(All dollar amounts are stated in Canadian dollars unless otherwise
indicated)VANCOUVER, Feb. 12 /CNW/ - Canaccord Capital Inc.'s (TSX & AIM: CCI)
revenue for the three months ended December 31, 2008 was $87.2 million, down
52.4% from the same quarter a year ago. The net loss for the third quarter
excluding a number of significant items, a non-GAAP measure, was $16.2(1)
million, or $0.33(1) per share. A number of significant items, listed below,
were recorded during the quarter which totalled $51.0 million on a pre-tax
basis, or $0.94 per share, of which $38.2 million were non-cash. Including
these significant items, Canaccord's net loss for the quarter, as measured
under GAAP, was $62.4 million and diluted loss per share was $1.27. Commenting
on the quarter, Paul Reynolds, President and CEO, said, "We have made
difficult but necessary decisions regarding our balance sheet this quarter.
Moving forward, we intend to leverage our solid capital base and aggressively
pursue growth opportunities while controlling costs."
Revenue for the nine months ended December 31, 2008 was $370.7 million,
down 37.0% from the same period a year ago. The net loss for year to date
fiscal 2009 was $51.3 million, and diluted loss per share was $1.05. Excluding
the significant items listed below, the net loss for the nine month period was
$5.2(1) million and diluted loss per share was $0.11(1).
The following significant items were recorded during the third quarter of
fiscal 2009:- ABCP adjustments:
- ABCP fair value adjustment: The Company recognized an additional
$6.7 million pre-tax non-cash adjustment related to ABCP held in
treasury to reflect the impact of the current market conditions
on the valuation of its holdings in ABCP. This adjustment reduces
the carrying value of the ABCP held by the Company in treasury to
$23.2 million as at December 31, 2008. This value excludes the
additional $9.5 million of MAV 2, Class 15 positions added to our
treasury holdings as announced on January 30, 2009.
- Canaccord Relief Program: The Canaccord Relief Program which was
announced in April 2008 included the repurchase of up to
$152 million of restructured ABCP at par value from clients who
hold $1 million or less. The total pre-tax provision recorded in
Q3/09 was $5.3 million, which brings the total provision relating
to client relief to $59.5 million as at December 31, 2008. The
provision is made up of the following:
- Relief provision - In connection with client relief, the
Company recorded a pre-tax provision of $54.2 million in fiscal
2008. The completion of the Canaccord Relief Program was
announced on January 30, 2009 and due to additional
out-of-pocket charges, the Company increased this provision by
$2.7 million in Q3/09.
- Fair value adjustment - In addition, the Company has also
recorded a $2.6 million pre-tax fair value adjustment related
to the MAV 2, Class 15 positions, purchased by the Company as a
result of the completion of the Canaccord Relief Program.
- Impairment of goodwill and intangibles:
- Canaccord Adams Inc.: Canaccord Adams Inc. ("CAI") primarily
provides capital markets services to institutional and corporate
clients in the US. This reporting unit has experienced a decline in
business activity and revenue with the continued deterioration in
the financial markets during Q3/09. Due to the adverse changes in
the business environment, a valuation was performed to assess the
fair value of this reporting unit compared to the carrying value.
The results of this valuation led to the recognition of a non-cash
charge for the impairment of goodwill and other intangible assets
related to our US capital markets business of $27.5 million.
- Enermarket: As a result of market conditions during Q3/09,
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, were negatively impacted. It was announced on
November 6, 2008, that the value of goodwill and intangibles
related to Enermarket had been impaired and, therefore, a pre-tax
non-cash charge of $4.0 million was recorded in Q3/09.
- Restructuring costs: As announced on October 30, 2008, Canaccord
implemented a firm-wide restructuring that resulted in the reduction
of staff across all geographies where the Company operates. This
restructuring resulted in a $7.5 million pre-tax expense recognized in
Q3/09 which was slightly higher than the estimated $6.8 million due to
additional costs identified once the magnitude of the staff reduction
had been finalized.The results for the third quarter and year-to-date fiscal 2009 also
include a pre-tax credit provision of $5.5 million, of which $4.5 million
relates to our Canadian operations and $1.0 million is attributed to our UK
operations. This provision is $2.0 million higher than our estimate announced
in October 30, 2008 due to further deterioration in the markets. As a result
of the volatility and rapid deterioration in the global financial markets
during Q3/09, a number of clients experienced losses that resulted in
unsecured balances. The Company recorded this provision in accordance with its
policy of reserving against unsecured balances. The after-tax provision is
$3.8 million, or $0.08 per share. Management will continue to work diligently
to collect these balances.Third quarter and year-to-date fiscal 2009 adjusted data
-------------------------------------------------------------------------
(C$ thousands, Three months
except EPS in $) ended December 31, 2008
-------------------------------------------------------------------------
Net loss Earnings
before per share
Revenue Expenses tax Net loss ("EPS")
-------------------------------------------------------------------------
Per financial
statements 87,188 159,625 (72,437) (62,378) (1.27)
ABCP fair value
adjustment(a) - 6,700 6,700 4,600 0.09
Relief
provision(b) - 2,700 2,700 1,854 0.04
Canaccord relief
program fair
value
adjustment(c) - 2,647 2,647 1,817 0.03
Impairment of
goodwill and
intangibles(d) - 31,524 31,524 31,524 0.65
Restructuring
costs(e) - 7,520 7,520 6,341 0.13
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Excluding
significant
items(f) 87,188 108,534 (21,346) (16,242) (0.33)
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-------------------------------------------------------------------------
(C$ thousands, Nine months
except EPS in $) ended December 31, 2008
-------------------------------------------------------------------------
Net loss
before
Revenue Expenses tax Net loss EPS
-------------------------------------------------------------------------
Per financial
statements 370,725 424,609 (53,884) (51,317) (1.05)
ABCP fair value
adjustment(a) - 6,700 6,700 4,600 0.09
Relief
provision(b) - 2,700 2,700 1,854 0.04
Canaccord relief
program fair
value
adjustment(c) - 2,647 2,647 1,817 0.03
Impairment of
goodwill and
intangibles(d) - 31,524 31,524 31,524 0.65
Restructuring
costs(e) - 7,520 7,520 6,341 0.13
-------------------------------------------------------------------------
Excluding
significant
items(f) 370,725 373,518 (2,793) (5,181) (0.11)
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a) Represents the Q3/09 ABCP fair value adjustment for ABCP held by the
Company.
b) Represents the additional accrual for client relief related to the
ABCP held by eligible clients.
c) Relates to the fair value adjustment of ABCP purchased by the Company
under a client relief program.
d) Relates to the impairment of CAI and Enermarket goodwill and
intangibles.
e) Consists of staff restructuring costs.
f) Financial statement items which exclude significant items costs are
non-GAAP measures.
Financial condition at third quarter 2009 vs. third quarter 2008
- Cash and cash equivalents balance of $684.5 million, up $262.7
million from $421.8 million
- Working capital of $285.6 million, up $7.7 million from $277.9
million
- Total shareholders' equity of $358.0 million, down $32.2 million from
$390.2 million
- Return on equity ("ROE") of (64.3)%, down from 16.2%
- Book value per diluted common share for the period end was $6.37,
down 19.9% from $7.95
Third quarter 2009 vs. third quarter 2008, excluding significant items
- Revenue of $87.2(1) million, down 52.5% or $96.2 million from
$183.4(1) million
- Expenses of $108.5(1) million, down 29.9% or $46.3 million from
$154.8(1) million
- Net loss of $16.2(1) million compared to net income of
$17.8(1) million in the same period of the prior year
- Diluted loss per share of $0.33(1) compared to EPS of $0.36(1)
- On February 11, 2009, the Board of Directors considered the dividend
policy in the context of the market environment and Canaccord's
business activity and approved a 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 become available.
Year-to-date 2009 vs. year-to-date 2008, excluding significant items(1)
- Revenue of $370.7(1) million, down 37.0% or $217.4 million from
$588.1(1) million
- Expenses of $373.5(1) million, down 21.8% or $103.9 million from
$477.4(1) million
- Net loss of $5.1(1) million compared to net income of
$72.2(1) million in the same period of the prior year
- Diluted loss per share of $0.11(1) compared to an EPS of $1.48(1) in
the prior year
Third quarter 2009 vs. second quarter 2009, excluding significant
items(1)
- Revenue of $87.2(1) million, down 21.3% or $23.6 million from $110.8
million
- Expenses of $108.5(1) million, down 6.3% or $7.3 million from $115.8
million
- Net loss of $16.2(1) million compared to net loss of $5.4 million
- Diluted loss per share of $0.33(1) compared to a diluted loss of
$0.11 per share in the second quarter of 2009
Summary of operations
- In January 2009, the Company implemented the Canaccord Relief Program
for eligible clients, demonstrating the Company's firm commitment to
putting our clients first
- In January 2009, Canaccord's Head of Private Client Services, John
Rothwell, appointed three new leadership positions in the division:
- National Sales Manager
- Head of Training and Education
- Director of Corporate Development
- Canaccord Adams, our capital markets team, led 9 transactions
globally to raise total proceeds of $189.3 million during Q3/09
- During Q3/09, Canaccord Adams led or co-led the following equity
transactions:
- $135.0 million on TSX/LSE for Yamana Gold Inc.
- US$10.3 million on NASDAQ for Osmetech plc
- $12.4 million on TSX for Mavrix Explore
- $7.0 million on TSX for Alexco Resource Corp.
- During Q3/09, Canaccord Adams acted as financial advisor on the
following transactions:
- Co-Advised First Calgary Petroleums Ltd. in its $923 million
acquisition by Eni SpA
- Advised Hargraves Technology in its acquisition by Parker Hannifin
Corporation
- Advised IAMGOLD Corporation in its pending $140 million
acquisition of Orezone Resources Inc.
- Canaccord Adams participated in 26 transactions(2) globally to raise
total proceeds of $5.8 billion during Q3/09
- Canaccord Adams ranked number one for 50 completed Private Investment
in Public Equity(3) ("PIPE") transactions in North America that
raised over US$1.2 billion in proceeds during calendar 2008
- Assets under administration ("AUA") of $9.0 billion, down 39.2% from
the same period a year ago, and down 22.0% from Q2/09
- Assets under management ("AUM") of $454 million, down 40.3% from the
same period a year ago, and down 25.5% from Q2/09
- As of December 31, 2008, Canaccord had 347 Advisory Teams, down 30
from the same period a year ago, and up 6 from Q2/09
------------------------------
(1) Financial statement items that exclude significant items are non-GAAP
measures (see non-GAAP Measures).
(2) Transactions over $1.5 million
(3) Source: Placement Tracker
Non-GAAP MeasuresManagement believes that the non-GAAP measures presented provide useful
information by excluding certain items that may not be indicative of
Canaccord's core operating results. Management believes that these non-GAAP
measures will allow for a better evaluation of the operating performance of
Canaccord's business and facilitate meaningful comparison of results in the
current period to those in prior periods and future periods. Reference to
these non-GAAP measures should not be considered as a substitute for results
that are presented in a manner consistent with GAAP. These non-GAAP measures
are provided to enhance investors' overall understanding of Canaccord's
current financial performance.
A limitation of utilizing these non-GAAP measures is that the GAAP
accounting effects of the significant items do in fact reflect the underlying
financial results of Canaccord's business and these effects should not be
ignored in evaluating and analyzing Canaccord's financial results. Therefore,
management believes that Canaccord's GAAP measures of loss per share and
diluted loss per share and the same respective non-GAAP measures of financial
performance should be considered together.LETTER TO SHAREHOLDERS
To Our ShareholdersThe third quarter of fiscal 2009 proved to be one of the most challenging
periods in market history. The rapid deterioration of business volumes driven
by the worst economic environment in generations had a material and negative
impact on our financial results. This, combined with charges we announced on
our last conference call and a number of significant items, resulted in a very
difficult quarter. Despite these difficulties, we ended the quarter with a
strong capital position that will serve Canaccord well in dealing not only
with the challenging conditions that lie immediately ahead but also the
opportunities that are likely to become available to build our businesses.
In addition, we are very pleased to have completed on January 30, 2009
the Canaccord Relief Program for eligible clients holding frozen Asset-Backed
Commercial Paper ("ABCP"). The funds are now in client accounts and this
challenging chapter in our history is behind us. Although we wish the hardship
of this experience could have been avoided, we are proud of the Canaccord
Relief Program, which demonstrates our continued commitment to putting our
clients first.
Financial overview
On an operating basis, the net loss, excluding significant items, for the
fiscal third quarter was $16 million or $0.33 per diluted share. Further
impacting this loss were several significant items booked in the quarter,
including a $31.5 million non-cash charge for goodwill impairment, a $6.7
million non-cash fair value adjustment for the ABCP in our treasury, a $2.6
million fair value adjustment to the ABCP received on closing of the Canaccord
Relief Program, $7.5 million for restructuring costs relating to staff
reductions and $2.7 million of additional expenses relating to the
ABCP-related client relief. Including the significant charges of $51 million
taken in the quarter, expenses were $160 million and the net loss was $62
million or $1.27 per diluted share. Further details on these charges may be
found on page 1 of this report.
The majority of these charges are non-cash, and we remain well
capitalized for any business environment. At the end of the third quarter,
Canaccord had cash and cash equivalents of nearly $685 million, $285 million
of net working capital and an estimated $130 million of excess capital. With
an unleveraged and highly liquid balance sheet, we believe that we are well
positioned to take advantage of market opportunities. This substantial capital
position gives us a solid operating base for the foreseeable future. However,
Canaccord remains focused on doing whatever we need to do to reduce or
eliminate further losses.
