Canaccord Financial Inc. reports fiscal third quarter 2010 results
Third quarter 2010 vs. third quarter 2009
- Revenue of $173.2 million, up 98.6% or $86.0 million from
$87.2 million
- Expenses of $150.9 million, down 5.5% or $8.7 million from
$159.6 million(1)
- Net income of $15.1 million compared to net loss of $62.4 million(1)
- Annualized return on equity (ROE) of 15.2%, up from (64.3)%
- Diluted EPS of $0.27 compared to diluted loss per share of $1.27(1)
Third quarter 2010 vs. second quarter 2010
- Revenue of $173.2 million, up 40.0% or $49.5 million from
$123.7 million
- Expenses of $150.9 million, up 30.2% or $35.0 million from
$115.9 million
- Net income of $15.1 million compared to net income of $6.7 million
- Annualized ROE of 15.2%, up from 6.9%
- Diluted EPS of $0.27 compared to diluted EPS of $0.12
Year-to-date fiscal 2010 (nine months ended December 31, 2009) vs. year-
to-date fiscal 2009 (nine months ended December 31, 2008)
- Revenue of $434.4 million, up 17.2% or $63.7 million from
$370.7 million
- Expenses of $388.2 million, down 8.6% or $36.4 million from
$424.6 million(1)
- Net income of $31.0 million compared to a net loss of
$51.3 million(1)
- Annualized ROE of 10.6%, up from (18.0)%
- Diluted EPS of $0.56 compared to diluted loss per share of $1.05(1)
Financial condition at end of third quarter 2010 vs. third quarter 2009
- Cash and cash equivalents balance of $782.6 million, up $98.1 million
from $684.5 million
- Working capital of $327.0 million, up $41.4 million from
$285.6 million
- Total shareholders' equity of $400.7 million, up $42.7 million from
$358.0 million
- Book value per diluted common share for the period end was $7.00, up
9.9% or $0.63 from $6.37
- On February 3, 2010 the Board of Directors considered the dividend
policy and approved a quarterly dividend of $0.05 per share payable
on March 10, 2010 with a record date of February 26, 2010.
Highlights of operations:
- Canaccord Adams led or co-led 61 transactions globally to raise total
proceeds of $3.6 billion(2) for our clients during fiscal Q3/10.
- Canaccord Adams participated in a total of 140 transactions globally
to raise total proceeds of $12.0 billion(2) during fiscal Q3/10.
- During Q3/10, Canaccord Adams led or co-led the following equity
fundraising transactions:
- C$172.5 million for Compton Petroleum Corporation on the TSX
- US$129.7 million Initial Public Offering (IPO) for DragonWave Inc.
on the NASDAQ
- C$113.5 million for TransAtlantic Petroleum Ltd. on the TSX
- US$99.5 million for Telvent GIT S.A. on the NASDAQ
- C$75 million for PetroDorado on the TSX Venture
- (pnds stlg)72.7 million for Petra Diamonds Limited on the AIM of
the LSE
- US$59.2 million for Northern Oil & Gas on the NYSE AMEX
- C$57.0 million for Exeter Resources Corporation on the TSX
- C$56.7 million for MBAC Opportunities and Financing Inc. on the
TSX Venture
- (pnds stlg)50.0 million for Rockhopper Exploration plc on the AIM
of the LSE
- Canaccord continued to rank first in Canada for block trading market
share on the TSX Venture, with 16.8% of market share in Q3/10, up
from 12.0% in Q3/09.(3)
- Canaccord Adams completed five Private Investment in Public Equity
(PIPE) transactions in the US that raised US$123.0 million in
proceeds during fiscal Q3/10.(4)
- Assets under administration of $12.2 billion, up 35.2% from
$9.0 billion at the end of Q3/09, and up 7.2% from $11.4 billion at
the end of Q2/10.
- Assets under management of $423 million, down 6.8% from $454 million
at the end of Q3/09, and down 6.6% from $453 million at the end of
Q2/10.
- During the quarter, Canaccord Wealth Management recruited five
Independent Wealth Management (IWM) branches to our platform, in
Gatineau, Quebec; Toronto (Eglinton), Ontario; Orangeville, Ontario;
Saskatoon, Saskatchewan and Prince George, British Columbia. In
addition, two existing corporate wealth management offices converted
to the IWM model.
- At the end of fiscal Q3/10 (December 31, 2009), Canaccord had 327
Advisory Teams(5), down 20 from 347 Advisory Teams as of
December 31, 2008, and down seven Advisory Teams from 334 teams as of
September 30, 2009. The decrease is largely due to a strategic review
of our Wealth Management division.
- On December 1, 2009, Canaccord Capital Inc. was renamed Canaccord
Financial Inc., to better reflect the growing scope of the Company's
global businesses. As a result, on December 4, 2009, shares in the
Company began trading under the stock symbols CF on the TSX and CF.
on AIM.
Subsequent to December 31, 2009:
- On January 4, 2010, Canaccord Wealth Management announced the
addition of Complete Canaccord ETF Portfolios to its robust wealth
management product suite, as well as the participation of a due
diligence partner, Rogerscasey Canada.
- Two Canaccord Wealth Management branches, Campbell River, British
Columbia and Nanaimo, British Columbia, converted to the Independent
Wealth Management model.
- On January 7, 2010, Canaccord Adams was ranked by Sagient Research
Systems in their PIPE Market League Tables as 5th by number of
transactions and 6th by total amount placed in the US PIPE market in
calendar 2009.
- On February 4, 2010, Canaccord Financial welcomed Charles N. Bralver
to the company's board of directors. Mr. Bralver has nearly 30 years
of experience in the global financial services industry, including as
a founding partner and Vice Chairman of Oliver Wyman & Company, an
international management consulting firm.
----------------------------
(1) Expenses in Q3/09 included significant items of $51.1 million related
to asset-backed commercial paper (ABCP) fair value adjustment, client
relief provision and fair value adjustment, impairment of goodwill
and intangibles, and restructuring costs. Excluding these significant
items, Q3/09 net loss was $16.2 million, diluted loss per share was
$0.33 and expenses were $108.5 million. For the nine month period
ended December 31, 2008, the net loss was $5.2 million, diluted loss
per share was $0.11 and expenses were $373.5 million, excluding these
significant items.
(2) Source: FPinfomart and Company information
(3) Source: Canada Equity. Market share by trade volume
(4) Source: Placement Tracker
(5) 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.
LETTER TO SHAREHOLDERS
There is much to be proud of in our third quarter results. Canaccord posted strong revenue growth, a significant increase in profitability and meaningful gains in our return on equity. However, we remain committed to improving our operating performance, believing there is even more that can be done to grow our strong global platform and generate lasting shareholder value.
Financial overview
Revenue for the three months ended
Net income for the three months was
Canaccord Adams
We were pleased with the results delivered by our global capital markets division this quarter. Our Canadian, US and UK teams led or co-led 61 transactions globally, raising total proceeds of
In
Our U.S. team delivered solid results that beat their prior-year revenue by nearly 37%. The group led two equity issues on the NASDAQ during the third quarter: a US$129.7 million Initial Public Offering for DragonWave, Inc. and a US$99.5 million equity transaction for Telvent GIT S.A.
