Attention Business/Financial Editors:
Canaccord Capital Inc. reports fiscal third quarter results
(All dollar amounts are stated in Canadian dollars unless otherwise
indicated)
VANCOUVER, Feb. 7 /CNW/ - Canaccord Capital Inc.'s (TSX & AIM: CCI)
revenue for the three months ended December 31, 2007 was $183.3 million, up
2.8% from the same quarter a year ago. Net income for the same period was
$15.0 million, down 36.5% and diluted earnings per share (EPS) were
$0.31, down 36.7% from the same period a year ago. Included in these results
is the third party asset-backed commercial paper (ABCP) fair value adjustment
of $4.2 million. Excluding the ABCP fair value adjustment, net income for the
quarter was $17.8 million, down 24.7% from the same period a year ago and EPS
were $0.36, down 26.5%. Commenting on the quarter, Paul Reynolds, President
and CEO said, "It was again a challenging quarter marked by volatile global
markets, so we're pleased to have emerged profitably and successfully. That
said, we're definitely cautious in our current outlook for the near term."
An adjustment of $4.2 million related to ABCP held in treasury has been
recorded at December 31, 2007 to reflect management's view of current market
conditions and the limited liquidity for these notes. In total, $8.6 million
has been recorded as an ABCP fair value adjustment in Q2 and Q3 of fiscal
2008. The fair value was estimated by management and the adjustment has been
recorded as an "ABCP fair value adjustment". The incremental adjustment of
$4.2 million booked this quarter is based on current market conditions, and on
management's assessment of the best available information.
Revenue for the nine months ended December 31, 2007 was $588.1 million,
up 8.8% from the same period a year ago. Net income was $66.5 million for the
nine-month period representing a decrease of 1.4% from the same period a year
ago. Diluted earnings per share were $1.37, down 2.1% from $1.40 for the same
period a year ago. Excluding the ABCP fair value adjustment, net income was
$72.2 million, up 7.0% compared to the same period a year ago, and EPS were
$1.48, up 5.7%.
<<
Financial highlights: impact of ABCP fair value adjustment
-------------------------------------------------------------------------
(C$ thousands, Three months
except EPS in $) ended December 31, 2007
-------------------------------------------------------------------------
Net income
before
Revenue Expenses tax Net income EPS
-------------------------------------------------------------------------
Including ABCP
fair value
adjustment $183,354 $159,043 $ 24,311 $ 15,048 $ 0.31
ABCP fair value
adjustment - $ 4,226 $ 4,226 $ 2,785 $ 0.05
-------------------------------------------------------------------------
Excluding ABCP
fair value
adjustment(1) $183,354 $154,817 $ 28,537 $ 17,833 $ 0.36
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(C$ thousands, Nine months ended
except EPS in $) ended December 31, 2007
-------------------------------------------------------------------------
Net income
before
Revenue(2) Expenses tax Net income EPS
-------------------------------------------------------------------------
Including ABCP
fair value
adjustment $588,093 $486,004 $102,089 $ 66,488 $ 1.37
ABCP fair value
adjustment - $ 8,625(2) $ 8,625 $ 5,684 $ 0.11
-------------------------------------------------------------------------
Excluding ABCP
fair value
adjustment(1) $588,093 $477,379 $110,714 $ 72,172 $ 1.48
-------------------------------------------------------------------------
(1) Excluding ABCP fair value adjustment refers to results excluding the
ABCP fair value adjustment recorded in Q2/08 and Q3/08. Data is
considered to be non-GAAP; for more details see MD&A.
(2) Revenue for Q2/08 has been adjusted to add back the $4.4 million of
the ABCP fair value adjustment. The adjustment has been recategorized
as an expense on the income statement for Q2/08, which is consistent
with the treatment of the Q3/08 ABCP fair value adjustment.
Highlights for the three months ended December 31, 2007 compared to the
three months ended December 31, 2006:
- Revenue of $183.3 million, up 2.8% or $5.0 million from
$178.3 million
- Expenses of $159.0 million, up 9.9% or $14.4 million from
$144.7 million
- Net income of $15.0 million, down 36.5% or $8.7 million from
$23.7 million
- Diluted EPS of $0.31, down 36.7% or $0.18 from $0.49
- Return on equity (ROE) of 16.2%, down from 27.6%
- Working capital down by 5.5% to $267.3 million from $283.0 million
- Book value per diluted common share for the period end was $7.95, up
7.0% or $0.52 from $7.43
- The Board of Directors approved a quarterly dividend of $0.125 per
share on February 6, 2008, payable on March 10, 2008 with a record
date of February 22, 2008
- Excluding the ABCP fair value adjustment, net income of
$17.8 million, down 24.7% or $5.9 million from $23.7 million
- Excluding the ABCP fair value adjustment, diluted EPS of $0.36, down
26.5% or $0.13 from $0.49
Highlights for the nine months ended December 31, 2007 compared to the
nine months ended December 31, 2006:
- Revenue of $588.1 million, up 8.8% or $47.6 million from
$540.5 million
- Expenses of $486.0 million, up 9.9% or $43.6 million from
$442.4 million
- Net income of $66.5 million, down 1.4% or $0.9 million from
$67.4 million
- Diluted EPS of $1.37, down 2.1% or $0.03 from $1.40
- ROE of 23.3%, down from 28.1%
- Excluding the ABCP fair value adjustment, net income of
$72.2 million, up 7.0% or $4.8 million from $67.4 million
- Excluding the ABCP fair value adjustment, diluted EPS of $1.48, up
5.7% or $0.08 from $1.40
Highlights of Operations:
- Canaccord Adams led over $7.3 billion(1) in transactions globally
from January 1 to December 31, 2007
- Canaccord Adams ranked number one by the National Post and number
three by the Globe and Mail for equity proceeds raised in Canada from
January 1 to December 31, 2007
- Canaccord Adams ranked seventh in Canada for block trading market
share(2) of 4.6% in Q3/08, up from 3.1% in Q3/07
- Canaccord Adams ranked number one(3) for 52 completed Private
Investment in Public Equity (PIPE) transactions in North America that
raised over $1.1 billion in proceeds
- Canaccord Adams led 46 transactions globally to raise total proceeds
of more than $2 billion during Q3/08
- During Q3/08, Canaccord Adams acted as a financial advisor for Yamana
Gold in its $4.6 billion acquisition of Meridian Gold and Northern
Orion Resources
- During Q3/08, Canaccord Adams led or co-led the following equity
transactions:
- $363.0 million on TSX for Heritage Oil Corp.
- $267.0 million on TSX and AIM for First Calgary Petroleum Ltd.
- $225.0 million on TSX-Venture for Rusoro Mining BVI Ltd.
- $110.8 million on TSX-Venture for Peak Gold
- $100.0 million on TSX-Venture for B2Gold Corp.
- $75.1 million on TSX and AIM for Artis REIT
- $44.9 million on AIM for Anglesey Mining PLC/Labrador Iron Mines
- $34.5 million on TSX for Arise Technologies Corp.
- $28.0 million on AMEX for PetroResources
- Including the led and co-led transactions referred to above,
Canaccord Adams participated in a total of 105 transactions globally
to raise gross proceeds of more than $5.5 billion during Q3/08.
Included in these totals:
- Canada participated in 82 transactions, which raised $3.7 billion
- UK participated in 13 transactions, which raised $1.1 billion
- US participated in 10 transactions, which raised $676.0 million
- Assets under administration (AUA) of $14.9 billion, up 5.2% from the
same period a year ago and down 2.8% from Q2/08
- Canaccord's Private Client Services group had 456 Investment Advisors
as of December 31, 2007, up 24 from the same period a year ago and up
three from Q2/08
-----------------------
(1) Source: FP Infomart and Company information. Transactions over
$1.5 million
(2) Source: Canada Equity
(3) Source: PlacementTracker as of December 31, 2007; includes placements
for companies incorporated in Canada and the US
>>
LETTER TO SHAREHOLDERS
We said in our second quarter report to shareholders that the summer of
2007 was one of the "most challenging" in memory. Unfortunately, these same
challenges continued into Canaccord's third quarter of fiscal 2008.
Disclosures about the depth and breadth of problems related to the US sub-
prime mortgage markets continued to dominate credit markets and the financial
services industry, and added unwelcome volatility to equity markets around the
world. The sharp decline in some housing markets, particularly in the United
States, also stimulated concerns about the likelihood of an economic slowdown
in the world's largest economy.
Given this context, we were generally pleased with Canaccord's operating
performance for the three months, which continued to demonstrate the strength
of our global platform, the diversification of our businesses and the
franchise we have built in the small- and mid-cap markets. Our businesses
showed themselves capable of generating consistent levels of revenue and
profitability in a very uncertain business environment - a testimonial to the
quality of our ideas and our service we deliver to our clients.
Update on the third party asset-backed commercial paper market
Following the restructuring of Skeena Capital Trust, Canaccord clients
hold approximately $269 million of third party asset-backed commercial paper
(ABCP) notes in accounts with Canaccord. Canaccord also holds a fair value of
approximately $34.5 million in ABCP.
On December 23, 2007, the Pan-Canadian Investors Committee for ABCP
announced an agreement in principle for a comprehensive restructuring of ABCP
between all parties. The approval of the restructuring is subject to votes by
all investors. While complex, the restructuring - expected to take place by
the end of March - will move all ABCP into three master conduits with short-
term and long-term components. Portions of these will likely begin trading
shortly after the restructuring is finalized. This agreement is intended to
provide investors with some near-term liquidity as well as the opportunity to
recover most or all of their principal over the longer term.
We have adjusted the fair value of the ABCP Canaccord holds to reflect
the present value of expected future cash flows. We recorded a $4.4 million
adjustment in the second quarter of fiscal 2008, and during this quarter made
a further $4.2 million adjustment to the fair value. This brings our total
adjustment to $8.6 million or $0.11 per share.
More detail can be found in the "Critical accounting estimates" section
of Management's Discussion and Analysis of the quarter, on page 22.
Financial highlights
The volatility of global credit and equity markets continued to have a
significant impact on investor confidence in small and mid-market growth
equities, Canaccord's primary market segment. Third quarter revenues from
principal trading, capital markets and Private Client Services were down in
Canada, in contrast to solid gains in our UK and US capital markets
operations. Total revenue was $183.3 million, an increase of 2.8% from the
third quarter of fiscal 2007. Expenses increased 10% due primarily to the ABCP
fair value adjustment, increased general and administrative costs and interest
expense, and ongoing investments in the business. Net income for the three
months declined 36.5% to $15 million. Diluted earnings per share were $0.31,
down 36.7%. Excluding the ABCP fair value adjustment, net income was
$17.8 million, down 24.7% year over year, earnings per share were $0.36, down
26.5%.
