3rd Nov 2010 10:00
CANACCORD FINANCIAL INC. REPORTS FISCAL SECOND QUARTER 2011 RESULTS
(All dollar amounts are stated in Canadian dollars unless otherwise indicated)
VANCOUVER, Nov. 3 /CNW/ - Canaccord Financial Inc.'s revenue for the secondquarter of fiscal year 2011, ended September 30, 2010, was $149.3 million, up20.6% from the same quarter last year but down 1.7% from the previous quarter.Net income for the second quarter was $9.7 million, up 44.0% compared to a netincome of $6.7 million during the same quarter last year and up 99.2% comparedto the previous quarter. Diluted earnings per share (EPS) for fiscal Q2/11were $0.12, compared to diluted EPS of $0.12 in Q2/10 and diluted EPS of $0.06the previous quarter. "Though we are encouraged by the dramatic marketturnaround the last two months, volatile market activity persisted through muchof July and August and had a noticeable impact on business levels during ourfiscal second quarter," noted Paul Reynolds, President and CEO of CanaccordFinancial Inc. "Client interest remains strong and as investors and corporateissuers regain confidence in the markets, the climate for trading andinvestment banking activity should continue to improve."
SECOND QUARTER 2011 VS. SECOND QUARTER 2010
· Revenue of $149.3 million, up 20.6% or $25.6 million
from $123.7 million
· Expenses of $135.3 million, up 16.8% or $19.4 million
from $115.9 million
· Net income of $9.7 million compared to net income of $6.7 million· Return on equity (ROE) of 5.7%, down from 6.9%(1)· Diluted EPS of $0.12 compared to diluted EPS of $0.12
Excluding acquisition-related expense items(1)(2)
· Expenses of $133.5 million, up 15.2% or $17.6 million
from $115.9 million
· Net income of $11.5 million compared to net income of $6.7 million· ROE of 6.7%, down from 6.9% (1)(3)· Diluted EPS of $0.14 compared to diluted EPS of $0.12
SECOND QUARTER 2011 VS. FIRST QUARTER 2011
· Revenue of $149.3 million, down 1.7% or $2.6 million
from $151.9 million
· Expenses of $135.3 million, down 6.5% or $9.4 million
from $144.7 million
· Net income of $9.7 million compared to net income of $4.9 million· ROE of 5.7%, up from 3.7%(1)· Diluted EPS of $0.12 compared to diluted EPS of $0.06
in the first quarter of 2011
Excluding acquisition-related expense items (1)(2)
· Expenses of $133.5 million, up 1.0% or $1.2 million
from $132.3 million
· Net income of $11.5 million compared to net income of $13.9 million· ROE of 6.7%, down from 10.3% (1)(3)· Diluted EPS of $0.14 compared to diluted EPS of $0.18
in the first quarter of 2011
FIRST HALF OF FISCAL 2011 VS. FIRST HALF OF FISCAL 2010 (Six months ended September 30, 2010 vs. six months ended September 30, 2009)
· Revenue of $301.2 million, up 15.3% or $40.0 million
from $261.2 million
· Expenses of $280.0 million, up 18.0% or $42.6 million
from $237.4 million
· Net income of $14.6 million compared to net income of $15.9 million· ROE of 4.7%, down from 8.3%(1)· Diluted EPS of $0.18 compared to diluted EPS of $0.28
in the first half of fiscal 2010
Excluding acquisition-related expense items(1)(2)
· Expenses of $265.8 million, up 12.0% or $28.4 million
from $237.4 million
· Net income of $25.4 million compared to net income of $15.9 million· ROE of 8.5%, up from 8.3% (1)(3)· Diluted EPS of $0.32 compared to diluted EPS of $0.28
in the first half of fiscal 2010
FINANCIAL CONDITION AT END OF SECOND QUARTER 2011 VS. SECOND QUARTER 2010
· Cash and cash equivalents balance of $636.9 million,
down $72.6 million from $709.5 million
· Working capital of $340.2 million, up $33.0 million
from $307.2 million
· Total shareholders' equity of $679.3 million, up $291.1
million from $388.2 million
· Book value per diluted common share for the period end
was $8.03, up 18.5% or $1.25 from $6.78(1)
· On November 2, 2010 the Board of Directors considered
the dividend policy and approved a quarterly
dividend of $0.05 per share payable on December 10, 2010
with a record date of November 19, 2010
SUMMARY OF OPERATIONS
Capital Markets
· Canaccord Genuity led 26 transactions globally to
raisetotal proceeds of $780.4 million(4) during
fiscal Q2/11· Canaccord Genuity participated in a total of 72
transactions globally to raise total proceeds of $1.3
billion(4) during fiscal Q2/11· During fiscal Q2/11, Canaccord Genuity led or co-led the following transactions: · $300.0 million for Primero Mining Corp. on the TSX Venture· $92.6 million for Artis Real Estate Investment Trust on the TSX· £52.0 million for Aberdeen Latin American
Income Fund Limited on the LSE
· $50.0 million for Zodiac Exploration Corp. on the TSX Venture· US$44.8 million for APO Energy Inc. (non-listed)· US$47 million for NPS Pharmaceuticals on the NASDAQ· $40.5 million for Extorre Gold Mines Limited on the TSX· $40.3 million for Pinecrest Energy Inc. on the TSX Venture· Canaccord Genuity advised on eight M&A transactions
thatclosed during the Q2/11, including:
· SunOpta Inc. on its sale of SunOpta Bioprocess
Inc. to Mascoma Corporation
· Pure Technologies Ltd. on its acquisition of
Pressure Pipe Inspection Co.
