4th Aug 2006 14:59
Attention Business/Financial Editors:Canaccord Capital Inc. implements management transition and posts record firstquarter fiscal 2007 results Peter Brown, Chairman & CEO, announces Paul Reynolds as President and Mark Maybank as COO; Record first quarter revenue up 108.2% with net income up 134.2% (All dollar amounts are stated in Canadian dollars unless otherwise indicated) VANCOUVER, Aug. 4 /CNW/ - Peter M. Brown, the Chairman of the Board &Chief Executive Officer of Canaccord Capital Inc. (TSX & AIM: CCI) ("CCI" orthe "Company") announced today the Board has appointed Paul Reynolds asPresident and Mark Maybank as Chief Operating Officer of Canaccord CapitalInc. In addition, Peter Brown announced the resignation of Michael G.Greenwood as Director and President & Chief Operating Officer of CCI. Paul Reynolds remains a director of CCI and Global Head of CanaccordAdams and, for regulatory purposes, President & Chief Operating Officer ofCanaccord Adams Limited (CCI's UK operating subsidiary). Mark Maybankcontinues as Deputy Head of Canaccord Adams and Global Head of Research &Operations. In addition, Mark Maybank has been nominated as the President &Chief Operating Officer of Canaccord Capital Corporation (the Company'sCanadian operating subsidiary), subject to regulatory approval. "I am confident in Paul's and Mark's abilities to take on the reigns ofthese key leadership roles, and to carry forward Canaccord's entrepreneurial,consensus-driven culture," said Peter Brown. "We are fortunate to have a deep,diverse, global pool of talent that has allowed us to develop the nextgeneration of leadership internally and I look forward to working with Pauland Mark to continue our tradition of generating sustainable growth." To support the transition period, Michael Greenwood has entered into atwelve-month consulting arrangement with Canaccord. Peter Brown stated, "Mikeleaves a great many friends behind at Canaccord, and his strategic leadershipand contribution to our growth over the last 14 years has been integral to oursuccess. We wish him every success in the future." Also, he added "On apersonal note, I, more than anyone else in the company, have worked with Mikeon a daily basis and I will miss the benefit of his forward thinking,dedication and drive for perfection in every area of our business." CCI's Fiscal Q1/07 Results Canaccord Capital Inc. announced that revenue for its first quarter offiscal 2007, ended June 30, 2006, was a first quarter record of$206.1 million, up $107.1 million, or 108.2%, from $99.0 million for the sameperiod a year ago. Net income of $25.9 million was also a first quarterrecord, up $14.9 million, or 134.2%, from $11.1 million for the first quarterof fiscal 2006, and diluted earnings per share (EPS) were a first quarterrecord of $0.54, up $0.30, or 125.0%, from $0.24 for the same period a yearago. "Strong global markets for the first part of the quarter played asignificant role in our record first quarter results," added Brad Kotush,Executive VP & CFO. "We are proud of the hard work and client focusdemonstrated by all of our partners". Highlights of the first quarter fiscal 2007 results (three months ended June 30, 2006) compared to the first quarter fiscal 2006 results (three months ended June 30, 2005): - Revenue of $206.1 million, up 108.2%, or $107.1 million, from $99.0 million - Expenses of $167.0 million, up 99.7%, or $83.4 million, from $83.6 million - Net income of $25.9 million, up 134.2%, or $14.9 million, from $11.1 million - Diluted EPS of $0.54, up 125.0%, or $0.30, from $0.24 - Return on equity (ROE) of 34.7%, up from 19.8% - Book value per common share at the period end increased to $6.51, up 32.6%, or $1.60, from $4.91 - The Board approved a common share dividend of $0.08 per share on August 3, 2006, payable on September 8, 2006, with a record date of August 25, 2006 - 47,827,350 total issued common shares outstanding on a diluted basis as of August 3, 2006 Highlights of Operations: - During Q1/07, our international capital markets team, Canaccord Adams, led the following equity transactions: - $200 million in a TSX financing for Yamana Gold Inc. (TSX: YRI) - $178 million in an AIM placing for European Nickel plc (AIM: ENK) - $175 million in a bought deal for First Calgary Petroleums Ltd. (TSX: FCP/AIM: FPL) - $125 million in a TSX financing for Corriente Resources Inc. (TSX: CTQ) - $55 million in a bought deal for Royal Laser Corp. (TSX: RLC) - $30 million in a TSX firm commitment for Westfield Real Estate Investment Trust (TSX: WFD.DB.C) - Revenue from Private Client Services' business increased by 82.4% over the same period a year ago to $72.3 million from $39.6 million. - During Q1/07, we experienced growth in market share in our Canadian trading operations. Canaccord's market share was 3.83% in terms of TSX-traded volume, up from 3.32% for the same period a year ago. - Canaccord ranked 4th, in Thomson Financial's Canada equity & equity-related league table (January to June 2006), raising US$951.3 million in proceeds for our clients serving as bookrunner on 15 deals - above all other independents. Canaccord also ranked 2nd in the Canada Secondary Offerings category, up from 6th place last year. - Our liquidity remains strong as working capital increased by 18.7% from $208.4 million a year ago, to $247.3 million. ANNUAL GENERAL MEETING: The Annual General Meeting of shareholders will be held on Friday, August4, 2006, at 2:00 p.m. (Pacific Time (PDT)) at the Four Seasons Hotel, 791West Georgia Street, Vancouver, BC, Canada. The Annual General Meeting willalso be simultaneously broadcast through a live Internet Webcast on August 4,2006. This Webcast will be archived for viewing after the event. Please visitthe Webcast events page at www.canaccord.com for more information and a directlink. ACCESS TO QUARTERLY RESULTS INFORMATION: Interested investors, the media and others may review this quarterlyearnings release and supplementary financial information atwww.canaccord.com/investor/financialreports. QUARTERLY CONFERENCE CALL AND WEBCAST PRESENTATION: Interested parties can listen to our first quarter fiscal 2007 resultsconference call with analysts and institutional investors live and archived,via the Internet and a toll free number. The conference call is scheduled forFriday, August 4, 2006, at 10:00 a.m. (Pacific Time (PDT)), 1:00 p.m. (EasternTime (EDT)), and 6:00 p.m. (UK Time (BST)). At that time, senior executiveswill comment on the results for the first quarter fiscal 2007 and respond toquestions from analysts and institutional investors. The conference call may be accessed live and archived on a listen-onlybasis via the Internet at: www.canaccord.com/investor/webcast Analysts and institutional investors can call in via telephone at: - 416-644-3416 (within Toronto) - 1-800-814-4941 (toll free outside Toronto) - 00-800-0000-2288 (toll free from the United Kingdom) A replay of the conference call can be accessed after 12:00 p.m. (PDT),3:00 p.m. (EDT) and 8:00 p.m. (BST) on August 4, 2006, until 12:00 a.m. (PDT),3:00 a.m. (EDT) and 8:00 a.m. (BST) Sunday, August 27, 2006, at 416-640-1917or 1-877-289-8525 by entering passcode 21195104 followed by the number sign. ABOUT CANACCORD CAPITAL INC.: Through its principal subsidiaries, Canaccord Capital Inc.(TSX & AIM: CCI) is a leading independent full service investment dealer inCanada with capital markets operations in the United Kingdom and the UnitedStates of America. Canaccord is publicly traded on both the Toronto StockExchange and AIM, a market operated by the London Stock Exchange. Canaccordhas operations in two of the principal segments of the securities industry:private client services and capital markets. Together, these operations offera wide range of complementary investment products, brokerage services andinvestment banking services to Canaccord's private, institutional andcorporate clients. Canaccord has approximately 1,530 employees worldwide in 31offices, including 25 Private Client Services offices located across Canada.Canaccord Adams, the international capital markets division, has operations inToronto, London, Boston, Vancouver, New York, Calgary, Montreal, San Franciscoand Houston. FOR FURTHER INFORMATION, CONTACT: North America Media: Scott Davidson Managing Director, Global Head of Marketing & Communications Phone: 416-869-3875, email: scott_davidson(at)canaccord.com London Media: Bobby Morse or Ben Willey Buchanan Communications (London) Phone: +44-(0)-207-466-5000, email: bobbym(at)buchanan.uk.co For investor relations inquiries contact: Katherine Young Vice President, Investor Relations Phone: 604-643-7013, email: katherine_young(at)canaccord.com ------------------------------------------------------------------------- None of the information on Canaccord's Web site www.canaccord.com should be considered incorporated herein by reference. ------------------------------------------------------------------------- Message from the Chairman and CEO This past quarter was a period of significant volatility for the broadercapital markets. Strength in the first half of the quarter was followed bysharp swings in value of global indices and commodity prices. Even with thesechallenges, Q1 of fiscal 2007 was our second most successful quarter in thefirm's history and a record first quarter. This performance comes on the heelsof our record financial performance in fiscal 2006. Revenue of $206.1 millionand net income of $25.9 million represents triple-digit revenue growth of108.2%, net income growth of 134.2% and diluted EPS growth of 125.0% relativeto Q1 of last year. Our achievements in Q1/07 demonstrate the strengthprovided by our different business lines and our geographical diversity. Our Culture of Ideas supported by Management Transition We credit our success to our idea-driven culture, and are proud thatCanaccord is an environment that demands contribution and facilitates successfor all our partners. Our client focus is evident in every area of ourbusiness. The global structure of our management team is designed to maintainand enhance this culture and further our growth, improve our client serviceand create value for our shareholders. We are fortunate to have a deep,diverse, global pool of talent that has allowed us to develop the nextgeneration of leadership internally, in line with our values and goals. The leaders that are stepping forward share all of our common goals andvalues. Paul Reynolds and Mark Maybank have made significant contributions toCanaccord's growth and proven their ability to lead a global investment firm.Working with the rest of our management team, they will continue to executeour business plan in a consensus-based, idea-driven environment. Unfortunately, Mike Greenwood, upon reflection, has decided that this isa good time to resign his role as Director, President & Chief OperatingOfficer of Canaccord Capital Inc. to pursue other interests. Mike joinedCanaccord in 1992 and shared with me the vision to convert a West Coasttransaction firm into Canada's largest independent full service investmentdealer with important international operations. Since that first vision, Mikehas played an integral role in our achievements and has led many of the keyinitiatives that helped develop the great firm we are today. Mike leaves agreat many friends behind at Canaccord, and his strategic leadership andcontribution to our growth over the last 14 years has been integral to oursuccess. We wish him every success in the future. On a personal note, I, morethan anyone else in the company, have worked with Mike on a daily basis and Iwill miss the benefit of his forward thinking, dedication and drive forperfection in every area of our business. Among our core values, we remain committed to a continued high level ofemployee ownership of the firm. During fiscal 2007, we will consider a varietyof different programs designed to maintain the high level of employeeownership in the firm. Canaccord Adams leverages its global platform Canaccord Adams' consolidated revenue increased 129.7%, from$54.5 million in Q1/06, to $125.1 million in Q1/07. Broken downgeographically, revenue in the UK increased 114.1%, from $22.8 million to$48.9 million; revenue in Canada increased 69.5%, from $31.6 