The investments we've made in building our management, sales, trading and research in Canaccord Adam's UK operations are beginning to deliver tangible returns. Third quarter revenue soared 110% over the comparable period in fiscal 2009 and was significantly higher than the second quarter. The group led a number of important equity transactions, including (pnds stlg)72.7 million for Petra Diamonds Limited and (pnds stlg)50 million for Rockhopper Exploration plc. Both were placed on the AIM of the
In early December, the UK Chancellor of the Exchequer announced an immediate 50% supertax on discretionary bonus pay-outs greater than (pnds stlg)25,000 made by the nation's banks. We believe this tax is being misapplied to Canaccord and others in our market segment, and are optimistic that it will ultimately not apply. We do not trade in sophisticated debt instruments, we are not a proprietary trading house nor do we lend money or receive deposits. And unlike the large commercial banks we believe the government is targeting, we did not have access to - or need - bailouts from the Bank of England. We are working with advisors to both communicate with the UK treasury and minimize the potential impacts on our shareholders and employees. We will continue to monitor and manage this situation carefully, remaining focused on maintaining a healthy and profitable business for clients, shareholders and employees.
Canaccord Wealth Management
We're pleased with the progress we are seeing in our Wealth Management operations. Revenue for the three months ended
We're enthusiastic about the early success of our Independent Wealth Management (IWM) program. Essentially the franchise model of our business, the strategy significantly expands the breadth of our recruiting effort and reduces the overhead costs associated with operating Wealth Management's branch system. We converted two corporate branches to the IWM program during the third quarter, bringing the total IWM branches to date to seven.
We also continue to make investments in the tools and advice Canadians need to better manage their wealth. During the quarter, the team launched a new product under the robust Complete Canaccord Investment Counselling Program called Complete Canaccord ETF Portfolios. The five Complete Canaccord ETF Portfolios offer clients a level of risk management and security selection usually reserved for large institutional investors. The portfolios were developed with the participation of Rogerscasey
New products and stronger markets are driving gains in assets under administration (AUM), though they are still short of the scale we need to become consistently profitable. At the end of the third quarter, AUM totalled
Looking ahead
As we announced last quarter, we have rebranded our company Canaccord Financial Inc. to better reflect the broad scope of our global operations. On
Looking ahead, we are cautiously optimistic about the near-term market outlook and the pipeline of opportunities we're seeing in our capital markets business. But we are more cautious about the longer-term impact of global dynamics, such as excess liquidity, commodity cycles and the evolving regulatory frameworks, on market valuations. We will remain vigilant on these potentially disruptive trends, just as we will remain focused on our strategies to control costs, build our share of our target markets and grow the value of our Company for shareholders. As always, we are very grateful to our dedicated partners at Canaccord who are the real drivers of our continuing evolution.
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 third 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:
- 647-427-7450 (within Toronto)
- 1-888-231-8191 (toll free outside Toronto)
- 0800-051-7107 (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
Through its principal subsidiaries, Canaccord Financial Inc. 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 build lasting client relationships. We achieve this by generating value for our individual, institutional and corporate clients through comprehensive investment solutions, brokerage services and investment banking services. Canaccord has 37 offices worldwide, including 29 Wealth Management offices located across
Canaccord Financial Inc. is publicly traded under the symbol CF on the TSX and the symbol CF. on AIM, a market operated by the
FOR FURTHER INFORMATION, CONTACT:
North American media:
Scott Davidson
Managing Director, Global Head of Marketing & Communications
Phone: 416-869-3875
Email: [email protected]
Investor relations inquiries:
Joy Fenney
Vice President,
Investor Relations
Phone: 416-869-3515
Email: [email protected]
London media:
Bobby Morse or Ben Willey
Buchanan Communications (London)
Phone: +44 (0) 207 466 5000
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 website at canaccordfinancial.com
should be considered incorporated herein by reference.
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Management's Discussion and Analysis
Fiscal third quarter 2010 for the three months and nine months ended
The following discussion of the financial condition and results of operations for Canaccord Financial Inc., formerly 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 nine-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 Counselling 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.
Financial statement items which exclude significant items are non-GAAP measures. Significant items include the asset-backed commercial paper (ABCP) fair value adjustment, additional accrual for client relief programs, fair value adjustment of ABCP purchased by the Company under a client relief program, impairment of goodwill and intangibles and restructuring costs.
--------------------------
(1) Previously known as Canaccord's Alliance Accounts and Private
Investment Management.
BUSINESS OVERVIEW
Through its principal subsidiaries, Canaccord (TSX: CF; AIM: CF.) 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 calendar year 2009, though it began with unprecedented challenges, ended on a more confident note. The low level of short-term interest rates prompted market participants to seek returns in all asset classes. The high level of liquidity in the market allowed for a resurgence in financing activity as well as an aggressive pursuit by investors of yield-producing vehicles. From October through
As global economic data was released in December, however, investors became more concerned with
Debt issuance by governments and corporations during the quarter came at record levels, yet consumers reduced debt and small businesses remained cautious. In the months ahead, significant attention will be focused on the critical issue of how all governments will safely withdraw monetary liquidity from the global economy, yet achieve comfortable levels of growth in 2010.
Market data
Financing values were up significantly on the TSX / TSX Venture and the NASDAQ compared to the same quarter last year. Compared to the previous quarter, financing values for the TSX / TSX Venture were down 8.5%, while the NASDAQ was down 21.6%. The AIM experienced a substantial increase in financings compared to the dismal market conditions during the same quarter last year.
Total financing value by exchange
-------------------------------------------------------------------------
October November December Fiscal Change Change
09 09 09 Q3/10 from from
fiscal fiscal
Q3/09 Q2/10
-------------------------------------------------------------------------
TSX and TSX
Venture
(C$ billions) 6.1 8.0 4.1 18.2 31.9% (8.5)%
AIM ((pnds stlg)
billions) 1.1 0.4 0.9 2.4 n.m. 60.0%
NASDAQ
(US$ billions) 7.6 4.1 4.3 16.0 n.m. (21.6)%
-------------------------------------------------------------------------
Source: TSX Statistics, LSE AIM Statistics, Equidesk
n.m.: not meaningful
Financing value for relevant AIM industry sectors
-------------------------------------------------------------------------
((pnds stlg)
millions, October November December Fiscal Change Change
except for 09 09 09 Q3/10 from from
percentage fiscal fiscal
amounts) Q3/09 Q2/10
-------------------------------------------------------------------------
Oil and gas 141.1 150.7 297.4 589.2 n.m. 80.9%
Mining 48.2 117.2 240.1 405.5 196.6% 94.9%
Pharmaceutical
and Biotech 8.0 7.2 15.9 31.1 n.m. 1.0%
Media 0.4 12.7 1.1 14.2 273.7% (73.1)%
Technology 11.5 8.4 25.9 45.8 249.6% 20.8%
-----------------------------------------------------------
Total (of
relevant
sectors) 209.2 296.2 580.4 1,085.8 503.9% 65.7%
-------------------------------------------------------------------------
Source: LSE AIM Statistics
n.m.: not meaningful
Financing value for relevant TSX and TSX Venture industry sectors
-------------------------------------------------------------------------
($ millions, October November December Fiscal Change Change
except for 09 09 09 Q3/10 from from
percentage fiscal fiscal
amounts) Q3/09 Q2/10
-------------------------------------------------------------------------
Oil and gas 1,451.8 1,307.3 863.2 3,622.3 138.3% 59.6%
Mining 452.6 1,300.3 1,507.7 3,260.6 n.m. (49.4)%
Biotech 24.7 60.7 - 85.4 n.m. n.m.
