5th Aug 2005 13:35
Canaccord Capital Inc. reports record first quarter 2006 results Record first quarter revenue and net income led by solid growth in Global Capital Markets (All dollar amounts are stated in Canadian dollars unless otherwise indicated) VANCOUVER, Aug. 5 /CNW/ - Canaccord Capital Inc. (CCI: TSX & AIM)announced that its revenue for its first quarter of fiscal 2006, endedJune 30, 2005, was a first quarter record of $99.0 million, up $18.5 millioncompared to the same period a year ago. Net income for the first quarter offiscal 2006 was a first quarter record of $11.1 million, up $2.7 million fromthe same period a year ago, and diluted earnings per share (EPS) were $0.24,up $0.01 from the same period a year ago. "We continued to successfully execute on our long term growth strategythis quarter, demonstrating strategic focus and entrepreneurial spirit," saidPeter M. Brown, Chairman & CEO. Michael G. Greenwood, President & COO, added,"The commitment and creativity of our employees and partners enabled us toleverage unseasonable market opportunities to deliver record revenue thisquarter." Highlights of fiscal first quarter 2006 (the three months ended June 30, 2005), compared to the fiscal first quarter of 2005 (three months ended June 30, 2004): - Revenue of $99.0 million, up $18.5 million, or 23%, from $80.5 million - Net income of $11.1 million, up $2.7 million, or 32%, from $8.4 million - Expenses of $83.6 million, up $15.5 million, or 23%, from $68.1 million - Diluted EPS of $0.24, up $0.01, or 4%, from $0.23 - Return on equity (ROE) of 19.8%, up from a ROE of 19.3% (the slower growth in diluted EPS and ROE than in revenue and net income is partially attributable to the issuance of $70 million in common shares resulting from the Initial Public Offering on June 30, 2004) - Book value per common share at the period end grew to $4.91, up $0.62 from $4.29 - A common share dividend of $0.06 per share was declared by the Board on August 4, 2005 to be payable on September 9, 2005, with a record date of August 24, 2005 - During the quarter the Company realized a one time pre-tax gain of $1.6 million from the disposal of an investment in the Bourse de Montrĩal. This gain was equivalent to $1.3 million after tax and approximately $0.03 per diluted share. Developments: - On June 22, 2005, Canaccord was admitted to the Alternative Investment Market (AIM) of the London Stock Exchange in the United Kingdom. Canaccord is now publicly traded on the Toronto Stock Exchange in Canada and on AIM in the United Kingdom, which will provide Canaccord and its shareholders with greater visibility, enhanced liquidity and access to a deeper capital pool, if needed. - As of August 5, 2005, Canaccord has 2,067,415 of its common shares available for purchase under its existing normal course issuer bid through the facilities of the Toronto Stock Exchange. The Board of Directors has approved a capital management plan for Canaccord to purchase for cancellation up to 500,000 of the 2,067,415 remaining common shares available under the normal course issuer bid by the end of the fiscal year. For more details on the capital management plan please see page 13. ACCESS TO QUARTERLY RESULTS INFORMATION: Interested investors, the media and others may review this quarterlyearnings release and supplementary financial information at:www.canaccord.com/investor/financialreports. QUARTERLY CONFERENCE CALL AND WEBCAST PRESENTATION: Interested parties can listen to our first quarter results conferencecall with analysts and institutional investors live and archived, via theInternet and toll free telephone. The conference call is scheduled for Friday, August 5, 2005 at 10:00 a.m.(Pacific time). At that time, senior executives will comment on the resultsfor the first quarter and respond to questions from analysts and institutionalinvestors. The conference call may be accessed live and archived on a listen-only basis via the Internet at: www.canaccord.com/investor/webcast. Analysts and institutional investors can call in via telephone at: 416-640-4127 (within Toronto), 1-800-814-4857 (toll-free outside Toronto) or00-800-0000-2288 (toll-free from the United Kingdom). A replay of theconference call can be accessed after 6:00 p.m. (Pacific time) on August 5,2005 until midnight August 19, 2005 at 416-640-1917 or 1-877-289-8525 byentering passcode 21130379 followed by the number sign. ANNUAL GENERAL MEETING: The Annual General Meeting of shareholders will be held on Friday,August 5, 2005 at 2:00 p.m. at the Four Seasons Hotel, 791 West GeorgiaStreet, Vancouver, BC, Canada. A live Internet Webcast of the Annual General Meeting will also beavailable for shareholders to view on August 5, 2005. This Webcast will bearchived for viewing after the event. Please visit the Webcast events page atwww.canaccord.com for more information and a direct link. ABOUT CANACCORD CAPITAL INC.: Canaccord Capital Inc. is a leading independent full service investmentdealer, publicly traded on both the Toronto Stock Exchange and the AlternativeInvestment Market, a market operated by the London Stock Exchange. Canaccordhas operations in two of the principal segments of the securities industry:Private Client Services and Global Capital Markets. Together, these operationsoffer a wide range of complementary investment products, brokerage servicesand investment banking services to Canaccord's retail, institutional andcorporate clients. Canaccord has approximately 1,300 employees worldwide in28 offices, this includes Investment Advisors located in 25 offices acrossCanada, and international Global Capital Markets professionals based inVancouver, Calgary, Toronto, Montrĩal and London (UK). FOR FURTHER INFORMATION CONTACT: Anthony Ostler London: Senior Vice President, Investor Bobby Morse/Charles Ryland Relations & Communications Buchanan Communications Phone: 604-643-7647 Phone: +44 (0) 207 466 5000 Email: anthony_ostler(at)canaccord.com Email: bobbym(at)buchanan.uk.com ------------------------------------------------------------------------- None of the information in Canaccord's Web site www.canaccord.com should be considered incorporated herein by reference. ------------------------------------------------------------------------- MESSAGE from the CHAIRMAN & CEO and the PRESIDENT & COO We continued to successfully execute on our long term growth strategythis quarter, demonstrating the strategic focus and entrepreneurial spiritthat has resulted in enhanced client service and record revenue to date.Canaccord normally experiences the traditional seasonal fluctuations of thefinancial industry, with the first half of each fiscal year contributingapproximately 35% to 40% of annual revenue. At the start of the quarter, itlooked as if Q1/06 would be similar to previous fiscal first quarters.However, we managed to generate 23% revenue growth and 32% net income growthover Q1/05 due to our ability to quickly adapt to market opportunities in themonth of June. This strong start to fiscal 2006 suggests that our growth iscontinuing and we expect the remaining three quarters to reflect historicalseasonal trends. Growth strategy drives performance Private Client Services continued its evolution toward stable andrecurring revenue this quarter. Fee-related revenue as a percentage of PrivateClient