Canaccord Capital Inc. Reports second quarter and first half of fiscal 2009 results
(All dollar amounts are stated in Canadian dollars unless otherwise
indicated)
VANCOUVER, Nov. 6 /CNW/ - Canaccord Capital Inc.'s (TSX & AIM: CCI)
revenue for the three months ended September 30, 2008 was $110.8 million, down
30.2% from the same quarter a year ago. Net loss for the same period was $5.4
million, down $20.7 million from the prior year, excluding non-recurring
asset- backed commercial paper ("ABCP") related charges, and diluted loss per
share was $0.11, down from earnings per share ("EPS") of $0.31 from the same
period a year ago excluding non-recurring ABCP related charges. Commenting on
the quarter, Paul Reynolds, President and CEO said, "During these
unprecedented market challenges, Canaccord remains focused on managing risk,
preserving the firm's capital, and maintaining a strong position for when
market conditions return to more normal levels. While we did not generate a
profit for the second quarter of fiscal 2009, we made a number of difficult
decisions we felt were prudent in light of the current market environment."
Revenue for the six months ended September 30, 2008 was $283.5 million,
down 29.9% from the same period a year ago. Net income was $11.1 million for
the six-month period, representing a decrease of 79.6% from the prior year
excluding non-recurring ABCP related charges. Diluted EPS were $0.21, down
81.1% from the same period a year ago excluding non-recurring ABCP related
charges.
Events subsequent to September 30, 2008 that will be booked in Q3/09:
- Staff restructuring: As previously announced, Canaccord has
implemented a firm-wide restructuring that has resulted in the layoff
of approximately 10% of its staff globally. The Company has currently
estimated the Q3 fiscal 2009 pre-tax expense to be $6.8 million. In
addition, a 10%-20% salary reduction has been implemented for senior
executives.
- Credit provision: As a result of the volatility and rapid
deterioration in the global financial markets during October 2008, a
number of the Private Client Services clients experienced losses that
resulted in an unsecured exposure. As per the Company's policy of
reserving against unsecured balances, the Company recorded a Q3
fiscal 2009 pre-tax provision of $3.5 million against the unsecured
balances. Management will continue to work diligently to collect
these balances.
- Impairment of Enermarket goodwill: As a result of market conditions
prevailing subsequent to September 30, 2008, including the steep
decline in oil prices, the earnings prospects for Canaccord
Enermarket Ltd. ("Enermarket"), whose primary business is to provide
advisory services to companies in the oil and gas industry, have been
negatively impacted. Management has concluded that the value of
goodwill and intangibles related to Enermarket has been impaired and
recorded a charge of $4.0 million in October 2008.
Financial Impact of Above Items:
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Pre-tax After-tax Impact on
charge charge diluted EPS
(C$ millions) (C$ millions) (C$)
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Staff restructuring $6.8 $5.8 $(0.11)
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Credit provision $3.5 $2.4 $(0.04)
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Enermarket goodwill and
intangibles impairment $4.0 $4.0 $(0.07)
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Total $14.3 $12.2 $(0.22)
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Summary of the financial condition as of September 30, 2008 compared to
September 30, 2007:
- Cash and cash equivalents balance of $521.3 million, up
$141.6 million from $379.7 million
- Working capital of $308.4 million, up $4.5 million from
$303.9 million
- Total shareholders' equity of $414.3 million, up $32.0 million from
$382.3 million
- Return on equity ("ROE") of (5.0)%, down from 12.8%
- Book value per diluted common share for the period end was $7.15,
down 8.7% or $0.68 from $7.83
Summary of the financial results for the fiscal second quarter 2009
results (three months ended September 30, 2008) compared to the fiscal
second quarter 2008 results (three months ended September 30, 2007)
excluding non-recurring ABCP related charges:
- Revenue of $110.8 million, down 30.3% or $48.1 million from
$158.9 million
- Expenses of $115.8 million, down 14.4% or $19.5 million from
$135.3 million
- Net loss of $5.4 million, down $20.7 million from net income of
$15.3 million
- Diluted loss per share of $0.11, down $0.42 from EPS of $0.31
- On November 5, 2008, the Board of Directors approved the temporary
suspension of Canaccord's quarterly dividend for this quarter. This
prudent measure was taken to enable Canaccord to preserve its strong
working capital and book value, as well as to position the Company to
take advantage of growth opportunities that may present themselves.
The Company evaluates the dividend policy on a quarterly basis in the
context of the market environment and our business activity.
Summary of the financial results for the first-half fiscal 2009 results
(six months ended September 30, 2008) compared to the first-half fiscal
2008 results (six months ended September 30, 2007) excluding non-
recurring ABCP related charges:
- Revenue of $283.5 million, down 29.9% or $121.2 million from
$404.7 million
- Expenses of $265.0 million, down 17.9% or $57.6 million from
$322.6 million
- Net income of $11.1 million, down 79.6% or $43.2 million from
$54.3 million
- Diluted EPS of $0.21, down 81.1% or $0.90 from $1.11
Summary of the financial results for the fiscal second quarter 2009
results (three months ended September 30, 2008) compared to the fiscal
first quarter 2009 results (three months ended June 30, 2008):
- Revenue of $110.8 million, down 35.8% or $61.9 million from
$172.7 million
- Expenses of $115.8 million, down 22.4% or $33.4 million from
$149.2 million
- Net loss of $5.4 million, down $21.9 million from net income of
$16.5 million
- Diluted loss per share of $0.11, down $0.42 from EPS of $0.31
Summary of Operations:
- As previously announced:
- John Rothwell has been named Head of Private Client Services,
effective October 30, 2008
- Ken Knowles has joined Canaccord Capital Corporation as Head of
Fixed Income
- Robert Lee has joined Canaccord Capital Corporation as Head of
Fixed Income Sales
- Canaccord Adams, our capital markets team, led 31 transactions(1)
globally to raise total proceeds of $506.1 million during Q2/09
- During Q2/09, Canaccord Adams led or co-led the following equity
transactions:
- $260.0 million on TSX-V for Gold Wheaton Gold Corporation
- $125.9 million for MBAC Opportunities Inc.
- $31.7 million on TSX for Mavrix Explore 2008 FT LP
- $30.0 million on TSX-V for Potash North Resource Corporation
- Canaccord Adams participated in 51 transactions(1) globally to raise
total proceeds of $1.9 billion during Q2/09
- Canaccord Adams ranked number two for 7 completed Private Investment
in Public Equity ("PIPE") transactions in North America that raised
over US$200.0 million in proceeds during Q2/09
- Assets under administration ("AUA") of $11.6 billion, down 24.2% from
the same period a year ago, and down 21.2% from Q1/09
- Assets under management ("AUM") of $609.0 million, down 21.6% from
the same period a year ago, and down 18.5% from Q1/09
- As of September 30, 2008, Canaccord had 341 Advisory Teams, down 37
from the same period a year ago, and down 13 from Q1/09. We have
hired 4 additional Advisory Teams subsequent to September 30, 2008
and had 345 Advisory Teams as of October 31, 2008
--------------------------
(1) Transactions over $1.5 million
LETTER TO SHAREHOLDERS
To Our Shareholders
The "tsunami" that swept through global financial markets during our
second quarter of fiscal 2009 had a major impact on business and investor
confidence. With the credit markets effectively shut down and volatility
reaching unprecedented levels, most investors stayed on the sidelines, waiting
for a more rational order to reassert itself. Investors' reluctance or
inability to act had a substantial impact on Canaccord's global business
during the quarter. While we were not profitable during our second quarter and
were required to make some difficult decisions to protect our strong capital
position, we completed the major elements of our 120-Day Plan and filled three
key senior management positions in Fixed Income and Private Client Services.
Financial overview
Total revenues declined 30% to $110.8 million in the second quarter of
fiscal 2009 compared to the same period last year. The drop in financing
activity to historic lows, combined with challenging market conditions in
global equity markets, led to a revenue decline of 24% in our Private Client
Services group and 35% at Canaccord Adams. Among the geographies, Canaccord
Adams' revenue declined 40% in Canada, 44% in the United Kingdom and Other
Foreign Location, and 12% in the United States.
Decreased incentive compensation was the primary factor in lower expenses
for the three months, which declined 17% to $115.8 million. The net loss for
the three months was $5.4 million compared to net income of $12.4 million in
the second quarter of fiscal 2008. The diluted loss per share was $0.11
compared to diluted earnings per share of $0.26 in the prior year period.
We are not pleased with these results. They reflect extremely challenging
market conditions that have left no one in the financial services industry
unscathed. Importantly, Private Client Services generated nearly $8 million in
earnings before taxes and overhead allocations for the three months and our
Canadian operations were profitable in Q2. Perhaps more importantly, Canaccord
remains in excellent financial condition, with $521 million in cash and
working capital of $308 million.
The Canaccord Relief Program for our clients who hold eligible ABCP is
also fully funded. Unfortunately, the restructuring is now delayed until mid
to late November; however, we remain confident of a successful resolution.
Scaling for a slower environment
It is likely that the challenges the financial services industry faces
are far from resolved and may continue for another 12 to 24 months. Preserving
Canaccord's capital base during what could be a prolonged downturn must be our
primary concern. That was the impetus for the decision we took in late October
to reduce Canaccord's global workforce by approximately 10%. Every area of the
Company has been touched by these layoffs, though we have sought to minimize
the impact on the firm's ability to generate revenues. This employee reduction
brings our staffing levels in line with expected market activity. Associated
with this reduction, Canaccord has booked a provision for severance charges of
$6.8 million pre-tax in Q3/09.
Canaccord employees have always taken pride in being part of a close-knit
culture. This culture made it difficult to say good-bye to valued colleagues
who have contributed so much. We thank those who are leaving for all they have
done to foster Canaccord's success as the leading independent investment firm
in Canada.
In addition to adjusting staffing levels for expected transaction
volumes, we are implementing a variety of initiatives that have come out of
our 120-Day Plan. We're confident that these actions will allow us to not only
protect our capital but also help Canaccord return to overall profitability:
- Our senior management team will take a 10% to 20% reduction in base
compensation.
- We are making further reductions in travel and entertainment
expenses.
- We will defer some projects and reduce the cost of support and
information technology. We are also exploring opportunities to make
more efficient use of our facilities.
The net contribution from these initiatives, including the cost savings
from the headcount reduction as well as revenue enhancement, is expected to be
in excess of $12 million annually. The combination of the expense reduction
program and revenue enhancement we have undertaken, and our balance sheet
strength, will put Canaccord into a better position to maintain its
competitive position and to take advantage of future opportunities.
Additionally, to preserve our strong working capital and book value in
the current business environment, the Board has decided to temporarily suspend
the quarterly dividend, effective immediately. We will re-visit our dividend
payment next quarter in the context of the market environment and our business
activity.
Subsequent events to impact third quarter results
Early in the third quarter, deteriorating market conditions required us
to make two decisions that will impact financial results in our fiscal third
quarter. First, the current market dislocation has rendered a number of our
Private Client Services clients unable to cover margin-related losses in their
accounts, leaving Canaccord with unsecured exposure in these cases. In keeping
with our prudent accounting policies, we will record a provision of $3.5
million, pre-tax, against this exposure while we continue to work diligently
to collect these balances.
Second, management has determined that current market conditions have
impaired the value of goodwill we hold on our books for Canaccord Enermarket
Ltd. Given Enermarket's ability to generate current or projected long-term
earnings has been negatively impacted, we will record an impairment charge of
$4.0 million pre-tax against the goodwill and other intangibles assets. This
brings the total charge for provisions booked in Q3/09 to $14.3 million pre-
tax. This amount includes the severance charge, credit provision, and the
Enermarket goodwill and intangibles impairment.
Operational highlights
For all its challenges, the quarter was not without its successes.
Globally, Canaccord Adams participated in 51 transactions that raised total
proceeds of $1.9 billion. Of these, we led or co-led 31 transactions for
proceeds of more than $500 million, including a $260 million issue for Wheaton
Gold Corporation on the TSX Venture Exchange. In the US, our team completed
seven private placements, which gave us the number two ranking in the sector.
In addition, Canaccord Adams' annual Global Growth Conference in Boston was a
great success. A record 1,200 institutional investors, company presenters and
private equity firms attended the conference this year, a corroboration of the
value our clients put on Canaccord's expertise in small- and mid-cap equities.
We were pleased to fill two key positions during the quarter in our Fixed
Income group. Ken Knowles is now responsible for leading Canaccord's Fixed
Income operations, taking over from Bill Whalen, who has retired. Ken is
joined by Robert Lee, Canaccord's new Managing Director and Head of Fixed
Income Sales. Ken and Robert each have more than 30 years of financial
services experience, most recently with JPMorgan Chase.
As mentioned, Private Client Services made a positive contribution to the
firm's financial results despite exceptionally challenging equity markets. The
across-the-board decline in global equity values was the key factor in
declining assets under administration and assets under management, which fell
24% and 22%, respectively, during the quarter. In addition, we also lost a
dozen Advisory Teams over the summer of 2008, though we have subsequently
hired four new teams to rebuild our complement.
The job of aggressively growing our Advisory Teams and assets now falls
to our new Executive Vice President and Head of Private Client Services, John
Rothwell. John is a high-energy leader with more than 30 years of experience
in the Canadian investment business. He was most recently president of
Wellington West, where he focused on broker recruitment, retail expansion and
revenue growth. He was a formidable competitor there, and we are delighted to
have John on the leadership team at Canaccord.
Looking ahead
In this letter I have focused on the need to protect the firm's capital.
Given all of the factors that make the current market situation truly
unprecedented, we cannot reasonably predict the timing of a turnaround in
transaction volumes. We must conserve our cash so we can sustain competitive
levels of compensation to the professionals who will deliver the ideas that
count when market activity resumes. We will continue to prudently monitor and
reduce risk. And we must - where prudent and accretive - make investments that
position us well for the inevitable turnaround in our markets. We have not
lost sight of our global focus nor our sector expertise, and we expect to use
the months ahead to enhance the Canaccord brand, as profitably as possible,
wherever we operate.
Paul D. Reynolds
President & Chief Executive Officer
ACCESS TO QUARTERLY RESULTS INFORMATION:
Interested investors, the media and others may review this quarterly
earnings release and supplementary financial information at
www.canaccord.com/investor/financialreports.
CONFERENCE CALL AND WEBCAST PRESENTATION:
Interested parties can listen to our second quarter fiscal 2009 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, November 6, 2008 at 5:00 a.m. (Pacific Time), 8:00 a.m. (Eastern
Time), and 1:00 pm (UK Time). During the conference call, senior executives
will comment on the results for Q2/09 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:
416-644-3422 (within Toronto)
1-800-588-4490 (toll free outside of Toronto)
00-800-2288-3501 (toll free from the United Kingdom)
A replay of the conference call can be accessed after 7:00 a.m. (Pacific
Time), 10:00 a.m. (Eastern Time), and 3:00 p.m. (UK Time) November 6, 2008, at
416-640-1917 or 1-877-289-8525 by entering passcode 21285861 followed by the
number sign. The replay will be available until 11:59 p.m. (Eastern Time)
Thursday, November 13, 2008.
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: capital markets
and private client services. Together, these operations offer a wide range of
complementary investment banking services, investment products and brokerage
services to Canaccord's corporate, institutional and private clients.
Canaccord has 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.
FOR FURTHER INFORMATION, CONTACT:
North American media:
Scott Davidson
Managing Director, Global Head of Marketing & Communications
Phone: 416-869-3875 Email:scott_davidson@canaccord.com
London media:
Bobby Morse or Ben Willey
Buchanan Communications (London)
Phone: +44 (0) 20 7466 5000 Email:bobbym@buchanan.uk.com
Investor relations inquiries:
Katherine Young
Vice President, Investor Relations
Phone: 416-869-7292
Email:katherine_young@canaccord.com
Nominated Adviser and Broker:
Marc Milmo or Dugald J. Carlean
Fox-Pitt, Kelton Limited
Phone: +44 (0) 207 663 6000
Email:marc.milmo@fpk.com
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None of the information on Canaccord's Web site at www.canaccord.com
should be considered incorporated herein by reference.
