Canaccord Capital Inc. reports fiscal first quarter 2010 results



    
    (All dollar amounts are stated in Canadian dollars unless otherwise
    indicated)
    

    VANCOUVER, Aug. 6 /CNW/ - Canaccord Capital Inc.'s revenue for the first
quarter of fiscal year 2010, ended June 30, 2009, was $137.5 million, up 28.5%
from the previous quarter. Net income for the first quarter was $9.1 million,
up 148.6% from the previous quarter. Diluted earnings per share (EPS) for
fiscal Q1/10 were $0.16, an increase of $0.09 from the previous quarter.
Commenting on the quarter, Paul Reynolds, President and CEO said "Our results
this quarter are not only an indication of our improving business environment,
but also our commitment to improving margins. Though we are pleased with our
first quarter performance, we remain fully engaged in increasing the value of
Canaccord for shareholders."

    
    First quarter 2010 vs. fourth quarter 2009

    -   Revenue of $137.5 million, up 28.5% or $30.5 million from
        $107.0 million

    -   Expenses of $121.5 million, up 21.1% or $21.2 million from
        $100.3 million

    -   Net income of $9.1 million compared to a net income of $3.7 million

    -   Diluted EPS of $0.16 compared to a diluted EPS of $0.07 in the fourth
        quarter of 2009

    Financial condition at end of first quarter 2010 vs. first quarter 2009

    -   Cash and cash equivalents balance of $734.3 million, up
        $179.3 million from $555.0 million

    -   Working capital of $301.6 million, down $31.7 million from
        $333.3 million due to a decrease in client receivables balance net of
        client payables

    -   Total shareholders' equity of $385.4 million, down $54.5 million from
        $439.9 million

    -   Book value per diluted common share for the period end was $6.73,
        down 12.1% or $0.93 from $7.66

    First quarter 2010 vs. first quarter 2009

    -   Revenue of $137.5 million, down 20.4% or $35.2 million from
        $172.7 million

    -   Expenses of $121.5 million, down 18.6% or $27.7 million from
        $149.2 million

    -   Net income of $9.1 million compared to a net income of $16.5 million
        in the same period of the prior year

    -   Return on equity (ROE) of 9.7%, down from 15.7%

    -   Diluted EPS of $0.16 compared to a diluted EPS of $0.31

    -   On August 5, 2009 the Board of Directors considered the dividend
        policy in the context of the market environment and Canaccord's
        business activity and approved the continued 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.

    Highlights of Operations:

    -   Canaccord Adams led 23 transactions globally to raise total proceeds
        of $551.8 million(1) during fiscal Q1/10

    -   Canaccord Adams participated in a total of 74 transactions globally
        to raise total proceeds of $1.5 billion(1) during fiscal Q1/10

    -   During Q1/10, Canaccord Adams led or co-led the following equity
        transactions:

           -  (pnds stlg)132.0 million for Heritage Oil Corporation (LSE)

           -  US$167.6 million for Itron Inc. (NASDAQ)

           -  C$162.3 million for TransAtlantic Petroleum Corp. (TSX)

           -  US$87.4 million for BPZ Resources, Inc. (AMEX)

           -  US$66.2 million for Telvent GIT S.A. (NASDAQ)

           -  C$50.1 million for Capstone Mining Corp. (TSX)

    -   Canaccord continued to rank first in Canada for block trading market
        share on the TSX Venture, with 16.9% of market share in Q1/10, up
        from 10.5% in Q1/09(2)

    -   Canaccord Adams completed 6 Private Investment in Public Equity
        (PIPE) transactions in North America that raised US$151.1 million in
        proceeds during fiscal Q1/10(3)

    -   Assets under administration of $10.3 billion, down 29.6% from
        $14.7 billion at the end of Q1/09, and up 12.6% from $9.2 billion at
        the end of Q4/09

    -   Assets under management of $443.0 million, down 40.7% from
        $747.0 million at the end of Q1/09, and up 12.7% from $393.0 million
        at the end of Q4/09

    -   As at June 30, 2009 Canaccord had 335 Advisory Teams(4), down 19 from
        354 Advisory Teams as of June 30, 2009, and down three from 338 teams
        as of March 31, 2009. The decrease is largely due to a strategic
        review of our Private Client Services division.

    -   On June 23, 2009, George Karkoulas joined Canaccord Capital
        Corporation as Senior Vice President & Head of Independent Financial
        Management in Toronto.

    -   On June 29, 2009, Giles Fitzpatrick joined Canaccord Adams Limited as
        President of Canaccord Adams' UK operations.
    

    Non-GAAP Measures

    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. 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 net income (loss) and
diluted earnings (loss) per share and the same respective non-GAAP measures of
financial performance should be considered together.

    
    ------------------------------
    (1) Source: FPinfomart and Company information
    (2) Source: Canada Equity. Market share by trade volume
    (3) Source: Placement Tracker. Includes placements for companies
        incorporated in Canada and the US
    (4) Advisory Teams are normally comprised of one or more Investment
        Advisors (IAs) and their assistants and associates, who together
        manage a shared set of client accounts. Advisory Teams that are led
        by, or only include, an IA who has been licenced for less than three
        years are not included in our Advisory Team count, as it typically
        takes a new IA approximately three years to build an average sized
        book.
    

    LETTER TO SHAREHOLDERS

    Overall, we were satisfied with Canaccord's performance during the first
quarter of fiscal 2010. While market volatility continued to keep some
investors and issuers on the sidelines during the quarter, all of our
divisions found opportunities to successfully leverage the current
marketplace. The cost containment initiatives that we announced over the
course of the year are also providing tangible results. Sequentially,
Canaccord's margins are improving, and we expect further gains from ongoing
cost-reduction programs.

    Financial Overview

    Revenues for the three months ended June 30th, 2009 totaled $137.5
million, a 29% increase compared to the previous quarter, but a 20% decrease
from revenues of $172.7 million for the first quarter of fiscal 2009. Expenses
declined 19% to $121.5 million compared to the same quarter last year, due
primarily to a 17% decrease in incentive compensation and a 38% reduction in
general and administrative costs. Net income was $9.1 million, a significant
improvement over the $3.7 million earned in the previous quarter, but a 45%
decline from the first quarter of fiscal 2009.
    At 9.7%, our return on equity for the first quarter of 2010 was below
what we believe is a suitable long-term ROE for Canaccord. We are committed to
finding more efficiencies and revenue growth opportunities in all parts of the
organization, and ultimately expect to achieve a long-term target of 20%
average ROE over our next business cycle.
    We will continue to make investments to support the growth of our
operations, but while we are committed to growth, we cannot support it at any
cost. Even as our businesses build revenues, they each must appropriately
contribute to our long-term ROE target. To ensure that all of Canaccord's
divisions are equally transparent to shareholders, beginning next quarter, we
will be providing additional financial disclosures to allocate certain direct
and other costs to our divisions. We believe this initiative will enhance
accountability as we continue being vigilant with costs. We are determined to
make whatever changes are necessary to unlock the inherent value we know
exists in all of our businesses.

    Solid performance from Canaccord Adams

    Canaccord Adams performed very well during the first quarter of 2010
despite general weakness in the global capital markets. Revenues from all
geographies declined 18% from the far more robust first quarter of our last
fiscal year. But there are signs that a gradual recovery is underway. Revenues
from our Canadian, U.K. and U.S. capital markets operations advanced 17%, 31%
and 60%, respectively since last quarter, a marked improvement due in part to
the improved capital markets during Q1.
    Globally, the Canaccord Adams team led 23 transactions that raised more
than $550 million and participated in 74 transactions that raised total
proceeds of $1.5 billion. A number of significant transactions occurred during
the quarter as a result of our strong balance sheet, capital base and global
distribution for clients. These included a (pnds stlg)132 million offering for
Heritage Oil on the London Stock Exchange and a C$162 million underwriting on
the Toronto Stock Exchange for TransAtlantic Petroleum Corp.
    Canaccord Adams acted as lead bookrunner on two U.S. underwritings that
were particularly notable - Itron Inc., a US$168 million offering, and Telvent
GIT, S.A., a US$66.2 million offering. These transactions demonstrated our
team's expertise in an emerging investment theme: energy efficiency and
infrastructure - the strength of both these companies.
    In the UK, we were very pleased to welcome Giles Fitzpatrick as the new
president of Canaccord Adams Limited - our U.K. operations - at the end of the
quarter. Giles was formerly CEO of a highly regarded global investment bank
and his well-established relationships in Europe, Asia and North America will
enable us to continue to strengthen our U.K. equity capital markets business.

    Progress in Private Client Services

    Private Client Services' revenues were dampened by market volatility that
reduced trading activity during the first three months of fiscal 2010.
Revenues declined 30% from the comparable quarter last year. Sequentially,
however, revenues advanced about 8%, suggesting a gradual return of a more
normalized business environment. At $10.3 billion, our assets under
administration increased by 12.6% since last quarter, however AUA declined
29.6% year-over-year due primarily to lower market values.
    PCS is making significant progress under the leadership of John Rothwell.
The division is in the first year of a three-year program of strategic
repositioning intended to build revenues through pricing, products and
services and to reduce costs through more-efficient use of resources. We
continue to have a strong commitment to advancing this group through quality
improvement programs, while also aggressively pursuing new opportunities for
growth.
    We recently hired George Karkoulas to head PCS's new Independent
Financial Management initiative. This program is a new strategically
complementary segment of our Private Client platform that will leverage
Canaccord's independence, infrastructure and operational strengths. It also
provides an opportunity to recruit brokers who wish to retain their
independence but operate under the prominence of the Canaccord brand. George
is the ideal executive to lead this growth initiative for us, having built a
similar business for one of our peers over the past seven years.

    Looking ahead

    We remain cautiously optimistic about the immediate future for Canaccord.
We're pleased with the achievements we've had to date in reducing our
breakeven costs and the continuing success our teams are having in executing
great ideas for clients in still-challenging market conditions. With the
lingering global economic downturn, we feel the need to continue to protect
the strength of Canaccord's capital base in the event the global recovery is
more prolonged.
    To our employees, we say thank you, as always, for your hard work and
dedication to the interests of our clients and shareholders. More importantly,
thank you for understanding the need for the changes we are making, and taking
them seriously. Progress requires change, and it is something we all know is
important for the ongoing success of Canaccord.