Services' revenue increased to 24.2% this quarter, assets undermanagement grew 50% to $410 million and assets under administration grew 21%to $10 billion. We continue to attract and retain highly skilled andexperienced professionals; the number of Investment Advisors in Private ClientServices increased to 439, up a net 13 from a year ago. We remain committed toproviding our private clients with superior wealth management strategies in anindependent, idea-driven environment. Global Capital Markets revenue reached $54.5 million in Q1/06,representing growth of 39% compared to the same period last year. Strength inthe income trust and energy sectors led these successful results, along withcontinued improvement in Global Capital Markets activity as a lead dealer,syndicate participation, sales and trading services, and our global researchfranchise. In the Brendan Wood International Institutional Equity Research,Sales and Trading Performance in Canada 2005 Report, Canaccord's ResearchGroup was the top ranked independent research department, tied for first forquality of investment ideas and tied for fourth for quality of researchoverall, and was ranked with 10 of 15 analysts in the top 10 in their sectors.In the StarMine Monitor Analyst Awards, Canaccord ranked eighth among the top10 most award winning dealers of 2004 in Canada, even with a smaller group ofanalysts than our competition. In addition, Sara Elford of our SpecialSituations team was ranked by StarMine Monitor Analyst Awards as Canada's topstock picker overall for accuracy in 2004. Along with Canaccord's growingreputational franchise and market share, the Global Capital Markets teamcontinues to grow, with the number of professionals increasing by 41, or 16%,in Q1/06 compared to Q1/05, as we improve and expand client service. As announced in Q3/05, we commenced the new flat incentive compensationpayout ratio structure for the Global Capital Markets group with the start offiscal 2006. The total compensation payout ratio to total fiscal 2006 revenuefor Global Capital Markets is expected to be approximately 55%, plus a 3%employment tax in Europe, compared to 59.1% in fiscal 2005. In 2005, GlobalCapital Markets incentive compensation was subject to a step-up based onreturn on allocated capital, which has been eliminated in 2006. Additionally,in 2006, certain salary and benefits expenses are now charged against theGlobal Capital Markets incentive compensation pool and deducted from otherwisepayable. Although the total Global Capital Markets compensation payout ratiofor Q1/06 of 55.2% is higher than 48.3% in Q1/05, it is important to note thatthis change is expected to effectively reduce Canaccord's overall totalcompensation expense ratio across the full fiscal year compared to fiscal2005. Canaccord - a growing global company Canaccord is a focused, integrated and global service provider ofinnovative investment ideas and sector expertise in the small-cap to mid-capmarket niche. When Canaccord expanded into the European markets in May 1999,it was the beginning of a long term investment in developing a differentiated,independent global perspective that would set us apart from our competition.Our goal is to provide our clients with insight and access to markets andopportunities worldwide in our key areas of expertise. Recent trends in theglobal marketplace, such as the deregulation of foreign content restrictionsin Registered Retirement Savings Plans in Canada and the strength in resourcesectors globally, have validated this strategic focus. In June 2004, our initial public offering (IPO) on the Toronto StockExchange furthered this growth strategy, providing access to public markets,enhanced visibility and the capital necessary to finance operations, potentialacquisitions and continued growth. Almost one year later, on June 25, 2005, wetook another step along this path and listed on the Alternative InvestmentMarket (AIM) in London, providing Canaccord and our shareholders with greatervisibility, liquidity and access to a deeper capital pool, if needed. We lookforward to continued execution of this strategy and growing a successful,sustainable company. Enhanced by our IPO, Canaccord has a strong capital base. We have beenable to add to this capital base, after dividends, another $30 million ininternally generated capital since the IPO. We are continually looking atinvestment opportunities for this capital. With our strong capital generationcapabilities, we need to ensure that we also return to shareholders any excesscapital that we cannot productively invest or do not need to hold. We have avariety of options available to us to return capital, including regulardividends, special distributions and share buybacks. As we announced at theend of fiscal 2005, we have instituted a new regular dividend policy startingthis quarter, and will also consider special distributions. However, webelieve it is important to use a mix of the capital management tools to helpreturn capital to shareholders while providing support to our earnings pershare and return on equity. Therefore, the Board approved the implementationof the capital management plan described on page 1 to purchase up to 500,000shares for cancellation between now and the end of the fiscal year pursuant toCanaccord's existing normal course issuer bid. We will continue to evaluateour capital position each quarter to ensure the appropriate balance betweenour capital needs and our desire to create value for shareholders. In closing, we would like to thank our employees and partners for theirvalued contribution and continued dedication in helping Canaccord retain itsrole as Canada's pre-eminent full service independent investment dealer. Welook forward to updating you on our progress over the year. (Signatures to come in final draft.) PETER M. BROWN MICHAEL G. GREENWOOD Chairman & Chief Executive Officer President & Chief Operating Officer Management's Discussion and Analysis First quarter fiscal 2006 ended June 30, 2005 - this document is dated August 5, 2005 The following discussion of Canaccord Capital Inc.'s (Canaccord)financial condition and results of operations is provided to enable a readerto assess material changes in financial condition and results of operationsfor the three-month period ended June 30, 2005, compared to the correspondingperiod in the preceding fiscal year, with an emphasis on the most recentthree-month period. Canaccord's fiscal year end is March 31. Canaccord's firstquarter fiscal 2006 was the three-month period ended June 30, 2005 and is alsoreferred to as first quarter 2006 and as Q1/06 in the following discussion.This discussion should be read in conjunction with the unaudited interimconsolidated financial statements for the three-month period ended June 30,2005, beginning on page 17 of this report, the annual Management's Discussionand Analysis (MD&A), our Annual Information Form of June 10, 2005 and theaudited consolidated financial statements for the fiscal year ended March 31,2005, in Canaccord's Annual Report dated June 27, 2005 (the Annual Report).There has been no material change to the information contained in the annualMD&A for fiscal 2005 except as disclosed in this MD&A. Canaccord's financialinformation is expressed in Canadian dollars and is prepared in accordancewith Canadian