3rd Quarter Results

8th Feb 2006 14:35

Canaccord Capital Inc. reports record third quarter results Q3/06 net income up 44.8% driven by successful integration of global distribution capabilities (All dollar amounts are stated in Canadian dollars unless otherwise indicated) VANCOUVER, Feb. 8 /CNW/ - Canaccord Capital Inc. (CCI: TSX & AIM)announced that revenue for its third quarter of fiscal 2006, endedDecember 31, 2005, was a quarterly record of $158.7 million, up $35.0 millionfrom $123.7 million for the same period a year ago. Net income of$24.2 million for the third quarter of fiscal 2006 was also a quarterlyrecord, up $7.5 million from $16.7 million the same period a year ago, anddiluted earnings per share (EPS) for the quarter was $0.52, up $0.16 from$0.36 for the same period a year ago. "We have experienced early success in the global integration of our US,UK and Canadian capital markets operations," said Peter Brown, Chairman & CEO."This quarter we led the largest transaction in our history, a $504 millionfinancing for UrAsia Energy (BVI) Ltd., followed closely by a $453 millionsecondary offering for NETELLER plc." Michael G. Greenwood, President & COOadded, "Our enhanced distribution capabilities allow us to execute largertransactions, delivering superior client service and generating value for ourshareholders." Highlights of the third quarter fiscal 2006 results (three months ended December 31, 2005), compared to the third quarter fiscal 2005 results (three months ended December 31, 2004): - Revenue of $158.7 million, up 28.3%, or $35.0 million, from $123.7 million - Expenses of $122.8 million, up 23.9%, or $23.7 million, from $99.1 million - Total compensation payout as a percentage of revenue was 58.2%, down from 61.8% in Q3/05 - Net income of $24.2 million, up 44.8%, or $7.5 million, from $16.7 million - Diluted EPS of $0.52, up 44.4%, or $0.16, from $0.36 - Return on equity (ROE) of 41.0%, up from 32.1% - Book value per common share at the period end increased to $5.29, up $0.64 from $4.65 - Canaccord's results for the year can support a dividend increase of $0.02 per share, or 33.3%, on the regular quarterly dividend commencing this quarter. Therefore, the Board approved a common share dividend of $0.08 per share on February 7, 2006, payable on March 9, 2006, with a record date of February 24, 2006 Highlights for the year-to-date fiscal 2006 results (nine months ended December 31, 2005), compared to the year-to-date fiscal 2005 results (nine months ended December 31, 2004): - Revenue of $376.3 million, up 29.8%, or $86.5 million, from $289.8 million - Expenses of $300.8 million, up 24.0%, or $58.3 million, from $242.5 million - Total compensation payout as a percentage of revenue was 58.2%, down from 60.7% for the same period last year - Net income of $51.1 million, up 63.3%, or $19.8 million, from $31.3 million - Diluted EPS of $1.10, up 52.8%, or $0.38, from $0.72 - ROE of 29.5%, up from 21.2% - In fiscal Q1/06, Canaccord recognized a one time pre-tax gain of $1.6 million, equivalent to approximately $0.03 per share after tax (on a diluted basis), from the disposal of an investment in the Bourse de Montrĩal Highlights of Operations: - On January 23, 2006, we launched our newly branded capital markets division, Canaccord Adams. This new partnership between the Canadian, UK and the recently acquired US operations boosts our global research, investment banking and sales trading expertises. Canaccord completed the acquisition of Adams Harkness Financial Group, Inc., a privately held Boston, Massachusetts based institutional investment bank, on January 3, 2006. This transaction was announced during Q2/06, on September 13, 2005, and during the third quarter, the new team jointly executed on three significant transactions. Operating in eight offices internationally, Canaccord Adams provides a global perspective and distribution in Mining and Metals, Energy, Technology, Life Sciences, Real Estate, Consumer and Industrial Growth sectors. Financial details for this transaction are provided on page 14. - During Q3/06, after the September 13, 2005 acquisition announcement, our international capital markets team jointly executed the two largest transactions in our history. Acting as financial advisors and brokers, the group raised $504 million for UrAsia Energy (BVI) Ltd. (UUU: TSX), and $453 million for NETELLER plc (NLR: AIM). We also raised $130 million for Yamana Gold Inc. (YRI: TSX) and $80 million for Intermap Technologies Corporation (IMP: TSX). - Canaccord completed the acquisition of Enermarket Solutions Ltd. on November 11, 2005, an Energy property acquisition and divestiture advisory services firm based in Calgary, Alberta. The business will operate as Canaccord Enermarket as a component of our capital markets operations. This transaction demonstrates Canaccord's commitment to expanding our advisory services in the Energy sector. Canaccord Enermarket offers a wide range of technical evaluation and marketing services for buyers and sellers of oil and gas properties. The firm's expertise covers a wide range of asset transactions including corporate sales, sales of producing properties and joint ventures. Financial details for this transaction are provided on page 27. - On January 17, 2006, Brad Kotush, CA, was promoted to Executive Vice President, Chief Financial Officer of Canaccord Capital Inc. Mr. Kotush brings to this role a deep and broad knowledge of Canaccord, advanced financial skills and extensive experience in the capital markets in Canada and the UK. Dennis Burdett, CA, retired from the position of Executive Vice President, Chief Financial Officer, that same day, and will remain at Canaccord to support the transition and to assist on various development projects. - During Q3/06, Canaccord renewed its normal course issuer bid (NCIB) through the facilities of the Toronto Stock Exchange. Canaccord's capital management plan currently allows for the purchase of up to 585,800 common shares for cancellation. As of February 7, 2006, the maximum number of common shares remaining available for purchase under the NCIB is 2,324,233. For more details on the capital management plan, please see page 14. - Canaccord relocated its growing Toronto office to a new location at BCE Place, 161 Bay Street. Canaccord's steady growth in the past few years called for a move to accommodate a larger service team and to provide enhanced facilities to our clients. ACCESS TO QUARTERLY RESULTS INFORMATION: Interested investors, the media and others may review this quarterlyearnings release and supplementary financial information at:www.canaccord.com/investor/financialreports. QUARTERLY CONFERENCE CALL AND WEBCAST PRESENTATION: Interested parties can listen to our third quarter fiscal 2006 resultsconference call with analysts and institutional investors live and archived,via the Internet and toll free telephone. The conference call is scheduled for Wednesday, February 8, 2006 at10:00 a.m. (Pacific Time). At that time, senior executives will comment on theresults for the third quarter fiscal 2006 and respond to questions fromanalysts and institutional investors. The conference call may be accessed liveand archived on a listen-only basis via the Internet at:www.canaccord.com/investor/webcast. Analysts and institutional investors can call in via telephone at: 416-644-3424 (within Toronto), 1-800-814-4941 (toll-free outside Toronto) or00-800-0000-2288 (toll-free from the United Kingdom). A replay of theconference call can be accessed after 6:00 p.m. (Pacific Time) on February 10,2006 until midnight March 9, 2006 at 416-640-1917 or 1-877-289-8525 byentering passcode 21165800 followed by the number sign. ABOUT CANACCORD CAPITAL INC.: Through its principal subsidiaries, Canaccord Capital Inc. (CCI) is aleading independent full service investment dealer in Canada with capitalmarkets operations in the United Kingdom and the United States of America.Canaccord is publicly traded on both the Toronto Stock Exchange and theAlternative Investment Market (AIM), operated by the London Stock Exchange.Canaccord has operations in two of the principal segments of the securitiesindustry: private client services and capital markets. Together, theseoperations offer a wide range of complementary investment products, brokerageservices and investment banking services to Canaccord's private, institutionaland corporate clients. Canaccord has approximately 1,450 employees worldwidein 31 offices, including 25 Private Client Services offices located acrossCanada. Canaccord Adams, the international capital markets division, hassignificant operations in Toronto, London, Boston, Vancouver, New York,Calgary, Montreal and San Francisco. FOR FURTHER INFORMATION CONTACT: Anthony Ostler Senior Vice President, Investor Relations & Communications Phone: 604-643-7647 Email: anthony_ostler(at)canaccord.com London: Bobby Morse Buchanan Communications Phone: +44 (0) 207 466 5000 Email: bobbym(at)buchanan.uk.com ------------------------------------------------------------------------- None of the information in Canaccord's Web site www.canaccord.com should be considered incorporated herein by reference. ------------------------------------------------------------------------- MESSAGE from the CHAIRMAN & CEO and the PRESIDENT & COO Canaccord is committed to fuelling the entrepreneurial economy byidentifying emerging opportunities and facilitating long-term growth.Entrepreneurship defines our corporate culture and most of our clients viewthemselves as entrepreneurs - from the CEO whose small start-up has become oris becoming a major enterprise or multi-billion dollar global company to thetargeted hedge fund manager looking for unique investment ideas, to the globalfund manager running multiple funds, and to the sole proprietor investing forretirement. We service these clients through two groups: Private ClientServices, focusing on the Canadian individual investor, and Global CapitalMarkets, which includes our international capital markets division, CanaccordAdams. The emerging companies that Canaccord Adams specializes in developingare part of the world's chief source of wealth creation, employment, ideas andeconomic advancement. We have created an organization capable of driving themomentum of these companies, which, in turn, push the markets forward.Similarly, our Private Client Services segment has 433 entrepreneurialInvestment Advisors (IAs) who value and nurture their relationships with theirclients by continually striving to meet their needs and exceed theirexpectations. Canaccord was proud to be a strong voice on behalf of our clients in therecent income trust debate in Canada; our highly regarded independent Researchteam published a report in late October, exposing the negative impact of theproposed trust reforms on Canadian investors and encouraging investors tospeak out in the debate. The positive outcome of this episode reaffirms ourview that there is a need for a strong, independent perspective in themarketplace and that Canaccord's ideas can have a powerful impact for ourclients. Revenue growth and operational improvements generate record results We generated revenue growth of 36.7% in the Global Capital Markets groupand 16.5% in our Private Client Services business in the third quarter offiscal 2006 over the same period last year. We also posted net profit growthof 44.8% and diluted EPS growth of 44.4%, compared to overall revenue growthof 28.3%, all up from the third fiscal quarter last year. Our performance forthe year-to-date has been equally strong, reflecting solid revenue growth of29.8%, driven by healthy equity markets, net income growth of 63.3% anddiluted EPS growth of 52.8%, when compared to the first nine months of fiscal2005. The stronger growth in profit relative to the growth in revenue for bothof the comparison periods reflects the operational leverage created by ourcommitment to controlling our costs. This improvement in operationalperformance has resulted in our nine month year-to-date fiscal 2006 net incomeof $51.1 million exceeding our full fiscal 2005 net income of $48.6 millioneven though the revenue base for the nine-month period was lower by$56.5 million than all of last year's revenue of $432.8 million. Global Capital Markets group continuing to grow and expand Our Global Capital Markets group continues to grow at a double-digitrate, posting revenue growth of 36.7% this quarter over a year ago and 34.9%for the year-to-date. Revenue from Capital Markets in Canada of $44.7 millionand $44.9 million in the UK largely contributed to the record quarterlyrevenue of $98.9 million for the Global Capital Markets group. Operatinghighlights