    
    Paul D. Reynolds
    President & Chief Executive Officer
    



    ACCESS TO QUARTERLY RESULTS INFORMATION:

    Interested investors, the media and others may review this quarterly
earnings release and supplementary financial information at
canaccord.com/investor/financialreports.

    CONFERENCE CALL AND WEBCAST PRESENTATION:

    Interested parties can listen to our fiscal first quarter 2010 results
conference call with analysts and institutional investors, live and archived,
via the Internet and a toll free number. The conference call is scheduled for
Thursday, August 6, 2009 at 8:30 a.m. (Pacific Time), 11:30 a.m. (Eastern
Time) and 4:30 p.m. (UK Time). At that time, senior executives will comment on
the results for the first quarter of fiscal 2010 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: canaccord.com/investor/webcast
    Analysts and institutional investors can call in via telephone at:

    
    -   416-644-3424 (within Toronto)
    -   1-800-591-7539 (toll free outside Toronto)
    -   00-800-2288-3501 (toll free from the United Kingdom)
    

    A replay of the conference call can be accessed after 10:30 a.m. (Pacific
Time), 1:30 p.m. (Eastern Time) and 6:30 p.m. (UK Time) on August 6, 2009
until September 21, 2009 at 416-640-1917 or 1-877-289-8525 by entering
passcode 21310740 followed by the pound (No.) sign.

    ABOUT CANACCORD CAPITAL INC.:

    Through its principal subsidiaries, Canaccord Capital Inc. (TSX & AIM:
CCI) is a leading independent, full-service investment dealer in Canada with
capital markets operations in the United Kingdom and the United States of
America. Canaccord is publicly traded on both the Toronto Stock Exchange and
AIM, a market operated by the London Stock Exchange. Canaccord has operations
in two of the principal segments of the securities industry: capital markets
and private client services. Together, these operations offer a wide range of
complementary investment products, brokerage services and investment banking
services to Canaccord's private, institutional and corporate clients.
Canaccord has 31 offices worldwide, including 24 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) 207 466 5000
    Email: bobbym@buchanan.uk.com

    Investor relations inquiries:
    Joy Fenney
    Vice President, Investor Relations
    Phone: 416-869-3515
    Email: joy_fenney@canaccord.com

    Nominated Adviser and Broker:
    Marc Milmo
    Fox-Pitt, Kelton Limited
    Phone:  +44 (0) 207 663 6000
    Email: marc.milmo@fpk.com

    -------------------------------------------------------------------------
    None of the information on Canaccord's Web site at canaccord.com should
    be considered incorporated herein by reference.
    -------------------------------------------------------------------------



    Management's Discussion and Analysis

    Fiscal first quarter 2010 for the three months ended June 30, 2009 - this
    document is dated August 6, 2009
    

    The following discussion of the financial condition and results of
operations for Canaccord Capital Inc. (Canaccord) is provided to enable the
reader to assess material changes in our financial condition and to assess
results for the three-month period ended June 30, 2009 compared to the
corresponding period in the preceding fiscal year. The three-month period
ended June 30, 2009 is also referred to as first quarter 2010, Q1/10 and
fiscal Q1/10 in the following discussion. This discussion should be read in
conjunction with the unaudited interim consolidated financial statements for
the three-month period ended June 30, 2009, beginning on page 23 of this
report; our Annual Information Form dated May 26, 2009; and the 2009 annual
Management's Discussion and Analysis (MD&A) including the audited consolidated
financial statements for the fiscal year ended March 31, 2009 (Audited Annual
Consolidated Financial Statements) in Canaccord's Annual Report dated May 20,
2009 (the Annual Report). There has been no material change to the information
contained in the annual MD&A for fiscal 2009 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. Non-GAAP measures included are: return
on average common equity (ROE), assets under administration (AUA), assets
under management (AUM), expenses as a % of revenue, and book value per diluted
share.
    Canaccord's capital is represented by 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.

    BUSINESS 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 (TSX) and AIM,
a market operated by the London Stock Exchange (LSE). The Company 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 institutional, corporate and private
clients.
    Canaccord's business is cyclical and experiences considerable variations
in revenue and income from quarter to quarter and year to year due to factors
beyond Canaccord's control. Our business is affected by the overall condition
of the North American and European equity markets, including seasonal
fluctuations.

    Business environment

    Aggressive liquidity injections by governments and central banks
continued into the first quarter  of Canaccord's 2010 fiscal year. Much of the
pessimism in fiscal Q4 2009 was replaced with a return of optimism. The
markets produced the best returns for equities since 2003 and the capital
environment saw great improvement as new issues occurred at a healthy pace.
Equity markets became a 'buy on pullback' opportunity versus the stance in Q4
2009 where investors looked to reduce exposure. Risky credit also saw much
reduced yields.
    The real economy continued to be negatively impacted. Manufacturing
activity in both Canada and the US was weak. Capacity utilization remains low.
Higher loan delinquencies and heightened unemployment occurred, as did a US
budget gap that exceeded the $1 trillion mark sooner than any time in history.
The government-led restructuring of the US auto industry changed the nature of
American business.
    Businesses continued to cut costs and many were forced to reorganize. In
some cases, they had to declare bankruptcy. With the assumption that emerging
nations such as China and India were in recovery, the price of raw materials
was bid-up. By quarter-end, weak demand from the real economy allowed for a
significant pullback in many commodity prices and new losses for speculative
traders.
    Short interest rates were kept low by the central banks throughout fiscal
Q1 2010, however 10-year yields rose significantly. This is a concern for any
sustainable housing recovery in the US. Housing activity in Canada rose to
near historic levels and kept a brisk pace. The UK, especially in the city of
London, saw stabilization of prices and renewed activity.
    By quarter's end however, many market participants believed that the
economic environment would be much improved by calendar year-end.

    Market Data

    The TSX, TSX Venture, and AIM all experienced gains in trading volumes
during fiscal Q1/10 compared to Q4/09, though volume on the NASDAQ decreased
slightly. The TSX and AIM recorded increases in trading volumes compared to
the first quarter of fiscal 2009, while trading volumes on the TSX Venture and
NASDAQ experienced lower trading volumes than a year ago.
    Financing values were up significantly on the TSX/TSX Venture, AIM and
NASDAQ compared to last quarter, with financings on the NASDAQ nearly tripling
since last quarter. Compared to the same quarter last year, financings on the
AIM fell by 45%, while North American markets gained momentum with increased
financing values on the TSX/TSX Venture and NASDAQ.


    
    Trading volume by exchange (billions of shares)
    -------------------------------------------------------------------------
                                                            Change    Change
                                                              from      from
                                                  Fiscal    fiscal    fiscal
                  April 09    May 09   June 09     Q1/10     Q1/09     Q4/09
    -------------------------------------------------------------------------
    TSX               10.7      11.5      10.9      33.1     32.4%     10.3%
    TSX Venture        3.1       3.8       4.2      11.1   (19.6)%     37.0%
    AIM               15.0      22.4      17.9      55.3     40.7%     81.3%
    NASDAQ            16.0      15.5      17.0      48.5   (13.6)%    (6.1)%
    -------------------------------------------------------------------------
    Source: TSX Statistics, LSE AIM Statistics, Thomson One


    Total financing value by exchange
    -------------------------------------------------------------------------
                                                            Change    Change
                                                              from      from
                                                  Fiscal    fiscal    fiscal
                  April 09    May 09   June 09     Q1/10     Q1/09     Q4/09
    -------------------------------------------------------------------------
    TSX and TSX
     Venture
     (C$ billions)     4.0       2.5       8.0      14.5     27.2%     16.9%
    AIM ((pnds stlg)
     billions)         0.1       0.6       0.4       1.1   (45.0)%     83.3%
    NASDAQ
     (US$ billions)    2.8       3.3       5.9      12.0    135.3%    287.1%
    -------------------------------------------------------------------------
    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)     April 09    May 09   June 09     Q1/10     Q1/09     Q4/09
    -------------------------------------------------------------------------
    Oil and gas        4.8     152.0     124.2     281.0    (8.9)%  1,452.5%
    Mining            19.9      87.1      11.5     118.5   (74.1)%   (47.9)%
    Pharmaceutical
     and Biotech       3.0       5.2      56.4      64.6     67.4%    994.9%
    Media              1.0       1.8      20.5      23.3     25.9%    308.8%
    Technology         3.1       3.6      51.0      57.7   (57.0)%  1,703.1%
                 ------------------------------------------------------------
    Total (of
     relevant
     sectors)         31.8     249.7     263.6     545.1   (43.1)%    109.4%
    -------------------------------------------------------------------------
    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)     April 09    May 09   June 09     Q1/10     Q1/09     Q4/09
    -------------------------------------------------------------------------
    Oil and gas      162.4   1,014.2   1,110.7   2,287.3   (19.8)%      3.2%
    Mining            34.7   1,697.2   1,057.4   2,789.3    127.8%     44.1%
    Biotech              -         -         -         -  (100.0)%       n/c
    Media                -         -         -         -  (100.0)%       n/c
    Technology           -      23.0      18.9      41.9   (25.0)%       n/c
                 ------------------------------------------------------------
    Total (of
     relevant
     sectors)        197.1   2,734.4   2,187.0   5,118.5     13.7%     22.0%
    -------------------------------------------------------------------------
    Source: FPinfomart
    n/c: No change
    

    About Canaccord's operations

    Canaccord Capital Inc.'s operations are divided into two business
segments: Canaccord Adams (our capital markets operations) and Private Client
Services. Together, these operations offer a wide range of complementary
investment banking services, investment products, and brokerage services to
Canaccord's institutional, corporate and private clients. Canaccord's
administrative segment is referred to as Corporate and Other.