generally accepted accounting principles (GAAP) with areconciliation to international financial reporting standards. All thefinancial data below is unaudited except for the fiscal year 2005 data. Caution regarding forward-looking statements This document may contain certain forward-looking statements. Thesestatements relate to future events or future performance and reflectmanagement's expectations regarding Canaccord's growth, results of operations,performance and business prospects and opportunities. Such forward-lookingstatements reflect management's current beliefs and are based on informationcurrently available to management. In some cases, forward-looking statementscan be identified by terminology such as "may", "will", "should", "expect","plan", "anticipate", "believe", "estimate", "predict", "potential","continue", "target" or the negative of these terms or other comparableterminology. By their very nature, forward-looking statements involve inherentrisks and uncertainties, both general and specific, and a number of factorscould cause actual events or results to differ materially from the resultsdiscussed in the forward-looking statements. In evaluating these statements,readers should specifically consider various factors, which may cause actualresults to differ materially from any forward-looking statement. These factorsinclude, but are not limited to, market and general economic conditions, thenature of the financial services industry and the risks and uncertaintiesdetailed from time to time in Canaccord's interim and annual financialstatements and its Annual Report and Annual Information Form filed onwww.sedar.com. These forward-looking statements are made as of the date ofthis document, and Canaccord assumes no obligation to update or revise them toreflect new events or circumstances. Overview Canaccord is a leading independent full service investment dealer.Canaccord has operations in each of the two principal segments of thesecurities industry: Private Client Services and Global Capital Markets.Together these operations offer a wide range of complementary investmentproducts, brokerage services and investment banking services to Canaccord'sretail, institutional and corporate clients. Canaccord's strong capital base enables the Company to support expansionin Private Client Services and Global Capital Markets and to respond quicklyto competitive changes in the industry. Canaccord's independent ownershipstructure, with a majority of its outstanding shares employee and directorowned, is key to promoting an entrepreneurial culture and providing a distinctrecruiting advantage for attracting and retaining highly qualifiedprofessionals. Non-GAAP measures Certain non-GAAP measures are utilized by Canaccord as measures offinancial performance. Non-GAAP measures do not have any standardized meaningprescribed by GAAP and are therefore unlikely to be comparable to similarmeasures presented by other companies. Canaccord's capital is represented by common shareholders' equity and,therefore, management uses return on average common equity (ROE) as aperformance measure. Assets under administration (AUA) is a non-GAAP measure of client assetsthat is common to the wealth management aspects of the private client servicesindustry. AUA is the market value of client assets administered by Canaccordin respect of which Canaccord earns commissions or fees. This measure includesfunds held in client accounts as well as the aggregate market value of longand short security positions. Canaccord's method of calculating AUA may differfrom the methods used by other companies and therefore may not be comparableto other companies. Management uses this measure to assess operationalperformance of the Private Client Services business segment. Consolidated overview Summary data(1) For the three months ended June 30 -------------------- (C$ thousands, except per share, employee and % amounts) 2005 2004 Increase ------------------------------------------------------------------------- Revenue 99,017 80,565 18,452 22.9% Expenses 83,587 68,094 15,493 22.8% Net income 11,078 8,406 2,672 31.8% Earnings per share (EPS) - diluted(2) 0.24 0.23 0.01 4.3% Return on average common equity (ROE)(2) 19.8% 19.3% Book value per common share - period end 4.91 4.29 0.62 14.5% Number of employees 1,288 1,202 86 7.2% ------------------------------------------------------------------------- (1) Some of this data is considered to be non-GAAP. (2) The lower diluted EPS and ROE for Q1/05 compared to Q1/06 partially reflects the issuance of $70 million in equity on June 30, 2004. Fiscal first quarter of 2006 revenue was a first quarter record of$99.0 million, up $18.5 million, or 22.9%, compared to the same period a yearago and is primarily due to an increase in capital markets activity in NorthAmerica and Europe during the first three months of fiscal 2006. Expenses for the quarter were $83.6 million, up $15.5 million, or 22.8%,from a year ago, reflecting increases in incentive compensation expense andgeneral and administrative expenses. For the quarter, incentive compensationexpense was $48.7 million, up $13.6 million, or 38.6%, largely due to therecord growth in revenue from our Global Capital Markets team, which resultedin higher compensation payouts compared to the same quarter a year ago.General and administrative expense was $10.0 million, up $4.0 million from ayear ago, or 65.7%. Of this increase, $1.0 million is due to an increase inpromotion and travel costs, reserves related to unsecured client balances of$1.1 million, professional fees of $0.9 million, expenses associated withbeing a public company of $0.3 million, and insurance and regulatory leviestotalling $0.4 million. Net income for the quarter was a first quarter record of $11.1 million,up $2.7 million, or 31.8%, from a year ago. Diluted EPS was $0.24, up $0.01,or 4.3%. For the first quarter of fiscal 2006, ROE was 19.8% compared to a ROEof 19.3% a year ago. The slower increase in diluted EPS and ROE than inrevenue and net income partially reflects the additional equity resulting fromthe issuance from treasury of $70 million in common shares from the InitialPublic Offering (IPO) on the Toronto Stock Exchange on June 30, 2004. Book value per common share increased by 14.5% to $4.91, up $0.62 from$4.29 a year ago, and is primarily a result of additional retained earningsduring the last 12 months. Income taxes were $4.4 million for the quarter, reflecting an effectivetax rate of 28.2% compared to 32.6% a year ago. The decrease in our effectivetax rate is a result of a one time gain of $1.6 million resulting from thesale of our investment in the Bourse de Montrĩal. As a capital gain, it istaxed at a lower rate, therefore reducing our effective income tax rate forthe quarter by 1.9%. Also contributing to the decrease in our consolidated taxrate was a revised estimate of the European future income tax liability, whichreduced our effective tax rate for the quarter by another 1.9%. Without thesechanges, our effective tax rate would have been 32.0%. The decrease ineffective tax rate in Q1/06 relative to Q1/05 is related to the geographicalcomposition of net income for the Company and lower federal statutory taxes inCanada. Please note that our effective tax rate may vary from time to time. Business