That said, I appreciate that this quarter's results and provisions may
raise some questions among shareholders and employees. So I intend to use the
balance of this letter to answer questions that I believe shareholders and
employees would ask about Canaccord's business plan and outlook for the
future. The Operating Highlights usually included in this letter can be found
on page 2 of this report.
Q: How do you intend to grow Canaccord through these difficult market
conditions?
We are working diligently to operate a strong and efficient business.
However, we intend to leverage our strong capital base and continue to
aggressively pursue growth opportunities while controlling costs. Despite the
obvious challenges, I see some excellent opportunities to build both revenues
and market share. In the short term, for example, our US sales and trading
operations are benefiting from the complete reshaping of the competitive
landscape in the US. The market is still tough, but we're gaining market share
and we've used the opportunity to add some industry veterans to fill out and
enhance our capabilities. And in Canada, we are the first independent dealer
to offer institutional clients direct market access, which is an innovative
trading strategy we've been working on for several years.
In the medium term, our new Head of Private Client Services, John
Rothwell, is putting together a strong team and a more-effective operating
structure for the division. He is aggressively addressing cost and capacity
issues in the business and has hired senior-level professionals to handle
recruiting and training. With the ABCP situation behind us, we're on the
offence in Private Client Services, putting together a stronger foundation for
future growth while the market is going through this very difficult period. We
will continue to build toward the long-term opportunity to provide wealth
management services while retaining our traditional brokerage expertise.
We think that calendar 2009 will be challenging in most of our
businesses. Looking past that horizon, however, we see a good opportunity to
be smart buyers of distressed assets. Additional scale would benefit our
global platform, not only by adding capabilities but also by offsetting our
fixed costs. That is yet another reason why we're so intent on protecting
Canaccord's capital base - we intend to be buyers, not sellers, when the time
is right. We believe this will be a great opportunity to grow.
Q: Are you committed to Canaccord's global business model?
Definitely. We intend to wholeheartedly support our global infrastructure
as long as our global service capability is valued by our clients. We're
committed to all of our individual business units, just as we are to improving
their integration and efficiency so we can be appropriately lean and global.
Q: What has been the effect of the cost-cutting initiatives, including
the 120-Day Plan you announced last quarter?
The 120-Day Plan we launched in June 2008 achieved its goals for cost
containment. But, frankly, the rapid and severe deterioration of markets in
October and November exceeded our expectations. The cost-cutting measures we
put in place were insufficient to deal with this market decline, and our
business volume fell faster than our expense reduction. However, in the
quarter, we did see over $5 million of net general and administrative cost
savings and over $1 million in net salary reductions. The combined benefit of
these and other initiatives is expected to be over $20 million on an
annualized basis.
Before the end of this fiscal year, we expect to deliver a plan that will
further address some of the systemic costs of our business, as well as a
proactive strategy to better align our operations to enhance shareholder
value. This plan - along with the initiatives we announced last quarter, like
reducing staff levels and management salaries, deferring projects and making
further cuts in discretionary costs - should demonstrably impact our ability
to generate positive returns for shareholders. We believe the impact of these
measures will be more evident in the fourth quarter of this fiscal year and
beyond, as employees across the Company continue to be increasingly vigilant
in controlling costs and increasing efficiencies.
Q: As far as you can see, what does the future look like for Canaccord?
I've already talked about some specifics, but as an over-arching comment
I'd say that we remain a significant force in the capital markets in Canada
and abroad. We intend to continue to provide clients with quality ideas that
help them make money. And we will become as efficient as possible in order to
deliver enhanced shareholder returns in the future. As I said, the remainder
of calendar 2009 will likely remain challenging, but our best analysis
suggests that global markets, and the global commodity cycle, will return to
more normal levels of business as the many national stimulus packages being
implemented rekindle demand around the world.
Q: Do you have any final thoughts on the ABCP situation?
I'm pleased that the restructuring process was finally completed, but it
has been a challenging 17-month-long process for Canaccord and the industry.
More to the point, it has been a very challenging process for the 1% of our
clients who were affected. We wish this situation could have been resolved
more quickly and that the cases of inconvenience and hardship could have been
avoided. I'd like to offer heartfelt thanks to our clients for their patience
with the entire process. Over 90% of the clients and over 92% of the affected
client assets have stayed with Canaccord and that is a strong testimonial to
the way in which we handled a very difficult situation. The Canaccord Relief
Program, and the tremendous amount of work that our employees put into
securing a deal, clearly reflect our commitment to protecting the best
interests of our clients. We can be proud of that.Paul D. Reynolds
President & Chief Executive OfficerACCESS 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 third 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, February 12, 2009 at 8:30 a.m. (Pacific Time), 11:30 a.m. (Eastern
Time), and 4:30 p.m. (UK Time). During the conference call, senior executives
will comment on the results for Q3/09 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:416-644-3418 (within Toronto)
1-800-731-6941 (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 10:30 a.m. (Pacific
Time), 1:30 p.m. (Eastern Time), and 6:30 p.m. (UK Time) February 12, 2009, at
416-640-1917 or 1-877-289-8525 by entering passcode 21294489 followed by the
number sign. The replay will be available until 11:59 p.m. (Eastern Time)
Thursday, February 26, 2009.
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
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 third quarter 2009 for the three and nine months ended
December 31, 2008 - this document is dated February 12, 2009The 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 nine-month periods ended December 31, 2008 compared
to the corresponding periods in the preceding fiscal year. The three- and
nine- month periods ended December 31, 2008 are also referred to as the third
quarter 2009, Q3/09, year-to-date fiscal 2009 and fiscal Q3/09 in the
following discussion. This discussion should be read in conjunction with the
unaudited interim consolidated financial statements for the three- and
nine-month periods ended December 31, 2008 beginning on page 35 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.
Management believes that the non-GAAP measures presented provide useful
information by excluding certain items that may not be indicative of
Canaccord's core operating results. Management believes that these non-GAAP
measures will allow for a better evaluation of the operating performance of
Canaccord's business and facilitate meaningful comparison of results in the
current period to those in prior periods and future periods. A limitation of
utilizing these non-GAAP measures is that the GAAP accounting effects of the
significant items do in fact reflect the underlying financial results of
Canaccord's business and these effects should not be ignored in evaluating and
analyzing Canaccord's financial results. Therefore, management believes that
Canaccord's GAAP measures of financial performance and the same respective
non-GAAP measures should be considered together.
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.
Financial statement items which exclude significant items are non-GAAP
measures. Significant items include the ABCP fair value adjustment, additional
accrual for client relief programs, fair value adjustment of ABCP purchased by
the Company under a client relief program, impairment of CAI and Enermarket
goodwill and intangibles and restructuring costs.
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
The effects of the global credit crisis persisted during the third
quarter of fiscal 2009 as world economies continued to weaken and equity
markets deteriorated. The dramatic decline of the US economy and the severe
credit conditions in its financial system prompted the sudden contraction in
the Canadian economy. This triggered subsequent job losses in Canada as shown
by the increase in the unemployment rate from 6.6% to 7.2% between December
2008 and January 2009. Financial markets were also impacted significantly. The
S&P/TSX index lost 23% of its value between October 1 and December 31, 2008.
Several fiscal and monetary measures are underway globally to help combat
declining economies. In January 2009, the Bank of Canada lowered its benchmark
interest rate to 1.0% and in February 2009, the Bank of England reduced its
benchmark interest rate to an all-time low of 1.0%. In December 2008, the US
Federal Open Market Committee established a target range for the federal funds
rate of 0% to 0.25%, which it re-affirmed at its most recent meeting.
Governments in all three countries have invested or earmarked significant
amounts of funds to shore up weakened financial institutions, increase the
availability of credit, and provide stimulus for job creation. Despite these
measures, the International Monetary Fund ("IMF") predicts that GDP will
contract by 1.2% in Canada, 1.6% in the US, and 2.8% in the UK in 2009.
Market data
The TSX, TSX Venture, and NASDAQ all experienced gains in trading volumes
during fiscal Q3/09 compared to Q2/09, though trading volumes on the AIM
decreased slightly. Compared to the same quarter last year, the TSX recorded a
substantial increase in trading volumes, while the TSX Venture, NASDAQ and AIM
had lower trading volumes on a year-over-year basis.
Financing values were varied, with the NASDAQ and AIM down substantially
quarter over quarter and year over year, but the TSX and TSX Venture up
significantly compared to Q2/09. Most of this increase can be attributed to
multiple stock offerings by Canadian banks in December - $5.6 billion of the
total $13.8 billion recorded in Q3.
Financing values for all of Canaccord's focus sectors on AIM and the
TSX/TSX Venture were down compared to the same period last year. Most focus
sectors on the AIM and the TSX/TSX Venture were down quarter over quarter,
though mining and media financing values improved on AIM and the oil and gas
sector grew on the TSX/TSX Venture.Trading volume by exchange (billions of shares)
-------------------------------------------------------------------------
Change Change
from from
Fiscal fiscal fiscal
Oct 08 Nov 08 Dec 08 Q3/09 Q2/09 Q3/08
-------------------------------------------------------------------------
TSX 12.2 10.4 10.5 33.1 28.8% 34.0%
TSX Venture 3.7 3.0 4.0 10.7 33.8% (29.1)%
AIM 11.9 7.9 7.8 27.6 (7.4)% (34.4)%
NASDAQ 27.3 18.3 16.5 62.1 7.6% (2.8)%
-------------------------------------------------------------------------
Source: TSX Statistics, LSE AIM Statistics, Thomson One
Total financing value by exchange
-------------------------------------------------------------------------
Change Change
from from
Fiscal fiscal fiscal
Oct 08 Nov 08 Dec 08 Q3/09 Q2/09 Q3/08
-------------------------------------------------------------------------
TSX and
TSX Venture
(C$ billions) 0.5 2.7 10.6 13.8 155.6% (5.5)%
AIM
((pnds stlg)
billions) 0.1 0.1 0.2 0.4 (55.6)% (87.1)%
NASDAQ
(US$
billions) 0.5 1.8 1.1 3.4 (26.1)% (85.5)%
-------------------------------------------------------------------------
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) Oct 08 Nov 08 Dec 08 Q3/09 Q2/09 Q3/08
-------------------------------------------------------------------------
Oil (pnds (pnds (pnds (pnds
and gas stlg) stlg) stlg) stlg)
14.5 6.0 3.1 23.6 (91.2)% (93.2)%
Mining 35.9 4.2 96.6 136.7 63.7% (63.6)%
Pharmac-
eutical
and
Biotech 0.9 0.5 1.2 2.6 (82.8)% (94.0)%
Media 0.8 2.4 0.6 3.8 90.0% (95.3)%
Technology 11.2 1.8 0.1 13.1 (64.2)% (85.6)%
--------------------------------------------------------------
Total (of
relevant
sect- (pnds (pnds (pnds (pnds
ors) stlg) stlg) stlg) stlg)
63.3 14.9 101.6 179.8 (55.7)% (80.8)%
-------------------------------------------------------------------------
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) Oct 08 Nov 08 Dec 08 Q3/09 Q2/09 Q3/08
-------------------------------------------------------------------------
Oil and gas $ 43.5 $ 1,181.8 $ 295.0 $ 1,520.3 44.1% (45.5)%
Mining 46.2 117.9 577.8 741.9 0.1% (84.0)%
Biotech 4.2 - - 4.2 (89.2)% (97.3)%
Media - - - - (100.0)% (100.0)%
Technology - - - - (100.0)% (100.0)%
------------------------------------------------------------
Total (of
relevant
sectors) $ 93.9 $ 1,299.7 $ 872.8 $ 2,266.4 23.0% (74.0)%
-------------------------------------------------------------------------
Source: FP InfomartAbout 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 an 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 600
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 transactions supporting more
than 1,500 institutional relationships around the world, operating
as an integrated team on one common platform.
- With more than 75 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
Third quarter and year-to-date fiscal 2009 summary data(1)
-------------------------------------------------------------------------
Three Nine
(C$ thousands, months ended Quarter- months ended YTD-
except per December 31 over- December 31 over-
share, employee quarter YTD
and % amounts) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Canaccord
Capital Inc.
Revenue
Commission 51,473 74,959 (31.3)% 184,099 226,462 (18.7)%
Investment
banking 20,198 84,910 (76.2)% 130,369 287,266 (54.6)%
Principal
trading 3,781 387 n.m. 9,779 3,275 198.6%
Interest 9,108 16,011 (43.1)% 33,171 48,594 (31.7)%
Other 2,628 7,087 (62.9)% 13,307 22,496 (40.8)%
Total revenue 87,188 183,354 (52.4)% 370,725 588,093 (37.0)%
-------------------------------------------------------------------------
Expenses
Incentive
compensation 43,299 90,778 (52.3)% 177,003 283,600 (37.6)%
Salaries and
benefits 12,817 12,658 1.3% 42,455 39,576 7.3%
Other
overhead
expenses(2) 52,418 51,381 2.0% 154,060 154,203 0.0%
ABCP fair
value
adjust-
ment(3) 6,700 4,226 (58.5)% 6,700 8,625 (22.3)%
Relief
provi-
sion(4) 2,700 - n.m. 2,700 - n.m.
Canaccord
relief
program
fair
value
adjust-
ment(5) 2,647 - n.m. 2,647 - n.m.
Impairment
of goodwill
and intan-
gibles(6) 31,524 - n.m. 31,524 - n.m.