    Canaccord Adams

    Canaccord Adams offers mid-market corporations and institutional
investors around the world 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, Infrastructure and
        Sustainability.
    -   Our Sales and Trading desk executes timely transactions for more than
        1,500 institutional relationships around the world, operating as an
        integrated team on one common platform.
    -   With more than 65 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, foreign
exchange gains and losses, 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

    First quarter and fiscal 2010 summary data(1)
    -------------------------------------------------------------------------
    (C$ thousands, except per               Three months ended         Year-
     share, number of employee                    June 30          over-year
     and % amounts)                         2009          2008        change
    -------------------------------------------------------------------------
    Canaccord Capital Inc.
      Revenue
        Commission                       $55,456       $71,996       (23.0)%
        Investment banking                55,886        76,147       (26.6)%
        Principal trading                 11,470         5,911         94.0%
        Interest                           3,476        12,329       (71.8)%
        Other                             11,175         6,325         76.7%
    -------------------------------------------------------------------------
    Total revenue                       $137,463      $172,708       (20.4)%
      Expenses
        Incentive compensation           $68,463       $82,727       (17.2)%
        Salaries and benefits             13,802        15,443       (10.6)%
        Other overhead expenses(2)        39,203        51,009       (23.1)%
    -------------------------------------------------------------------------
    Total expenses                      $121,468      $149,179       (18.6)%
    Income before income taxes            15,995        23,529       (32.0)%
    Net income                             9,112        16,459       (44.6)%
    Earnings per share (EPS) - diluted      0.16          0.31       (48.4)%
    Return on average common equity (ROE)   9.7%         15.7%      (6.0)p.p.
    Book value per share - period end       6.73          7.66       (12.1)%
    Number of employees                    1,509         1,698       (11.1)%
    -------------------------------------------------------------------------
    (1) Data is considered to be GAAP except for ROE, book value per share
        and number of employees.
    (2) Consists of trading costs, premises and equipment, communication and
        technology, interest, general and administrative, amortization and
        development costs.
    p.p.: percentage points


    Geographic distribution of revenue for the first quarter of
    fiscal 2009(1)
    -------------------------------------------------------------------------
                                            Three months ended         Year-
                                                  June 30          over-year
    (C$ thousands, except % amounts)        2009          2008        change
    -------------------------------------------------------------------------
    Canada                               $87,934      $108,898       (19.3)%
    UK                                    20,925        33,718       (37.9)%
    US                                    27,179        25,621          6.1%
    Other Foreign Location                 1,425         4,471       (68.1)%
    -------------------------------------------------------------------------
    (1) For a business description of Canaccord's geographic distribution
        please refer to the "About Canaccord's Operations" section on page
        10.
    

    First quarter 2010 vs. first quarter 2009

    On a consolidated basis, revenue is generated through five activities:
commissions and fees associated with agency trading and private client wealth
management activity, investment banking, principal trading, interest and
other. Revenue for the three months ended June 30, 2009 was $137.5 million, a
decrease of 20.4% or $35.2 million compared to the same period a year ago.
    For the first quarter of fiscal 2010, revenue generated from commissions
declined by $16.5 million to $55.5 million compared to the same period a year
ago. This decrease was largely attributed to a $12.7 million commission
revenue decline in our Private Client Services segment.
    Investment banking revenue was $55.9 million, a decline of $20.3 million
or 26.6%, primarily due to a drop in capital markets activities from our UK
and Canadian operations. Revenue derived from principal trading was $11.5
million, an increase of $5.6 million or 94.0%. This increase was mainly due to
higher inventory gains from market making activities in UK and Other Foreign
Location.
    Interest revenue was $3.5 million, which decreased by $8.9 million or
71.8% due to the decrease in the number and size of margin accounts and lower
interest rates.
    Other revenue was $11.2 million, an increase of $4.9 million or 76.7%
which was mainly attributed to foreign exchange gains in the quarter.
    First quarter revenue in Canada was $87.9 million, a decrease of 19.3% or
$21.0 million from the same period a year ago. Our operations were affected by
the weaker Canadian equity markets compared to Q1/09.
    Revenue in the UK was $20.9 million, down 37.9% or $12.8 million compared
to the same period a year ago. Revenue from Other Foreign Location was $1.4
million, a decline of 68.1% or $3.0 million. These declines were due to the
global economic downturn that started during the last half of fiscal 2009.
    Revenue in the US was $27.2 million, up $1.6 million or 6.1% from Q1/09.
Revenue in the US operations increased slightly compared to Q1/09 because of
our improved banking environment in certain focus sectors.


    
    Expenses as a percentage of revenue
    -------------------------------------------------------------------------
                                            Three months ended         Year-
                                                  June 30          over-year
                                            2009          2008        change
    -------------------------------------------------------------------------
      Incentive compensation               49.8%         47.9%        1.9p.p.
      Salaries and benefits                10.0%          8.9%        1.1p.p.
      Other overhead expenses(1)           28.5%         29.6%      (1.1)p.p.
                                          -----------------------------------
    Total                                  88.3%         86.4%        1.9p.p.
    -------------------------------------------------------------------------
    (1) Consists of trading costs, premises and equipment, communication and
        technology, interest, general and administrative, amortization and
        development costs.
     p.p.: percentage points
    

    First quarter 2010 vs. first quarter 2009

    Expenses for the three months ended June 30, 2009 were $121.5 million,
down 18.6% or $27.7 million from a year ago.
    Incentive compensation expense was $68.5 million for the quarter, a
decrease of 17.2% or $14.3 million, consistent with the decrease in
incentive-based revenue. Consolidated incentive compensation as a percentage
of total revenue was 49.8%, up 1.9 percentage points. Salaries and benefits
expense was $13.8 million, a decrease of 10.6% in the first quarter of fiscal
2010 from the same period a year ago. This decrease was due to a reduction of
employees' salaries during fiscal 2009 as part of the overall cost savings
initiative.
    The total compensation (incentive compensation plus salaries) payout as a
percentage of consolidated revenue for Q1/10 was 59.8%, an increase of 3.0
percentage points from 56.8% in Q1/09.


    
    Other overhead expenses
    -------------------------------------------------------------------------
                                            Three months ended         Year-
                                                  June 30          over-year
    (C$ thousands, except % amounts)        2009          2008        change
    -------------------------------------------------------------------------
      Trading costs                       $7,324        $6,321         15.9%
      Premises and equipment               5,882         5,785          1.7%
      Communication and technology         5,489         6,163       (10.9)%
      Interest                               845         3,959       (78.7)%
      General and administrative          11,888        19,277       (38.3)%
      Amortization                         1,921         2,042        (5.9)%
      Development costs                    5,854         7,462       (21.5)%
    -------------------------------------------------------------------------
    Total other overhead expenses        $39,203       $51,009       (23.1)%
    -------------------------------------------------------------------------
    

    First quarter 2010 vs. first quarter 2009

    Other overhead expenses decreased by 23.1% or $11.8 million from the
prior year to $39.2 million for the first quarter of fiscal 2010 mainly due to
the decrease in interest, development, and general and administrative expense.
    Interest expense decreased by $3.1 million or 78.7%, which was
attributable to the decrease in interest rates compared to the prior year. The
US operations offered fewer hiring incentives during Q1/10, which was the
primary reason for the $1.6 million or 21.5% decrease in development costs
compared to Q1/09.
    The main contributor to the decrease in general and administrative
expense was a $5.1 million or 61.6% decrease in promotion and travel expense
and a $1.4 million or 33.1% decrease in professional fees. Promotion and
travel expense decreased due to a firm-wide effort to decrease expenses
incurred by the firm as part of the restructuring plan. Expense recoveries
from compensation pools also contributed to the decline of promotion and
travel expense. Professional fees decreased in Q1/10 due to non-recurring
consultancy fees incurred in Q1/09 to upgrade internal infrastructure.
    Net income for Q1/10 was $9.1 million compared to $16.5 million the same
period a year ago. Diluted EPS were $0.16 in Q1/10 compared to $0.31 in Q1/09.
ROE for Q1/10 was 9.7% compared to an ROE of 15.7% in Q1/09. Book value per
diluted share for Q1/10 was $6.73 versus $7.66 in Q1/09.
    Income taxes were $6.9 million for the quarter, reflecting an effective
tax rate of 43.0%, an increase of 13.0 percentage points from 30.0% a year
ago. The increase was primarily due to a change in future income tax asset.


    
    RESULTS OF OPERATIONS

    Canaccord Adams(1)
    -------------------------------------------------------------------------
    (C$ thousands, except                   Three months ended         Year-
     number of employees                          June 30          over-year
     and % amounts)                         2009          2008        change
    -------------------------------------------------------------------------
    Canaccord Adams
      Revenue                            $85,497      $104,793       (18.4)%
      Direct expenses
        Incentive compensation           $45,231       $52,529       (13.9)%
        Salaries and benefits              3,404         4,223       (19.4)%
        Other overhead expenses           20,497        28,268       (27.5)%
                                        -------------------------------------
      Total direct expenses               69,132        85,020       (18.7)%
      Revenue less direct expenses(2)     16,365        19,773       (17.2)%
      Number of employees                    474           545       (13.0)%
    -------------------------------------------------------------------------
    (1) Data is considered to be GAAP except for number of employees.
    (2) Revenue less direct expenses excludes overhead and compensation
        expenses that are included in the Corporate and Other segment that
        are not specifically allocated to this segment.
    

    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.

    First quarter 2010 vs. first quarter 2009

    Revenue for Canaccord Adams in Q1/10 was $85.5 million, a decline of
18.4% or $19.3 million from the same quarter a year ago, due to the weak
global capital markets in Canada and the UK.

    Revenue from Canadian operations

    Canaccord Adams in Canada generated revenue of $36.5 million in Q1/10, a
decrease of 13.2% or $5.6 million from Q1/09. The decrease in revenue in this
geographic sector was largely due to the overall drop in capital markets
activity in North America since the last half of fiscal 2009. Canadian revenue
for Canaccord Adams of $36.5 million represented 42.7% (Q1/09: 40.1%) of
Canaccord Adams' total revenue.