· Brett Resources Inc. on its sale to Osisko
Mining Corporation
· Primero Mining Corp. on its acquisition of
Goldcorp's San Dimas gold and silver mine
· Canaccord Genuity completed 15 Private Investment in
Public Equity (PIPE) transactions in North
America that raised US$222.4 million in proceeds during
fiscal Q2/11(5)
· Canaccord Genuity ranked first for Quality of Investing
Ideas and first for Quality of Small-Cap
Research in the Canadian 2010 Brendan Wood International
survey (6)
Wealth Management
· Assets under administration of $13.9 billion, up 22.0%
from $11.4 billion at the end of Q2/10, and up
10.3% from $12.6 billion at the end of Q1/11(1)· Assets under management of $473 million, up 4.4% from
$453 million at the end of Q2/10, and up 9.7%
from $431 million at the end of Q1/11 (1)· As at September 30, 2010 Canaccord had 280 Advisory
Teams(7) down 54 from 334 Advisory Teams as of
September 30, 2009 and down 10 from 290 Advisory Teams
as of June 30, 2010
· This decrease is largely due to an ongoing
strategic review of our Wealth Management
division and the conversion of corporate
branches to the Independent
Wealth Management (IWM) platform, where each
branch is led by one IA and
is counted as one Advisory Team· During Q2/11, Canaccord Wealth Management closed its
Orangeville (Ontario) branch, which operated on
Canaccord's IWM platform · On August 24, 2010, Canaccord Wealth Management added
to its service offering with the launch of
Complete Canaccord Philanthropic Solutions, which
provides clients with a tax-efficient and
cost-effective way to include charitable giving as part
of their overall estate plan
Subsequent to September 30, 2010
· On November 1, 2010, Canaccord Wealth Management's
corporate Prince George branch converted to the
Independent Wealth Management platform · Canaccord Wealth Management now has 30 offices across
Canada, including 11 branches on the IWM
platform
Non-GAAP Measures
Non-GAAP measures presented include assets under administration, assets undermanagement, book value per diluted common share, return on equity and figuresthat exclude acquisition-related expense items. Management believes that thesenon-GAAP measures will allow for a better evaluation of the operatingperformance of Canaccord's business and facilitate meaningful comparison ofresults in the current period to those in prior periods and future periods.Figures that exclude acquisition-related expense items provide usefulinformation by excluding certain items that may not be indicative ofCanaccord's core operating results. A limitation of utilizing these figuresthat exclude acquisition-related expense items is that the GAAP accountingeffects of the acquisition-related expense items do in fact reflect theunderlying financial results of Canaccord's business and these effects shouldnot be ignored in evaluating and analyzing Canaccord's financial results.Therefore, management believes that Canaccord's GAAP measures of financialperformance and the respective non-GAAP measures should be consideredtogether.
_______________________________________________
1 See non-GAAP measures
Acquisition-related expense items are in connection with the acquisition of
Genuity Capital Markets. Second quarter 2011 figures include $1.9 million of 2 amortization of intangible assets. First half of fiscal 2011 figures include
$11.0 million of acquisition-related costs and $3.3 million of amortization of intangible assets.
ROE figures excluding acquisition-related expense items, exclude only $1.9
million of amortization of intangible assets recorded in Q2/11, $11.0 million 3 in acquisition-related costs and $1.4 million of amortization of intangible
assets recorded in Q1/11, and $5.0 million of acquisition-related costs in Q4 /10.