Solid performance in capital markets
Given the market context, Canaccord Adams' year-over-year performance was
solid during the third quarter. Revenue advanced 8% to $109.6 million compared
to the third quarter of the prior year, due to higher underwriting and
advisory fees. Our teams in Canada, the US and the UK led 39 transactions
globally during the quarter that raised total proceeds of $1.0 billion,
including a $363 million financing for Heritage Oil Corporation on the TSX.
In Canada, revenue declined 11.4%, to $52 million, from a year ago. The
decrease was driven by lower, more volatile Canadian equity markets during the
three-month period, which reduced trading revenues and investment banking
activity. Calendar 2007, however, provides a better view of Canaccord Adams'
momentum in Canada. According to the National Post rankings for equity
proceeds raised during the year, Canaccord Adams was first overall, with
$4.55 billion raised in 414 transactions. This is an exceptional achievement
for an independent investment firm in Canada. In total, we led more than
$7.3 billion worth of transactions globally during calendar 2007.
In the UK, year-over-year revenues for the quarter advanced 66% to
$34.6 million on renewed strength in investment banking mandates. Our team
participated in eight transactions, which raised $215 million, as we took
advantage of our reputation as a leading broker and Nominated Adviser (Nomad).
Canaccord Adams' momentum continues to build in the United States.
Despite volatile markets and considerable uncertainty, revenue rose nearly 27%
to $22.4 million for the third quarter compared to a year ago, driven by
stronger investment banking business. Private Investment in Public Equity
(PIPE) transactions continue to be an attractive opportunity for us. For
calendar 2007, Canaccord Adams was the leading North American investment firm
in these vehicles, completing 52 transactions in the US and Canada that raised
over $1.1 billion in proceeds(1).
Private Client Services - operating in challenging markets
Despite the uncertainty surrounding the direction of the volatile North
American equity markets, Private Client Services maintained a good level of
revenue and profitability for the quarter. As Private Client Services is based
in Canada, the more volatile Canadian markets had an impact on this segment's
revenue, which declined by 11% quarter-over-quarter. The main declines in
revenue were in principal trading revenue down 3.6% and in unrealized losses
on mark-to-market adjustments down 4.2%. A drop in compensation expense was
partially offset by increased interest expense due to higher average cash
balances in client accounts. Income before income taxes and corporate
allocations for the quarter was $13.0 million, down $5.6 million or 30.1% from
the same period a year ago.
At quarter end, Canaccord had 456 Investment Advisors (IAs), an increase
of 24 from the same period a year ago and a net addition of three since the
end of our second quarter. We have been successful during previous market
downturns in building our roster of experienced IAs. We will continue our
recruitment activity by being aggressive in communicating the substantial
advantages that a move to Canaccord can provide to prospective advisors and
their clients.
Assets under administration (AUA) in Private Client Services was
$14.9 billion, a 5.2% increase over the same period a year ago and down 2.8%
sequentially, versus a general TSX decline of 2.2%. At quarter end, our assets
under management (AUM) were $760 million, down 6.6% from the same period a
year ago and down 2.2% sequentially. Following a six-year period in which our
assets grew at a 23% compound annual growth rate, it is clear that we have
slowing momentum in both AUA and AUM growth. Our senior management team is
currently developing strategies and objectives to grow our AUA and AUM, and we
have every confidence that with a refined strategy and renewed investment,
Private Client Services will retain its strong growth history.
Business outlook
We see the word "unprecedented" in many descriptions of the current state
of global markets. Given the uncertainty that comes with major dislocations
such as those affecting the credit markets, we will tread carefully until the
cycle and the challenges work themselves out.
That is not to say Canaccord will move to the sidelines. We are now even
more focused on those things we do well. Our business pipelines remain strong
even though transaction timing is uncertain. We have strong franchises in
underwriting and advisory services, and we are a more competitive, better
diversified firm than we were a year ago. More importantly, we have a strong,
coordinated and consensus-driven team that is committed to thriving in any
market that confronts us. These will be the real drivers of value - for
clients, for shareholders and for fellow employees - as we move through the
challenges ahead.
Paul D. Reynolds
President & Chief Executive Officer
-----------------------
(1) Includes placement for companies incorporated in Canada and the US
ACCESS TO QUARTERLY RESULTS INFORMATION:
Interested investors, the media and others may review this quarterly
earnings release and supplementary financial information at
www.canaccord.com/investor/financialreports.
CONFERENCE CALL AND WEBCAST PRESENTATION:
Interested parties can listen to our fiscal third quarter 2008 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
Thursday, February 7, 2008, at 8:30 a.m. (Pacific Time), 11:30 a.m. (Eastern
Time), and 4:30 p.m. (UK Time). At that time, senior executives will comment
on the results for the third quarter of fiscal 2008 and respond to questions
from analysts and institutional investors.
The conference call may be accessed live and archived on a listen-only
basis via the Internet at www.canaccord.com/investor/webcast
<<
Analysts and institutional investors can call in via telephone at:
- 416-644-3414 (within Toronto)
- 1-800-733-7571 (toll free outside Toronto)
- 00-800-2288-3501 (toll free from the United Kingdom)
>>
A replay of the conference call can be accessed after 10:30 a.m. (Pacific
Time), 1:30 p.m. (Eastern Time) and 6:30 p.m. (UK Time) on February 7, 2008,
until 9:00 p.m. (Pacific Time), 12:00 a.m. (Eastern Time) and 5:00 a.m. (UK
Time) on February 21, 2008, at 416-640-1917 or 1-877-289-8525 by entering
passcode 21256997 followed by the number sign.
ABOUT CANACCORD CAPITAL INC.:
Through its principal subsidiaries, Canaccord Capital Inc. (TSX & AIM:
CCI) is a leading independent, full service investment dealer in Canada with
capital markets operations in the United Kingdom and the United States of
America. Canaccord is publicly traded on both the Toronto Stock Exchange and
AIM, a market operated by the London Stock Exchange. Canaccord has operations
in two of the principal segments of the securities industry: private client
services and capital markets. Together, these operations offer a wide range of
complementary investment products, brokerage services and investment banking
services to Canaccord's private, institutional and corporate clients.
Canaccord has approximately 1,676 employees worldwide in 30 offices, including
23 Private Client Services offices located across Canada. Canaccord Adams, the
international capital markets division, has operations in Toronto, London,
Boston, Vancouver, New York, Calgary, Montreal, San Francisco, Houston and
Barbados.
-------------------------------------------------------------------------
None of the information on Canaccord's Web site at www.canaccord.com
should be considered incorporated herein by reference.
-------------------------------------------------------------------------
Management's Discussion and Analysis
Fiscal third quarter 2008 for the three months and nine months ended
December 31, 2007 - this document is dated February 7, 2008
The following discussion of the financial condition and results of
operations for Canaccord Capital Inc. is provided to enable the reader to
assess material changes in such financial condition and to assess results for
the three- and nine-month periods ended December 31, 2007 compared to the
corresponding periods in the preceding fiscal year. The three- and nine-month
periods ended December 31, 2007 are also referred to as the third quarter
2008, Q3/08 and fiscal Q3/08 in the following discussion. This discussion
should be read in conjunction with the unaudited interim consolidated
financial statements for the three- and nine-month periods ended December 31,
2007 beginning on page 28 of this report; our Annual Information Form dated
June 26, 2007; and the 2007 annual Management's Discussion and Analysis
(annual MD&A) including the audited consolidated financial statements for the
fiscal year ended March 31, 2007 in Canaccord's Annual Report dated June 26,
2007 (the Annual Report). Unless otherwise indicated or the context otherwise
requires, the "Company" refers to Canaccord Capital Inc. "Canaccord" and the
"Canaccord group" refers to the Company and its direct and indirect
subsidiaries. "Canaccord Adams" refers to the international capital markets
division of the Company. The Annual Information Form and the Annual Report
have been filed on sedar.com. There has been no material change to the
information contained in the annual MD&A for fiscal 2007 except as disclosed
in this MD&A. Canaccord's financial information is expressed in Canadian
dollars unless otherwise specified. The financial information presented in
this document is prepared in accordance with Canadian generally accepted
accounting principles (GAAP) unless specifically noted. All the financial data
below is unaudited except for certain fiscal year data from our 2007 audited
financial statements.
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.
Canaccord's capital is represented by common shareholders' equity and,
therefore, management uses return on average common equity (ROE) as a
performance measure.
Assets under administration (AUA) and assets under management (AUM) are
non-GAAP measures of client assets that are common to the wealth management
aspects of the private client services industry. AUA is the market value of
client assets administered by Canaccord from which Canaccord earns commissions
or fees. This measure includes the aggregate market value of long and short
positions and funds held in client accounts. Canaccord's method of calculating
AUA may differ from the methods used by other companies and therefore may not
be comparable to other companies. Management uses this measure to assess
operational performance of the Private Client Services business segment. In
Q1/08, our AUM definition was expanded to include all assets managed on a
discretionary basis under our programs generally described as or known as the
Independence Accounts, Separately Managed Accounts, and Advisor Managed
Accounts. AUM including all these programs have been reclassified commencing
in Q1/07 on this basis. Services under these programs include the selection of
investments and the provision of investment advice. AUM are also administered
by Canaccord and are included in AUA.
Overview
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. In addition to general economic conditions and
international market factors, our business is affected by the overall
condition of the North American and European equity markets, including the
seasonal variance in these markets.
Business environment
Widespread economic and financial uncertainties have heightened the
volatility of global markets since October 2007. Recent economic data for the
period of October to December 2007 is evidence of the high volatility
displayed in the capital markets. Sub-prime mortgage market conditions in the
US deteriorated and this accelerated the risk pricing for commercial paper and
all asset-backed debt. Pending merger and acquisition deals were questioned
and fewer deals were initiated. During this last quarter, financial firms
holding investments in sub-prime mortgages, structured investment vehicles and
third party asset-backed commercial paper (ABCP) have taken billions of
dollars in write-downs.