    Revenue from UK and Other Foreign Location

    Canaccord Adams' operations in the UK and Europe include providing
institutional sales and trading, corporate finance and research services.
Revenue derived from capital markets activity outside of Canada, the UK and
the US is reported as Other Foreign Location, which includes operations for
Canaccord International Limited. Revenue in this business was $22.4 million,
which declined 41.5% or $15.8 million from the same period a year ago due to
the global downturn that began in the last half of fiscal 2009. UK and Other
Foreign Location revenue of $22.4 million was 26.1% (Q1/09: 36.4%) of
Canaccord Adams' total revenue.

    Revenue from US operations

    The US operations reflect the capital markets activities of Canaccord
Adams Inc. First quarter 2010 revenue for Canaccord Adams in the US was $26.7
million (Q1/09: $24.6 million), representing 31.2% (Q1/09: 23.4%) of Canaccord
Adams' total revenue.

    Expenses

    Expenses for Q1/10 were $69.1 million, down 18.7% or $15.9 million. The
lower expenses were mainly attributed to the decrease in incentive
compensation of $7.3 million or 13.9% due to lower incentive-based revenue in
the quarter. Salary and benefits expense for the quarter also decreased by
$0.8 million or 19.4%, which was due to the decrease in number of employees as
a result of the staff restructuring in fiscal 2009. Total compensation expense
as a percentage of revenue for the quarter was 56.9%, an increase of 2.7
percentage points from 54.2% in Q1/09.
    General and administrative expense was $5.9 million in Q1/10, a decrease
of $6.2 million or 51.1%. This decrease was mainly made up of a drop in
promotion and travel expense and professional fees expense. Promotion and
travel decreased by $4.4 million or 68.1% due to the cost reduction
initiatives announced in fiscal 2009 and changes in expense allocations to
compensation pools introduced in fiscal 2009. Professional fees also decreased
by $1.1 million due to non-recurring consultancy fees to upgrade internal
infrastructure incurred in Q1/09.
    Income before income taxes excluding allocated overhead expenses included
in Corporate and Other segment for the quarter was $16.4 million, a decline of
$3.4 million or 17.2% from the same quarter a year ago. The decline was mainly
a result of the global economic downturn that began during the last half of
fiscal 2009.


    
    Private Client Services(1)
    -------------------------------------------------------------------------
    (C$ thousands, except
     AUM and AUA, which are
     in C$ millions; number of              Three months ended         Year-
     employees; number of Advisory                June 30          over-year
     Teams; and % amounts)                  2009          2008        change
    -------------------------------------------------------------------------
    Revenue                              $40,185       $57,853       (30.5)%
    Direct expenses
      Incentive compensation             $18,643       $26,950       (30.8)%
      Salaries and benefits                4,246         3,781         12.3%
      Other overhead expenses             12,279        13,952       (12.0)%
                                        -------------------------------------
    Total direct expenses                $35,168       $44,683       (21.3)%
    Revenue less direct expenses(2)        5,017        13,170       (61.9)%
    Assets under management (AUM)            443           747       (40.7)%
    Assets under administration (AUA)     10,341        14,695       (29.6)%
    Number of Advisory Teams                 335           354        (5.4)%
    Number of employees                      688           760        (9.5)%
    -------------------------------------------------------------------------
    (1) Data is considered to be GAAP except for AUM, AUA, number of Advisory
        Teams and number of employees.
    (2) Revenue less direct expenses excludes overhead and compensation
        expenses that are included in the Corporate and Other segment that
        are not specifically allocated to this segment.
    

    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.

    First quarter 2010 vs. first quarter 2009

    Revenue from Private Client Services was $40.2 million, a decline of
$17.7 million or 30.5% mainly due to reduced trading activity relative to
Q1/09. AUA dropped by 29.6% or $4.4 billion to $10.3 billion compared to Q1/09
primarily due to lower market values. AUM decreased by 40.7% year over year.
There were 335 Advisory Teams at the end of the first quarter of fiscal 2010,
a decline of 19 from a year ago. Canaccord's fee-based revenue accounted for
13.8% of Private Client Services in Q1/10, compared to 15.7% in Q1/09.
    Expenses for Q1/10 were $35.2 million, a decline of 21.3% or $9.5
million. For the current quarter, the largest decrease in expenses related to
incentive compensation expense, which was a decrease of 30.8% or $8.3 million.
This decrease was consistent with the decrease in revenue during this period.
Salaries and benefits expense increased 12.3% compared to Q1/09 due to an
ongoing effort to invest additional resources in this segment. In addition,
interest expense decreased by 91.7% or $2.7 million due to lower interest
rates.
    Income before income taxes excluding allocated overhead expenses included
in Corporate and Other segments for the quarter was $5.0 million compared to
$13.2 million from the same period a year ago. The decline was due to reduced
revenue in Q1/10 compared to Q1/09 as described above.


    
    Corporate and Other(1)
    -------------------------------------------------------------------------
    (C$ thousands, except                   Three months ended         Year-
     number of employees                          June 30          over-year
     and % amounts)                         2009          2008        change
    -------------------------------------------------------------------------
    Revenue                              $11,781       $10,062         17.1%
    Direct expenses
      Incentive compensation              $4,589        $3,248         41.3%
      Salaries and benefits                6,152         7,439       (17.3)%
      Other overhead expenses              6,427         8,789       (26.9)%
                                        -------------------------------------
    Total direct expenses                $17,168       $19,476       (11.9)%
    Revenue less direct expenses          (5,387)       (9,414)      (42.8)%
    Number of employees                      347           393       (11.7)%
    -------------------------------------------------------------------------
    (1) Data is considered to be GAAP except for number of employees.
    

    Canaccord's administrative segment, described as Corporate and Other,
includes correspondent brokerage services, bank and other interest, foreign
exchange gains and losses 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.

    First quarter 2010 vs. first quarter 2009

    Revenue for the three months ended June 30, 2009 was $11.8 million, an
increase of 17.1% or $1.7 million from the same quarter a year ago. The change
was mainly related to a $3.9 million increase in foreign exchange gains
compared to the prior year same quarter. This increase was due to the
fluctuation of foreign exchange rates during the year and its impact on
foreign currency client receivables. This was partially offset by a decrease
in interest revenue, which resulted from the drop in interest rates in the
current quarter compared to a year ago.
    Expenses for Q1/10 were $17.2 million, a decrease of 11.9% or $2.3
million. There was a decrease in salaries and benefits expense by 17.3% or
$1.3 million, a result of the staff restructuring in fiscal 2009. General and
administrative expense also decreased by $1.2 million or 35.7% primarily due
to a $0.6 million decrease in promotion and travel and a $0.5 million decrease
in office expenses.
    Overall, loss before income taxes was $5.4 million in the current quarter
compared to a loss before income taxes of $9.4 million in the same quarter a
year ago.

    
    FINANCIAL CONDITION

    Below are specific changes in selected balance sheet items.

    Assets
    

    Cash and cash equivalents were $734.3 million on June 30, 2009 compared
to $701.2 million on March 31, 2009. Refer to the Liquidity and Capital
Resources section below for more details.
    Securities owned were $169.0 million compared with $133.7 million on
March 31, 2009, mainly attributable to an increase in equities and convertible
debentures.
    Accounts receivable were $1.2 billion at June 30, 2009 compared to $1.1
billion at March 31, 2009.
    Other assets were $114.9 million compared to $126.1 million at March 31,
2009 mainly due to a decrease in income taxes receivable and future income
taxes.

    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 June 30, 2009 there was bank indebtedness of $105.8 million compared to
$75.6 million on March 31, 2009.
    Accounts payable were $1.6 billion compared to $1.5 billion at March 31,
2009, an increase of $0.1 billion mainly related to an increase in payables to
clients.
    Other liabilities were $71.3 million, a decrease of $33.1 million
compared to $104.4 million at March 31, 2009 due to the $10.0 million
repayment of subordinated debt and a $23.1 million decrease in securities sold
short.

    OFF-BALANCE SHEET ARRANGEMENTS

    At June 30, 2009 Canaccord has available credit facilities with banks in
Canada and the US in the aggregate amount of $478.5 million (March 31, 2009 -
$568.7 million). These credit facilities, consisting of call loans, letters of
credit and daylight overdraft facilities are collateralized by either unpaid
client securities and/or securities owned by the Company. As of June 30, 2009
the Company has a balance of $105.8 million outstanding (March 31, 2009 -
$75.6 million).
    A subsidiary of the Company has entered into irrevocable secured standby
letters of credit from a financial institution totalling $2.6 million (US$2.3
million) (March 31, 2009 - $2.9 million (US$2.3 million)) as rent guarantees
for its leased premises in Boston, New York and San Francisco.