environment Canaccord's business is cyclical and thus experiences considerablevariations in revenue and income from quarter to quarter and year to year dueto the factors discussed above. These factors are beyond Canaccord's controland, accordingly, revenue and net income will fluctuate, as they havehistorically. Our business is correlated to the overall condition of the NorthAmerican equity markets, including the seasonal variance in those markets. Ingeneral, North American capital markets are slower during the first half ofthe fiscal year, which generally contributes only about 35% to 40% of annualrevenue, whereas between 60% to 65% of annual revenue has historically beengenerated during the second half of each fiscal year. Industry outlook Performance of the North American equity markets up to June 2005 has beengenerally positive. In Canada, the S&P/TSX Composite was up 15.9% fromJune 30, 2004 and 3.0% during the last quarter. Despite the economic slowdownexperienced in April and May 2005, the equity markets improved and continuedto gain due to strength in the income trust and energy sectors. Industrysources reported that for the first half of the year, the number of Canadianmergers and acquisitions deals remained fairly consistent with 638 dealscompleted compared to 649 for the first half of calendar 2004. The European equity markets have put in a strong performance as well.Attractive valuations, a positive earnings outlook and a stable interest rateenvironment are all providing support to the equity market. Specifically, theAlternative Investment Market (AIM) of the London Stock Exchange (LSE)attracted 147 new issuers between April and June of 2005, a 93% increase overthe same period last year. A total of $3.4 billion was also raised by AIMlisted companies during the second quarter of calendar year 2005, marking a194% increase over the same quarter of calendar year 2004. Growth in thismarket is largely due to increasing international awareness and the quality ofemerging companies that are seeking admission. Despite soaring oil prices and the recent increase in US interest rates,we believe the economic environment for the remainder of the year remainsfavourable. Performance in July is consistent with our expectations even withthe seasonal variance in market activity during the summer months for theindustry. Results of operations Revenue Revenue for the three months ended June 30 ------------------------------------------ (C$ thousands, except % amounts) 2005 2004 Increase ------------------------------------------------------------------------- Private Client Services 39,630 40.0% 38,322 47.6% 1,308 3.4% Global Capital Markets 54,457 55.0% 39,171 48.6% 15,286 39.0% Other 4,930 5.0% 3,072 3.8% 1,858 60.5% -------- --------- -------- Total 99,017 80,565 18,452 22.9% Consolidated revenue grew $18.5 million in the first quarter over thesame quarter a year ago and principally reflects solid growth from GlobalCapital Markets, which increased its revenue by 39.0% compared to the samequarter a year ago. Geographic revenues Revenue from the UK and Europe is derived entirely from Global CapitalMarkets activity, while revenue in North America is derived from PrivateClient Services, Global Capital Markets and Other segments. Geographic revenue for the three months ended June 30 ----------------------------------------------------- (C$ thousands, except % amounts) 2005 2004 Increase ------------------------------------------------------------------------- Canada 76,184 76.9% 64,216 79.7% 11,968 18.6% UK 22,833 23.1% 16,349 20.3% 6,484 39.7% -------- --------- -------- Total 99,017 80,565 18,452 22.9% Revenue for the first quarter in North America was up by 18.6% from ayear ago due to exceptionally favourable market conditions when compared tothe same quarter a year ago. Private Client Services and Global CapitalMarkets revenue increased by $1.3 million and $8.8 million, respectively,compared to last year. Revenue in the UK and Europe increased 39.7%, which islargely due to the continued strength in European capital markets. The tableon page 28 of the interim unaudited consolidated financial statements providesfurther detail on Canaccord's geographic results. Expenses Expenses and expenses as a % of revenue for the three months ended June 30 --------------------------------------- (C$ thousands, Increase except % amounts) 2005 2004 (decrease) ------------------------------------------------------------------------- Incentive compensation 48,650 49.1% 35,093 43.6% 13,557 38.6% Salaries and benefits 9,226 9.3% 11,214 13.9% (1,988) (17.7)% Other overhead expenses(1) 25,711 26.0% 21,787 27.0% 3,924 18.0% -------- --------- -------- Total 83,587 84.4% 68,094 84.5% 15,493 22.8% (1) Consists of trading costs, premises and equipment, communication and technology, interest, general and administrative expense, amortization, development costs and gain on disposal of investments. ------------------------------------------------------------------------- The above change in compensation payouts partially reflects the implementation of a new flat payout structure for Global Capital Markets, which will effectively reduce the overall total company compensation expense ratio across the full fiscal year compared to fiscal 2005's ratio. ------------------------------------------------------------------------- Incentive compensation and salaries and benefits As of April 1, 2005, a new incentive compensation schedule wasimplemented to better integrate our Global Capital Markets team in Canada andEurope. As a result, the compensation structure of Global Capital Markets wasreorganized and is expected to result in a total compensation payout ratio tototal fiscal 2006 revenue for this segment of approximately 55% with anadditional 3% allocated to cover applicable National Health Insurance (NHI)taxes for UK based employees. The change will effectively reduce the overalltotal company compensation expense ratio across the full fiscal year comparedto fiscal 2005's ratio. For the three months ended June 30, 2005, incentive compensation, as apercentage of revenue, increased to 49.1% compared to 43.6% the same quarter ayear ago, reflecting the changes to a flat payout structure in Global CapitalMarkets. The dollar amount paid out increased by $13.6 million for the firstthree months of fiscal year 2006 compared to last year, which reflects thechange in payouts and the increased revenue compared to the same period a yearago. Salaries and benefits expense decreased by $2.0 million during the firstthree months of fiscal 2006 compared to the same quarter a year ago, which isprincipally due to the change in the Global Capital Markets payout structure. Other overhead expenses Other overhead expenses increased by $3.9 million during the first threemonths of fiscal 2006 compared to the same quarter a year ago. This increaseis largely due to increases in general and administrative expense as describedbelow. General and administrative expense Included as a component of other overhead expenses is general andadministrative expense, which grew by $4.0 million in Q1/06 compared to Q1/05.This amount reflects increases in such items as promotion and travel costs of$1.0 million, reserves of $1.1 million, professional fees of $0.9 million,public company related