Media - - - - - (100.0)%
Technology 292.4 18.9 45.9 357.2 n.m. n.m.
-----------------------------------------------------------
Total (of
relevant
sectors) 2,221.5 2,687.2 2,461.8 7,325.5 223.2% (16.8)%
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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 Financial Inc. 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 build lasting client relationships. We achieve this by generating value for our individual, institutional and corporate clients through comprehensive investment solutions, brokerage services and investment banking services. Canaccord has 37 offices worldwide, including 29 Wealth Management offices located across
Canaccord Adams
Canaccord Adams offers 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 650
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 and global insight, as well as
proven 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
Canaccord Wealth Management provides wealth creation, wealth management and wealth transfer services to individual investors from 29 offices across
Canaccord Wealth Management delivers superior training and education to Investment Advisors. Our personal and professional development platform, Canaccord University, supports 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
Third quarter and year-to-date fiscal 2010 summary data(1)
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Three months Nine months
(C$ thousands, ended Quarter- ended
except per December 31 over- December 31 YTD-
share, employee quarter over-YTD
and % amounts) 2009 2008 change 2009 2008 change
Canaccord
Financial Inc.
Revenue
Commission 60,696 51,473 17.9% 172,780 184,099 (6.1)%
Investment
banking 88,417 20,198 n.m. 191,923 130,369 47.2%
Principal
trading 15,645 3,781 n.m. 38,704 9,779 n.m.
Interest 3,099 9,108 (66.0)% 9,696 33,171 (70.8)%
Other 5,340 2,628 103.2% 21,301 13,307 60.1%
Total revenue 173,197 87,188 98.6% 434,404 370,725 17.2%
Expenses
Incentive
compensation 93,872 43,299 116.8% 226,301 177,003 27.9%
Salaries and
benefits 14,945 12,817 16.6% 42,730 42,455 0.6%
Other
overhead
expenses(2) 42,070 52,418 (19.7)% 119,207 154,060 (22.6)%
ABCP fair
value
adjustment - 6,700 (100.0)% - 6,700 (100.0)%
Client relief
provision - 2,700 (100.0)% - 2,700 (100.0)%
Canaccord
relief
program
fair value
adjustment - 2,647 (100.0)% - 2,647 (100.0)%
Impairment of
goodwill and
intangibles - 31,524 (100.0)% - 31,524 (100.0)%
Restructuring
costs - 7,520 (100.0)% - 7,520 (100.0)%
Total
expenses 150,887 159,625 (5.5)% 388,238 424,609 (8.6)%
Income (loss)
before income
taxes 22,310 (72,437) (130.8)% 46,166 (53,884) (185.7)%
Net income
(loss) 15,113 (62,378) (124.2)% 30,971 (51,317) (160.4)%
Earnings (loss)
per share -
diluted 0.27 (1.27) (121.3)% 0.56 (1.05) (153.3)%
Return on
average
common equity 15.2% (64.3)% 79.5p.p. 10.6% (18.0)% 28.6p.p.
Book value
per share -
period end 7.00 6.37 9.9%
Number of
employees 1,570 1,570 0.0%
-------------------------------------------------------------------------
(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 third quarter of fiscal
2010(1)
-------------------------------------------------------------------------
Three months Nine months
ended Quarter- ended
(C$ thousands, December 31 over- December 31 YTD-
except % quarter over-YTD
amounts) 2009 2008 change 2009 2008 change
-------------------------------------------------------------------------
Canada 123,626 57,907 113.5% 290,750 247,580 17.4%
UK 26,420 11,752 124.8% 61,120 58,567 4.4%
US 22,817 16,533 38.0% 80,133 60,438 32.6%
Other Foreign
Location 334 996 (66.5)% 2,401 4,140 (42.0)%
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Total 173,197 87,188 98.6% 434,404 370,725 17.2%
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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
9.
Third quarter 2010 vs. third 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 third quarter of fiscal 2010, revenue generated from commissions was up 17.9% to
Investment banking revenue was
Revenue derived from principal trading was
Interest revenue was
Other revenue was
Third quarter revenue in
Revenue in the UK was
Revenue in the US was
Year-to-date fiscal year 2010 vs. year-to-date fiscal year 2009
Revenue for the nine months ended
Investment banking revenue was
Revenue from principal trading was
Interest revenue was
Year-to-date revenue in
Expenses as a percentage of revenue
-------------------------------------------------------------------------
Three months Nine months
ended Quarter- ended
December 31 over- December 31 YTD-
(in percentage quarter over-YTD
points) 2009 2008 change 2009 2008 change
-------------------------------------------------------------------------
Incentive
compensation 54.2% 49.7% 4.5p.p. 52.1% 47.7% 4.4p.p.
Salaries and
benefits 8.6% 14.7% (6.1)p.p. 9.8% 11.5% (1.7)p.p.
Other overhead
expenses(1) 24.3% 60.1% (35.8)p.p. 27.4% 41.6% (14.2)p.p.
ABCP fair
value
adjustment - 7.7% (7.7)p.p. - 1.8% (1.8)p.p.
Client relief
provision - 3.1% (3.1)p.p. - 0.7% (0.7)p.p.
Canaccord
relief
program
fair value
adjustment - 3.0% (3.0)p.p. - 0.7% (0.7)p.p.
Impairment of
goodwill and
intangibles - 36.2% (36.2)p.p. - 8.5% (8.5)p.p.
Restructuring
costs - 8.6% (8.6)p.p. - 2.0% (2.0)p.p.
-------------------------------------------------------------------------
Total 87.1% 183.1% (96.0)p.p. 89.3% 114.5% (25.2)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
Third quarter 2010 vs. third 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 Q3/10 was 62.8%, a decrease of 1.5 percentage points from 64.4% in Q3/09. This was mainly due to a decrease in salaries and benefits expense as a result of the staff restructuring in the third quarter of fiscal 2009.
Year-to-date fiscal year 2010 vs. year-to-date fiscal year 2009
Expenses for the nine months ended
Salaries and benefits expense for the nine month period was
Other overhead expenses
-------------------------------------------------------------------------
Three months Nine months
ended Quarter- ended
(C$ thousands, December 31 over- December 31 YTD-
except % quarter over-YTD
amounts) 2009 2008 change 2009 2008 change
-------------------------------------------------------------------------
Trading costs 7,140 6,708 6.4% 21,466 19,746 8.7%
Premises and
equipment 6,228 6,549 (4.9)% 18,214 18,291 (0.4)%
Communication
and
technology 5,838 6,277 (7.0)% 16,572 18,979 (12.7)%
Interest 631 2,568 (75.4)% 1,968 9,881 (80.1)%
General
and admin-
istrative 13,609 19,827 (31.4)% 37,195 58,715 (36.7)%
Amortization 1,904 2,751 (30.8)% 5,731 6,865 (16.5)%
Development
costs 6,720 7,738 (13.2)% 18,061 21,583 (16.3)%
-------------------------------------------------------------------------
Total other
overhead
expenses 42,070 52,418 (19.7)% 119,207 154,060 (22.6)%
-------------------------------------------------------------------------
Third quarter 2010 vs. third quarter 2009
Other overhead expenses decreased by 19.7% or
General and administrative expense declined mainly due to a reduced credit provision required in our wealth management segment as a result of stronger market conditions in Q3/10 compared to Q3/09. The lower provision reduced expenses by
Interest expense was decreased by
Net income for Q3/10 was
The effective tax rate for this quarter was 32.3% compared to 13.9% in the same quarter last year and 14.2% last quarter. The increase from a year ago was due primarily to the reduction of previously recorded valuation allowances in Q3/09. The increase from Q2/10 was due to the decrease in the utilization of tax losses carried forward in Q3/10 as compared to Q2/10.