include the largest transaction in our history, the Canaccord-led$504 million transaction for UrAsia Energy (BVI) Ltd., creating the thirdlargest listed global pure uranium producer by market capitalization. We alsoplaced $453 million in a secondary offering for NETELLER plc. Othertransactions of note include $130 million for Yamana Gold Inc., $80 millionfor Intermap Technologies Corporation and $65 million for Westfield RealEstate Investment Trust. These international transactions are evidence of theprogression of our global franchise and our enhanced distributioncapabilities. A year ago, we commenced the integration of our Canadian and UKoperations of our Global Capital Markets group in order to enhance our clientservice and to increase our ability to facilitate increasingly largertransactions. In addition, we completed the acquisition of Adams HarknessFinancial Group, Inc. on January 3, 2006, which has resulted in the furtherexpansion of our capabilities and sector coverage. Our management team spentthe three months prior to the close of the transaction preparing and creatingour integration plans so as to better focus on rapidly integrating AdamsHarkness into the newly branded Canaccord Adams division of our Global CapitalMarkets group. We want to maximize synergies between our US, UK and Canadianplatforms and we are encouraged by the common ground that has quickly beenestablished within our key focus areas. Additionally, it was evident that theacquisition of Adams Harkness contributed to our more prominent role in someof the largest transactions in our history. Although we do not see thepotential at this time for any acquisitions in the short term, we willcontinue to be opportunistic if presented with a prospect consistent with ourstrategies for growth. Growth in assets supports Private Client Services' revenue growth Private Client Services' revenue for the quarter was up 16.5% from a yearago, reaching $54.7 million. On December 31, 2005, our assets under management(AUM) reached $528 million, up $184 million, or 53.5%, year-over-year. Growthin AUM can be attributed to the success of our Independence Accounts program.Our assets under administration (AUA) reached a record $12.2 billion, up 35.4%from a year ago, reflecting stronger equity valuations, organic growth and theaddition of new assets from recently recruited IAs. A key development for thequarter was the successful implementation of our advanced wealth managementtraining program and associated tools and services for our IAs, a reflectionof our commitment to providing our private clients with superior wealthmanagement strategies in an independent, idea-driven environment. Theseenhancements have also supported our recruitment efforts, making our platformmore attractive relative to our peers. We would like to thank and congratulate our employees and partners fortheir outstanding efforts this record quarter. We look forward to providingyou with an update in May after the completion of our current fiscal year. (signed) (signed) PETER M. BROWN MICHAEL G. GREENWOOD Chairman & Chief Executive Officer President & Chief Operating Officer Management's Discussion and Analysis Third quarter fiscal 2006 for the three months ended December 31, 2005 - this document is dated February 8, 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 financial condition and results ofoperations for the three- and nine-month periods ended December 31, 2005,compared to the corresponding periods in the preceding fiscal year, with anemphasis on the most recent three-month period. Canaccord's fiscal year end isMarch 31. Canaccord's third quarter fiscal 2006 was the three-month periodended December 31, 2005, and is also referred to as third quarter 2006 and asQ3/06 in the following discussion. This discussion should be read inconjunction with the unaudited interim consolidated financial statements forthe three- and nine-month periods ended December 31, 2005, beginning onpage 18 of this report, the annual Management's Discussion and Analysis(MD&A), our Annual Information Form dated June 10, 2005, and the auditedconsolidated financial statements for the fiscal year ended March 31, 2005, inCanaccord's Annual Report dated June 27, 2005 (the Annual Report). There hasbeen no material change to the information contained in the annual MD&A forfiscal 2005 except as disclosed in this MD&A and in the MD&As for Q1/06 andQ2/06. Canaccord's financial information is expressed in Canadian dollarsunless otherwise specified. This document is prepared in accordance withCanadian generally accepted accounting principles (GAAP) with reconciliationto international financial reporting standards (IFRS). All the financial databelow is unaudited except for the fiscal year 2005 data. Caution regarding forward-looking statements This document may contain certain forward-looking statements. Thesestatements relate to future events or future performance and reflectmanagement's expectations regarding Canaccord's growth, results of operations,performance and business prospects and opportunities. Such forward-lookingstatements reflect management's current beliefs and are based on informationcurrently available to management. In some cases, forward-looking statementscan be identified by terminology such as "may", "will", "should", "expect","plan", "anticipate", "believe", "estimate", "predict", "potential","continue", "target" or the negative of these terms or other comparableterminology. By their very nature, forward-looking statements involve inherentrisks and uncertainties, both general and specific, and a number of factorscould cause actual events or results to differ materially from the resultsdiscussed in the forward-looking statements. In evaluating these statements,readers should specifically consider various factors which may cause actualresults to differ materially from any forward-looking statement. These factorsinclude, but are not limited to, market and general economic conditions, thenature of the financial services industry and the risks and uncertaintiesdetailed from time to time in Canaccord's interim and annual financialstatements and its Annual Report and Annual Information Form filed onwww.sedar.com. These forward-looking statements are made as of the date ofthis document, and Canaccord assumes no obligation to update or revise them toreflect new events or circumstances. 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 are assets discretionarily managed byCanaccord as part of our Independence Accounts program that are beneficiallyowned by clients. Services provided include the selection of investments andthe provision of investment advice. AUM is also administered by Canaccord. Overview Canaccord is a leading independent full service investment dealer withoperations in each of the two principal segments of the securities industry:private client services and capital markets. Together these operations offer awide range of complementary investment products, brokerage services andinvestment banking services to Canaccord's private, institutional andcorporate clients. Canaccord's strong capital base enables it to remaincompetitive in today's changing financial landscape and to continue its growththrough maintaining high standards of client service, while enhancingrelationships, continually recruiting highly qualified professionals andconducting strategic institutional and retail acquisitions as opportunitiesarise. Canaccord's main capital markets revenue-generating activities are in theMining and Metals, Energy, Technology, Life Sciences, Real Estate, Consumer,and Industrial Growth sectors, and are comprised of investment banking andinstitutional equities activities, such as sales, trading and research.Canaccord consistently ranks as one of the leading underwriters in terms oftransaction participation in Canada and is among the leading nominatedadvisers (popularly known as "nomads") on AIM in the United Kingdom. TheGlobal Capital Markets group internationally has been re-branded as CanaccordAdams. As a result, Canaccord Capital (Europe) Limited (engaged primarily incapital markets activities in the United Kingdom and Europe) has been renamedCanaccord Adams Limited, and the newly acquired Adams Harkness FinancialGroup, Inc. (engaged in capital markets activities in the United States) hasbeen renamed Canaccord Adams Inc. Also, the division of Canaccord CapitalCorporation that is engaged in capital markets activities in Canada has beenbranded as Canaccord Adams, a division of Canaccord Capital Corporation. Business environment and industry outlook Canaccord's business is cyclical and experiences considerable variationsin revenue and income from quarter to quarter and year to year due to thefactors discussed on page 5. These factors are beyond Canaccord's control and,accordingly, revenue and net income are expected to fluctuate as they havehistorically. Our business correlates to the overall condition of the NorthAmerican and the European equity markets, including the seasonal variance inthese markets. In general, North American capital markets are slower duringthe first half of our fiscal year, during which we typically generateapproximately 35% to 40% of annual revenue. During the second half of ourfiscal year we typically generate 60% to 65% of annual revenue. However,during the first half of fiscal 2006, we generated unusually strong revenuefrom our North American operations and therefore the traditional seasonalitypatterns may be less pronounced this year. North American equity markets finished on an upswing in the fourthcalendar quarter 2005 and are expected to remain buoyant in calendar 2006. InCanada, the S&P/TSX Composite was up 21.9% for the calendar year, however, itwas only up 2.4% since the previous quarter. Reflecting this moderate increasein general market performance over the previous quarter, Canaccord's PrivateClient Services division generated 4.4% revenue growth over the previousquarter. Canadian equity markets strengthened after an announcement byCanada's finance minister of the change in the personal tax rate on corporatedividends so as to better level the playing field between corporate taxationand income trusts - a highly popular investment instrument in Canada.Continued strong demand for natural resource commodities coupled with a risingUS trade deficit has supported the Canadian dollar in its move to a 10-yearhigh of US$0.875. Although monetary tightening by the US Federal Reserve Boardand the Bank of Canada is expected to cause a slowdown in the economy,offsetting support is expected to emerge from a decline in energy costs aswell from rebuilding efforts in areas devastated by hurricanes in calendaryear 2005. Performance in the European equity markets was stronger compared to theprevious quarter as investment growth in Europe remained strong. The AIMmarket of the London Stock Exchange had its most successful year since itslaunch in 1995, both in terms of total money raised and number of new issues.However, during the fourth quarter of calendar year 2005, AIM admitted only105 new companies, a decrease of 6.3% compared to 112 in the third quarter ofcalendar 2005. Despite this decrease, our UK Q3/06 revenue increased by 7.9%from the same period a year ago. During the 2005 calendar year, AIM admitted atotal of 494 new companies and AIM companies raised overpnds stlg 5.98 billion, a 115.2% increase compared to the 2004 calendar year.Overall, growth in this market is largely due to London's position as a liquidinternational trading market and its international reputation of havingfavourable standards of regulation and corporate governance. Consolidated overview Third fiscal quarter and year-to-date summary data(1) ------------------------------------------------------------------------- Three months ended Nine months ended December 31 December 31 (C$ thousands, Year- Year- except per share, over-year over-year employee and increase increase % amounts) 2005 2004 (decrease) 2005 2004 (decrease) ------------------------------------------------------------------------- Revenue Canada 113,789 82,101 38.6% 292,215 206,594 41.4% UK 44,881 41,582 7.9% 84,126 83,255 1.0% ------------------------------------------------------ Total Revenue(2) 158,670 123,683 28.3% 376,341 289,849 29.8% Expenses Incentive compensation 82,662 65,449 26.3% 190,892 143,263 33.2% Salaries and benefits 9,668 10,957 (11.8)% 28,303 32,585 (13.1)% Other overhead expenses(3) 30,442 22,688 34.2% 81,571 66,672 22.3% ------------------------------------------------------ Total Expenses 122,772 99,094 23.9% 300,766 242,520 24.0% Net income 24,248 16,743 44.8% 51,080 31,272 63.3% Earnings per share (EPS) - diluted(4) 