4 Source: FP Infomart and Company information 5 Source: Placement Tracker. Includes placements for companies incorporated in Canada and the US
6 Brendan Wood International: Institutional Equity Research, Sales and Trading
Performance in Canada 2010 Report. Advisory Teams are normally comprised of one or more Investment Advisors
(IAs) and their assistants and associates, who together manage a shared set 7 of client accounts. Advisory Teams that are led by, or only include, an IA
who has been licenced for less than three years are not included in
our Advisory Team count, as it typically takes a new IA approximately three
years to build an average sized book. LETTER TO SHAREHOLDERSTo Our ShareholdersWe've seen a dramatic improvement in both market activity and equityperformance during the last two months, which is particularly encouraging asSeptember is typically marked by lower returns. Still, this improved marketenvironment does not reflect our experience during the first two months of ourfiscal second quarter. After an unusually slow summer period marked by muchuncertainty on the part of investors and issuers, Canaccord Financial postedrelatively good results for the three months ended September 30, 2010 andfinished the quarter with strong momentum across all of our businesses. Inaddition, the integration of the Canaccord Genuity teams, facilities and clientrelationships has gone extremely well and is beginning to reveal the strongcapital markets synergies we anticipated from the acquisition.Revenue for the three months ended September 30, 2010 totalled $149.3 million,a 20.6% increase from the same period a year ago. Net income rose 44% to $9.7million while diluted earnings per share remained flat at $0.12 due to theissuance of shares during the first quarter of fiscal 2011 for the acquisitionof Genuity Capital Markets (Genuity). Diluted EPS doubled compared to lastquarter, when most charges related to the acquisition of Genuity were booked.The amortization of assets related to the Genuity acquisition peaked during Q2/11, resulting in $1.9 million of acquisition-related expenses. Excludingacquisition-related expense items, net income for the quarter was $11.5 millioncompared to $6.7 million in the same period last year and $13.9 million in Q1/11. On this basis, diluted EPS was $0.14 for the quarter, up 17% compared tothe same period last year, but down 22% compared to the previous quarter. Netincome was up 60% in the first six months of fiscal 2011, compared to the firstsix months of fiscal 2010.As part of our ongoing commitment to cost containment, we are in the process ofimplementing many new initiatives to enhance Canaccord's operating efficiency.We expect to achieve up to $20 million in cost savings from these changes,which will help bring us closer to our long-term target for return on equity.Excluding acquisition-related expense items, annualized ROE for the secondquarter of fiscal 2011 was 6.7% compared to 6.9% for the second quarter lastyear. Importantly, our cash and working capital positions remain very strong.Canaccord GenuityThe surge of activity Canaccord Genuity experienced in September was notsufficient to completely offset the market uncertainty that affected the entireindustry during the summer months of 2010. Nonetheless, Canaccord Genuity led26 transactions globally during the quarter, raising total proceeds of morethan $780 million. The division's revenue for the three months ended September30, 2010 declined 3% to $97 million compared to the first quarter of fiscal2011, during which we completed the acquisition of Genuity. Excludingacquisition-related charges, Canaccord Genuity's second quarter operatingincome, before intersegment cost allocations, declined 18% to $21.2 millioncompared to the first quarter. Second-quarter revenue from M&A advisoryassignments declined to $13 million.In Canada, the Canaccord Genuity team worked hard to get deals done that couldbe done in the difficult market environment. We're seeing the benefits of theGenuity acquisition with many of our advisory clients. Two companies we advisedduring the quarter, SunOpta Inc. and Pure Technologies Ltd., are great examplesof how we have been able to add value to our pre-existing client relationshipsthrough our new combined platform. We also reached beyond our traditionalstrengths in mining and energy to complete transactions for clients in the realestate, life sciences and technology sectors. The secondary offering we didfor Artis Real Estate Investment Trust during the quarter is a prime example ofour sector diversification and the strength of our client relationships. At$93 million, it was the fifth offering we led or co-led for this client sinceJanuary 2010, bringing the total value of capital raised for Artis this year to$375 million.We were very pleased to see excellent revenue growth from our trading desksacross all geographies, outperforming many of our competitors. In Canada,strong client relationships continue to drive increases in market share on theTSX and TSX-Venture exchanges compared to our activity prior to the integrationof Canaccord Genuity. Our ability to grow our agency business in challengingmarkets results from a combination of great execution and great ideas, so weare very pleased to be recognized in Brendan Woods' Institutional EquityResearch, Sales and Trading Performance in Canada 2010 Report with the toprankings for Quality of Investing Ideas and Quality of Small-Cap Research.Three of our analysts also received top-three rankings in the report, includingMario Mendonca who placed first in Canada for his coverage of insurancecompanies and second for his coverage of banks.While investor uncertainty in the U.S. during our second quarter reducedbanking and advisory revenue compared to the previous quarter, our U.S. agencytrading business continued to grow and gain market share, despite lower overallvolumes industry-wide. We also continue to expand our equity research group,with two prominent additions to our technology practice. In August, our U.S.team held Canaccord's 30th annual Global Growth Conference in Boston, withgreat success. We had record institutional attendance and client participation,with over 1,300 registrants that included 524 institutional investors.Impressively, our team facilitated nearly 600 investment banking meetings andmore than 3,000 one-on-one meetings for our clients over just three days. Ourclients are continually impressed by not only the quality of opportunities thatare identified through the conference but also the corporate relationships wehelp to facilitate.
Our U.K. business continues to be a key contributor to Canaccord's global platform.