    LIQUIDITY AND CAPITAL RE

SOURCES Canaccord has a capital structure comprised of share capital, retained earnings and accumulated other comprehensive losses. On June 30, 2009 cash and cash equivalents of $734.3 million net of bank indebtedness of $105.8 million were $628.5 million, an increase of $2.9 million from $625.6 million as of March 31, 2009. During the quarter ended June 30, 2009 financing activities used cash in the amount of $13.1 million. Investing activities provided cash in the amount of $0.4 million relating to the proceeds on net redemption of restructured asset-backed commercial paper (ABCP) notes. Operating activities provided cash in the amount of $11.4 million, which was due to an increase in net income and items not affecting cash. An increase in cash of $4.1 million was attributed to the effect of foreign exchange on cash balances. In total, there was an increase in net cash of $2.9 million compared to March 31, 2009. Canaccord's business requires capital for operating and regulatory purposes. The majority of current assets reflected on Canaccord's balance sheet are highly liquid. The majority of the positions held as securities owned are readily marketable and all are recorded at their fair value. The fair value of these securities fluctuates daily as factors such as changes in market conditions, economic conditions and investor outlook affect market prices. Client receivables are secured by readily marketable securities and are reviewed daily for impairment in value and collectibility. Receivables and payables from brokers and dealers represent the following: current open transactions that generally settle within the normal three-day settlement cycle; collateralized securities borrowed and/or loaned in transactions that can be closed within a few days on demand; and balances on behalf of introducing brokers representing net balances in connection with their client accounts. During the period, there have been no material changes to the Company's commitments from those described in Note 17 of the March 31, 2009 Audited Annual Consolidated Financial Statements. OUTSTANDING SHARE DATA ------------------------------------------------------------------------- Outstanding shares as of June 30 ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- Issued shares excluding unvested shares(1) 49,118,377 50,068,905 Issued shares outstanding(2) 55,233,820 54,590,583 Issued shares outstanding - diluted(3) 57,244,652 57,465,952 Average shares outstanding - basic 48,165,290 47,518,618 Average shares outstanding - diluted 55,331,249 52,720,457 ------------------------------------------------------------------------- (1) Excludes 2,863,284 unvested shares that are outstanding relating to share purchase loans for recruitment and retention programs, and 3,252,159 unvested shares purchased by employee benefit trust for the long term incentive plan (LTIP). (2) Includes 2,863,284 unvested shares that are outstanding relating to share purchase loans for recruitment and retention programs, and 3,252,159 unvested shares purchased by employee benefit trust for the LTIP. (3) Includes 2,010,832 of share issuance commitments. At June 30, 2009 Canaccord had 55,233,820 common shares issued and outstanding, an increase of 643,237 common shares from June 30, 2008 due to shares issued in connection with stock compensation plans. STOCK-BASED COMPENSATION PLANS Stock options The Company granted stock options to purchase common shares of the Company to independent directors. The independent directors have been granted options to purchase up to an aggregate of 350,000 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 $12.46. Long term incentive plan (LTIP) Under the LTIP, eligible participants are awarded restricted share units (RSUs) which vest over three years. For employees in Canada, an employee benefit trust (the Trust) has been established, and either (a) the Company will fund the Trust with cash which will be used by a trustee to purchase on the open market common shares of the Company that will be held in trust by the trustee until RSUs vest or (b) the Company will issue common shares from treasury to participants following vesting of RSUs. For employees in the United States and the United Kingdom, at the time of each RSU award, the Company will allot common shares and these shares will be issued from treasury at the time they vest for each participant. 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 June 30, 2009 forward contracts outstanding to sell US dollars had a notional amount of US$6.0 million, a decrease of $12.0 million from a year ago. Forward contracts outstanding to buy US dollars had a notional amount of US$3.0 million, a decrease of US$10.25 million compared to a year ago. The fair value of these contracts was nominal. Some of Canaccord's operations in London, England are conducted in UK pounds sterling; however, any foreign exchange risk in respect of these transactions is generally limited, as pending settlements on both sides of the transaction are typically in UK pounds sterling. RELATED PARTY TRANSACTIONS Security trades executed for employees, officers and directors of Canaccord are transacted in accordance with terms and conditions applicable to all clients. Commission income on such transactions in the aggregate is not material in relation to the overall operations of Canaccord. CRITICAL ACCOUNTING ESTIMATES The following is a summary of Canaccord's critical accounting estimates. Canaccord's accounting policies are in accordance with Canadian GAAP and are described in Note 1 to the Audited Annual Consolidated Financial Statements. The accounting policies described below require estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses recorded in the financial statements. Because of their nature, estimates require judgment based on available information. Actual results or amounts could differ from estimates, and the difference could have a material impact on the financial statements. Revenue recognition and valuation of securities Securities owned and sold short, including share purchase warrants and options, are categorized as held for trading as per Canadian Institute of Chartered Accountants (CICA) Handbook Section 3855 "Financial Instruments - Recognition and Measurement", and are recorded at fair value with unrealized gains and losses recognized in net income. In the case of publicly traded securities, fair value is determined on the basis of market prices from independent sources, such as listed exchange prices or dealer price quotations. Adjustments to market prices are made for liquidity, relative to the size of the position, holding periods and other resale restrictions, if applicable. Investments in illiquid or non-publicly traded securities categorized as held for trading are measured at fair value determined by a valuation model. There is inherent uncertainty and imprecision in estimating the factors that can affect value and in estimating values generally. The extent to which valuation estimates differ from actual results will affect the amount of income or loss recorded for a particular security position in any given period. With Canaccord's security holdings consisting primarily of publicly traded securities except as noted below, our procedures for obtaining market prices from independent sources, the validation of estimates through actual settlement of transactions and the consistent application of our approach from period to period, we believe that the estimates of fair value recorded are reasonable. Asset-backed commercial paper There is a significant amount of uncertainty in estimating the amount and timing of cash flows associated with the Company's holdings in ABCP. The Company estimates the fair value of its ABCP holdings by discounting expected future cash flows on a probability weighted basis considering the best available data. Since the fair value of the ABCP is based on the Company's assessment of current conditions, amounts reported may change materially in subsequent periods. Refer to Note 7 in the Audited Annual Consolidated Financial Statements for further details. Provisions Canaccord records provisions related to pending or outstanding legal matters and doubtful accounts associated with client receivables, loans, advances and other receivables. Provisions in connection with legal matters are determined on the basis of management's judgment in consultation with legal counsel, considering such factors as the amount of the claim, the possibility of wrongdoing by an employee of Canaccord, and precedents. Client receivables are generally collateralized by securities and, therefore, any impairment is generally measured after considering the market value of any collateral. Provisions in connection with other doubtful accounts are generally based on management's assessment of the likelihood of collection and the recoverable amount. Provisions are also recorded utilizing discount factors in connection with syndicate participation. Tax Accruals for income tax liabilities require management to make estimates and judgments with respect to the ultimate outcome of tax filings and assessments. Actual results could vary from these estimates. Canaccord operates within different tax jurisdictions and is subject to their individual assessments. Tax filings can involve complex issues, which may require an extended period of time to resolve in the event of a dispute or re-assessment by tax authorities. Accounting standards require a valuation allowance when it is more likely than not that all or a portion of a future income tax asset will not be realized prior to its expiration. Although realization is not assured, Canaccord believes that, based on all evidence, it is more likely than not that all of the future income tax assets, net of the valuation allowance, will be realized. Canaccord believes that adequate provisions for income taxes have been made for all years. Consolidation of variable interest entities The Company consolidates variable interest entities (VIEs) in accordance with the guidance provided by CICA Accounting Guideline 15 "Consolidation of Variable Interest Entities" (AcG-15). AcG-15 defines a VIE as an entity which either does not have sufficient equity at risk to finance its activities without additional subordinated financial support or where the holders of equity at risk lack the characteristics of a controlling financial interest. The enterprise that consolidates a VIE is called the primary beneficiary of the VIE. An enterprise should consolidate a VIE when that enterprise has a variable interest that will absorb a majority of the entity's expected losses, or receive a majority of the entity's expected residual returns. The Company has established an employee benefit trust to fulfill obligations to employees arising from the Company's stock-based compensation plan. The employee benefit trust has been consolidated in accordance with AcG-15 as it meets the definition of a VIE and the Company is the primary beneficiary of the employee benefit trust. Stock-based compensation plans Stock-based compensation represents the cost related to stock-based awards granted to employees. The Company uses the fair value method to account for such awards. Under this method, the Company measures the fair value of stock-based awards as of the grant date and recognizes the cost as an expense over the applicable vesting period with a corresponding increase in contributed surplus. In the case where vesting is also dependent on performance criteria, the cost is recognized over the vesting period in accordance with the rate at which such performance criteria are achieved (net of estimated forfeitures). Otherwise, the cost is recognized on a graded basis. When stock-based compensation awards vest, contributed surplus is reduced by the applicable amount and share capital is increased by the same amount. RECENT ACCOUNTING PRONOUNCEMENTS Business Combinations and Consolidated Financial Statements In January 2009 the CICA issued a new accounting standard, CICA Handbook Section 1582 "Business Combinations", which replaces the former Section 1581 "Business Combinations". This standard harmonizes Canadian guidance to the International Financial Reporting Standard (IFRS) 3 "Business Combinations". This standard requires additional use of fair value measurements, provides guidance on the recognition and measurement of goodwill acquired in the business combination, transaction costs to be expensed and requires increased financial statements note disclosure. This standard is to be applied prospectively for business combinations for which the acquisition date is on or after April 1, 2011. In addition, the CICA has issued Handbook Section 1601 "Consolidated Financial Statements" and Handbook Section 1602 "Non-controlling Interests", which replace CICA Handbook Section 1600 "Consolidated Financial Statements". CICA Handbook Section 1601 carries forward guidance from CICA Handbook Section 1600 except for the standards relating to the accounting for non-controlling interests, which are addressed separately in Section 1602. Section 1602 harmonizes Canadian standards with amended International Accounting Standard 27 "Consolidated and Separate Financial Statements". This Canadian standard provides guidance on accounting for non-controlling interest in a subsidiary in the consolidated financial statements subsequent to a business combination. These two standards will be effective for the Company beginning April 1, 2011. Early adoption