Restructuring
costs(7) 7,520 - n.m. 7,520 - n.m.
Total expenses 159,625 159,043 (0.4)% 424,609 486,004 (12.6)%
-------------------------------------------------------------------------
Income (loss)
before income
taxes (72,437) 24,311 (398.0)% (53,884) 102,089 (152.8)%
Net income
(loss) (62,378) 15,048 (514.5)% (51,317) 66,488 (177.2)%
Earnings (loss)
per share -
diluted ("EPS") (1.27) 0.31 (509.7)% (1.05) 1.37 (176.6)%
Return on
average
common equity (64.3)% 16.2% (80.5)p.p. (18.0)% 23.3% (41.3) p.p.
Book value per
share -
period end 6.37 7.95 (19.9)%
Number of
employees 1,570 1,676 (6.3)%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for ROE, book value per share
and number of employees.
(2) Consists of trading costs, premises and equipment, communication and
technology, interest, general and administrative, amortization and
development costs. Also includes the pre-tax credit provision of
$5.5 million recorded in fiscal Q3/09 as discussed on page 2 of this
MD&A.
(3) Represents the ABCP fair value adjustment for ABCP held by the
Company.
(4) Represents the additional accrual for client relief related to the
ABCP held by eligible clients.
(5) Relates to the fair value adjustment of the ABCP purchased by the
Company under a client relief program
(6) Relates to impairment of CAI and Enermarket goodwill and intangibles.
(7) Consists of staff restructuring costs.
p.p.: percentage points
n.m.: not meaningful
Third quarter and year-to-date fiscal 2009 adjusted data
-------------------------------------------------------------------------
(C$ thousands, except Three months
EPS in $) ended December 31, 2008
-------------------------------------------------------------------------
Net loss
before Net
Revenue Expenses tax loss EPS
-------------------------------------------------------------------------
Per financial
statements 87,188 159,625 (72,437) (62,378) (1.27)
ABCP fair value
adjustment(1) - 6,700 6,700 4,600 0.09
Relief provision(2) - 2,700 2,700 1,854 0.04
Canaccord relief
program fair value
adjustment(3) - 2,647 2,647 1,817 0.03
Impairment of
goodwill and
intangibles(4) - 31,524 31,524 31,524 0.65
Restructuring costs(5) - 7,520 7,520 6,341 0.13
-------------------------------------------------------------------------
Excluding
significant items(6) 87,188 108,534 (21,346) (16,242) (0.33)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(C$ thousands, except Nine months
EPS in $) ended December 31, 2008
-------------------------------------------------------------------------
Net loss
before Net
Revenue Expenses tax loss EPS
-------------------------------------------------------------------------
Per financial
statements 370,725 424,609 (53,884) (51,317) (1.05)
ABCP fair value
adjustment(1) - 6,700 6,700 4,600 0.09
Relief provision(2) - 2,700 2,700 1,854 0.04
Canaccord relief
program fair value
adjustment(3) - 2,647 2,647 1,817 0.03
Impairment of
goodwill and
intangibles(4) - 31,524 31,524 31,524 0.65
Restructuring costs(5) - 7,520 7,520 6,341 0.13
-------------------------------------------------------------------------
Excluding
significant items(6) 370,725 373,518 (2,793) (5,181) (0.11)
-------------------------------------------------------------------------
(1) Represents the Q3/09 ABCP fair value adjustment for ABCP held by the
Company.
(2) Represents the additional accrual for client relief related to the
ABCP held by eligible clients.
(3) Relates to the fair value adjustment of the ABCP purchased by the
Company under a client relief program.
(4) Relates to the impairment of CAI and Enermarket goodwill and
intangibles.
(5) Consists of staff restructuring costs.
(6) Financial statement items that exclude significant items are non-GAAP
measures.
Geographic distribution of revenue(1)
-------------------------------------------------------------------------
Three Nine
months ended Quarter- months ended YTD-
December 31 over- December 31 over-
(C$ thousands, quarter YTD
except % amounts) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Canada 57,854 125,102 (53.8)% 247,482 404,470 (38.8)%
UK 11,752 34,644 (66.1)% 58,567 102,952 (43.1)%
US 16,586 23,135 (28.3)% 60,536 70,294 (13.9)%
Other Foreign
Location 996 473 110.6% 4,140 10,377 (60.1)%
-------------------------------------------------------------------------
Total 87,188 183,354 (52.4)% 370,725 588,093 (37.0)%
-------------------------------------------------------------------------
(1) For a business description of Canaccord's geographic distribution
please refer to the "About Canaccord's Operations" section
on page 13.Third quarter 2009 vs. third 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 December 31, 2008 was $87.2 million,
down $96.2 million compared to the same period a year ago.
For the third quarter of fiscal 2009, revenue generated from commissions
was $51.5 million, a decrease of 31.3% compared to the same period a year ago
largely due to the continuing weak market conditions during the quarter.
Investment banking revenue was $20.2 million, a decrease of $64.7 million
primarily due to lower financing activity related to the heightened investor
anxiety in the markets compared to the same period in the prior year.
Principal trading had revenue of $3.8 million during Q3/09 compared to total
revenue of $0.4 million during Q3/08. The increase in principal trading
revenue was as a result of exiting certain proprietary trading strategies to
mitigate our portfolio risk. Interest revenue was $9.1 million, a decrease of
43.1% mainly due to lower interest rates and smaller clients' receivable
balances. Other revenue decreased by 62.9% or $4.5 million to $2.6 million
compared to the same period in the prior year mainly due to a decrease in
foreign exchange gain.
Third quarter 2009 revenue in Canada was $57.9 million, a decrease of
53.8% or $67.2 million from the same quarter a year ago. Revenue in the UK
decreased by 66.1% to $11.8million compared to the same period a year ago. In
the US, revenue was $16.6 million, a decline of 28.3% compared to Q3/08. Other
Foreign Location revenue increased by $0.5 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 has continued to
impact the global equity markets during the third quarter of fiscal 2009.
Year-to-date fiscal 2009 vs. year-to-date fiscal 2008
Revenue for the nine months ended December 31, 2008 was $370.7 million, a
decline of 37.0% or $217.4 million compared to the same period a year ago.
Revenue generated from commissions decreased by 18.7% to $184.1 million
compared to the prior year largely due to the credit crunch that resulted in
weaker financial markets. Investment banking revenue was $130.4 million,
representing a decrease of 54.6% primarily due to the decline in financing
activity in equity markets across the geographies where we operate.
Principal trading revenue was $9.8 million, representing an increase of
$6.5 million compared to the same period in the prior year. This increase in
revenue was a result of exiting certain proprietary trading strategies to
maintain a lower risk inventory portfolio. Interest revenue was $33.2 million,
a decline of 31.7% due to lower client interest revenue. Other revenue
decreased by $9.2 million to $13.3 million during year-to-date fiscal 2009 as
a result of lower foreign exchange gains.
Year-to-date revenue in Canada was $247.5 million, a drop of 38.8% or
$157.0 million from the same period a year ago. Year-to-date fiscal 2009
revenue in the UK was $58.6 million, a decrease of 43.1% or $44.4 million from
the same period a year ago. Revenue in the US was $60.5 million, representing
a decline of 13.9% or $9.8 million compared to year-to-date fiscal 2008.
Revenue from Other Foreign Location was $4.1 million compared to $10.4 million
in the nine months ended December 31, 2007. The overall decrease in revenue
across the various operations was a result of the decline in global financial
markets during fiscal 2009.Expenses as a percentage of revenue
-------------------------------------------------------------------------
Three Nine
months ended Quarter- months ended YTD-
December 31 over- December 31 over-
(in percentage quarter YTD
points) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Incentive
compensation 49.7% 49.5% 0.2 p.p. 47.7% 48.2% (0.5) p.p.
Salaries and
benefits 14.7% 6.9% 7.8 p.p. 11.5% 6.8% 4.7 p.p.
Other overhead
expenses(1) 60.1% 28.0% 32.1 p.p. 41.6% 26.2% 15.4 p.p.
ABCP fair value
adjustment(2) 7.7% 2.3% 5.4 p.p. 1.8% 1.5% 0.3 p.p.
Relief
provision(3) 3.1% - 3.1 p.p. 0.7% - 0.7 p.p.
Canaccord relief
program fair
value
adjustment(4) 3.0% - 3.0 p.p. 0.7% - 0.7 p.p.
Impairment of
goodwill and
intangibles(5) 36.2% - 36.2 p.p. 8.5% - 8.5 p.p.
Restructuring
costs(6) 8.6% - 8.6 p.p. 2.0% - 2.0 p.p.
-------------------------------------------------------------------------
Total 183.1% 86.7% 96.4 p.p. 114.5% 82.7% 31.8 p.p.
-------------------------------------------------------------------------
(1) Consists of trading costs, premises and equipment, communication and
technology, interest, general and administrative, amortization
and development costs. Also includes the pre-tax credit provision of
$5.5 million as discussed on page 2 of this MD&A.
(2) Represents the ABCP fair value adjustment for ABCP held by the
Company.
(3) Represents the additional accrual for client relief related to the
ABCP held by eligible clients.
(4) Relates to the fair value adjustment of the ABCP purchased by the
Company under a client relief program.
(5) Relates to the impairment of CAI and Enermarket goodwill and
intangibles.
(6) Consists of staff restructuring costs.
p.p.: percentage pointsThird quarter 2009 vs. third quarter 2008
Expenses for the three months ended December 31, 2008 were $159.6
million, a slight increase of 0.4% or $0.6 million from a year ago. Incentive
compensation expense decreased by 52.3% or $47.5 million which is consistent
with the 52.4% drop in total revenue. Total compensation (incentive
compensation plus salaries) as a percentage of consolidated revenue for Q3/09
was 64.4% compared to 56.4% in Q3/08, an increase of 8.0 percentage points.
This increase was attributed to constant salaries and benefits expense
combined with declining revenue.
During the quarter, non-compensation expenses increased by $47.9 million
or 86.1% from $55.6 million in Q3/08 to $103.5 million in Q3/09. This was
mainly a result of the following significant items: ABCP fair value
adjustment, additional accrual for client relief , fair value adjustment of a
client relief program, impairment of CAI and Enermarket goodwill and
intangibles and the restructuring costs recognized in the current quarter. The
additional ABCP fair value non-cash adjustment of $6.7 million pre-tax
resulted from a valuation of the ABCP held by the Company based on current
market conditions. An additional $5.3 million pre-tax charge was recorded in
the current quarter for client relief programs, bringing the total accrual to
$59.5 million. The current period charge included $2.7 million additional
out-of-pocket charges and $2.6 million fair value adjustment regarding ABCP
purchased by the Company under a client relief program. Further information
regarding the Canaccord relief program is provided under the "Asset-backed
Commercial Paper" section. The Company recognized a non-cash $27.5 million
impairment of goodwill and intangibles related to CAI, the US capital markets
reporting unit. A $4.0 million impairment of Enermarket goodwill and
intangibles was recognized to reflect the impact of the deteriorating market
conditions on Enermarket's earnings prospects. The restructuring costs
included the $7.5 million pre-tax for staff restructuring expense which was
slightly higher than anticipated by the Company when it made its announcement
last quarter.
Year-to-date fiscal 2009 vs. year-to-date fiscal 2008
Expenses for the nine months ended December 31, 2008 were $424.6 million,
an overall decrease of $61.4 million or 12.6% from a year ago. Incentive
compensation expense was $177.0 million, a decrease of 37.6%, which was
consistent with the 37.0% decline in total revenue. Incentive compensation as
a percentage of total revenue was 47.7%, compared to 48.2% during year-to-date
fiscal 2008.
Salaries and benefits expense was $42.5 million, an increase of $2.9
million during year-to-date fiscal 2009 compared to the same period a year
ago. Total compensation (incentive compensation plus salaries) as a percentage
of consolidated revenue was 59.2% in fiscal 2009, representing an increase of
4.1 percentage points compared to the same period in fiscal 2008. The increase
was due to an increase in number of staff during the first six months of
fiscal 2009 to enhance our operations and support services. However, the
number of employees decreased during Q3/09 due to the staff restructuring
announced in October 2008, which resulted in a $1.4 million decrease in
salaries and benefits expense between Q2/09 and Q3/09.
The ABCP fair value adjustment, additional accrual for client relief,
fair value adjustment of ABCP purchased by the Company under a client relief
program, impairment of CAI and Enermarket goodwill and intangibles and
restructuring costs were $51.1 million pre-tax in aggregate, which represented
13.7% of total revenue.Other overhead expenses
-------------------------------------------------------------------------
Three Nine
months ended Quarter- months ended YTD-
December 31 over- December 31 over-
(C$ thousands, quarter YTD
except % amounts) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Trading costs 6,708 7,054 (4.9)% 19,746 21,261 (7.1)%
Premises and
equipment 6,549 5,781 13.3% 18,291 16,775 9.0%
Communication
and
technology 6,277 5,611 11.9% 18,979 17,163 10.6%
Interest 2,568 6,574 (60.9)% 9,881 19,155 (48.4)%
General and
adminis-
trative(1) 19,827 17,390 14.0% 58,715 51,416 14.2%
Amortization 2,751 2,197 25.2% 6,865 6,320 8.6%
Development
costs 7,738 6,774 14.2% 21,583 22,113 (2.4)%
-------------------------------------------------------------------------
Total other
overhead
expenses 52,418 51,381 2.0% 154,060 154,203 0.0%
-------------------------------------------------------------------------
(1) Consists of trading costs, premises and equipment, communication and
technology, interest, general and administrative, amortization and
development costs. Also includes the pre-tax credit provision of $5.5
million as discussed on page 2 of this MD&A.Third quarter 2009 vs. third quarter 2008
Other overhead expenses increased 2.0% to $52.4 million for the third
quarter of fiscal 2009 compared to the same period a year ago. Contributing to
the overall increase in other overhead expenses was an increase in general and
administrative expense and communication and technology expense. General and
administrative expense increased by $2.4 million mainly due to the recognition
of a pre-tax credit provision of $5.5 million as announced in Q2/09. Of this
$5.5 million provision, $4.5 million related to our Canadian operations and
$1.0 million related to our UK operations. The $0.7 million increase in
communication and technology expense was mainly due to technological
enhancements incurred during the quarter. This was offset by a decrease in
interest expense of $4.0 million due to lower interest rates and lower client
payable balances.