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Management's Discussion and Analysis
Fiscal second quarter 2009 for the three months and six months ended
September 30, 2008 - this document is dated November 6, 2008
The following discussion of the financial condition and results of
operations for Canaccord Capital Inc. ("Canaccord") is provided to enable the
reader to assess material changes in such financial condition and to assess
results for the three- and six-month periods ended September 30, 2008 compared
to the corresponding periods in the preceding fiscal year. The three- and six-
month periods ended September 30, 2008 are also referred to as the second
quarter 2009, Q2/09, fiscal Q2/09 and first-half fiscal year 2009 in the
following discussion. This discussion should be read in conjunction with the
unaudited interim consolidated financial statements for the three- and six-
month periods ended September 30, 2008 beginning on page 30 of this report;
our Annual Information Form dated June 30, 2008; and the 2008 annual
Management's Discussion and Analysis ("MD&A") including the audited
consolidated financial statements for the fiscal year ended March 31, 2008
("Audited Annual Consolidated Financial Statements") in Canaccord's Annual
Report dated July 8, 2008 ("the Annual Report"). There has been no material
change to the information contained in the annual MD&A for fiscal 2008 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. This MD&A
is based on unaudited interim and Audited Annual Consolidated Financial
Statements prepared in accordance with Canadian GAAP.
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 funds held in client accounts as
well as the aggregate market value of long and short security positions.
Canaccord's method of calculating AUA may differ from the methods used by
other companies and therefore may not be comparable to other companies.
Management uses this measure to assess operational performance of the Private
Client Services business segment. AUM includes all assets managed on a
discretionary basis under our programs generally described as or known as the
Alliance Program and Private Investment Management. Services provided include
the selection of investments and the provision of investment advice. AUM is
also administered by Canaccord and is included in AUA.
Excluding ABCP adjustments is a non-GAAP measure that reflects
Canaccord's business results excluding the charges related to third party
asset-backed commercial paper ("ABCP") for the Canaccord Relief Program and
restructuring as well as the fair value adjustment related to the ABCP
Canaccord holds in treasury.
Overview
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.
Canaccord is publicly traded on both the Toronto Stock Exchange and AIM, a
market operated by the London Stock Exchange. The Company has operations in
two of the principal segments of the securities industry: Capital Markets and
Private Client Services.
Canaccord's business is cyclical and experiences considerable variations
in revenue and income from quarter to quarter and year to year due to factors
beyond Canaccord's control. Our business is affected by the overall condition
of the North American and European equity markets, including the seasonal
variance in these markets.
Business environment
Global capital markets faced an unprecedented amount of volatility during
the second quarter of Canaccord's fiscal year. Currency markets shifted from
an inflation focus in July, to a pursuit of safety and preservation of capital
in August and September. Inter-bank lending slowed to a near halt in the wake
of the sub-prime debt crisis, placing further pressure on companies with
already strained cash flows. Corporations found it difficult to raise capital
and the cost of borrowing rose dramatically.
The "credit crisis" left no financial company completely unscathed and
spilled over into other sectors. Even traditionally strong non-financial
companies experienced challenges rolling over their commercial paper funding
programs to help manage their short-term cash flow needs.
Long-time institutions on Wall Street and large US banks experienced
significant changes:
- Lehman Brothers and several other financial institutions were allowed
to fail. This created significant financial dislocation for Lehman
Brothers' counterparties, including many hedge funds.
- The world's largest insurer, AIG, suffered a crisis in confidence
after Lehman Brothers was allowed to fail, and due to AIG's key role
as the leading insurer of various credit-related securities, it was
bailed out by the US Treasury and Federal Reserve. Similarly, two
government sponsored entities, Fannie Mae and Freddie Mac, were
essentially nationalized to help reliquify mortgage markets.
- Merrill Lynch was sold to Bank of America and Washington Mutual was
sold to JPMorgan Chase, resulting in two well known names in the
investment industry being sold at a significant discount to what they
were valued at just a few months ago. Wachovia was also sold under
duress to Wells Fargo.
- The remaining large independent Wall Street dealers had to
significantly reduce the leverage in their balance sheets, and
Goldman Sachs, Morgan Stanley and Raymond James applied to switch
their status to the much more restrictive bank holding company
structure.
Canada was not immune to the financial and economic turmoil of the credit
crisis. The fact that there were no initial public offerings on the TSX during
Canaccord's second quarter of fiscal 2009 is a reflection of this negative
business environment.
Canadian equity markets suffered from global investors selling both
commodity currencies and commodity equities. The Canadian dollar dropped from
a July peak of parity to the US dollar to the $0.93 level on September 30,
2008. The major equity market, the S&P/TSX Index moved from 14,467 on June 30,
2008 to a close of 11,750 on September 30, 2008. Canadian debt markets saw the
treasury bill yields fall dramatically while the yields for the short- to mid-
term government debt market rose significantly. Debt markets de-coupled with
spreads and absolute yield levels becoming the issue for borrowers.
Since October 1, 2008, aggressive US government intervention was enacted
to deal with the jarring impact of ongoing credit contraction on equity and
credit markets. An overarching US$700 billion bailout plan was approved by the
US House of Representatives on October 4, 2008, with hopes of stabilizing
financial markets, cushioning troubled US banks, and providing some liquidity
to the US credit market. The bill also included a temporary increase in
federal insurance on bank deposits in the event of a bank failure, from
US$100,000 to US$250,000. The crisis in confidence persisted despite the US
bailout and, as a result, six central banks, including the US Federal Reserve,
European Central Bank and the Bank of Canada, enacted a coordinated reduction
of 50 basis points of their bank lending rates and further injections of
liquidity on October 8, 2008. On October 13, 2008, the US government announced
major equity purchases in several US banks - injecting US$250 billion in
capital into the firms. The US government also agreed to a three-year
guarantee of inter-bank lending. Most recently, the US Federal Reserve
announced that it is finalizing a program to become a "buyer of last resort"
for troubled commercial paper.
European markets and financial institutions were also adversely affected
by the worldwide economic environment. European governments have injected
hundreds of billions of euros into European banks and lending companies in a
collective effort to keep their countries' credit systems and economies from
stalling. The UK government rescued several major financial institutions
through forced sales of firms and over (pnds stlg)37 billion in equity
infusion into major banks-restoring some much needed capital. Germany, France,
Spain, Italy, and other European governments also announced rescue packages
totalling hundreds of billions - all in hopes of restabilizing banks and
lending companies in their regions. Over (euro)1.3 trillion has already been
committed to guarantee bank loans and take stakes in lenders. Further to this,
following Ireland's lead, many European countries have made arrangements to
guarantee all private bank accounts, agreeing to do "whatever it takes" to
prevent losses for depositors in their countries. As a result of the financial
crisis, several countries have now requested financial aid from the IMF,
including (near-bankrupt) Iceland, as well as Pakistan, Belarus and the
Ukraine.
The overall economic climate is being affected by the credit crisis. On
October 3, 2008, the US reported its largest monthly job loss in over five
years, reaffirming a recession had already started. Nevertheless, the
contraction of US consumer spending and the dramatic fall in commodity prices
are already being felt by Canadian firms. As a result, declining GDP is
forecast for Canada for the last quarter of calendar 2008 and first quarter of
2009. On October 21, 2008, the Bank of Canada cut its key interest rate by an
additional quarter of a percent in an attempt to support the Canadian economy
in the face of what the central bank has labelled a "global recession". The
Bank indicated that more interest rate cuts were likely to come.
The TSX saw several days of record losses in September and early October
and experienced a more rapid decline in the S&P/TSX Index than what occurred
for the S&P 500 Index especially on a currency adjusted basis. The Canadian
dollar experienced an unprecedented decline versus the US dollar; from $0.94
on October 1, 2008, to $0.77 by month end. Hedge fund redemptions in
conjunction with mutual fund liquidations and cashing in the remaining values
of many 401K plans moved US equities down to levels not seen since the last
cycle started in 2003.
Confidence has been viciously challenged. Whether it is US consumer
confidence or German business confidence, the picture is gloomy and suggests
strongly that the global economy will be weak for the next few quarters. The
business question for Canaccord is how much of the economic outlook has
already been discounted by both the debt and equity markets. A sustainable
economic recovery features the return of liquidity to credit markets to fuel
business and consumer activity. We believe the massive government monetary and
policy interventions are a positive start. The dramatic price decline of many
commodities and most notably crude oil is meaningful to restore some spending
power by consumers. Forecasters, including the Bank of Canada, suggest a new
economic expansion is unlikely to take hold until 2010. However, it has been
the historical experience that markets will anticipate this event well in
advance.
Market data
Both year-over-year and quarter-over-quarter trading volumes were
relatively neutral or declining for the TSX-V, AIM and the NASDAQ. The TSX did
post a 12.2% increase in trading volumes year over year however. Financing
values on all exchanges were down compared to Q2/08 and the previous quarter
due to the challenging market conditions and volatility.
Financing values for all of Canaccord's focus sectors on AIM fell
substantially compared to the previous quarter, while only oil and gas
financing grew compared to Q2/08. Financing values on the Canadian Exchanges
were also down in all of Canaccord's focus sectors, with more substantial
decreases year over year.
Trading volume by exchange (billions of shares)
-------------------------------------------------------------------------
Change Change
from from
Fiscal fiscal fiscal
Jul 08 Aug 08 Sep 08 Q2/09 Q1/09 Q2/08
-------------------------------------------------------------------------
TSX 8.1 6.9 10.7 25.7 3.2% 12.2%
TSX Venture 2.9 2.2 2.9 8.0 (42.4)% (27.3)%
AIM 11.5 7.3 11.0 29.8 (24.0)% (6.9)%
NASDAQ 20.0 15.7 22.0 57.7 1.6% (11.4)%
-------------------------------------------------------------------------
Source: TSX Statistics, LSE AIM Statistics, Thomson One
Total financing value by exchange
-------------------------------------------------------------------------
Change Change
from from
Fiscal fiscal fiscal
Jul 08 Aug 08 Sep 08 Q2/09 Q1/09 Q2/08
-------------------------------------------------------------------------
TSX and TSX
Venture
(C$ billions) 2.5 0.9 2.0 5.4 (52.2)% (46.5)%
AIM ((pnds stlg)
billions) 0.5 0.3 0.1 0.9 (55.0)% (72.7)%
NASDAQ
(US$ billions) 2.3 1.1 1.2 4.6 (9.8)% (56.2)%
-------------------------------------------------------------------------
Source: TSX Statistics, LSE AIM Statistics, Equidesk
Financing value for relevant AIM industry sectors
-------------------------------------------------------------------------
((pnds stlg)
millions, Change Change
except for from from
percentage Fiscal fiscal fiscal
amounts) Jul 08 Aug 08 Sep 08 Q2/09 Q1/09 Q2/08
-------------------------------------------------------------------------
Oil and gas 159.0 74.0 35.5 268.5 (12.9)% 39.0%
Mining 76.8 4.4 2.3 83.5 (81.8)% (76.1)%
Pharmaceutical
and Biotech 2.7 8.6 3.8 15.1 (60.9)% (64.9)%
Media 1.2 0.5 0.3 2.0 (89.2)% (99.0)%
Technology - 19.0 17.6 36.6 (72.7)% (72.7)%
-----------------------------------------------------------
Total
(of relevant
sectors) 239.7 106.5 59.5 405.7 (56.9)% (54.9)%
-------------------------------------------------------------------------
Source: LSE AIM Statistics
Financing value for relevant TSX and TSX Venture industry sectors
-------------------------------------------------------------------------
($ millions, Change Change
except for from from
percentage Fiscal fiscal fiscal
amounts) Jul 08 Aug 08 Sep 08 Q2/09 Q1/09 Q2/08
-------------------------------------------------------------------------
Oil and gas $ 544.9 $ 481.9 $ 28.5 $1,055.3 (47.1)% (68.4)%
Mining 661.8 43.7 35.8 741.3 (23.8)% (46.2)%
Biotech 32.6 4.5 1.8 38.9 (35.9)% (67.2)%
Media - - - - - -
Technology 8.7 - - 8.7 (97.2)% (85.7)%
-----------------------------------------------------------
Total
(of relevant
sectors) $1,248.0 $ 530.1 $ 66.1 $1,844.2 (47.8)% (62.3)%
-------------------------------------------------------------------------
Source: FP Infomart
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. Together, these operations offer a wide range of complementary
investment banking services, investment products, and brokerage services to
Canaccord's institutional, corporate and private clients. Canaccord's
administrative segment is referred to as Corporate and Other.
Canaccord Adams
Canaccord Adams offers mid-market corporations and institutional
investors around the world a seamlessly integrated platform for equity
research, sales and trading, and investment banking services that is built on
extensive operations in Canada, the United States and the United Kingdom.
- Canaccord's research analysts have deep knowledge of more than 550
small to mid-cap companies across eight focus sectors: Mining and
Metals, Energy, Technology, Life Sciences, Consumer, Real Estate,
Industrial Growth and Sustainability.
- Our Sales and Trading desk executes timely transactions to more than
1,500 institutional relationships around the world, operating as an
integrated team on one common platform.
- With more than 100 skilled investment bankers, Canaccord Adams
provides clients with deep sector expertise and broad equity
transaction and M&A advisory experience.
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.
Private Client Services
As a leading independent investment dealer, Canaccord's Private Client
Services has built its reputation on the quality of our investment ideas. We
recognize that the growing complexity of many clients' financial circumstances
demands experienced Advisory Teams who can provide solutions and ideas that
meet our clients' needs. Many of our Investment Advisors have completed the
training required for advanced industry designations such as Chartered
Financial Analyst or Certified Investment Manager. We continue to provide our
advisors with ongoing training opportunities.
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 Advisory
Teams in respect of investment banking and venture capital transactions by
private clients.
Corporate and Other
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
Canaccord Adams or Private Client Services divisions. Also included in this
segment are Canaccord's operations and support services, which are responsible
for front and back-office information technology systems, compliance and risk
management, operations, finance and all administrative functions.
CONSOLIDATED OPERATING RESULTS
Second quarter and first-half fiscal 2009 summary data(1)
-------------------------------------------------------------------------
(C$ thousands, Three months Six months
except ended Quarter- ended
per share, September 30 over- September 30 YTD-
employee and ------------------- quarter ------------------- over-YTD
% amounts) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Canaccord
Capital Inc.
Revenue
Commission $ 60,630 $ 65,728 (7.8)% 132,626 $151,503 (12.5)%
Investment
banking 34,024 73,731 (53.9)% 110,171 202,356 (45.6)%
Principal
trading(2) 87 (3,925) 102.2% 5,998 2,888 107.7%
Interest 11,734 16,273 (27.9)% 24,063 32,583 (26.1)%
Other 4,354 7,062 (38.3)% 10,679 15,409 (30.7)%
-------------------------------------------------------------------------
Total revenue $110,829 $158,869 (30.2)% $283,537 $404,739 (29.9)%
Expenses
Incentive
compensation 50,977 71,416 (28.6)% 133,704 192,822 (30.7)%
Salaries and
benefits 14,195 12,649 12.2% 29,638 26,918 10.1%
Other
overhead
expenses(3) 50,633 51,277 (1.3)% 101,642 102,822 (1.1)%
ABCP fair
value
adjustment(4) - 4,399 n.m. - 4,399 n.m.
-------------------------------------------------------------------------
Total
expenses $115,805 $139,741 (17.1)% $264,984 $326,961 (19.0)%
Income (loss)
before income
taxes (4,976) 19,128 (126.0)% 18,553 77,778 (76.1)%
Net income
(loss) (5,398) 12,411 (143.5)% 11,061 51,440 (78.5)%
Earnings
(loss) per
share -
diluted (0.11) 0.26 (142.3)% 0.21 1.07 (80.4)%
Return on
average
common equity (5.0)% 12.8% (17.8)p.p. 5.3% 26.9% (21.6)p.p.
Book value
per share -
period end 7.15 7.83 (8.7)%
Number of
employees 1,688 1,689 (0.1)%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for ROE, book value per share
and number of employees.
(2) The ABCP fair value adjustment has been recategorized in Q2/08 from
principal trading revenue to an expense. This is consistent with the
treatment in subsequent periods.