Year-to-date fiscal year 2010 vs. year-to-date fiscal year 2009
Other overhead expenses for the nine months ended
Interest expense dropped by 80.1% or
Net income for the year-to-date of fiscal 2010 was
Income tax expense was
RESULTS OF OPERATIONS
Canaccord Adams(1)
-------------------------------------------------------------------------
Three months Nine months
ended Quarter- ended
(C$ thousands, December 31 over- December 31 YTD-
except employees quarter over-YTD
and % amounts) 2009 2008 change 2009 2008 change
-------------------------------------------------------------------------
Canaccord Adams
Revenue 116,090 49,250 135.7% 280,062 212,379 31.9%
Expenses
Incentive
compen-
sation 63,567 28,857 120.3% 151,559 111,384 36.1%
Salaries
and
benefits 4,441 3,413 30.1% 11,221 11,555 (2.9)%
Other
overhead
expenses 20,102 26,027 (22.8)% 58,480 83,528 (30.0)%
Impairment
of goodwill
and
intangibles - 31,524 (100.0)% - 31,524 (100.0)%
Restructuring
costs - 5,949 (100.0)% - 5,949 (100.0)%
-------------------------------------------------------------------------
Total
expenses 88,110 95,770 (8.0)% 221,260 243,940 (9.3)%
Income (loss)
before income
taxes(2) 27,980 (46,520) (160.1)% 58,802 (31,561) (286.3)%
Income (loss)
before
significant
items and
income
taxes 27,980 (9,047) n.m. 58,802 5,912 n.m.
Number of
employees 503 480 4.8%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for income (loss) before
significant items and income taxes, and 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.
Third quarter 2010 vs. third quarter 2009
Revenue for Canaccord Adams in Q3/10 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. Third quarter 2010 revenue for Canaccord Adams in the US was
Expenses
Expenses in Canaccord Adams for the third quarter of fiscal 2010 were
General and administrative expense was
Income before income taxes for the quarter was
Year-to-date fiscal year 2010 vs. year-to-date fiscal year 2009
Revenue for Canaccord Adams for the year-to-date 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 year-to-date 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 higher advisory fees. Revenue was
Expenses
Expenses for the year-to-date of fiscal 2010 were
Salary and benefits expense for the year-to-date of fiscal 2010 declined slightly 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 Nine months
employees; ended Quarter- ended
Advisory December 31 over- December 31 YTD-
Teams; and quarter over-YTD
% amounts) 2009 2008 change 2009 2008 change
-------------------------------------------------------------------------
Revenue 51,733 33,532 54.3% 132,056 135,229 (2.3)%
Expenses
Incentive
compensation 24,376 14,195 71.7% 62,387 61,261 1.8%
Salaries and
benefits 4,015 3,057 31.3% 12,621 10,315 22.4%
Other
overhead
expenses 13,656 17,437 (21.7)% 37,420 43,707 (14.4)%
Client relief
provision - 2,700 (100.0)% - 2,700 (100.0)%
Canaccord
relief
program fair
value
adjustment - 2,647 (100.0)% - 2,647 (100.0)%
Restructuring
costs - 180 (100.0)% - 180 (100.0)%
-------------------------------------------------------------------------
Total expenses 42,047 40,216 4.6% 112,428 120,810 (6.9)%
Income before
income taxes(2) 9,686 (6,684) (244.9)% 19,628 14,419 36.1%
Income (loss)
before
significant
items and
income taxes 9,686 (1,157) n.m. 19,628 19,946 (1.6)%
Assets under
management 423 454 (6.8)% 423 454 (6.8)%
Assets under
admin-
istration 12,210 9,030 35.2% 12,210 9,030 35.2%
Number of
Advisory Teams 327 347 (5.8)%
Number of
employees 707 725 (2.5)%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for AUM, AUA, number of Advisory
Teams, income (loss) before significant items and income taxes and
number of employees.
(2) See "Intersegment Allocated Costs".
n.m.: not meaningful
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.
Third quarter 2010 vs. third quarter 2009
Revenue from Canaccord Wealth Management was
Expenses for Q3/10 were
Other overhead expenses decreased mainly due to a decrease in general and administrative expense of
Income before income taxes for the quarter was
Year-to-date fiscal year 2010 vs. year-to-date fiscal year 2009
Revenue from Canaccord Wealth Management was
Expenses for the nine months ended
The decrease in expenses was offset by an increase in development costs of
Income before income taxes for the year-to-date of fiscal 2010 was
Corporate and Other(1)
-------------------------------------------------------------------------
Three months Nine months
ended Quarter- ended
(C$ thousands, December 31 over- December 31 YTD-
except employees quarter over-YTD
and % amounts) 2009 2008 change 2009 2008 change
-------------------------------------------------------------------------
Revenue 5,374 4,406 22.0% 22,286 23,117 (3.6)%
Expenses
Incentive
compensation 5,929 247 n.m. 12,355 4,358 183.5%
Salaries and
benefits 6,489 6,347 2.2% 18,888 20,585 (8.2)%
Other overhead
expenses 8,312 8,954 (7.2)% 23,307 26,825 (13.1)%
ABCP fair
value
adjustment - 6,700 (100.0)% - 6,700 (100.0)%
Restructuring
costs - 1,391 (100.0)% - 1,391 (100.0)%
-------------------------------------------------------------------------
Total expenses 20,730 23,639 (12.3)% 54,550 59,859 (8.9)%
Loss before
income
taxes(2) (15,356) (19,233) (20.2)% (32,264) (36,742) (12.2)%
Loss before
significant
items and
income taxes (15,356) (11,142) 37.8% (32,264) (28,651) 12.6%
Number of
employees 360 365 (1.4)%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for loss before significant
items and income taxes and number of employees
(2) See "Intersegment Allocated Costs".
n.m.: not meaningful
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.
Third quarter 2010 vs. third quarter 2009
Revenue for the three months ended
Expenses for Q3/10 were
Overall, loss before income taxes was
Year-to-date fiscal year 2010 vs. year-to-date fiscal year 2009
Revenue was
Expenses for the year-to-date 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
Securities sold short were
Other liabilities include income taxes payable and subordinated debt with a total balance of
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 and is further complemented by subordinated debt. 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 nine-months ended
OUTSTANDING SHARE DATA
-------------------------------------------------------------------------
Outstanding shares
as of
December 31
-------------------------------------------------------------------------
2009 2008
-------------------------------------------------------------------------
Issued shares excluding unvested shares(1) 48,105,856 49,108,237
Issued shares outstanding(2) 55,404,528 54,636,139
Issued shares outstanding - diluted(3) 57,266,909 56,218,193
Average shares outstanding - basic 48,376,433 48,656,116
Average shares outstanding - diluted 55,576,702 54,329,767
-------------------------------------------------------------------------
(1) Excludes 3,811,007 unvested shares that are outstanding relating to
share purchase loans for recruitment and retention programs, and
3,487,665 unvested shares purchased by the employee benefit trust for
the LTIP.