Net loss for Q3/09 was $62.4 million compared to net income of $15.0
million from a year ago. Diluted loss per share was $1.27 in Q3/09 and diluted
earnings per share was $0.31 in Q3/08. 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 Q3/09 was (64.3)%
compared to ROE of 16.2% a year ago. Book value per diluted share for Q3/09
decreased by 19.9% to $6.37 compared to Q3/08. Income tax recovery was $10.1
million in Q3/09.
Excluding significant items, net loss was $16.2 million in Q3/09 and net
income was $17.8 million in Q3/08. Diluted loss per share was $0.33 in Q3/09
compared to diluted EPS of $0.36 in Q3/08 after excluding significant items.
Year-to-date fiscal 2009 vs. year-to-date fiscal 2008
Other overhead expenses for the nine months ended December 31, 2008 was
$154.1 million, consistent with the prior period overhead expense of $154.2
million. Premises and equipment, communication and technology and general and
administrative expenses all increased during the fiscal 2009 year to date.
Premises and equipment increased by $1.5 million or 9.0% to $18.3 million
during fiscal 2009 year to date partly due to an expansion of premises in
Canada in the current period. The increase was also due to a lower than normal
rental expense in the UK in Q3/08, which resulted from the reversal of a
rental accrual during that period. Communication and technology expense was
$19.0 million, which increased $1.8 million or 10.6%. This increase was mainly
attributed to technological enhancements incurred during the quarter. General
and administrative expense increased to $58.7 million, up $7.3 million
compared to year-to-date figures at Q3/08. The increase in general and
administrative expense for year-to-date fiscal 2009 related mostly to
consultancy fees incurred to upgrade internal infrastructure and an increase
in the credit provision as announced in October 2008 due to the current market
conditions. This increase was offset by a decrease in promotion and travel
expense during the first nine months of fiscal 2009.
The increase in overhead expenses was offset by the decline in interest
expense, which decreased by 48.4% or $9.3 million. The decrease in interest
expense was the result of a drop in clients' payable balances in addition to
lower interest rates.
Net loss for year-to-date fiscal 2009 was $51.3 million, and net income
for the same period a year ago was $66.5 million. Diluted loss per share for
the first nine months of fiscal 2009 was $1.05 compared to diluted EPS for the
first nine months in fiscal 2008 of $1.37. This decrease was due to lower net
income resulting from the negative impact of the credit crunch on the global
markets during fiscal 2009 as well as the share issuance as discussed
previously. ROE was (18.0)% compared to 23.3% a year ago. Book value per
diluted share at the period end was $6.37, a decrease of 19.9% from Q3/08.
Excluding significant items, net loss was $5.2 million for year-to-date
fiscal 2009 compared to net income of $72.2 million year-to-date fiscal 2008.
This resulted in a diluted loss per share of $0.11 in Q3/09 compared to a
diluted EPS of $1.48 at Q3/08.
Income tax recovery was $2.6 million in year-to-date fiscal 2009, a
decrease of $38.2 million. The change was largely due to reduced income. The
year-to-date effective tax rate was 4.8% compared to 34.9% for the same period
last year. The decrease in effective tax rate was due in part to certain
expenses not being deductible for tax purposes, changes in estimates, as well
as a valuation allowance provision against certain future income tax assets.RESULTS OF OPERATIONS
Canaccord Adams(1)
-------------------------------------------------------------------------
Three Nine
(C$ thousands, months ended Quarter- months ended YTD-
except December 31 over- December 31 over-
employees quarter YTD
and % amounts) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Canaccord Adams
Revenue 49,250 109,583 (55.1)% 212,379 353,677 (40.0)%
Expenses
Incentive
compen-
sation 28,857 57,933 (50.2)% 111,384 176,341 (36.8)%
Salaries
and
benefits 3,413 3,275 4.2% 11,555 10,488 10.2%
Other
overhead
expenses(2) 26,027 25,140 3.5% 83,528 78,850 5.9%
ABCP fair
value
adjust-
ment(3) - 1,101 n.m. - 2,247 n.m.
Impairment
of
goodwill
and
intang-
ibles(4) 31,524 - n.m. 31,524 - n.m.
Restruc-
turing
costs(5) 5,949 - n.m. 5,949 - n.m.
-------------------------------------------------------------------------
Total
expenses 95,770 87,449 9.5% 243,940 267,926 (9.0)%
Income (loss)
before
income
taxes(6) (46,520) 22,134 (310.2)% (31,561) 85,751 (136.8)%
Income (loss)
before
significant
items and
income
taxes(7) (9,047) 23,235 (138.9)% 5,912 87,998 (93.3)%
Number of
employees 480 531 (9.6)%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for number of employees and
income before significant items and income taxes.
(2) Includes $1.0 million of the total pre-tax $5.5 million credit
provision as discussed on page 2 of this MD&A
(3) Represents the ABCP fair value adjustment for ABCP held by the
Company.
(4) Relates to impairment of CAI and Enermarket goodwill and intangibles.
(5) Consists of staff restructuring costs.
(6) Income before income taxes excludes allocated overhead expenses that
are included in Corporate and Other segment expenses.
(7) Significant items include ABCP fair value adjustment, impairment of
goodwill and intangibles and restructuring costs.
n.m.: not meaningfulRevenue from Canaccord Adams is generated from commissions and fees
earned in connection with investment banking transactions and institutional
sales and trading activity as well as trading gains and losses from
Canaccord's principal and international trading operations.
Third quarter 2009 vs. third quarter 2008
Total revenue for Canaccord Adams in Q3/09 was $49.3 million, a decline
of $60.3 million from the same quarter a year ago due to challenging market
conditions as described in the "Business Environment" section on page 11.
Revenue from Canadian operations
As a result of these market challenges, our Canadian operations generated
fiscal third quarter 2009 revenue of $20.4 million, a decrease of 60.8%
compared to a year ago. Canaccord Adams' Canadian revenue is made up of the
following revenue streams: capital markets, international trading, registered
trading, and fixed income. The decrease in revenue was mainly attributed to
the drop in capital markets revenue of $30.3 million. International trading
decreased by $0.9 million and registered trading increased by $0.6 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 41.5% of
Canaccord Adams' total revenue.
Revenue from UK operations
Revenue from our UK operations was $11.8 million, a drop of 66.1% from
the same period a year ago due to a general slowdown in the market. Revenue
from UK operations represents 23.9% of Canaccord Adams' total revenue.
Revenue from US operations
In the US, revenue was $16.1 million, a decrease of 28.2% from a year
ago. This represents 32.6% of Canaccord Adams' total revenue. The decrease in
revenue was due to the financial crisis that impacted the equity markets
significantly during the third quarter of fiscal 2009.
Revenue from Other Foreign Location operations
Revenue from Other Foreign Location operations was $1.0 million compared
to revenue of $0.5 million in Q3/08. In any quarter, revenue in this region
represents a small number of transactions and is therefore very irregular.
Revenue from Other Foreign Location operations represents 2.0% of Canaccord
Adams' total revenue.
Expenses
Expenses for Q3/09 were $95.8 million, up $8.3 million compared to the
same period in the prior year. The main contributor to the increase was the
$31.5 million impairment of goodwill and intangibles with $27.5 million
related to CAI and $4.0 million related to Enermarket. Both subsidiaries'
earnings prospects were severely impacted by the credit crisis during the
quarter. The Company also recognized a pre-tax $5.9 million charge in
Canaccord Adams for staff restructuring costs compared to the consolidated
$7.5 million charge.
This increase was offset by the 50.2% or $29.1 million decline in
incentive compensation expense for the quarter, consistent with the 55.1%
decrease in revenue during the quarter. Salary and benefits expense during
Q3/09 remained stable at $3.4 million compared to $3.3 million in Q3/08. The
total compensation expense payout as a percentage of revenue for the quarter
was 65.5%, which represented a 9.6 percentage point increase from Q3/08 mainly
due to the steep decline in revenue combined with a constant salaries and
benefits expense.
Loss before income taxes and corporate overhead allocations in Q3/09 was
$46.5 million and net income before income taxes and corporate overhead
allocation in Q3/08 was $22.1 million. Excluding significant items, loss
before income taxes and corporate overhead allocations in Q3/09 was $9.0
million.
Year-to-date fiscal 2009 vs. year-to-date fiscal 2008
Revenue for Canaccord Adams for the first nine months of fiscal 2009 was
$212.4 million, which decreased $141.3 million from the same period last year
due to declining capital markets in all geographies where we operate.
Revenue from Canadian operations
In Canada, revenue was $91.6 million, a decrease of 47.0% from the same
period a year ago. Within Canada, $70.5 million was derived from investment
banking and equities activity, while $21.1 million was from our international
trading, registered trading 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. Overall, our Canadian revenue represented
43.1% of Canaccord Adams' total revenue.
Revenue from UK operations
Our UK revenue was $58.6 million, down $44.4 million from the same period
a year ago due to slower market conditions. Revenue from our UK operations
represented 27.6% of Canaccord Adams' total revenue.
Revenue from US operations
In the US, revenue was $58.1 million, a decrease of $9.4 million or 13.9%
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 27.4% of Canaccord Adams' total revenue.
Revenue from Other Foreign Location operations
Revenue from Other Foreign Location was $4.1 million, a decrease of $6.2
million compared to Q3/08. Revenue from Other Foreign Location represents 1.9%
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 nine months of fiscal 2009 were $243.9 million, a
decrease of $24.0 million. Incentive compensation was $111.4 million, which
was a decrease of $65.0 million or 36.8% compared to the same period a year
ago. This decline is consistent with the 40.0% drop in total revenue during
the first nine months of the fiscal year.
Salary and benefits expense for year-to-date fiscal 2009 increased by
$1.1 million from a year ago. The total compensation expense payout as a
percentage of revenue also increased by 5.1 percentage points to 57.9% during
year-to-date fiscal 2009. This increase was due to a growth in the number of
employees during the first six months of fiscal 2009. However, in Q3/09,
salaries and benefits expense decreased by $0.5 million compared to Q2/09 as a
result of the staff restructuring announced in October 2008.
The general and administrative expense increased by $4.1 million to $33.2
million for year-to-date fiscal 2009. The general and administrative expense
increase was due to consultancy fees paid to upgrade our internal
infrastructure and an increase in reserve expense. Communication and
technology expenses also increased by approximately $1.3 million mainly due to
technological enhancements incurred during the quarter. This increase was
partially offset by a decrease in promotion and travel expense.
Loss before income taxes and corporate overhead allocations for the
period was $31.6 million, a decrease of $117.3 million from the same period a
year ago. Excluding significant items, the net income before income taxes and
corporate overhead allocations for the first nine months of fiscal 2009 was
$5.9 million.Private Client Services(1)
-------------------------------------------------------------------------
(C$ thousands,
except AUM and AUA,
which are in Three Nine
C$ millions; months ended Quarter- months ended YTD-
employees; December 31 over- December 31 over-
Advisory Teams, quarter YTD
and % amounts) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Revenue 33,532 61,166 (45.2)% 135,229 194,664 (30.5)%
Expenses
Incentive
compensation 14,195 28,443 (50.1)% 61,261 91,474 (33.0)%
Salaries and
benefits 3,057 3,272 (6.6)% 10,315 10,831 (4.8)%
Other overhead
expenses(2) 17,437 16,417 6.2% 43,707 47,014 (7.0)%
Relief
provision(3) 2,700 - n.m. 2,700 - n.m.
Canaccord
relief
program
fair value
adjustment(4) 2,647 - n.m. 2,647 - n.m.
-------------------------------------------------------------------------
Restructuring
costs(5) 180 - n.m. 180 - n.m.
-------------------------------------------------------------------------
Total expenses 40,216 48,132 (16.4)% 120,810 149,319 (19.1)%
Income (loss)
before income
taxes(6) (6,684) 13,034 (151.3)% 14,419 45,345 (68.2)%
Income (loss)
before
significant
items and
income
taxes(6) (1,157) 13,034 (108.9)% 19,946 45,345 (56.0)%
Assets under
management 454 760 (40.3)%
Assets under
administration 9,030 14,860 (39.2)%
Number of
Advisory Teams 347 377 (8.0)%
Number of
employees 725 772 (6.1)%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for AUM, AUA, number of Advisory
Teams, number of employees, and income (loss) before significant
items and income taxes.
(2) Includes $4.5 million of the total pre-tax $5.5 million credit
provision as discussed on page 2 of this MD&A.
(3) Represents the additional accrual for client relief related to the
ABCP held by eligible clients.
(4) Relates to the fair value adjustment of the ABCP purchased by the
Company under a client relief program.