million to $53.6million; and revenue in the US was $22.6 million reflecting the contributionfrom our recent acquisition. Much of this growth was driven by higher market share in Canada and theUK as well as increased overall capital markets activity year over year.Canaccord Adams was ranked fourth in lead underwritings by Thomson Financialin its Canadian equity and equity-related statistics. Significantly, marketshare in terms of proceeds raised from Canadian transactions increased to 7.8%for the six months ended June 30, 2006, up from 4.1% for the same period in2005. Operating highlights include leading a $200 million equity offering onthe TSX for Yamana Gold Inc. We also led a $178 million placement for EuropeanNickel plc on AIM and a $175 million bought deal for First Calgary PetroleumsLtd. Although resource sector transactions revenue was relatively high, 64.7%of our total transactions this quarter were for non-resource companies,demonstrating our sector diversity despite a commodities boom. An example ofthis diversity and focus on balance is that we are breaking new ground in thecreation and development of innovative small-to mid-cap Canadian REITs. We continue to make solid progress integrating our new US group since theclose of our acquisition of Adams Harkness Financial Group, Inc. in January.The development and evolution of our US operation is focused on addingtalented professionals to our existing team, broadening our capabilities, andproviding our clients with superior, money-making ideas. To support this plan,we will continue to expand our San Francisco-based technology practice, andfurther diversify our sector mix in the US through the expansion of ourcurrent energy practice in Houston, as well as building out our New Yorkfacilities in order to solidify our growing presence in a key US financialcentre. Growth in Assets Supports Private Client Services' Revenue Growth Private Client Services' revenue for the quarter was $72.3 million, up82.4% from a year ago. This increase is due to both market share gains as wellas strong activity in the North American equity markets. Our assets undermanagement (AUM) were $649 million, experiencing growth of 58.3% year overyear. Despite tougher markets during May and June, AUM increased by 5.9% fromMarch 31, 2006. Assets under administration (AUA) were up 40.1% to $13.9 billion fromlast year, and were down 2.6% from March 31, 2006 versus the S&P/TSX indexdecline of 4.1% during fiscal Q1. Year-over-year AUA growth reflects marketvalue increases in North American equity markets, asset transfers with newInvestment Advisors (IA) and additional assets added to our existing clientaccounts. As at June 30, 2006, there were 430 IAs, a net increase of 12 from ayear ago. We continue to improve the products and services we offer to our privateclients. To this end, in July 2006 we added Connor, Clark & Lunn FinancialGroup and Dixon Mitchell Investment Counsel Inc. to our Alliance program,bringing the total to six portfolio managers. Additional high value managerswill be added to our managed accounts platform as we find appropriate firmswith which to partner. Outlook for the Remainder of Fiscal 2007 Our business is cyclical and, as such, revenue and net income vary fromquarter to quarter and year to year. Normally, Canaccord experiences thetraditional seasonal fluctuations of the financial industry with the firsthalf of each fiscal year contributing approximately 35% to 40% of our annualrevenue. While the capital markets performed better during the first quarterof fiscal 2007, compared to the same quarter in previous years, we expect theremaining quarters of this year to reflect historical seasonality patterns.Capital markets globally experienced a sharp drop in performance in May, whichhas continued into the summer, and we expect Q2/07 performance to be more inline with previous fiscal second quarters. We would like to congratulate and thank our employees and partners fortheir continued commitment and dedication. These contributions enableCanaccord to successfully continue with carrying out our long term strategy.We look forward to discussing our progress with you over the remainingquarters of this year. "signed" Peter M. Brown Chairman & Chief Executive Officer Management's Discussion and Analysis First quarter fiscal 2007 for the three months ended June 30, 2006 - this document is dated August 4, 2006 The following discussion of the financial condition and results ofoperations for Canaccord Capital Inc. (Canaccord) is provided to enable thereader to assess material changes in such condition and results for thethree-month period ended June 30, 2006, compared to the corresponding periodin the preceding fiscal year, with an emphasis on the most recent three-monthperiod. Canaccord's fiscal year end is March 31. Canaccord's first quarterfiscal 2007 was the three-month period ended June 30, 2006, and is alsoreferred to as first quarter 2007 and as Q1/07 in the following discussion.This discussion should be read in conjunction with the unaudited interimconsolidated financial statements for the three-month period ended June 30,2006, beginning on page 21 of this report, the 2006 annual Management'sDiscussion and Analysis (MD&A), our Annual Information Form dated June 26,2006, and the audited consolidated financial statements for the fiscal yearended March 31, 2006, in Canaccord's Annual Report dated June 26, 2006 (theAnnual Report). There has been no material change to the information containedin the annual MD&A for fiscal 2006 except as disclosed in this MD&A.Canaccord's financial information is expressed in Canadian dollars unlessotherwise specified. This document is prepared in accordance with Canadiangenerally accepted accounting principles (GAAP) with reconciliation tointernational financial reporting standards (IFRS). All the financial databelow is unaudited except for the full fiscal year 2006 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 or beliefs regarding future events includingbusiness and economic conditions and Canaccord's growth, results ofoperations, performance and business prospects and opportunities. Suchforward-looking statements reflect management's current beliefs and are basedon 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 ofthese terms or other comparable terminology. By their very nature,forward-looking statements involve inherent risks and uncertainties, bothgeneral and specific, and a number of factors could cause actual events orresults to differ materially from the results discussed in the forward-lookingstatements. In evaluating these statements, readers should specificallyconsider various factors which may cause actual results to differ materiallyfrom any forward-looking statement. These factors include, but are not limitedto, market and general economic conditions, the nature of the financialservices industry and the risks and uncertainties detailed from time to timein Canaccord's interim and annual consolidated financial statements and itsAnnual Report and Annual Information Form filed on www.sedar.com. Theseforward-looking statements are made as of the date of this document, andCanaccord assumes no obligation to update or revise them to reflect new eventsor circumstances. 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) and assets under management (AUM) arenon-GAAP measures of client assets that are common to the wealth managementaspects of the private client services industry. AUA is the market value ofclient assets administered by Canaccord in respect of which Canaccord earnscommissions or fees. This measure includes funds held in client accounts aswell as the aggregate market value of long and short security positions.Canaccord's method of calculating AUA may differ from the methods used byother companies and therefore may not be comparable to other companies.Management uses this measure to assess operational performance of the PrivateClient Services business segment. AUM is the market value of assets that arebeneficially owned by clients and are discretionarily managed by Canaccord aspart of our Independence Accounts program. Services provided include theselection of investments and the provision of investment advice. AUM are alsoadministered by Canaccord and are included in AUA. Overview Business environment Canaccord's business is cyclical and experiences considerable variationsin revenue and income from quarter to quarter and year to year due to factorsbeyond Canaccord's control and, accordingly, revenue and net income areexpected to fluctuate as they have historically. Our business is subject tothe overall condition of the North American and the European equity markets,including the seasonal variance in these markets. In general, North Americancapital markets are slower during the first half of our fiscal year, duringwhich we typically generate approximately 35% to 40% of our annual revenue.During the second half of our fiscal year, we typically generate 60% to 65% ofour annual revenue. However, during the first quarter of fiscal 2007, globalcapital markets performed better compared to the same quarter in previousyears. Capital markets' activity dropped sharply in late May with nosignificant improvement to date. We expect, therefore, that fiscal Q2/07performance will be more reflective of our historical seasonality pattern. Wecontinue, however, to have a pipeline of potential transactions available forcompletion subject to market activity improvement. We expect that Japan's efforts to normalize its economy will have a neteffect of causing a rise in global interest rates, resulting in slowereconomic growth on a global scale. This effect has started to be felt in theUS as its growth slowed to 3.5% in the second quarter of calendar 2006, inresponse to past monetary tightening, a cooling housing market, and theexpectation of further interest rate increases in the second half of 2006.Similarly, growth in Canada levelled off at 3.3%, and Canadian capital marketsexperienced a considerable drop in activity in May 2006 as measured by thevolume of equity traded. For the second half of calendar 2006, the Canadiandollar may continue its rise against the US dollar, therefore challengingexports and affecting our net trading balance. As a result, Canadian interestrates remained stable in July and further increases are expected to belimited. European confidence levels plunged in June as inflation and interestrates continued to rise. Economic activity in Europe slowed considerablyduring fiscal Q1/07, which is expected to continue in Q2 of fiscal 2007.Household expenditure is still lacking solid support from labour marketfundamentals and is expected to rise by only 0.5% by the end of Q3 calendar2006. About Canaccord's operations Canaccord Capital Inc.'s operations are divided into three segments: Thefirst two, Private Client Services and Canaccord Adams, are principallyoperating segments, while the third, Other, is mainly an administrativesegment. Private Client Services provides brokerage services and investment adviceto retail or private clients primarily in Canada, and to a lesser degree, inthe US and internationally. Canaccord Adams (formerly known as Canaccord'sGlobal Capital Markets) includes investment banking, research and tradingactivities on behalf of corporate, institutional and government clients aswell as principal trading activities in Canada, the UK and the US. Canaccord acquired 100% of Adams Harkness Financial Group, Inc. (engagedprimarily in capital markets activities in the US), on January 3, 2006. As aresult of this acquisition, the Adams Harkness Financial Group, Inc.'soperating subsidiary was renamed Canaccord Adams Inc. and Canaccord's GlobalCapital Markets (Canada, UK and US) was re-branded globally as CanaccordAdams. Canaccord Adams Inc. together with Canaccord Capital Corporation (USA),Inc., which includes US Private Client Services and Other operations in theUS, constitute Canaccord's US geographic segment. In addition, Canaccord Adams Limited (engaged in capital marketsactivities in the United Kingdom) constitutes Canaccord's UK geographicsegment. The division of Canaccord Capital Corporation, our principal Canadianoperating subsidiary, that is engaged in capital markets activities in Canadawas