Market conditions and fears of a US recession prompted central banks in
North America, the UK and Europe to either lower interest rates or inject
market liquidity. Many economists forecast lowered US economic activity for
2008, and believe that the US could already be in a recession. The US fiscal
and monetary authorities have made significant rate cuts and are expected to
continue to take aggressive action.
Emerging nation development should support commodity prices at their
current levels. The global infrastructure expansion may slow in the US but
activity is expected to remain elevated in the rest of the world. Currency
volatility and the decidedly bearish action of the US dollar prompted
investors to move gold to a new high in early calendar 2008. Oil prices are
expected to remain at levels that produce high profitability for the energy
sector.
Canada has maintained relatively strong economic fundamentals. High
commodity prices, healthy corporate balance sheets, a federal budget surplus,
and low inflation and interest rates have all been factors contributing to
this strength. Equity markets will continue to be volatile until credit issues
are meaningfully resolved. The current crunch has forced many financial
services companies to raise capital at very high long-term costs. These
elevated new capital costs will prompt businesses to seek other forms of
capital.
The impact of these conditions was generally unfavourable for our various
businesses and geographies during fiscal Q3/08 relative to Q3/07, and we
remain cautious in our outlook going forward. Canaccord's strength in the
resources sector will continue to be an asset if the strong resource market
continues.
Market data
While trading volumes were higher on each of the TSX, TSX-Venture, AIM
and NASDAQ for fiscal Q3/08 relative to Q3/07, the financing values declined
for each exchange. However, when compared to Q2/08, the TSX, TSX-Venture and
NASDAQ experienced considerable growth in financing values which was mainly
due to a few unusually large transactions that skewed the data during this
period. In Canaccord's focus sectors on the AIM, financing values for oil and
gas and mining increased, while biotech, media and technology decreased year
over year.
<<
Trading volume by exchange (billions of shares)
-------------------------------------------------------------------------
Increase
Increase (decrease)
October November December Fiscal from fiscal from fiscal
07 07 07 Q3/08 Q3/07 Q2/08
-------------------------------------------------------------------------
TSX 9.1 8.7 6.9 24.7 13.0% 8.0%
TSX-Venture 6.3 5.1 3.7 15.1 60.0% 37.6%
AIM 18.8 13.0 10.3 42.1 16.0% 31.6%
NASDAQ 22.8 23.8 17.3 63.9 11.4% (1.9)%
-------------------------------------------------------------------------
Total financing value by exchange
-------------------------------------------------------------------------
Increase
Increase (decrease)
October November December Fiscal from fiscal from fiscal
07 07 07 Q3/08 Q3/07 Q2/08
-------------------------------------------------------------------------
TSX and
TSX-Venture
(C$ billions) 3.4 5.4 5.8 14.6 (3.6)% 45.4%
AIM
((pnds stlg)
billions) 0.4 1.3 1.4 3.1 (42.0)% (6.0)%
NASDAQ
(US$
billions) 6.0 7.3 2.9 16.2 (14.5)% 54.2%
-------------------------------------------------------------------------
Financing value for relevant AIM industry sectors
-------------------------------------------------------------------------
((pnds stlg) Increase Increase
millions, (decrease) (decrease)
except for from from
percentage October November December Fiscal fiscal fiscal
amounts) 07 07 07 Q3/08 Q3/07 Q2/08
-------------------------------------------------------------------------
Oil and gas 26.7 138.6 181.8 347.1 12.7% 79.6%
Mining 58.3 90.0 227.3 375.6 139.1% 7.5%
Biotech 2.0 32.5 8.7 43.2 (45.7)% 0.4%
Media 10.7 36.5 33.7 80.9 (26.6)% (58.6)%
Technology 31.7 25.2 33.9 90.8 (18.0)% (32.4)%
----------------------------------------------------------
Total 129.4 322.8 485.4 937.6 22.5% 2.4%
-------------------------------------------------------------------------
Source: TSX Statistics, LSE AIM Statistics, Thomson One, and Equidesk
>>
About Canaccord's operations
Canaccord Capital Inc.'s operations are divided into two business
segments: Canaccord Adams (our capital markets operations) and Private Client
Services.
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.
Revenue from Private Client Services is generated through traditional
commission-based brokerage services; the sale of fee-based products and
services; client-related interest; and fees and commissions earned by
Investment Advisors (IAs) in respect of investment banking and venture capital
transactions by private clients.
Canaccord's administrative segment, described as Corporate and Other,
includes correspondent brokerage services, bank and other interest, and
foreign exchange revenue and expenses not specifically allocable to either the
Private Client Services or Canaccord Adams divisions. Also included in this
segment are Canaccord's operations and support services, which are responsible
for front and back-office information technology systems, compliance and risk
management, operations, finance and all administrative functions.
<<
Consolidated operating results
Third quarter and year-to-date 2008 summary data(1)
-------------------------------------------------------------------------
Three Year- Nine Year-
(C$ thousands, months ended over- months ended over-
except per December 31 year December 31 year
share, employee ------------ increase ------------- increase
and % amounts) 2007 2006 (decrease) 2007 2006 (decrease)
-------------------------------------------------------------------------
Canaccord
Capital Inc.
Revenue
Commission $ 74,959 $ 74,380 0.8% $226,462 $215,990 4.8%
Investment
banking 84,910 78,177 8.6% 287,266 251,135 14.4%
Principal
trading 387 9,035 n.m. 3,275(2) 22,209 n.m.
Interest 16,011 14,355 11.5% 48,594 42,252 15.0%
Other 7,087 2,366 199.5% 22,496 8,885 153.2%
-------------------------------------------------------------------------
Total revenue 183,354 $178,313 2.8% $588,093 $540,471 8.8%
Expenses
Incentive
compensation 90,778 89,466 1.5% 283,600 269,395 5.3%
Salaries and
benefits 12,658 11,610 9.0% 39,576 34,746 13.9%
Other
overhead
expenses(3) 51,381 43,601 17.8% 154,203 138,269 11.5%
ABCP fair
value
adjust-
ment(4) 4,226 - n.m. 8,625(2) - n.m.
-------------------------------------------------------------------------
Total expenses $159,043 $144,677 9.9% $486,004 $442,410 9.9%
Income before
income taxes 24,311 33,636 (27.7)% 102,089 98,061 4.1%
Net income 15,048 23,692 (36.5)% 66,488 67,440 (1.4)%
Earnings per
share (EPS)
- diluted 0.31 0.49 (36.7)% 1.37 1.40 (2.1)%
Return on
average common
equity (ROE) 16.2% 27.6% (11.4)p.p. 23.3% 28.1% (4.8)p.p.
Book value per
share - period
end $7.95 $7.43 7.0%
Number of
employees 1,676 1,575 6.4%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for ROE, book value per share
and number of employees.
(2) The ABCP fair value adjustment has been recategorized in Q2/08 from
principal trading revenue to an expense. This is consistent with the
treatment of the Q3/08 adjustment.
(3) Consists of trading costs, premises and equipment, communication and
technology, interest, general and administrative, amortization and
development costs.
(4) Represents the ABCP fair value adjustment for ABCP held by the
Company.
p.p.: percentage points
n.m.: not meaningful
Third quarter and year-to-date fiscal 2008 adjusted data
-------------------------------------------------------------------------
(C$ thousands, except Three months
EPS in $) ended December 31, 2007
-------------------------------------------------------------------------
Net
income
before Net
Revenue Expenses tax income EPS
-------------------------------------------------------------------------
Including ABCP fair
value adjustment $183,354 $159,043 $ 24,311 $ 15,048 $ 0.31
ABCP fair value
adjustment - $ 4,226 $ 4,226 $ 2,785 $ 0.05
-------------------------------------------------------------------------
Excluding ABCP fair
value adjustment(1) $183,354 $154,817 $ 28,537 $ 17,833 $ 0.36
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(C$ thousands, except Nine months
EPS in $) ended December 31, 2007
-------------------------------------------------------------------------
Net
income
before Net
Revenue Expenses tax income EPS
-------------------------------------------------------------------------
Including ABCP fair
value adjustment $588,093 $486,004 $102,089 $ 66,488 $ 1.37
ABCP fair value
adjustment - $8,625(2) $ 8,625 $ 5,684 $ 0.11
-------------------------------------------------------------------------
Excluding ABCP fair
value adjustment(1) $588,093 $477,379 $110,714 $ 72,172 $ 1.48
-------------------------------------------------------------------------
(1) Excluding ABCP fair value adjustment refers to results excluding the
ABCP fair value adjustment recorded in Q2/08 and Q3/08. Data is
considered to be non-GAAP.
(2) Revenue for Q2/08 has been adjusted to add back the $4.4 million ABCP
fair value adjustment. The adjustment has been recategorized as an
expense on the income statement for Q2/08, which is consistent with
the treatment of the Q3/08 adjustment.
Geographic distribution of revenue(1)
-------------------------------------------------------------------------
Three Year- Nine Year-
months ended over- months ended over-
December 31 year December 31 year
(C$ thousands, increase increase
except % amounts) 2007 2006 (decrease) 2007 2006 (decrease)
-------------------------------------------------------------------------
Canada $125,102 $134,705 (7.1)% $404,470 $376,363 7.5%
UK 34,644 20,865 66.0% 102,952 91,400 12.6%
US 23,135 18,613 24.3% 70,294 61,343 14.6%
Other Foreign
Location 473 4,130 n.m. 10,377 11,365 (8.7)%
-------------------------------------------------------------------------
Total $183,354 $178,313 2.8% $588,093 $540,471 8.8%
-------------------------------------------------------------------------
(1) For a business description of Canaccord's geographic distribution
please refer to the "About Canaccord's operations" section on
page 10.
n.m.: not meaningful
>>
Third quarter 2008 vs. third quarter 2007
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 December 31, 2007 was $183.3 million, up 2.8% compared to
the same period a year ago.
For the third quarter of fiscal 2008, revenue generated from commissions
was $74.9 million, up 0.8% compared to the same period a year ago and is
largely due to strength in market activity early in the quarter. Investment
banking revenue was $84.9 million, up $6.7 million largely due to increased
activity in the UK. Principal trading revenue was $0.4 million compared to
$9.0 million during the same period a year ago. The primary focus of
Canaccord's principal trading activity is in small- to mid-cap equities, which
experienced significant valuation challenges during the quarter due to the
credit contraction and its related impact on the equity markets. The
year-over- year decline is due to the challenging market conditions during the
quarter. Interest revenue was $16.0 million, up 11.5% mainly due to higher
interest revenue from client accounts and bank balances. Other revenue was
$7.1 million, up $4.7 million due to increases in foreign exchange and
correspondent services revenue.