With a solid increase in revenue for the second quarter, our U.K. team ismaking significant progress within the still-difficult economic environmentthere. Most recently, our team led a £206 million follow-on issue forRockhopper Exploration, a transaction that will be recognized in our fiscalthird quarter. And with a 61% increase in commission revenue during the firstsix months of fiscal 2011 compared to the same period last year, we're verypleased that the investments we've made to build out our U.K. sales and tradingdesks are beginning to deliver the results we anticipated. Canaccord Wealth ManagementUncertain and volatile equity markets reduced investor activity for most of thesecond quarter of fiscal 2011. Revenue for Canaccord Wealth Management totalled$44.5 million, an 11% increase from the same period last year but down 5.7%from the previous quarter. After intersegment cost allocations, the divisionlost $4 million compared to a loss of $3.3 million in the year-earlier quarterand a loss of $1.9 million in the first quarter of fiscal 2011.The realignment of our wealth management operations is a core strategy forCanaccord, but it is clear that we must do more to lower the division'sbreakeven so it can become self-sustaining. We expect that approximately $10million of the savings we've identified in our current round ofcost-containment initiatives will come from changes to improve operationalefficiencies in Canaccord Wealth Management. To that end, we recently promotedTanya Bird to Chief Operating Officer of the division, a role in which she willbe responsible for improving the productivity of our wealth managementoperations and implementing strategies to enhance our clients' experience.Looking aheadDespite the tough market environment we faced through much of the summer - asituation not unique to Canaccord - we began to see positive momentum inSeptember, with profit contribution across all of our geographies. Thatmomentum has carried over into the third quarter, giving us reason to beoptimistic, although cautiously, about the immediate months ahead. We'reparticularly pleased with the success of the integration of the CanaccordGenuity capital markets teams and the early synergies we're seeing among ourskill sets and client relationships. We entered the third quarter with a strongpipeline and a sense of growing momentum in all of our business units.Amidst the challenging economic backdrop, we're seeing great prospects forgrowth, particularly in new markets. There are significant opportunities inAsia that would allow us to leverage our core strengths, strong clientrelationships and focus on growth companies. China, specifically, has a highdemand for expertise in areas we've established market leadership in,especially the mining, energy and clean technology sectors. We are activelyengaged in exploring several opportunities that would increase our access to,and presence in, this important growth market. We hope to be able to share ourAsia strategy with you in the near future and look forward to discussing itsbenefits with you in the months ahead.Paul D. ReynoldsPresident & Chief Executive OfficerACCESS TO QUARTERLY RESULTS INFORMATION:Interested investors, the media and others may review this quarterly earningsrelease and supplementary financial information at http://www.canaccordfinancial.com/EN/IR/Pages/default.aspx.CONFERENCE CALL AND WEBCAST PRESENTATION:Interested parties are invited to listen to Canaccord's second quarter fiscal2011 results conference call with analysts and institutional investors, via alive webcast or a toll free number. The conference call is scheduled forWednesday, November 3, 2010 at 5:00 a.m. (Pacific Time), 8:00 a.m. (EasternTime) and 12:00 p.m. (UK Time). At that time, senior executives will comment onthe results for the second quarter of fiscal 2011 year and respond to questionsfrom analysts and institutional investors.The conference call may be accessed live and archived on a listen-only basisvia the Internet at: www.canaccordfinancial.com/EN/NewsEvents/Pages/Events.aspx
Analysts and institutional investors can call in via telephone at:
· 647-427-7450 (within Toronto)· 1-888-231-8191 (toll free outside Toronto)· 0-800-051-7107 (toll free from the United Kingdom)
Please request to participate in Canaccord Financial's Q2/11 earnings call.
A replay of the conference call can be accessed after 8:00 a.m. (Pacific Time), 11:00 a.m. (Eastern Time) and 3:00 p.m. (UK Time) on November 3, 2010 until December 18, 2010 at 416-849-0833 or 1-800-642-1687 by entering passcode 15967524 followed by the pound (#) sign.
ABOUT CANACCORD FINANCIAL INC.:Through its principal subsidiaries, Canaccord Financial Inc. is a leadingindependent, full-service financial services firm, with operations in twoprincipal segments of the securities industry: wealth management and globalcapital markets. Since its establishment in 1950, Canaccord has been driven byan unwavering commitment to building lasting client relationships. We achievethis by generating value for our individual, institutional and corporateclients through comprehensive investment solutions, brokerage services andinvestment banking services. Canaccord has 38 offices worldwide, including 30Wealth Management offices located across Canada. Canaccord Genuity, theinternational capital markets division, operates in the US, UK, Canada andBarbados.
Canaccord Financial Inc. is publicly traded under the symbol CF on the TSX and the symbol CF. on AIM, a market operated by the London Stock Exchange.