(2) Includes 3,811,007 unvested shares that are outstanding relating to
share purchase loans for recruitment and retention programs, and
3,487,665 unvested shares purchased by the employee benefit trust for
the LTIP.
(3) Includes 1,862,381 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
In
On
Long term incentive plan
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 and Note 6 of the Unaudited Interim Consolidated Financial Statements.
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
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 three phases:
1. Diagnostic phase - This phase involves preparing the high-level
impact assessment of the significant differences between IFRS and
Canadian GAAP that may have a material impact on the Company's
financial statements. The procedures in this phase will prioritize
the areas that will be affected.
2. Design and planning - This phase includes identification, evaluation,
and selection of accounting policies in accordance with IFRS. Mock
financial statements will be prepared during this phase and
quantitative impacts will be determined. Operational plans will be
completed to evaluate the impact of conversion on information
technology, internal control over financial reporting, training, and
communication to internal and external stakeholders.
3. Implementation and post-implementation review - This phase involves
execution of the plans prepared in the phases described above. It
will also include collecting information required for IFRS-compliant
financial statements, implementing IFRS in business processes,
obtaining audit committee approval of IFRS financial statements, and
provide any further taining for employees for revised systems.
The Company is in the design and planning phase of the changeover plan. We are currently focusing on the areas that will have the most significant impact on the consolidated financial statements. Assessment of the application of IFRS 1 "First time adoption of IFRS" (IFRS 1) is also ongoing. IFRS 1 provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions, in certain areas, to the general requirements for full retrospective application of IFRSs.
It is noted that both the AcSB and the IASB have significant workplans to change certain accounting standards. The AcSB is continuously making changes to converge some standards to align with IASB before the changeover date, while IASB is modifying its standards to meet the needs of the current economic environment. For example, the IASB have published discussion papers and exposure drafts proposing significantly different accounting models in the following areas that may materially impact the Company's consolidated financial statements: lease accounting, financial instruments, and revenue recognition. The Company will continue to monitor the progress of these changes and assess the impact on the changeover implementation plan. Due to the uncertainties of the proposed standards, the Company has not been able to evaluate the quantitative impacts expected on its consolidated financial statements.
We have identified three main areas below that contain significant differences based on current Canadian GAAP and IFRS as of today.
Financial instruments
---------------------
The IASB recently issued IFRS 9 "Financial Instruments: Recognition and
Measurement", which specifically addresses the recognition and
measurement of financial assets. Financial assets are initially measured
at fair value and classified as either amortized cost or fair value. This
differs from the current CICA Handbook Section 3855 "Financial
Instruments: Recognition and Measurement" in that financial assets are
initially measured at fair value, and they are classified as held for
trading, held to maturity, loans and receivables, or available for sale.
Under Canadian GAAP, any gains or losses from available for sale assets
are recognized in other comprehensive income; however, this
classification does not exist under IFRS. Any changes in fair value or
amortization of amortized cost financial assets are recognized into net
income directly.
Transaction costs are also required to be capitalized as part of the fair
value of the financial asset upon initial recognition under IFRS.
Canadian GAAP allows for the option to expense transaction costs as
incurred or capitalized as part of the fair value of the financial asset.
Stock-based compensation
------------------------
IFRS 2 "Share-Based Payments" requires that cash-settled share-based
payments to employees be measured based on fair values of the awards at
initial and subsequent measurement. Under CICA Handbook Section 3870
"Stock-Based Compensation", cash-settled share-based payments are
measured at intrinsic values of the awards. This will have an impact on
the accounting of our stock-based compensation plans.
Revenue recognition
-------------------
Per CICA Handbook Section 3400 "Revenue", revenue is recognized when
performance is completed and collectibility is reasonably assured.
Performance relating to services rendered and long-term contracts is
determined using the percentage completion method or the completed
contract method. Per International Accounting Standard (IAS) 18
"Revenue", revenue should be recognized based on the stage of completion
of the transaction at the end of the reporting period when the following
conditions are satisfied: amount of revenue can be reasonably determined,
probable that economic benefits of the transaction will flow to the
entity, stage of completion of the transaction at the end of the
reporting period can be measured reliably, and costs incurred for the
transaction and the costs to complete the transaction can be measured
reliably.
Accounting for revenue under Canadian GAAP and IFRS is similar except for
some differences in the accounting for long-term contracts where the
completed contract method is permitted under Canadian GAAP but not under
IFRS. This may have an impact on the revenue recognition of our
investment banking revenue.
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 of the Unaudited Interim Consolidated Financial Statements.
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
The first two installments of interest (to
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, Fiscal 2010 Fiscal 2009
except EPS in $) ----------- -----------
-------------------------------------------------------------------------
Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Revenue
Canaccord Adams $116,090 $78,475 $85,497 $64,972 $49,250
Canaccord Wealth
Management 51,733 40,138 40,185 37,255 33,532
Corporate and Other 5,374 5,131 11,781 4,769 4,406
-------------------------------------------------------------------------
Total revenue 173,197 123,744 137,463 106,996 87,188
Net income (loss) 15,113 6,746 9,112 3,666 (62,378)
EPS - basic 0.31 0.14 0.19 0.07 (1.27)
EPS - diluted 0.27 0.12 0.16 0.07 (1.27)
-------------------------------------------------------------------------
----------------------------------------------------------------
(C$ thousands, Fiscal 2009 Fiscal 2008
except EPS in $) ----------- -----------
----------------------------------------------------------------
Q2 Q1 Q4 Q3
----------------------------------------------------------------
Revenue
Canaccord Adams $58,336 $104,793 $77,965 $109,583
Canaccord Wealth
Management 43,844 57,853 54,463 61,166
Corporate and Other 8,649 10,062 11,018 12,605
----------------------------------------------------------------
Total revenue 110,829 172,708 143,446 183,354
Net income (loss) (5,398) 16,459 (35,154) 15,048
EPS - basic (0.11) 0.35 (0.80) 0.34
EPS - diluted (0.11) 0.31 (0.80) 0.31
----------------------------------------------------------------
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 Financial Inc. (formerly Canaccord Capital Inc.)
Unaudited
For the three months and nine months ended December 31, 2009
(Expressed in Canadian dollars)
Canaccord Financial Inc.
INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands of dollars)
As at December 31, March 31,
2009 2009
$ $
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents 782,576 701,173
Securities owned (note 3) 404,537 133,691
Accounts receivable (notes 5 and 11) 1,311,144 1,061,161
Income taxes receivable - 23,771
Future income taxes 11,890 15,680
-------------------------------------------------------------------------
Total current assets 2,510,147 1,935,476
Investment 5,000 5,000
Investment in asset-backed commercial paper
(note 6) 28,239 35,312
Equipment and leasehold improvements 40,471 46,311
-------------------------------------------------------------------------
2,583,857 2,022,099
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness 44,600 75,600
Securities sold short (note 3) 324,877 79,426
Accounts payable and accrued liabilities
(notes 5 and 11) 1,794,123 1,469,369
Income taxes payable 4,590 -
Subordinated debt (note 8) 15,000 25,000
-------------------------------------------------------------------------
Total current liabilities 2,183,190 1,649,395
-------------------------------------------------------------------------
Commitments and contingencies (note 13)
Shareholders' equity
Common shares (note 9) 188,610 183,619
Contributed surplus 49,279 44,383
Retained earnings 189,026 160,868
Accumulated other comprehensive losses (26,248) (16,166)
-------------------------------------------------------------------------
Total shareholders' equity 400,667 372,704
-------------------------------------------------------------------------
2,583,857 2,022,099
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Canaccord Financial Inc.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands of dollars,
except per share amounts)
For the three For the nine
months ended months ended
---------------------- ----------------------
December December December December
31, 2009 31, 2008 31, 2009 31, 2008
$ $ $ $
------------------------------------------------- ----------------------
REVENUE
Commission 60,696 51,473 172,780 184,099
Investment banking 88,417 20,198 191,923 130,369
Principal trading (note 6) 15,645 3,781 38,704 9,779
Interest 3,099 9,108 9,696 33,171
Other 5,340 2,628 21,301 13,307
------------------------------------------------- ----------------------
173,197 87,188 434,404 370,725
------------------------------------------------- ----------------------
EXPENSES
Incentive compensation 93,872 43,299 226,301 177,003
Salaries and benefits 14,945 12,817 42,730 42,455
Trading costs 7,140 6,708 21,466 19,746
Premises and equipment 6,228 6,549 18,214 18,291
Communication and
technology 5,838 6,277 16,572 18,979
Interest 631 2,568 1,968 9,881
General and administrative 13,609 19,827 37,195 58,715
Amortization 1,904 2,751 5,731 6,865
Development costs 6,720 7,738 18,061 21,583
Asset-backed commercial
paper fair value
adjustment - 6,700 - 6,700
Client relief program - 5,347 - 5,347
Impairment of goodwill
and intangibles - 31,524 - 31,524
Restructuring costs - 7,520 - 7,520
------------------------------------------------- ----------------------
150,887 159,625 388,238 424,609
------------------------------------------------- ----------------------
Income (loss) before
income taxes 22,310 (72,437) 46,166 (53,884)
Income tax expense
(recovery)
Current 7,070 (7,769) 11,429 (17,910)
Future 127 (2,290) 3,766 15,343
------------------------------------------------- ----------------------
7,197 (10,059) 15,195 (2,567)
------------------------------------------------- ----------------------
------------------------------------------------- ----------------------
Net income (loss) for
the period 15,113 (62,378) 30,971 (51,317)
------------------------------------------------- ----------------------
------------------------------------------------- ----------------------
Basic earnings (loss)
per share (note 9 (iv)) 0.31 (1.27) 0.64 (1.05)
Diluted earnings (loss)
per share (note 9 (iv)) 0.27 (1.27) 0.56 (1.05)
------------------------------------------------- ----------------------
------------------------------------------------- ----------------------
See accompanying notes
Canaccord Financial Inc.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands of dollars)
For the three For the nine
months ended months ended
----------------------------------------------
December December December December
31, 2009 31, 2008 31, 2009 31, 2008
$ $ $ $
----------------------------------------------
Net income (loss) for
the period 15,113 (62,378) 30,971 (51,317)
Other comprehensive loss,
net of taxes
Net change in unrealized
losses on translation
of self-sustaining
foreign operations (63) (1,519) (10,082) (8,281)
-------------------------------------------------------------------------
Comprehensive income
(loss) for the period 15,050 (63,897) 20,889 (59,598)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INTERIM CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (Unaudited)
(in thousands of dollars)
As at and for the nine months ended December 31, December 31,
2009 2008
$ $
-------------------------------------------------------------------------
Common shares, opening 183,619 111,142
Shares issued 3,819 69,979
Shares cancelled - (442)
Acquisition of common shares for long
term incentive plan (notes 9 and 10) (11,691) (13,839)
Release of vested common shares from
employee benefit trust (note 10) 10,035 5,994
Unvested share purchase loans 2,828 3,162
-------------------------------------------------------------------------
Common shares, closing 188,610 175,996
-------------------------------------------------------------------------
Contributed surplus, opening 44,383 34,024
Excess on redemption of common shares - (340)
Stock-based compensation (note 10) 4,742 9,509
Unvested share purchase loans 154 (451)
-------------------------------------------------------------------------
Contributed surplus, closing 49,279 42,742
-------------------------------------------------------------------------
Retained earnings, opening 160,868 222,597
Net income for the period 30,971 (51,317)
Dividends (2,813) (13,457)
-------------------------------------------------------------------------
Retained earnings, closing 189,026 157,823
-------------------------------------------------------------------------
Accumulated other comprehensive losses,
opening (16,166) (10,319)
Other comprehensive losses for the period (10,082) (8,281)
-------------------------------------------------------------------------
Accumulated other comprehensive losses,
closing (26,248) (18,600)
-------------------------------------------------------------------------
Shareholders' equity 400,667 357,961
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Canaccord Financial Inc.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands of dollars)
For the three For the nine
months ended months ended
---------------------- ----------------------
December December December December
31, 2009 31, 2008 31, 2009 31, 2008
$ $ $ $
------------------------------------------------- ----------------------
OPERATING ACTIVITIES
Net income (loss) for
the period 15,113 (62,378) 30,971 (51,317)
Items not affecting cash
Amortization 1,904 2,751 5,731 6,865
Stock-based compensation
expense 5,874 5,542 16,949 16,122
Future income tax
(recovery) expense 127 (2,290) 3,766 15,343
Impairment of goodwill
and intangibles - 31,524 - 31,524
Asset-backed commercial
paper gain and fair
value adjustment (4,559) 6,700 (4,559) 6,700
Changes in non-cash
working capital
Decrease (increase) in
securities owned 112,437 (16,974) (271,752) 19,251
Decrease (increase) in
accounts receivable 670,252 425,012 (255,291) 606,405
Decrease (increase) in
income taxes receivable
net of payable 5,877 (9,295) 25,231 (17,614)
(Decrease) increase in
securities sold short (57,345) 46,927 245,822 48,351
(Decrease) increase in
accounts payable and
accrued liabilities (630,792) (296,629) 329,681 (490,610)
------------------------------------------------- ----------------------
Cash provided by
operating activities 118,888 130,890 126,549 191,020
------------------------------------------------- ----------------------
FINANCING ACTIVITIES
Acquisition of common
shares for long term
incentive plan (6,454) - (11,691) (13,839)
Dividends paid (2,770) - (2,770) (13,457)
Decrease in unvested
common share purchase
loans (308) 1,936 2,828 2,711
Repayment of subordinated
debt - - (10,000) -
Issuance of shares for cash
net of issuance costs - - - 66,462
Purchase and cancellation
of shares - - - (782)
------------------------------------------------- ----------------------
Cash (used in) provided by
financing activities (9,532) 1,936 (21,633) 41,095
------------------------------------------------- ----------------------
INVESTING ACTIVITIES
Purchase of equipment and
leasehold improvements (993) (5,267) (1,558) (8,024)
Purchase of Intelli (1,199) - (1,199) -
Proceeds on sale of
investment in ABCP 18,537 - 18,537 -
Purchase of investment
in ABCP under client
relief program, net of
redemptions (8,666) - (6,905) -
------------------------------------------------- ----------------------
Cash provided by (used in)
investing activities 7,679 (5,267) 8,875 (8,024)
------------------------------------------------- ----------------------
Effect of foreign exchange
on cash balances (2,914) 3,396 (1,388) 721
------------------------------------------------- ----------------------
Increase in cash position 114,121 130,955 112,403 224,812
Cash position, beginning
of period 623,855 514,468 625,573 420,611
------------------------------------------------- ----------------------
Cash position, end of
period 737,976 645,423 737,976 645,423
------------------------------------------------- ----------------------
------------------------------------------------- ----------------------
Cash position is
comprised of:
Cash and cash equivalents 782,576 684,463 782,576 684,463
Bank indebtedness (44,600) (39,040) (44,600) (39,040)
------------------------------------------------- ----------------------
------------------------------------------------- ----------------------
737,976 645,423 737,976 645,423
------------------------------------------------- ----------------------
------------------------------------------------- ----------------------
Supplemental cash flow
information
Interest paid 579 2,508 1,806 9,775
Income taxes paid 591 3,420 2,594 6,256
------------------------------------------------- ----------------------
------------------------------------------------- ----------------------
See accompanying notes
Canaccord Financial Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the three and nine months ended December 31, 2009
(in thousands of dollars, except per share amounts)
Through its principal subsidiaries, Canaccord Financial Inc. (formerly
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: global 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 (loss) 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 and liquidity of financial instruments. The Company adopted
these new amendments during fiscal 2010 and this information is included
in Note 4.