Third quarter revenue in Canada was $125.1 million, down 7.1% or
$9.6 million from the same period a year ago. This decline was due to a
decrease in activity in the Canadian equity markets. Revenue in the UK was
$34.6 million, up $13.8 million from the same period a year ago. In the US,
revenue was $23.1 million, up 24.3% from Q3/07.
Year-to-date fiscal year 2008 vs. year-to-date fiscal year 2007
Year-to-date revenue for December 31, 2007 was $588.1 million, up 8.8% or
$47.6 million compared to the same period a year ago. Revenue generated from
commissions increased by $10.5 million to $226.5 million compared to the same
period a year ago largely due to healthier market conditions in Q1/08 and in
the early parts of the following two quarters. Investment banking revenue was
$287.3 million, up $36.1 million primarily due to increased financing activity
in the UK and Canadian equity markets and from higher merger and acquisition
fees. Principal trading revenue was $3.3 million compared to $22.2 million
last year, down $18.9 million from the same period a year ago. Principal
trading revenue in Q2/08 has been recategorized to exclude the ABCP fair value
adjustment. This adjustment is now included as an expense item for both Q2/08
and Q3/08. Canaccord has re-focused its principal trading operations to reduce
certain market exposures through rebalancing internal capital allocations.
Interest revenue was $48.6 million, up $6.3 million for the same reasons
mentioned above. Other revenue was $22.5 million, up $13.6 million due to
foreign exchange and correspondent services revenue. Year to date revenue in
Canada was $404.5 million, up 7.5% or $28.1 million from the same period a
year ago. Our operations in Canada benefited from greater activity in fiscal
Q1/08 and in the early part of the subsequent two quarters in the Canadian
equity markets, largely due to the continued global demand for commodities and
related equities. Year-to-date fiscal 2008 revenue in the UK was
$102.9 million, up $11.5 million from the same period a year ago. Revenue from
Other Foreign Location was $10.4 million, down $1.0 million year-over-year,
and in the US revenue was $70.3 million, up $8.9 million from the same period
a year ago.
<<
Expenses as a percentage of revenue
-------------------------------------------------------------------------
Three Year- Nine Year-
months ended over- months ended over-
December 31 year December 31 year
increase increase
2007 2006 (decrease) 2007 2006 (decrease)
-------------------------------------------------------------------------
Incentive
compensation 49.5% 50.2% (0.7)p.p. 48.2% 49.8% (1.6)p.p.
Salaries and
benefits 6.9% 6.5% 0.4p.p. 6.7% 6.4% 0.3p.p.
Other overhead
expenses(1) 28.0% 24.4% 3.6p.p. 26.2% 25.6% 0.6p.p.
ABCP fair value
adjustment(2) 2.3% - n.m. 1.5% - n.m.
-------------------------------------------------------------------------
Total 86.7% 81.1% 5.6p.p. 82.6% 81.9% 0.7p.p.
-------------------------------------------------------------------------
(1) Consists of trading costs, premises and equipment, communication and
technology, interest, general and administrative, amortization and
development costs.
(2) Represents the ABCP fair value adjustment for ABCP held by the
Company.
p.p.: percentage points
n.m.: not meaningful
>>
Third quarter 2008 vs. third quarter 2007
Expenses for the three months ended December 31, 2007 were
$159.0 million, up 9.9% or $14.4 million from a year ago. The overall increase
in expenses is largely due to the ABCP fair value adjustment of $4.2 million;
general and administrative expenses, up $3.0 million; interest expense, up
$1.6 million; and development costs, up $1.5 million. Incentive compensation
expense was $90.8 million for the quarter, up 1.5%. For the quarter, incentive
compensation expense as a percentage of total revenue decreased 0.7 percentage
points to 49.5% compared to the same period a year ago.
Salaries and benefits expense was $12.6 million in the third quarter of
fiscal 2008, up 9.0% from the same period a year ago largely due to the
increased contribution by the firm towards the Employee Stock Purchase Plan
(ESPP), which is discussed in our fiscal year 2007 Annual Report. In May 2007
the matching contribution by the firm increased from a maximum of $1,500 per
eligible employee to a maximum contribution of $3,000. Also contributing to
the increase in salaries and benefits expense is the overall increase of 101
net new employees across the firm. The total compensation (incentive
compensation plus salaries) payout as a percentage of consolidated revenue for
Q3/08 was 56.4%, down from 56.7% in Q3/07.
Year-to-date fiscal year 2008 vs. year-to-date fiscal year 2007
Expenses for the nine months ended December 31, 2007 were $486.0 million,
up $43.6 million or 9.9% from a year ago. Expenses for Q2/08 have been
recategorized to include the $4.4 million the ABCP fair value adjustment that
was previously included in principal trading revenue. Year-to-date expenses
include the $8.6 million ABCP fair value adjustment. Incentive compensation
expense was $283.6 million, up 5.3% due to the increase in incentive-based
revenue. Consolidated incentive compensation as a percentage of total revenue
was 48.2%, down 1.6 percentage points primarily due to the implementation of
our long term incentive plan (LTIP) in Q1/08.
Salaries and benefits expense was $39.6 million, up $4.8 million for the
year to date of fiscal 2008 compared to the same period a year ago for the
same reasons mentioned above. The total compensation (incentive compensation
plus salaries) payout as a percentage of consolidated revenue was 54.9%, down
from 56.3% the prior year.
<<
Other overhead expenses
-------------------------------------------------------------------------
Three Year- Nine Year-
months ended over- months ended over-
December 31 year December 31 year
(C$ thousands, increase increase
except % amounts) 2007 2006 (decrease) 2007 2006 (decrease)
-------------------------------------------------------------------------
Trading costs $ 7,054 $ 6,056 16.5% $ 21,261 $ 20,734 2.5%
Premises and
equipment 5,781 5,810 (0.5)% 16,775 17,561 (4.5)%
Communication
and technology 5,611 5,352 4.8% 17,163 15,802 8.6%
Interest 6,574 4,926 33.5% 19,155 15,310 25.1%
General and
administrative 17,390 14,413 20.7% 51,416 47,807 7.5%
Amortization 2,197 1,797 22.3% 6,320 6,152 2.7%
Development
costs 6,774 5,247 29.1% 22,113 14,903 48.4%
ABCP fair
value
adjustment(1) 4,226 - n.m. 8,625 - n.m.
-------------------------------------------------------------------------
Total other
overhead
expenses $ 55,607 $ 43,601 27.5% $162,828 $138,269 17.8%
-------------------------------------------------------------------------
(1) Represents the ABCP fair value adjustment for ABCP held by the
Company.
>>
Third quarter 2008 vs. third quarter 2007
Other overhead expenses increased 27.5% to $55.6 million for the third
quarter of fiscal 2008 compared to the same period a year ago. Contributing to
the overall increase in other overhead expenses were trading costs, which
increased by 16.5% in Q3/08 due to security rebates received in Q3/07 which
lowered trading costs in Q3/07. Development costs increased by 29.1% largely
due to Canaccord's growth across all geographies. Interest expense was up
33.5% due to larger cash balances in client accounts and subordinated debt
entered into on March 30, 2007. Also entered during Q3/08 was the ABCP fair
value adjustment of $4.2 million.
General and administrative expense was up $3.0 million in Q3/08. This was
largely due to an increase in client expenses, and promotion and travel
expense largely due to increased business development costs such as corporate
conferences.
Development costs, which include hiring incentives and systems
development costs, were $6.8 million, up 29.1% or $1.5 million from the prior
year. Hiring incentives are one of our tools to recruit new IAs and capital
markets professionals. Hiring incentives also include retention costs related
to the acquisition of Adams Harkness Financial Group, Inc. During Q3/08,
hiring incentives increased by 37.4% largely due to recruitment and retention
costs of Canaccord Adams' professionals in the US. Systems development costs
are expenditures to enhance our information technology platform, and increased
by 4.7% due to enhancements to our technological platform associated with our
growth initiatives.
Net income for Q3/08 was $15.0 million, down $8.7 million from a year
ago. Diluted EPS were $0.31, down $0.18 or 36.7%. ROE for Q3/08 was 16.2%
compared to an ROE of 27.6% a year ago. The decrease in EPS and ROE is largely
due to the decline in net income resulting from investments made across our
global operations and from the ABCP fair value adjustment booked. Book value
per common share for Q3/08 was up 7.0% year over year to $7.95.
Income taxes were $9.3 million for the quarter reflecting an effective
tax rate of 38.1%, up from 29.6% a year ago. The increase in the effective tax
rate in Q3/08 relative to Q3/07 is a result of our reduction of future income
tax assets which increased our overall tax provision. The reduction of future
income tax assets is due to a reduction in Canadian federal tax rates from
2008 to 2012.
Year-to-date fiscal year 2008 vs. year-to-date fiscal year 2007
Other overhead expenses for the nine months ended December 31, 2007 were
up 17.8% or $24.5 million to $162.8 million from the same period a year ago.
Contributing to the overall increase in other overhead expenses were
development costs, which increased by 48.4% or $7.2 million to $22.1 million
and interest expense which was up $3.8 million due to higher client interest
rates, larger cash balances in client accounts and subordinated debt entered
into on March 30, 2007. These increases are largely related to Canaccord's
growth across all geographies. For the year to date, the ABCP fair value
adjustment of $8.6 million was recorded.
General and administrative expense was up $3.6 million largely due to an
increase in promotion and travel expense. Promotion and travel increased by
20.6%, which is largely due to an increase in business development costs and
business travel. This increase was offset by decreases in reserve expenses.
Development costs were $22.1 million, up 48.4% or $7.2 million from the
previous year. A large portion of the 55.9% increase in hiring incentives is
for the recruitment of Canaccord Adams' professionals and for the retention
plan associated with the acquisition of Adams Harkness Financial Group, Inc.
Overall systems development costs for the year to date of fiscal 2008
increased by 25.3% due to enhancements to our technological platform
associated with our growth.