(5) Consists of staff restructuring costs.
(6) Income before income taxes excludes allocated overhead expenses that
are included in Corporate and Other segment expenses.
(7) Significant items include additional accrual for client relief, fair
value adjustment of the ABCP purchased by the Company under a client
relief program and the restructuring costs.
n.m.: not meaningfulRevenue 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.
Third quarter 2009 vs. third quarter 2008
Revenue from Private Client Services was $33.5 million, a decrease of
$27.6 million mainly due to the deteriorating market conditions in North
America during the quarter. AUA decreased by $5.8 billion to $9.0 billion. AUM
decreased by 40.3% year over year to $454 million. The decrease in AUA and AUM
was due to lower market value of assets related to declining global markets in
Q3/09. There were 347 Advisory Teams at the end of the third quarter of fiscal
2009, a decrease of 30 from 377 a year ago. Fee-related revenue as a
percentage of total Private Client Services revenue increased by 3.1
percentage points to 18.4% 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 decreased.
Expenses for Q3/09 were $40.2 million, down $7.9 million or 16.4%. The
decrease in incentive compensation of $14.2 million or 50.1% was the main
contributor to the overall decrease in total expenses during the quarter. This
decline in incentive compensation was consistent with the 45.2% drop in total
revenue. The total compensation expense payout as a percentage of revenue for
the quarter was 51.4%, a decrease of 0.5 percentage points from 51.9% for the
same period a year ago.
The largest decrease in non-compensation expenses was the 66.9% or $3.5
million decline in interest expense due to lower interest rates and smaller
cash balances in our client accounts this year versus last year. This decrease
was offset by an increase in the general and administrative expense of $4.2
million. The general and administrative expense increased to $7.8 million
during Q3/09 mainly due to the recognition of a $4.5 million pre-tax credit
provision against the unsecured balances resulting from deteriorating
financial markets.
The Company also recognized an additional $5.3 million charge for client
relief programs in the current quarter bringing the total pre-tax accrual to
$59.5 million as at December 31, 2008. The current period charge consisted of
$2.7 million additional out-of-pocket charges and $2.6 million fair value
adjustment of ABCP purchased by the Company under a client relief program. The
Canaccord Relief Program was announced in April 2008 and includes the
repurchase of up to $138 million of restructured ABCP at par value from
eligible clients. Additional information is provided in the "Asset-backed
Commercial Paper" section of this MD&A.
Loss before income taxes and corporate overhead allocations for the
quarter was $6.7 million, a decrease of 151.3% or $19.7 million from the same
period a year ago. Excluding significant items, loss before income taxes and
corporate overhead allocations was $1.2 million.
Year-to-date fiscal 2009 vs. year-to-date fiscal 2008
Revenue from Private Client Services was $135.2 million, a decrease of
$59.4 million mainly due to weakening market conditions in North America
during the first nine months of fiscal 2009. Fee-related revenue as a
percentage of total Private Client Services revenue was 17.6% for both
year-to-date fiscal 2009 and fiscal 2008.
Expenses for the nine months ended December 31, 2008 were $120.8 million,
down $28.5 million or 19.1%. The largest decrease in expenses was incentive
compensation expense, which decreased $30.2 million, and interest expense,
which decreased $8.7 million. Incentive compensation declined by 33.0%, which
was in line with the 30.5% 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 nine months of fiscal 2009 was 52.9%, no
change from the same period a year ago. Trading costs also decreased by $1.6
million or 22.9% due to lower trading activity.
The decreases were offset by an increase in the general and
administrative expense of $5.8 million or 63.9%, which was mainly due to an
increase in the credit provision. As discussed above, this expense was
recognized to provide for unsecured balances in client accounts resulting from
current market conditions. The Company also recognized a $5.3 million charge
for client relief as mentioned above.
Income before income taxes and corporate overhead allocations for
year-to-date fiscal 2009 was $14.4 million, a decrease of 68.2% or $30.9
million from the same period a year ago. Excluding significant items, net
income before income taxes and corporate overhead allocations was $19.9
million.Corporate and Other(1)
-------------------------------------------------------------------------
Three Nine
(C$ thousands, months ended Quarter- months ended YTD-
except December 31 over- December 31 over-
employees quarter YTD
and % amounts) 2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Revenue 4,406 12,605 (65.0)% 23,117 39,752 (41.8)%
Expenses
Incentive
compensation 247 4,402 (94.4)% 4,358 15,785 (72.4)%
Salaries and
benefits 6,347 6,111 3.9% 20,585 18,257 12.8%
Other overhead
expenses 8,954 9,824 (8.9)% 26,825 28,339 (5.3)%
ABCP fair
value
adjustment(2) 6,700 3,125 (114.4)% 6,700 6,378 (5.0)%
Restructuring
costs(3) 1,391 - n.m. 1,391 - n.m.
-------------------------------------------------------------------------
Total expenses 23,639 23,462 (0.8)% 59,859 68,759 (12.9)%
Loss before
income
taxes (19,233) (10,857) (77.1)% (36,742) (29,007) (26.7)%
Loss before
significant
items and
income
taxes(4) (11,142) (7,732) (44.1)% (28,651) (22,629) (26.6)%
-------------------------------------------------------------------------
Number of
employees 365 373 (2.1)%
-------------------------------------------------------------------------
(1) Data is considered to be GAAP except for number of employees and loss
before significant items and income taxes.
(2) Represents the ABCP fair value adjustment for ABCP held by the
Company.
(3) Consists of staff restructuring costs.
(4) Significant items include ABCP fair value adjustment and
restructuring costs.
n.m: not meaningfulCanaccord'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.
Third quarter 2009 vs. third quarter 2008
Revenue for the three months ended December 31, 2008 was $4.4 million, a
decrease of $8.2 million from the same quarter a year ago. The change was
mostly related to a decrease in foreign exchange gains compared to the prior
year. Foreign exchange gains declined $5.8 million or 187.3% during the
quarter to a total foreign exchange loss of $2.7 million. Interest revenue
also decreased by $2.7 million or 39.0% compared to the same period a year ago
as a result of lower interest rates.
Fiscal 2009 third quarter expenses were $23.6 million, a decrease of
0.8%. Incentive compensation also decreased by $4.2 million due to lower
profitability of the consolidated group of companies. This decrease was
partially offset by a $1.4 million charge to restructuring costs related to
the firm-wide staff restructuring announced in October 2008 and partially
offset by a $6.7 million ABCP fair value adjustment.
Loss before income taxes was $19.2 million in Q3/09 compared to a net
loss of $10.9 million in Q3/08. Excluding significant items, net loss before
income taxes was $11.1 million.
Year-to-date fiscal 2009 vs. year-to-date fiscal 2008
Revenue was $23.1 million, a decrease of $16.6 million from the same
period a year ago for the same reasons mentioned above.
Expenses for year-to-date fiscal 2009 were $59.9 million, a decrease of
$8.9 million. The decline is mainly due to a decrease in incentive
compensation expense of $11.4 million or 72.4% for the same reasons mentioned
above. This was offset by a $1.4 million increase in restructuring costs that
related to the firm-wide staff restructuring announced in October 2008 and
$6.7 million ABCP fair value adjustment.
Overall, loss before income taxes was $36.7 million compared to a loss of
$29.0 million in the same period a year ago. Excluding significant items, net
loss before income taxes was $28.7 million.
FINANCIAL CONDITION
Below are specific changes in selected balance sheet items.
Assets
Cash and cash equivalents were $684.5 million on December 31, 2008
compared to $435.6 million on March 31, 2008. Refer to the "Liquidity and
Capital Resources" section for more details.
Securities owned were $72.9 million compared with $92.8 million on March
31, 2008. The decrease related mainly to fewer financings that were committed
at December 31, 2008 as well as a decrease in market value of securities.
Accounts receivable were $0.8 billion on December 31, 2008 compared with
$1.4 billion on March 31, 2008. The decrease mainly related to a decrease in
receivable balances from clients and brokers and investment dealers.
Other assets in aggregate were $115.9 million at December 31, 2008
compared with $147.4 at March 31, 2008. The decrease was mainly due to the
impairment of CAI and Enermarket goodwill and intangibles and the ABCP fair
value adjustment, offset by an increase in equipment and leasehold
improvements.
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 December 31, 2008, there was bank indebtedness of $39.0 million compared to
$15.0 million on March 31, 2008.
Accounts payable were $1.2 billion compared to $1.7 billion at March 31,
2008, a decrease of $0.5 billion mainly related to a decrease in payable
balances to clients and brokers and investment dealers.
Other liabilities in aggregate were $87.1 million at December 31, 2008
compared with $38.8 million at March 31, 2008. The change was mainly due to an
increase in corporate and government debt securities sold short as at December
31, 2008.
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2008, Canaccord had credit facilities with banks in
Canada, the UK and the US in the aggregate amount of $491.8 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
$2.8 million (US$2.3 million) as rent guarantees for its leased premises in
Boston, New York and San Francisco. As of December 31, 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
programs. The Canaccord Relief Program was successfully completed on January
30, 2009 without drawing the two letters of credit and, as a result, they have
been subsequently cancelled.
LIQUIDITY AND CAPITAL RESOURCES
Canaccord has a capital structure comprising share capital, retained
earnings and accumulated other comprehensive losses. On December 31, 2008,
cash and cash equivalents net of call loans were $645.4 million, an increase
of $224.8 million from $420.6 million as of March 31, 2008. During the quarter
ended December 31, 2008, financing activities provided cash in the amount of
$1.9 million, which was primarily due to a decrease in unvested common share
purchase loans. Investing activities used cash in the amount of $5.3 million
for the purchase of equipment and leasehold improvements. Operating activities
generated cash in the amount of $130.9 million for the quarter, which was due
to net change in non-cash working capital items, net loss and items not
affecting cash.
Canaccord's business requires capital for operating and regulatory
purposes. The majority of current assets reflected on Canaccord's balance
sheet are highly liquid. The majority of the positions held as securities
owned are readily marketable and all are recorded at their market value. The
market value of these securities fluctuates daily as factors such as changes
in market conditions, economic conditions and investor outlook affect market
prices. Clients' receivable balances are secured by readily marketable
securities and are reviewed daily for impairment in value and collectibility.
Receivable and payable balances from brokers and dealers represent the
following: current open transactions that generally settle within the normal
three-day settlement cycle; collateralized securities borrowed and/or loaned
in transactions that can be closed within a few days on demand; and balances
on behalf of introducing brokers representing net balances in connection with
their client accounts.
Canaccord is committed to minimum lease payments for premises and
equipment that extend beyond the next five years. The following table
summarizes the approximate amount of Canaccord's consolidated long-term
contractual obligations as of December 31, 2008.-------------------------------------------------------------------------
Contractual obligation payments due by period
Fiscal Fiscal
2011- 2013-
Fiscal fiscal fiscal
(C$ thousands) Total 2010 2012 2014 Thereafter
-------------------------------------------------------------------------
Premises and
equipment
operating leases 160,457 26,928 42,387 34,246 56,896
-------------------------------------------------------------------------
OUTSTANDING SHARE DATA
-------------------------------------------------------------------------
Outstanding shares as of December 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Issued shares excluding unvested shares(1) 49,108,237 44,191,145
Issued shares outstanding(2) 54,636,139 47,835,051
Diluted shares(3) 56,218,193 49,095,816
Average shares outstanding - basic 48,656,116 44,670,881
Average shares outstanding - diluted(4) 54,329,767 48,420,575
-------------------------------------------------------------------------
(1) Excludes 2,810,989 unvested shares that are outstanding relating to
share purchase loans for recruitment and retention programs and
2,716,913 unvested shares purchased by the employee benefit trust for
the LTIP.
(2) Includes 2,810,989 unvested shares that are outstanding relating to
share purchase loans for recruitment and retention programs and
2,716,913 unvested shares purchased by the employee benefit trust for
the LTIP.
(3) Includes dilutive earned shares under our stock-based compensation
plans.
(4) This is the diluted share number used to calculate diluted EPS.At December 31, 2008, Canaccord had 54,636,139 common shares issued and
outstanding, an increase of 6,801,088 common shares from December 31, 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 are being used for
business development and general corporate purposes.
STOCK-BASED COMPENSATION PLANS
Adams Harkness
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, and a retention plan was
established. This retention plan provided for the issuance of up to 1,118,952
common shares after a three-year vesting period, which ended on December 31,
2008. As of December 31, 2008, 616,205 shares vested and this number was based
on revenue earned by Canaccord Adams Inc. during the vesting period. As
revenue levels were achieved during the vesting period, the associated
proportion of the retention payment was recorded as a development cost and the
applicable number of retention shares was included in weighted average diluted
common shares outstanding.
On December 15, 2008, the Company issued 53,384 common shares to former
employees of Adams Harkness as required by the retention plan upon vesting.
The common shares were issued at $10.25 per share for an aggregate value of
$547,186.
The Company issued 616,205 common shares in February 2009 to employees
who received awards under the plan and the plan terminated on December 31,
2008.
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 that will be used by a trustee to purchase
common shares of the Company on the open market which 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 December 31, 2008, forward contracts outstanding to sell US dollars had a
notional amount of US$0.6 million, down from US$7.0 million a year ago.