0.52 0.36 44.4% 1.10 0.72 52.8% Return on average common equity (ROE)(4) 41.0% 32.1% 8.9% 29.5% 21.2% 8.3% Book value per common share - period end 5.29 4.65 13.8% Number of employees 1,320 1,224 7.8% ------------------------------------------------------------------------- (1) Some of this data is considered to be non-GAAP. (2) Revenue from the UK is derived entirely from Global Capital Markets activity, while revenue in North America is derived from Private Client Services, Global Capital Markets and Other segments. (3) Consists of trading costs, premises and equipment, communication and technology, interest, general and administrative expense, amortization, development costs and gain on disposal of investments. (4) The slower growth in diluted EPS and ROE than net income for year-to- date fiscal 2006 compared to year-to-date fiscal 2005 partially reflects the issuance of $70 million in equity on June 30, 2004, and the issuance of shares in Q3/06 in association with recruiting and acquisition activity. Three-month summary Revenue was a third quarter record of $158.7 million, up $35.0 million,or 28.3%, compared to the same period a year ago and is primarily due to arally in capital markets activity in North America and a seasonal increase inactivity in the UK capital markets during the last calendar quarter in 2005. In North America, revenue was up by 38.6% from a year ago due toexceptionally favourable market conditions (not seen since the year 2000).Private Client Services' and Global Capital Markets' revenue increased by$7.8 million and $23.3 million, respectively, compared to last year. Revenuein the UK increased by $3.3 million, or 7.9%, when compared to the samequarter a year ago. ------------------------------------------------------------------------- Three months ended Expenses as a percentage of revenue December 31 Year- over-year increase 2005 2004 (decrease) ------------------------------------------------------------------------- Incentive compensation 52.1% 52.9% (0.8)% Salaries and benefits 6.1% 8.9% (2.8)% Other overhead expenses 19.2% 18.3% 0.9% ---------------------------- Total 77.4% 80.1% (2.7)% ------------------------------------------------------------------------- Expenses were $122.8 million, up $23.7 million, or 23.9%, from a yearago, reflecting increases in incentive compensation expense and general andadministrative expense. For the quarter, incentive compensation expense was$82.7 million, up $17.2 million, or 26.3%, largely due to increases in fiscalthird quarter revenue posted by the Private Client Services and Global CapitalMarkets groups, which resulted in higher compensation payouts compared to thesame quarter a year ago. Incentive compensation, as a percentage of revenue,decreased to 52.1% compared to 52.9% for the same quarter a year ago largelydue to the reorganization of the compensation structure of Global CapitalMarkets in Q1/06. This reorganization is expected to result in a totalcompensation payout ratio to total fiscal 2006 revenue for this segment ofapproximately 55% with an additional 3% allocated to cover applicable NationalHealth Insurance (NHI) taxes for UK based employees. The change shouldeffectively reduce the overall total compensation expense ratio for Canaccordacross the full fiscal year compared to the ratio in fiscal 2005. Salaries and benefits expense was down by $1.3 million for the thirdquarter of fiscal 2006, compared to the same quarter a year ago, which isprincipally due to the change in the variable payout structure as mentionedabove. As a result of this change and increased revenue, total compensationpayout as a percentage of consolidated revenue for Q3/06 was 58.2%, down from61.8% in Q3/05. Other overhead expenses increased by $7.8 million during the thirdquarter of fiscal 2006, compared to the same quarter a year ago. This increaseis largely due to increases in general and administrative expense, up$5.2 million, and premises and equipment costs, which were higher by$1.2 million mainly due to the move and renovation of Canaccord's Torontooffice and upgrades to the Calgary and London (UK) offices. General and administrative expense was $12.4 million, up $5.2 million, or71.4%, from a year ago. The increase in general and administrative expense islargely attributed to increases in reserves of $2.0 million, $1.7 million inclient expenses, $1.7 million in promotion and travel costs to support theoverall increase in business activity, and an increase in public companycosts. ------------------------------------------------------------------------- Three months ended Development costs December 31 Year- over-year increase (C$ thousands, except % amounts) 2005 2004 (decrease) ------------------------------------------------------------------------- Hiring incentives 1,058 796 32.9% Systems development 1,045 1,076 (2.9)% ---------------------------- Total 2,103 1,872 12.3% ------------------------------------------------------------------------- Development costs are also included as a component of other overheadexpenses and include hiring incentives and systems development costs. Hiringincentives are traditionally an element in our recruitment strategy whenCanaccord hires new Investment Advisors (IAs) or capital marketsprofessionals. Systems development costs are expenditures that Canaccord hasmade in conjunction with the development of its information technologyplatform. Net income was a third quarter record of $24.2 million, up by$7.5 million, or 44.8%, from a year ago. Diluted EPS was $0.52, up by $0.16,or 44.4%, and ROE was 41.0% compared to a ROE of 32.1% a year ago. The slowerincrease in ROE compared to the increase in net income is partially associatedwith the issuance of 77,646 shares for the purchase of Enermarket SolutionsLtd. on November 11, 2005, and the issuance of 691,940 shares for recruitingpurposes. Book value per common share increased by 13.8% to $5.29, up $0.64from $4.65 a year ago. Income taxes were $11.7 million for the quarter, reflecting an effectivetax rate of 32.5% compared to 31.9% a year ago. The increase in the effectivetax rate in Q3/06 relative to Q3/05 is related to the geographical compositionof Canaccord's net income. Our effective tax rate may vary from time to time. Nine-month summary Revenue was $376.3 million, up $86.5 million, or 29.8%, compared to thesame period a year ago. Revenue in North America was up $85.6 million, or41.4%, reflecting strong growth in the North American equity markets, recordenergy prices and high M&A activity during the first nine months of fiscal2006 compared to the same period a year ago. In the UK and Europe, revenue wasup by $0.9 million, or 1.0%, which is largely due to a moderate capitalmarkets performance in the UK during the summer, particularly in the Energysector. ------------------------------------------------------------------------- Nine months ended Expenses as a percentage of revenue December 31 Year- over-year increase 2005 2004 (decrease) ------------------------------------------------------------------------- Incentive compensation 50.7% 49.4% 1.3% Salaries and benefits 7.5% 11.3% (3.8)% Other overhead expenses 21.7% 23.0% (1.4)% ---------------------------- Total 79.9% 83.7% (3.8)% ------------------------------------------------------------------------- Expenses were $300.8 million, up $58.3 million, or 24.0%, from a yearago, reflecting an increase primarily in incentive compensation expense(driven by the strong growth in revenue), premises and equipment,communications and technology and general and administrative expenses.Incentive compensation expense was $190.9 million, up $47.6 million, or 33.2%,and incentive compensation, as a percentage of revenue, increased to 50.7%compared to 49.4%. Premises and equipment, and communications and technologyexpenses were $10.8 and $11.5 million, up 22.1% and 11.6%, respectively,largely due to Canaccord's Toronto office relocation. Salaries and benefits expense decreased by $4.3 million during the firstnine months of fiscal 2006, which is largely due to the change in GlobalCapital Markets' payout structure discussed on page 11. Therefore, the totalcompensation payout as a percentage of revenue for the first nine months offiscal 2006 was 58.2%, down from 60.7% for the same period last year. Other overhead expenses increased by $14.9 million for the first ninemonths of fiscal 2006. This increase is largely due to increases in generaland administrative expense as described below. General and administrative expense was $31.5 million, up $10.2 millionfrom a year ago, or 47.9%. Of this increase, $3.6 million is due to anincrease in promotion and travel costs; $2.9 million is due to an increase inreserves related to increases in unsecured client balances; $1.6 million isdue to an increase in other expenses and $1.3 million is due to increases inclient expenses which include transfer fees paid for new clients, clientsettlements and other fees. However, nine-month professional fees expensedecreased by $1.1 million. ------------------------------------------------------------------------- Nine months ended Development costs December 31 Year- over-year increase (C$ thousands, except % amounts) 2005 2004 (decrease) ------------------------------------------------------------------------- Hiring incentives 3,091 2,348 31.6% Systems development 3,141 3,575 (12.1)% ---------------------------- Total 6,232 5,923 5.2% ------------------------------------------------------------------------- Net income for the nine-month period of fiscal 2006 was $51.1 million, up$19.8 million, or 63.3%, from a year ago. Diluted EPS was $1.10, up $0.38, or52.8%. Year-to-date ROE was 29.5% compared to a ROE of 21.2 % a year ago. Theslower increase in diluted EPS and ROE compared to the increase in net incomereflects the issuance of shares from treasury for acquisition and recruitingpurposes as discussed in the three-month summary and the additional equityresulting from the issuance from treasury of 6,829,268 common shares inconnection with the Initial Public Offering (IPO) on the Toronto StockExchange on June 30, 2004. Income taxes were $24.5 million for the first nine months of fiscal 2006,reflecting an effective tax rate of 32.4% compared to 33.9% a year ago. Thedecrease in our effective tax rate is the result of a one time gain of$1.6 million resulting from the sale of our investment in the Bourse deMontrĩal during Q1/06. Capital gains are taxed at a lower rate, thereforereducing our effective income tax rate for the year-to-date by 0.38%. Alsocontributing to the decrease in our consolidated tax rate was a revisedestimate of the European income tax liability, which reduced our effective taxrate for the year-to-date by another 0.39%. Offsetting these reductions was analignment of estimated taxes for fiscal 2005 to actual tax returns filedcontributing to an increase in the effective tax rate of 0.61%. Without thesechanges, our effective tax rate would have been 32.6% for the first ninemonths of fiscal 2006. Results of operations Private Client Services ------------------------------------------------------------------------- Three months ended Nine months ended December 31 December 31 (C$ thousands, except assets under administration, which is in C$ millions, employees, Investment Year- Year- Advisors and over-year over-year % amounts) 2005 2004 increase 2005 2004 increase ------------------------------------------------------------------------- Revenue 54,731 46,964 16.5% 146,772 121,785 20.5% Expenses 39,889 32,788 21.7% 107,991 87,757 23.1% Income before income taxes 14,842 14,176 4.7% 38,781 34,028 14.0% Assets under management (AUM) 528 344 53.5% Assets under administration (AUA) 12,183 8,998 35.4% Number of Investment Advisors (IAs) 433 412 5.1% Number of employees 687 647 6.2% ------------------------------------------------------------------------- Private Client Services' revenue is principally derived from tradingcommissions generated from a diverse client base of individuals and high networth accounts. Revenue derived from client activity is closely tied togeneral stock market performance and trading activity. Three months ended December 31, 2005, compared with three months ended December 31, 2004 Revenue from Private Client Services was a third quarter record of$54.7 million, up $7.8 million, or 16.5%, from a year ago due to strongermarket activity in North American equity markets during Q3/06. Parallel withthis revenue growth was a $3.2 billion increase in assets under administration(AUA) to $12.2 billion. The 35.4% increase in AUA since Q3/05 reflects thegeneral increase in market values in North American equity markets and theaddition of assets