expenses of $0.3 million, regulatory fees of$0.2 million and insurance costs of $0.2 million. Development costs Also included as a component of other overhead expenses are developmentcosts which include hiring incentives and systems development costs. Hiringincentives are often an element in our recruitment strategy when Canaccordhires new Investment Advisors (IAs) or Global Capital Markets professionals.Systems development costs are expenditures that Canaccord has made inconjunction with the development of its information technology platform. Development costs for the three months ended June 30 ----------------- (C$ thousands) 2005 2004 ------------------------------------------------------------------------- Hiring incentives 1,009 728 Systems development 1,082 1,347 ----------------- Total 2,091 2,075 Net income Net income for the first quarter of fiscal 2006 was $11.1 million, up$2.7 million, or 31.8%, compared to net income of $8.4 million for the sameperiod a year ago. This growth in earnings is mainly due to a strong start tofiscal 2006 in both primary business segments and continued revenue growth inGlobal Capital Markets largely due to favourable market conditions in NorthAmerica and Europe. Diluted EPS for Q1/06 was $0.24, up $0.01, or 4.3%, from ayear earlier. The lower increase in EPS relative to net income is largely dueto the dilutive impact of the issuance from treasury of $70 million in equityfrom the IPO on June 30, 2004. Business segment results Private Client Services Private Client Services summary for the three months ended June 30 ----------------------------------- (C$ thousands, except assets under administration which is in C$ millions, employees, Investment Increase Advisors and % amounts) 2005 2004 (decrease) ------------------------------------------------------------------------- Revenue 39,630 38,322 1,308 3.4% Expenses 31,020 28,284 2,736 9.7% Income before income taxes 8,610 10,038 (1,428) (14.2)% Assets under administration (AUA) 9,954 8,244 1,710 20.7% Number of Investment Advisors (IAs) 439 426 13 3.1% Number of employees 667 642 25 3.9% Private Client Services revenue is principally derived from tradingcommissions generated from a diverse client base of individuals and high networth accounts. Revenue derived from client activity is closely tied togeneral stock market performance and trading activity. Revenue from Private Client Services for the quarter was $39.6 million,up $1.3 million, or 3.4%, from a year ago due to stronger market activity inNorth American equity markets during the quarter compared to Q1/05. The 20.7%growth in AUA largely reflects the general increase in equity values in NorthAmerican equity markets and the addition of assets transferred with newlyhired IAs. There were 439 IAs at the end of the first quarter of 2006, a netincrease of 13 from a year ago. As of Q1/06, a total of 25 net new employeeswere hired from a year ago, to drive the expansion of Private Client Servicescompared to Q1/05. Expenses for Q1/06 were $31.0 million, up $2.7 million, or 9.7%, largelyreflecting increases in general and administrative expenses, which were up$1.7 million. Within general and administrative expense, there was an increaseof $1.3 million in reserves, which is largely due to fluctuations in clientactivity and market conditions, and an increase of $0.5 million inprofessional fees. Also contributing to the increase in expenses was clientinterest expense, up $0.5 million, premises costs, up $0.2 million, andrecruiting costs, up $0.2 million, compared to the same period a year ago. Income before income taxes for the quarter was $8.6 million, down 14.2%from the same period a year ago, reflecting the fact that expenses grew fasterthan revenue. Global Capital Markets Global Capital Markets summary for the three months ended June 30 ---------------------------------- (C$ thousands, except employees and % amounts) 2005 2004 Increase ------------------------------------------------------------------------- Revenue 54,457 39,171 15,286 39.0% Expenses 39,464 26,125 13,339 51.1% Income before income taxes 14,993 13,046 1,947 14.9% Number of employees 293 252 41 16.3% Global Capital Markets revenue is generated from commissions and feesearned in connection with investment banking transactions and institutionalsales and trading activity as well as net trading gains and losses fromCanaccord's principal and international trading operations. Accordingly, thisrevenue is directly affected by the level of corporate and institutionalactivity and general economic, market and business conditions in Canada andinternationally. Revenue from Global Capital Markets for the quarter was up $15.3 million,or 39.0%, compared to the same quarter a year ago due to exceptionally strongcapital markets activity in North America and Europe. For the current quarter,revenue from North American markets was $31.6 million, up $8.8 million, or38.6%, when compared to the same quarter a year ago, whereas in Europeanmarkets, revenue was up $6.5 million, or 39.7%, for the quarter. We areconcentrating our efforts to expand stable sources of revenue for GlobalCapital Markets. As a result, we are placing more emphasis on providing mergerand acquisition and advisory services, which offer revenue that is counter-cyclical to financing activity. Total advisory fees earned by ourGlobal Capital Markets team for the quarter totalled $3.4 million, up$2.9 million from the same period a year ago. Revenue from the Registered Trading business was up $0.6 million thisquarter compared to the same quarter a year ago but down $1.3 million sinceQ4/05. The decline in revenue since Q4/05 is partly due to slower marketconditions during the first two months of Q1/06, but also due to structuralchanges implemented in fiscal 2005, which included a reduction in the numberof traders. As of April 1, 2005, a new incentive compensation schedule wasimplemented to better integrate our Global Capital Markets teams in Canada andEurope. As a result, the total compensation payout ratio to total fiscal 2006revenue is expected to be approximately 55% with an additional 3% allocated tocover applicable NHI taxes for UK based employees. As part of this new compensation structure, the allocation of salary andbenefits expense related to Global Capital Markets professionals has changedstarting Q1/06. Salary and benefits expense is now allocated directly to theGlobal Capital Markets incentive compensation pool for employees of thissegment, with the exception of a portion of the salary and benefits costs fromResearch, which are allocated to Private Client Services for services used byour IAs. The change will effectively reduce the Company's overall totalcompensation expense ratio across the full fiscal year compared to fiscal2005's ratio. Overall, the increase in Global Capital Markets incentivecompensation expense ratio to revenue reflects the change to a flat annualpayout structure in Global Capital Markets and record revenue in both NorthAmerica and Europe. Salary and benefits expense for the quarter was $1.3 million, down 66.3%compared to a year ago. Although a total of 41 new employees were hired overthe same quarter a year ago in Corporate Finance, Research and our New IssuesServices team, there was a decrease in salary and benefits expense. Thisdecrease