FOR FURTHER INFORMATION, CONTACT:
Investor relations Joint Broker: North American media: inquiries: Oliver Hearsey or Scott Davidson Jamie Kokoska Nick Triggs Managing Director, Global Manager, Investor Relations Keefe, Bruyette & Head of & Woods Limited Marketing & Communications Communications Phone: +44 (0) 20 Phone: 416-869-3875 Phone: 416-869-3891 7663 5400, Email: Email: Email:
[email protected] [email protected] [email protected]
London media: Nominated Adviser and Joint Bobby Morse or Ben Romney Broker: Buchanan Communications Marc Milmo or Carl Holmes (London) Charles Stanley Securities
Phone: +44 (0) 207 466 5000 Phone: +44 020 7149 6764,
Email: Email: [email protected] [email protected]
None of the information on Canaccord's websites at www.canaccordfinancial.com, www.canaccordgenuity.com, and www.canaccord.com should be considered
incorporated herein by reference. Management's Discussion and AnalysisFiscal second quarter 2011 for the three months and six months ended September30, 2010 - this document is dated November 3, 2010The following discussion of the financial condition and results of operationsfor Canaccord Financial Inc. (Canaccord or the Company) is provided to enablethe reader to assess material changes in our financial condition and to assessresults for the three- and six-month periods ended September 30, 2010 comparedto the corresponding periods in the preceding fiscal year. The three- andsix-month periods ended September 30, 2010 are also referred to as secondquarter 2011, Q2/11, fiscal Q2/11 and first-half fiscal year 2011 in thefollowing discussion. This discussion should be read in conjunction with theunaudited interim consolidated financial statements for the three- andsix-month periods ended September 30, 2010, beginning on page 34 of thisreport; our Annual Information Form dated May 19, 2010; and the 2010 annualManagement's Discussion and Analysis (MD&A) including the audited consolidatedfinancial statements for the fiscal year ended March 31, 2010 (Audited AnnualConsolidated Financial Statements) in Canaccord's Annual Report dated May 19,2010 (the Annual Report). There has been no material change to the informationcontained in the annual MD&A for fiscal 2010 except as disclosed in this MD&A.Canaccord's financial information is expressed in Canadian dollars unlessotherwise specified. The financial information presented in this document isprepared in accordance with Canadian generally accepted accounting principles(GAAP) unless specifically noted. This MD&A is based on unaudited interim andAudited Annual Consolidated Financial Statements prepared in accordance withCanadian GAAP.Caution regarding forward-looking statementsThis document may contain certain forward-looking statements. These statementsrelate to future events or future performance and reflect management'sexpectations or beliefs regarding future events including business and economicconditions and Canaccord's growth, results of operations, performance andbusiness prospects and opportunities. Such forward-looking statements reflectmanagement's current beliefs and are based on information currently availableto management. In some cases, forward-looking statements can be identified byterminology such as "may", "will", "should", "expect", "plan", "anticipate","believe", "estimate", "predict", "potential", "continue", "target", "intend"or the negative of these terms or other comparable terminology. By their verynature, forward-looking statements involve inherent risks and uncertainties,both general and specific, and a number of factors could cause actual events orresults to differ materially from the results discussed in the forward-lookingstatements. In evaluating these statements, readers should specificallyconsider various factors that may cause actual results to differ materiallyfrom any forward-looking statement. These factors include, but are not limitedto, market and general economic conditions, the nature of the financialservices industry and the risks and uncertainties detailed from time to time inCanaccord's interim and annual consolidated financial statements and its AnnualReport and Annual Information Form filed on www.sedar.com. Theseforward-looking statements are made as of the date of this document, and willnot be updated or revised except as may be required by applicable law. Non-GAAP MeasuresCertain non-GAAP measures are utilized by Canaccord as measures of financialperformance. Non-GAAP measures do not have any standardized meaning prescribedby GAAP and are therefore unlikely to be comparable to similar measurespresented by other companies.
Canaccord's capital is represented by common shareholders' equity and, therefore, management uses return on average common equity (ROE) as a performance measure. Also used by the Company as a performance measure is book value per diluted common share, which is calculated as total shareholders' equity divided by the number of diluted shares outstanding.
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 from which Canaccord earns commissionsor fees. This measure includes funds held in client accounts as well as theaggregate market value of long and short security positions. Canaccord's methodof calculating AUA may differ from the methods used by other companies andtherefore may not be comparable to other companies. Management uses thismeasure to assess operational performance of the Canaccord Wealth Managementbusiness segment. AUM includes all assets managed on a discretionary basisunder our programs generally described as or known as the Complete CanaccordInvestment Counselling Program and the Complete Canaccord Managed AccountProgram. Services provided include the selection of investments and theprovision of investment advice. AUM is also administered by Canaccord and isincluded in AUA.Financial statement items which exclude acquisition-related expense items arenon-GAAP measures. Acquisition-related expense items includeacquisition-related costs and the amortization of intangible assets related tothe acquisition of Genuity. Non-GAAP measures presented include assets under administration, assets undermanagement, book value per diluted common share, return on equity and figuresthat exclude acquisition-related expense items. Management believes that thesenon-GAAP measures will allow for a better evaluation of the operatingperformance of Canaccord's business and facilitate meaningful comparison ofresults in the current period to those in prior periods and future periods.Figures that exclude acquisition-related expense items provide usefulinformation by excluding certain items that may not be indicative ofCanaccord's core operating results. A limitation of utilizing these figuresthat exclude acquisition-related expense items is that the GAAP accountingeffects of the acquisition-related expense items do in fact reflect theunderlying financial results of Canaccord's business and these effects shouldnot be ignored in evaluating and analyzing Canaccord's financial results.Therefore, management believes that Canaccord's GAAP measures of financialperformance and the respective non-GAAP measures should be consideredtogether. BUSINESS OVERVIEWThrough its principal subsidiaries, Canaccord Financial Inc. is a leadingindependent, full-service financial services firm, with operations in twoprincipal segments of the securities industry: wealth management and globalcapital markets. Since its establishment in 1950, Canaccord has been driven byan unwavering commitment to building lasting client relationships. We achievethis by generating value for our individual, institutional and corporateclients through comprehensive investment solutions, brokerage services andinvestment banking services. Canaccord has 38 offices worldwide, including 30Wealth Management offices located across Canada. Canaccord Genuity, theinternational capital markets division, operates in the US, UK, Canada andBarbados.