Net income for the year to date of fiscal 2008 was $66.5 million, down
1.4% or $0.9 million from the same period a year ago. Diluted EPS were $1.37,
down $0.03 and ROE was 23.3% compared to an ROE of 28.1% a year ago. The
decrease in EPS and ROE is largely due to the decline in net income resulting
from the ABCP fair value adjustment, and the investments made across our
global operations. Book value per common share was up 7.0% to $7.95. Income
taxes were $35.6 million for the year to date of fiscal 2008 reflecting an
effective tax rate of 34.9%, up from 31.2% a year ago due to the same reasons
mentioned above.
<<
Results of operations
Canaccord Adams
-------------------------------------------------------------------------
Three Year- Nine Year-
months ended over- months ended over-
(C$ thousands, December 31 year December 31 year
except employees increase increase
and % amounts) 2007 2006 (decrease) 2007 2006 (decrease)
-------------------------------------------------------------------------
Canaccord Adams
Revenue
Canada -
Investment
Banking
and
Equities $ 42,952 $ 48,897 (12.1)% $144,711 $130,180 11.2%
Canada -
Intern-
ational
Trading,
Registered
Traders and
Fixed
Income 9,126 9,884 (7.7)% $28,141(1) 28,663 (1.8)%
-------------------------------------------------------------------------
Total
Canada $ 52,078 $ 58,781 (11.4)% $172,852 $158,843 8.8%
UK 34,644 20,865 66.0% 102,952 91,400 12.6%
US 22,388 17,651 26.8% 67,496 57,958 16.4%
Other
Foreign
Location 473 4,130 n.m. 10,377 11,365 (8.7)%
-------------------------------------------------------------------------
Total revenue $109,583 $101,427 8.0% $353,677 $319,566 10.7%
Expenses
Incentive
compens-
ation 57,933 51,546 12.4% 176,341 162,799 8.3%
Salaries
and
benefits 3,275 3,158 3.7% 10,488 8,574 22.3%
Other
overhead
expenses 25,140 20,613 22.0% 78,850 66,169 19.2%
ABCP fair
value
adjustment(2) 1,101 - n.m. 2,247(1) - n.m.
-------------------------------------------------------------------------
Total
expenses $ 87,449 $ 75,317 16.1% $267,926 $237,542 12.8%
Income before
income
taxes(3) 22,134 26,110 (15.2)% 85,751 82,024 4.5%
Income before
ABCP fair
value
adjustment
and taxes 23,235 26,110 (11.0)% 87,998 82,024 7.3%
Number of
employees 531 502 5.8%
-------------------------------------------------------------------------
(1) Fixed income revenue has been recategorized in Q2/08 to exclude the
ABCP fair value adjustment. This is included as an expense for Q2/08
and Q3/08.
(2) Represents the ABCP fair value adjustment for ABCP held by the
Company.
(3) Income before income taxes excludes allocated overhead expenses that
are included in Corporate and Other segment expenses.
n.m.: not meaningful
>>
Revenue from Canaccord Adams (our capital markets segment) is generated
from commissions and fees earned in connection with investment banking
transactions and institutional sales and trading activity as well as trading
gains and losses from Canaccord's principal and international trading
operations.
Third quarter 2008 vs. third quarter 2007
Total revenue for Canaccord Adams in Q3/08 was $109.6 million, up
$8.1 million from the same quarter a year ago largely due to increases in
investment banking revenue and higher merger and acquisition fees. Canadian
operations generated fiscal third quarter revenue of $52.1 million, down 11.4%
compared to a year ago. Within this revenue, $42.9 million is derived from
Investment Banking and Equities activity while $9.1 million is derived from
our International Trading, Registered Traders and Fixed Income operations. The
decline in Canadian revenue is largely due to a decrease in Canadian equity
markets compared to the same period a year ago. Our Canadian revenue
represents 47.5% of Canaccord Adams' total revenue. Revenue from our UK
operations was $34.6 million, up 66.0% from the same period a year ago. This
increase in revenue is largely due to higher investment banking revenue. UK
revenue of $34.6 million represents 31.6% of Canaccord Adams' total revenue.
In the US, revenue was $22.4 million, up 26.8% from a year ago, and represents
20.4% of Canaccord Adams' total revenue. This increase in revenue is also due
to the higher investment banking revenue. Revenue in Other Foreign Location
declined to $473 thousand in Q3/08, down from $4.1 million a year ago. In any
quarter, revenue in this region represents a small number of transactions and
is therefore very irregular.
Expenses for Q3/08 were $87.4 million, up $12.1 million. The largest
increase in non-compensation expenses were in development costs, up
$1.5 million, and general and administrative expense, up $1.4 million. Within
general and administrative expense, promotion and travel increased by 31.7%
largely due to higher business development costs. The increase in general and
administrative expense was offset by a decrease in premises and equipment
expense. Also included in expenses during Q3/08 was the ABCP fair value
adjustment of $1.1 million of the $4.2 million total ABCP fair value
adjustment. The increase in incentive compensation for the quarter of
$6.4 million is largely attributable to the increase in incentive-based
revenue in the UK during the quarter. Salary and benefits expense for the
quarter was up 3.7% to $3.3 million compared to a year ago. The total
compensation expense payout as a percentage of revenue for the quarter was
55.9%, which is up 2.0 percentage points from Q3/07.
Income before income taxes and corporate overhead allocations for the
quarter was $22.1 million, down $4.0 million or 15.2% from the same quarter a
year ago.
Year-to-date fiscal year 2008 vs. year-to-date fiscal year 2007
Revenue for Canaccord Adams for the year to date of fiscal 2008 was
$353.7 million, up $34.1 million from the same period last year due to
relatively strong capital markets in all geographies, particularly during the
early months of fiscal 2008. In Canada, revenue was $172.8 million, up 8.8%
from the same period a year ago. Within Canada, $144.7 million is derived from
Investment Banking and Equities activity while $28.1 million is from our
International Trading, Registered Traders and Fixed Income operations. Fixed
Income revenue for Q2/08 has been recategorized to exclude the ABCP fair value
adjustment, which is now classified as an expense. The overall growth in
Canada is largely due to our growing market share and from the continued
global demand for commodities and for Canadian equities relative to the same
period a year ago. Overall, our Canadian revenue represents 48.9% of Canaccord
Adams' total revenue. Our UK revenue was $102.9 million, up $11.5 million from
the same period a year ago due to increased revenue from investment banking
activities. UK revenue of $102.9 million represents 29.3% of Canaccord Adams'
total revenue. In the US, revenue was $67.5 million, and represents 19.2% of
Canaccord Adams' total revenue. Revenue from Other Foreign Location was
$10.4 million, and represents 3.0% of Canaccord Adams' total revenue.
Year-to-date expenses were $267.9 million, up $30.4 million. The largest
increases in non-compensation expenses were in development costs, up
$6.7 million, and general and administrative expense, up $4.5 million. Within
general and administrative expense, promotion and travel was up 33.2% or
$4.3 million. Also included in expenses was the ABCP fair value adjustment of
$2.2 million from the total $8.6 million ABCP fair value adjustment for the
year to date of fiscal 2008.
The increase of $13.5 million in incentive compensation for the period is
mainly attributable to the increase in incentive-based revenue for the year to
date of fiscal 2008. Salary and benefits expense was up $1.9 million from a
year ago. The total compensation expense payout as a percentage of revenue for
the year to date of fiscal 2008 was 52.8%, down 0.8 percentage points from
53.6% for the same period a year ago.
Income before income taxes and corporate overhead allocations for the
period was $85.7 million, up $3.7 million from the same period a year ago.
<<
Private Client Services
-------------------------------------------------------------------------
(C$ thousands,
except assets under
administration
and assets under
management, which
are in C$ millions; Three Year- Nine Year-
employees; months ended over- months ended over-
Investment December 31 year December 31 year
Advisors; and increase increase
% amounts) 2007 2006 (decrease) 2007 2006 (decrease)
-------------------------------------------------------------------------
Revenue $61,166 $68,831 (11.1)% $194,664 $196,743 (1.1)%
Expenses
Incentive
compensation 28,443 31,848 (10.7)% 91,474 90,101 1.5%
Salaries and
benefits 3,272 3,039 7.7% 10,831 9,323 16.2%
Other overhead
expenses 16,417 15,291 7.4% 47,014 47,317 (0.6)%
-------------------------------------------------------------------------
Total expenses $48,132 $50,178 (4.1)% $149,319 $146,741 1.8%
Income before
income taxes(1) 13,034 18,653 (30.1)% 45,345 50,002 (9.3)%
Assets under
management (AUM) 760 814 (6.6)%
Assets under
administration
(AUA) 14,860 14,121 5.2%
Number of
Investment
Advisors (IAs) 456 432 5.6%
Number of
employees 772 725 6.5%
-------------------------------------------------------------------------
(1) Income before income taxes excludes allocated overhead expenses that
are included in Corporate and Other segment expenses.
>>
Revenue from Private Client Services is generated through traditional
commission-based brokerage services; the sale of fee-based products and
services; client-related interest; and fees and commissions earned by IAs in
respect of investment banking and venture capital transactions by private
clients.
Third quarter 2008 vs. third quarter 2007
Revenue from Private Client Services was $61.2 million, down $7.7 million
mainly due to challenging market conditions during the quarter. AUA of
$14.9 billion was up by $0.7 billion compared to Q3/07. AUM was $760 million,
down 6.6% year over year. There were 456 IAs at the end of the third quarter
of fiscal 2008, up 5.6% from a year ago. Fee-related revenue as a percentage
of total Private Client Services revenue was up 6.8 percentage points to 29.6%
from the same period last year.
Expenses for Q3/08 were $48.1 million, down $2.0 million. For the
quarter, the largest decrease in expenses was in incentive compensation
expense, down $3.4 million due to lower revenue. This decrease was offset by
an increase in interest expense which was up 20.2% this quarter largely due to
larger cash balances in our client accounts this year versus last year. The
total compensation expense payout as a percentage of revenue for the quarter
was 51.9%, up 1.2 percentage points from 50.7% for the same period a year ago.
Income before income taxes and corporate allocations for the quarter was
$13.0 million, down $5.6 million or 30.1% from the same period a year ago.
Year-to-date fiscal year 2008 vs. year-to-date fiscal year 2007
Revenue from Private Client Services was $194.7 million, down
$2.1 million mainly due to less favourable market conditions in North America
for the year to date of fiscal 2008 compared to the same period a year ago.
Fee-related revenue as a percentage of total Private Client Services revenue
was up 3.6 percentage points to 26.5% compared to the same period last year.