through transfers with 21 newly hired IAs' accounts andadditional assets added to existing accounts since Q3/05. Similarly, fee-basedrevenue as a percentage of total revenue increased by 5.2% compared to thesame quarter a year ago, reflecting efforts to generate more recurring revenuein Private Client Services. There were 433 IAs at the end of the third quarterof 2006, a net increase of 21 from a year ago despite an extremely competitiverecruiting environment. Expenses for Q3/06 were $39.9 million, up $7.1 million, or 21.7%, largelyreflecting an increase in incentive compensation expense, up $2.6 million,mainly due to higher revenue for the quarter. Also contributing to the overallincrease in expenses for the quarter is general and administrative expense, up$2.9 million, and interest costs, up $0.8 million compared to a year ago.Within general and administrative expense, there was an increase of$1.5 million in client expenses related to transfer fees and clientsettlements and other fees, and an increase of $1.1 million in reserves, whichis largely due to changes in client activity and market conditions. Income before income taxes for the quarter was $14.8 million, up 4.7%from the same period a year ago, reflecting the fact that expenses increasedat a greater rate than revenue for the reasons stated above. Nine months ended December 31, 2005, compared with nine months ended December 31, 2004 Fiscal 2006 nine-month revenue from Private Client Services was$146.8 million, up $25.0 million, or 20.5% compared to the same period a yearago, largely reflecting strong market activity in North American equitymarkets relative to the same nine months a year ago. Similarly, fee-basedrevenue as a percentage of total revenue increased by 3.3% from the sameperiod a year ago. Nine-month expenses were $108.0 million, up $20.2 million, or 23.1%,largely reflecting an increase in incentive compensation expense, up$10.2 million, general and administrative expense, up $5.7 million, anddevelopment costs, which were up $0.9 million compared to a year ago. Withingeneral and administrative expense, there was an increase of $3.2 million inreserves, which is largely due to changes in client activity and marketconditions, and an increase of $1.2 million in client expenses. Income before income taxes for the first nine months of fiscal 2006 was$38.8 million, up 14.0% from the same period a year ago reflecting thestronger market activity this year and the contribution from IAs recruited inthe past year. Global Capital Markets(1) ------------------------------------------------------------------------- Three months ended Nine months ended December 31 December 31 (C$ thousands, Year- Year- except employees over-year over-year and % amounts) 2005 2004 increase 2005 2004 increase ------------------------------------------------------------------------- Revenue 98,918 72,368 36.7% 213,423 158,210 34.9% Expenses 65,385 51,058 28.1% 146,241 112,653 29.8% Income before income taxes 33,533 21,310 57.4% 67,182 45,557 47.5% Number of employees 296 261 13.4% ------------------------------------------------------------------------- (1) A substantial majority of Canaccord's Global Capital Markets' activity is now conducted under the name Canaccord Adams, reflecting the acquisition of Adams Harkness Financial Group, Inc. Global Capital Markets' revenue is generated from commissions and feesearned in connection with investment banking transactions and institutionalsales and trading activity as well as net trading gains and losses fromCanaccord's principal and international trading operations. Accordingly, thisrevenue is directly affected by the level of corporate and institutionalactivity and general economic, market and business conditions in Canada andinternationally. Three months ended December 31, 2005, compared with three months ended December 31, 2004 Revenue from Global Capital Markets in Q3/06 was a quarterly record of$98.9 million, up $26.6 million, or 36.7%, compared to the same quarter a yearago due to exceptionally strong capital markets activity in North America. Forthe current quarter, revenue from North American capital markets was$54.0 million, up $23.3 million, or 75.5%, when compared to the same quarter ayear ago. Revenue from European capital markets was $44.9, up $3.3 million, or7.9%. During Q3/06, our capital markets group executed the two largest dealsin Canaccord's history. Acting as financial advisers and brokers, the groupraised $504 million for UrAsia Energy (BVI) Ltd. (UUU: TSX), and $453 millionfor NETELLER plc (NLR: AIM). Total advisory fees earned by our Global CapitalMarkets team for the quarter totalled $859.3 thousand, up $784.3 thousand fromthe same period a year ago. As of April 1, 2005, Global Capital Markets' new incentive compensationwas restructured to better integrate our teams in Canada and Europe. As aresult, the total compensation payout ratio to total fiscal 2006 revenue isexpected to be approximately 55% for fiscal 2006 with an additional 3%allocated to cover applicable National Health Insurance (NHI) taxes for UKbased employees. The change should effectively reduce the overall totalcompensation expense ratio across the full fiscal year compared to the ratiofor fiscal 2005. Incentive compensation for the quarter was $52.3 million, up 30.9%compared to the same quarter a year ago, and is largely due to the increase inrevenue which resulted in higher payouts for the period. Also contributing tothis increase was the introduction of Canaccord's Employee Stock IncentivePlan (ESIP) in Q2/06, which was primarily offered to key Global CapitalMarkets' employees. Salary and benefits expense for the quarter was $1.8 million, down 57.4%compared to a year ago despite the fact that a total of 35 net new employeeswere hired over the same quarter a year ago in Corporate Finance and Researchin Europe and in Canada. The decrease in expenses is largely attributed to thechanges in the variable compensation structure. For the quarter, the totalcompensation expense payout as a percentage of revenue was 54.7%, down 6.2%compared to 60.9% a year ago. General and administrative expense was up $3.2 million, or 133.5%, and islargely due to increases in promotion and travel and reserves, which were up$1.6 million and $0.8 million respectively, compared to the same quarter ayear ago. These costs relate to expenses incurred to relocate Canaccord'sToronto office and an overall increase in business travel activity required tosupport the growth in the business. Income before income taxes for the quarter was up $12.2 million, or57.4%, compared to the same quarter a year ago. Nine months ended December 31, 2005, compared with nine months ended December 31, 2004 Fiscal 2006 nine-month revenue for Global Capital Markets was a recordcompared to all past fiscal nine-month periods. Combined revenue (NorthAmerica and Europe) for the first nine months of fiscal 2006 was$213.4 million, up $55.2 million, or 34.9%, compared to the same period a yearago due to sustained capital markets activity in North America and moderateactivity in European capital markets. For the first nine months of fiscal2006, revenue from North American markets was $129.3 million, up$54.3 million, or 72.5%, when compared to the same period a year ago. Also, inEuropean markets, revenue was up $0.9 million, an increase of 1.0% compared tothe first nine months of fiscal 2005. Total advisory fees earned for the firstnine months of fiscal 2006 totalled $5.3 million, up $2.8 million compared tothe same period a year ago. Incentive compensation for the first nine months of fiscal 2006 was$111.8 million, up 42.5% compared to the same period a year ago, and islargely due to the increase in revenue, which resulted in higher payouts forthe period and the introduction of Canaccord's key employee retention program,ESIP, which was introduced at the beginning of Q2/06. Salary and benefits expense for the first nine months of fiscal 2006 was$4.8 million, down 58.9%, compared to a year ago. This decrease is largelyattributed to the recent change in the variable compensation structure. Forthe first nine months of fiscal 2006, the total compensation payout as apercentage of revenue for Global Capital Markets was 54.7%, down 2.3% comparedto 57.0% for the same period in 2005. For the full fiscal year of 2006, thisratio is expected to be lower than the full fiscal year 2005 payout ratio of59.1% reflecting the change in the payout structure. Year-to-date general and administrative expense was up $4.6 million, or52.2%, and is primarily due to an increase in promotion and travel costsrelated to increases in business travel activity to support the growth in thebusiness. Income before income taxes for the nine-month period ended December 31,2005, was up $21.6 million, or 47.5%, when compared to the same period a yearago and is largely due to positive equity markets. Other segment ------------------------------------------------------------------------- Three months ended Nine months ended December 31 December 31 Year- Year- (C$ thousands, over-year over-year except employees increase increase and % amounts) 2005 2004 (decrease) 2005 2004 (decrease) ------------------------------------------------------------------------- Revenue 5,021 4,351 15.4% 16,146 9,854 63.9% Expenses 17,498 15,248 14.8% 46,534 42,110 10.5% (Loss) before income taxes (12,477) (10,897) 14.5% (30,388) (32,256) (5.8)% Number of employees 337 316 6.6% ------------------------------------------------------------------------- The Other segment includes correspondent brokerage services, interest,foreign exchange revenue and expenses not specifically allocable to PrivateClient Services and Global Capital Markets. Also included in this segment areCanaccord's operations and support services, which are responsible for frontand back office information technology systems, compliance and riskmanagement, operations, finance and all administrative functions. Three months ended December 31, 2005, compared with three months ended December 31, 2004 Revenue for the three months ended December 31, 2005 was $5.0 million, up$0.7 million, or 15.4%, compared to the same quarter a year ago and isprimarily attributed to an increase in bank interest and security rebaterevenue. Expenses for the quarter were $17.5 million, up $2.3 million, or 14.8%,and is largely due to an increase in incentive compensation expense of$2.2 million, up 79.1% compared to the same period a year ago. Strongoperating performance resulted in larger incentive payouts. The introductionof the ESIP program during Q2/06 also contributed to the increase in expenses.Premises and equipment expenses increased by 91.8% compared to the samequarter a year ago. This is mainly attributed to relocation expenses relatedto Canaccord's new offices in Toronto. Also, salary and benefits expenseincreased by $0.8 million and is related to the increase of 96 net newemployees that were hired since last year. Loss before income taxes was $12.5 million in the third quarter of fiscal2006, up $1.6 million, or 14.5% compared to a loss of $10.9 million in thesame quarter a year ago. Nine months ended December 31, 2005, compared with nine months ended December 31, 2004 Revenue for the first nine months of fiscal 2006 was $16.1 million, up$6.3 million, or 63.9%, compared to the same period a year ago and is largelyattributed to increases of $4.9 million from bank interest revenue and$1.8 million from foreign exchange revenue. Nine-month expenses were $46.5 million, up $4.4 million, or 10.5%, andare attributable to an increase in incentive compensation of $4.1 million, andinclude costs related to the ESIP for key employees of this business segment.Also contributing to the increase in year-to-date expenses are premises andequipment expenses up by $0.9 million, or 37.1%, for the relocation ofCanaccord's Toronto office. Salaries and benefits increased by $1.8 million,or 13.7% compared to a year ago. However, nine-month interest expensedecreased by $1.1 million, or 36.3%, and expenses were further reduced by aone time gain of $1.6 million in Q1/06 resulting from the sale of ourinvestment in the Bourse de Montrĩal. This gain was equivalent to $1.3 millionafter tax and approximately $0.03 per diluted share. Loss before income taxes was $30.4 million in the first nine months offiscal 2006, an improvement of $1.9 million, or 5.8%, compared to a loss of$32.3 million in the same period a year ago. Financial conditions Below are certain changes in selected balance sheet items. Accounts receivable Client security purchases are entered into either on a cash or marginbasis. When securities are purchased on margin, Canaccord extends a