Canaccord Financial Inc. is publicly traded under the symbol CF on the TSX and the symbol CF. on AIM, a market operated by the London Stock Exchange.
Our business is subject to the overall condition of the North American and European equity markets, including seasonal fluctuations.
Business Environment
The impact of the market flash-crash in May continued to have professional andnon-professional investors noticeably sidelined during July and August. Equitymarket activity slowed considerably and failed to reflect the higher pricelevels of economically sensitive materials. Individual investors continued tolower their exposure to equity mutual funds and increase exposure to debtinstruments and debt focused funds.Currency movement dominated the movement of all markets. The deterioration ofthe euro in fiscal Q1/11 was matched by an equally dramatic decline of the USdollar in fiscal Q2/11. Fears that the US economy was weakening severely ledto sharp price increases for commodities.Economic data released over the quarter provided mixed messages, however weakjob growth was a consistent theme. Economic growth prospects were lowered forcalendar 2010 by developed nations' central bankers.
In September the investment environment made a positive turn as sidelined cash was redeployed toward equities.
Though September typically provides the worst market returns of the year, thisyear it became the best performing September since 1939. The S&P 500 benchmarkindex gained 8.8% in September. With corporate cash mounting, merger andacquisition activity began to pick up during the month. Commodity producing countries became favourite destinations for investment. Junior resource transactions saw a significant lift in value and volumes. Withall the newly injected liquidity, everything rose in price except for amuch-needed lift in house prices in developed countries as investment in realestate remained questionable in a no job-growth environment. By the end ofSeptember, interest rate instruments left little room for further capitalgains. Currency market volatility made long-range decisions difficult andequities and commodities became the default choice for investment. This trendshould continue into fiscal Q3/11.
Market Data
Financing values declined on the AIM and NASDAQ markets compared to the previous quarter and the same quarter last year, while financings on the TSX and TSX Venture were down significantly.
Financings in our key sectors on the TSX and TSX Venture were down 48% comparedto the same quarter last year, and down 18% compared to the previous quarter. The mining sector had the most significant decline, while the technology sectorsaw a prominent increase compared to the previous quarter.
Financings in our key sectors on the AIM were down over 50% compared to the previous quarter, with all but the technology sector experiencing lowered financing activity.
Total financing value by exchange
Change Change from July August September Fiscal from fiscal Q1 10 10 10 Q2/11 fiscal Q2/10 /11 TSX and TSX Venture (C$ billions) 3.3 2.5 2.3 8.1 (59.3)% (44.1)% AIM (£ billions) 0.6 0.3 0.4 1.3 (13.3)% (13.3)% NASDAQ (US$ billions) 1.1 4.0 3.0 8.1 (60.3)% (10.0)%
Source: TSX Statistics, LSE AIM Statistics, Equidesk
Financing value for relevant AIM industry sectors
Change Change from from(£ millions, except for July August September Fiscal fiscal Q2 fiscal Q1percentage amounts) 10 10 10 Q2/11 /10 /11 Oil and gas 191.8 104.3 52.1 348.2 6.9% (26.3)% Mining 24.8 20.4 89.7 134.9 (35.2)% (76.9)% Pharmaceutical and Biotech 2.3 0.9 0.1 3.3 (89.3)% (85.8)% Media 3.2 0.3 -- 3.5 (93.4)% (30.0)% Technology 10.6 7.5 13.8 31.9 (15.8)% 15.2% Total (of relevant sectors) 232.7 133.4 155.7 521.8 (20.4)% (53.1)% Source: LSE AIM Statistics
Financing value for relevant TSX and TSX Venture industry sectors
($ millions, except for Change Changepercentage Fiscal from fromamounts) July 10 August 10 September 10 Q2/11 fiscal Q2/10 fiscal Q1/11 Oil and gas 878.1 964.2 284.0 2,126.3 (6.3)% (42.7)% Mining 722.1 554.7 270.1 1,546.9 (76.0)% (6.9)% Biotech -- 42.0 7.4 49.4 n.m. (7.0)% Media 200.0 -- -- 200.0 247.8% n.m. Technology 686.0 5.5 -- 691.5 n.m. 268.4% Total (of 2,486.2 1,566.4 561.5 4,614.1 relevant sectors) (47.6)% (18.1)% Source: FP Infomartn.m.: not meaningfulAbout Canaccord's operationsCanaccord Financial Inc.'s operations are divided into two business segments:Canaccord Genuity (capital markets operations) and Canaccord WealthManagement. Together, these operations offer a wide range of complementaryinvestment banking services, investment products and brokerage services toCanaccord's institutional, corporate and private clients. Canaccord'sadministrative segment is referred to as Corporate and Other. Canaccord GenuityCanaccord Genuity offers mid-market corporations and institutional investorsaround the world an integrated platform for equity research, sales and trading,and investment banking services that is built on extensive operations inCanada, the United States and the United Kingdom. · Canaccord's research analysts have deep knowledge of
more
than 760 companies across our focus sectors: Mining and Metals, Energy, Technology, Life Sciences, Agriculture & Fertilizers, Media & Telecom, Financials, Consumer, Real Estate, Infrastructure, Transportation and Sustainability
· Our Sales and Trading desk executes timely transactions
for
more than 2,000 institutional relationships around the world, operating as an integrated team on one common platform
· With more than 135 skilled investment bankers,
Canaccord
Genuity provides clients with deep sector expertise and broad equity transaction and M&A advisory experience
Revenue from Canaccord Genuity is generated from commissions and fees earned in connection with investment banking transactions and institutional sales and trading activity, as well as trading gains and losses from Canaccord's principal and international trading operations.