Expenses for the nine months ended December 31, 2007 were $149.3 million,
up $2.6 million. The largest increase in expenses was in interest expense, up
$2.7 million due to higher interest rates and larger cash balances in our
client accounts this year versus last year, salary and benefits up
$1.5 million, and incentive compensation expense up $1.4 million due to higher
incentive-based revenue as a percentage of total revenue for the year to date
of fiscal 2008 compared to the same period a year ago. These increases were
offset by a decrease in general and administrative expense, down $2.2 million
largely related to lower provisions made in Q3/08 versus Q3/07. The total
compensation expense payout as a percentage of revenue for the year to date of
fiscal 2008 was 52.6%, up 2.1 percentage points from 50.5% for the same period
a year ago.
Income before income taxes and corporate allocations for the year to date
of fiscal 2008 was $45.3 million, down 9.3% from the same period a year ago.
<<
Corporate and Other
-------------------------------------------------------------------------
Three Year- Nine Year-
months ended over- months ended over-
(C$ thousands, December 31 year December 31 year
except employees increase increase
and % amounts) 2007 2006 (decrease) 2007 2006 (decrease)
-------------------------------------------------------------------------
Revenue $12,605 $ 8,055 56.5% $39,752(1) $ 24,162 64.5%
Expenses
Incentive
compensation 4,402 6,072 (27.5)% 15,785 16,495 (4.3)%
Salaries and
benefits 6,111 5,413 12.9% 18,257 16,849 8.4%
Other overhead
expenses 9,824 7,697 27.6% 28,339 24,783 14.3%
ABCP fair value
adjustment(2) 3,125 - n.m. 6,378(1) - n.m.
-------------------------------------------------------------------------
Total expenses $23,462 $19,182 22.3% $68,759 $58,127 18.3%
Loss before
income taxes (10,857) (11,127) (2.4)% (29,007) (33,965) (14.6)%
Loss before ABCP
fair value
adjustment and
income taxes (7,732) (11,127) (30.5)% (22,629) (33,965) (33.4)%
Number of
employees 373 348 7.2%
-------------------------------------------------------------------------
(1) Revenue for Q2/08 has been recategorized to exclude the ABCP fair
value adjustment. It has been included as an expense for Q2/08 and
Q3/08.
(2) Represents the ABCP fair value adjustment for ABCP held by the
Company.
>>
Canaccord's administrative segment, described as Corporate and Other,
includes correspondent brokerage services, bank and other interest, and
foreign exchange revenue and expenses not specifically allocable to either the
Private Client Services or Canaccord Adams divisions. Also included in this
segment are Canaccord's operations and support services, which are responsible
for front and back-office information technology systems, compliance and risk
management, operations, finance, and all administrative functions.
Third quarter 2008 vs. third quarter 2007
Revenue for the three months ended December 31, 2007 was $12.6 million,
up $4.5 million from the same quarter a year ago largely due to increases in
interest rates and foreign exchange revenue.
Fiscal 2008 third quarter expenses were $23.5 million, up $4.3 million.
Included in expenses is the ABCP fair value adjustment of $3.1 million of the
total $4.2 million ABCP fair value adjustment during the quarter related to
the corporately held ABCP originally in treasury. Loss before income taxes was
$10.8 million, representing a $0.3 million improvement from the same quarter a
year ago.
Year-to-date fiscal year 2008 vs. year-to-date fiscal year 2007
Revenue was $39.7 million, up $15.6 million from the same period a year
ago for the same reasons mentioned above. Revenue in Q2/08 has been
recategorized to exclude the ABCP fair value adjustment.
Expenses for the year to date of fiscal 2008 were $68.7 million, up
$10.6 million. The largest increase in expenses is the ABCP fair value
adjustment of $6.4 million of the $8.6 million total ABCP fair value
adjustment related to the corporately held ABCP originally in treasury. This
includes the Q2/08 ABCP fair value adjustment that was previously booked in
revenue. Interest expense increased by $1.5 million, largely attributable to
our subordinated debt facility. Salary and benefits expense increased by
$1.4 million and general and administrative expense increased by $1.3 million.
Loss before income taxes was $29.0 million representing a $4.9 million
improvement from the same period a year ago.
Financial condition
Below are specific changes in selected balance sheet items.
Cash and cash equivalents
Cash and cash equivalents were $421.8 million on December 31, 2007
compared to $506.6 million on March 31, 2007. Operating activities used cash
of $6.4 million due to net changes in non-cash working capital items
comprising mostly a decrease in accounts receivable of $366.9 million offset
by a decrease in accounts payable and accrued liabilities of $631.8 million.
Accounts receivable
Client security purchases are entered into on either a cash or a margin
basis. When securities are purchased on margin, Canaccord extends a loan to
the client, using securities purchased and/or securities in the client's
account as collateral. Client accounts receivable were $499.7 million on
December 31, 2007 compared to $694.1 million on March 31, 2007. These
receivables vary significantly on a day-to-day basis, as they are based on
trading volumes. On December 31, 2007 total accounts receivable were
$1.3 billion compared with $1.7 billion on March 31, 2007 mainly due to
increases in brokers', dealers' and clients' accounts at fiscal quarter end.
Call loans
Loan facilities utilized by Canaccord may vary significantly on a day-to-
day basis and depend on securities trading activity. The amounts borrowed
pursuant to call loan facilities on December 31, 2007 and on March 31, 2007
were nil.
Off-balance sheet arrangements
At December 31, 2007 Canaccord has credit facilities with Canadian, US
and UK banks in an aggregate amount of $521.1 million. These credit
facilities, consisting of call loans, letters of credit and daylight overdraft
facilities are collateralized by unpaid securities and/or securities owned by
the Company. Canaccord Capital Corporation has provided a bank letter of
credit in the amount of $1.2 million as a guarantee for lease obligations of
Canaccord Adams Limited. Canaccord Adams Inc. has also entered into
irrevocable standby letters of credit from a financial institution totalling
$2.3 million (US$2.3 million) as rent guarantees for its leased premises in
Boston, New York and San Francisco. As of December 31, 2007 there were no
outstanding balances under these standby letters of credit.
Liquidity and capital resources
Canaccord has a capital structure comprising share capital, retained
earnings and accumulated other comprehensive income (losses). On December 31,
2007 cash and cash equivalents net of call loans were $421.8 million, down
$84.8 million from $506.6 million as of March 31, 2007. During the quarter
ended December 31, 2007 financing activities used cash in the amount of
$10.1 million, which was primarily due to dividend payments of $5.9 million
and the purchase of common shares related to Canaccord's LTIP of $5.0 million.
Investing activities used cash in the amount of $2.1 million for the purchase
of equipment and leasehold improvements. Operating activities provided cash in
the amount of $105.7 million for the quarter, which was due to net change in
non-cash working capital items, net income and items not affecting cash.
Canaccord's business requires capital for operating and regulatory
purposes. The majority of current assets reflected on Canaccord's balance
sheet are highly liquid. The majority of the positions held as securities
owned are readily marketable and all are recorded at their market value. The
market value of these securities fluctuates daily as factors such as changes
in market conditions, economic conditions and investor outlook affect market
prices. Client receivables are secured by readily marketable securities and
are reviewed daily for impairment in value and collectibility. Receivables and
payables from brokers and dealers represent the following: current open
transactions that generally settle within the normal three-day settlement
cycle; collateralized securities borrowed and/or loaned in transactions that
can be closed within a few days on demand; and balances on behalf of
introducing brokers representing net balances in connection with their client
accounts.
The addition of subordinated debt at the end of fiscal 2007 provides
additional regulatory capital to support business activities across our global
platform. Subordinated debt supports regulatory capital in our operating
subsidiaries. Therefore, this addition of leverage to our balance sheet
supports our ongoing growth initiatives.
Canaccord is committed to minimum lease payments for premises and
equipment over the next five years. The following table summarizes the
approximate amount of Canaccord's consolidated long-term contractual
obligations as of December 31, 2007.
<<
-------------------------------------------------------------------------
Contractual obligation payments due by period
Fiscal Fiscal
2010 - 2012 -
(C$ in Fiscal Fiscal Fiscal
thousands) Total 2009 2011 2013 Thereafter
-------------------------------------------------------------------------
Premises and
equipment
operating leases $163,142 $20,814 $38,518 $32,833 $70,977
-------------------------------------------------------------------------
Outstanding share data
-------------------------------------------------------------------------
Outstanding shares as of December 31
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------
Issued shares excluding unvested shares(1) 44,191,145 46,320,542
Issued shares outstanding(2) 47,835,051 47,831,203
Diluted shares(3) 49,095,816 48,045,762
Average shares outstanding - basic 44,670,881 46,273,768
Average shares outstanding - diluted(4) 48,420,575 48,045,762
-------------------------------------------------------------------------
(1) Excludes 2,390,540 unvested shares that are outstanding relating to
share purchase loans for recruitment and retention programs and
1,253,366 unvested shares purchased by employee benefit trust for the
LTIP.
(2) Includes 2,390,540 unvested shares that are outstanding relating to
share purchase loans for recruitment and retention programs and
1,253,366 unvested shares purchased by employee benefit trust for the
LTIP.
(3) Includes dilutive earned shares under our stock-based compensation
plans.
(4) This is the diluted share number used to calculate diluted EPS.
>>
At December 31, 2007 Canaccord had 47,835,051 common shares issued and
outstanding, an increase of 3,848 common shares from December 31, 2006 due to
the net effect of shares issued and shares cancelled.
The Company renewed its normal course issuer bid (NCIB) and is entitled
to acquire, from December 31, 2007 to December 30, 2008, up to 2,391,753 of
its shares, which represent 5% of its shares outstanding as of December 21,
2007. There were no share transactions under the NCIB between March 31, 2007
and December 31, 2007. However, the employee benefit trust has purchased
1,253,366 shares for the LTIP, and the Company, through wholly owned
subsidiaries, acquired 79,149 shares in exempt offers to former employees in
accordance with pre-existing contractual agreements; and the Company acquired
6,121 shares as an adjustment of the consideration for the acquisition of
Adams Harkness Financial Group, Inc., which reduced the number of shares
allowable under the NCIB to 1,053,244.
On January 3, 2006 Canaccord completed the acquisition of Adams Harkness
Financial Group, Inc., which was a privately held Boston-based institutional
investment bank. The consideration consisted of US$8.0 million in cash and the
issuance of 1,342,696 common shares from treasury valued at US$12.0 million.