Forward contracts outstanding to buy US dollars had a notional amount of
US$2.3 million, down from US$11.0 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 fair value with unrealized
gains and losses recognized in net income. In the case of publicly traded
securities, fair value is determined on the basis of market prices from
independent sources, such as listed exchange prices or dealer price
quotations. Adjustments to market prices are made for liquidity, relative to
the size of the position, holding periods and other resale restrictions, if
applicable. Investments in illiquid or non-publicly traded securities
categorized as held for trading are measured at fair value determined by a
valuation model. There is inherent uncertainty and imprecision in estimating
the factors that can affect value and in estimating values generally. The
extent to which valuation estimates differ from actual results will affect the
amount of revenue or loss recorded for a particular security position in any
given period. With Canaccord's security holdings consisting primarily of
publicly traded securities, our procedures for obtaining market prices from
independent sources, the validation of estimates through actual settlement of
transactions and the consistent application of our approach from period to
period, we believe that the estimates of fair value recorded are reasonable.
Asset-backed commercial paper
There is a significant amount of uncertainty in estimating the amount and
timing of cash flows associated with the Company's holdings in ABCP. 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' receivables, loans,
advances and other receivables. Provisions in connection with legal matters
are determined on the basis of management's judgment in consultation with
legal counsel, considering such factors as the amount of the claim, the
possibility of wrongdoing by an employee of Canaccord and precedents. 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. Accounting standards require a valuation allowance when it
is more likely than not that all or a portion of a future income tax asset
will not be realized prior to its expiration. Although realization is not
assured, Canaccord, believes that, based on all evidence, it is more likely
than not that all of the future income tax assets, net of the valuation
allowance, will be realized. Canaccord believes that adequate provisions for
income taxes have been made for all years.
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.
The purchase of Adams Harkness (renamed Canaccord Adams Inc.) resulted in
the recognition of $27.5 million of goodwill and intangibles which represented
the cost of the acquisition in excess of the fair value of the net tangible
assets at the time of purchase. Canaccord Adams Inc. primarily provides
capital markets services to institutional and corporate clients in the US.
This reporting unit has experienced a decline in business activity and revenue
with the continued deterioration in the financial markets during Q3/09. Due to
the adverse changes in the business environment, the Company performed a
valuation to assess the fair value of this reporting unit compared to the
carrying value. The results of this valuation led to the recognition of a
charge for the impairment of goodwill and other intangible assets related to
our US capital markets business of $27.5 million. The impairment charge was
determined based on a valuation of Canaccord Adams Inc. using an expected
discounted cash flow analysis and certain market value indicators. 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.
The Company also recorded a charge of $4.0 million to recognize an
impairment of the goodwill and intangible related to Enermarket. An impairment
test was performed and the results concluded that the fair value was
significantly lower than the carrying amount due to the weak market
conditions. Enermarket's primary business is to provide advisory services to
companies in the oil and gas industry, and its earnings prospects were
negatively impacted by the steep decline in oil prices and volatile financial
markets.
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, net of estimated forfeitures, 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 - Presentation", 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 December 31,
2008 unaudited interim consolidated financial statements.
Financial Instruments - Disclosures and Presentation
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 December 31, 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
December 31, 2008 unaudited interim consolidated financial statements.
ASSET-BACKED COMMERCIAL PAPER
At December 31, 2008, the Company held ABCP with a par value of $42.7
million and an estimated fair value of $23.2 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 (the "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 the
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. On December 24, 2008, the Committee
announced that an agreement had been reached with all key stakeholders,
including the governments of Canada, Quebec, Ontario and Alberta, to provide
additional margin facilities to support the Plan and certain further
enhancements to the Plan.
On January 12, 2009, the Ontario Superior Court issued the final
implementation order in the ABCP restructuring process. The restructuring
closed on January 21, 2009. The exchange of restructured ABCP notes was also
completed on January 21, 2009. A first installment of interest (to August 31,
2008) was paid on the same day. The balance of the interest is to be paid in
subsequent installments, and the amounts and timing are still to be
determined. Restructuring fees already incurred and a reserve for additional
restructuring fees were deducted from this first interest payment.
The Plan as amended provided for a declaratory release that was effective
on implementation of the Plan and that, with the closing of the Canaccord
Relief Program, has resulted in the release of all existing and future
ABCP-related claims against the Company.
There is no assurance that the validity or effectiveness of the
declaratory release will not be challenged in actions commenced against the
Company and others. Any determination that the declaratory release is invalid
or ineffective could materially adversely affect the Company's business,
results of operations and financial condition.
The Company estimates the fair value of its ABCP by discounting expected
future cash flows on a probability weighted basis considering the best
available data at period end. 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 December 31,
2008 with revised assumptions based on current market conditions and, as a
result, an additional $6.7 million of fair value adjustment was recorded.DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL
REPORTINGDisclosure 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 December 31, 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 February 11, 2009, the Board of Directors considered the dividend
policy in the context of the market environment and its business activity and
approved a 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 become available.
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 general capital markets activity, which dropped significantly
during Q3/09 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 December 31, 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 EPS Fiscal 2009 Fiscal 2008
in $) ----------- -----------
Q3 Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Revenue
Canaccord Adams 49,250 58,336 104,793 77,965 109,583
Private Client Services 33,532 43,844 57,853 54,463 61,166
Corporate and Other 4,406 8,649 10,062 11,018 12,605
-------------------------------------------------------------------------
Total revenue 87,188 110,829 172,708 143,446 183,354
Net income (loss) (62,378) (5,398) 16,459 (35,154) 15,048
EPS - basic (1.27) (0.11) 0.35 (0.80) 0.34
EPS - diluted (1.27) (0.11) 0.31 (0.80) 0.31
-------------------------------------------------------------------------
----------------------------------------------------------------
(C$ thousands, except EPS Fiscal 2008 Fiscal 2007
in $) ----------- -----------
Q2 Q1 Q4 Q3
----------------------------------------------------------------
Revenue
Canaccord Adams 89,071 155,023 130,151 101,427
Private Client Services 57,415 76,083 75,876 68,831
Corporate and Other 12,383 14,764 10,416 8,055
----------------------------------------------------------------
Total revenue 158,869 245,870 216,443 178,313
Net income (loss) 12,411 39,029 26,016 23,692
EPS - basic 0.28 0.86 0.57 0.51
EPS - diluted 0.26 0.80 0.54 0.49
----------------------------------------------------------------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 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 activities 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
December 31, 2008 unaudited 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 nine months ended December 31, 2008
(Expressed in Canadian dollars)
Canaccord Capital Inc.
INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands of dollars)
As at December 31, March 31, December 31,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents 684,463 435,649 421,783
Securities owned (note 3) 72,938 92,796 164,388
Accounts receivable
(notes 5 and 12) 806,402 1,422,917 1,260,869
Income taxes recoverable 29,887 11,083 2,758
Future income taxes 13,657 28,207 10,630
-------------------------------------------------------------------------
Total current assets 1,607,347 1,990,652 1,860,428
Investment (note 6) 5,000 5,000 5,000
Investment in asset-backed
commercial paper (note 7) 23,160 29,860 34,501
Equipment and leasehold
improvements 44,178 40,686 39,939
Goodwill and other intangible
assets (note 8) - 32,520 32,873
-------------------------------------------------------------------------
1,679,685 2,098,718 1,972,741
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness 39,040 15,038 -
Securities sold short (note 3) 62,151 13,757 96,383
Accounts payable and accrued
liabilities (notes 5 and 12) 1,195,533 1,687,479 1,461,130
Subordinated debt (note 9) 25,000 25,000 25,000
-------------------------------------------------------------------------
Total current liabilities 1,321,724 1,741,274 1,582,513
-------------------------------------------------------------------------
Commitments and contingencies
(note 15)
Shareholders' equity
Share capital (note 10) 218,738 145,166 141,370
Retained earnings 157,823 222,597 263,571
Accumulated other comprehensive
losses (18,600) (10,319) (14,713)
-------------------------------------------------------------------------
Total shareholders' equity 357,961 357,444 390,228
-------------------------------------------------------------------------
1,679,685 2,098,718 1,972,741
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Canaccord Capital Inc.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands of dollars,
except per share amounts)
For the three For the nine
months ended months ended
--------------------- ---------------------
December December December December
31, 2008 31, 2007 31, 2008 31, 2007
$ $ $ $
--------------------------------------------------- ---------------------
REVENUE
Commission 51,473 74,959 184,099 226,462
Investment banking 20,198 84,910 130,369 287,266
Principal trading 3,781 387 9,779 3,275
Interest 9,108 16,011 33,171 48,594
Other 2,628 7,087 13,307 22,496
--------------------------------------------------- ---------------------
87,188 183,354 370,725 588,093
--------------------------------------------------- ---------------------
EXPENSES
Incentive compensation 43,299 90,778 177,003 283,600
Salaries and benefits 12,817 12,658 42,455 39,576
Trading costs 6,708 7,054 19,746 21,261
Premises and equipment 6,549 5,781 18,291 16,775
Communication and technology 6,277 5,611 18,979 17,163
Interest 2,568 6,574 9,881 19,155
General and administrative 19,827 17,390 58,715 51,416
Amortization 2,751 2,197 6,865 6,320
Development costs 7,738 6,774 21,583 22,113
Asset-backed commercial paper
fair value adjustment (note 7) 6,700 4,226 6,700 8,625
Canaccord relief program
(note 16) 5,347 - 5,347 -
Impairment of goodwill and
intangibles (note 8) 31,524 - 31,524 -
Restructuring costs (note 17) 7,520 - 7,520 -
--------------------------------------------------- ---------------------
159,625 159,043 424,609 486,004
--------------------------------------------------- ---------------------
Income (loss) before income
taxes (72,437) 24,311 (53,884) 102,089
Income tax expense (recovery)
Current (7,769) 10,395 (17,910) 37,775
Future (2,290) (1,132) 15,343 (2,174)
--------------------------------------------------- ---------------------
(10,059) 9,263 (2,567) 35,601
--------------------------------------------------- ---------------------
--------------------------------------------------- ---------------------
Net income (loss)
for the period (62,378) 15,048 (51,317) 66,488
--------------------------------------------------- ---------------------
--------------------------------------------------- ---------------------
Basic earnings (loss) per
share (note 10 (iv)) (1.27) 0.34 (1.05) 1.49
Diluted earnings (loss) per
share (note 10 (iv)) (1.27) 0.31 (1.05) 1.37
--------------------------------------------------- ---------------------
--------------------------------------------------- ---------------------
See accompanying notes
Canaccord Capital Inc.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (Unaudited)
As at and for the nine months (in thousands of dollars)
ended December 31, 2008 December 31, March 31, December 31,
and 2007 and for the year 2008 2008 2007
ended March 31, 2008 $ $ $
-------------------------------------------------------------------------
Common shares, opening 111,142 147,900 147,900
Shares issued 69,979 495 495
Shares cancelled (442) (127) (127)
Acquisition of common shares for
long term incentive plan
(note 11) (13,839) (27,247) (23,335)
Release of vested common shares
from employee benefit trust
(note 11) 5,994 - -
Unvested share purchase loans 3,162 (9,879) (9,285)
-------------------------------------------------------------------------
Common shares, closing 175,996 111,142 115,648
-------------------------------------------------------------------------
Contributed surplus, opening 34,024 8,396 8,396
Excess on redemption of common
shares (340) (369) (369)
Shortfall on distribution of
acquired common shares - (29) (29)
Stock-based compensation
(note 11) 9,509 20,776 14,841
Unvested share purchase loans (451) 5,250 2,883
-------------------------------------------------------------------------
Contributed surplus, closing 42,742 32,024 25,722
-------------------------------------------------------------------------
Share capital 218,738 145,166 141,370
-------------------------------------------------------------------------
Retained earnings, opening 222,597 213,659 213,659
Net income (loss) for the period (51,317) 31,334 66,488
Cash dividends (13,457) (22,396) (16,576)
-------------------------------------------------------------------------
Retained earnings, closing 157,823 222,597 263,571
-------------------------------------------------------------------------
Accumulated other comprehensive
income (loss), opening (10,319) 2,236 2,236
Other comprehensive losses (8,281) (12,555) (16,949)
-------------------------------------------------------------------------
Accumulated other comprehensive
losses, closing (18,600) (10,319) (14,713)
-------------------------------------------------------------------------
Shareholders' equity 357,961 357,444 390,228
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands of dollars)
For the three For the nine
months ended months ended
--------------------- ---------------------
December December December December
31, 2008 31, 2007 31, 2008 31, 2007
$ $ $ $
--------------------------------------------------- ---------------------
Net income (loss) for the
period (62,378) 15,048 (51,317) 66,488
Other comprehensive loss,
net of taxes
Net change in unrealized
losses on translation of
self-sustaining foreign
operations (1,519) (3,149) (8,281) (16,949)
--------------------------------------------------- ---------------------
Comprehensive income (loss)
for the period (63,897) 11,899 (59,598) 49,539
--------------------------------------------------- ---------------------
--------------------------------------------------- ---------------------
See accompanying notes
Canaccord Capital Inc.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands of dollars)
For the three For the nine
months ended months ended
--------------------- ---------------------
December December December December
31, 2008 31, 2007 31, 2008 31, 2007
$ $ $ $
--------------------------------------------------- ---------------------
OPERATING ACTIVITIES
Net income (loss) for the
period (62,378) 15,048 (51,317) 66,488
Items not affecting cash
Amortization 2,751 2,197 6,865 6,320
Stock-based compensation
expense 5,542 5,813 16,122 13,834
Future income tax (recovery)
expense (2,290) 41 15,343 123
Impairment of goodwill
and intangibles 31,524 - 31,524 -
Asset-backed commercial
paper fair value
adjustment 6,700 4,226 6,700 8,625
Changes in non-cash working
capital
Decrease (increase) in
securities owned (16,974) 28,165 19,251 148,239
Decrease in accounts
receivable 425,012 514,899 606,405 350,887
Increase in income taxes
receivable (9,295) - (17,614) -
Increase in securities
sold short 46,927 47,602 48,351 55,216
Decrease in accounts
payable and accrued
liabilities (296,629) (508,963) (490,610) (640,422)
Decrease in income taxes
payable - (3,322) - (15,710)
--------------------------------------------------- ---------------------
Cash provided by (used in)
operating activities 130,890 105,706 191,020 (6,400)
--------------------------------------------------- ---------------------
FINANCING ACTIVITIES
Issuance of shares for cash
net of issuance costs - 48 66,462 495
Purchase and cancellation
of shares - 1,214 (782) (6,402)
Decrease (increase) in
unvested common share
purchase loans 1,936 (497) 2,711 (497)
Acquisition of common shares
for long term incentive plan - (5,040) (13,839) (23,335)
Dividends paid - (5,856) (13,457) (16,576)
--------------------------------------------------- ---------------------
Cash provided by (used in)
financing activities 1,936 (10,131) 41,095 (46,315)
--------------------------------------------------- ---------------------
INVESTING ACTIVITIES
Purchase of equipment and
leasehold improvements (5,267) (2,116) (8,024) (9,506)
Acquisition of investment - - - (5,000)
--------------------------------------------------- ---------------------
Cash used in investing
activities (5,267) (2,116) (8,024) (14,506)
--------------------------------------------------- ---------------------
Effect of foreign exchange
on cash balances 3,396 (3,226) 721 (17,636)
--------------------------------------------------- ---------------------
Increase (decrease) in cash
position 130,955 90,233 224,812 (84,857)
Cash position, beginning
of period 514,468 331,550 420,611 506,640
--------------------------------------------------- ---------------------
Cash position, end of period 645,423 421,783 645,423 421,783
--------------------------------------------------- ---------------------
Cash position is comprised of:
Cash and cash equivalents 684,463 421,783 684,463 421,783
Bank indebtedness (39,040) - (39,040) -
--------------------------------------------------- ---------------------
645,423 421,783 645,423 421,783
--------------------------------------------------- ---------------------
Supplemental cash flow
information
Interest paid 2,508 6,579 9,775 19,130
Income taxes paid 3,420 13,458 6,256 54,334
--------------------------------------------------- ---------------------
--------------------------------------------------- ---------------------
See accompanying notes
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the three and nine months (in thousands of dollars, except
ended December 31, 2008 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
December 31, 2008 March 31, 2008 December 31, 2007
------------------- ------------------- -------------------
Secur- Secur- Secur-
Secur- ities Secur- ities Secur- ities
ities sold ities sold ities sold
owned short owned short owned short
$ $ $ $ $ $
-------------------------------------------------------------------------
Corporate and
government
debt 48,385 58,137 34,433 5,106 98,274 84,484
Equities and
convertible
debentures 24,553 4,014 58,363 8,651 66,114 11,899
-------------------------------------------------------------------------
72,938 62,151 92,796 13,757 164,388 96,383
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at December 31, 2008, corporate and government debt maturities range
from 2009 to 2049 (March 31, 2008 - 2008 to 2053 and December 31, 2007 -
2008 to 2054) and bear interest ranging from 2.70% to 11.50% (March 31,
2008 - 2.85% to 11.60% and December 31, 2007 - 2.85% to 11.60%).