is largely attributed to the recent change in the compensationstructure where the majority of salary and benefits expense is now coveredthrough Global Capital Markets incentive compensation pool. General and administrative expense was up $1.1 million, or 39.3%, and islargely due to an increase in promotion and travel costs which were up$1.0 million compared to the same quarter a year ago and is due to the overallincrease in business travel activity to support the growth in the business. Income before income taxes for the quarter was up $1.9 million, or 14.9%,when compared to the same quarter a year ago and is largely due to positiveequity market. Other segment Other segment summary for the three months ended June 30 ----------------------------- (C$ thousands, except employees Increase and % amounts) 2005 2004 (decrease) ------------------------------------------------------------------------- Revenue 4,930 3,072 1,858 60.5% Expenses 13,103 13,685 (582) (4.3)% (Loss) before income taxes (8,173) (10,613) 2,440 23.0% Number of employees 328 308 20 6.5% The Other segment includes correspondent brokerage services, interest,foreign exchange revenue and expenses not specifically allocable to PrivateClient Services and Global Capital Markets. Also included in this segment areCanaccord's operations and support services, which are responsible for frontand back office information technology systems, compliance and riskmanagement, operations, finance and all administrative functions. Revenue for the quarter was $4.9 million, up $1.9 million, or 60.5%,compared to the same quarter a year ago and is largely attributed to anincrease of $1.4 million from bank interest revenue resulting from theissuance of common shares from our IPO on June 30, 2004 and from an increaseof $0.6 million from our correspondent brokerage services, Pinnacle. Expenses for the quarter were down $0.6 million largely due to a one timegain on disposal of investment of $1.6 million resulting from the sale of ourinvestment in Bourse de Montrĩal. This gain was equivalent to $1.3 millionafter tax and approximately $0.03 per diluted share. This gain was partiallyoffset by the increase in general and administrative expense, which was up$1.1 million, or 52.6%, from a year ago. The general and administrativeexpense increase was primarily due to an increase in professional fees, publiccompany related expenses and insurance costs. The disposal of this investmentwill not impair our ability to conduct business in Montrĩal as we still haveaccess to the Bourse de Montrĩal and continue to have a significant presencein the province of Quĩbec. Loss before income taxes was $8.2 million in the first quarter of fiscal2006, a $2.4 million, or 23.0%, improvement compared to a loss of$10.6 million in the same quarter a year ago. Financial conditions Below are certain changes in selected balance sheet items. Accounts receivable Client security purchases are entered into either on a cash or marginbasis. When securities are purchased on margin, Canaccord extends a loan tothe client for the purchase of securities, using securities purchased and/orsecurities in the client's account as collateral. Therefore, client accountreceivable balances, which were $346.1 million as at June 30, 2005, may varysignificantly on a day-to-day basis and are based on trading volumes andmarket activity. As at June 30, 2005, total accounts receivable were$855.6 million compared with $1,068.5 million as at March 31, 2005. Call loans Loan facilities utilized by Canaccord may vary significantly on a day-to-day basis and depend on securities trading activity. Amounts borrowedpursuant to these call loan facilities, at June 30, 2005, totalled$0.8 million and were nil as at March 31, 2005. Cash and cash equivalents Cash and cash equivalents were $282.5 million as of June 30, 2005compared to $349.7 million as of March 31, 2005. Significant cash sources oruses of cash include decreases in accounts receivable of $205.9 million,accounts payable of $249.3 million, securities owned of $37.1 million,securities sold short of $56.3 million and taxes payable of $6.7 million, andthe payment of dividends of $5.1 million. Liquidity and capital resources Canaccord has a capital structure completely underpinned by sharecapital, retained earnings and cumulative foreign currency translationadjustments. As at June 30, 2005, total cash and cash equivalents were$282.5 million, compared to $349.7 million as of March 31, 2005. For thequarter ended June 30, 2005, operating activities were a use of cash in theamount of $59.8 million, which was primarily due to net changes in non-cashworking capital items, net income and items not affecting cash. For thequarter ended June 30, 2005, financing activities used cash in the amount of$3.9 million, which was primarily due to the payment of dividends of$5.1 million. Investing activities used cash in the amount of $1.1 million,which was primarily due to an increase in notes receivable and the purchase ofequipment and leasehold improvements totalling $2.7 million but then reducedby the $1.6 million proceeds received upon the sale of our investment in theBourse de Montrĩal. The increases in notes payable and notes receivablecorrespond to each other and are in connection with Canaccord's ImmigrantInvestor Program of Quebec. In addition, there was a decrease effect offoreign exchange on cash balances resulted in a decrease of $3.2 millionrelating primarily to the decline in the British pound sterling compared tothe Canadian dollar since March 31, 2005 on the valuation of our European netassets. Canaccord's business requires capital for operating and regulatorypurposes. The current assets reflected on Canaccord's balance sheet are highlyliquid. The majority of the positions held as securities owned are readilymarketable and are recorded at their market value. The market value of thesesecurities fluctuates daily as factors (including changes in marketconditions, economic conditions and investor outlook) affect market prices.Margin receivables are secured by readily marketable securities and arereviewed daily for impairment in value and collectibility. Receivables andpayables from brokers and dealers represent the following: current opentransactions which normally settle within the normal three-day settlementcycle, collateralized securities that are borrowed and/or loaned intransactions that can be closed within a few days on demand and balances dueto our introducing brokers representing net balances in connection with theirclient accounts. Notes payable and notes receivable Notes payable in the amount of $42.7 million as of June 30, 2005 are non-recourse to Canaccord and correspond to the notes receivable in the sameamount. These notes relate to Canaccord's Immigrant Investor Program ofQuebec. Under this program immigrant investors borrow, through a creditfacility arranged by Canaccord, the requisite funds for making a qualifyinginvestment for immigration purposes. Canaccord borrows the investment fundsthrough a non-recourse bank facility, loans the borrowed funds to theimmigrant investor by way of a promissory note, and then pledges the note tothe lending bank as collateral for the original loan. The lending bank has norecourse to Canaccord beyond the notes receivable that are pledged