loan tothe client for the purchase of securities, using securities purchased and/orsecurities in the client's account as collateral. Therefore, the clientaccounts receivable balance of $380.6 million may vary significantly on a day-to-day basis and is based on trading volumes and market activity. As atDecember 31, 2005, total accounts receivable were $1,091.1 million comparedwith $1,068.8 million as at March 31, 2005. Also included in total accountsreceivable are receivables from brokers and investment dealers totalling$397.8 million and $279.5 million in RRSP cash balances held in trust. Cash and cash equivalents Cash and cash equivalents were $241.4 million as of December 31, 2005compared to $349.7 million as of March 31, 2005. Significant cash sources oruses of cash include an increase in accounts receivable of $43.7 million,increase in securities owned of $59.4 million, and the payment of dividends of$10.6 million. Call loans Loan facilities utilized by the company may vary significantly on a day-to-day basis and depend on securities trading activity. Amounts borrowedpursuant to these call loan facilities, at December 31, 2005, totalled$0.3 million. Liquidity and capital resources Canaccord has a capital structure completely underpinned by shareholders'equity, which is comprised of share capital, retained earnings and cumulativeforeign currency translation adjustments. As at December 31, 2005, total cashand cash equivalents were $241.4 million, compared to $349.7 million as ofMarch 31, 2005. During the nine months ended December 31, 2005, operatingactivities used cash in the amount of $60.5 million, which was primarily dueto net changes in non-cash working capital items, net income and items notaffecting cash. During the nine months ended December 31, 2005, financingactivities used cash in the amount of $64.2 million, which was primarily dueto a decrease in notes payable, payment of dividends of $10.6 million and$4.6 million for the redemption and cancellation of 414,200 common shares.Investing activities were a source of cash in the amount of $27.1 million,primarily due to a decrease in notes receivable and proceeds of $1.6 millionreceived from the sale of our investment in the Bourse de Montrĩal offset bythe purchase of equipment and leasehold improvements totalling $12.0 million.During Q3/06, the remaining offsetting non-recourse notes payable and notesreceivable connected with Canaccord's Immigrant Investor Program of Quĩbecwere, effective December 23, 2005, assigned and transferred at book value of$10.0 million. Canaccord's business requires capital for operating and regulatorypurposes. The current assets reflected on Canaccord's balance sheet are highlyliquid. The majority of the positions held as securities owned are readilymarketable and are recorded at their market value. The market value of thesesecurities fluctuates daily as factors such as changes in market conditions,economic conditions and investor outlook affect market prices. Marginreceivables are secured by readily marketable securities and are revieweddaily for impairment in value and collectibility. Receivables and payablesfrom brokers and dealers represent the following: current open transactionswhich normally settle within the normal three-day settlement cycle;collateralized securities that are borrowed and/or loaned in transactions thatcan be closed within a few days on demand; and balances due to our introducingbrokers representing net balances in connection with their client accounts. Notes payable and notes receivable Canaccord has credit facilities with Canadian and UK banks in anaggregate amount of $323.3 million. These credit facilities, consisting ofcall loans, letters of credit and daylight overdraft facilities, arecollateralized by either unpaid securities and/or securities owned byCanaccord. As at December 31, 2005, Canaccord had $345,000 outstanding from anoverdraft related to operations in the UK. Outstanding share data ------------------------------------------------------------------------- Outstanding shares as of December 31 2005 2004 ------------------------------------------------------------------------- Shares outstanding - basic(1) 44,431,796 45,416,197 Shares outstanding - diluted(2) 46,484,654 46,129,268 Average shares outstanding - basic 44,385,377 45,387,916 Average shares outstanding - diluted 46,438,235 46,100,987 ------------------------------------------------------------------------- (1) Excludes 2,052,858 unvested shares that are outstanding relating to share purchase loans. (2) Includes 2,052,858 unvested shares referred to in footnote (1) above. As of December 31, 2005, Canaccord had 46.5 million common sharesoutstanding on a diluted basis, up 355,386 common shares as of March 31, 2005,comprised of 77,646 common shares issued in connection with acquisitions;691,940 common shares issued as part of the ESIP and offset by 414,200 commonshares, which were purchased and cancelled during the nine months of fiscal2006 through the normal course issuer bid (NCIB). During Q3/06 there were nocommon shares purchased for cancellation through the NCIB. During the first nine months of fiscal 2006, 414,200 common shares werecancelled at a weighted average price of $11.18 per share. As of February 7,2006, there are 2,324,233 common shares available for purchase under the NCIB.Canaccord renewed its NCIB on December 22, 2005, for one year commencing onDecember 29, 2005 and ending on December 28, 2006. Going forward and from timeto time, Canaccord may purchase its common shares for the purpose of resale orcancellation. Although the amount and timing of any such purchases will bedetermined by Canaccord, the Board of Directors approved at the beginning offiscal Q2/06 a capital management plan to purchase up to 500,000 common sharesthrough the NCIB for cancellation by the end of the fiscal year, subject totrading blackouts and availability of shares. At the beginning of Q3/06, theBoard of Directors approved a further increase of 500,000 common shares thatcould be purchased for cancellation. Under this expanded plan there remain upto 585,800 total common shares that could be purchased for cancellation.Canaccord's Board originally approved the NCIB to facilitate the resale ofcommon shares coming out of escrow. Through this capital management plan, theBoard approved the further usage of the NCIB to also cancel shares to helputilize capital that has been generated in the last year. Furthermore,Canaccord can purchase up to 130,000 shares daily, up to a maximum of1,000,000 in total. Canaccord has agreed with the relevant regulators toupdate its shareholders at a minimum rate of every two weeks and will updateshareholders immediately if more than 1% of its shares outstanding arepurchased in one day. Subsequent to quarter end, on January 3, 2006, Canaccord closed theacquisition of Adams Harkness Financial Group, Inc., a privately held Boston,Massachusetts based institutional investment bank. The consideration consistedof US$8 million in cash and the issuance of 1,342,696 common shares fromtreasury valued at US$12 million. These shares will be held in escrow, withannual releases of one-third per year, beginning on June 30, 2006 and endingon June 30, 2008. In addition, 1,118,952 common shares were reserved forissuance from treasury at $10.50 per share as a retention payment of up toUS$10.0 million for certain key employees of Adams Harkness to be paid after athree-year vesting period. The total number of shares to be vested is alsobased on achievement of revenue targets and will be included in diluted commonshares outstanding as such targets are achieved. As of January 7, 2006,Canaccord Capital Inc. has 47,827,350 common shares outstanding on a dilutedbasis. Issuance of share capital subsequent to the third quarter fiscal 2006 ------------------------------------------------------------------------- Transactions subsequent to December 31, 2005 Number of (C$ thousands, except share amounts) shares Amount ------------------------------------------------------------------------- Issuance of common shares on closing of acquisition of Adams Harkness 1,342,696 $ 14,098 Shares vested since December 31, 2005 20,395 New unvested shares since December 31, 2005 (37,288) --------------------------- Shares outstanding - basic - February 7, 2006 45,757,599 Shares outstanding - diluted- February 7, 2006 47,827,350 ------------------------------------------------------------------------- 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 December 31, 2005, forward contracts outstanding to sell US dollars had anotional amount of US$7.0 million, down $12.5 million from a year ago. Forwardcontracts outstanding to buy US dollars had a notional amount ofUS$4.0 million, down US$3.0 million compared to a year ago. The fair value ofthese contracts was nominal. Certain of Canaccord's operations in London,England are conducted in British pounds sterling; however, any foreignexchange risk in respect of these transactions is generally limited, aspending settlements on both sides of the transaction are typically in Britishpounds sterling. In anticipation of acquiring Adams Harkness, Inc., which wasannounced in Q2/06, Canaccord entered into foreign exchange contractstotalling US$8.0 million to hedge the cash component of this agreement. Hedgeaccounting has been applied for these contracts and accordingly, there is norecognition of unrealized gains and losses related to these contracts inincome during the period. Critical accounting estimates The following is a summary of Canaccord's critical accounting estimates.Canaccord's accounting policies are in accordance with Canadian GAAP and aredescribed in Note 1 to the audited consolidated financial statements for theyear ended March 31, 2005. The accounting policies described below requireestimates and assumptions that affect the amounts of assets, liabilities,revenues and expenses recorded in the financial statements. Because of theirnature, estimates require judgement based on available information. Actualresults or amounts could differ from estimates and the difference could have amaterial impact on the financial statements. Revenue recognition and valuation of securities Securities held, including share purchase warrants and options, arerecorded at market value and, accordingly, the interim consolidated financialstatements reflect unrealized gains and losses associated with suchsecurities. In the case of publicly traded securities, market value isdetermined on the basis of market prices from independent sources such aslisted exchange prices or dealer price quotations. Adjustments to marketprices are made for liquidity relative to the size of the position and holdingperiods and other resale restrictions, if applicable. Investments in illiquidor non-publicly traded securities are valued on a basis determined bymanagement using information available and prevailing market prices ofsecurities with similar qualities and characteristics, if known. There is inherent uncertainty and imprecision in estimating the factorswhich can affect value and in estimating values generally. The extent to whichvaluation estimates differ from actual results will affect the amount ofrevenue or loss recorded for a particular security position in any particularperiod. With Canaccord's security holdings consisting primarily of publiclytraded securities, its procedures for obtaining market prices from independentsources, the validation of estimates through actual settlement of transactionsand the consistent application of its approach from period to period,Canaccord believes that the estimates of market value recorded are reasonable. Provisions Canaccord records provisions related to pending or outstanding legalmatters and doubtful accounts related to client receivables, loans, advancesand other receivables. Provisions in connection with legal matters aredetermined on the basis of management's judgement in consultation with legalcounsel considering such factors as the amount of the claim, the validity ofthe claim, the possibility of wrongdoing by an employee of Canaccord andprecedents. Client receivables are generally collateralized by securities and,therefore, any impairment is generally measured after considering the marketvalue of the collateral. Provisions in connection with other doubtful accountsare generally based on management's assessment as to the likelihood ofcollection and the recoverable amount. Provisions are also recorded utilizingdiscount factors in connection with syndicate participation. Tax Accruals for income tax liabilities require management to make estimatesand judgements with respect to the ultimate outcome of tax