branded as Canaccord Adams, and together with Canadian Private ClientServices and Other operations, they constitute Canaccord's Canadian geographicsegment. Other includes correspondent brokerage services, interest and foreignexchange revenue and expenses not specifically allocable to Private ClientServices and Canaccord Adams. Consolidated operating results First quarter fiscal 2007 summary data(1) ------------------------------------------------------------------------- Year- (C$ thousands, except per Three months ended June 30 over-year share, employee and % amounts) 2006 2005 increase ------------------------------------------------------------------------- Canaccord Capital Inc. Revenue(2) Commission $ 78,054 $ 40,811 91.3% Investment banking 102,840 49,505 107.7% Principal trading 7,784 (1,741) n.m. Interest 13,638 8,243 65.4% Other 3,811 2,199 73.3% ------------------------------------ Total Revenue $ 206,127 $ 99,017 108.2% Expenses Incentive compensation $ 104,955 $ 48,650 115.7% Salaries and benefits 12,493 9,226 35.4% Other overhead expenses(3) 49,504 25,711 92.5% ------------------------------------ Total Expenses $ 166,952 $ 83,587 99.7% Income before income taxes 39,175 15,430 153.9% Net income 25,942 11,078 134.2% Earnings per share (EPS) - diluted 0.54 0.24 125.0% Return on average common equity (ROE) 34.7% 19.8% 14.9p.p. Book value per share - period end $ 6.51 $ 4.91 32.6% Number of employees 1,534 1,288 19.1% ------------------------------------------------------------------------- US geographic segment(4) Revenue $ 23,985 - n.m. Expenses - n.m. Incentive compensation 12,902 - n.m. Salaries and benefits 1,754 - n.m. Other overhead expenses(3) 7,141 - n.m. ------------------------------------ Total Expenses $ 21,797 - n.m. Income before income taxes 2,188 - n.m. Net income 1,648 - n.m. ------------------------------------------------------------------------- ------------------------------------------------------------------------- Canaccord Capital Inc., excluding US geographic segment Revenue $ 182,142 $ 99,017 84.0% Expenses Incentive compensation $ 92,053 $ 48,650 89.2% Salaries and benefits 10,739 9,226 16.4% Other overhead expenses(3) 42,363 25,711 64.8% ------------------------------------ Total Expenses $ 145,155 $ 83,587 73.7% Income before income taxes 36,987 15,430 139.7% Net income 24,294 11,078 119.3% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Some of this data is considered to be non-GAAP. (2) To enhance our disclosure and to facilitate comparison with other companies in the industry, consolidated revenue has been changed from "revenue by business segment" to "revenue by activity". For revenue by business segment information, please refer to the Results of Operations section on page 12. (3) Consists of trading costs, premises and equipment, communication and technology, interest, general and administrative, amortization, development costs and gain on disposal of investment. (4) Starting on January 3, 2006, revenues and expenses for Canaccord Capital Corporation (USA), Inc. and Canaccord Adams Inc. are disclosed together under the US geographic segment. Therefore, US geographic segment results are not to be interpreted as generated exclusively from Canaccord Adams Inc. or as a result of the acquisition of Adams Harkness Financial Group, Inc. n.m.: not meaningful p.p.: percentage points Geographic distribution of revenue for first quarter fiscal 2007 ------------------------------------------------------------------------- Year- Three months ended June 30 over-year (C$ thousands, except % amount) 2006 2005 increase ------------------------------------------------------------------------- Canada(1) $ 133,250 $ 76,184 74.9% UK(2) 48,892 22,833 114.1% US(3) 23,985 - n.m. ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Canada geographic segment includes operations for Private Client Services, Canaccord Adams (a division of Canaccord Capital Corporation) and Other business segments. (2) UK geographic segment includes operations for Canaccord Adams Limited. (3) Commencing on January 3, 2006, as a result of the acquisition of Adams Harkness Financial Group, Inc., the US geographic segment includes operations for Canaccord Adams Inc. and Canaccord Capital Corporation (USA), Inc., which also includes operations from Private Client Services and Other business segments in the US. n.m.: not meaningful Three-month summary Revenue was a first quarter record of $206.1 million, up $107.1 million,or 108.2%, compared to the same period a year ago. Revenue increased acrossall lines of business due to Canaccord's higher market share in its keyCanadian and UK market sectors, which also experienced higher activity duringthe quarter compared to the same period a year ago. Also, the momentum fromour growth initiatives and expanded sector participation created during Q4/06contributed to the increase in revenue during Q1/07. On a consolidated basis,revenue is generated through five activities: commissions, investment banking,principal trading, interest, and other. Overall, first quarter fiscal 2007revenue would have been $182.1 million, up $83.1 million, or 84.0%, comparedto first quarter fiscal 2006, excluding the contribution of the US geographicsegment (see footnote (4) of first quarter fiscal 2007 summary data tableabove). Revenue generated from commissions for the first quarter of fiscal 2007was $78.1 million, up $37.2 million, or 91.3%, from the same period a yearago, in part due to higher transaction volumes, growth in client assets,improved market share in Canada, and the addition of Canaccord Adams Inc. inthe US. Investment banking revenue was $102.8 million, up $53.3 million, or107.7%, mainly due to greater contributions from larger financingtransactions, including secondary offerings, private placements, and initialpublic offerings; an increase in proceeds from the sale of fee shares receivedas compensation for investment banking transactions; and the addedcontribution of Canaccord Adams Inc. in the US. Revenue derived from principal trading activity was $7.8 million, up$9.5 million, compared to a loss of $1.7 million in Q1/06 mainly due tofavourable market conditions and increased activity in Canaccord Adams. Inaddition to traditional sales and trading activities for clients, CanaccordAdams trades as principal and is a market maker for a number of equitysecurities. Interest revenue was $13.6 million, up $5.4 million, or 65.4%, mainly dueto an increase in the number and size of margin accounts and the increase ininterest rates in Canada since Q1/06. Other revenue was $3.8 million, up $1.6 million, or 73.3%, mainly due toincreases in foreign exchange gains. First quarter revenue in Canada increased to $133.3 million, up$57.1 million, or 74.9%, from a year ago, reflecting increased market share incorporate finance and trading that benefited from the robust market activityin Canadian equity markets, largely due to rising global demand forcommodities and related equities. Similarly, revenue in the UK increased to$48.9 million, up $26.1 million, or 114.1%, as the result of Canaccord'sleading market share on AIM, which benefited from high levels of activity,resulting in increased corporate finance revenue. First quarter fiscal 2007 consolidated revenue in the US was$24.0 million and includes revenue generated by Canaccord Capital Corporation(USA), Inc. ($2.6 million) and Canaccord Adams Inc. ($21.4 million), as aresult of the acquisition of Adams Harkness Financial Group, Inc., onJanuary 3, 2006. Consequently, our US operations became a reportable segmentfor the first time in Q4/06. ------------------------------------------------------------------------- Expenses as a percentage of revenue Year- over-year Increase (decrease) in Three months ended June 30 increase percentage points 2006 2005 (decrease) ------------------------------------------------------------------------- Incentive compensation 50.9% 49.1% 1.8p.p. Salaries and benefits 6.1% 9.3% (3.2)p.p. Other overhead expenses(1) 24.0% 26.0% (2.0)p.p. ------------------------------------ Total 81.0% 84.4% (3.4)p.p. ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Consists of trading costs, premises and equipment, communication and technology, interest, general and administrative, amortization, development costs and gain on disposal of investment. p.p.: percentage points Expenses were $167.0 million, up $83.4 million, or 99.7%, from a yearago. In addition to the $21.8 million of expenses incurred by the USgeographic segment, the overall increase is largely due to a rise in incentivecompensation, trading costs, and general and administrative expense, whichcollectively increased at a slower pace than revenue. During Q1/06, Canaccordrealized a one time pre-tax gain of $1.6 million from the disposal of aninvestment in the Bourse de Montrĩal. Had Canaccord not realized such gain inQ1/06, the expense to revenue ratio would have been 86.1% compared to 81.0%for Q1/07. Overall, first quarter fiscal 2007 expenses would have been$145.2 million, up $61.6 million, or 73.7%, compared to Q1/06 excluding theexpenses incurred by the US geographic segment. For the quarter, incentive compensation expense was $105.0 million, up$56.3 million, or 115.7%, largely due to the increase in fiscal first quarterrevenue posted by the Private Client Services and Canaccord Adams divisions.However, incentive compensation as a percentage of revenue increased to 50.9%compared to 49.1% for the same quarter a year ago. Investment Advisors areindividually earning higher revenue and are therefore receiving higher payoutsthat are based on a sliding revenue scale. Compensation expense includes a 3%National Health Insurance (NHI) tax applicable for UK-based employees. Salaries and benefits expense increased by $3.3 million for the firstquarter of fiscal 2007, compared to the same quarter a year ago due to ourincreased levels of activity and the addition of salaries and benefitsexpenses associated with Canaccord Adams Inc. in the US. The totalcompensation payout as a percentage of consolidated revenue for Q1/07 was57.0%, down from 58.5% in Q1/06 due to the leverage achieved from our fixedlevel of salaries and benefits expense. ------------------------------------------------------------------------- Other overhead expenses Year- Three months ended June 30 over-year (C$ thousands, except % amount) 2006 2005 increase ------------------------------------------------------------------------- Trading costs 8,559 4,312 98.5% Premises and equipment 5,937 3,626 63.7% Communication and technology 5,063 3,690 37.2% Interest 4,982 2,491 100.0% General and administrative 19,107 10,016 90.8% Amortization 1,989 1,118 77.9% Development costs 3,867 2,091 84.9% Gain on disposal of investment - (1,633) n.m. ------------------------------------ Total other overhead expenses 49,504 25,711 92.5% ------------------------------------------------------------------------- ------------------------------------------------------------------------- n.m.: not meaningful Other overhead expenses increased by $23.8 million for the first quarterof fiscal 2007, compared to the same quarter a year ago. This increase islargely attributable to the increase in trading costs, up $4.2 million mainlydue to the increase in activity in our commission revenue and the contributionassociated with our new US platform; interest, up by $2.5 million due tohigher interest rates compared to Q1/06; and general and administrativeexpense, up $9.1 million. General and administrative expense was $19.1 million, up $9.1 million, or90.8%, from a year ago partly due to the increase in business activity duringthe quarter, and the addition of Adams Harkness in Q4/06. The largestincreases in general and administrative expense were in reserves, up$1.1 million related to increased trading activity; promotion and travel, up$3.1 million, largely attributable to the increase in the geographic span ofour business; and client expenses, up $1.3 million, reflecting an increasedprovision related to client activity. ------------------------------------------------------------------------- Development costs Year- Three months ended June 30 over-year (C$ thousands, except % amount) 2006 2005 increase ------------------------------------------------------------------------- Hiring incentives 2,698 1,009 167.4% Systems development 1,169 1,082 8.0% ------------------------------------ Total 3,867 2,091 84.9% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Development costs are also included as a component of other overheadexpenses and include hiring incentives and systems development costs. Hiringincentives are one of our tools to recruit new Investment Advisors (IAs) andcapital markets professionals. The increase in hiring incentives in Q1/07 ismainly due to the costs associated with the hiring of Private Client Servicesemployees in Canada and the costs associated with retaining Adams Harkness'employees. Systems development costs are expenditures that Canaccord has maderelated to enhancing its information technology platform. Overall hiring incentives increased by $1.7 million from a year ago.Private Client Services' Q1 fiscal 2007 hiring incentives were $1.5 million,up $0.7 million, compared to the same period a year ago. Similarly, hiringincentives for Canaccord Adams were $1.2 million, up $1.0 million. Theincrease in hiring incentives is due to the recruitment of professionals forboth Private Client Services and Canaccord Adams, and the retention costsassociated with Adams Harkness' employees, as a result of the acquisition onJanuary 3, 2006. Net income was a first quarter record of $25.9 million, up by$14.9 million, or 134.2%, from a year ago. Diluted EPS was $0.54, up by $0.30,or 125.0%, and ROE was 34.7% compared to a ROE of 19.8% a year ago. The lowerincrease in EPS and ROE compared to the increase in net income is partiallyassociated with the issuance of 691,940 shares under the incentive plan forrecruiting purposes and the issuance of 1,420,342 common shares in connectionwith acquisitions during fiscal 2006. Book value per common share increased by32.6% to $6.51, up $1.60 from $4.91 a year ago, reflecting an increase inretained earnings and share capital. The US geographic segment generated quarterly net income of $1.6 million,equivalent to 6.4% of Canaccord's overall net income of $25.9 million. Income taxes were $13.2 million for the quarter, reflecting an effectivetax rate of 33.8% compared to 28.2% a year ago. The increase in the effectivetax rate in Q1/07 relative to Q1/06 is related to the geographical compositionof Canaccord's net income and the preferential tax treatment a year ago due tothe capital gain from the disposal of an investment in the Bourse de Montrĩal.Had Canaccord not realized such gain, the effective tax rate in Q1/06 wouldhave been 30.1%. Our effective tax rate will vary depending on the geographiccomposition of our operating activities. Results of operations Private Client Services ------------------------------------------------------------------------- (C$ thousands, except assets under administration and assets under management, which are in C$ millions, employees, Year- Investment Advisors and % Three months ended June 30 over-year amounts) 2006 2005 increase ------------------------------------------------------------------------- Revenue $ 72,286 39,630 82.4% Expenses Incentive compensation 33,368 17,581 89.8% Salaries and benefits 3,430 3,036 13.0% Other overhead expenses 18,419 10,403 77.1% ------------------------------------ Total Expenses $ 55,217 31,020 78.0% Income before income taxes 17,069 8,610 98.2% Assets under management (AUM) 649 410 58.3% Assets under administration (AUA) 13,942 9,954 40.1% Number of Investment Advisors (IAs) 430 418 2.9% Number of employees 710 667 6.4% ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue from Private Client Services is generated through traditionalcommission-based brokerage services; the sale of fee-based products andservices; client-related interest; and fees and commissions earned by IAs inrespect to corporate finance and venture capital transactions by privateclients. Three months ended June 30, 2006, compared with three months ended June 30, 2005 Revenue from Private Client Services was $72.3 million, up $32.7 million,or 82.4%, from a year ago due to strong activity in the North American equitymarkets, particularly in Canada within the resource sectors during the firsttwo months of fiscal Q1/07. Parallel to this revenue growth was a $4.0 billionincrease in assets under administration (AUA) to a total of $13.9 billion. The40.1% increase in AUA since fiscal Q1/06 reflects the strong increase inmarket values in North American equity markets, the addition of assets throughtransfers with newly hired IAs and additional assets added to existingaccounts since Q1/06. There were 430 IAs at the end of the first quarter offiscal 2007, a net increase of 12 from a year ago in an extremely competitiverecruiting environment. Fee-related revenue as a percentage of total PrivateClient Services' revenue decreased 4.2 percentage points to 20.0% compared tothe same period a year ago. Expenses for Q1/07 were $55.2 million, up $24.2 million, or 78.0%. Thelargest increases in expenses were recorded in incentive compensation expense,up $15.8 million, or 89.8%, due to the increase in revenue for the quarter.Other overhead expenses included interest, up $3.0 million, or 231.1%; andgeneral and administrative expense, up $3.2 million, or 113.1%. The largestcomponents of general and administrative expense were client expenses, up $1.3million due to increased provisions related to client activity; promotion andtravel, up $0.7 million, which was required to support the overall increase inbusiness activity due to corporate expansion, and other expenses, up$1.1 million, pertaining to regulatory expenses. Income before income taxes for the quarter was $17.1 million, up 98.2%from the same period a year ago. Canaccord Adams ------------------------------------------------------------------------- Year- (C$ thousands, except employees Three months ended June 30 over-year and % amounts) 2006 2005 increase ------------------------------------------------------------------------- Canaccord Adams(1) Revenue $ 125,106 54,457 129.7% Expenses Incentive compensation 65,948 28,781 129.1% Salaries and benefits 3,188 1,287 147.7% Other overhead expenses 22,386 9,396 138.3% ------------------------------------ Total Expenses $ 91,522 39,464 131.9% Income before income taxes 33,584 14,993 124.0% Number of employees 481 293 64.2% ------------------------------------------------------------------------- US geographic segment(2) Revenue $ 22,625 - n.m. Expenses - n.m. Incentive compensation 12,303 - n.m. Salaries and benefits 1,754 - n.m. Other overhead expenses 7,144 - n.m. ------------------------------------ Total Expenses $ 21,201 - n.m. Income before income taxes 1,424 - n.m. Number of employees 154 - n.m. ------------------------------------------------------------------------- Canaccord Adams, excluding the US geographic segment Revenue $ 102,481 54,457 88.2% Expenses Incentive compensation 53,645 28,781 86.4% Salaries and benefits 1,434 1,287 11.4% Other overhead expenses 15,242 9,396 62.2% ------------------------------------ Total Expenses $ 70,321 39,464 78.2% Income before income taxes 32,160 14,993 114.5% Number of employees 327 293 11.6% ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Includes the global capital markets division of Canaccord Capital Corporation in Canada; Canaccord Adams Limited in the UK; and Canaccord Adams Inc. and Canaccord Capital Corporation (USA), Inc. in the US. (2) US geographic segment includes the operations of Canaccord Adams Inc. and Canaccord Capital Corporation (USA), Inc.'s capital markets activities only. n.m.: not meaningful Revenue in this business segment is generated from commissions and feesearned in connection with investment banking transactions and institutionalsales and trading activity as well as trading gains and losses fromCanaccord's principal and international trading operations. Contribution toCanaccord Adams' revenue comes from three regions: Canada, the UK, and mostrecently, from the US through the acquisition of Adams Harkness FinancialGroup, Inc. Three months ended June 30, 2006, compared with three months ended June 30, 2005 Revenue from Canaccord Adams in Q1/07 was a quarterly record of$125.1 million, up $70.6 million, or 129.7%, compared to the same quarter ayear ago due to increases in market share that also benefited from strongcapital markets activity in Canada, the US, and the UK. Excluding thecontribution of the US geographic segment, Q1/07 revenue would have been$102.5 million, up $48.0 million, or 88.2%, compared to Q1/06. Revenue from Canadian operations Canaccord Adams in Canada generated a fiscal first quarter record revenueof $53.6 million that was derived from four divisions: Capital Markets($42.8 million, up $16.9 million, or 65.5%); International Trading ($7.4million, up $4.0 million, or 115.6%); Registered Traders ($1.6 million, up$1.1 million, or 205.3%); and Fixed Income $1.8 million, same as Q1/06. Theincrease in this sector is primarily due to benefits from increased marketshare in corporate finance and trading as a result of an increase in marketactivity in the Canadian equity markets during Q1/07, largely due to risingglobal demand for commodities and Canadian equities. Revenue from UK operations Operations related to Canaccord Adams Limited in the UK includeinstitutional sales and trading, corporate finance, and research teams.Revenue in this business was an all-time quarterly record of $48.9 million, up$26.1 million, or 114.1%, from Q1/06. This increase is a result of CanaccordAdams' leadership position as a Nominated Advisor/Broker on AIM, increasingliquidity and international interest in that market, and the successfulexpansion of our global securities distribution platform. Revenue from US operations The US geographic segment's results reflect the contribution of CanaccordCapital Corporation (USA), Inc. and Canaccord Adams Inc. (formerly theoperating subsidiary of Adams Harkness Financial Group, Inc., acquired onJanuary 3, 2006). Operational results for this new geographic segment arebeing reported separately as of January 3, 2006, and therefore, have no fiscalQ1 historical data for comparative purposes. Q1/07 revenue for Canaccord Adamsin the US was $22.6 million, representing 11.0% of Canaccord's total revenue. Expenses for Q1/07 were $91.5 million, up $52.1 million, or 131.9%.Excluding expenses from Canaccord Adams' US geographic segment, expenses wouldhave been $70.3 million, up $30.9 million, or 78.2%. The largest increases innon-compensation expenses were in trading costs, up $3.6 million, reflectingthe addition of Canaccord Adams Inc.; general and administrative expense, up$4.8 million related to higher business activity; and hiring incentives, up$1.0 million, related to ongoing hiring costs and the retention costsassociated with the acquisitions of Adams Harkness Financial Group, Inc. andEnermarket Solutions Ltd. The increase in incentive compensation for the quarter of $37.2 million,or 129.1%, is largely attributed to the 129.7% increase in revenue, whichresulted in higher payouts for the period. Also contributing to this increasewas the introduction of Canaccord's Employee Stock Incentive Plan (ESIP) inQ2/06, which was primarily offered to key Canaccord Adams' employees. Salaryand benefits expense for the quarter increased by 147.7% compared to a yearago, due to the fact that the US geographic segment added $1.4 million in newsalaries and benefits for the quarter. For the quarter, the total compensationexpense payout as a percentage of revenue was 55.3%, up 0.1 percentage pointscompared to 55.2% for the same period a year ago. The largest components of other non-compensation overhead expenses weregeneral and administrative expenses, up $4.8 million; premises and equipment,up $1.7 million; and communication and technology, up $2.4 million related toexpansion and upgrades of our premises globally. The largest increase ingeneral and administrative expenses was promotion and travel, up $2.0 million,to support the overall increase in business activity due to corporateexpansion. General and administrative expenses incurred by Canaccord AdamsInc. in the US were $2.1 million, or 24.1%, of Canaccord Adams' overallgeneral and administrative expenses. Excluding Canaccord Adams