Revenue Recognition
The Company introduced Registered Plan Administration Fees during the
three month period ended December 31, 2009. This fee income is received
in advance for a one-year period and it is deferred and recognized into
income as earned on a straight line basis.
3. SECURITIES OWNED AND SECURITIES SOLD SHORT
December 31, 2009 March 31, 2009
----------------------- -----------------------
Securities Securities Securities Securities
owned sold short owned sold short
$ $ $ $
-------------------------------------------------------------------------
Corporate and government
debt 311,503 311,023 86,069 72,315
Equities and convertible
debentures 93,034 13,854 47,622 7,111
-------------------------------------------------------------------------
404,537 324,877 133,691 79,426
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2009, corporate and government debt maturities ranged
from 2010 to 2060 (March 31, 2009 - 2009 to 2049) bearing interest
ranging from 0.50% to 14.00% (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 recent 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.
Estimated
Carrying value fair value
December March 31, December
31, 2009 2009 31, 2009
Level 1 Level 2 Level 3
$ $ $ $ $
-------------------------------------------------------------------------
Held for trading(1)
Cash and cash equivalents 782,576 701,173 782,576 - -
Securities owned, net of
securities sold short 79,660 54,265 74,606 5,054 -
Investment in ABCP (note 6) 28,239 35,312 - - 28,239
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
December 31, March 31,
2009 2009
$ $
-------------------------------------------------------------------------
Brokers and investment dealers 535,303 331,930
Clients 326,995 288,877
RRSP cash balances held in trust 379,179 397,011
Other 69,667 43,343
-------------------------------------------------------------------------
1,311,144 1,061,161
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts payable and accrued liabilities
December 31, March 31,
2009 2009
$ $
-------------------------------------------------------------------------
Brokers and investment dealers 659,383 419,437
Clients 988,817 923,902
Other 145,923 126,030
-------------------------------------------------------------------------
1,794,123 1,469,369
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts payable to clients include $379.2 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 (IIROC) 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 (December 31, 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
December 31, March 31,
2009 2009
$ $
-------------------------------------------------------------------------
Investment in asset-backed commercial paper 28,239 35,312
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 December 31, 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. This release has been given
effect in the United States under Chapter 15 of the US Bankruptcy Code.
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.
On December 21, 2009, a Hearing Panel of the IIROC accepted a settlement
agreement between the IIROC Staff and Canaccord Financial Ltd. regarding
matters surrounding ABCP, which resulted in a settlement of $3.1 million.
This amount was substantially accrued at September 30, 2009 and
therefore, there was no significant impact on net income in the quarter
ended December 31, 2009. This amount was paid subsequent to December 31,
2009.
There has been very limited trading of the restructured ABCP notes since
January 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. During the quarter ended December 31, 2009, the Company
disposed of its investment in ABCP with a carrying value of $14.3 million
for proceeds of $18.5 million resulting in a gain of $4.2 million
included in principal trading revenue. A fair value adjustment of
$0.3 million was also included in principal trading revenue.
The assumptions used in the valuation model include:
December 31, 2009 March 31, 2009
-------------------------------------------------------------------------
Weighted average interest rate 0.29% 4.72%
Weighted average discount rate 6.03% 6.83%
Maturity of notes 7 to 18 years 8 to 19 years
Credit losses 30% to 100% 25% to 100%
The following is a summary of transactions impacting ABCP for the
nine-month period ended December 31, 2009:
Amount
$
-------------------------------------------------------------------------
Balance, March 31, 2009 35,312
Net redemptions (2,222)
Purchases under the client relief program 9,127
Disposal of investment (14,276)
Fair value adjustment 298
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance, December 31, 2009 28,239
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 three For the nine
months ended months ended
December December December December
31, 2009 31, 2008 31, 2009 31, 2008
$ $ $ $
-------------------------------------------------------------------------
Income taxes at the
estimated statutory rate 6,772 (22,595) 13,976 (16,780)
Less: International
Finance Business recovery
of provincial taxes (208) (336) (389) (336)
Less: Difference in tax
rates in foreign
jurisdictions (178) (1,199) (124) (2,111)
Non-deductible items
affecting the
determination of
taxable income 490 10,254 1,164 11,295
Change in valuation
allowance related to
US operating losses (223) 4,277 (2,920) 6,043
Change in FIT asset -
reversal period of
temporary differences 544 (460) 3,488 (678)
-------------------------------------------------------------------------
Income tax expense -
current and future 7,197 (10,059) 15,195 (2,567)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. SUBORDINATED DEBT
December 31, 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 IIROC.
9. SHARE CAPITAL
December 31, March 31,
2009 2009
$ $
-------------------------------------------------------------------------
Share capital
Common shares 253,237 249,418
Unvested share purchase loans (28,083) (30,911)
Acquisition of common shares for
long term incentive plan (note 10) (36,544) (34,888)
-------------------------------------------------------------------------
188,610 183,619
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Share capital of Canaccord Financial 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, December 31, 2008 54,636,139 243,336
Shares issued in connection with
stock compensation plans (note 10) 681,777 7,101
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) 311,684 3,819
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance, December 31, 2009 55,404,528 253,237
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 December 31, 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 three For the nine
months ended months ended
---------------------- ----------------------
December December December December
31, 2009 31, 2008 31, 2009 31, 2008
$ $ $ $
-------------------------------------------------------------------------
Basic earnings (loss)
per share
Net income (loss) for
the period $15,113 $(62,378) $30,971 $(51,317)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number
of common shares
(number) 48,147,301 49,073,032 48,376,433 48,656,116
Basic earnings (loss)
per share $0.31 $(1.27) $0.64 $(1.05)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings (loss)
per share
Net income (loss) for
the period $15,113 $(62,378) $30,971 $(51,317)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average number
of common shares
(number) 48,147,301 49,073,032 48,376,433 48,656,116
Dilutive effect of
unvested shares (number) 3,811,007 2,810,989 3,811,007 2,810,989
Dilutive effect of stock
options (number) (note 10) 412,594 - 26,563 -
Dilutive effect of share
issuance commitment in
connection with retention
plan (number) (note 10) - 616,205 - 616,205
Dilutive effect of
unvested shares purchased
by employee benefit trust
(number) (note 10) 3,422,722 2,719,062 3,092,333 2,246,457
Dilutive effect of share
issuance commitment in
connection with long
term incentive plan
(number) (note 10) 480,544 - 270,366 -
-------------------------------------------------------------------------
Adjusted weighted
average number of
common shares (number) 56,274,168 55,219,288 55,576,702 54,329,767
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings (loss)
per share $0.27 $(1.27) $0.56 $(1.05)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 December 31, 2009.