On closing, these shares were delivered into escrow, subject to annual
releases of one-third per year beginning on June 30, 2006 and ending on
June 30, 2008.
In connection with the acquisition of Adams Harkness Financial Group,
Inc. a retention plan was established, which provides for the issuance of up
to 1,118,952 common shares after a three-year vesting period ending on
December 31, 2008. The total number of shares to be vested is also based on
revenue earned by Canaccord Adams Inc. subsequent to the date of acquisition.
The aggregate number of common shares that will vest and will therefore be
issued at the end of the vesting period will be the number that is equal to
the revenue earned by Canaccord Adams Inc. during the vesting period, divided
by US$250.0 million, multiplied by the number of common shares subject to the
retention plan (804,012 common shares after forfeitures as of December 31,
2007). As such revenue levels are achieved during the vesting period, the
associated proportion of the retention payment will be recorded as a
development cost and the applicable number of retention shares will be
included in weighted average diluted common shares outstanding.
International Financial Centre
Canaccord is a member of the International Financial Centre Vancouver and
International Financial Centre Montreal, which provide certain tax and
financial benefits pursuant to the International Financial Business (Tax
Refund) Act of British Columbia and the Act Respecting International Financial
Centres of Quebec. Accordingly, Canaccord's overall income tax rate is less
than the rate that would otherwise be applicable.
Foreign exchange
Canaccord manages its foreign exchange risk by periodically hedging
pending settlements in foreign currencies. Realized and unrealized gains and
losses related to these transactions are recognized in income during the year.
On December 31, 2007 forward contracts outstanding to sell US dollars had a
notional amount of US$7.0 million, down from US$12.9 million a year ago.
Forward contracts outstanding to buy US dollars had a notional amount of
US$11.0 million, up from US$2.5 million compared to a year ago. The fair value
of these contracts was nominal. Some of Canaccord's operations in London,
England are conducted in UK pounds sterling, however, any foreign exchange
risk in respect of these transactions is generally limited as pending
settlements on both sides of the transaction are typically in UK pounds
sterling.
Critical accounting estimates
The following is a summary of Canaccord's critical accounting estimates.
Canaccord's accounting policies are in accordance with Canadian GAAP and are
described in Note 1 to the audited consolidated financial statements for the
year ended March 31, 2007. 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 held, 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 revenue or loss
recorded for a particular security position in any given period. With
Canaccord's security holdings consisting primarily of publicly traded
securities, 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 market value recorded are reasonable.
ABCP fair value adjustment
--------------------------
The third party asset-backed commercial paper (ABCP) last traded on an
active market on August 13, 2007 and there are currently no market quotations
available for this ABCP. The Montreal Proposal was unveiled in August by a
group of major financial institutions, spearheaded by the Caisse de depot et
placement du Quebec.
Subsequently, on September 6, 2007 we announced our support for the Pan-
Canadian Investors Committee for ABCP, with Canaccord participating on the
committee. This committee has convened to seek options for the equitable
restructuring of ABCP conduits. The committee includes investors who were
signatories to the Montreal Proposal plus other significant holders.
On December 23, 2007, a comprehensive restructuring of the ABCP was
agreed to in principle. The approval of the restructuring is subject to votes
by all investors, and is anticipated to close by March 2008. The Company
believes the majority of its ABCP holdings will be eligible for restructuring.
At December 31, 2007, Canaccord held as principal ABCP with a par value
of $43.2 million. At the dates the Company acquired the ABCP it was rated R1
(High) by Dominion Bond Rating Services (DBRS), the highest credit rating
issued for commercial paper. As it matured, the ABCP did not settle as a
result of liquidity issues in the ABCP market. The ABCP in which the Company
has invested continues to be rated R1 (High, Under Review with Developing
Implications) by DBRS.
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 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.
The ABCP was classified as held for trading on initial adoption of
Section 3855. An adjustment of $4.2 million and $8.6 million has been recorded
for the three and nine months ended December 31, 2007 to reflect the lack of
liquidity in the ABCP market. The adjustment of $4.2 million for the three
months ended December 31, 2007 reflects changes in market conditions. As a
result of the proposed restructuring, the Company has also concluded that the
most probable outcome is that the ABCP will not be realized within a year and
has accordingly reclassified the ABCP from securities owned to long-term
investments.
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 the
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. Canaccord believes that adequate provisions for income
taxes have been made for all years.
Goodwill and other intangible assets
As a result of the acquisitions of Adams Harkness Financial Group, Inc.
and Enermarket Solutions Ltd. Canaccord acquired goodwill and other intangible
assets. Goodwill is the cost of the acquired companies in excess of the fair
value of their net assets, including other intangible assets, at the
acquisition date. The identification and valuation of other intangible assets
required management to use estimates and make assumptions. Goodwill is
assessed for impairment at least annually or whenever a potential impairment
may arise as a result of an event or change in circumstances, to ensure that
the fair value of the reporting unit to which goodwill has been allocated is
greater than or at least equal to its carrying value. Fair value will be
determined using valuation models that take into account such factors as
projected earnings, earnings multiples, discount rates, other available
external information and market comparables. The determination of fair value
requires management to apply judgment in selecting the valuation models and
assumptions and estimates to be used in such models and value determinations.
These judgments affect the determination of fair value and any resulting
impairment charges. Other intangible assets are amortized over their estimated
useful lives and tested for impairment periodically or whenever a potential
impairment may arise as a result of an event or change in circumstances.
Management must exercise judgment and make use of estimates and assumptions in
determining the estimated useful lives of other intangible assets and in
periodic determinations of value.
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.
Recent accounting pronouncements
The CICA has issued a new accounting standard, Section 1535, "Capital
Disclosures", which establishes standards for disclosing qualitative and
quantitative information about an entity's capital and how it is managed. This
new standard applies to interim and annual financial statements relating to
fiscal years beginning on or after October 1, 2007. The Company will adopt
Section 1535 effective April 1, 2008.
In addition, the CICA issued two accounting standards related to the
disclosure and presentation of financial instruments. CICA Handbook Section
3862, "Financial Instruments - Disclosure" and CICA Handbook Section 3863,
"Financial Instruments - Presentation" apply to interim and annual financial
statements relating to fiscal years beginning on or after October 1, 2007. The
Company will adopt these new standards effective April 1, 2008.
Retention plans
Stock-based compensation
In connection with the acquisition of Enermarket Solutions Ltd.,
Canaccord agreed to issue common shares to key employees of Enermarket and its
senior management over two years. These shares have all been issued as of
December 31, 2007. Similarly, in connection with the acquisition of Adams
Harkness Financial Group, Inc., Canaccord agreed to issue common shares to
certain key employees of Adams Harkness upon the expiry of a three-year
vesting period with the numbers of common shares to be adjusted in the event
that certain revenue targets are not achieved.
Long term incentive plan
The long term incentive plan (LTIP) is a new plan implemented in the
first quarter of fiscal 2008. Under the LTIP eligible participants are awarded
restricted share units which vest over three years.
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.
Changes in accounting policies
On April 1, 2007 the Company adopted the provisions of CICA Handbook
Section 3855, "Financial Instruments - Recognition and Measurement", CICA
Handbook Section 3865, "Hedges" and CICA Handbook Section 1530, "Comprehensive
Income".
Financial Instruments - Recognition and Measurement
Section 3855 prescribes the recognition and measurement of financial
instruments. It requires all financial assets and liabilities (including
derivatives) to be measured at fair value on initial recognition except for
certain related-party transactions. Measurement in subsequent periods depends
on the classification of the instruments. All financial instruments must be
classified as one of the following: held for trading, held to maturity, loans
and receivables, available for sale assets, and other.
The financial assets categorized as held for trading are measured at fair
value with unrealized gains and losses recognized in net income. Section 3855
permits an entity to designate any financial instrument as held for trading on
initial recognition or adoption of this standard even if that instrument would
not otherwise meet the definition of held for trading as specified in Section
3855. The Company's financial instruments classified as held for trading
include commercial paper and bankers' acceptances, marketable securities owned
and sold short, forward contracts and broker warrants. The Company has
historically measured these instruments at fair value and any unrealized gains
and losses have been included in income. The Company's accounting treatment of
these instruments remains unchanged as a result of adoption of the new
accounting standards.
Available for sale financial assets are measured at fair value with
unrealized gains and losses recognized in other comprehensive income. The
Company's investment to develop a new Alternative Trading System has been
classified as available for sale. The investment has been carried at cost as
there is no available quoted market price in an active market.
The financial assets classified as loans and receivables and held to
maturity are measured at amortized cost. There is no change in accounting
treatment for these financial instruments as a result of adoption of Section
3855.
Hedges
Section 3865 sets out the criteria of when hedge accounting is applied
and how it is applied. It provides the option of designating qualifying
transactions as hedges for accounting purposes. The qualifying hedging
relationships include fair value hedges, cash flow hedges and hedges of
foreign currency exposures of net investments in self-sustaining foreign
operations. The changes in the fair value of the hedging derivatives will be
recognized in net earnings or other comprehensive income depending on the
nature of the hedging relationships. Any gains and losses resulting from any
ineffectiveness in hedging relationships are recognized in net income
immediately. The Company does not currently apply hedge accounting and as a
result Section 3865 does not apply to the Company at this time.
Comprehensive Income
Section 1530 establishes standards for the reporting and disclosure of
other comprehensive income (OCI) in a new category, Accumulated Other
Comprehensive Income (Losses), which will be added to shareholders' equity on
the consolidated balance sheet. Comprehensive income includes all changes in
equity of the Company during a period except those resulting from investments
by shareholders and distributions to shareholders. The major components
included in Accumulated Other Comprehensive Income (Losses) are unrealized
gains and losses on financial assets classified as available for sale, and
unrealized foreign exchange gains and losses arising on translation of the
financial statements of self-sustaining foreign operations.
As a result of adopting Section 1530, the Company has disclosed the OCI
in a new category, Accumulated Other Comprehensive Income (Losses), which has
been added to shareholders' equity on the consolidated balance sheet. The OCI
comprises the cumulative translation adjustment arising on the translation of
the financial statements of self-sustaining foreign operations. The Company
has reclassified $6.3 million of cumulative translation adjustments to the
opening balance of Accumulated Other Comprehensive Income (Losses).