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. The fair value is determined by utilizing valuation
techniques if quoted market prices do not exist. 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 is 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
receivables, and accounts payable and accrued liabilities, bank
indebtedness 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 receivable. 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 December 31, 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 December 31, 2008, the allowance for doubtful accounts was $12.3
million (March 31, 2008 - $5.8 million; December 31, 2007 - $5.8 million)
The Company is also exposed to the risk that counterparties to
transactions will not fulfill their obligations. Counterparties primarily
include investment dealers, clearing agencies, banks and other financial
institutions. The Company does not rely entirely on ratings assigned by
credit rating agencies in evaluating counterparties' risks. The Company
mitigates credit risk by performing its own due diligence assessments on
the counterparties, obtaining and analyzing information regarding the
structure of the financial instruments, and keeping current with new
innovations in the market. The Company also 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 December 31, 2008 and 2007 and March 31, 2008, the Company's most
significant counterparty concentrations were 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, including short-term debt
instruments included in cash and cash equivalents, 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 December 31, 2008:
Financial liability Carrying amount Contractual term to maturity
$
-------------------------------------------------------------------------
Bank indebtedness 39,040 Due on demand
Accounts payable and
accrued liabilities 1,195,533 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 activities 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.
The Company has recorded fair value adjustments 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. This valuation was updated with the best
available data at December 31, 2008 and the carrying amount of the ABCP
was adjusted to reflect any changes in the estimate. The fair value of
ABCP would decrease by a further $1.3 million if the discount rate used
was to increase by 100 basis points. Detailed information is disclosed in
Note 7.
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 Effect
of a 10% of a 10%
increase in decrease in
Financial Carrying fair value fair value
instrument value on net income on net income
$ $ $
-------------------------------------------------------------------------
Securities owned,
net of securities
sold short 10,787 372 (372)
Investment in ABCP 23,160 1,598 (1,598)
Investment(1) 5,000 n/a (345)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Investment (Note 6) is classified as available for sale and carried
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, net brokers and investment dealers' 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 December 31, 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 effect of
a 100 bps a 100 bps
increase in decrease in
Carrying interest interest
value rates rates
$ $ $
-------------------------------------------------------------------------
Cash and cash
equivalents, net
of bank
indebtedness 645,423 1,113 (1,113)
Clients' payable,
net 556,053 (959) 959
RRSP cash balances
held in trust 345,368 596 (596)
Brokers' and
investment dealers'
payable, net 57,796 (247) 247
Subordinated debt 25,000 (43) 43
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 fluctuation
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 10% 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 Effect of Effect of
a 10% a 10% a 10% a 10%
increase in decrease in increase in decrease in
foreign foreign foreign foreign
exchange exchange exchange exchange
rate on rate on rate on rate on
net income net income OCI OCI
$ $ $ $
-------------------------------------------------------------------------
US dollar (5,936) 5,936 (19) 19
Pound sterling (256) 256 12,613 (12,613)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 reporting
period.
Forward contracts outstanding at December 31, 2008:
Notional amounts Average price Maturity Fair value
(millions of USD) (CAD/USD) (millions of USD)
-------------------------------------------------------------------------
To sell
US dollars $0.6 $1.28 January 2, $0.1
2009
To buy
US dollars 2.3 1.22 January 2, (0.1)
2009
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Forward contracts outstanding at March 31, 2008:
Notional amounts Average price Maturity Fair value
(millions of USD) (CAD/USD) (millions 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 December 31, 2007:
Notional amounts Average price Maturity Fair value
(millions of USD) (CAD/USD) (millions of USD)
-------------------------------------------------------------------------
To sell
US dollars $7.00 $0.99 January 3, $0.1
2008
To buy
US dollars 11.00 0.99 January 3, (0.1)
2008
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 December 31, 2008, the floating rates for equities and bonds
were 1.26% and 1.216%, respectively (March 31, 2008 - 1.32% and 2.95%,
respectively, and December 31, 2007 - 1.32% and 2.95%, respectively).
Cash Securities
Cash Securities
-------------------------- --------------------------
Loaned or Borrowed or Loaned or Borrowed or
delivered as received as delivered as received as
collateral collateral collateral collateral
$ $ $ $
-------------------------------------------------------------------------
December 31, 2008 88,894 12,812 597 102,901
March 31, 2008 188,654 84,257 13,541 279,550
December 31, 2007 182,491 66,982 7,656 254,716
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Lines of credit
The Company has credit facilities with banks in Canada, the US and the UK
for an aggregate amount of $491.8 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 December 31, 2008, the Company had
bank indebtedness of $39.0 million outstanding.
A subsidiary of the Company has also entered into secured irrevocable
standby letters of credit from a financial institution totalling
$2.8 million (US$2.3 million) as rent guarantees for its leased premises
in Boston, New York and San Francisco. As of December 31, 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 programs. The Canaccord Relief Program was successfully completed
on January 30, 2009 (Note 18) without drawing the two letters of credit
and, as a result, they have been subsequently cancelled.
5. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts receivable
December 31, March 31, December 31,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Brokers and investment dealers 205,333 425,038 383,120
Clients 214,246 555,935 499,739
RRSP cash balances held in trust 345,368 400,603 331,902
Other 41,455 41,341 46,108
-------------------------------------------------------------------------
806,402 1,422,917 1,260,869
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts payable and accrued liabilities
December 31, March 31, December 31,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Brokers and investment dealers 263,129 407,193 391,091
Clients 770,299 1,037,860 902,226
Other 162,105 242,426 167,813
-------------------------------------------------------------------------
1,195,533 1,687,479 1,461,130
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accounts payable to clients include $345.4 million (March 31, 2008 -
$400.6 million and December 31, 2007 - $331.9 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 (December 31, 2008:
6.50%-7.00% and 0.25%-0.50%, respectively; March 31, 2008: 7.25%-8.00%
and 0.25%-2.25%, respectively; and December 31, 2007: 8.00%-9.25% and
1.13%-3.00%, respectively).
6. INVESTMENT
December 31, March 31, December 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
December 31, March 31, December 31,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Investment in asset-backed
commercial paper 23,160 29,860 34,501
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At December 31, 2008, the Company held ABCP with a par value of
$42.7 million and an estimated fair value of $23.2 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 (the "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 the 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.
On December 24, 2008, the Committee announced that an agreement had been
reached with all key stakeholders, including the governments of Canada,
Quebec, Ontario and Alberta to provide additional margin facilities to
support the Plan and finalized certain enhancements to the Plan.
On January 12, 2009, the Ontario Superior Court issued the final
implementation order in the ABCP restructuring process. The restructuring
closed on January 21, 2009. The exchange of restructured ABCP notes was
completed on January 21, 2009. A first installment of interest (to
August 31, 2008) was also paid on the same day. The balance of the
interest is to be paid in subsequent installments, and the amounts and
timing are still to be determined. Restructuring fees already incurred
and a reserve for additional restructuring fees were deducted from this
first interest payment.
The Plan as amended provided for a declaratory release that was effective
on implementation of the Plan and that, with the closing of the Canaccord
Relief Program, resulted in the release of all existing and future ABCP-
related claims against the Company.
There is no assurance that the validity or effectiveness of the
declaratory release will not be challenged in actions commenced against
the Company and others. Any determination that the declaratory release is
invalid or ineffective could materially adversely affect the Company's
business, results of operations and financial condition.
Based on the information contained in the Information Statement and other
public information available at December 31, 2008, the Company estimated
that it would receive upon completion of the restructuring in January
2009:
- $38.9 million of senior Master Asset Vehicle MAV II Class A-1 and A-2
Notes and subordinated Class B and Class C Notes
- $18.6 million of Class A-1 Notes
- $16.2 million of Class A-2 Notes
- $2.9 million of Class B Notes
- $1.2 million of Class C Notes
Class A-1, Class A-2 and Class B Notes will bear interest at the
Bankers' Acceptance ("BA") rate less 0.50% and Class C Notes will
bear interest at the BA rate plus 20%. These notes have legal
maturity dates in 2056 but the expected repayment date of the Class
A-1 and A-2 notes is January 22, 2017. The senior notes (Class A-1
and Class A-2) have been rated "A" by DBRS Limited while the
subordinated notes (Class B and C) are unrated.
- $1.3 million of MAV III Traditional Assets ("TA") Tracking Notes
The TA Tracking Notes will bear interest at a rate based on the net
rate of return generated by the underlying tracking assets. The
maturities of the notes are based on the maturities of the underlying
assets. Some of the TA Tracking Notes are rated as follows:
- Class 5A: AAA
- Class 7A: AAA
- Class 10A: AA (high)
- Class 12A: AA (high)
- Class 15A: AAA
- Class 16A: A (low)
- $2.5 million of MAV II Ineligible Asset ("IA") Notes
The IA Tracking Notes will bear interest at a rate based on the net
rate of return generated by the underlying tracking assets. The
maturities of the notes are based on the maturities of the underlying
assets. These 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 at
December 31, 2008. 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 at December 31, 2008 include:
Weighted average interest rate 1.53%
Weighted average discount rate 6.89%
Maturity of notes 8 years to 19 years
Credit losses 10% to 80%
If these assumptions were to change, the fair value of ABCP could change
significantly. The Company recorded a fair value adjustment of
$12.8 million during the year ended March 31, 2008. The valuation model
was updated at December 31, 2008 with revised assumptions based on
current market conditions and, as a result, an additional $6.7 million
fair value adjustment was recorded for the period ended December 31,
2008.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
December 31, March 31, December 31,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Goodwill
Balance at beginning of period 30,070 30,070 30,070
Impairment (30,070) - -
-------------------------------------------------------------------------
Balance at end of period - 30,070 30,070
-------------------------------------------------------------------------
Other intangible assets
Balance at beginning of period 1,745 3,863 3,863
Amortization (291) (1,413) (1,060)
Impairment (1,454) - -
-------------------------------------------------------------------------
Balance at end of period - 2,450 2,803
-------------------------------------------------------------------------
- 32,520 32,873
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
In accordance with CICA Handbook Section 3062 "Goodwill and other
intangible assets", the Company is required to annually evaluate goodwill
to determine whether it is impaired. Goodwill should also be tested for
impairment 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. 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.