(3) Consists of trading costs, premises and equipment, communication and
technology, interest, general and administrative, amortization and
development costs.
(4) Represents the ABCP fair value adjustment for ABCP held by the
Company.
p.p.: percentage points
n.m.: not meaningful
Geographic distribution of revenue(1)
-------------------------------------------------------------------------
Three months Six months
ended Quarter- ended
(C$ thousands, September 30 over- September 30 YTD-
except ------------------- quarter ------------------- over-YTD
% amounts) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Canada $ 80,750 $117,275 (31.1)% $189,628 $279,368 (32.1)%
UK 13,096 20,807 (37.1)% 46,815 68,308 (31.5)%
US 18,309 20,737 (11.7)% 43,950 47,159 (6.8)%
Other Foreign
Location (1,326) 50 n.m. 3,144 9,904 (68.2)%
-------------------------------------------------------------------------
Total $110,829 $158,869 (30.2)% $283,537 $404,739 (29.9)%
-------------------------------------------------------------------------
(1) For a business description of Canaccord's geographic distribution
please refer to the "About Canaccord's Operations" section.
n.m.: not meaningful
Second quarter 2009 vs. second quarter 2008
On a consolidated basis, revenue is generated through five activities:
commissions and fees associated with agency trading and private client wealth
management activity, investment banking, principal trading, interest and
other. Revenue for the three months ended September 30, 2008 was $110.8
million, down $48.0 million compared to the same period a year ago.
For the second quarter of fiscal 2009, revenue generated from commissions
was $60.6 million, a decrease of 7.8% compared to the same period a year ago
largely due to the turbulent market conditions during the quarter. Investment
banking revenue was $34.0 million, a decrease of $39.7 million primarily due
to lower financing activity related to the volatile markets and the credit
crunch. Principal trading experienced a gain of $0.1 million compared to a
loss of $3.9 million during the same period a year ago. Interest revenue was
$11.7 million, a decrease of 27.9% mainly due to lower interest rates and
smaller clients receivable balances. Other revenue decreased to $4.4 million
from $7.1 million compared to Q2/08 mainly due to a decrease in foreign
exchange gains during Q2/09.
Second quarter revenue in Canada was $80.8 million, a drop of 31.1% or
$36.5 million from the same quarter a year ago. Revenue in the UK also
declined by 37.1% to $13.1 million compared to the same period a year ago. In
the US, revenue was $18.3 million, a decrease of 11.7% compared to Q2/08.
Other foreign location revenue decreased by $1.4 million compared to the same
quarter in the prior year. The overall decrease in revenue across geographies
was mainly attributed to the financial credit crisis that significantly
impacted global equity markets during the second quarter of fiscal 2009.
First-half fiscal year 2009 vs. first-half fiscal year 2008
Revenue for the six months ended September 30, 2008 was $283.5 million,
down 29.9% or $121.2 million compared to the same period a year ago. Revenue
generated from commissions decreased by 12.5% to $132.6 million compared to
the prior year largely due to the declining market conditions in the first-
half of fiscal year 2009. Investment banking revenue was $110.2 million,
representing a drop of 45.6% primarily due to the decreased financing activity
in equity markets across the geographies where we operate.
Principal trading experienced an overall increase of $3.1 million to $6.0
million compared to the same period last year. Interest revenue was $24.1
million, a drop of 26.1% due to lower client interest revenue. Other revenue
decreased by $4.7 million to $10.7 million during the first-half fiscal year
2009 as a result of lower foreign exchange gains.
Year-to-date revenue in Canada was $189.6 million, a decrease of 32.1% or
$89.7 million from the same period a year ago. First-half fiscal year 2009
revenue in the UK was $46.8 million, a drop of 31.5% or $21.5 million from the
same period a year ago. Revenue in the US was $44.0 million, a decrease of
6.8% or $3.2 million compared to the first-half fiscal year 2008. Revenue from
Other foreign location was $3.1 million compared to $9.9 million in the six
months ended September 30, 2007. The overall decrease in revenue across the
various operations was a result of the liquidity challenges that affected
markets globally.
Expenses as a percentage of revenue
-------------------------------------------------------------------------
Three months Six months
ended Quarter- ended
in September 30 over- September 30 YTD-
percentage ------------------- quarter ------------------- over-YTD
points 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Incentive
compensation 46.0% 45.0% 1.0 p.p. 47.2% 47.6% (0.4)p.p.
Salaries and
benefits 12.8% 7.9% 4.9 p.p. 10.4% 6.7% 3.7 p.p.
Other overhead
expenses(1) 45.7% 32.3% 13.4 p.p. 35.8% 25.4% 10.4 p.p.
ABCP fair
value
adjustment(2) - 2.8% (2.8)p.p. - 1.1% (1.1)p.p.
-------------------------------------------------------------------------
Total 104.5% 88.0% 16.5 p.p. 93.4% 80.8% 12.6 p.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
Second quarter 2009 vs. second quarter 2008
Expenses for the three months ended September 30, 2008 were $115.8
million, a decrease of 17.1% or $23.9 million from a year ago. The overall
decrease in expenses was largely due to lower incentive compensation expense,
which decreased 28.6% or $20.4 million, consistent with the 30.2% decrease in
total revenue.
The decrease in incentive compensation expense was partially offset by an
increase in salaries and benefits. Salaries and benefits expense was $14.2
million in the second quarter of fiscal 2009, an increase of $1.5 million or
12.2% from the same period a year ago. The increase was mainly attributed to
the net increase of 18 employees hired in our UK operations and 23 employees
hired in our Corporate and Other segment to enhance our operations and support
services. The total compensation (incentive compensation plus salaries) payout
as a percentage of consolidated revenue for Q2/09 was 58.8% compared to 52.9%
in Q2/08, an increase of 5.9 percentage points.
First-half fiscal year 2009 vs. first-half fiscal year 2008
Expenses for the six months ended September 30, 2008 were $265.0 million,
an overall decrease of $62.0 million or 19.0% from a year ago. Incentive
compensation expense was $133.7 million, a decrease of 30.7%, which was
consistent with the 29.9% decrease in total revenue. Consolidated incentive
compensation as a percentage of total revenue was 47.2%, a decrease of 0.4
percentage points.
Salaries and benefits expense was $29.6 million, an increase of 10.1% in
the first half of fiscal 2009 compared to the same period a year ago for the
same reasons mentioned above. The total compensation (incentive compensation
plus salaries) payout as a percentage of consolidated revenue was 57.6%, an
increase of 3.3 percentage points from 54.3% in the first six months of fiscal
2008.
Other overhead expenses
-------------------------------------------------------------------------
Three months Six months
ended Quarter- ended
(C$ thousands, September 30 over- September 30 YTD-
except ------------------- quarter ------------------- over-YTD
% amounts) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Trading costs $ 6,717 $ 7,249 (7.3)% $ 13,038 $ 14,207 (8.2)%
Premises and
equipment 5,957 5,735 3.9% 11,742 10,994 6.8%
Communication
and technology 6,539 5,813 12.5% 12,702 11,552 10.0%
Interest 3,354 6,413 (47.7)% 7,313 12,581 (41.9)%
General and
administrative 19,611 15,755 24.5% 38,888 34,026 14.3%
Amortization 2,072 2,146 (3.4)% 4,114 4,123 (0.2)%
Development
costs 6,383 8,166 (21.8)% 13,845 15,339 (9.7)%
ABCP fair
value
adjustment(1) - 4,399 n.m. - 4,399 n.m.
-------------------------------------------------------------------------
Total other
overhead
expenses $ 50,633 $ 55,676 (9.1)% $101,642 $107,221 (5.2)%
-------------------------------------------------------------------------
(1) Represents the ABCP fair value adjustment for ABCP held by the
Company.
n.m.: not meaningful
Second quarter 2009 vs. second quarter 2008
Other overhead expenses decreased 9.1% to $50.6 million for the second
quarter of fiscal 2009 compared to the same period a year ago. The main reason
for the decrease was a non-recurring ABCP fair value adjustment of $4.4
million that was recognized in the second quarter 2008. Also contributing to
the overall decrease in other overhead expenses was interest expense, which
decreased by $3.1 million or 47.7%, compared to the same quarter a year ago.
The decrease in interest expense was mainly due to smaller clients payable
balances and lower interest rates compared to the same period a year ago.
This decrease was partially offset by a $3.9 million or 24.5% increase in
general and administrative expense. This increase in general and
administrative expense primarily related to a $1.9 million non-recurring
expense for consultancy fees incurred to upgrade internal infrastructure,
which is substantially completed. Reserves expense increased by $1.3 million
based on an assessment of current market conditions.
Development costs for Q2/09 were $6.4 million, a drop of 21.8% or $1.8
million from the previous year. There were less hiring incentives incurred in
the current volatile market, which resulted in the decrease.
Net loss for Q2/09 was $5.4 million, a drop of $17.8 million compared to
net income of $12.4 million from a year ago. Diluted loss per share was $0.11,
a decrease of $0.37 or 142.3%. The decrease in EPS was due to the decline in
net income as well as the issuance of 6,733,250 common shares in connection
with the equity financing in May 2008. ROE for Q2/09 was (5.0)% compared to
ROE of 12.8% a year ago. Book value per diluted share for Q2/09 decreased by
8.7% to $7.15 compared to Q2/08.
Income tax expense was $0.4 million in Q2/09 despite reporting a net loss
before income taxes, due to certain expenses not being deductible for tax
purposes and a valuation allowance for a portion of a future income tax asset.
First-half fiscal year 2009 vs. first-half fiscal year 2008
Other overhead expenses for the six months ended September 30, 2008
decreased by 5.2% or $5.6 million to $101.6 million from the same period a
year ago. The main reason for the decrease was the non-recurring $4.4 million
ABCP fair value adjustment recognized in the first-half of fiscal year 2008.
The remaining decrease in overhead expenses was due to interest expense, which
dropped 41.9% or $5.3 million, and development costs which decreased $1.5
million. The decrease in interest expense was the result of a drop in clients
payable balances in addition to lower interest rates. As discussed above, the
decrease in development costs was a result of a decline in hiring incentives
paid, particularly in the US operations.
The decrease in overhead expense was offset by an increase in general and
administrative expense, which increased by $4.9 million. The increase in
general and administrative expense for the first half of fiscal 2009 related
mostly to non-recurring consultancy fees incurred to upgrade internal
infrastructure and also an increase in reserves expense.
Net income for the first half of fiscal 2009 was $11.1 million, a
decrease of 78.5% or $40.4 million from the same period a year ago. Diluted
EPS were $0.21, down $0.86, and ROE was 5.3% compared to 26.9% a year ago.
This decrease was due to lower net income resulting from the negative impact
of the credit crunch in the global markets during fiscal 2009 as well as the
share issuance as discussed previously. Book value per diluted share at the
period end decreased by 8.7% to $7.15.
Income tax expense was $7.5 million in the first half of fiscal 2009, a
decrease of $18.8 million. The year-to-date effective tax rate was 40.4%
compared to 33.9% for the same period last year. The increase in effective tax
rate was due in part to certain expenses not being deductible for tax purposes
as well as changes in estimates. The amount of current year-to-date non-
deductible expenses is comparable to that for the same period last year but
has a more significant impact on our effective tax rate due to the lower
taxable income. The higher effective tax rate also reflected a valuation
allowance for a portion of a future income tax asset.
RESULTS OF OPERATIONS
Canaccord Adams(1)
-------------------------------------------------------------------------
(C$ thousands, Three months Six months
except ended Quarter- ended
employees September 30 over- September 30 YTD-
and % ------------------- quarter ------------------- over-YTD
amounts) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Canaccord
Adams
Revenue $ 58,336 $ 89,071 (34.5)% $163,129 $244,094 (33.2)%
Expenses
Incentive
compen-
sation 29,998 42,205 (28.9)% 82,527 118,408 (30.3)%
Salaries
and
benefits 3,919 3,194 22.7% 8,142 7,213 12.9%
Other
overhead
expenses 29,233 27,583 6.0% 57,501 53,710 7.1%
ABCP fair
value
adjustment(2) - 1,146 n.m. - 1,146 n.m.
-------------------------------------------------------------------------
Total
expenses $ 63,150 $ 74,128 (14.8)% $148,170 $180,477 (17.9)%
Income
before
income
taxes(3) $ (4,814) 14,943 (132.2)% 14,959 63,617 (76.5)%
Income
before
ABCP fair
value
adjustment
and taxes $ (4,814) 16,089 (129.9)% 14,959 64,763 (76.9)%
Number of
employees 551 535 3.0%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for number of employees and
income before ABCP adjustments
(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 is generated from commissions and fees
earned in connection with investment banking transactions and institutional
sales and trading activity as well as trading gains and losses from
Canaccord's principal and international trading operations.
Second quarter 2009 vs. second quarter 2008
Total revenue for Canaccord Adams in Q2/09 was $58.3 million, a decrease
of $30.7 million from the same quarter a year ago due to challenging market
conditions as described in the "Business environment" section on page 9.
Revenue from Canadian Operations
As a result of these market challenges, our Canadian operations generated
fiscal second quarter 2009 revenue of $29.1 million, a decrease of 39.8%
compared to a year ago. Canaccord Adams Canadian revenue is made up of the
following revenue streams: capital markets, international trading, registered
traders, and fixed income. The decrease in revenue was mainly attributed to
the drop in capital markets revenue of $15.7 million. International trading
decreased by $1.4 million and registered trading decreased by $1.6 million.
The decrease in capital markets revenue was consistent with the significant
drop in financing activity and the challenging market conditions in the
Canadian equity markets. Revenue from Canadian operations represents 49.9% of
Canaccord Adams' total revenue.
Revenue from UK Operations
Revenue from our UK operations was $13.1 million, a drop of 37.1% from
the same period a year ago due to a general slowdown in the market. UK revenue
of $13.1 million represents 22.4% of Canaccord Adams' total revenue.
Revenue from US Operations
In the US, revenue was $17.5 million, a decrease of 12.0% from a year
ago. This represents 30.0% of Canaccord Adams' total revenue. The decrease in
revenue was due to the financial crisis that impacted the equity markets
significantly during the second quarter of fiscal 2009.
Revenue from Other Foreign Location
Revenue from Other Foreign Location was a loss of $1.3 million compared
to revenue of $0.05 million in Q2/08. In any quarter, revenue in this region
represents a small number of transactions and is therefore very irregular.
Expenses
Expenses for Q2/09 were $63.2 million, a drop of $11.0 million compared
to the same period in the prior year. The largest decrease in non-compensation
expenses was in development costs, a decrease of $1.9 million, which was
offset by an increase in general and administrative expense of $2.4 million.
The increase in general and administrative expense was mainly due to non-
recurring consultancy fees incurred to upgrade internal infrastructure.
Development costs decreased due to fewer hiring incentives incurred in our US
operations. In the same prior year period, there was also a $1.1 million non-
recurring expense resulting from the ABCP fair value adjustment to the ABCP
Canaccord holds in treasury.
The decrease in incentive compensation for the quarter of $12.2 million
was consistent with the decline in revenue during the quarter. Salary and
benefits expense for the quarter increased $0.7 million or 22.7% compared to a
year ago. This increase was largely due to the increase in employees hired for
our UK operations. The total compensation expense payout as a percentage of
revenue for the quarter was 58.1%, which was an increase of 7.1 percentage
points from Q2/08.
Loss before income taxes and corporate overhead allocations for the
quarter was $4.8 million, representing a decrease in net income of $19.8
million or 132.2% from the same quarter a year ago.
First-half fiscal year 2009 vs. first-half fiscal year 2008
Revenue for Canaccord Adams for the first half of fiscal 2009 was $163.1
million, which decreased $81.0 million from the same period last year due to
declining capital markets in all geographies where we operate, particularly
during Q2/09.
Revenue from Canadian Operations
In Canada, revenue was $71.1 million, a decrease of 41.1% from the same
period a year ago. Within Canada, $57.8 million was derived from investment
banking and equities activity while $13.3 million was from our international
trading, registered traders and fixed income operations. The overall reduction
in revenue from the Canadian operations was largely due to the weak capital
markets both in Canada and globally, particularly during Q2/09. Overall, our
Canadian revenue represented 43.5% of Canaccord Adams' total revenue.