assecurity. Canaccord has credit facilities with Canadian and UK banks in anaggregate amount of $311.0 million. These credit facilities, consisting ofcall loans, letters of credit and daylight overdraft facilities, arecollateralized by either unpaid securities and/or securities owned byCanaccord. As at June 30, 2005, these credit facilities were available, butnot in use. Outstanding share data Outstanding shares as of June 30 -------------------------------- 2005 2004 ------------------------------------------------------------------------- Shares outstanding - basic(1) 45,413,175 45,165,352 Shares outstanding - diluted(2) 46,116,268 46,129,268 Average shares outstanding - basic 45,426,032 30,292,110 Average shares outstanding - diluted 46,129,125 38,466,683 (1) Excludes 703,093 unvested shares outstanding, which relate to share purchase loans. (2) Includes 703,093 unvested shares referred to in footnote (1) above. As of June 30, 2005, Canaccord had 46.1 million common shares issued andoutstanding on a diluted basis, which reflects the issuance of 6.8 millionshares from the IPO and various other share issuances. On December 29, 2004, Canaccord commenced a normal course issuer bid(NCIB) to purchase up to 2,306,463 of its common shares through the facilitiesof the Toronto Stock Exchange. Under British Columbia corporate legislation,Canaccord is permitted to purchase and hold its own shares without anyrequirement for cancellation. The total number of shares which may berepurchased under this program is 5% of Canaccord's total outstanding commonshares. The purchase of common shares under the normal course issuer bid willenable the Company to acquire shares for resale to employees and forcancellation. Such purchases may continue until December 28, 2005 under theterms of the NCIB. During the quarter ended June 30, 2005, 13,000 common shares werepurchased and cancelled under the NCIB. As of August 5, 2005, there are2,067,415 common shares available for purchase under the NCIB. Going forwardand from time to time, the Company may purchase its common shares for thepurpose of resale or cancellation. Although the amount and timing of any suchpurchases will be determined by the Company, the Board of Directors hasapproved a capital management plan to purchase up to 500,000 common sharesthrough the NCIB for cancellation by the end of the fiscal year, subject totrading blackouts and availability of shares. Canaccord's Board originallyapproved the NCIB to facilitate the resale of common shares coming out ofescrow. Through this capital management plan, the Board has now approved thefurther usage of the NCIB to also cancel shares to help absorb excess capitalthat has been generated in the last year. Under this capital management plan,Canaccord expects to purchase between zero and 130,000 shares a day, up to amaximum of 500,000 in total. Canaccord has agreed with the relevant regulatorsto update its shareholders at a minimum rate of every two weeks to satisfyregulatory reporting requirements and will update shareholders immediately ifmore than 1% of its shares outstanding are purchased in one day. If required,Canaccord may apply to renew the NCIB when the current NCIB expires onDecember 28, 2005. International Financial Centres Canaccord is a member of the International Financial Centres of bothBritish Columbia and Quebec, which provide certain tax and financial benefitspursuant to the International Financial Activities Act of British Columbia andthe Act Respecting International Financial Centres of Quebec. As such,Canaccord's overall income tax rate is less than the rate that would otherwisebe applicable. Foreign exchange Canaccord manages its foreign exchange risk by periodically hedgingpending settlements in foreign currencies. As of June 30, 2005, forwardcontracts outstanding to sell US dollars had a notional amount ofUS$12.3 million, up $2.3 million from a year ago. Forward contractsoutstanding to buy US dollars had a notional amount of US$8.3 million, downUS$8.2 million compared to a year ago. The fair value of these contracts wasnominal. Certain of Canaccord's operations in London, England are conducted inBritish pounds sterling; however, any foreign exchange risk in respect ofthese transactions is generally limited as pending settlements on both sidesof the transaction are typically in British pounds sterling. Critical accounting estimates The following is a summary of Canaccord's critical accounting estimates.Canaccord's accounting policies are in accordance with Canadian GAAP and aredescribed in Note 1 to the audited consolidated financial statements for theyear ended March 31, 2005. The accounting policies described below requireestimates and assumptions that affect the amounts of assets, liabilities,revenues and expenses recorded in the financial statements. Because of theirnature, estimates require judgement based on available information. Actualresults or amounts could differ from estimates and the difference could have amaterial impact on the financial statements. Revenue recognition and valuation of securities Securities held, including share purchase warrants and options, arerecorded at market value and, accordingly, the interim consolidated financialstatements reflect unrealized gains and losses associated with suchsecurities. In the case of publicly traded securities, market value isdetermined on the basis of market prices from independent sources such aslisted exchange prices or dealer price quotations. Adjustments to marketprices are made for liquidity relative to the size of the position and holdingperiods and other resale restrictions, if applicable. Investments in illiquidor non-publicly traded securities are valued on a basis determined bymanagement using information available and prevailing market prices ofsecurities with similar qualities and characteristics, if known. There is inherent uncertainty and imprecision in estimating the factorswhich can affect value and in estimating values generally. The extent to whichvaluation estimates differ from actual results will affect the amount ofrevenue or loss recorded for a particular security position in any particularperiod. With Canaccord's security holdings consisting primarily of publiclytraded securities, its procedures for obtaining market prices from independentsources, the validation of estimates through actual settlement of transactionsand the consistent application of its approach from period to period,Canaccord believes that the estimates of market value recorded are reasonable. Provisions Canaccord records provisions related to pending or outstanding legalmatters and doubtful accounts related to client receivables, loans, advancesand other receivables. Provisions in connection with legal matters aredetermined on the basis of management's judgement in consultation with legalcounsel considering such factors as the amount of the claim, the validity ofthe claim, the possibility of wrongdoing by an employee of Canaccord andprecedents. Client receivables are generally collateralized by securities and,therefore, any impairment is generally measured after considering the marketvalue of the collateral. Provisions in connection with other doubtful accountsare generally based on management's assessment as to the likelihood ofcollection and the