The purchase of Adams Harkness Financial Group, Inc.(renamed Canaccord
Adams Inc.) resulted in the recognition of $27.5 million of goodwill and
intangibles which represented the cost of the acquisition in excess of
the fair value of the net tangible assets at the time of purchase.
Canaccord Adams Inc. primarily provides capital markets services to
institutional and corporate clients in the US. With the rapid
deterioration in the market conditions and uncertainties in the financial
markets, this reporting unit experienced a decline in business activity
and revenue. Due to these adverse changes in the business environment,
the Company performed a valuation to assess the fair value of this
reporting unit compared to the carrying value. The results of this
valuation led to the recognition of a charge for the impairment of
goodwill and other intangible assets related to Canaccord Adams Inc. of
$27.5 million. The impairment charge was determined based on a valuation
of Canaccord Adams Inc. using an expected discounted cash flow analysis
and certain market value indicators. 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.
The Company also recorded a charge of $4.0 million to recognize the
impairment of the goodwill and intangibles related to Canaccord
Enermarket Ltd. ("Enermarket"). Enermarket's primary business is to
provide advisory services to companies in the oil and gas industry, and
its earnings prospects were negatively impacted by the volatile financial
markets conditions, including the recent steep decline in oil prices.
9. SUBORDINATED DEBT
December 31, March 31, December 31,
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
December 31, March 31, December 31,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Share capital
Common shares 243,336 173,799 173,799
Unvested share purchase loans (32,248) (35,410) (34,816)
Acquisition of common shares
for long term incentive plan
(note 11) (35,092) (27,247) (23,335)
Contributed surplus 42,742 34,024 25,722
-------------------------------------------------------------------------
218,738 145,166 141,370
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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, December 31, 2007 and March 31, 2008 47,835,051 173,799
Shares issued for cash 6,733,250 67,341
Shares issued in connection with stock
compensation plan (note 11) 167,838 2,638
Shares cancelled (100,000) (442)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance, December 31, 2008 54,636,139 243,336
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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.
(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 nine months ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
2008 2007 2008 2007
-------------------------------------------------------------------------
Basic earnings
(loss) per share
Net income (loss)
for the period (62,378) 15,048 (51,317) 66,488
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
number of
common shares
(number) 49,073,032 44,442,253 48,656,116 44,670,881
Basic earnings
(loss) per share (1.27) 0.34 (1.05) 1.49
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings
(loss) per share
Net income (loss)
for the period (62,378) 15,048 (51,317) 66,488
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average
number of
common shares
(number) 49,073,032 44,442,253 48,656,116 44,670,881
Dilutive effect
of unvested
shares (number) 2,810,989 2,390,540 2,810,989 2,390,540
Dilutive effect
of share
issuance
commitment in
connection with
retention plan
(number)
(note 11) 616,205 420,359 616,205 420,359
Dilutive effect
of unvested
shares purchased
by employee
benefit trust
(number)
(note 11) 2,719,062 1,023,043 2,246,457 796,063
Dilutive effect
of share
issuance
commitment in
connection with
long term
incentive plan
(number)
(note 11) - 48,158 - 142,732
-------------------------------------------------------------------------
Adjusted weighted
average number
of common
shares (number) 55,219,288 48,324,353 54,329,767 48,420,575
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings
(loss) per share (1.27) 0.31 (1.05) 1.37
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 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, which ended on December 31, 2008. As of
December 31, 2008, 616,205 shares vested and this number was based on
revenue earned by Canaccord Adams Inc. during the vesting period. The
aggregate number of common shares that vested was 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 were achieved during the vesting
period, the associated proportion of the retention payment was recorded
as a development cost and the applicable number of retention shares were
included in diluted common shares outstanding (Note 10 (iv)). The Company
has expensed $845 and $2,437 for the three and nine months ended
December 31, 2008, respectively ($672 and $2,611 for the three and nine
months ended December 31, 2007).
On December 15, 2008, the Company issued 53,384 common shares to former
employees of Adams Harkness as required by the retention plan upon
vesting. The common shares were issued at $10.25 per share for an
aggregate value of $547.
The following table details the activity under the Company's retention
plans:
For the three months ended For the nine months ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
2008 2007 2008 2007
-------------------------------------------------------------------------
Number of common
shares subject
to the
Enermarket
retention plan:
Beginning of
period - 10,254 - 10,254
Issued - (3,949) - (3,949)
Adjustments
and
forfeitures - (6,305) - (6,305)
-------------------------------------------------------------------------
End of period - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shares vested
during the
period - 3,949 - 3,949
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common
shares subject
to the Adams
Harkness
retention plan:
Beginning of
period 772,473 818,889 804,012 953,107
Issued (53,384) - (53,384) (9,268)
Forfeitures (102,884) (14,877) (134,423) (139,827)
-------------------------------------------------------------------------
End of period 616,205 804,012 616,205 804,012
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shares vested
during the
period 616,205 - 616,205 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 $15.54.
The following is a summary of the Company's stock options as at
December 31, 2008 and 2007 and March 31, 2008 and changes during the
periods then ended.
Weighted
average
Number of exercise
options price ($)
-------------------------------------------------------------------------
Balance, December 31, 2007 125,000 23.13
Granted - -
Exercised - -
-------------------------------------------------------------------------
Balance, March 31, 2008 125,000 23.13
-------------------------------------------------------------------------
Granted 150,000 9.21
Exercised - -
-------------------------------------------------------------------------
Balance, December 31, 2008 275,000 15.54
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The fair value of each stock option grant was estimated on the 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 $51 and $152 was recognized for the three and
nine months ended December 31, 2008, respectively ($41 and $123 for the
three and nine months ended December 31, 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
that will be used by a trustee to purchase common shares of the Company
on the open market which 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 $4.7 million and $13.5 million was
recognized for the three and nine months ended December 31, 2008,
respectively ($5.1 million and $11.1 million for the three and nine
months ended December 31, 2007).
For the three months ended For the nine months ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
2008 2007 2008 2007
--------------------------- ---------------------------
Awards
outstanding,
beginning of
period 3,881,558 1,207,328 2,221,578 -
Grants 133,994 419,896 2,195,969 1,627,224
Vested (128,100) - (530,095) -
-------------------------------------------------------------------------
Awards
outstanding,
end of period 3,887,452 1,627,224 3,887,452 1,627,224
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended For the nine months ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
2008 2007 2008 2007
--------------------------- ---------------------------
Common shares
held by Trust,
beginning of
period 3,011,055 937,162 1,621,895 -
Acquired - 316,264 1,706,903 1,253,366
Released on
vesting (97,898) - (415,641) -
-------------------------------------------------------------------------
Common shares
held by Trust,
end of period 2,913,157 1,253,366 2,913,157 1,253,366
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 included
the following balances with related parties:
December 31, March 31, December 31,
2008 2008 2007
$ $ $
-------------------------------------------------------------------------
Accounts receivable 37,539 48,521 55,348
Accounts payable and accrued
liabilities 73,779 64,945 68,272
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 December 31,
2008
-------------------------------------------
Private Corporate
Canaccord Client and
Adams Services Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenue 49,250 33,532 4,406 87,188
Expenses 58,409 37,441 21,762 117,612
Amortization 1,586 463 702 2,751
Development costs 4,251 2,312 1,175 7,738
Impairment of goodwill and
intangibles 31,524 - - 31,524
-------------------------------------------------------------------------
Income (loss) before
income taxes (46,520) (6,684) (19,233) (72,437)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007
-------------------------------------------
Private Corporate
Canaccord Client and
Adams Services Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenue 109,583 61,166 12,605 183,354
Expenses 82,529 46,087 21,456 150,072
Amortization 984 495 718 2,197
Development costs 3,936 1,550 1,288 6,774
Impairment of goodwill and
intangibles - - - -
-------------------------------------------------------------------------
Income (loss) before
income taxes 22,134 13,034 (10,857) 24,311
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine months ended December 31,
2008
-------------------------------------------
Private Corporate
Canaccord Client and
Adams Services Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenue 212,379 135,229 23,117 370,725
Expenses 196,936 114,271 53,430 364,637
Amortization 3,424 1,283 2,158 6,865
Development costs 12,056 5,256 4,271 21,583
Impairment of goodwill and
intangibles 31,524 - - 31,524
-------------------------------------------------------------------------
Income (loss) before
income taxes (31,561) 14,419 (36,742) (53,884)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007
-------------------------------------------
Private Corporate
Canaccord Client and
Adams Services Other Total
$ $ $ $
-------------------------------------------------------------------------
Revenue 353,677 194,664 39,752 588,093
Expenses 251,236 143,659 62,676 457,571
Amortization 2,880 1,397 2,043 6,320
Development costs 13,810 4,263 4,040 22,113
Impairment of goodwill and
intangibles - - - -
-------------------------------------------------------------------------
Income (loss) before
income taxes 85,751 45,345 (29,007) 102,089
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 nine months ended
---------------------------------------------------------
December 31, December 31, December 31, December 31,
2008 2007 2008 2007
$ $ $ $
-------------------------------------------------------------------------
Canada
Revenue 57,854 125,102 247,482 404,470
Equipment and
leasehold
improvements 29,285 24,400 29,285 24,400
Goodwill and
other
intangible
assets - 4,144 - 4,144
United Kingdom
Revenue 11,752 34,644 58,567 102,952
Equipment and
leasehold
improvements 7,099 8,273 7,099 8,273
United States
Revenue 16,586 23,135 60,536 70,294
Equipment and
leasehold
improvements 7,794 7,266 7,794 7,266
Goodwill and
other
intangible
assets - 28,729 - 28,729
Other Foreign
Location
Revenue 996 473 4,140 10,377
-------------------------------------------------------------------------
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 losses, and is further complemented by subordinated debt.
The following table summarizes our capital as at December 31, 2008:
As a
Carrying percentage
Type of capital amount of capital
$
-------------------------------------------------------------------------
Share capital 218,738 57.1%
Retained earnings 157,823 41.2%
Accumulated other comprehensive losses (18,600) (4.8)%
-------------------------------------------------------------------------
Shareholders' equity 357,961 93.5%
Subordinated debt 25,000 6.5%
-------------------------------------------------------------------------
382,961 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 nine months ended December 31, 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 26,928
2011 22,799
2012 19,588
2013 17,756
2014 16,490
Thereafter 56,896
-------------------------------------------------------------------------
160,457
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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. CANACCORD RELIEF PROGRAM
The Company has previously announced the details of the Canaccord Relief
Program ("CRP") which included the repurchase of up to $152 million of
restructured ABCP at par value from clients who hold $1 million or less.
The CRP closed on January 30, 2009, and combined transactions with third-
party sources with a Company-funded top-up to achieve par value. Clients
were entitled to receive any unpaid interest to the extent it was
available under the restructuring plan and the Company has reimbursed the
clients for any restructuring costs.
Due to additional out-of-pocket charges, the Company increased its client
relief programs provision by $2.7 million for the period ended
December 31, 2008 to reflect the revised costs of the programs. Also, an
additional expense of $2.6 million has been recorded to reflect the fair
value adjustment of the MAV II Class 15 notes purchased by the Company as
part of the completion of the CRP in January 2009 (Note 18.) The total
provision related to the ABCP relief programs was $59.5 million at
December 31, 2008.
17. RESTRUCTURING COSTS
The Company implemented a firm-wide restructuring in October 2008 that
has resulted in the reduction of staff across all geographies where the
Company operates. The Company recorded a pre-tax expense of $7.5 million
related to the staff restructuring.
18. SUBSEQUENT EVENTS
(i) The ABCP restructuring Plan ((Note 7) was implemented on January 21,
2009. The ABCP held by the Company with a par value of $42.7 million at
December 31, 2008 was exchanged for restructured notes on January 21,
2009. The par values of the restructured notes received by the Company on
January 21, 2009 corresponded with the notes that were expected to be
received at December 31, 2008 as disclosed in Note 7, Investment in
Asset-backed Commercial Paper.
The restructured notes represent new financial instruments as they are
new notes issued in exchange for existing ABCP positions. The Company is
currently assessing the accounting treatment of the new notes in
accordance with CICA Handbook Section 3855, "Financial Instruments -
Recognition and Measurement".
As a result of the completion of the Canaccord Relief Program, the
Company has purchased MAV II, Class 15 notes, with a carrying value of
$9.5 million on January 21, 2009. A fair value adjustment of $2.6 million
was recorded for the period ended December 31, 2008 (Note 16).
(ii) The total costs of the ABCP relief programs to the Company were
approximately $59.5 million. The Canaccord Relief Program was executed on
January 30, 2009 following the successful restructuring of ABCP. The
payments under the Canaccord Relief Program included the par value of the
ABCP held, as well as interest paid to date under the restructuring plan
and the reimbursement for any restructuring expenses borne by the
eligible clients.
(iii) In connection with the Adams Harkness retention plan (Note 11),
616,205 common shares were issued in February 2009 to employees who
received awards under the plan. The plan terminated on December 31, 2008
and in connection therewith, employees who met the vesting conditions
received common shares in accordance with the terms of the plan.
(iv) On February 11, 2009, the Board of Directors considered the dividend
policy in the context of the market environment and its business activity
and approved a suspension of the Company's quarterly dividend for the
quarter ended December 31, 2008. 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
become available.
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: Mark Dickenson,
Fox-Pitt, Kelton Limited, Phone: +44 (0) 207 663 6000, Email:
marc.milmo@fpk.com