prior to April 1, 2011 is permitted, and all three standards must be adopted concurrently. The impact of adoption of these standards is being assessed. International financial reporting standards (IFRS) The Canadian Accounting Standards Board (AcSB) has confirmed that the use of IFRS will be required commencing in 2011 for publicly accountable, profit-oriented enterprises. IFRS will replace Canadian GAAP currently followed by the Company. The purpose of this adoption is to increase the comparability of financial reporting among countries and to improve transparency. The Company will be required to begin reporting under IFRS for its fiscal year ended March 31, 2012 and will be required to provide information that conforms with IFRS for the comparative periods presented. The Company is currently in the process of evaluating the potential impact of IFRS to the consolidated financial statements. This is an ongoing process as the International Accounting Standards Board (IASB) and the AcSB continue to issue new standards and recommendations. The Company's consolidated financial performance and financial position as disclosed in the current Canadian GAAP financial statements may differ significantly when presented in accordance with IFRS. Some of the significant differences identified between IFRS and Canadian GAAP may have a material effect on the Company's consolidated financial statements. CHANGES IN ACCOUNTING POLICIES Goodwill and Intangible Assets The CICA issued a new accounting standard, CICA Handbook Section 3064 "Goodwill and Intangible Assets", which prescribes when expenditures qualify for recognition as intangible assets and provides increased guidance on the recognition and measurement of internally generated goodwill and intangible assets. The Company adopted Section 3064 effective April 1, 2009. The adoption of this new standard has no impact on the Company's financial statements. ASSET-BACKED COMMERCIAL PAPER 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). The Court issued the final implementation order in the ABCP restructuring process on January 12, 2009 and the restructuring closed on January 21, 2009. The first two installments of interest (to August 31, 2008) were made during the year ended March 31, 2009 and one further and final payment is expected, concurrent with reimbursement of restructuring costs under the Canaccord Relief Program. Restructuring fees already incurred and a reserve for additional restructuring fees were deducted from these interest payments. There has been no active trading of the restructured ABCP notes since January 21, 2009 and as such no meaningful market quote is available. There is a significant amount of uncertainty in estimating the amount and timing of cash flows associated with the ABCP. The Company estimates the fair value of its ABCP by discounting expected future cash flows on a probability weighted basis considering the best available data at June 30, 2009. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING Disclosure controls and procedures Based on an evaluation performed as of March 31, 2009, the President & CEO and the Executive Vice President & CFO concluded that the design and operation of our disclosure controls and procedures were effective as defined under National Instrument 52-109. During the quarter ended June 30, 2009, there were no changes that would have materially affected, or are reasonably likely to materially affect, Canaccord's disclosure controls and procedures. Changes in internal control over financial reporting An evaluation of the Company's internal control over financial reporting was performed as of March 31, 2009. Based on this evaluation, the President & CEO and the Executive Vice President & CFO concluded that our internal control over financial reporting are designed and operating effectively as defined under National Instrument 52-109 and there were no material weaknesses. There were no changes in internal control over financial reporting that occurred during the quarter ended June 30, 2009 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 August 5, 2009 the Board of Directors considered the dividend policy in the context of the market environment and Canaccord's business activity and approved the continued 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. If general capital markets activity were to drop significantly, Canaccord could experience losses. The following table provides selected quarterly financial information for the nine most recently completed financial quarters ended June 30, 2009. 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 Fiscal 2010 Fiscal 2009 per share amounts) ----------- ----------- ------------------------------------------------------------------------- Q1 Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Revenue Canaccord Adams 85,497 64,972 49,250 58,336 104,793 Private Client Services 40,185 37,255 33,532 43,844 57,853 Corporate and Other 11,781 4,769 4,406 8,649 10,062 ------------------------------------------------------------------------- Total revenue 137,463 106,996 87,188 110,829 172,708 Net income 9,112 3,666 (62,378) (5,398) 16,459 --------------------------------------------- EPS - basic 0.19 0.07 (1.27) (0.11) 0.35 EPS - diluted 0.16 0.07 (1.27) (0.11) 0.31 ------------------------------------------------------------------------- ---------------------------------------------------------------- (C$ thousands, except Fiscal 2008 per share amounts) ----------- ---------------------------------------------------------------- Q4 Q3 Q2 Q1 ---------------------------------------------------------------- Revenue Canaccord Adams 77,965 109,583 89,071 155,023 Private Client Services 54,463 61,166 57,415 76,083 Corporate and Other 11,018 12,605 12,383 14,764 ---------------------------------------------------------------- Total revenue 143,446 183,354 158,869 245,870 Net income (35,154) 15,048 12,411 39,029 ------------------------------------ EPS - basic (0.80) 0.34 0.28 0.86 EPS - diluted (0.80) 0.31 0.26 0.80 ---------------------------------------------------------------- RISKS The securities industry and Canaccord's activities are by their very nature subject to a number of inherent risks. Economic conditions, competition and market factors such as volatility in the Canadian and international markets, interest rates, commodity prices, market prices, trading volumes and liquidity will have a significant impact on Canaccord's profitability. An investment in the common shares of Canaccord involves a number of risks, including market, liquidity, credit, operational, legal and regulatory risks, which could be substantial and are inherent in Canaccord's business. Canaccord is also directly exposed to market price risk, liquidity risk and volatility risk as a result of its principal trading activities in equity securities and to specific interest rate risk as a result of its principal trading in fixed income securities. 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. The Company has a capital management framework to maintain the level of capital that will: meet the firm's regulated subsidiaries' target ratios as set out by the respective regulators, fund current and future operations, ensure that the firm is able to meet its financial obligations as they come due, and support the creation of shareholder value. The regulatory bodies that certain of the Company's subsidiaries are subject to are listed in Note 16 of the March 31, 2009 Audited Annual 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 2009 Annual Report, which are available on our website at canaccord.com/investor and on SEDAR at sedar.com. Interim Consolidated Financial Statements Canaccord Capital Inc. Unaudited For the three months ended June 30, 2009 (Expressed in Canadian dollars) Canaccord Capital Inc. INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands of dollars) June 30, March 31, 2009 2009 As at $ $ ------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 734,268 701,173 Securities owned (note 3) 169,030 133,691 Accounts receivable (notes 5 and 11) 1,166,610 1,061,161 Income taxes receivable 17,740 23,771 Future income taxes 13,358 15,680 ------------------------------------------------------------------------- Total current assets 2,101,006 1,935,476 Investment 5,000 5,000 Investment in asset-backed commercial paper (note 6) 34,418 35,312 Equipment and leasehold improvements 44,366 46,311 ------------------------------------------------------------------------- 2,184,790 2,022,099 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness 105,788 75,600 Securities sold short (note 3) 56,318 79,426 Accounts payable and accrued liabilities (notes 5 and 11) 1,622,288 1,469,369 Subordinated debt (note 8) 15,000 25,000 ------------------------------------------------------------------------- Total current liabilities 1,799,394 1,649,395 ------------------------------------------------------------------------- Commitments and contingencies (note 13) Shareholders' equity Common shares (note 9) 185,068 183,619 Contributed surplus (note 9) 46,230 44,383 Retained earnings 169,980 160,868 Accumulated other comprehensive losses (15,882) (16,166) ------------------------------------------------------------------------- Total shareholders' equity 385,396 372,704 ------------------------------------------------------------------------- 2,184,790 2,022,099 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Canaccord Capital Inc. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands of dollars, except per share amounts) For the three months ended ---------------------------- June 30, June 30, 2009 2008 $ $ ------------------------------------------------------------------------- REVENUE Commission 55,456 71,996 Investment banking 55,886 76,147 Principal trading 11,470 5,911 Interest 3,476 12,329 Other 11,175 6,325 ------------------------------------------------------------------------- 137,463 172,708 ------------------------------------------------------------------------- EXPENSES Incentive compensation 68,463 82,727 Salaries and benefits 13,802 15,443 Trading costs 7,324 6,321 Premises and equipment 5,882 5,785 Communication and technology 5,489 6,163 Interest 845 3,959 General and administrative 11,888 19,277 Amortization 1,921 2,042 Development costs 5,854 7,462 ------------------------------------------------------------------------- 121,468 149,179 ------------------------------------------------------------------------- Income before income taxes 15,995 23,529 Income tax expense (recovery) (note 7) Current 4,561 (11,550) Future 2,322 18,620 ------------------------------------------------------------------------- 6,883 7,070 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net income for the period 9,112 16,459 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic earnings per share (note 9(iv)) 0.19 0.35 Diluted earnings per share (note 9 (iv)) 0.16 0.31 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Canaccord Capital Inc. INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (in thousands of dollars) For the three months ended ---------------------------- June 30, June 30, 2009 2008 $ $ ------------------------------------------------------------------------- Net income for the period 9,112 16,459 Other comprehensive income, net of taxes Net change in unrealized gains (losses) on translation of self-sustaining foreign operations 284 (430) ------------------------------------------------------------------------- Comprehensive income for the period 9,396 16,029 ------------------------------------------------------------------------- ------------------------------------------------------------------------- INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (in thousands of dollars) June 30, June 30, As at and for the three months ended June 30, 2009 2008 2009 and 2008 $ $ ------------------------------------------------------------------------- Common shares, opening 183,619 111,142 Shares issued 1,629 67,952 Shares held in treasury - (221) Shares cancelled - - Acquisition of common shares for long term incentive plan (note 10) (4,461) (790) Release of vested common shares from employee benefit trust (note 10) 4,486 3,125 Unvested share purchase loans (205) (1,416) ------------------------------------------------------------------------- Common shares, closing 185,068 179,792 ------------------------------------------------------------------------- Contributed surplus, opening 44,383 34,024 Excess on redemption of common shares - (170) Stock-based compensation (note 10) 296 2,790 Unvested share purchase loans 1,551 1,983 ------------------------------------------------------------------------- Contributed surplus, closing 46,230 38,627 ------------------------------------------------------------------------- Retained earnings, opening 160,868 222,597 Net income for the period 9,112 16,459 Dividends - (6,824) ------------------------------------------------------------------------- Retained earnings, closing 169,980 232,232 ------------------------------------------------------------------------- Accumulated other comprehensive losses, opening (16,166) (10,319) Other comprehensive income (losses) for the period 284 (430) ------------------------------------------------------------------------- Accumulated other comprehensive losses, closing (15,882) (10,749) ------------------------------------------------------------------------- Shareholders' equity 385,396 439,902 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Canaccord Capital Inc. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands of dollars) For the three months ended ---------------------------- June 30, June 30, 2009 2008 $ $ ------------------------------------------------------------------------- OPERATING ACTIVITIES Net income for the period 9,112 16,459 Items not affecting cash Amortization 1,921 2,042 Stock-based compensation expense 5,268 6,308 Future income tax expense 2,322 18,620 Changes in non-cash working capital Increase in securities owned (34,789) (24,215) Increase in accounts receivable (95,038) (102,446) Decrease (increase) in income taxes receivable 3,732 (8,798) (Decrease) increase in securities sold short (23,322) 18,451 Increase in accounts payable and accrued liabilities 142,230 143,820 ------------------------------------------------------------------------- Cash provided by operating activities 11,436 70,241 ------------------------------------------------------------------------- FINANCING ACTIVITIES Repayment of subordinated debt (10,000) - Acquisition of common shares for long term incentive plan (4,461) (790) Decrease (increase) in unvested common share purchase loans 1,346 567 Issuance of shares for cash net of issuance costs - 66,462 Acquisition of shares held in treasury - (391) ------------------------------------------------------------------------- Cash (used) provided by financing activities (13,115) 65,848 ------------------------------------------------------------------------- INVESTING ACTIVITIES Disposal (purchase) of equipment and leasehold improvements (452) (670) Proceeds on net redemption of investment in ABCP 894 - ------------------------------------------------------------------------- Cash provided (used) in investing activities 442 (670) ------------------------------------------------------------------------- Effect of foreign exchange on cash balances 4,144 (1,013) ------------------------------------------------------------------------- Increase in cash position 2,907 134,406 Cash position, beginning of period 625,573 420,611 ------------------------------------------------------------------------- Cash position, end of period 628,480 555,017 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash position is comprised of: Cash and cash equivalents 734,268 555,017 Bank indebtedness 105,788 - ------------------------------------------------------------------------- 628,480 555,017 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplemental cash flow information Interest paid 791 3,923 Income taxes paid 824 553 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Canaccord Capital Inc. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the three months (in thousands of dollars, ended June 30, 2009 except per share amounts) Through its principal subsidiaries, Canaccord Capital Inc. (the Company) is a leading independent, full-service investment dealer in Canada with capital markets operations in the United Kingdom (UK) and the United States of America (US). The Company has operations in each of the two principal segments of the securities industry: capital markets and private client services. Together, these operations offer a wide range of complementary investment products, brokerage services and investment banking services to the Company's private, institutional and corporate clients. The Company's business is cyclical and experiences considerable variations in revenue and income from quarter to quarter and year to year due to factors beyond the Company's control. The Company's business is affected by the overall condition of the North American and European equity markets, including the seasonal variance in these markets. 1. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation and principles of consolidation These unaudited interim consolidated financial statements have been prepared by the Company in accordance with Canadian generally accepted accounting principles (GAAP) with respect to interim financial statements, 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, 2009 as filed on SEDAR on May 26, 2009 (Audited Annual Consolidated Financial Statements) except for the changes in accounting policies as described in Note 2. Accordingly, they do not include all the information and footnotes required for compliance with Canadian GAAP for annual financial statements. These unaudited interim consolidated financial statements and notes thereon should be read in conjunction with the Audited Annual Consolidated Financial Statements. The preparation of these unaudited interim consolidated financial statements and the accompanying notes requires management to make estimates and assumptions that affect the amounts reported. In the opinion of management, these unaudited interim consolidated financial statements reflect all adjustments necessary to state fairly the results for the periods presented. Actual results could vary from these estimates and the operating results for the interim periods presented are not necessarily indicative of results that may be expected for the full year. Recent accounting pronouncements Business Combinations and Consolidated Financial Statements In January 2009, the Canadian Institute of Chartered Accountants (CICA) issued a new accounting standard, CICA Handbook Section 1582 "Business Combinations", which replaces the former Section 1581 "Business Combinations". This standard harmonizes Canadian guidance to the International Financial Reporting Standard (IFRS) 3 "Business Combinations". This standard requires additional use of fair value measurements, provides guidance on the recognition and measurement of goodwill acquired in the business combination, transaction costs to be expensed and requires increased financial statements note disclosure. This standard is to be applied prospectively for business combinations for which the acquisition date is on or after April 1, 2011. In addition, the CICA has issued Handbook Section 1601 "Consolidated Financial Statements" and Handbook Section 1602 "Non-controlling Interests", which replace CICA Handbook Section 1600 "Consolidated Financial Statements". CICA Handbook Section 1601 carries forward guidance from CICA Handbook Section 1600 except for the standards relating to the accounting for non-controlling interests, which are addressed separately in Section 1602. Section 1602 substantially harmonizes Canadian standards with amended International Accounting Standard 27 "Consolidated and Separate Financial Statements". This Canadian standard provides guidance on accounting for non-controlling interest in a subsidiary in the consolidated financial statements subsequent to a business combination. These two standards will be effective for the Company beginning April 1, 2011. Early adoption prior to April 1, 2011 is permitted, and all three standards must be adopted concurrently. The impact of adoption of these standards is being assessed. International Financial Reporting Standards (IFRS) The Canadian Accounting Standards Board (AcSB) has confirmed that the use of IFRS will be required commencing in 2011 for publicly accountable, profit-oriented enterprises. IFRS will replace Canadian GAAP currently followed by the Company. The purpose of this adoption is to increase the comparability of financial reporting among countries and to improve transparency. The Company will be required to begin reporting under IFRS for its fiscal year ended March 31, 2012 and will be required to provide information that conforms with IFRS for the comparative periods presented. The Company is currently in the process of evaluating the potential impact of IFRS to the consolidated financial statements. This is an ongoing process as the International Accounting Standards Board (IASB) and the AcSB continue to issue new standards and recommendations. The Company's consolidated financial performance and financial position as disclosed in the current Canadian GAAP financial statements may differ significantly when presented in accordance with IFRS. Some of the significant differences identified between IFRS and Canadian GAAP may have a material impact on the Company's consolidated financial statements. 2. CHANGE IN ACCOUNTING POLICIES Goodwill and Intangible Assets The CICA issued a new accounting standard, CICA Handbook Section 3064 "Goodwill and Intangible Assets", which prescribes when expenditures qualify for recognition as intangible assets and provides increased guidance on the recognition and measurement of internally generated goodwill and intangible assets. The Company adopted Section 3064 effective April 1, 2009. The adoption of this new standard has no impact on the consolidated financial statements. 3. SECURITIES OWNED AND SECURITIES SOLD SHORT June 30, 2009 March 31, 2009 ------------------------- ----------------------- Securities Securities Securities Securities owned sold short owned sold short $ $ $ $ ------------------------------------------------------------------------- Corporate and government debt 45,879 27,965 86,069 72,315 Equities and convertible debentures 123,151 28,353 47,622 7,111 ------------------------------------------------------------------------- 169,030 56,318 133,691 79,426 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at June 30, 2009 corporate and government debt maturities range from 2009 to 2049 (March 31, 2009 - 2009 to 2049) and bear interest ranging from 2.75% to 11.00% (March 31, 2009 - 3.00% to 10.75%). 4. FINANCIAL INSTRUMENTS During the period, there have been no material changes to the risks associated with the Company's financial instruments from those described in Note 4 of the March 31, 2009 Audited Annual Consolidated Financial Statements. Additional disclosures regarding fair value measurements of financial instruments as required by new amendments made to CICA Handbook Section 3862 are disclosed below. A fair value hierarchy is presented below that distinguishes the significance of the inputs used in determining the fair value measurements of various financial instruments. The hierarchy contains the following levels: Level 1 uses inputs based on quoted prices, Level 2 uses observable inputs other than quoted prices and Level 3 uses inputs that are not based on observable market data. Carrying Value Estimated Fair Value June 30, March 31, June 30, 2009 2009 2009 Level 1 Level 2 Level 3 $ $ $ $ $ ------------------------------------------------------------------------- Held for trading Cash and cash equivalents 734,268 701,173 734,268 - - Securities owned, net of securities sold short 112,712 54,265 111,583 1,129 - Investment in ABCP (note 6) 34,418 35,312 - - 34,418 Available for sale financial assets Investment(1) 5,000 5,000 n/a n/a n/a Other financial liabilities Subordinated debt 15,000 25,000 15,000 - ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Investment is classified as available for sale and carried at cost as the investment does not have a quoted market price. The estimated fair value of the investment cannot be reliably determined and therefore, it is not disclosed in the above table. (2) The fair value of the Company's bank indebtedness, accounts receivable, and accounts payable and accrued liabilities approximate their carrying value due to their short term nature. 5. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts receivable June 30, March 31, 2009 2009 $ $ ------------------------------------------------------------------------- Brokers and investment dealers 301,836 331,930 Clients 417,439 288,877 RRSP cash balances held in trust 403,000 397,011 Other 44,335 43,343 ------------------------------------------------------------------------- 1,166,610 1,061,161 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accounts payable and accrued liabilities June 30, March 31, 2009 2009 $ $ ------------------------------------------------------------------------- Brokers and investment dealers 393,931 419,437 Clients 1,047,365 923,902 Other 180,992 126,030 ------------------------------------------------------------------------- 1,622,288 1,469,369 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accounts payable to clients include $403.0 million (March 31, 2009 - $397.0 million) payable to clients for RRSP cash balances held in trust. Client security purchases are entered into on either a cash or margin basis. In the case of a margin account, the Company extends a loan to a client for the purchase of securities, using securities purchased and/or other securities in the client's account as collateral. Amounts loaned to any client are limited by margin regulations of the Investment Industry Regulatory Organization of Canada and other regulatory authorities and are subject to the Company's credit review and daily monitoring procedures. Amounts due from and to clients are due by the settlement date of the trade transaction. Margin loans are due on demand and are collateralized by the assets in the client accounts. Interest on margin loans and amounts due to clients is based on a floating rate (June 30, 2009 - 5.25%-6.25% and 0.00%-0.05%, respectively; March 31, 2009 - 5.50%-6.25% and 0.00%-0.20%, respectively). 