recoverable amount. Provisions are also recorded utilizingdiscount factors in connection with syndicate participation. Tax Accruals for income tax liabilities require management to make estimatesand judgements with respect to the ultimate outcome of tax filings andassessments. Actual results could vary from these estimates. Canaccordoperates within different tax jurisdictions and is subject to assessment inthese different jurisdictions. Tax filings can involve complex issues, whichmay require an extended period of time to resolve in the event of a dispute orre-assessment by tax authorities. Canaccord believes that adequate provisionsfor income taxes have been made for all years. Related party transactions Security trades executed by Canaccord for employees, officers andshareholders of Canaccord are conducted in accordance with terms andconditions applicable to all clients of Canaccord. Commission income on suchtransactions in the aggregate is not material in relation to the overalloperations of Canaccord. Dividend policy In respect of fiscal year 2006, Canaccord intends to pay a quarterlydividend of $0.06 per share per quarter. Although dividends are expected to bedeclared and paid quarterly, the Board of Directors, in its sole discretion,will determine the amount and timing of any dividends. All dividend paymentswill depend on general business conditions, Canaccord's financial condition,results of operations and capital requirements and such other factors as theBoard determines to be relevant. Dividend declaration For the first quarter of fiscal 2006, the Board of Directors declared acommon share dividend of $0.06 per share, which is payable on September 9,2005, to shareholders of record on August 24, 2005. The common share dividendpayment to common shareholders will total approximately $2.8 million, orapproximately 25.0% of first quarter net income. Historical quarterly information Canaccord's business is cyclical and may experience considerablevariations in revenue and income from quarter to quarter and year to year dueto the risk factors discussed in the risk section. In addition to overallmarket cycles, Canaccord's revenue is generally seasonal over the fiscal year,where historically, 60% to 65% of industry revenue has occurred in the lasttwo fiscal quarters of the year. Therefore, historically, revenue during thefirst two fiscal quarters has approximately averaged 35% to 40% of the annualrevenue for the industry. Canaccord's experience follows that of the industry.Furthermore, Canaccord's revenue from an underwriting transaction is recordedonly when the transaction has closed. Consequently, the timing of revenuerecognition can materially affect Canaccord's quarterly results. The expensestructure of Canaccord's operations is geared towards providing service andcoverage in the current market environment. If general capital marketsactivity were to drop significantly, Canaccord would experience losses if itcould not change its expense structure quickly enough. The following table provides selected quarterly financial information forthe nine most recently completed financial quarters ended June 30, 2005. Thisinformation is unaudited, but reflects all adjustments of a recurring nature,which are, in the opinion of management, necessary to present a fair statementof the results of operations for the periods presented. Quarter-to-quartercomparisons of financial results are not necessarily meaningful and should notbe relied upon as an indication of future performance. Fiscal 2006 Fiscal 2005 (C$ thousands, except per ------ ----------- share amounts) Q1 Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Revenue Private Client Services 39,630 56,391 46,964 36,499 38,322 Global Capital Markets 54,457 81,444 72,368 46,671 39,171 Other 4,930 5,094 4,351 2,431 3,072 -------------------------------------------- Total revenue 99,017 142,929 123,683 85,601 80,565 Net income (loss) 11,078 17,307 16,743 6,123 8,406 EPS - basic 0.24 0.38 0.37 0.14 0.28 EPS - diluted 0.24 0.38 0.36 0.13 0.23 Fiscal 2004 (C$ thousands, except per ----------- share amounts) Q4 Q3 Q2 Q1 ---------------------------------------------------------------- Revenue Private Client Services 60,667 48,540 39,144 27,632 Global Capital Markets 85,425 66,515 39,001 20,817 Other 4,595 3,584 3,258 2,979 ----------------------------------- Total revenue 150,687 118,639 81,403 51,428 Net income (loss) 20,992 11,267 8,601 (431) EPS - basic 0.74 0.40 0.31 (0.02) EPS - diluted 0.58 0.32 0.24 (0.02) Risks The securities industry and Canaccord's activities are by their verynature subject to a number of inherent risks. Economic conditions, competitionand market factors such as volatility in the Canadian and internationalmarkets, interest rates, commodity prices, market prices, trading volumes andliquidity will have a significant impact on Canaccord's profitability. Aninvestment in the common shares involves a number of risks, including market,liquidity, credit, operational, legal and regulatory risks, which could besubstantial and are inherent in Canaccord's business. Revenue from PrivateClient Services activity is dependent on trading volumes and, as such, isdependent on the level of market activity and investor confidence. Revenuefrom Global Capital Markets activity is dependent on financing activity bycorporate issuers and the willingness of institutional clients to activelytrade and participate in capital markets transactions. There may also be a lagbetween market fluctuations and changes in business conditions and the levelof Canaccord's market activity and the impact that these factors have onCanaccord's operating results and financial position. Risks have not changedsubstantially from those set out in the Annual Report of June 27, 2005. Additional information A comprehensive discussion of our business, strategies, objectives andrisks is available in the Management's Discussion and Analysis, AnnualInformation Form and audited annual financial statements in Canaccord's 2005Annual Report which is available on our Web site at www.canaccord.com/investorand on SEDAR at www.sedar.com. Additional information relating to Canaccord, including Canaccord'sProspectus, Annual Information Form of June 10, 2005 and interim filings canalso be found on our Web site and on SEDAR. Interim Consolidated Financial Statements Canaccord Capital Inc. Unaudited For the three months ended June 30, 2005 (Expressed in Canadian dollars) Canaccord Capital Inc. INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands of dollars) As at June 30, March 31, 2005 2005 $ $ ------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 282,485 349,700 Securities owned, at market (note 2) 122,745 160,348 Accounts receivable (notes 4 and 7) 855,583 1,068,537 Income taxes recoverable 1,222 - Future income taxes 4,109 3,992 ------------------------------------------------------------------------- Total current assets 1,266,144 1,582,577 Equipment and leasehold improvements 14,131 13,750 Notes receivable (note 5) 42,731 41,618 Deferred charges 147 220 ------------------------------------------------------------------------- 1,323,153 1,638,165 ------------------------------------------------------------------------- ----------------Related Shares:
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