filings andassessments. Actual results could vary from these estimates. Canaccordoperates within different tax jurisdictions and is subject to assessment inthese different jurisdictions. Tax filings can involve complex issues, whichmay require an extended period of time to resolve in the event of a dispute orre-assessment by tax authorities. Canaccord believes that adequate provisionsfor income taxes have been made for all years. Related party transactions Security trades executed by Canaccord for employees, officers andshareholders of Canaccord are conducted in accordance with terms andconditions applicable to all clients of Canaccord. Commission income on suchtransactions in the aggregate is not material in relation to the overalloperations of Canaccord. Dividend policy 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. Inrespect of fiscal year 2006, Canaccord originally intended to pay a quarterlydividend of $0.06 per share per quarter. However, Canaccord's results for thefiscal year 2006 can support a dividend increase of $0.02 per share, or 33.3%to the regular quarterly common share dividend. Therefore, the Board approveda common share dividend of $0.08 per share for Q3/06 and Canaccord intends tocontinue to pay a $0.08 regular quarterly common share dividend in Q4/06 andfor each quarter in fiscal year 2007. Dividend declaration For the third quarter of fiscal 2006, the Board of Directors declared acommon share dividend of $0.08 per share, which is payable on March 9, 2006,to shareholders of record on February 24, 2006. The common share dividendpayment to common shareholders will total approximately $3.8 million, orapproximately 15.3% of third quarter net income. Historical quarterly information Canaccord's business is cyclical and may experience considerablevariations in revenue and income from quarter to quarter and year to year dueto the risk factors discussed in the risk section. In addition to overallmarket cycles, Canaccord's revenue is generally seasonal over the fiscal year,where historically, 60% to 65% of industry revenue has occurred in the lasttwo fiscal quarters of the year. Therefore, historically, revenue duringCanaccord's first two fiscal quarters has approximately averaged 35% to 40% ofthe annual revenue for the industry. Canaccord's experience follows that ofthe industry. However, fiscal Q1/06 and Q2/06 generated unusually strongrevenue in North America, and thus our first six months revenue for thisfiscal year may be stronger than the historical average relative to our annualrevenue for this fiscal year. Furthermore, Canaccord's revenue from anunderwriting transaction is recorded only when the transaction has closed.Consequently, the timing of revenue recognition can materially affectCanaccord's quarterly results. The expense structure of Canaccord's operationsis geared towards providing service and coverage in the current marketenvironment. If general capital markets activity were to drop significantly,Canaccord would experience losses if it could not change its expense structurequickly enough. The following table provides selected quarterly financial information forthe nine most recently completed fiscal quarters ended December 31, 2005. Thisinformation is unaudited, but reflects all adjustments of a recurring nature,which are, in the opinion of management, necessary to present a fair statementof the results of operations for the periods presented. Quarter-to-quartercomparisons of financial results are not necessarily meaningful and should notbe relied upon as an indication of future performance. Fiscal 2006 (C$ thousands, except ----------- per share amounts) Q3 Q2 Q1 ---------------------------------------------- Revenue Private client services 54,731 52,411 39,630 Global capital markets 98,918 60,048 54,457 Other 5,021 6,195 4,930 --------------------------- Total revenue 158,670 118,654 99,017 Net income 24,248 15,754 11,078 EPS - basic 0.55 0.35 0.24 EPS - diluted 0.52 0.34 0.24 Fiscal 2005 Fiscal 2004 (C$ thousands, except ----------- ----------- per share amounts) Q4 Q3 Q2 Q1 Q4 Q3 ------------------------------------------------------------------------- Revenue Private client services 56,391 46,964 36,499 38,322 60,667 48,540 Global capital markets 81,444 72,368 46,671 39,171 85,425 66,515 Other 5,094 4,351 2,431 3,072 4,595 3,584 ------------------------------------------------------ Total revenue 142,929 123,683 85,601 80,565 150,687 118,639 Net income 17,307 16,743 6,123 8,406 20,992 11,267 EPS - basic 0.38 0.37 0.14 0.28 0.74 0.40 EPS - diluted 0.38 0.36 0.13 0.23 0.58 0.32 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. Revenuefrom Private Client Services' activity is dependent on trading volumes and, assuch, is dependent on the level of market activity and investor confidence.Revenue from Global Capital Markets activity is dependent on financingactivity by corporate issuers and the willingness of institutional clients toactively trade and participate in capital markets transactions. There may alsobe a lag between market fluctuations and changes in business conditions andthe level of Canaccord's market activity and the impact that these factorshave on Canaccord's operating results and financial position. Risks have notchanged substantially from those set out in the Annual Report of June 27,2005. Additional information A comprehensive discussion of our business, strategies, objectives andrisks is available in the Management's Discussion and Analysis, AnnualInformation Form and audited annual financial statements in Canaccord's 2005Annual Report which 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. Interim Consolidated Financial Statements Canaccord Capital Inc. Unaudited For the three and nine months ended December 31, 2005 (Expressed in Canadian dollars) Canaccord Capital Inc. INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands of dollars) As at December 31, March 31, December 31, 2005 2005 2004 $ $ $ ------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 241,380 349,700 256,158 Securities owned, at market (note 2) 218,459 160,348 184,895 Accounts receivable (notes 4 and 8) 1,091,147 1,068,757 719,774 Future income taxes 2,750 3,992 1,834 ------------------------------------------------------------------------- Total current assets 1,553,736 1,582,797 1,162,661 Equipment and leasehold improvements 22,483 13,750 13,904 Notes receivable (note 5) - 41,618 41,055 Goodwill and other intangibles (notes 6 and 12) 4,203 - - ------------------------------------------------------------------------- 1,580,422 1,638,165 1,217,620 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Call loans 345 - 6,311 Securities sold short, at market (note 2) 132,481 105,527 90,033 Accounts payable and accrued liabilities (notes 4 and 8) 1,193,863 1,262,072 862,582 Income taxes payable 7,638 6,737 3,259 ------------------------------------------------------------------------- Total current liabilities 1,334,327 1,374,336 962,185 Notes payable (note 5) - 41,618 41,055 ------------------------------------------------------------------------- Total liabilities 1,334,327 1,415,954 1,003,240 ------------------------------------------------------------------------- Contingencies (note 10) Shareholders' equity Share capital (note 7) 143,237 151,030 151,156 Cumulative foreign currency translation adjustment (7,362) (1,383) (1,258) Retained earnings 110,220 72,564 64,482 ------------------------------------------------------------------------- Total shareholders' equity 246,095 222,211 214,380 ------------------------------------------------------------------------- 1,580,422 1,638,165 1,217,620 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 For the nine months ended months ended ------------------- ------------------- December December December December 31, 2005 31, 2004 31, 2005 31, 2004 $ $ $ $ ----------------------------------------------------- ------------------- REVENUE Private client services 54,731 46,964 146,772 121,785 Global capital markets 98,918 72,368 213,423 158,210 Other 5,021 4,351 16,146 9,854 ----------------------------------------------------- ------------------- 158,670 123,683 376,341 289,849 ----------------------------------------------------- ------------------- EXPENSES Incentive compensation 82,662 65,449 190,892 143,263 Salaries and benefits 9,668 10,957 28,303 32,585 Trading costs 4,441 4,377 13,000 12,370 Premises and equipment 4,082 2,875 10,775 8,824 Communication and technology 4,023 3,524 11,511 10,318 Interest 2,441 1,990 7,337 5,699 General and administrative 12,422 7,248 31,501 21,305 Amortization 930 802 2,848 2,233 Development costs 2,103 1,872 6,232 5,923 Gain on disposal of investment (note 11) - - (1,633) - ----------------------------------------------------- ------------------- 122,772 99,094 300,766 242,520 ----------------------------------------------------- ------------------- Income before income taxes 35,898 24,589 75,575 47,329 Income tax expense (recovery) Current 10,843 8,071 23,253 18,864 Future 807 (225) 1,242 (2,807) ----------------------------------------------------- ------------------- Net income for the period 24,248 16,743 51,080 31,272 Retained earnings, beginning of period 88,761 50,044 72,564 38,013 Cash dividends (2,789) (2,305) (10,628) (4,610) Excess on redemption of common shares (note 7 (iii)) - - (2,796) (193) ----------------------------------------------------- ------------------- Retained earnings, end of period 110,220 64,482 110,220 64,482 ----------------------------------------------------- ------------------- ----------------------------------------------------- ------------------- Basic earnings per share (note 7 (v)) 0.55 0.37 1.15 0.77 Diluted earnings per share (note 7 (v)) 0.52 0.36 1.10 0.72 ----------------------------------------------------- ------------------- ----------------------------------------------------- ------------------- See accompanying notes Canaccord Capital Inc. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands of dollars) For the three For the nine months ended months ended ------------------- ------------------- December December December December 31, 2005 31, 2004 31, 2005 31, 2004 $ $ $ $ ----------------------------------------------------- ------------------- OPERATING ACTIVITIES Net income for the period 24,248 16,743 51,080 31,272 Items not affecting cash Amortization 1,317 1,169 3,574 2,833 Future income taxes (recovery) 807 (225) 1,242 (2,807) Gain on disposal of investment - - (1,633) - Changes in non-cash working capital Decrease (increase) in securities owned (61,428) 120,716 (59,423) 191,552 Decrease (increase) in accounts receivable 45,257 291,701 (43,735) 278,441 Increase (decrease) in securities sold short 72,879 (100,763) 26,954 (191,690) Decrease in accounts payable and accrued liabilities (56,458) (237,149) (40,188) (185,813) Increase (decrease) in income taxes payable 5,337 3,960 1,593 (13,646) ----------------------------------------------------- ------------------- Cash provided by (used in) operating activities 31,959 96,152 (60,536) 110,142 ----------------------------------------------------- ------------------- FINANCING ACTIVITIES Increase (decrease) in notes payable (10,023) 1,804 (41,618) 12,290 Redemption of convertible debentures - - - (20) Decrease in subordinated debt - - - (10,000) Issuance of share capital (net of issuance costs) - 219 - 71,528 Decrease (increase) in unvested common share purchase loans 762 56 (7,274) (952) Redemption of share capital - - (4,631) (379) Dividends paid (2,789) (2,305) (10,628) (4,610) ----------------------------------------------------- ------------------- Cash provided by (used in) financing activities (12,050) (226) (64,151) 67,857 ----------------------------------------------------- ------------------- INVESTING ACTIVITIES Purchase of equipment and leasehold improvements (7,705) (2,333) (11,986) (3,764) Decrease (increase) in notes receivable 10,023 (1,804) 41,618 (12,290) Proceeds on disposal of investment - - 1,639 - Acquisition of subsidiary (note 12) (4,203) - (4,203) - ----------------------------------------------------- ------------------- Cash provided by (used in) investing activities (1,885) (4,137) 27,068 (16,054) ----------------------------------------------------- ------------------- Effect of foreign exchange on cash balances (903) 175 (11,046) (1,523) ----------------------------------------------------- ------------------- Increase (decrease) in cash position 17,121 91,964 (108,665) 160,422 Cash position, beginning of period 223,914 157,883 349,700 89,425 ----------------------------------------------------- ------------------- Cash position, end of period 241,035 249,847 241,035 249,847 ----------------------------------------------------- ------------------- ----------------------------------------------------- ------------------- Cash position is comprised of: Cash and cash equivalents 241,380 256,158 241,380 256,158 Call loans (345) (6,311) (345) (6,311) ----------------------------------------------------- ------------------- 241,035 249,847 241,035 249,847 ----------------------------------------------------- ------------------- ----------------------------------------------------- ------------------- Supplemental cash flow information Interest paid 2,373 158 5,953 1,217 Income taxes paid 5,783 4,205 22,813 24,593 ----------------------------------------------------- ------------------- ----------------------------------------------------- ------------------- See accompanying notes Canaccord Capital Inc. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the three and nine months ended December 31, 2005 (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 Global 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. 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, 2005 ("Audited Annual Consolidated Financial Statements") except as noted below. 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 the results expected for the full year. 2. SECURITIES OWNED AND SECURITIES SOLD SHORT December 31, 2005 March 31, 2005 ------------------------- ------------------------- Securities Securities Securities Securities owned sold short owned sold short $ $ $ $ ------------------------------------------------------------------------- Corporate and government debt 136,409 116,084 124,395 82,001 Equities and convertible debentures 82,050 16,397 35,953 23,526 ------------------------------------------------------------------------- 218,459 132,481 160,348 105,527 ------------------------------------------------------------------------- ------------------------------------------------------------------------- December 31, 2004 ------------------------- Securities Securities owned sold short $ $ ----------------------------------------------- Corporate and government debt 159,578 74,994 Equities and convertible debentures 25,317 15,039 ----------------------------------------------- 184,895 90,033 ----------------------------------------------- ----------------------------------------------- As at December 31, 2005, corporate and government debt maturities range from 2006 to 2053 (March 31, 2005 - 2005 to 2051 and December 31, 2004 - 2005 to 2051) and bear interest ranging from 2.05% to 14.00% (March 31, 2005 - 2.05% to 14.00% and December 31, 2004 - 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 December 31, 2005: Notional amounts Average Fair value (millions price (millions of USD) (CAD/USD) Maturity of USD) ------------------------------------------------------------------------- To sell US dollars $7.00 $1.16 January 4, 2006 $0.1 To buy US dollars $4.00 $1.16 January 4, 2006 ($0.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Forward contracts outstanding at March 31, 2005: Notional amounts Average Fair value (millions price (millions of USD) (CAD/USD) Maturity of USD) ------------------------------------------------------------------------- To sell US dollars $22.75 $1.21 April 5, 2005 $0.1 To buy US dollars $10.25 $1.21 April 5, 2005 ($0.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Forward contracts outstanding at December 31, 2004: Notional amounts Average Fair value (millions price (millions of USD) (CAD/USD) Maturity of USD) ------------------------------------------------------------------------- To sell US dollars $19.50 $1.22 January 6, 2005 $0.1 To buy US dollars $7.00 $1.22 January 6, 2005 ($0.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- During the second and third quarter of the current fiscal year, the Company also entered into foreign exchange contracts to purchase US$8.0 million in respect of the cash consideration required for the acquisition of Adams Harkness Financial Group, Inc. (see Note 13(i)). The Company has applied hedge accounting for these contracts in accordance with CICA Accounting Guideline 13, "Hedging Relationships" ("AcG-13"). Accordingly, there was no recognition of any unrealized gains or losses relating to these contracts recorded in the income statement during the period. 4. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts receivable December 31, March 31, December 31, 2005 2005 2004 $ $ $ ------------------------------------------------------------------------- Brokers and investment dealers 397,841 353,734 198,778 Clients 380,604 406,769 252,788 RRSP cash balances held in trust 279,546 293,595 248,995 Other 33,156 14,659 19,213 ------------------------------------------------------------------------- 1,091,147 1,068,757 719,774 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accounts payable and accrued liabilities December 31, March 31, December 31, 2005 2005 2004 $ $ $ ------------------------------------------------------------------------- Brokers and investment dealers 331,725 358,711 185,595 Clients 736,879 719,195 584,802 Other 125,259 184,166 92,185 ------------------------------------------------------------------------- 1,193,863 1,262,072 862,582 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accounts payable to clients include $279.5 million (March 31, 2005 - $293.6 million and December 31, 2004 - $249.0 million) payable to clients for RRSP cash balances held in trust. Client security purchases are entered into on either a cash or margin basis. In the case of a margin account, the Company extends a loan to a client for the purchase of securities, using securities purchased and/or other securities in the client's account as collateral. Amounts loaned to any client are limited by margin regulations of the Investment 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 (December 31, 2005 - 7.00% and 2.00%, respectively, March 31, 2005 - 6.25% and 1.25%, respectively, and December 31, 2004 - 6.25% and 1.25%, respectively). 5. IMMIGRANT INVESTOR PROGRAM OF QUEBEC The Company sponsored an immigrant investor program that provided assistance to Canadian immigrant applicants under the investor category and to their professional consultants and advisors. Included in these services was a program that enabled immigrant investors to borrow, through a credit facility arranged by the Company, the requisite funds for making a qualifying investment for immigration purposes. The Company borrowed as notes payable the investment funds through a non-recourse bank facility, loaned the borrowed funds to the immigrant investor by way of notes receivable and then pledged the notes receivable to the lending bank as collateral for the notes payable. Effective September 15, 2005, the Company sold a significant portion of all outstanding notes receivable under this program for total proceeds of $34.4 million and repaid all corresponding outstanding notes payable in the amount of $34.8 million for a net loss on disposition of $0.4 million. Effective December 23, 2005, the Company irrevocably assigned the remaining outstanding notes receivable and notes payable under this program at book value of $10.0 million. (i) Notes receivable Interest revenue of $0.1 million and $1.4 million, respectively, for the three and nine months ended December 31, 2005 ($0.6 million and $1.5 million, respectively, for the three and nine months ended December 31, 2004) on these loans is included in Other revenue. (ii) Notes payable Interest expense of $0.1 million and $1.8 million, respectively, for the three and nine months ended December 31, 2005 ($0.6 million and $1.5 million, respectively, for the three and nine months ended December 31, 2004) on these loans is included in Interest expense. 6. GOODWILL AND OTHER INTANGIBLE ASSETS December 31, March 31, December 31, 2005 2005 2004 $ $ $ ------------------------------------------------------------------------- Goodwill 3,203 - - Other intangibles 1,000 - - ------------------------------------------------------------------------- 4,203 - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other intangible assets are amortized on a straight-line basis over their estimated useful life of four years. 7. SHARE CAPITAL On June 21, 2004, the Company's shareholders approved a two-for-one subdivision of the Company's outstanding Class A, Class B and Class C common shares. All common share and per share data included herein have been adjusted to reflect the two-for-one subdivision as if it had occurred at the beginning of the periods reflected. December 31, March 31, December 31, 2005 2005 2004 $ $ $ ------------------------------------------------------------------------- Issued and fully paid Share capital Common shares 159,183 153,061 153,002 Unvested share purchase loans (19,596) (2,929) (2,413) Contributed surplus 3,650 898 567 ------------------------------------------------------------------------- 143,237 151,030 151,156 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 Common Shares Class B No. of Amount No. of Amount shares $ shares $ ------------------------------------------------------------------------- Balance, March 31, 2004 - - 26,751,482 51,292 Shares issued for cash - - 897,454 3,568 Shares cancelled - - (95,826) (186) Shares issued on conversion of Class 4 preferred shares Series A - - 82,816 190 Shares issued on conversion of convertible debentures - - 7,378,660 20,357 Exchange into common shares(1) 39,266,210 86,757 (35,014,586) (75,221) Shares issued in connection with initial public offering(2) 6,829,268 66,111 - - Shares issued for cash(3) 33,790 134 - - ------------------------------------------------------------------------- Balance, December 31, 2004 46,129,268 153,002 - - Initial public offering costs adjustment(2) - 59 - - ------------------------------------------------------------------------- Balance, March 31, 2005 46,129,268 153,061 - - Shares issued for cash 691,940 6,573 - - Shares issued in connection with acquisition 77,646 924 - - Shares cancelled (414,200) (1,375) - - ------------------------------------------------------------------------- Balance, December 31, 2005 46,484,654 159,183 - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Class C Total No. of Amount No. of Amount shares $ shares $ ------------------------------------------------------------------------- Balance, March 31, 2004 3,809,524 10,000 30,561,006 61,292 Shares issued for cash 442,100 1,536 1,339,554 5,104 Shares cancelled - - (95,826) (186) Shares issued on conversion of Class 4 preferred shares Series A - - 82,816 190 Shares issued on conversion of convertible debentures - - 7,378,660 20,357 Exchange into common shares(1) (4,251,624) (11,536) - - Shares issued in connection with initial public offering(2) - - 6,829,268 66,111 Shares issued for cash(3) - - 33,790 134 ------------------------------------------------------------------------- Balance, December 31, 2004 - - 46,129,268 153,002 Initial public offering costs adjustment(2) - - - 59 ------------------------------------------------------------------------- Balance, March 31, 2005 - - 46,129,268 153,061 Shares issued for cash - - 691,940 6,573 Shares issued in connection with acquisition - - 77,646 924 Shares cancelled - - (414,200) (1,375) ------------------------------------------------------------------------- Balance, December 31, 2005 - - 46,484,654 159,183 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Pursuant to an order obtained on June 22, 2004 from the Supreme Court of British Columbia, a capital reorganization which included the creation of a class of common shares and the exchange of all Class B and C common shares for common shares was approved. (2) Net of share issue costs. Final costs were $3.8 million. (3) Sale of shares held by a subsidiary in the group. Pursuant to the Company's normal course issuer bid, 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 normal course issuer bid, the Company has purchased for resale or cancellation a total of 222,548 common shares between December 29, 2004 and March 31, 2005 and 414,200 common shares during the nine months ended December 31, 2005 with a book value of $1.4 million for aggregate cash consideration of $4.6 million. The excess has been recorded to contributed surplus and retained earnings. The Company has renewed its normal course issuer bid and is 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 between December 20, 2005 and December 31, 2005. Preferred shares Class 4 Series A No. of Amount shares $ ------------------------------------------------------------------------- Balance, March 31, 2004 190,477 190 Exchange into