phone: (416) 869-3515, Email: [email protected]; Nominated Adviser and Broker: Marc Milmo or Jonny Franklin-Adams, Fox-Pitt, Kelton Limited, Phone: +44 (0) 207 663 6000, Email: [email protected]
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