Controls and procedures
Disclosure controls and procedures
Canaccord's management, including the CEO and the Executive Vice
President & CFO, has designed disclosure controls and procedures to provide
reasonable assurance that all relevant information is identified to the
Disclosure Committee to ensure appropriate and timely decisions are made
regarding public disclosure.
Changes in internal control over financial reporting
There were no changes in internal control over financial reporting that
occurred during the quarter ended December 31, 2007 that have materially
affected, or are reasonably likely to materially affect, Canaccord's internal
control over financial reporting.
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
For the third quarter of fiscal 2008, the Board of Directors approved a
quarterly dividend of $0.125 per share. Dividends are payable on March 10,
2008 to shareholders of record on February 22, 2008. The common share dividend
payment to common shareholders will total approximately $5.8 million or about
38.7% of third quarter net income. Canaccord intends to pay a $0.125 regular
quarterly common share dividend for each quarter in fiscal 2008.
Historical quarterly information
Canaccord's revenue from an underwriting transaction is recorded only
when the transaction has closed. Consequently, the timing of revenue
recognition can materially affect Canaccord's quarterly results. The expense
structure of Canaccord's operations is geared towards providing service and
coverage in the current market environment. If general capital markets
activity were to drop significantly Canaccord could experience losses.
The following table provides selected quarterly financial information for
the nine most recently completed financial quarters ended December 31, 2007.
This information is unaudited but reflects all adjustments of a recurring
nature, which are, in the opinion of management, necessary to present a fair
statement of the results of operations for the periods presented. Quarter-to-
quarter comparisons of financial results are not necessarily meaningful and
should not be relied upon as an indication of future performance.
<<
-------------------------------------------------------------------------
(C$ thousands, except EPS Fiscal 2008 Fiscal 2007
in $) ----------- -----------
-------------------------------------------------------------------------
Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Revenue
Canaccord Adams 109,583 87,925 155,023 130,151 101,427
Private Client Services 61,166 57,415 76,083 $75,876 68,831
Corporate and Other 12,605 9,130 14,764 10,416 8,055
-------------------------------------------------------------------------
Total revenue 183,354 154,470 245,870 216,443 178,313
Net income 15,048 12,411 39,029 26,016 23,692
EPS - basic 0.34 0.28 0.86 0.57 0.51
EPS - diluted 0.31 0.26 0.80 0.54 0.49
-------------------------------------------------------------------------
----------------------------------------------------------------
(C$ thousands, except EPS Fiscal 2007 Fiscal 2006
in $) ----------- -----------
----------------------------------------------------------------
Q2 Q1 Q4 Q3
----------------------------------------------------------------
Revenue
Canaccord Adams 93,033 125,106 120,243 98,918
Private Client Services 55,626 72,286 78,422 54,731
Corporate and Other 7,372 8,735 8,409 5,021
----------------------------------------------------------------
Total revenue 156,031 206,127 207,074 158,670
Net income 17,806 25,942 30,070 24,248
EPS - basic 0.39 0.57 0.66 0.55
EPS - diluted 0.37 0.54 0.63 0.52
----------------------------------------------------------------
>>
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 risks, 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. Private Client Services'revenue is dependent on trading
volumes and, as such, is dependent on the level of market activity and
investor confidence. Canaccord Adams' revenue is dependent on financing
activity by corporate issuers and the willingness of institutional clients to
actively trade and participate in capital markets transactions. There may also
be a lag between market fluctuations and changes in business conditions and
the level of Canaccord's market activity and the impact that these factors
have on Canaccord's operating results and financial position. Furthermore,
Canaccord may not achieve its growth plans associated with the acquisition and
integration of Adams Harkness Financial Group, Inc.
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 financial statements in Canaccord's
2007 Annual Report, which are available on our Web site at
canaccord.com/investor and on SEDAR at sedar.com.
<<
Interim Consolidated Financial Statements
Canaccord Capital Inc.
Unaudited
For the three and nine months ended December 31, 2007
(Expressed in Canadian dollars)
Canaccord Capital Inc.
INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands of dollars)
As at December 31, March 31, December 31,
2007 2007 2006
$ $ $
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents 421,783 506,640 371,525
Securities owned, at market
(note 3) 164,388 348,764 146,030
Accounts receivable
(notes 5 and 12) 1,260,869 1,672,035 1,204,371
Income taxes recoverable 2,758 - -
-------------------------------------------------------------------------
Total current assets 1,849,798 2,527,439 1,721,926
Investment (note 6) 5,000 - -
Investment in asset-backed
commercial paper (note 7) 34,501 - -
Equipment and leasehold
improvements 39,939 37,549 33,566
Future income taxes 10,630 11,021 11,782
Goodwill and other intangible
assets (note 8) 32,873 33,933 26,869
-------------------------------------------------------------------------
1,972,741 2,609,942 1,794,143
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Securities sold short, at market
(note 3) 96,383 41,176 54,467
Accounts payable and accrued
liabilities (notes 5 and 12) 1,461,130 2,156,540 1,380,767
Income taxes payable - 15,035 3,681
Subordinated debt (note 9) 25,000 25,000 -
-------------------------------------------------------------------------
Total current liabilities 1,582,513 2,237,751 1,438,915
-------------------------------------------------------------------------
Commitments and contingencies
(note 14)
Shareholders' equity
Share capital (note 10) 141,370 156,296 159,520
Retained earnings 263,571 213,659 192,425
Accumulated other comprehensive
income (losses) (note 2) (14,713) 2,236 3,283
-------------------------------------------------------------------------
Total shareholders' equity 390,228 372,191 355,228
-------------------------------------------------------------------------
1,972,741 2,609,942 1,794,143
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Canaccord Capital 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, 2007 31, 2006 31, 2007 31, 2006
$ $ $ $
---------------------------------------------------- --------------------
REVENUE
Commission 74,959 74,380 226,462 215,990
Investment banking 84,910 78,177 287,266 251,135
Principal trading 387 9,035 3,275 22,209
Interest 16,011 14,355 48,594 42,252
Other 7,087 2,366 22,496 8,885
---------------------------------------------------- --------------------
183,354 178,313 588,093 540,471
---------------------------------------------------- --------------------
EXPENSES
Incentive compensation 90,778 89,466 283,600 269,395
Salaries and benefits 12,658 11,610 39,576 34,746
Trading costs 7,054 6,056 21,261 20,734
Premises and equipment 5,781 5,810 16,775 17,561
Communication and technology 5,611 5,352 17,163 15,802
Interest 6,574 4,926 19,155 15,310
General and administrative 17,390 14,413 51,416 47,807
Amortization 2,197 1,797 6,320 6,152
Development costs 6,774 5,247 22,113 14,903
Asset-backed commercial paper
fair value adjustment (note 7) 4,226 - 8,625 -
---------------------------------------------------- --------------------
159,043 144,677 486,004 442,410
---------------------------------------------------- --------------------
Income before income taxes 24,311 33,636 102,089 98,061
Income tax expense (recovery)
Current 10,395 8,973 37,775 31,634
Future (1,132) 971 (2,174) (1,013)
---------------------------------------------------- --------------------
9,263 9,944 35,601 30,621
---------------------------------------------------- --------------------
---------------------------------------------------- --------------------
Net income for the period 15,048 23,692 66,488 67,440
---------------------------------------------------- --------------------
---------------------------------------------------- --------------------
Basic earnings per share
(note 10 (vi)) 0.34 0.51 1.49 1.46
Diluted earnings per share
(note 10 (vi)) 0.31 0.49 1.37 1.40
---------------------------------------------------- --------------------
---------------------------------------------------- --------------------
See accompanying notes
Canaccord Capital Inc.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (Unaudited)
As at and for the nine months (in thousands of dollars)
ended December 31, 2007 December 31, March 31, December 31,
and 2006 and for the year 2007 2007 2006
ended March 31, 2007 $ $ $
-------------------------------------------------------------------------
Common shares, opening 147,900 152,705 152,705
Shares issued 495 194 122
Shares cancelled (127) (45) (23)
Acquisition of common shares for
long term incentive plan
(note 11) (23,335) - -
Unvested share purchase loans (9,285) (4,954) 1,759
-------------------------------------------------------------------------
Common shares, closing 115,648 147,900 154,563
-------------------------------------------------------------------------
Contributed surplus, opening 8,396 4,939 4,939
Excess on redemption of common
shares (note 10(iii)) (369) (38) (38)
Excess (shortfall) on distribution
of acquired common shares
(note 10 (v)) (29) 1,623 1,623
Stock-based compensation (note 11) 14,841 - -
Unvested share purchase loans 2,883 1,872 (1,567)
-------------------------------------------------------------------------
Contributed surplus, closing 25,722 8,396 4,957
-------------------------------------------------------------------------
Share capital 141,370 156,296 159,520
-------------------------------------------------------------------------
Retained earnings, opening 213,659 136,463 136,463
Net income for the period 66,488 93,456 67,440
Cash dividends (16,576) (16,260) (11,478)
-------------------------------------------------------------------------
Retained earnings, closing 263,571 213,659 192,425
-------------------------------------------------------------------------
Accumulated other comprehensive
income (losses), opening 2,236 (6,277) (6,277)
Other comprehensive income (loss) (16,949) 8,513 9,560
-------------------------------------------------------------------------
Accumulated other comprehensive
income (losses), closing (14,713) 2,236 3,283
-------------------------------------------------------------------------
Shareholders' equity 390,228 372,191 355,228
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands of dollars)
For the three For the nine
months ended months ended
--------------------- --------------------
December December December December
31, 2007 31, 2006 31, 2007 31, 2006
$ $ $ $
--------------------- --------------------
Net income for the period 15,048 23,692 66,488 67,440
Other comprehensive income
(loss), net of taxes
Net change in unrealized
gains (losses) on
translation of
self-sustaining foreign
operations (3,149) 8,242 (16,949) 9,560
-------------------------------------------------------------------------
Comprehensive income for the
period 11,899 31,934 49,539 77,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Canaccord Capital 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, 2007 31, 2006 31, 2007 31, 2006
$ $ $ $
---------------------------------------------------- --------------------
OPERATING ACTIVITIES
Net income for the period 15,048 23,692 66,488 67,440
Items not affecting cash
Amortization 2,197 1,797 6,320 6,152
Future income tax expense
(recovery) (1,132) 971 (2,174) (1,013)
Stock option expense 41 - 123 -
Changes in non-cash working
capital
Decrease (increase) in
securities owned 28,165 (25,299) 148,239 58,128
Decrease in accounts
receivable 