Inc.'soperations in the US during Q1/07, general and administrative expenses forCanaccord Adams would have been $6.7 million, up $2.8 million, or 71.8%,compared to Q1/06. Income before income taxes for the quarter was $33.6 million, up$18.6 million, or 124.0%, compared to the same quarter a year ago. Other segment ------------------------------------------------------------------------- Year- (C$ thousands, except employees Three months ended June 30 over-year and % amounts) 2006 2005 increase ------------------------------------------------------------------------- Revenue 8,735 4,930 77.2% Expenses Incentive compensation 5,639 2,288 146.5% Salaries and benefits 5,875 4,903 19.8% Other overhead expenses 8,699 5,912 47.1% ------------------------------------ Total Expenses 20,213 13,103 54.3% (Loss) before income taxes (11,478) (8,173) 40.4% Number of employees 343 328 4.6% ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Other segment includes correspondent brokerage services, interest,foreign exchange revenue and expenses not specifically allocable to thePrivate Client Services and Canaccord Adams divisions. Also included in thissegment are Canaccord's operations and support services, which are responsiblefor front and back office information technology systems, compliance and riskmanagement, operations, finance, and all administrative functions. Three months ended June 30, 2006, compared with three months ended June 30, 2005 Revenue for the three months ended June 30, 2006, was $8.7 million, up$3.8 million, or 77.2%, compared to the same quarter a year ago, and isprimarily attributed to an increase in foreign exchange revenue, bank interestand security rebate revenue. Expenses for Q1/07 were $20.2 million, up $7.1 million, or 54.3%. Thelargest increases in expenses were recorded in incentive compensation, up $3.4million; salaries and benefits, up $1.0 million; and general andadministrative expense, up $1.1 million, mainly attributable to increases inpromotion and travel, up $0.4 million. Loss before income taxes was $11.5 million in the first quarter of fiscal2007, up $3.3 million, or 40.4%, compared to a loss of $8.2 million in thesame quarter a year ago. This is mainly due to a one time pre-tax gain of $1.6million from the disposal of an investment in the Bourse de Montrĩal inQ1/06. Had Canaccord not realized such gain in Q1/06, loss before income taxesin Q1/07 would have increased by $1.7 million, or 17.1%. Another contributingfactor to the increase in loss is due to higher incentive compensationexpenses related to higher profitability. Financial conditions Below are specific 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, the clients'accounts receivable balance of $428.0 million may vary significantly on aday-to-day basis and is based on trading volumes and market activity. As atJune 30, 2006, total accounts receivable were $1,154.5 million compared to$1,540.0 million as at March 31, 2006. Also included in total accountsreceivable are receivables from brokers and investment dealers totalling$368.3 million; $306.6 million in RRSP cash balances held in trust; and otherreceivables totalling $51.5 million. Cash and cash equivalents Cash and cash equivalents were $377.0 million as of June 30, 2006,compared to $370.5 million as of March 31, 2006. Significant sources of cashinclude net income of $25.9 million and securities sold short of$72.8 million. Uses of cash include a decrease in accounts receivable of$388.1 million; a decrease in securities owned of $9.0 million; the payment ofdividends of $3.8 million; income taxes payable of $6.9 million; and thedecrease in accounts payable of $474.4 million. Call loans Loan facilities utilized by the company may vary significantly on aday-to-day basis and depend on securities trading activity. Amounts borrowedpursuant to these call loan facilities, at June 30, 2006, totalled$0.6 million. Off-balance sheet arrangements On June 30, 2006, Canaccord had an irrevocable standby letter of creditfrom one of its banks in the amount of $1.3 million as a rent guarantee forour leased premises in the UK. Canaccord Adams has also entered intoirrevocable standby letters of credit from a financial institution totalling$1.6 million as rent guarantees for its leased premises in Boston, New Yorkand San Francisco. As of June 30, 2006, the total outstanding balances werezero. Liquidity and capital resources Canaccord has a capital structure underpinned by shareholders' equity,which is comprised of share capital, retained earnings and cumulative foreigncurrency translation adjustments. On June 30, 2006, cash and cash equivalentsnet of call loans were $376.4 million, up $10.6 million from $365.8 million asof March 31, 2006. During the first quarter fiscal 2007 ended June 30, 2006,financing activities used cash in the amount of $2.8 million, which wasprimarily due to payment of dividends of $3.8 million, and offset by a$1.0 million for the decrease in unvested common share purchase loans(1)related to Canaccord's ESIP and other stock plans. Investing activities usedcash in the amount of $0.4 million for the purchase of equipment and leaseholdimprovement. A further reduction in cash of $1.1 million was attributed to theeffect of foreign exchange on cash balances. Operating activities providedcash in the amount of $14.9 million, which was due to net changes in non-cashworking capital items, net income and items not affecting cash. Canaccord's business requires capital for operating and regulatorypurposes. The current assets reflected on Canaccord's balance sheet are highlyliquid. The majority of the positions held as securities owned are readilymarketable and all are recorded at their market value. The market value ofthese securities fluctuates daily as factors such as changes in marketconditions, economic conditions and investor outlook affect market prices.Client receivables are secured by readily marketable securities and arereviewed daily for impairment in value and collectibility. Receivables andpayables from brokers and dealers represent the following: current opentransactions which generally settle within the normal three-day settlementcycle; collateralized securities that are borrowed and/or loaned intransactions that can be closed within a few days on demand; and balances dueto introducing brokers representing net balances in connection with theirclient accounts. In fiscal Q1/07, Canaccord entered into a new tenancy agreement for itspremises in London, England. The following table summarizes Canaccord's consolidated long-termcontractual obligations as of June 30, 2006. Contractual obligations payments due by period ----------------------------------------------- Less than 1-3 4-5 After (C$ in thousands) Total 1 year years years 5 years ------------------------------------------------------------------------- Premises and equipment operating leases 187,305 18,894 39,278 37,177 91,956 ------------------------------------------------------------------------- Credit facilities Canaccord has credit facilities with Canadian, US and UK banks in anaggregate amount of $342.3 million. These credit facilities, consisting ofcall loans, letters of credit and daylight overdraft facilities, arecollateralized by either unpaid securities and/or securities owned byCanaccord. Outstanding share data ------------------------------------------------------------------------- Outstanding shares as of June 30 2006 2005 ------------------------------------------------------------------------- Issued shares outstanding - basic(1) 45,906,368 45,413,175 Issued shares outstanding - diluted(2) 47,827,350 46,116,268 Average shares outstanding - basic 45,906,368 45,426,032 Average shares outstanding - diluted 47,998,175 46,129,125 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Excludes 703,093 unvested shares that are outstanding relating to share purchase loans for recruitment and retention programs. (2) Includes 703,093 shares related to share purchase loans referred to in footnote (1) above. As of June 30, 2006, Canaccord had 47,827,350 common shares issued andoutstanding on a diluted basis, up 1,711,082 common shares from June 30, 2005,comprising 1,420,342 common shares issued in connection with acquisitions,691,940 common shares issued as part of the employee treasury stock purchaseplan offset by a reduction of 401,200 common shares, which were purchased andcancelled during fiscal year 2006 through the normal course issuer bid (NCIB). On December 22, 2005, Canaccord renewed its NCIB for one year commencingon December 29, 2005, and ending on December 28, 2006. The NCIB allows forpurchases of up to 5% of Canaccord's issued and outstanding shares at the timeof the renewal. As of August 4, 2006, there are 2,324,233 common sharesavailable for purchase under the NCIB. Canaccord has agreed with the relevantregulators to update its shareholders at a minimum rate of every two weeks ifpurchases are made, and will update shareholders immediately if more than 1%of its outstanding shares are purchased in one day. Going forward and fromtime to time, Canaccord may purchase its common shares for the purpose ofresale or cancellation. On January 3, 2006, Canaccord closed the acquisition of Adams HarknessFinancial Group, Inc., which was a privately held Boston, Massachusetts-basedinstitutional investment bank. The consideration consisted of US$8 million incash and the issuance of 1,342,696 common shares from treasury valued at US$12million. These shares will be held in escrow, with annual releases ofone-third per year, beginning on June 30, 2006, and ending on June 30, 2008. In connection with the acquisition of Adams Harkness Financial Group,Inc., a retention plan was established, which provides for the issuance of upto 1,118,952 shares after a three-year vesting period. The total number ofshares to be vested is also based on revenue earned by Canaccord Adams Inc.subsequent to the date of acquisition. The aggregate number of common sharesthat will vest and will therefore be issued at the end of the vesting periodwill be that number, which is equal to the revenue earned by Canaccord AdamsInc. during the vesting period divided by US$250.0 million multiplied by1,118,952, subject to the maximum of 1,118,952 common shares adjusted forforfeitures and cancellations. As such revenue levels are achieved during thevesting period, the associated proportion of the retention payment will berecorded as development costs, and the applicable number of retention shareswill be included in weighted average diluted common shares outstanding. As of August 3, 2006, Canaccord had 47,827,350 common shares outstandingon a diluted basis. International financial centres Canaccord is a member of the International Financial Centres of bothBritish Columbia and Quĩbec, which provide certain tax and financial benefitspursuant to the International Financial Activity Act of British Columbia andthe Act Respecting International Financial Centres of Quĩbec. 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. Realized and unrealized gains andlosses related to those contracts are recognized in income during the year. Asof June 30, 2006, forward contracts outstanding to sell US dollars had anotional amount of US$8.5 million, down $3.8 million from a year ago. Forwardcontracts outstanding to buy US dollars had a notional amount ofUS$14.5 million, up US$6.3 million compared to a year ago. The fair value ofthese contracts was nominal. A certain number of Canaccord's operations inLondon, England, are conducted in British pounds sterling; however, anyforeign exchange risk in respect of these transactions is generally limited aspending settlements on both sides of the transaction are typically in Britishpounds 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, 2006. 