Revenue from UK Operations
Our UK revenue was $46.8 million, a decrease of $21.5 million from the
same period a year ago due to slower market conditions. Revenue from our UK
operations represented 28.7% of Canaccord Adams' total revenue.
Revenue from US Operations
In the US, revenue was $42.0 million, a drop of $3.1 million or 6.8%
compared to the same period a year ago. The decrease is attributed to the
declining markets and recessionary economy in the US. Revenue from US
operations represented 25.8% of Canaccord Adams' total revenue.
Revenue from Other Foreign Location
Revenue from Other Foreign Location was $3.2 million, down by $6.8
million compared to Q2/08. Revenue from Other Foreign Location represents 2.0%
of Canaccord Adams' total revenue. Revenue in this region represents a small
number of transactions and is therefore very irregular.
Expenses
Expenses for the first half of fiscal 2009 were $148.2 million, a
decrease of $32.3 million. Incentive compensation was $82.5 million, a
decrease of $35.9 million or 30.3% compared to the same period a year ago.
This decrease is consistent with the 33.2% drop in total revenue during the
first six months of the fiscal year.
Salary and benefits expense for the first half of fiscal 2009 increased
by $0.9 million from a year ago mainly due to a net increase of 16 additional
staff, particularly in our UK operations. The total compensation expense
payout as a percentage of revenue for the first half of fiscal 2009 was 55.6%,
an increase of 4.1 percentage points from 51.5% for the same period a year
ago.
Development costs also decreased by $2.1 million to $7.8 million during
the first half of fiscal 2009 mainly due to a decrease in hiring incentives
incurred in our US operations. This was offset by a $4.0 million increase in
general and administrative expense, which was $24.3 million for the first half
of fiscal 2009. General and administrative expense increased due to non-
recurring consultancy fees paid to upgrade our internal infrastructure as well
as an increase in reserves expense.
Income before income taxes and corporate overhead allocations for the
period was $15.0 million, a decrease of $48.7 million from the same period a
year ago.
Private Client Services(1)
-------------------------------------------------------------------------
(C$ thousands,
except AUM
and AUA,
which are in
C$ millions; Three months Six months
employees; ended Quarter- ended
Advisory September 30 over- September 30 YTD-
Teams, and ------------------- quarter ------------------- over-YTD
% amounts) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Revenue $ 43,844 $ 57,415 (23.6)% $101,697 $133,498 (23.8)%
Expenses
Incentive
compensation 20,116 25,351 (20.7)% 47,066 63,031 (25.3)%
Salaries and
benefits 3,477 3,510 (0.9)% 7,258 7,559 (4.0)%
Other
overhead
expenses 12,318 15,178 (18.8)% 26,270 30,597 (14.1)%
-------------------------------------------------------------------------
Total
expenses $ 35,911 $ 44,039 (18.5)% $ 80,594 $101,187 (20.4)%
Income before
income
taxes(2) 7,933 13,376 (40.7)% 21,103 32,311 (34.7)%
Assets under
management 609 777 (21.6)%
Assets under
administration 11,584 15,288 (24.2)%
Number of
Advisory Teams 341 378 (9.8)%
Number of
employees 744 784 (5.1)%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for AUM, AUA, number of Advisory
Teams, and number of employees.
(2) 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 Advisory
Teams in respect of investment banking and venture capital transactions by
private clients.
Second quarter 2009 vs. second quarter 2008
Revenue from Private Client Services was $43.8 million, a decrease of
$13.6 million mainly due to the deteriorating market conditions in North
America during the quarter. AUA decreased by $3.7 billion to $11.6 billion.
AUM declined by 21.6% year over year to $609 million. The decrease in AUA and
AUM was due to lower market value of assets and declining investor confidence
in Q2/09. There were 341 Advisory Teams at the end of the second quarter of
fiscal 2009, a drop of 37 from 378 a year ago. There were 4 new Advisory Teams
hired subsequent to September 30, 2008, and Canaccord had 345 Advisory Teams
as of October 31, 2008. Fee-related revenue as a percentage of total Private
Client Services revenue increased by 3.3 percentage points to 19.3% from the
same period last year. The increase was the result of fee-related revenue
remaining stable compared to prior periods while other Private Client Services
revenue declined.
Expenses for Q2/09 were $35.9 million, down $8.1 million or 18.5%. The
decline in incentive compensation of $5.2 million or 20.7% was the main
contributor to the overall decrease in total expenses during the quarter. This
decrease in incentive compensation was consistent with the 23.6% decrease in
total revenue. The total compensation expense payout as a percentage of
revenue for the quarter was 53.8%, an increase of 3.5 percentage points from
50.3% for the same period a year ago.
The largest decrease in non-compensation expenses was the drop in
interest expense of 54.8% or $3.0 million due to lower interest rates and
smaller cash balances in our client accounts this year versus last year.
Income before income taxes and corporate allocations for the quarter was
$7.9 million, a decrease of 40.7% or $5.4 million from the same period a year
ago.
First-half fiscal year 2009 vs. first-half fiscal year 2008
Revenue from Private Client Services was $101.7 million, a decrease of
$31.8 million mainly due to weakening market conditions in North America
during the first-half of fiscal year 2009. Fee-related revenue as a percentage
of total Private Client Services revenue increased by 3.6 percentage points to
17.3% compared to the same period last year. The increase was as a result of
fee-related revenue remaining stable compared to prior periods while total
Private Client Services revenue declined.
Expenses for the six months ended September 30, 2008 were $80.6 million,
a decrease of $20.6 million or 20.4%. The largest decreases in expenses were
incentive compensation expense, which declined $16.0 million, and interest
expense, which dropped $5.1 million. Incentive compensation decreased by 25.3%
which was in line with the 23.8% decrease in total revenue. Interest expense
decreased due to lower interest rates and smaller cash balances in our client
accounts this year versus last year. The total compensation expense payout as
a percentage of revenue for the first six months of fiscal 2009 was 53.4%, an
increase of 0.5 percentage points from 52.9% for the same period a year ago.
Trading costs also decreased by $1.1 million or 24.2% due to decreased trading
activity.
The decreases were offset by an increase in general and administrative
expense of $1.6 million or 28.9%, which was mainly due to a combination of an
increase in professional fees and reserves expense.
Income before income taxes and corporate allocations for the first half
of fiscal 2009 was $21.1 million, a decrease of 34.7% from the same period a
year ago.
Corporate and Other(1)
-------------------------------------------------------------------------
(C$ thousands, Three months Six months
except ended Quarter- ended
employees September 30 over- September 30 YTD-
and % ------------------- quarter ------------------- over-YTD
amounts) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Revenue $ 8,649 $ 12,383 (30.2)% 18,711 27,147 (31.1)%
Expenses
Incentive
compensation 863 3,860 (77.6)% 4,111 11,383 (63.9)%
Salaries and
benefits 6,799 5,945 14.4% 14,238 12,146 17.2%
Other
overhead
expenses 9,082 8,516 6.6% 17,871 18,515 (3.5)%
ABCP fair
value
adjustment(2) - 3,253 n.m. - 3,253 n.m.
-------------------------------------------------------------------------
Total
expenses $ 16,744 $ 21,574 (22.4)% 36,220 45,297 (20.0)%
Loss before
income taxes (8,095) (9,191) (11.9)% (17,509) (18,150) (3.5)%
Loss before
ABCP fair
value
adjustment
and income
taxes(1) (8,095) (5,938) 36.3% (17,509) (14,897) 17.5%
-------------------------------------------------------------------------
Number of
employees 393 370 6.2%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for number of employees and loss
excluding fair value adjustments.
(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
Canaccord Adams or Private Client Services divisions. Also included in this
segment are Canaccord's operations and support services, which are responsible
for front and back-office information technology systems, compliance and risk
management, operations, finance, and all administrative functions.
Second quarter 2009 vs. second quarter 2008
Revenue for the three months ended September 30, 2008 was $8.6 million, a
decrease of $3.7 million from the same quarter a year ago. The change was
partially related to a decrease in foreign exchange gains compared to the
prior year. Foreign exchange gains decreased $1.5 million or 51.7% during the
quarter to $1.4 million. Interest revenue also decreased by $2.4 million or
33.2% compared to the same period a year ago as a result of lower interest
rates.
Fiscal 2009 second quarter expenses were $16.7 million, a drop of 22.4%.
A portion of the decrease was due to the $3.3 million ABCP non-recurring fair
value adjustment recognized in Q2/08. Incentive compensation also decreased by
$3.0 million due to lower profitability of the consolidated group of
companies. This was partially offset by a $0.9 million increase in salaries
and benefits due to the hiring of an additional 23 employees in the Corporate
and Other segment of the Canadian operations. Most of the new employees were
hired to enhance our operations and support services. General and
administrative expense also increased by $0.9 million partially due to a
timing difference of donation expense incurred this quarter.
Loss before income taxes was $8.1 million, representing a $1.1 million
improvement from the same quarter a year ago.
First-half fiscal year 2009 vs. first-half fiscal year 2008
Revenue was $18.7 million, a decrease of $8.4 million from the same
period a year ago for the same reasons mentioned above.
Expenses for the first half of fiscal 2009 were $36.2 million, a decrease
of $9.1 million. A portion of the decrease was due to a $3.3 million ABCP fair
value adjustment recognized in the prior year. In addition, there was a net
decrease in total compensation expense of $5.2 million or 22.0% for the same
reasons mentioned above.
Overall, loss before income taxes was $17.5 million representing a $0.6
million improvement from the same period a year ago.
FINANCIAL CONDITION
Below are specific changes in selected balance sheet items.
Assets
Cash and cash equivalents were $521.3 million on September 30, 2008
compared to $435.6 million on March 31, 2008. Refer to the "Liquidity and
Capital Resources" section for more details
Securities owned were $56.1 million compared with $92.8 million on March
31, 2008. The decrease related mainly to fewer financings that were committed
at September 30, 2008 as well as a decrease in market value of securities.
Accounts receivable were $1.2 billion compared to $1.4 billion on March
31, 2008. The decrease mainly related to a decline in receivable balances from
clients and brokers and investment dealers.
Other assets decreased by $10.1 million compared to March 31, 2008 mainly
due to a decrease in future income taxes which was partially offset by an
increase in income taxes receivable.
Liabilities
Bank overdrafts and call loan facilities utilized by Canaccord may vary
significantly on a day-to-day basis and depend on securities trading activity.
On September 30, 2008 there was bank indebtedness of $6.9 million compared to
$15.0 million on March 31, 2008.
Accounts payable were $1.5 billion compared to $1.7 billion at March 31,
2008, a decrease of $0.2 billion mainly related to a decrease in payable
balances to clients and brokers and investment dealers.
Other liabilities increased by $1.4 million compared to March 31, 2008
due to an increase in marketable securities sold short.
OFF-BALANCE SHEET ARRANGEMENTS
At September 30, 2008, Canaccord had credit facilities with banks in
Canada, the UK and the US in an aggregate amount of $491.1 million. These
credit facilities, consisting of call loans, letters of credit and daylight
overdraft facilities are collateralized by either unpaid securities and/or
securities owned by the Company. A subsidiary of the Company has entered into
irrevocable standby letters of credit from a financial institution totalling
$2.4 million (US$2.3 million) as rent guarantees for its leased premises in
Boston, New York and San Francisco. As of September 30, 2008, there were no
outstanding balances under these standby letters of credit.
In connection with the Canaccord Relief Program, the Company entered into
two letters of credit in April 2008 to facilitate the funding of the relief
program. Subject to certain terms and conditions, the letters of credit will
be drawn upon successful completion of the Canaccord Relief Program.
LIQUIDITY AND CAPITAL RESOURCES
Canaccord has a capital structure comprising share capital, retained
earnings and accumulated other comprehensive losses. On September 30, 2008,
cash and cash equivalents net of call loans were $514.5 million, an increase
of $93.9 million from $420.6 million as of March 31, 2008. During the quarter
ended September 30, 2008, financing activities used cash in the amount of
$26.7 million, which was primarily due to the purchase of common shares
related to Canaccord's long term incentive plan ("LTIP") of $13.0 million, and
dividend payments of $13.5 million. Investing activities used cash in the
amount of $2.1 million for the purchase of equipment and leasehold
improvements. Operating activities used cash in the amount of $10.1 million
for the quarter, which was due to net change in non-cash working capital
items, net loss and items not affecting cash.
Canaccord's business requires capital for operating and regulatory
purposes. The majority of current assets reflected on Canaccord's balance
sheet are highly liquid. The majority of the positions held as securities
owned are readily marketable and all are recorded at their market value. The
market value of these securities fluctuates daily as factors such as changes
in market conditions, economic conditions and investor outlook affect market
prices. Clients receivable balances are secured by readily marketable
securities and are reviewed daily for impairment in value and collectibility.
Receivable and payable balances from brokers and dealers represent the
following: current open transactions that generally settle within the normal
three-day settlement cycle; collateralized securities borrowed and/or loaned
in transactions that can be closed within a few days on demand; and balances
on behalf of introducing brokers representing net balances in connection with
their client accounts.
Canaccord is committed to minimum lease payments for premises and
equipment over the next five years. The following table summarizes the
approximate amount of Canaccord's consolidated long-term contractual
obligations as of September 30, 2008.
-------------------------------------------------------------------------
Contractual obligation payments due by period
Fiscal Fiscal
2011- 2013-
Fiscal Fiscal Fiscal
(C$ thousands) Total 2010 2012 2014 Thereafter
-------------------------------------------------------------------------
Premises and
equipment
operating leases $ 140,693 $ 22,506 $ 37,759 $ 32,368 $ 48,060
-------------------------------------------------------------------------
OUTSTANDING SHARE DATA
-------------------------------------------------------------------------
Outstanding shares as of September 30
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Issued shares excluding unvested shares(1) 48,273,824 44,548,023
Issued shares outstanding(2) 54,552,553 47,866,229
Diluted shares(3) 57,981,364 48,829,916
Average shares outstanding - basic 48,247,858 45,195,734
Average shares outstanding - diluted(4) 53,956,302 48,284,775
-------------------------------------------------------------------------
(1) Excludes 2,949,931 unvested shares that are outstanding relating to
share purchase loans for recruitment and retention programs and
3,328,798 unvested shares purchased by employee benefit trust for the
LTIP.
(2) Includes 2,949,931 unvested shares that are outstanding relating to
share purchase loans for recruitment and retention programs and
3,328,798 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 September 30, 2008, Canaccord had 54,552,553 common shares issued and
outstanding, an increase of 6,686,324 common shares from September 30, 2007
due to the net effect of shares issued relating to the equity financing in May
2008, shares issued in connection with stock-based compensation plans and
shares cancelled.
On May 2, 2008, the Company closed a fully underwritten financing of
5,855,000 common shares at a price of $10.25 per share for total gross
proceeds of $60.0 million. On May 22, 2008, the underwriters exercised an
over- allotment option in connection with the financing to purchase an
additional 878,250 common shares at a price of $10.25 per share for gross
proceeds of $9.0 million. The net proceeds of the offering will be used for
business development and general corporate purposes.
The Company renewed its normal course issuer bid ("NCIB") and is
currently entitled to acquire up to 2,391,753 of its shares from December 31,
2007 to December 30, 2008, which represented 5% of its shares outstanding as
of December 21, 2007. There were 100,000 shares purchased through NCIB and
subsequently cancelled in July 2008. The employee benefit trust also purchased
an aggregate of 2,075,432 shares for the Company's LTIP between December 21,
2007 and September 30, 2008, which reduced the number of shares allowable
under the NCIB. The number of shares available for purchase under the NCIB as
of September 30, 2008 is 216,321.
STOCK-BASED COMPENSATION PLANS
Adams Harkness
In connection with the acquisition of Adams Harkness Financial Group Inc.