common shares(1) (190,477) (190) ------------------------------------------------------------------------- Balance, December 31 and March 31, 2005 and December 31, 2004 - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Pursuant to an order obtained on June 22, 2004 from the Supreme Court of British Columbia, a capital reorganization which included the creation of a class of common shares and the exchange of all preferred shares for common shares was approved. (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 ($0.5 million) and retained earnings ($2.8 million). For the three For the nine months ended months ended ------------------- ------------------- December December December December 31, 2005 31, 2004 31, 2005 31, 2004 $ $ $ $ ------------------------------------------------------------------------- Redemption price - - 4,631 379 Book value - - 1,375 186 ------------------------------------------------------------------------- Excess on redemption of common shares - - 3,256 193 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (iv) 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. (v) Earnings per share For the three For the nine months ended months ended ---------------------- ---------------------- December December December December 31, 2005 31, 2004 31, 2005 31, 2004 $ $ $ $ ------------------------------------------------------------------------- Basic earnings per share Net income for the period 24,248 16,743 51,080 31,272 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares (number) 44,385,377 45,387,916 44,271,300 40,421,055 Basic earnings per share ($) 0.55 0.37 1.15 0.77 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings per share Net income for the period 24,248 16,743 51,080 31,272 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares (number) 44,385,377 45,387,916 44,271,300 40,421,055 Dilutive effect of convertible debentures (number) - - - 2,411,654 Dilutive effect of preferred shares (number) - - - 27,103 Dilutive effect of unvested shares (number) 2,052,858 713,071 2,052,858 713,071 ------------------------------------------------------------------------- Adjusted weighted average number of common shares (number) 46,438,235 46,100,987 46,324,158 43,572,883 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings per share ($) 0.52 0.36 1.10 0.72 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 8. RELATED PARTY TRANSACTIONS Security trades executed by the Company for employees, officers and shareholders 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: December 31, March 31, December 31, 2005 2005 2004 $ $ $ ------------------------------------------------------------------------- Accounts receivable 41,718 31,698 34,055 Accounts payable and accrued liabilities 63,278 54,691 47,931 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 9. SEGMENTED INFORMATION The Company operates in two industry segments as follows: Private Client Services - provides brokerage services and investment advice to retail or private clients. Global Capital Markets - includes investment banking, research and trading activities on behalf of corporate, institutional and government clients as well as principal trading activities. Corporate and Other includes correspondent brokerage services, interest and foreign exchange revenue and expenses not specifically allocable to Private Client Services and Global Capital Markets. 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 capital assets to the segments. Amortization is allocated to the segments based on square footage occupied. There are no significant inter-segment revenues. For the three months ended December 31, 2005 ---------------------------------------------- Private Global Corporate Client Capital and Services Markets Other Total $ $ $ $ ------------------------------------------------------------------------- Revenues 54,731 98,918 5,021 158,670 Expenses 38,466 65,065 16,208 119,739 Amortization 324 365 241 930 Development, restructuring and other costs 1,099 (45) 1,049 2,103 ------------------------------------------------------------------------- Income (loss) before income taxes 14,842 33,533 (12,477) 35,898 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2004 ---------------------------------------------- Private Global Corporate Client Capital and Services Markets Other Total $ $ $ $ ------------------------------------------------------------------------- Revenues 46,964 72,368 4,351 123,683 Expenses 31,783 50,655 13,982 96,420 Amortization 274 317 211 802 Development, restructuring and other costs 731 86 1,055 1,872 ------------------------------------------------------------------------- Income (loss) before income taxes 14,176 21,310 (10,897) 24,589 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the nine months ended December 31, 2005 ---------------------------------------------- Private Global Corporate Client Capital and Services Markets Other Total $ $ $ $ ------------------------------------------------------------------------- Revenues 146,772 213,423 16,146 376,341 Expenses 104,128 144,933 42,625 291,686 Amortization 977 1,110 761 2,848 Development, restructuring and other costs 2,886 198 3,148 6,232 ------------------------------------------------------------------------- Income (loss) before income taxes 38,781 67,182 (30,388) 75,575 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2004 ---------------------------------------------- Private Global Corporate Client Capital and Services Markets Other Total $ $ $ $ ------------------------------------------------------------------------- Revenues 121,785 158,210 9,854 289,849 Expenses 84,998 111,332 38,034 234,364 Amortization 769 873 591 2,233 Development, restructuring and other costs 1,990 448 3,485 5,923 ------------------------------------------------------------------------- Income (loss) before income taxes 34,028 45,557 (32,256) 47,329 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company's business operations are grouped into two geographic segments as follows: For the three For the nine months ended months ended ---------------------- ----------------------- December December December December 31, 2005 31, 2004 31, 2005 31, 2004 $ $ $ $ ------------------------------------------------- ----------------------- Canada Revenue 113,789 82,101 292,215 206,594 Net income 13,408 9,655 32,036 17,017 Equipment and leasehold improvements 20,877 11,913 20,877 11,913 United Kingdom Revenue 44,881 41,582 84,126 83,255 Net income 10,840 7,088 19,044 14,255 Equipment and leasehold improvements 1,606 1,991 1,606 1,991 ------------------------------------------------- ----------------------- ------------------------------------------------- ----------------------- 10. CONTINGENCIES During the period, there have been no material changes to the Company's contingencies from those described in the March 31, 2005 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 $1.6 million from the sale of its investment in shares of the Bourse de Montrĩal. 12. ACQUISITION On November 11, 2005, the Company acquired a 100% interest in Enermarket Solutions Ltd. ("Enermarket"), a property acquisition and divestiture advisory services firm focused on the Energy sector and based in Calgary, Alberta. The entity will operate as part of the Company's Global Capital Markets group as Canaccord Enermarket. The purchase price was $4.8 million, consisting of cash consideration of $3.9 million (comprised of $3.1 million and working capital adjustments of $0.8 million) and $0.9 million consisting of 77,646 common shares at $11.90 per share. In addition, retention payments up to a total of $0.3 million will be paid to key employees of Enermarket and its senior management. The retention payments will involve the issuance of common shares of the Company which will be paid after a two-year vesting period. Using the purchase method, this acquisition, including capitalized acquisition costs of $0.1 million, resulted in total net assets of $0.7 million, goodwill of $3.2 million and intangible assets of $1.0 million being recorded in the Consolidated Balance Sheet. The operating results of Enermarket since acquisition have been included in the Company's consolidated financial statements. 13. SUBSEQUENT EVENTS (i) Adams Harkness Financial Group, Inc. On January 3, 2006, the Company acquired a 100% interest in Adams Harkness Financial Group, Inc. ("Adams Harkness"), a US investment bank based in Boston, Massachusetts. The consideration for the acquisition included US$8.0 million (C$9.5 million) in cash and the issuance of 1,342,696 common shares at C$10.50 per share. These shares will be held in escrow until June 30, 2008, with annual releases of one-third per year, beginning on June 30, 2006. Canaccord received approval for the 1,342,696 common shares to be admitted to trading on the Alternative Investment Market ("AIM"), operated by the London Stock Exchange, on January 4, 2006. In addition, 1,118,952 common shares of the Company were reserved for issuance at C$10.50 per share as retention payments for certain key employees of Adams Harkness to be paid after a three-year vesting period. The total number of common shares to be vested is also based on achievement of revenue targets. These retention shares will be included in diluted common shares outstanding as such revenue targets are achieved during the vesting period. The Company has entered into foreign exchange contracts with respect to the cash consideration for this acquisition (see Note 3). (ii) Dividend On February 7, 2006, the Board of Directors declared a common share dividend of $0.08 per share payable on March 9, 2006, with a record date of February 24, 2006. 14. 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 nine months ended December 31, 2005 and 2004. 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: December December 31, 2005 31, 2004 $ $ ------------------------------------------------------------------------- ISSUED AND PAID SHARE CAPITAL Common shares Balance at the beginning of the period 153,061 61,292 Shares issued for cash 6,573 5,238 Shares cancelled (1,375) (186) Shares issued on conversion of Class 4 preferred shares Series A - 190 Shares issued on conversion of serial debentures - 20,357 Shares issued in connection with initial public offering - 66,111 Shares issued in connection with acquisition 924 - ------------------------------------------------------------------------- Balance at the end of the period 159,183 153,002 ------------------------------------------------------------------------- Unvested share purchase loans Balance at the beginning of the period (2,929) (1,514) Movements during the period (16,667) (899) ------------------------------------------------------------------------- Balance at the end of the period (19,596) (2,413) ------------------------------------------------------------------------- Preferred shares Balance at the beginning of the period - 190 Exchange into common shares - (190) ------------------------------------------------------------------------- Balance at the end of the period - - ------------------------------------------------------------------------- Contributed surplus Balance at the beginning of the period 898 441 Movements during the period 2,752 126 ------------------------------------------------------------------------- Balance at the end of the period 3,650 567 ------------------------------------------------------------------------- 143,237 151,156 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT Balance at the beginning of the period (1,383) 265 Movements during the period (5,979) (1,523) ------------------------------------------------------------------------- Balance at the end of the period (7,362) (1,258) ------------------------------------------------------------------------- ------------------------------------------------------------------------- RETAINED EARNINGS Balance at the beginning of the period 72,564 38,013 Net income for the period 51,080 31,272 Excess on redemption of common shares (2,796) (193) Cash dividends (10,628) (4,610) ------------------------------------------------------------------------- Balance at the end of the period 110,220 64,482 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the fiscal 2005 annual financial statement presentation. For further information: Anthony Ostler, Senior Vice President, InvestorRelations & Communications, Phone: (604) 643-7647, Email:anthony_ostler(at)canaccord.com; London: Bobby Morse, Buchanan Communications,Phone: +44 (0) 207 466 5000, Email: bobbym(at)buchanan.uk.com (CCI)ENDCANACCORD CAPITAL INC.

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