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 havea material 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. Goodwill and other intangible assets As a result of the acquisitions of Adams Harkness Financial Group, Inc.and Enermarket Solutions Ltd., Canaccord acquired goodwill and otherintangible assets. Goodwill is the cost of the acquired companies in excess ofthe fair value of their net assets, including other intangible assets, at theacquisition date. The identification and valuation of other intangible assetsrequired management to use estimates and make assumptions. Goodwill will beassessed for impairment at least annually, or whenever a potential impairmentmay arise as a result of an event or change in circumstances, to ensure thatthe fair value of the reporting unit to which goodwill has been allocated isgreater than or at least equal to its original value. Fair value will bedetermined using valuation models that take into account such factors asprojected earnings, earnings multiples, discount rates, other availableexternal information and market comparables. The determination of fair valuewill require management to apply judgement in selecting the valuation modelsand assumptions and estimates to be used in such models and valuedeterminations. These judgements will affect the determination of fair valueand any resulting impairment changes. Other intangible assets are amortized over their estimated useful livesand tested for impairment periodically or whenever a potential impairment mayarise as a result of an event or change in circumstances. Management mustexercise judgement and make use of estimates and assumptions in determiningthe estimated useful lives of other intangible assets and in periodicdeterminations of value. Stock-based compensation In connection with the acquisition of Adams Harkness Financial Group,Inc., Canaccord agreed to issue common shares to certain key employees ofAdams Harkness upon the expiry of a three-year vesting period, with the numberof common shares to be adjusted in the event that certain revenue targets arenot achieved. Canaccord uses the fair-value method of accounting for thesepayments, which includes making estimates in respect of forfeiture rates.Under this method the compensation expense is recognized over the relevantvesting period on a pro-rata basis as revenue targets are achieved. The fairvalue of the stock-based compensation was determined as of the grant date. 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 Although dividends are expected to be declared and paid quarterly, theBoard of Directors, in its sole discretion, will determine the amount andtiming of any dividends. All dividend payments will depend on general businessconditions, Canaccord's financial condition, results of operations and capitalrequirements and such other factors as the Board determines to be relevant.Canaccord intends to continue to pay a $0.08 regular quarterly common sharedividend in respect of Q1/07 and for each quarter in fiscal year 2007. Dividend declaration For the first quarter of fiscal 2007, the Board of Directors declared acommon share dividend of $0.08 per share, which is payable on September 8,2006, to shareholders of record on August 25, 2006. The common share dividendpayment to common shareholders will total approximately $3.8 million orapproximately 14.7% of first quarter net income. Financial instruments In the normal course of business Canaccord utilizes certain financialinstruments to manage its exposure to credit risk, market risk and foreignexchange risk as mentioned above. Historical quarterly information Canaccord's revenue from an underwriting transaction is recorded onlywhen the transaction has closed. Consequently, the timing of revenuerecognition can materially affect Canaccord's quarterly results. The expensestructure of Canaccord's operations is geared towards providing service andcoverage in the current market environment. If general capital marketsactivity were to drop significantly, Canaccord could experience losses. The following table provides selected quarterly financial information forthe nine most recently completed financial quarters ended June 30, 2006. Thisinformation is unaudited, but reflects all adjustments of a recurring nature,which are, in the opinion of management, necessary to present a fair statementof the results of operations for the periods presented. Quarter-to-quartercomparisons of financial results are not necessarily meaningful and should notbe relied upon as an indication of future performance. Fiscal 2007 Fiscal 2006 (C$ thousands, except ----------- ----------- per share amounts) Q1 Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Revenue Private Client Services 72,286 78,422 54,731 52,411 39,630 Canaccord Adams 125,106 120,243 98,918 60,048 54,457 Other 8,735 8,409 5,021 6,195 4,930 -------------------------------------------- Total Revenue 206,127 207,074 158,670 118,654 99,017 Net income 25,942 30,070 24,248 15,754 11,078 EPS - basic 0.57 0.66 0.55 0.35 0.24 EPS - diluted 0.54 0.63 0.52 0.34 0.24 Fiscal 2005 (C$ thousands, except ----------- per share amounts) Q4 Q3 Q2 Q1 ---------------------------------------------------------------- Revenue Private Client Services 56,391 46,964 36,499 38,322 Canaccord Adams 81,444 72,368 46,671 39,171 Other 5,094 4,351 2,431 3,072 ----------------------------------- Total Revenue 142,929 123,683 85,601 80,565 Net income 17,307 16,743 6,123 8,406 EPS - basic 0.38 0.37 0.14 0.28 EPS - diluted 0.38 0.36 0.13 0.23 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 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. PrivateClient Services' revenue is dependent on trading volumes and, as such, isdependent on the level of market activity and investor confidence. CanaccordAdams' revenue is dependent on financing activity by corporate issuers and thewillingness of institutional clients to actively trade and participate incapital markets transactions. There may also be a lag between marketfluctuations and changes in business conditions and the level of Canaccord'smarket activity and the impact that these factors have on Canaccord'soperating results and financial position. Furthermore, Canaccord may notachieve its growth plans associated with the acquisition and integration ofAdams Harkness Financial Group, Inc. In addition to the risks previouslymentioned above, other risks have not changed substantially from those set outin the Annual Report of June 26, 2006. 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 2006Annual Report, which are available on our Web site atwww.canaccord.com/investor and on SEDAR at www.sedar.com. Additional information relating to Canaccord, including Canaccord'sAnnual Information Form and interim filings can also be found on our Web siteand on SEDAR at www.sedar.com. ------------------- (1) These are forgivable loans granted to key employees in connection to the purchase of common stock in the open market under the ESIP and other incentive plans. Interim Consolidated Financial Statements Canaccord Capital Inc. Unaudited For the three months ended June 30, 2006 (Expressed in Canadian dollars) Canaccord Capital Inc. INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands of dollars) As at June 30, March 31, June 30, 2006 2006 2005 $ $ $ ------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 376,986 370,507 282,485 Securities owned, at market (note 2) 194,061 203,020 122,745 Accounts receivable (notes 4 and 8) 1,154,454 1,539,998 855,730 Income taxes recoverable - - 1,222 ------------------------------------------------------------------------- Total current assets 1,725,501 2,113,525 1,262,182 Equipment and leasehold improvements 24,449 25,750 14,131 Notes receivable - - 42,731 Future income taxes 11,872 10,769 4,109 Goodwill and other intangible assets (note 5) 27,575 27,929 - ------------------------------------------------------------------------- 1,789,397 2,177,973 1,323,153 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Call loans 556 4,684 819 Securities sold short, at market (note 2) 109,923 37,169 49,180 Accounts payable and accrued liabilities (notes 4 and 8) 1,359,198 1,832,956 1,003,765 Income taxes payable 8,522 15,334 - ------------------------------------------------------------------------- Total current liabilities 1,478,199 1,890,143 1,053,764 Notes payable - - 42,731 ------------------------------------------------------------------------- Total liabilities 1,478,199 1,890,143 1,096,495 ------------------------------------------------------------------------- Commitments and contingencies (note 10) Shareholders' equity Share capital (note 6) 158,718 157,644 151,100 Cumulative foreign currency translation adjustment (6,099) (6,277) (3,010) Retained earnings 158,579 136,463 78,568 ------------------------------------------------------------------------- Total shareholders' equity 311,198 287,830 226,658 ------------------------------------------------------------------------- 1,789,397 2,177,973 1,323,153 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Canaccord Capital Inc. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Unaudited) (in thousands of dollars, except per share amounts) For the three months ended -------------------------- June 30, June 30, 2006 2005 $ $ ------------------------------------------------------------------------- REVENUE Commission 78,054 40,811 Investment banking 102,840 49,505 Principal trading 7,784 (1,741) Interest 13,638 8,243 Other 3,811 2,199 ------------------------------------------------------------------------- 206,127 99,017 ------------------------------------------------------------------------- ------------------------------------------------------------------------- EXPENSES Incentive compensation 104,955 48,650 Salaries and benefits 12,493 9,226 Trading costs 8,559 4,312 Premises and equipment 5,937 3,626 Communication and technology 5,063 3,690 Interest 4,982 2,491 General and administrative 19,107 10,016 Amortization 1,989 1,118 Development costs 3,867 2,091 Gain on disposal of investment (note 11) - (1,633) ------------------------------------------------------------------------- 166,952 83,587 ------------------------------------------------------------------------- Income before income taxes 39,175 15,430 Income tax expense (recovery) Current 14,336 4,469 Future (1,103) (117) ------------------------------------------------------------------------- Net income for the period 25,942 11,078 Retained earnings, beginning of period 136,463 72,564 Cash dividends (3,826) (5,074) ------------------------------------------------------------------------- Retained earnings, end of period 158,579 78,568 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic earnings per share (note 6 (vi)) 0.57 0.24 Diluted earnings per share (note 6 (vi)) 0.54 0.24 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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, 2006 2005 $ $ ------------------------------------------------------------------------- OPERATING ACTIVITIES Net income for the period 25,942 11,078 Items not affecting cash Amortization 1,377 1,205 Future income tax recovery (1,103) (117) Gain on disposal of investment - (1,633) Changes in non-cash working capital Decrease in securities owned 9,035 37,181 Decrease in accounts receivable 388,138 205,844 Increase in income taxes recoverable - (997) Increase (decrease) in securities sold short 72,766 (56,348) Decrease in accounts payable and accrued liabilities (474,398) (249,330) Decrease in income taxes payable (6,868) (6,737) ------------------------------------------------------------------------- Cash provided by (used in) operating activities 14,889 (59,854) ------------------------------------------------------------------------- FINANCING ACTIVITIES Increase in notes payable - 1,113 Decrease in unvested common share purchase loans 1,074 187 Redemption of share capital - (117) Dividends paid (3,826) (5,074) ------------------------------------------------------------------------- Cash used in financing activities (2,752) (3,891) ------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of equipment and leasehold improvements (446) (1,571) Increase in notes receivable - (1,113) Proceeds on disposal of investment - 1,639 ------------------------------------------------------------------------- Cash used in investing activities (446) (1,045) ------------------------------------------------------------------------- Effect of foreign exchange on cash balances (1,084) (3,244) ------------------------------------------------------------------------- Increase (decrease) in cash position 10,607 (68,034) Cash position, beginning of period 365,823 349,700 ------------------------------------------------------------------------- Cash position, end of period 376,430 281,666 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash position is comprised of: Cash and cash equivalents 376,986 282,485 Call loans (556) (819) ------------------------------------------------------------------------- 376,430 281,666 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplemental cash flow information Interest paid 4,939 1,685 Income taxes paid 21,614 12,622 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Canaccord Capital Inc. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the three months ended June 30, 2006 (in thousands of dollars, except per share amounts) Canaccord Capital Inc. (the "Company") is an independent full service investment dealer. The Company has operations in each of the two principal segments of the securities industry: private client services and capital markets. Together these operations offer a wide range of complementary investment products, brokerage services and investment banking services to the Company's retail, institutional and corporate clients. Historically, the Company's operating results are characterized by a seasonal pattern and it earns the majority of its revenue in the last two quarters of its fiscal year. However, during the first quarter of fiscal 2007, the Company generated unusually strong revenue from North American operations, and therefore, the traditional seasonality variances may be less pronounced this fiscal year. 1. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation and principles of consolidation These interim unaudited consolidated financial statements have been prepared by the Company in accordance with Canadian generally accepted accounting principles ("GAAP") with respect to interim financial statements, applied on a consistent basis. These interim unaudited consolidated financial statements follow the same accounting principles and methods of application as those disclosed in Note 1 to the Company's audited consolidated financial statements as at and for the year ended March 31, 2006 ("Audited Annual Consolidated Financial Statements"). Accordingly, they do not include all the information and footnotes required for compliance with Canadian GAAP for annual financial statements. These interim unaudited consolidated financial statements and notes thereon should be read in conjunction with the Audited Annual Consolidated Financial Statements. The preparation of these interim unaudited consolidated financial statements and the accompanying notes requires management to make estimates and assumptions that affect the amounts reported. In the opinion of management, these interim unaudited consolidated financial statements reflect all adjustments (which include only normal, recurring adjustments) necessary to state fairly the results for the periods presented. Actual results could vary from these estimates and the operating results for the interim periods presented are not necessarily indicative of results that may be expected for the full year. 2. SECURITIES OWNED AND SECURITIES SOLD SHORT June 30, 2006 March 31, 2006 ------------- -------------- Securities Securities Securities Securities owned sold short owned sold short $ $ $ $ ------------------------------------------------------------------------- Corporate and government debt 116,317 88,710 40,784 14,319 Equities and convertible debentures 77,744 21,213 162,236 22,850 ------------------------------------------------------------------------- 194,061 109,923 203,020 37,169 ------------------------------------------------------------------------- ------------------------------------------------------------------------- June 30, 2005 ------------- Securities Securities owned sold short $ $ ------------------------------------------------- Corporate and government debt 66,822 29,592 Equities and convertible debentures 55,923 19,588 ------------------------------------------------- 122,745 49,180 ------------------------------------------------- ------------------------------------------------- As at June 30, 2006, corporate and government debt maturities range from 2006 to 2053 (March 31, 2006 - 2006 to 2053 and June 30, 2005 - 2005 to 2053) and bear interest ranging from 2.55% to 14.00% (March 31, 2006 and June 30, 2005 - 2.05% to 14.00%). 3. FINANCIAL INSTRUMENTS Foreign exchange risk Foreign exchange risk arises from the possibility that changes in the price of foreign currencies will result in losses. The Company periodically trades certain foreign exchange contracts to manage and hedge foreign exchange risk on pending settlements in foreign currencies. Realized and unrealized gains and losses related to these contracts are recognized in income during the year. Forward contracts outstanding at June 30, 2006: Notional amounts Average price Fair value (millions of USD) (CAD/USD) Maturity (millions of USD) ------------------------------------------------------------------------- To sell US dollars $ 8.50 1.11 July 5, 2006 $0.1 To buy US dollars $14.50 1.11 July 5, 2006 ($0.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Forward contracts outstanding at March 31, 2006: Notional amounts Average price Fair value (millions of USD) (CAD/USD) Maturity (millions of USD) ------------------------------------------------------------------------- To sell US dollars $90.85 $1.16 April 5, 2006 $0.1 To buy US dollars $ 7.00 $1.16 April 3, 2006 ($0.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Forward contracts outstanding at June 30, 2005: Notional amounts Average price Fair value (millions of USD) (CAD/USD) Maturity (millions of USD) ------------------------------------------------------------------------- To sell US dollars $12.25 $1.23 July 5, 2005 $0.1 To buy US dollars $ 8.25 $1.23 July 6, 2005 ($0.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 4. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts receivable June 30, March 31, June 30, 2006 2006 2005 $ $ $ ------------------------------------------------------------------------- Brokers and investment dealers 368,262 567,308 238,507 Clients 428,005 607,118 346,098 RRSP cash balances held in trust 306,648 320,766 252,731 Other 51,539 44,806 18,394 ------------------------------------------------------------------------- 1,154,454 1,539,998 855,730 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accounts payable and accrued liabilities June 30, March 31, June 30, 2006 2006 2005 $ $ $ ------------------------------------------------------------------------- Brokers and investment dealers 300,774 397,733 283,279 Clients 919,481 1,172,511 621,693 Other 138,943 262,712 98,793 ------------------------------------------------------------------------- 1,359,198 1,832,956 1,003,765 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accounts payable to clients include $306.6 million (March 31, 2006 - $320.8 million and June 30, 2005 - $252.7 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 Dealers Association 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, 2006 - 8.00% and 3.00%, respectively, March 31, 2006 - 7.50% and 2.50%, respectively, and June 30, 2005 - 6.25% and 1.25%, respectively). 5. GOODWILL AND OTHER INTANGIBLE ASSETS The changes in the carrying amount of goodwill and other intangible assets are as follows: June 30, March 31, June 30, 2006 2006 2005 $ $ $ ------------------------------------------------------------------------- Goodwill 22,653 22,653 - ------------------------------------------------------------------------- Other intangible assets Balance at beginning of period 5,276 - - Acquisitions - 5,650 - Amortization 354 374 - ------------------------------------------------------------------------- Balance at end of period 4,922 5,276 - ------------------------------------------------------------------------- 27,575 27,929 - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other intangible assets reflect assigned values related to acquired brand names, customer relationships and technology and are amortized on a straight-line basis over their estimated useful life of four years. Goodwill and other intangible assets relate to the Canaccord Adams operating segment. 6. SHARE CAPITAL June 30, March 31, June 30, 2006 2006 2005 $ $ $ ------------------------------------------------------------------------- Issued and fully paid Share capital Common shares 173,282 173,282 153,018 Unvested share purchase loans (20,202) (20,577) (2,958) Contributed surplus 5,638 4,939 1,040 ------------------------------------------------------------------------- 158,718 157,644 151,100 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 No. of Amount shares $ ------------------------------------------------------------- Balance, March 31, 2005 46,129,268 153,061 Shares cancelled (13,000) (43) ------------------------------------------------------------- Balance, June 30, 2005 46,116,268 153,018 Shares issued for cash 691,940 6,574 Shares issued in connection with acquisitions 1,420,342 15,022 Shares cancelled (401,200) (1,332) ------------------------------------------------------------- Balance, June 30 and March 31, 2006 47,827,350 173,282 ------------------------------------------------------------- ------------------------------------------------------------- Pursuant to the Company's normal course issuer bid ("NCIB"), as approved by the Toronto Stock Exchange, the Company was entitled to acquire up to 2,306,463, or 5.0%, of its shares from December 29, 2004 to December 28, 2005. Under the NCIB, the Company purchased for resale a total of 222,548 common shares between December 29, 2004 and March 31, 2005 and purchased for cancellation 414,200 common shares during the twelve months ended March 31, 2006 with a book value of $1.3 million for aggregate cash consideration of $4.6 million. The excess has been recorded to contributed surplus and retained earnings. The Company renewed its NCIB and is currently entitled to acquire from December 29, 2005 to December 28, 2006, up to 2,324,233 of its shares, which represents 5% of its shares outstanding as of December 20, 2005. There were no share transactions under the NCIB between December 20, 2005 and June 30, 2006. (iii) Excess on redemption of common shares The excess on redemption of common shares represents amounts paid to shareholders, by the Company and its subsidiaries, on redemption of their shares in excess of the book value of those shares at the time of redemption. The excess on redemption of common shares has been charged against contributed surplus. For the three months ended -------------------------- June 30, June 30, 2006 2005 $ $ ------------------------------------------------------------------------- Redemption price - 117 Book value - 43 ------------------------------------------------------------------------- Excess on redemption of common shares - 74 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (iv) 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 of three years. Contributed surplus represents the amortization of unvested forgivable common share purchase loans. (v) Distribution of acquired common shares On November 24, 2005, the Company repurchased 132,000 common shares from departed employees at cost for total cash consideration of $0.5 million. These shares were subsequently distributed to existing employees at an average market price of $14.00 per share for total cash proceeds of $1.8 million. This excess on distribution of $1.3 million has been credited to contributed surplus. Contributed Surplus $ ------------------------------------------------------------------------- Balance, March 31, 2005 898 Unvested share purchase loans 216 Excess on redemption of common shares (74) ------------------------------------------------------------------------- Balance, June 30, 2005 1,040 Unvested share purchase loans and stock compensation plans 2,970 Excess on redemption of common shares (386) Excess on distribution of acquired common shares 1,315 ------------------------------------------------------------------------- Balance, March 31, 2006 4,939 Unvested share purchase loans and stock compensation plans 699 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Balance, June 30, 2006 5,638 