("Adams Harkness"), a retention plan was established. On January 3, 2006,
Canaccord completed the acquisition of Adams Harkness (renamed Canaccord Adams
Inc.) which was a privately held Boston, Massachusetts-based institutional
investment bank. A retention plan was established, which provides for the
issuance of up to 1,118,952 common shares after a three-year vesting period.
The total number of shares to be vested is also based on revenue earned by
Canaccord Adams Inc. subsequent to the date of acquisition. As 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. After forfeitures, the number of shares subject to the
retention plan was 772,473.
Stock options
The Company granted stock options to purchase common shares of the
Company to independent directors. The independent directors have been granted
the option to purchase up to an aggregate of 275,000 common shares of the
Company. The stock options vest over a four-year period and expire seven years
after the grant date. The weighted average exercise price of the stock options
is $15.54.
Long term incentive plan
Under the LTIP, eligible participants are awarded restricted share units
("RSUs") which vest over three years. For employees in Canada, an employee
benefit trust (the "Trust") has been established, and either (a) the Company
will fund the Trust with cash which will be used by a trustee to purchase
common shares of the Company on the open market that will be held in trust by
the trustee until RSUs vest or (b) the Company will issue common shares from
treasury to participants following vesting of RSUs. For employees in the
United States and the United Kingdom, at the time of each RSU award, the
Company will allot common shares, and these shares will be issued from
treasury at the time they vest for each participant. The shares issued as part
of the LTIP will generally be offset by purchases under the Company's NCIB.
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 September 30, 2008, forward contracts outstanding to sell US dollars had a
notional amount of US$9.5 million, down from US$26.5 million a year ago.
Forward contracts outstanding to buy US dollars had a notional amount of
US$5.5 million, down from US$9.5 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 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 pounds sterling.
RELATED PARTY TRANSACTIONS
Security trades executed for employees, officers and directors of
Canaccord are transacted in accordance with terms and conditions applicable to
all clients. Commission income on such transactions in the aggregate is not
material in relation to the overall operations of Canaccord.
CRITICAL ACCOUNTING ESTIMATES
The following is a summary of Canaccord's critical accounting estimates.
Canaccord's accounting policies are in accordance with Canadian GAAP and are
described in Note 1 to the Audited Annual Consolidated Financial Statements.
The accounting policies described below require estimates and assumptions that
affect the amounts of assets, liabilities, revenues and expenses recorded in
the financial statements. Because of their nature, estimates require judgment
based on available information. Actual results or amounts could differ from
estimates and the difference could have a material impact on the financial
statements.
Revenue recognition and valuation of securities
Securities owned and sold short, including share purchase warrants and
options, are categorized as held for trading as per Canadian Institute of
Chartered Accountants ("CICA") Handbook Section 3855, "Financial Instruments -
Recognition and Measurement", and are recorded at market value with unrealized
gains and losses recognized in net income. In the case of publicly traded
securities, market value is determined on the basis of market prices from
independent sources, such as listed exchange prices or dealer price
quotations. Adjustments to market prices are made for liquidity, relative to
the size of the position, holding periods and other resale restrictions, if
applicable. Investments in illiquid or non-publicly traded securities
categorized as held for trading will be 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.
Asset-backed commercial paper
There is a significant amount of uncertainty in estimating the amount and
timing of cash flows associated with the Company's holdings in ABCP. As there
is no available market price, the Company estimates the fair value of its ABCP
by discounting expected future cash flows on a probability weighted basis
considering the best available data. Since the fair value of the ABCP is based
on the Company's assessment of current conditions, amounts reported may change
materially in subsequent periods. Refer to Note 7 in the Audited Annual
Consolidated Financial Statements for further details.
Provisions
Canaccord records provisions related to pending or outstanding legal
matters and doubtful accounts associated with clients receivable, 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. Clients
receivable balances 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.
Stock-based compensation plans
Stock-based compensation represents the cost related to stock-based
awards granted to employees. The Company uses the fair value method to account
for such awards. Under this method, the Company measures the fair value of
stock-based awards as of the grant date and recognizes the cost as an expense
over the applicable vesting period with a corresponding increase in
contributed surplus. In the case where vesting is also dependent on
performance criteria, the cost is recognized over the vesting period in
accordance with the rate at which such performance criteria are achieved (net
of estimated forfeitures). Otherwise, the cost is recognized on a graded
basis. When stock-based compensation awards vest, contributed surplus is
reduced by the applicable amount and share capital is increased by the same
amount.
RECENT ACCOUNTING PRONOUNCEMENTS
Goodwill and intangible assets
The CICA has issued a new accounting standard, CICA Handbook Section
3064, "Goodwill and Intangible Assets", which prescribes when expenditures
qualify for recognition as intangible assets and provides increased guidance
on the recognition and measurement of internally generated goodwill and
intangible assets. The Company will adopt Section 3064 effective April 1,
2009. The Company is currently evaluating the impact of adopting this section.
International Financial Reporting Standards
The Canadian Accounting Standards Board has now confirmed that the use of
International Financial Reporting Standards ("IFRS") will be required
commencing in 2011 for publicly accountable, profit-oriented enterprises. IFRS
will replace Canadian GAAP currently followed by the Company. The Company will
be required to begin reporting under IFRS for its fiscal year ended March 31,
2012 and will be required to provide information that conforms to IFRS for the
comparative periods presented. The Company is currently evaluating the impact
of the transition to IFRS including its effect on accounting policies,
disclosures, financial systems, and internal controls.
CHANGES IN ACCOUNTING POLICIES
On April 1, 2008, the Company adopted the provisions of CICA Handbook
Section 3862, "Financial Instruments - Disclosures", CICA Handbook Section
3863, "Financial Instruments - Presentations", CICA Handbook Section 1535,
"Capital Disclosures", and CICA Handbook Section 1400, "General Standards on
Financial Statement Presentation".
Capital Disclosures
This new standard requires the Company to disclose qualitative and
quantitative information about the Company's capital and how it is managed.
Additional note disclosure has been included in Note 14 of the September 30,
2008 unaudited interim consolidated financial statements.
Financial Instruments - Disclosures and Presentations
These two new standards require the Company to provide additional
disclosure regarding the nature and extent of risk associated with financial
instruments and how these risks are managed. Additional information has been
provided in Note 4 of the September 30, 2008 interim consolidated financial
statements, which includes a quantitative analysis on the risk of holding
financial instruments including credit risk, liquidity risk and market risk.
General Standards on Financial Statement Presentation
CICA Handbook Section 1400, "General Standards on Financial Statement
Presentation", prescribes additional requirements to assess and disclose a
company's ability to continue as a going concern. This new standard was
adopted by the Company beginning April 1, 2008, and there was no impact on the
September 30, 2008 interim consolidated financial statements.
ASSET-BACKED COMMERCIAL PAPER
At September 30, 2008 the Company held ABCP with a par value of $42.7
million and an estimated fair value of $29.9 million. The ABCP did not settle
as it matured as a result of liquidity issues in the ABCP market. There has
been no active trading of the ABCP since mid-August 2007.
On March 17, 2008, the Pan-Canadian Investors Committee for ABCP filed
proceedings for a plan of compromise and arrangement (the "Plan") under the
Companies' Creditors Arrangement Act (Canada) ("CCAA") with the Ontario
Superior Court (the "Court"). At the meeting of ABCP noteholders on April 25,
2008, noteholders approved the Plan by the required majorities. On June 5,
2008, the Court issued a sanction order and reasons for decision approving the
Plan as amended. On August 18, 2008, that decision was upheld by the Ontario
Court of Appeal and, on September 19, 2008, the Supreme Court of Canada denied
leave to appeal. It is expected the Plan will be implemented in a timely
manner.
The Plan as amended provides for a declaratory release that will be
effective on implementation of the Plan. This will result in the release of
all existing and future ABCP-related claims against the Company except claims
of express fraudulent misrepresentation made in accordance with the procedures
set out in the Plan. This claim can be made by participants in the Canaccord
Relief Program who do not receive the payments contemplated by the Canaccord
Relief Program before the end of the 20th business day after the completion of
the distribution of the plan notes on the implementation of the Plan.
The Canaccord Relief Program is conditional on the successful
implementation of the Plan and certain other conditions. However, there can be
no assurance that the Plan will be implemented or, if it is implemented, that
the declaratory release contained therein will not be amended in a manner that
does not result in the release of existing and potential claims against the
Company. If the Plan is not implemented, or if the declaratory release is
amended in such a manner that the Plan does not result in the release of
existing and potential claims, the Company may be found liable in connection
with the pending related lawsuits and further legal actions may be commenced
against the Company, which could materially adversely affect the Company's
business, results of operations and financial condition. If the Plan is
implemented, there is no assurance that all of the other conditions for the
purchase by the Company of the restructured notes under the Canaccord Relief
Program will be met. If the Canaccord Relief Program is not completed as a
result of one or more of these other conditions not being met, the Company's
business, results of operations and financial condition could be materially
adversely affected. In addition, even if the Plan is implemented in its
current form and the declaratory release is not amended, there is no assurance
that the validity or effectiveness of the declaratory release will not be
challenged either in the context of the CCAA proceedings or in actions
commenced against the Company and others. Any determination that the
declaratory release is invalid or ineffective could materially adversely
affect the Company's business, results of operations and financial condition.
In addition, if credit derivative or other transactions underlying the
asset-backed commercial paper held by the Company or by clients who are
eligible for the Canaccord Relief Program are terminated before the
implementation of the Plan or are subject to collateral calls, the value of
the restructured notes acquired by the Company in respect of its holdings or
under the Canaccord Relief Program on the implementation of the Plan and
completion of the Canaccord Relief Program could be materially adversely
affected.
The Company estimates the fair value of its ABCP by discounting expected
future cash flows on a probability weighted basis considering the best
available data. The assumptions used in determining the estimated fair value
reflect the details included in the Information Statement issued by the
Committee. There is a significant amount of uncertainty in estimating the
amount and timing of cash flows associated with the ABCP. The Company recorded
a fair value adjustment of $12.8 million during the fiscal year ended March
31, 2008. The valuation model was updated at September 30, 2008 and results
indicated no further fair value adjustment was required for the six months
ended September 30, 2008.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL
REPORTING
Disclosure controls and procedures
Canaccord's management, including the President & 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 September 30, 2008 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
On November 5, 2008, the Board of Directors approved the temporary
suspension of Canaccord's quarterly dividend for this quarter. This measure
was taken to enable Canaccord to preserve its working capital and book value,
as well as to position the Company to take advantage of growth opportunities
that may present themselves. The Company evaluates the dividend policy on a
quarterly basis in the context of the market environment and our business
activity.
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. Profitability of the Company is
dependent on the general capital markets activity, which dropped significantly
during the current quarter resulting in a net loss for the quarter.
The following table provides selected quarterly financial information for
the nine most recently completed financial quarters ended September 30, 2008.
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 per share Fiscal 2009 Fiscal 2008
amounts) ----------- -----------
-------------------------------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue
Canaccord Adams 58,336 104,793 77,965 109,583 89,071 155,023
Private Client
Services 43,844 57,853 54,463 61,166 57,415 76,083
Corporate and
Other 8,649 10,062 11,018 12,605 12,383 14,764
-------------------------------------------------------------------------
Total revenue 110,829 172,708 143,446 183,354 158,869 245,870
Net income (loss) (5,398) 16,459 (35,154) 15,048 12,411 39,029
EPS - basic (0.11) 0.35 (0.80) 0.34 0.28 0.86
EPS - diluted (0.11) 0.31 (0.80) 0.31 0.26 0.80
-------------------------------------------------------------------------
----------------------------------------------
(C$ thousands,
except per share Fiscal 2007
amounts) -----------
----------------------------------------------
Q4 Q3 Q2
----------------------------------------------
Revenue
Canaccord Adams 130,151 101,427 93,033
Private Client
Services 75,876 68,831 55,626
Corporate and
Other 10,416 8,055 7,372
----------------------------------------------
Total revenue 216,443 178,313 156,031
Net income (loss) 26,016 23,692 17,806
EPS - basic 0.57 0.51 0.39
EPS - diluted 0.54 0.49 0.37
----------------------------------------------
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. Current
market conditions may increase many of these risks, including credit risk.
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. The
Company has a capital management framework to maintain the level of capital
that will meet the firm's regulated subsidiaries' target ratios as set out by
the respective regulators, fund current and future operations, ensure that the
firm is able to meet its financial obligations as they come due, and support
the creation of shareholder value. The regulatory bodies that certain of the
Company's subsidiaries are subject to are listed in Note 14 of the September
30, 2008 interim consolidated financial statements.
ADDITIONAL INFORMATION
A comprehensive discussion of our business, strategies, objectives and
risks is available in our Annual Information Form and Management's Discussion
and Analysis, including our Audited Annual Consolidated Financial Statements
in Canaccord's 2008 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 six months ended September 30, 2008
(Expressed in Canadian dollars)
Canaccord Capital Inc.
INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands of dollars)
As at September 30, March 31, September 30,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents 521,322 435,649 379,680
Securities owned (note 3) 56,055 92,796 227,368
Accounts receivable (notes 5
and 12) 1,227,426 1,422,917 1,829,712
Income taxes recoverable 19,772 11,083 661
Future income taxes 11,566 28,207 9,940
-------------------------------------------------------------------------
Total current assets 1,836,141 1,990,652 2,447,361
Investment (note 6) 5,000 5,000 5,000
Investment in asset-backed
commercial paper (note 7) 29,860 29,860 -
Equipment and leasehold
improvements 39,254 40,686 40,137
Goodwill and other intangible
assets (note 8) 31,815 32,520 33,227
-------------------------------------------------------------------------
1,942,070 2,098,718 2,525,725
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness 6,854 15,038 48,130
Securities sold short (note 3) 15,194 13,757 48,784
Accounts payable and accrued
liabilities (notes 5 and 12) 1,480,714 1,687,479 2,021,498
Subordinated debt (note 9) 25,000 25,000 25,000
-------------------------------------------------------------------------
Total current liabilities 1,527,762 1,741,274 2,143,412
-------------------------------------------------------------------------
Commitments and contingencies
(note 15)
Shareholders' equity
Share capital (note 10) 211,188 145,166 139,498
Retained earnings 220,201 222,597 254,379
Accumulated other comprehensive
losses (17,081) (10,319) (11,564)
Total shareholders' equity 414,308 357,444 382,313
-------------------------------------------------------------------------
1,942,070 2,098,718 2,525,725
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Canaccord Capital Inc.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands of dollars, except per share amounts)
For the three months ended For the six months ended
---------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2008 2007 2008 2007
$ $ $ $
--------------------------------------------- ---------------------------
REVENUE
Commission 60,630 65,728 132,626 151,503
Investment banking 34,024 73,731 110,171 202,356
Principal trading 87 (3,925) 5,998 2,888
Interest 11,734 16,273 24,063 32,583
Other 4,354 7,062 10,679 15,409
--------------------------------------------- ---------------------------
110,829 158,869 283,537 404,739
--------------------------------------------- ---------------------------
EXPENSES
Incentive
compensation 50,977 71,416 133,704 192,822
Salaries and benefits 14,195 12,649 29,638 26,918
Trading costs 6,717 7,249 13,038 14,207
Premises and equipment 5,957 5,735 11,742 10,994
Communication and
technology 6,539 5,813 12,702 11,552
Interest 3,354 6,413 7,313 12,581
General and
administrative 19,611 15,755 38,888 34,026
Amortization 2,072 2,146 4,114 4,123
Development costs 6,383 8,166 13,845 15,339
Asset-backed
commercial paper
fair value adjustment - 4,399 - 4,399
--------------------------------------------- ---------------------------
115,805 139,741 264,984 326,961
--------------------------------------------- ---------------------------
Income (loss) before
income taxes (4,976) 19,128 18,553 77,778
Income tax expense
(recovery)
Current 1,409 10,305 (10,141) 27,380
Future (987) (3,588) 17,633 (1,042)
--------------------------------------------- ---------------------------
422 6,717 7,492 26,338
--------------------------------------------- ---------------------------
--------------------------------------------- ---------------------------
Net income (loss) for
the period (5,398) 12,411 11,061 51,440
--------------------------------------------- ---------------------------
--------------------------------------------- ---------------------------
Basic earnings (loss)
per share (note 10
(iv)) (0.11) 0.28 0.23 1.14
Diluted earnings (loss)
per share (note 10
(iv)) (0.11) 0.26 0.21 1.07
--------------------------------------------- ---------------------------
--------------------------------------------- ---------------------------
See accompanying notes
Canaccord Capital Inc.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
As at and for the six months
ended September 30, 2008 (in thousands of dollars)
and 2007 and for the year September 30, March 31, September 30,
ended March 31, 2008 2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Common shares, opening 111,142 147,900 147,900
Shares issued 68,829 495 447
Shares cancelled (442) (127) -
Acquisition of common shares
for long term incentive plan
(note 11) (13,839) (27,247) (18,295)
Release of vested common shares
from employee benefit trust
(note 11) 4,778 - -
Unvested share purchase loans (403) (9,879) (9,106)
-------------------------------------------------------------------------
Common shares, closing 170,065 111,142 120,946
-------------------------------------------------------------------------
Contributed surplus, opening 34,024 8,396 8,396
Excess on redemption of common
shares (340) (369) -
Shortfall on distribution of
acquired common shares - (29) -
Stock-based compensation (note 11) 6,261 20,776 8,666
Unvested share purchase loans 1,178 5,250 1,490
-------------------------------------------------------------------------
Contributed surplus, closing 41,123 34,024 18,552
-------------------------------------------------------------------------
Share capital 211,188 145,166 139,498
-------------------------------------------------------------------------
Retained earnings, opening 222,597 213,659 213,659
Net income for the period 11,061 31,334 51,440
Cash dividends (13,457) (22,396) (10,720)
-------------------------------------------------------------------------
Retained earnings, closing 220,201 222,597 254,379
-------------------------------------------------------------------------
Accumulated other comprehensive
income (loss), opening (10,319) 2,236 2,236
Other comprehensive losses (6,762) (12,555) (13,800)
-------------------------------------------------------------------------
Accumulated other comprehensive
losses, closing (17,081) (10,319) (11,564)
-------------------------------------------------------------------------
Shareholders' equity 414,308 357,444 382,313
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands of dollars)
For the three months ended For the six months ended
--------------------------------------------------------
September 30, September 30, September 30, September 30,
2008 2007 2008 2007
$ $ $ $
--------------------------------------------------------
Net income (loss)
for the period (5,398) 12,411 11,061 51,440
Other comprehensive
loss, net of taxes
Net change in
unrealized
losses on
translation of
self-sustaining
foreign operations (6,332) (6,834) (6,762) (13,800)
-------------------------------------------------------------------------
Comprehensive
income (loss) for
the period (11,730) 5,577 4,299 37,640
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Canaccord Capital Inc.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands of dollars)
For the three months ended For the six months ended
---------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2008 2007 2008 2007
$ $ $ $
--------------------------------------------- ---------------------------
OPERATING ACTIVITIES
Net income (loss)
for the period (5,398) 12,411 11,061 51,440
Items not
affecting cash
Amortization 2,072 2,146 4,114 4,123
Stock-based
compensation
expense 4,272 1,694 10,580 8,043
Future income tax
(recovery) expense (987) (3,588) 17,633 (1,042)
Changes in non-cash
working capital
Decrease (increase)
in securities
owned 60,440 (2,200) 36,225 120,074
Decrease (increase)
in accounts
receivable 283,839 255,948 181,393 (162,910)
Decrease (increase)
in income taxes
receivable 479 - (8,319) -
Increase (decrease)
in securities
sold short (17,027) (36,435) 1,424 7,614
Decrease in
accounts payable
and accrued
liabilities (337,801) (195,629) (193,981) (127,060)
Decrease in income
taxes payable - (1,754) - (12,388)
--------------------------------------------- ---------------------------
Cash provided by
(used in) operating
activities (10,111) 32,593 60,130 (112,106)
--------------------------------------------- ---------------------------
FINANCING ACTIVITIES
Issuance of shares
for cash net of
issuance costs - 21 66,462 447
Purchase and
cancellation of
shares (391) - (782) -
Decrease (increase)
in unvested common
share purchase loans 208 (2,367) 775 (7,616)
Acquisition of common
shares for long term
incentive plan (13,049) (9,751) (13,839) (18,295)
Dividends paid (13,457) (5,934) (13,457) (10,720)
--------------------------------------------- ---------------------------
Cash used in financing
activities (26,689) (18,031) 39,159 (36,184)
--------------------------------------------- ---------------------------
INVESTING ACTIVITIES
Purchase of equipment
and leasehold
improvements (2,087) (3,203) (2,757) (7,390)
Acquisition of
investment - - - (5,000)
--------------------------------------------- ---------------------------
Cash used in investing
activities (2,087) (3,203) (2,757) (12,390)
--------------------------------------------- ---------------------------
Effect of foreign
exchange on cash
balances (1,662) (7,128) (2,675) (14,410)
--------------------------------------------- ---------------------------
Increase (decrease)
in cash position (40,549) 4,231 93,857 (175,090)
Cash position,
beginning of period 555,017 327,319 420,611 506,640
--------------------------------------------- ---------------------------
Cash position, end
of period 514,468 331,550 514,468 331,550
--------------------------------------------- ---------------------------
--------------------------------------------- ---------------------------
Cash position is
comprised of:
Cash and cash
equivalents 521,322 379,680 521,322 379,680
Call loans (6,854) (48,130) (6,854) (48,130)
--------------------------------------------- ---------------------------
--------------------------------------------- ---------------------------
514,468 331,550 514,468 331,550
--------------------------------------------- ---------------------------
--------------------------------------------- ---------------------------
Supplemental cash
flow information
Interest paid 3,344 6,391 7,267 12,551
Income taxes paid 2,283 12,602 2,836 40,876
--------------------------------------------- ---------------------------
--------------------------------------------- ---------------------------
See accompanying notes
Canaccord Capital Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the three and six months ended September 30, 2008
(in thousands of dollars, except per share amounts)
Through its principal subsidiaries, Canaccord Capital Inc. (the
"Company") is a leading independent, full-service investment dealer in
Canada with capital markets operations in the United Kingdom ("UK") and
the United States of America ("US"). The Company has operations in each
of the two principal segments of the securities industry: capital markets
and private client services. Together, these operations offer a wide
range of complementary investment products, brokerage services and
investment banking services to the Company's private, institutional and
corporate clients.
The Company's business is cyclical and experiences considerable
variations in revenue and income from quarter to quarter and year to year
due to factors beyond the Company's control. The Company's business is
affected by the overall condition of the North American and European
capital markets, including the seasonal variance in these markets.
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
These interim unaudited consolidated financial statements have been
prepared by the Company in accordance with Canadian generally accepted
accounting principles ("GAAP") with respect to interim financial
statements, applied on a consistent basis. These interim unaudited
consolidated financial statements follow the same accounting principles
and methods of application as those disclosed in Note 1 to the Company's
audited consolidated financial statements as at and for the year ended
March 31, 2008 ("Audited Annual Consolidated Financial Statements").
Accordingly, they do not include all the information and footnotes
required for compliance with Canadian GAAP for annual financial
statements. These interim unaudited consolidated financial statements and
notes thereon should be read in conjunction with the Audited Annual
Consolidated Financial Statements.
The preparation of these interim unaudited consolidated financial
statements and the accompanying notes requires management to make
estimates and assumptions that affect the amounts reported. In the
opinion of management, these interim unaudited consolidated financial
statements reflect all adjustments (which include only normal, recurring
adjustments) necessary to state fairly the results for the periods
presented. Actual results could vary from these estimates and the
operating results for the interim periods presented are not necessarily
indicative of results that may be expected for the full year.
Recent accounting pronouncements
Goodwill and Intangible Assets
The CICA issued a new accounting standard, CICA Handbook Section 3064,
"Goodwill and Intangible Assets", which prescribes when expenditures
qualify for recognition as intangible assets and provides increased
guidance on the recognition and measurement of internally generated
goodwill and intangible assets. The Company will adopt Section 3064
effective April 1, 2009. The Company is currently assessing the impact of
the new standard on the consolidated financial statements.
International Financial Reporting Standards ("IFRS")
The Canadian Accounting Standards Board has now confirmed that the use of
IFRS will be required commencing in 2011 for publicly accountable,
profit-oriented enterprises. IFRS will replace Canadian GAAP currently
followed by the Company. The Company will be required to begin reporting
under IFRS for its fiscal year ended March 31, 2012 and will be required
to provide information that conforms with IFRS for the comparative
periods presented. The Company is currently evaluating the impact of the
transition to IFRS including its effect on accounting policies,
disclosures, financial systems, and internal controls.
2. CHANGE IN ACCOUNTING POLICIES
On April 1, 2008 the Company adopted the provisions of CICA Handbook
Section 1535, "Capital Disclosures", CICA Handbook Section 3862,
"Financial Instruments - Disclosures", CICA Handbook Section 3863,
"Financial Instruments - Presentation", and CICA Handbook Section 1400,
"General Standards on Financial Statement Presentation".
Capital Disclosures
The Company adopted the provisions of CICA Handbook Section 1535,
"Capital Disclosures", which establishes standards for disclosing
qualitative and quantitative information about an entity's capital and
how it is managed. This information is included in Note 14.
Financial Instruments - Disclosures and Presentation
The Company adopted two new accounting standards related to the
disclosure and presentation of financial instruments: CICA Handbook
Section 3862, "Financial Instruments - Disclosures", and CICA Handbook
Section 3863, "Financial Instruments - Presentation". These new standards
increase the emphasis on disclosures about the nature and extent of risks
associated with financial instruments and how these risks are managed.
Refer to Note 4 for further information.
General Standards on Financial Statement Presentation
The Company adopted CICA Handbook Section 1400, "General Standards on
Financial Statement Presentation", which prescribes additional
requirements to assess and disclose a company's ability to continue as a
going concern. There was no impact on the interim unaudited consolidated
financial statements as a result of adoption.
3. SECURITIES OWNED AND SECURITIES SOLD SHORT
September 30, 2008 March 31, 2008 September 30, 2007
-------------------- ------------------ --------------------
Secur- Secur- Secur- Secur- Secur- Secur-
ities ities ities ities ities ities
owned sold owned sold owned sold
short short short
$ $ $ $ $ $
-------------------------------------------------------------------------
Corporate and
government
debt 21,695 5,986 34,433 5,106 84,679 20,909
Equities and
convertible
debentures 34,360 9,208 58,363 8,651 142,689 27,875
-------------------------------------------------------------------------
56,055 15,194 92,796 13,757 227,368 48,784
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at September 30, 2008, corporate and government debt maturities range
from 2008 to 2031 (March 31, 2008 - 2008 to 2053 and September 30, 2007 -
2007 to 2054) and bear interest ranging from 2.75% to 11.60% (March 31,
2008 - 2.85% to 11.60% and September 30, 2007 - 3.13% to 11.50%).
4. FINANCIAL INSTRUMENTS
The Company classifies financial instruments as one of the following
categories according to CICA Handbook Section 3855, "Financial
Instruments - Recognition and Measurement": held for trading, held to
maturity, loans and receivables, available for sale assets and other
financial liabilities.
The financial assets and liabilities 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 provided that the fair
value of the financial instrument can be reliably determined. The
Company's financial instruments classified as held for trading include
cash, commercial paper and bankers' acceptances, marketable securities
owned and sold short, forward contracts and broker warrants.
Available for sale financial assets are measured at fair value, with
unrealized gains and losses recognized in other comprehensive income. The
Company's investment (Note 6) 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 and liabilities classified as loans and receivables,
held to maturity and other financial liabilities are measured at
amortized cost. The Company classifies accounts receivable as loans and
receivable, and accounts payable and accrued liabilities and subordinated
debt as other financial liabilities. The carrying values of the loans and
receivables and other financial liabilities approximate their fair
values.
The Company's financial instruments are recognized on a trade date basis.
Transaction costs relating to the Company's financial instruments are
expensed as incurred.
Credit risk
Credit risk is the risk of loss associated with a counterparty's
inability to fulfill its payment obligations. Credit risk arises from
cash and cash equivalents, net receivables from clients and brokers and
investment dealers and other accounts receivables. The maximum exposure
of the Company to credit risk before taking into account any collateral
held or other credit enhancements is the carrying amount of the financial
instruments as disclosed in the interim unaudited consolidated financial
statements as at September 30, 2008.
The primary source of credit risk to the Company is in connection with
trading activity by private clients and private client margin accounts.
To minimize its exposure, the Company applies certain credit standards,
applies limits to transactions and requires settlement of securities
transactions on a cash basis or delivery against payment. Margin
transactions are collateralized by securities in the clients' accounts in
accordance with limits established by the applicable regulatory
authorities and are subject to the Company's credit review and daily
monitoring procedures. Management monitors the collectibility of
receivables and estimates an allowance for doubtful accounts. It is the
Company's policy to provide an allowance against all unsecured balances.
As at September 30, 2008, the allowance for doubtful accounts was
$6.9 million (March 31, 2008 - $5.8 million; September 30, 2007 -
$5.4 million)
The Company is also exposed to the risk that counterparties to
transactions do not fulfill their obligations. Counterparties primarily
include investment dealers, clearing agencies, banks and other financial
institutions. The Company manages this risk by imposing and monitoring
individual and aggregate position limits for each counterparty,
conducting regular credit reviews to assess creditworthiness, reviewing
security and loan concentrations, holding and marking to market
collateral on certain transactions and conducting business through
clearing organizations with performance guarantees.
As at September 30, 2008 and 2007, the Company's most significant
counterparty concentrations are with financial institutions and
institutional clients. Management believes that they are in the normal
course of business and does not anticipate loss for non-performance.
The Company holds debt instruments that are subject to credit risk if the
counterparties do not fulfill their obligations. The Company manages the
risk with regards to debt instruments by monitoring counterparties'
credit ratings.
Liquidity risk
Liquidity risk is the risk that the Company cannot meet a demand for cash
or fund its obligations as they become due. The Company's management is
responsible for reviewing liquidity resources to ensure funds are readily
available to meet its financial obligations as they become due, as well
as ensuring adequate funds exist to support business strategies and
operational growth. The Company's business requires capital for operating
and regulatory purposes. The current assets reflected on the 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.
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. Additional information regarding the
Company's capital structure and capital management objectives is
discussed in Note 14.
The following table presents the contractual terms to maturity of the
financial liabilities owed by the Company as at September 30, 2008:
Financial liability Carrying amount Contractual terms
$ to maturity
-------------------------------------------------------------------------
Bank indebtedness 6,854 Due on demand
Accounts payable and accrued
liabilities 1,480,714 Due within one year
Subordinated debt 25,000 Due on demand(*)
-------------------------------------------------------------------------
(*) subject to Investment Industry Regulatory Organization of Canada's
approval.
Market risk
Market risk is the risk that the fair value of financial instruments will
fluctuate because of changes in market prices. The Company separates
market risk into three categories: fair value risk, interest rate risk,
and foreign exchange risk.
Fair value risk
The Company is exposed to fair value risk as a result of its principal
trading in equity securities and fixed income securities. Securities held
for trading are valued based on quoted market prices and as such changes
in fair value affect earnings as they occur. Fair value risk also arises
from the possibility that changes in market prices will affect the value
of the securities the Company holds as collateral for private client
margin accounts. The Company mitigates its fair value risk exposure
through controls to limit concentration levels and capital usage within
its inventory trading accounts, as well as monitoring procedures of the
margin accounts.
During the year ended March 31, 2008, the Company recorded a fair value
adjustment of its investment in asset-backed commercial paper ("ABCP") as
a result of the uncertainties and lack of liquidity in the ABCP market.
As there is no available market price, the Company estimates the fair
value of its ABCP by discounting expected future cash flows on a
probability weighted basis considering the best available data. The fair
value of ABCP would decrease by a further $1,862 if the discount rate
used were to increase by 100bps. Detailed information is disclosed in
Note 7 of the Audited Annual Consolidated Financial Statements.
The following table summarizes the effect on net income as a result of a
fair value change in financial instruments. This analysis assumes all
other variables remain constant.