In May 2009, the Company granted an aggregate of 125,000 stock options to
five independent directors with an exercise price of $7.21 per share. The
options vest over a four-year period and expire seven years after the
grant date.
In August 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 $9.47 per share that vest over five years. The options
expire at the earliest of: (1) seven years after the grant date,
(2) three years after death or any other event of termination of
employment, (3) after any unvested optioned shares held by the optionee
are cancelled for any reason, and (4) in the case of early retirement,
after a determination that the optionee has competed with the Company or
violated any non-competition, non-solicitation or non-disclosure
obligations.
The following is a summary of the Company's stock options to independent
directors and senior managers as at December 31, 2009 and changes during
the year then ended:
Weighted
average
Number of exercise
shares price ($)
-------------------------------------------------------------------------
Balance, December 31, 2008 275,000 $15.54
Expired (50,000) 16.31
-------------------------------------------------------------------------
Balance, March 31, 2009 225,000 15.37
Granted 2,224,993 9.34
-------------------------------------------------------------------------
Balance, December 31, 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 $436 and $693 has been recognized for the three
and nine months ended December 31, 2009 ($51 and $152 for the three and
nine months ended December 31, 2008) in respect of the above stock
options.
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 $5.4 million and $16.3 million has been
recognized for the three and nine months ended December 31, 2009
($4.7 million and $13.5 million for the three and nine months ended
December 31, 2008) in respect of the LTIP.
For the three For the nine
months ended months ended
---------------------- ----------------------
December December December December
31, 2009 31, 2008 31, 2009 31, 2008
---------------------- ----------------------
Awards outstanding,
beginning of period 5,447,251 3,881,558 4,602,385 2,221,578
Grants 285,756 133,994 2,189,216 2,195,969
Vested (169,425) (128,100) (1,228,019) (530,095)
-------------------------------------------------------------------------
Awards outstanding,
end of period 5,563,582 3,887,452 5,563,582 3,887,452
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three For the nine
months ended months ended
---------------------- ----------------------
December December December December
31, 2009 31, 2008 31, 2009 31, 2008
---------------------- ----------------------
Common shares held by
Trust, beginning of
period 2,931,932 3,011,055 3,075,300 1,621,895
Acquired 680,119 - 1,328,700 1,706,903
Released on vesting (124,386) (97,898) (916,335) (415,641)
-------------------------------------------------------------------------
Common shares held by
Trust, end of period 3,487,665 2,913,157 3,487,665 2,913,157
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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:
December 31, March 31,
2009 2009
$ $
-------------------------------------------------------------------------
Accounts receivable 44,297 38,733
Accounts payable and accrued liabilities 79,763 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 December 31
2009
----------------------------------------------
Canaccord Corporate
Canaccord Wealth and
Adams Management Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenue 116,090 51,733 5,374 173,197
Expenses 84,743 38,194 19,326 142,263
Amortization 903 637 364 1,904
Development costs 2,464 3,216 1,040 6,720
Impairment of goodwill
and intangibles - - - -
-------------------------------------------------------------------------
Income (loss) before
income taxes 27,980 9,686 (15,356) 22,310
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008
----------------------------------------------
Canaccord Corporate
Canaccord Wealth and
Adams Management Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenue 49,250 33,532 4,406 87,188
Expenses 58,409 37,441 21,762 117,612
Amortization 1,586 463 702 2,751
Development costs 4,251 2,312 1,175 7,738
Impairment of goodwill
and intangibles 31,524 - - 31,524
-------------------------------------------------------------------------
Income (loss) before
income taxes (46,520) (6,684) (19,233) (72,437)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended December 31
2009
----------------------------------------------
Canaccord Corporate
Canaccord Wealth and
Adams Management Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenue 280,062 132,056 22,286 434,404
Expenses 211,278 102,837 50,331 364,446
Amortization 2,787 1,857 1,087 5,731
Development costs 7,195 7,734 3,132 18,061
Impairment of goodwill
and intangibles - - - -
-------------------------------------------------------------------------
Income (loss) before
income taxes 58,802 19,628 (32,264) 46,166
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008
----------------------------------------------
Canaccord Corporate
Canaccord Wealth and
Adams Management Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenue 212,379 135,229 23,117 370,725
Expenses 196,936 114,271 53,430 364,637
Amortization 3,424 1,283 2,158 6,865
Development costs 12,056 5,256 4,271 21,583
Impairment of goodwill
and intangibles 31,524 - - 31,524
-------------------------------------------------------------------------
Income (loss) before
income taxes (31,561) 14,419 (36,742) (53,884)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 three For the nine
months ended months ended
----------------------------------------------
December December December December
31, 2009 31, 2008 31, 2009 31, 2008
$ $ $ $
-------------------------------------------------------------------------
Canada
Revenue 123,626 57,907 290,750 247,580
Equipment and leasehold
improvements 28,791 29,285 28,791 29,285
United Kingdom
Revenue 26,420 11,752 61,120 58,567
Equipment and leasehold
improvements 5,736 7,099 5,736 7,099
United States
Revenue 22,817 16,533 80,133 60,438
Equipment and leasehold
improvements 5,944 7,794 5,944 7,794
Other Foreign Location
Revenue 334 996 2,401 4,140
-------------------------------------------------------------------------
13. COMMITMENTS AND CONTINGENCIES
During the period, there were no material changes, except for the
contingencies disclosed below, to the Company's commitments and
contingencies from those described in Note 17 of the Audited Annual
Consolidated Financial Statements.
a) Canaccord Financial Ltd. 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.
As disclosed in the Audited Annual Consolidated Financial Statements, in
2002, an action was commenced in the Ontario Superior Court of Justice
against the Company and other defendants including another investment
dealer. The claim makes allegations of illegal activities by two of the
Company's former Investment Advisors who were previously employed by the
other investment dealer named in the action. The claim against the
Company and the other investment dealer is, among other things, that
there was a failure to supervise the conduct of the investment advisors.
The damages claimed in this action are $27 million. During the period
ended December 31, 2009, this action was dismissed for failure to post
security for costs. The period for an appeal of that decision has not yet
expired.
14. BUSINESS COMBINATION
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 net
assets at fair value of approximately $5.8 million, for cash
consideration of $7.0 million. Intelli is focused on investment companies
and companies within the asset management sector.
15. SUBSEQUENT EVENTS
On February 3, 2010, the Board of Directors declared a common share
dividend of $0.05 per share payable on March 10, 2010, with a record date
of February 26, 2010.
For further information: North American media: Scott Davidson, Managing Director, Global Head of Marketing & Communications, Phone: (416) 869-3875, Email: [email protected]; Investor relations inquiries: Joy Fenney, Vice President, Investor Relations, Phone: (416) 869-3515, Email: [email protected]; London media: Bobby Morse or Ben Willey, Buchanan Communications (London), Phone: +44 (0) 207 466 5000, 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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