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (vi) Earnings per share For the three months ended -------------------------- June 30, June 30, 2006 2005 $ $ ------------------------------------------------------------------------- Basic earnings per share Net income for the period 25,942 11,078 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares (number) 45,906,368 45,426,032 Basic earnings per share 0.57 0.24 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings per share Net income for the period 25,942 11,078 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares (number) 45,906,368 45,426,032 Dilutive effect of unvested shares (number) 1,644,206 703,093 Dilutive effect of stock-based compensation plans (number) (note 7) 447,601 - ------------------------------------------------------------------------- Adjusted weighted average number of common shares (number) 47,998,175 46,129,125 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings per share 0.54 0.24 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 7. STOCK-BASED COMPENSATION PLANS Retention Plans As described in the Audited Annual Consolidated Financial Statements, the Company established two retention plans in connection with the acquisitions of Enermarket and Adams Harkness. The plan for Enermarket consists of the issuance of up to 25,210 common shares of the Company which will be paid after a two-year vesting period. The plan for Adams Harkness provides for the issuance of up to 1,118,952 common shares of the Company after a three-year vesting period. The total number of shares which will vest is also based on revenue earned by Canaccord Adams Inc. during the vesting period. The aggregate number of common shares which vest will be that number which is equal to the revenue earned by Canaccord Adams Inc. during the vesting period divided by US$250.0 million multiplied by 1,118,952 subject to the maximum of 1,118,952 common shares adjusted for forfeitures and cancellations. As such revenue levels are achieved during the vesting period, the associated proportion of the retention payment will be recorded as a development cost and the applicable number of retention shares will be included in diluted common shares outstanding (Note 6(vi)). Employee Treasury Stock Purchase Plan In August 2005, the Company established an employee treasury stock purchase plan under which the Company made a forgivable loan to an employee for the purpose of paying 40% of the aggregate purchase price of common shares of the Company issued from treasury. A repayable loan in the amount of 35% of the aggregate purchase price of the common shares was also made to the employee. Subject to continued employment, one-third of the number of common shares purchased utilizing the forgivable loan portion of the aggregate purchase will vest on each anniversary of the date of the purchase and the forgivable loan portion related to amounts vested will be forgiven. The applicable number of shares under this employee treasury stock purchase plan will be included in diluted common shares outstanding (Note 6(vi)). The following table details the activity under the Company's retention plans and employee treasury stock purchase plan: For the three months ended June 30, June 30, 2006 2005 -------------------------- Number of common shares subject to the Enermarket retention plan: Beginning of period 25,210 - Grants - - ------------------------------------------------------------------------- End of period 25,210 - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Number of common shares subject to the Adams Harkness retention plan: Beginning of period 1,046,219 - Grants 72,733 - Forfeitures (2,308) - ------------------------------------------------------------------------- End of period 1,116,644 - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Number of common shares subject to the employee treasury stock purchase plan: Beginning of period 276,776 - Issued - - ------------------------------------------------------------------------- End of period 276,776 - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Under the fair value method, the aggregate cost of the grants made under the retention plans are estimated to be $12.0 million - $0.3 million relating to Enermarket and $11.7 million (US$10.0 million) for Adams Harkness. The cost of the retention plans will be recognized in the financial statements of the Company in accordance with the vesting terms of the respective plans. The forgivable loan amount in respect of the common shares issued under the employee treasury stock purchase plan is $2.6 million. This amount will be recognized in the financial statements of the Company over the vesting period on a straight-line basis. 8. RELATED PARTY TRANSACTIONS Security trades executed by the Company for employees, officers and directors are transacted in accordance with the terms and conditions applicable to all clients. Commission income on such transactions in the aggregate is not material in relation to the overall operations of the Company. Accounts receivable and accounts payable and accrued liabilities include the following balances with related parties: June 30, March 31, June 30, 2006 2006 2005 $ $ $ ------------------------------------------------------------------------- Accounts receivable 35,815 34,582 30,762 Accounts payable and accrued liabilities 86,745 88,506 64,111 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 9. SEGMENTED INFORMATION The Company has two operating segments: Private Client Services - provides brokerage services and investment advice to retail or private clients. 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 United Kingdom and the United States of America. The Corporate and Other segment includes correspondent brokerage services, interest and foreign exchange revenue and expenses not specifically allocable to Private Client Services and Canaccord Adams. 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, 2006 ----------------------------------------------- Private Corporate Client Canaccord and Services Adams Other Total $ $ $ $ ------------------------------------------------------------------------- Revenues 72,286 125,106 8,735 206,127 Expenses 53,286 89,285 18,525 161,096 Amortization 410 950 629 1,989 Development, restructuring and other costs 1,521 1,287 1,059 3,867 ------------------------------------------------------------------------- Income (loss) before income taxes 17,069 33,584 (11,478) 39,175 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2005 ----------------------------------------------- Private Corporate Client Canaccord and Services Adams Other Total $ $ $ $ ------------------------------------------------------------------------- Revenues 39,630 54,457 4,930 99,017 Expenses 29,758 38,864 11,756 80,378 Amortization 380 445 293 1,118 Development, restructuring and other costs 882 155 1,054 2,091 ------------------------------------------------------------------------- Income (loss) before income taxes 8,610 14,993 (8,173) 15,430 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company's business operations are grouped into three geographic segments as follows: For the three months ended -------------------------- June 30, June 30, 2006 2005 $ $ ------------------------------------------------------------------------- Canada Revenue 133,250 76,184 Net income 13,103 5,960 Equipment and leasehold improvements 20,950 12,428 Goodwill and other intangible assets 4,521 - United States Revenue 23,985 - Net income 1,648 - Equipment and leasehold improvements 2,351 - Goodwill and other intangible assets 23,054 - United Kingdom Revenue 48,892 22,833 Net income 11,191 5,118 Equipment and leasehold improvements 1,148 1,703 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 10. COMMITMENTS AND CONTINGENCIES Commitments Subsidiaries of the Company are committed to approximate minimum lease payments for premises and equipment over the next five years and thereafter as follows: $ ------------------------------------------------------------------------- 2007 14,282 2008 18,798 2009 20,189 2010 18,978 2011 18,495 Thereafter 96,563 ------------------------------------------------------------------------- 187,305 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Contingencies During the period, there have been no material changes to the Company's contingencies from those described in Note 17 of the March 31, 2006 Audited Annual Consolidated Financial Statements. 11. GAIN ON DISPOSAL OF INVESTMENT During the three months ended June 30, 2005, the Company recognized a gain of $1,633 from the sale of its investment in shares of the Bourse de Montrĩal. 12. SUBSEQUENT EVENT Dividend On August 3, 2006, the Board of Directors declared a common share dividend of $0.08 per share payable on September 8, 2006, with a record date of August 25, 2006. 13. CANADIAN AND INTERNATIONAL FINANCIAL REPORTING STANDARDS DIFFERENCES These consolidated financial statements have been prepared in accordance with Canadian GAAP with respect to interim financial statements. In certain respects, International Financial Reporting Standards ("IFRS") adopted by the International Accounting Standards Board differ from those applied in Canada. If IFRS were employed, there would be no material adjustment to net income or earnings per share and consolidated shareholders' equity of the Company for the three months ended June 30, 2006 and 2005. The area of material difference between GAAP and IFRS and its impact on the consolidated financial statements of the Company is in the consolidated statement of changes in shareholders' equity. IFRS requires the inclusion of a consolidated statement of changes in shareholders' equity for each statement of income year, as follows: June 30, June 30, 2006 2005 $ $ ------------------------------------------------------------------------- ISSUED AND PAID SHARE CAPITAL Common shares Balance at the beginning of the period 173,282 153,061 Shares cancelled - (43) ------------------------------------------------------------------------- Balance at the end of the year 173,282 153,018 ------------------------------------------------------------------------- Unvested share purchase loans Balance at the beginning of the period (20,577) (2,929) Movements during the period 375 (29) ------------------------------------------------------------------------- Balance at the end of the period (20,202) (2,958) ------------------------------------------------------------------------- Contributed surplus Balance at the beginning of the period 4,939 898 Movements during the period 699 142 ------------------------------------------------------------------------- Balance at the end of the period 5,638 1,040 ------------------------------------------------------------------------- 158,718 151,100 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT Balance at the beginning of the period (6,277) (1,383) Movements during the period 178 (1,627) ------------------------------------------------------------------------- Balance at the end of the period (6,099) (3,010) ------------------------------------------------------------------------- ------------------------------------------------------------------------- RETAINED EARNINGS Balance at the beginning of the period 136,463 72,564 Net income for the period 25,942 11,078 Cash dividends (3,826) (5,074) ------------------------------------------------------------------------- Balance at the end of the period 158,579 78,568 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 14. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the fiscal 2006 annual financial statement presentation./For further information: North America Media: Scott Davidson, ManagingDirector, Global Head of Marketing & Communications, Phone: (416) 869-3875,email: [email protected]; London Media: Bobby Morse or BenWilley, Buchanan Communications (London), Phone: +44-(0)-207-466-5000, email:[email protected]; For investor relations inquiries contact: KatherineYoung, Vice President, Investor Relations, Phone: (604) 643-7013, email:[email protected]/(CCI.)CO: Canaccord Capital Inc.ST: British ColumbiaIN: FINSU: ERN CCA PER ENDCANACCORD CAPITAL INC.Related Shares:
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