Effect of a Effect of a
10% increase 10% decrease
in fair value in fair value
Financial instrument Carrying value on net income on net income
$ $ $
-------------------------------------------------------------------------
Securities owned, net of
securities sold short 40,861 988 (988)
Investment in ABCP 29,860 1,935 (1,935)
Investment(1) 5,000 n/a (242)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Investment is classified as available for sale and carried at cost as
the investment does not have a quoted market price, and, therefore,
there is no impact on other comprehensive income ("OCI") resulting
from any temporary fluctuation in the market price of the investment.
An other than temporary decline in the value of the investment is
recognized in net income, and the table indicates the impact on net
income as a result of a 10% impairment of the investment.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest
rates will affect the fair value or future cash flows of financial
instruments held by the Company. The Company incurs interest rate risk on
its own cash and cash equivalent balances, net clients' payable balances,
clients' cash balances, as well as its subordinated debt. The Company
minimizes and monitors its exposure to interest rate risk through
quantitative analysis of its net holdings positions of fixed income
securities, clients' cash balances, securities lending and borrowing
activities, and short-term borrowings. The Company does not hedge its
exposure to interest rate risk as it is minimal.
All cash and cash equivalents mature within three months. Net clients
receivable (payable) balances charge (incur) interest based on floating
interest rates. Subordinated debt bears interest at a rate of prime plus
2%, payable monthly.
The following table provides the effect on net income if interest rates
were to increase or decrease by 100 basis points for the three months
ended September 30, 2008 applied to balances as of this date.
Fluctuations in interest rates do not have an effect on OCI. This
sensitivity analysis assumes all other variables are constant.
Net income Net income
effect of a effect of a
100 bps 100 bps
increase in decrease in
Carrying value interest rates interest rates
$ $ $
-------------------------------------------------------------------------
Cash and cash equivalents,
net of bank indebtedness 514,468 625 (625)
Clients' payable, net 470,503 (572) 572
RRSP cash balances held
in trust 338,952 412 (412)
Brokers and investment
dealers' payable, net 10,938 (151) 151
Subordinated debt 25,000 (30) 30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Foreign exchange risk
Foreign exchange risk arises from the possibility that changes in the
price of foreign currencies will result in losses. The Company's primary
foreign exchange risk results from its investment in its US and UK
subsidiaries. These subsidiaries are considered self-sustaining and,
therefore, are translated using the current rate method. Any fluctuations
in the Canadian dollar against the US dollar and the pound sterling will
result in a change in the unrealized gains (losses) on translation of
self-sustaining foreign operations, recognized in accumulated other
comprehensive income (losses).
The Canadian subsidiaries also hold financial instruments in foreign
currencies, and, therefore, any fluctuations in foreign exchange rates
will impact the realized foreign exchange gains or losses.
The following table summarizes the effects on net income and OCI as a
result of a 5% change in the value of the foreign currencies where there
is significant exposure. The analysis assumes all other variables remain
constant.
Currency Effect of Effect of
a 5% a 5% Effect of Effect of
increase in decrease in a 5% a 5%
fair value fair value increase in decrease in
on net on net fair value fair value
income income on OCI on OCI
$ $ $ $
-------------------------------------------------------------------------
US dollar (938) 938 387 (387)
Pound sterling (37) 37 7,821 (7,821)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company uses derivative financial instruments primarily to manage
foreign exchange risk on pending security settlements in foreign
currencies. The fair value of these contracts is nominal due to their
short term to maturity. Realized and unrealized gains and losses related
to these contracts are recognized in net income during the year.
Forward contracts outstanding at September 30, 2008:
Notional amounts Average price Maturity Fair value
(millions (millions
of USD) (CAD/USD) of USD)
-------------------------------------------------------------------------
To sell US dollars $9.50 $1.06 October 1, 2008 $0.1
To buy US dollars $5.50 $1.06 October 1, 2008 ($0.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Forward contracts outstanding at March 31, 2008:
Notional amounts Average price Maturity Fair value
(millions (millions
of USD) (CAD/USD) of USD)
-------------------------------------------------------------------------
To sell US dollars $6.00 $1.03 April 1, 2008 $0.1
To buy US dollars $3.50 $1.03 April 2, 2008 ($0.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Forward contracts outstanding at September 30, 2007:
Notional amounts Average price Maturity Fair value
(millions (millions
of USD) (CAD/USD) of USD)
-------------------------------------------------------------------------
To sell US dollars $26.50 $0.995 October 1, 2007 $0.1
To buy US dollars $9.50 $0.995 October 1, 2007 ($0.1)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Securities lending and borrowing
The Company employs securities lending and borrowing primarily to
facilitate the securities settlement process. These arrangements are
typically short term in nature, with interest being received on the cash
delivered and interest being paid on the cash received. These
transactions are fully collateralized and are subject to daily margin
calls for any deficiency between the market value of the security given
and the amount of collateral received. These transactions are
collateralized by either cash or securities, including government
treasury bills and government bonds, and are reflected within accounts
receivable and accounts payable. The Company manages its credit exposure
by establishing and monitoring aggregate limits by customer for these
transactions. Interest earned on cash collateral is based on a floating
rate. At September 30, 2008 the floating rates for equities and bonds
were 1.025% and 2.623%, respectively (March 31, 2008 - 1.32% and 2.95%,
respectively, and September 30, 2007 - 2.96% and 4.05%, respectively).
Cash Securities
-------------------------- --------------------------
Loaned or Borrowed or Loaned or Borrowed or
delivered as received as delivered as received as
collateral collateral collateral collateral
$ $ $ $
-------------------------------------------------------------------------
September 30, 2008 130,006 33,970 3,657 168,778
March 31, 2008 188,654 84,257 13,541 279,550
September 30, 2007 307,957 80,562 15,414 399,001
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Lines of credit
The Company also has credit facilities with banks in Canada, the US and
the UK for an aggregate amount of $491.1 million. These credit
facilities, consisting of call loans, letters of credit and daylight
overdraft facilities are collateralized by either unpaid securities
and/or securities owned by the Company. At September 30, 2008, the
Company had bank indebtedness of $6,854 outstanding.
A subsidiary of the Company has also entered into secured irrevocable
standby letters of credit from a financial institution totalling
$2.4 million (US$2.3 million) as rent guarantees for its leased premises
in Boston, New York and San Francisco. As of September 30, 2008, there
were no outstanding balances under these standby letters of credit.
In connection with the Canaccord Relief Program, the Company entered into
two letters of credit in April 2008 to facilitate the funding of the
relief program. Subject to certain terms and conditions, the letters of
credit will be drawn on upon successful completion of the Canaccord
Relief Program.
5. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts receivable
September 30, March 31, September 30,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Brokers and investment dealers 355,345 425,038 631,275
Clients 490,344 555,935 765,999
RRSP cash balances held in trust 338,952 400,603 393,742
Other 42,785 41,341 38,696
-------------------------------------------------------------------------
1,227,426 1,422,917 1,829,712
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts payable and accrued liabilities
September 30, March 31, September 30,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Brokers and investment dealers 366,283 407,193 520,476
Clients 960,847 1,037,860 1,308,435
Other 153,584 242,426 192,587
-------------------------------------------------------------------------
1,480,714 1,687,479 2,021,498
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts payable to clients include $339.0 million (March 31, 2008 -
$400.6 million and September 30, 2007 - $393.7 million) payable to
clients for RRSP cash balances held in trust.
Client security purchases are entered into on either a cash or a margin
basis. In the case of a margin account, the Company extends a loan to a
client for the purchase of securities, using securities purchased and/or
other securities in the client's account as collateral. Amounts loaned to
any client are limited by margin regulations of the Investment Industry
Regulatory Organization of Canada ("IIROC") and other regulatory
authorities and are subject to the Company's credit review and daily
monitoring procedures.
Amounts due from and to clients are due by the settlement date of the
trade transaction. Margin loans are due on demand and are collateralized
by the assets in the client accounts. Interest on margin loans and
amounts due to clients is based on a floating rate (September 30, 2008:
6.75%-7.00% and 0.25%-1.75%, respectively; March 31, 2008: 7.25%-8.00%
and 0.25%-2.25%, respectively; and September 30, 2007: 8.25%-9.75% and
1.83%-3.25%, respectively).
6. INVESTMENT
September 30, March 31, September 31,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Available for sale 5,000 5,000 5,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company has invested $5 million in a limited partnership as part of
its initiative to develop a new Alternative Trading System. The
investment is carried at cost as there is no available quoted market
price in an active market.
7. INVESTMENT IN ASSET-BACKED COMMERCIAL PAPER
September 30, March 31, September 30,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Investment in asset-backed
commercial paper 29,860 29,860 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At September 30, 2008 the Company held ABCP with a par value of
$42.7 million and an estimated fair value of $29.9 million. The ABCP did
not settle as it matured as a result of liquidity issues in the ABCP
market. There has been no active trading of the ABCP since mid-August
2007.
On March 17, 2008, the Pan-Canadian Investors Committee for ABCP filed
proceedings for a plan of compromise and arrangement (the "Plan") under
the Companies' Creditors Arrangement Act (Canada) ("CCAA") with the
Ontario Superior Court (the "Court"). At the meeting of ABCP noteholders
on April 25, 2008, noteholders approved the Plan by the required
majorities. On June 5, 2008, the Court issued a sanction order and
reasons for decision approving the Plan as amended. On August 18, 2008,
that decision was upheld by the Ontario Court of Appeal and, on
September 19, 2008, the Supreme Court of Canada denied leave to appeal.
It is expected the Plan will be implemented in a timely manner.
The Plan as amended provides for a declaratory release that will be
effective on implementation of the Plan and that will result in the
release of all existing and future ABCP-related claims against the
Company except claims of express fraudulent misrepresentation made in
accordance with the procedures set out in the Plan by participants in the
Canaccord Relief Program who do not receive the payments contemplated by
the Canaccord Relief Program before the end of the 20th business day
after the completion of the distribution of the plan notes on the
implementation of the Plan.
The Canaccord Relief Program is conditional on the successful
implementation of the Plan and certain other conditions. However, there
can be no assurance that the Plan will be implemented or, if it is
implemented, that the declaratory release contained therein will not be
amended in a manner that does not result in the release of existing and
potential claims against the Company. If the Plan is not implemented, or
if the declaratory release is amended in such a manner that the Plan does
not result in the release of existing and potential claims, the Company
may be found liable in connection with the pending related lawsuits and
further legal actions may be commenced against the Company, which could
materially adversely affect the Company's business, results of operations
and financial condition. If the Plan is implemented, there is no
assurance that all of the other conditions for the purchase by the
Company of the restructured notes under the Canaccord Relief Program will
be met. If the Canaccord Relief Program is not completed as a result of
one or more of these other conditions not being met, the Company's
business, results of operations and financial condition could be
materially adversely affected. In addition, even if the Plan is
implemented in its current form and the declaratory release is not
amended, there is no assurance that the validity or effectiveness of the
declaratory release will not be challenged either in the context of the
CCAA proceedings or in actions commenced against the Company and others.
Any determination that the declaratory release is invalid or ineffective
could materially adversely affect the Company's business, results of
operations and financial condition.
In addition, if credit derivative or other transactions underlying the
asset-backed commercial paper held by the Company or by clients who are
eligible for the Canaccord Relief Program are terminated before the
implementation of the Plan or are subject to collateral calls, the value
of the restructured notes acquired by the Company in respect of its
holdings or under the Canaccord Relief Program on the implementation of
the Plan and completion of the Canaccord Relief Program could be
materially adversely affected.
Based on the information contained in the Information Statement and other
public information, the Company estimates that it will receive:
- $32.9 million of senior MAV2 Class A-1 and A-2 Notes and subordinated
Class B and Class C Notes
- $17.6 million of Class A-1 Notes
- $12.2 million of Class A-2 Notes
- $2.1 million of Class B Notes
- $1.0 million of Class C Notes
Class A-1, Class A-2 and Class B Notes will bear interest at the
BA rate less 0.50% and Class C Notes will bear interest at 20%.
These notes will mature in approximately 9 years. The senior notes
are expected to be rated "AA" by Dominion Bond Rating Services
while the subordinated notes (Class B and C) will likely be
unrated.
- $8.7 million of MAV3 Traditional Assets ("TA") and Ineligible Asset
("IA") Tracking Notes
The TA and IA Tracking Notes will bear interest at the rate equal
to the net rate of return generated by the related specific
tracking assets. The maturities of the notes will range between
13 years and 29 years. These notes will likely be unrated.
- $1.1 million of MAV2 IA Tracking Notes
The IA Tracking Notes will bear interest at the rate equal to the
net rate of return generated by the related specific tracking
assets. The maturities of the notes will range between 5 years and
31 years. The IA Tracking Notes will not be rated.
There is a significant amount of uncertainty in estimating the amount and
timing of cash flows associated with the ABCP. The Company estimates the
fair value of its ABCP by discounting expected future cash flows on a
probability weighted basis considering the best available data. The
assumptions used in determining the estimated fair value reflect the
details included in the Information Statement issued by the Committee.
The assumptions used in the valuation model include:
Weighted average interest rate 2.61%
Weighted average discount rate 7.33%
Maturity of notes 9 years to 20 years
Credit losses rated notes 5% to 10%
unrated notes 20% to 55%
If these assumptions were to change, the fair value of ABCP could change
significantly. Based on these assumptions, the Company recorded a fair
value adjustment of $12.8 million during the year ended March 31, 2008.
The valuation model was updated at September 30, 2008 and results
indicated no further fair value adjustment was required for the six
months ended September 30, 2008.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
September 30, March 31, September 30,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Goodwill 30,070 30,070 30,070
-------------------------------------------------------------------------
Other intangible assets
Balance at beginning of period 2,450 3,863 3,863
Amortization 705 1,413 706
-------------------------------------------------------------------------
Balance at end of period 1,745 2,450 3,157
-------------------------------------------------------------------------
31,815 32,520 33,227
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other intangible assets reflect assigned values related to acquired brand
names, customer relationships and technology and are amortized on a
straight-line basis over their estimated useful life of four years.
Goodwill and other intangible assets relate to the Canaccord Adams
operating segment.
9. SUBORDINATED DEBT
September 30, March 31, September 30,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Loan payable, interest payable
monthly at prime + 2% per annum,
due on demand 25,000 25,000 25,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The loan payable is subject to a subordination agreement and may only be
repaid with the prior approval of the IIROC.
10. SHARE CAPITAL
September 30, March 31, September 30,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Share capital
Common shares 242,186 173,799 173,878
Unvested share purchase loans (36,308) (35,410) (34,637)
Acquisition of common shares
for long term incentive plan
(note 11) (35,813) (27,247) (18,295)
Contributed surplus 41,123 34,024 18,552
-------------------------------------------------------------------------
211,188 145,166 139,498
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Share capital of the Company is comprised of the following:
(i) Authorized
Unlimited common shares without par value
Unlimited preferred shares without par value
(ii) Issued and fully paid
Common shares
Number of Amount
Shares $
-------------------------------------------------------------------------
Balance, September 30, 2007 47,866,229 173,878
Shares issued in connection with stock
compensation plans (note 11) 3,949 48
Shares cancelled (35,127) (127)
-------------------------------------------------------------------------
Balance, March 31, 2008 47,835,051 173,799
-------------------------------------------------------------------------
Shares issued for cash 6,733,250 67,218
Shares issued in connection with stock
compensation plan (note 11) 84,252 1,611
Shares cancelled (100,000) (442)
-------------------------------------------------------------------------
Balance, September 30, 2008 54,552,553 242,186
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On May 2, 2008, the Company closed a fully underwritten financing of
5,855,000 common shares at a price of $10.25 per share for total gross
proceeds of $60.0 million. On May 22, 2008, the underwriters exercised an
over-allotment option in connection with the financing to purchase an
additional 878,250 common shares at a price of $10.25 per share for gross
proceeds of $9.0 million. Total share issuance costs net of taxes were
$1.6 million.