Canaccord Wealth ManagementAs a leading independent investment dealer, Canaccord Wealth Managementprovides comprehensive wealth management solutions and services to our privateclients. We recognize that the growing complexity of many clients' financialcircumstances demands experienced Advisory Teams who can provide tailoredfinancial services and ideas that meet our clients' needs. Many of ourInvestment Advisors have obtained advanced industry designations such asChartered Financial Analyst or Certified Investment Manager. We continue toprovide our advisors with support from specialized financial planning andinsurance experts, the latest technology, and ongoing training opportunities.
Revenue from Canaccord Wealth Management is generated through traditional commission-based brokerage services, the sale of fee-based products and services, client-related interest, and fees and commissions earned by Advisory Teams in respect of investment banking and venture capital transactions by private clients.
Corporate and OtherCanaccord's administrative segment, described as Corporate and Other, includesrevenues and expenses associated with providing correspondent brokerageservices, bank and other interest, foreign exchange gains and losses, andactivities not specifically allocable to either the Canaccord Genuity orCanaccord Wealth Management divisions. Also included in this segment areCanaccord's operations and support services, which are responsible for frontand back-office information technology systems, compliance and risk management,operations, finance, and all administrative functions.CONSOLIDATED OPERATING RESULTSSecond quarter and first-half fiscal 2011 summary data(1)(4) Three months Six months ended September 30 ended September 30 (C$ thousands, except QTD Q2/11 YTDper share, employee vs. Q2/10 fiscal 2011and % amounts) 2010 2009 2008 2010 2009 2008 vs. 2010 Canaccord Financial Inc. Revenue Commission $63,002 $56,628 $60,630 11.3% $125,258 112,084 $132,626 11.8% Investment banking 51,236 32,366 27,894 58.3% 107,137 78,956 78,883 35.7% Advisory fees 13,215 15,254 6,130 (13.4)% 33,936 24,550 31,288 38.2% Principal trading 9,597 11,589 87 (17.2)% 15,555 23,059 5,998 (32.5)% Interest 5,436 3,121 11,734 74.2% 8,580 6,597 24,063 30.1% Other 6,799 4,786 4,354 42.1% 10,736 15,961 10,679 (32.7)% Total revenue $149,285 $123,744 $110,829 20.6% $301,202 $261,207 $283,537 15.3% Expenses Incentive 50,977 133,704 9.4% compensation 71,823 63,966 12.3% 144,914 132,429 Salaries and 14,195 29,638 15.7% benefits 16,322 13,983 16.7% 32,138 27,785 Other overhead 50,633 101,642 19.3% expenses (2) 47,201 37,934 24.4% 91,988 77,137 Acquisition-related - - n.m. costs - - - 10,990 - Total expenses $135,346 $115,883 $115,805 16.8% $280,030 $237,351 $264,984 18.0% Income (loss) before 77.3%
(11.3)%income taxes 13,939 7,861 (4,976) 21,172 23,856 18,553 Net income (loss) 9,711 6,746 (5,398) 44.0% 14,586 15,858 11,061 (8.0)% Earnings (loss) per - (35.7)%diluted share 0.12 0.12 (0.11) 0.18 0.28 0.21 Return on average (1.2).p.p. (3.6)p.p.common equity 5.7% 6.9% (5.0)% 4.7% 8.3% 5.3% Dividends per share 0.05 0.05 - - 0.10 0.05 0.125 100.0% Book value per 18.5% 18.5%diluted common share 8.03 6.78 7.15 8.03 6.78 7.15 Total assets 5,274,244 3,407,005 1,942,070 54.8% 5,274,244 3,407,005 1,942,070 54.8% Total liabilities 4,594,972 3,018,780 1,527,762 52.2% 4,594,972 3,018,780 1,527,762 52.2% Total shareholders' 75.0% 75.0%equity 679,272 388,225 414,308 679,272 388,225 414,308 Number of employees 1,631 1,539 1,688 6.0% 1,631 1,539 1,688 6.0%
Excluding acquisition-related expense
items(3) Total expenses 133,519 115,883 115,805 15.2% 265,774 237,351 264,984 12.0% Income (loss) before 100.6% 48.5%income taxes 15,766 7,861 (4,976) 35,428 23,856 18,553 Net income (loss) 11,538 6,746 (5,398) 71.0% 25,432 15,858 11,061 60.4% Earnings (loss) per 16.7% 14.3%diluted share 0.14 0.12 (0.11) 0.32 0.28 0.21
(1) Data is considered to be GAAP except for ROE, book value per diluted common
share, number of employees and figures excluding acquisition-related expense items.