6. INVESTMENT IN ASSET-BACKED COMMERCIAL PAPER June 30, March 31, 2009 2009 $ $ ------------------------------------------------------------------------- Investment in asset-backed commercial paper 34,418 35,312 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As a result of liquidity issues in the asset-backed commercial paper (ABCP) market, there has been no active trading of the ABCP since mid- August 2007. In January 2009, the Company received restructured ABCP notes upon the final implementation order issued by the Ontario Superior Court in a plan of arrangement under the Companies' Creditors Arrangement Act (CCAA) (the Plan). During the quarter ended June 30, 2009, there have been no material changes to the accounting treatment of investment in ABCP. Refer to Note 7 of the March 31, 2009 Audited Annual Consolidated Financial Statements as filed on SEDAR on May 26, 2009 for further information. The Plan as amended provided for a declaratory release that was effective on implementation of the Plan and that, with the closing of the Canaccord Relief Program, resulted in the release of all existing and future ABCP- related claims against the Company. There is no assurance that the validity or effectiveness of the declaratory release will not be challenged in actions commenced against the Company and others. Any determination that the declaratory release is invalid or ineffective could materially adversely affect the Company's business, results of operations and financial condition. There has been no active trading of the restructured ABCP notes since January 21, 2009 and as such no meaningful market quote is available. There is a significant amount of uncertainty in estimating the amount and timing of cash flows associated with the ABCP. The Company estimates the fair value of its ABCP by discounting expected future cash flows on a probability weighted basis considering the best available data at the reporting date. The assumptions used in the valuation model include: June 30, March 31, 2009 2009 ------------------------------------------------------------------------- Weighted average interest rate 5.00% 4.72% Weighted average discount rate 6.79% 6.83% Maturity of notes 8 to 19 years 8 to 19 years Credit losses 25% to 100% 25% to 100% During the period ended June 30, 2009, certain restructured ABCP notes held by the Company with a fair value of $1.7 million were redeemed by the issuer and received $0.8 million fair value of restructured ABCP notes as part of the client relief program. There was no fair value adjustment of the investment in ABCP during the 3 months ended June 30, 2009. 7. INCOME TAXES The Company's income tax expense differs from the amount that would be computed by applying the combined federal and provincial/state income tax rates as a result of the following: June 30, June 30, 2009 2008 $ $ ------------------------------------------------------------------------- Income taxes at the statutory rate 4,673 7,368 Less: International Finance Business recovery of provincial taxes - - Less: Difference in tax rates in foreign jurisdictions (124) (647) Non-deductible items affecting the determination of taxable income 324 341 Change in FIT asset - reversal period of temporary differences 1,293 8 Change in accounting and tax base estimate 717 - ------------------------------------------------------------------------- Income tax expense - current and future 6,883 7,070 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 8. SUBORDINATED DEBT June 30, March 31, 2009 2009 $ $ ------------------------------------------------------------------------- Loan payable, interest payable monthly at prime + 4% per annum, due on demand 15,000 25,000 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The loan payable is subject to a subordination agreement and may only be repaid with the prior approval of the Investment Industry Regulatory Organization of Canada. 9. SHARE CAPITAL June 30, March 31, 2009 2009 $ $ ------------------------------------------------------------------------- Share capital Common shares 251,047 249,418 Unvested share purchase loans (31,116) (30,911) Acquisition of common shares for long term incentive plan (note 10) (34,863) (34,888) ------------------------------------------------------------------------- 185,068 183,619 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Share capital of Canaccord Capital Inc. is comprised of the following: (i) Authorized Unlimited common shares without par value Unlimited preferred shares without par value (ii) Issued and fully paid Common shares Number of Amount shares $ ------------------------------------------------------------------------- Balance, June 30, 2008 54,590,583 241,751 Shares issued in connection with stock compensation plans (note 10) 827,333 9,128 Shares cancelled (325,072) (1,461) ------------------------------------------------------------------------- Balance, March 31, 2009 55,092,844 249,418 Shares issued in connection with stock compensation plans (note 10) 140,976 1,629 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Balance, June 30, 2009 55,233,820 251,047 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (iii) Common share purchase loans The Company provides forgivable common share purchase loans to employees in order to purchase common shares. The unvested balance of forgivable common share purchase loans is presented as a deduction from share capital. The forgivable common share purchase loans are amortized over a vesting period up to five years. The difference between the unvested and unamortized values is included in contributed surplus. (iv) Earnings per share For the three months ended --------------------------- June 30, June 30, 2009 2008 $ $ ------------------------------------------------------------------------- Basic earnings per share Net income for the period 9,112 16,459 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares (number) 48,165,290 47,518,618 Basic earnings per share 0.19 0.35 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings per share Net income for the period 9,112 16,459 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares (number) 48,165,290 47,518,618 Dilutive effect of unvested shares (number) 3,886,761 2,895,551 Dilutive effect of share issuance commitment in connection with retention plan (number) - 552,631 Dilutive effect of unvested shares purchased by employee benefit trust (number) (note 10) 3,102,761 1,594,664 Dilutive effect of share issuance commitment in connection with long term incentive plan (number) (note 10) 176,437 158,993 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Adjusted weighted average number of common shares (number) 55,331,249 52,720,457 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings per share 0.16 0.31 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 10. STOCK-BASED COMPENSATION PLANS 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 or 30 days after the participant ceases to be a director. The exercise price is based on the fair market value of the common shares at grant date. The weighted average exercise price of the stock options is $12.46 at June 30, 2009. The following is a summary of the Company's stock options to Directors as at June 30, 2009 and changes during the period then ended: Weighted average Number of exercise shares price ($) ------------------------------------------------------------------------- Balance, June 30, 2008 250,000 16.31 Granted 25,000 7.87 Expired (50,000) 16.31 ------------------------------------------------------------------------- Balance, March 31, 2009 225,000 15.37 Granted 125,000 7.21 ------------------------------------------------------------------------- Balance, June 30, 2009 350,000 12.46 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The fair value of each stock option grant has been estimated on grant date using the Black-Scholes option pricing model with the following assumptions: May August June 2009 2008 2008 grant grant grant ------------------------------------------------------------------------- Dividend yield 2.30% 5.10% 5.10% Expected volatility 44.00% 30.00% 30.00% Risk-free interest rate 0.25% 2.32% 2.32% 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 $62 (June 30, 2008 - $51) has been recognized for the three months ended June 30, 2009. Long term incentive plan Under the long term incentive plan (LTIP), eligible participants are awarded restricted share units (RSUs) which vest over three years. For employees in Canada, an employee benefit trust (the Trust) has been established, and either (a) the Company will fund the Trust with cash, which will be used by a trustee to purchase on the open market common shares of the Company that will be held in trust by the trustee until RSUs vest or (b) the Company will issue common shares from treasury to participants following vesting of RSUs. For employees in the United States and the United Kingdom, at the time of each RSU award, the Company will allot common shares and these shares will be issued from treasury at the time they vest for each participant. The costs of the RSUs are amortized over the vesting period of three years. Compensation expense of $5,206 (June 30, 2008 - $4,828) has been recognized for the three months ended June 30, 2009. For the three month period ended June 30, June 30, 2009 2008 ---------------------------- Number of awards outstanding: Awards outstanding, beginning of period 4,602,385 2,221,578 Granted 908,324 1,204,870 Vested (536,046) (168,050) ------------------------------------------------------------------------- Awards outstanding, end of period 4,974,663 3,258,398 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three month period ended June 30, June 30, 2009 2008 ---------------------------- Number of common shares held by Trust: Common shares held by Trust, beginning of period 3,075,300 1,621,895 Acquired 571,929 100,000 Released on vesting (395,070) (145,768) ------------------------------------------------------------------------- Common shares held by Trust, end of period 3,252,159 1,576,127 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 11. RELATED PARTY TRANSACTIONS Security trades executed by the Company for employees, officers and directors are transacted in accordance with the terms and conditions applicable to all clients. Commission income on such transactions in the aggregate is not material in relation to the unaudited interim consolidated financial statements. Accounts receivable and accounts payable and accrued liabilities include the following balances with the related parties described above: June 30, March 31, 2009 2009 $ $ ------------------------------------------------------------------------- Accounts receivable 42,095 38,733 Accounts payable and accrued liabilities 84,049 77,334 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 12. SEGMENTED INFORMATION The Company has two operating segments: Canaccord Adams - includes investment banking, research and trading activities on behalf of corporate, institutional and government clients as well as principal trading activities in Canada, the UK and 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 --------------------------------------------------- June 30, 2009 --------------------------------------------------- Private Canaccord Client Corporate Adams Services and Other Total $ $ $ $ ------------------------------------------------------------------------- Revenues 85,497 40,185 11,781 137,463 Expenses excluding undernoted 65,230 32,661 15,802 113,693 Amortization 958 602 361 1,921 Development costs 2,944 1,905 1,005 5,854 ------------------------------------------------------------------------- Income (loss) before income taxes 16,365 5,017 (5,387) 15,995 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the three months ended --------------------------------------------------- June 30, 2008 --------------------------------------------------- Private Canaccord Client Corporate Adams Services and Other Total $ $ $ $ ------------------------------------------------------------------------- Revenues 104,793 57,853 10,062 172,708 Expenses excluding undernoted 79,985 42,708 16,982 139,675 Amortization 912 409 721 2,042 Development costs 4,123 1,566 1,773 7,462 ------------------------------------------------------------------------- Income (loss) before income taxes 19,773 13,170 (9,414) 23,529 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company's business operations are grouped into the following four geographic segments (revenue is attributed to geographic areas on the basis of the underlying corporate operating results): For the three months ended --------------------------- June 30, June 30, 2009 2008 $ $ ------------------------------------------------------------------------- Canada Revenue 87,934 108,898 Equipment and leasehold improvements 30,564 24,780 Goodwill and other intangible assets - 4,020 United Kingdom Revenue 20,925 33,718 Equipment and leasehold improvements 6,792 7,798 United States Revenue 27,179 25,621 Equipment and leasehold improvements 7,010 6,997 Goodwill and other intangible assets - 28,147 Other Foreign Location Revenue 1,425 4,471 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 13. COMMITMENTS AND CONTINGENCIES During the period, there have been no material changes to the Company's commitments and contingencies from those described in Note 17 of the March 31, 2009 Audited Annual Consolidated Financial Statements as filed on SEDAR on May 26, 2009.

For further information:

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) 207 466 5000, Email:
bobbym@buchanan.uk.com; Investor relations inquiries: Joy FenneyVice
President, Investor Relations, Phone: (416) 869-3515, Email:
joy_fenney@canaccord.com; Nominated Adviser and Broker: Marc Milmo, Fox-Pitt,
Kelton Limited, Phone: +44 (0) 207 663 6000, Email: marc.milmo@fpk.com


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