The Company renewed its normal course issuer bid ("NCIB") on December 24,
2007 and is currently entitled to acquire up to 2,391,753 of its shares
from December 31, 2007 to December 30, 2008, which represents 5% of its
shares outstanding as of December 21, 2007. The employee benefit trust
purchased 2,075,432 shares for the long term incentive plan (Note 11)
from December 21, 2007 to September 30, 2008, which reduces the number of
shares allowable under the NCIB. In addition, there were 100,000 shares
purchased and cancelled under the NCIB during this period. The number of
shares available for purchase under the NCIB as of September 30, 2008 was
216,321.
(iii) Common share purchase loans
The Company provides forgivable common share purchase loans to employees
in order to purchase common shares. The unvested balance of forgivable
common share purchase loans is presented as a deduction from share
capital. The forgivable common share purchase loans are amortized over
the vesting period. Contributed surplus includes the amortization of
unvested forgivable common share purchase loans.
(iv) Earnings (loss) per share
For the three months ended For the six months ended
---------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Basic earnings
(loss) per share
Net income (loss)
for the period ($5,398) $12,411 $11,061 $51,440
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
number of common
shares (number) 49,020,939 44,971,889 48,247,858 45,195,734
Basic earnings
(loss) per share ($0.11) $0.28 0.23 $1.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings
(loss) per share
Net income (loss)
for the period ($5,398) $12,411 $11,061 $51,440
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
number of common
shares (number) 49,020,939 44,971,889 48,247,858 45,195,734
Dilutive effect of
unvested shares
(number) 2,949,931 2,381,104 2,949,931 2,381,104
Dilutive effect of
directors options
(number) (note 11) 811 - 3,171 -
Dilutive effect of
share issuance
commitment in
connection with
retention plan
(number) (note 11) 602,366 363,378 602,366 363,378
Dilutive effect of
unvested shares
purchased by
employee benefit
trust (number)
(note 11) 2,556,807 511,906 2,078,364 281,470
Dilutive effect of
share issuance
commitment in
connection with
long term
incentive plan
(number) (note 11) 7,716 41,309 74,612 63,089
-------------------------------------------------------------------------
Adjusted weighted
average number of
common shares
(number) 55,138,570 48,269,586 53,956,302 48,284,775
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings
(loss) per share ($0.11) $0.26 $0.21 $1.07
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. STOCK-BASED COMPENSATION PLANS
Retention plans
As described in the Audited Annual Consolidated Financial Statements, the
Company established two retention plans in connection with the
acquisitions of Enermarket Solutions Ltd. ("Enermarket") and Adams
Harkness Financial Group, Inc. ("Adams Harkness").
The plan for Enermarket provided for the issuance of up to 25,210 common
shares of the Company over two years. The Company issued 14,203 common
shares under this plan during the years ended March 31, 2008 and
March 31, 2007. The remaining shares have been forfeited.
The plan for Adams Harkness (renamed Canaccord Adams Inc.) provides for
the issuance of up to 1,118,952 common shares of the Company after a
three-year vesting period. The total number of shares which will vest is
also based on revenue earned by Canaccord Adams Inc. during the vesting
period. The aggregate number of common shares that vest will be that
number which is equal to the revenue earned by Canaccord Adams Inc.
during the vesting period divided by US$250.0 million multiplied by the
number of common shares subject to the retention plan. As such revenue
levels are achieved during the vesting period, the associated proportion
of the retention payment will be recorded as a development cost and the
applicable number of retention shares will be included in diluted common
shares outstanding (Note 10 (iv)). The Company has expensed $661 and
$1,592 for the three and six months ended September 30, 2008 ($810 and
$1,939 for the three and six months ended September 30, 2007). At
September 30, 2008, the number of common shares subject to the plan was
772,473.
Under the fair value method the aggregate costs of the grants made under
the Adams Harkness retention plan is estimated to be $9.7 million
(US$9.1 million).
The following table details the activity under the Company's retention
plans:
For the three months ended For the six months ended
---------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Number of common
shares subject to
the Enermarket
retention plan:
Beginning of
period - 10,254 - 10,254
Grants - - - -
Issued - - - -
-------------------------------------------------------------------------
End of period - 10,254 - 10,254
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shares vested
during the period - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common
shares subject to
the Adams Harkness
retention plan:
Beginning of
period 774,768 892,354 804,012 953,107
Issued - (1,995) - (9,268)
Forfeitures (2,295) (71,470) (31,539) (124,950)
-------------------------------------------------------------------------
End of period 772,473 818,889 772,473 818,889
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shares vested
during the period - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options
The Company granted stock options to purchase common shares of the
Company to independent directors. The stock options vest over a four-year
period and expire seven years after the grant date. Exercise price is
based on the fair market value of the common shares at grant date. The
weighted average exercise price of the stock options is $15.54.
The following is a summary of the Company's stock options as at
September 30, 2008 and 2007 and changes during the periods then ended.
Weighted
average
Number of exercise
options price ($)
-------------------------------------------------------------------------
Balance, September 30, 2007 125,000 23.13
Granted - -
Exercised - -
-------------------------------------------------------------------------
Balance, March 31, 2008 125,000 23.13
-------------------------------------------------------------------------
Granted 150,000 9.21
Exercised - -
-------------------------------------------------------------------------
Balance, September 30, 2008 275,000 15.54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The fair value of each stock option grant has been estimated on grant
date using the Black-Scholes option pricing model with the following
assumptions:
August 2008 June 2008 May 2007
grant grant grant
-------------------------------------------------------------------------
Dividend yield 5.10% 5.10% 1.80%
Expected volatility 30.00% 30.00% 30.00%
Risk-free interest rate 2.32% 2.32% 4.25%
Expected life 5 years 5 years 5 years
Option pricing models require the input of highly subjective assumptions
including the expected price volatility. Changes in the subjective
assumptions can materially affect the fair value estimate and therefore
the existing models do not necessarily provide a reliable single measure
of the fair value of the Company's stock options.
Compensation expense of $50 and $101 has been recognized for the three
and six months ended September 30, 2008 ($41 and $82 for the three and
six months ended September 30, 2007).
Long term incentive plan
Under the long term incentive plan ("LTIP"), eligible participants are
awarded restricted share units ("RSUs") which vest over three years. For
employees in Canada, an employee benefit trust (the "Trust") has been
established, and either (a) the Company will fund the Trust with cash
which will be used by a trustee to purchase common shares of the Company
on the open market that will be held in trust by the trustee until RSUs
vest or (b) the Company will issue common shares from treasury to
participants following vesting of RSUs. For employees in the United
States and the United Kingdom, at the time of each RSU award, the Company
will allot common shares and these shares will be issued from treasury at
the time they vest for each participant. The shares issued as part of the
LTIP will generally be offset by purchases under the Company's NCIB.
The costs of the RSUs are amortized over the vesting period of three
years. Compensation expense of $4.0 million and $8.8 million has been
recognized for the three and six months ended September 30, 2008
($4.1 million and $6.0 million for the three and six months ended
September 30, 2007).
For the three months ended For the six months ended
---------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2008 2007 2008 2007
---------------------------- ---------------------------
Awards
outstanding,
beginning of
period 3,258,398 475,168 2,221,578 -
Grants 857,105 732,160 2,061,975 1,207,328
Vested (233,945) - (401,995) -
-------------------------------------------------------------------------
Awards
outstanding,
end of period 3,881,558 1,207,328 3,881,558 1,207,328
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended For the six months ended
---------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2008 2007 2008 2007
---------------------------- ---------------------------
Common shares
held by Trust,
beginning of
period 1,576,127 401,239 1,621,895 -
Acquired 1,606,903 535,863 1,706,903 937,102
Released on
vesting (171,975) - (317,743) -
-------------------------------------------------------------------------
Common shares
held by Trust,
end of period 3,011,055 937,102 3,011,055 937,102
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS
Security trades executed by the Company for employees, officers and
directors are transacted in accordance with the terms and conditions
applicable to all clients. Commission income on such transactions in the
aggregate is not material in relation to the overall operations of the
Company.
Accounts receivable and accounts payable and accrued liabilities include
the following balances with related parties:
September 30, March 31, September 30,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Accounts receivable 44,854 48,521 51,570
Accounts payable and accrued
liabilities 71,107 64,945 76,812
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. SEGMENTED INFORMATION
The Company has two operating segments:
Canaccord Adams - includes investment banking, research and trading
activities on behalf of corporate, institutional and government
clients as well as principal trading activities in Canada, the UK and
the US.
Private Client Services - provides brokerage services and investment
advice to retail or private clients in Canada and the US.
The Corporate and Other segment includes correspondent brokerage
services, interest and foreign exchange revenue and expenses not
specifically allocable to Canaccord Adams and Private Client Services.
The Company's industry segments are managed separately because each
business offers different services and requires different personnel and
marketing strategies. The Company evaluates the performance of each
business based on income (loss) before income taxes.
The Company does not allocate total assets or equipment and leasehold
improvements to the segments. Amortization is allocated to the segments
based on square footage occupied. There are no significant inter-segment
revenues.
For the three months ended September 30,
2008
----------------------------------------------------
Private Corporate
Canaccord Client and
Adams Services Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenues 58,336 43,844 8,649 110,829
Expenses 58,542 34,122 14,686 107,350
Amortization 926 411 735 2,072
Development costs 3,682 1,378 1,323 6,383
-------------------------------------------------------------------------
Income (loss) before
income taxes (4,814) 7,933 (8,095) (4,976)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007
----------------------------------------------------
Private Corporate
Canaccord Client and
Adams Services Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenues 89,071 57,415 12,383 158,869
Expenses 67,561 42,226 19,642 129,429
Amortization 985 472 689 2,146
Development costs 5,582 1,341 1,243 8,166
-------------------------------------------------------------------------
Income (loss) before
income taxes 14,943 13,376 (9,191) 19,128
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the six months ended September 30,
2008
----------------------------------------------------
Private Corporate
Canaccord Client and
Adams Services Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenues 163,129 101,697 18,711 283,537
Expenses 138,527 76,830 31,668 247,025
Amortization 1,838 820 1,456 4,114
Development costs 7,805 2,944 3,096 13,845
-------------------------------------------------------------------------
Income (loss) before
income taxes 14,959 21,103 (17,509) 18,553
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007
----------------------------------------------------
Private Corporate
Canaccord Client and
Adams Services Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenues 244,094 133,498 27,147 404,739
Expenses 168,707 97,572 41,220 307,499
Amortization 1,896 902 1,325 4,123
Development costs 9,874 2,713 2,752 15,339
-------------------------------------------------------------------------
Income (loss) before
income taxes 63,617 32,311 (18,150) 77,778
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company's business operations are grouped into four geographic
segments (revenue is attributed to geographic areas on the basis of the
underlying corporate operating results):
For the three months ended For the six months ended
---------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
Canada
Revenue 80,750 117,275 189,628 279,368
Equipment and
leasehold
improvements 24,799 24,012 24,799 24,012
Goodwill and
other intangible
assets 3,959 4,208 3,959 4,208
United Kingdom
Revenue 13,096 20,807 46,815 68,308
Equipment and
leasehold
improvements 7,411 8,604 7,411 8,604
United States
Revenue 18,309 20,737 43,950 47,159
Equipment and
leasehold
improvements 7,044 7,521 7,044 7,521
Goodwill and
other intangible
assets 27,856 29,019 27,856 29,019
Other Foreign Location
Revenue (1,326) 50 3,144 9,904
-------------------------------------------------------------------------
14. CAPITAL MANAGEMENT
The Company's business requires capital for operating and regulatory
purposes, including funding current and future operations. The Company's
capital structure is underpinned by shareholders' equity, which is
comprised of share capital, retained earnings and accumulated other
comprehensive income or losses, and is further complemented by
subordinated debt. The following table summarizes our capital as at
September 30, 2008:
Type of capital Carrying As a
amount percentage
$ of capital
-------------------------------------------------------------------------
Share capital 211,188 48.1%
Retained earnings 220,201 50.1%
Accumulated other comprehensive losses (17,081) (3.9)%
-------------------------------------------------------------------------
Shareholders' equity 414,308 94.3%
Subordinated debt 25,000 5.7%
-------------------------------------------------------------------------
439,308 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company's capital management framework is designed to maintain the
level of capital that will:
- Meet the Company's regulated subsidiaries' target ratios as set out
by the respective regulators
- Fund current and future operations
- Ensure that the Company is able to meet its financial obligations as
they become due
- Support the creation of shareholder value
The following subsidiaries are subject to regulatory capital requirements
in the respective jurisdictions by the listed regulators:
- Canaccord Capital Corporation is subject to regulation in Canada
primarily by the IIROC
- Canaccord Adams Limited is regulated in the UK by the Financial
Services Authority and is a member of the London Stock Exchange
- Canaccord Adams Inc. is registered as a broker dealer in the US and
is subject to regulation primarily by the Financial Industry
Regulatory Authority
- Canaccord Capital Corporation (USA), Inc. is registered as a broker
dealer in the US and is subject to regulation primarily by the
Financial Industry Regulatory Authority
- Canaccord International Ltd. is regulated in Barbados by the Central
Bank of Barbados
Margin requirements in respect of outstanding trades, underwriting deal
requirements and/or working capital requirements cause regulatory capital
requirements to fluctuate on a daily basis. Compliance with these
requirements may require the Company to keep sufficient cash and other
liquid assets on hand to maintain regulatory capital requirements rather
than using these liquid assets in connection with its business or paying
them out in the form of cash disbursements. The Company's subsidiaries
were in compliance with all of the minimum regulatory capital
requirements during the six months ended September 30, 2008.
15. COMMITMENTS AND CONTINGENCIES
Commitments
Subsidiaries of the Company are committed to approximate minimum lease
payments for premises and equipment over the next five years and
thereafter as follows:
$
-------------------------------------------------------------------------
2010 22,506
2011 19,842
2012 17,917
2013 16,807
2014 15,561
Thereafter 48,060
-------------------------------------------------------------------------
140,693
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the period, there have been no material changes to the Company's
contingencies from those described in Note 18 of the March 31, 2008
Audited Annual Consolidated Financial Statements.
16. SUBSEQUENT EVENTS
a. On October 30, 2008, the Company announced that it has implemented a
firm-wide restructuring that has resulted in the layoff of
approximately 10% of its staff globally. The Company has currently
estimated the Q3 fiscal 2009 pre-tax expense to be $6.8 million. In
addition, a 10%-20% salary reduction has been implemented for senior
executives. As management had not committed to the restructuring plan
at September 30, 2008, none of the related expense had been accrued
at period end.
b. As a result of the volatility and rapid deterioration in the global
financial markets during October 2008, a number of Private Client
Services clients experienced losses that resulted in an unsecured
exposure. As per the Company's policy of reserving against unsecured
balances, the Company recorded a Q3 fiscal 2009 pre-tax provision of
$3.5 million against the unsecured balances. Management will continue
to work diligently to collect these balances.
c. As a result of market conditions prevailing subsequent to
September 30, 2008, including the steep decline in oil prices, the
earnings prospects for Enermarket, whose primary business is to
provide advisory services to companies in the oil and gas industry,
have been negatively impacted. Management has concluded that the
value of goodwill and intangibles related to Enermarket has been
impaired and recorded a charge of $4.0 million in October 2008.
d. On November 5, 2008, the Board of Directors approved the temporary
suspension of the Company's quarterly dividend for this quarter. This
measure was taken to enable the Company to preserve its working
capital and book value, as well as to position the Company to take
advantage of growth opportunities that may present themselves. The
Company evaluates the dividend policy on a quarterly basis in the
context of the market environment and our business activity.
For further information: North American media: Scott Davidson, Managing
Director, Global Head of Marketing & Communications, Phone: (416) 869-3875,
Email: scott_davidson@canaccord.com; London media: Bobby Morse or Ben Willey,
Buchanan Communications (London), Phone: +44 (0) 20 7466 5000,
Email:bobbym@buchanan.uk.com; Investor relations inquiries: Katherine Young,
Vice President, Investor Relations, Phone: (416) 869-7292,
Email:katherine_young@canaccord.com; Nominated Adviser and Broker: Marc Milmo
or Dugald J. Carlean, Fox-Pitt, Kelton Limited, Phone: +44 (0) 207 663 6000,
Email:marc.milmo@fpk.com
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