(2) Consists of trading costs, premises and equipment, communication and
technology, interest, general and administrative, amortization and development costs.
(3) Acquisition-related expense items in the second quarter 2011 include $1.9
million of amortization of intangible assets in connection with the
acquisition of Genuity Capital Markets. Acquisition-related expense items
during first-half fiscal 2011 include $11.0 million acquisition-related
costs and $3.3 million amortization of intangible assets in connection with
the acquisition of Genuity Capital Markets. (4) Data includes the results of Genuity since the closing date of April 23, 2010. p.p.: percentage points n.m.: not meaningful Geographic distribution of revenue for the second quarter of fiscal 2011 (1) Three months Quarter- Six months ended September over- ended September YTD-over- 30 quarter 30 YTD (C$ thousands, except % 2010 change 2009 changeamounts) 2009 2010 Canada $109,493 $79,190 38.3% $218,411 $167,124 30.7% UK 18,338 13,774 33.1% 34,783 34,700 0.2% US 21,093 30,137 (30.0)% 47,799 57,316 (16.6)% Other Foreign Location 361 643 (43.9)% 209 2,067 (89.9)% Total $ 20.6% $ $261,207 15.3% 149,285 $123,744 301,202
(1) For a business description of Canaccord's geographic distribution please
refer to the "About Canaccord's Operations" section on page 12. RevenueSecond quarter 2011 vs. second quarter 2010On a consolidated basis, revenue is generated through six activities:commissions and fees associated with agency trading and private client wealthmanagement activity, investment banking, advisory fees, principal trading,interest and other. Revenue for the three months ended September 30, 2010 was$149.3 million, an increase of 20.6% or $25.6 million compared to the sameperiod a year ago.For the second quarter of fiscal 2011, revenue generated from commissionsincreased by $6.4 million to $63.0 million compared to the same period a yearago. Our Canaccord Genuity segment contributed $3.9 million and our CanaccordWealth Management segment contributed $2.5 million to this increase. Investment banking revenue was $51.2 million, up $18.9 million or 58.3%,primarily due to increased capital markets activities from our Canadianoperations. Advisory fees revenue was $13.2 million, a decrease of $2.0 millionor 13.4%. This decrease is mainly due to declining market conditions in our USoperations, which was partially offset by higher revenues in our Canadianoperations as a result of increased performance from our focus sectors and theacquisition of Genuity. Revenue derived from principal trading was $9.6 million, down $2.0 million or17.2% mainly due to reduced trading gains in the Canaccord Wealth Managementsegment, and the UK and Canadian capital markets operations, offset by strongerperformance by the Fixed Income group.
Interest revenue was $5.4 million, which increased by $2.3 million or 74.2% resulting from higher interest rates and additional interest revenue earned from activities of the Fixed Income group in Q2/11. Other revenue was $6.8 million, up $2.0 million or 42.1%, which was mainly attributed to anincrease in foreign exchange gains in the quarter compared to the same period last year.
Second quarter revenue in Canada was $109.5 million, up 38.3% or $30.3 millionfrom the second quarter last year. Despite the challenging market environment,operations in Canada were improved due to significant growth in investmentbanking and advisory fees revenue. Revenue in the UK was $18.3 million, an increase of 33.1% or $4.6 millioncompared to the same period a year ago due to stronger financing activities inthe UK market as well as the contribution from the new sales trading team hiredin the UK operations. Revenue from Other Foreign Location was $0.4 million, adecrease of $0.3 million. Revenue in the US was $21.1 million, down $9.0 million or 30.0% from Q2/10.
Revenue dropped from the second quarter last year because of decreased activity in respect of both public and private offerings and advisory work.
First-half fiscal year 2011 vs. first-half fiscal year 2010Revenue for the six months ended September 30, 2010 was $301.2 million, anincrease of 15.3% or $40.0 million compared to the same period a year agodespite the uncertainties in the economic environment, due to the acquisitionof Genuity and increased activities in our focus sectors. Both the CanaccordWealth Management and Canaccord Genuity segments generated more tradingactivities than during the same period a year ago, resulting in an increase incommission revenue of 11.8% to $125.3 million. The Company's growing capital markets business contributed to the increase ininvestment banking and advisory fees revenue. Investment banking revenue was$107.1 million, up $28.2 million or 35.7% and advisory fees revenue was $33.9million representing an increase of $9.4 million or 38.2%.
Principal trading revenue experienced a decrease of $7.5 million to $15.6 million compared to the same period last year. As discussed above, reduced trading gains in the Canadian and UK operations resulted in lower principal trading revenue, partially offset by stronger performance by the Fixed Income group.
Interest revenue was $8.6 million, an increase of 30.1% due to higher interestrates and interest revenue earned by the Fixed Income group. Other revenuedecreased by $5.2 million to $10.7 million during the first half of fiscal year2011, largely as a result of reduced foreign exchange gains. First quarter offiscal year 2010 experienced large fluctuations in foreign exchange ratesresulting in exceptionally high foreign exchange gains during that quarter thatdid not recur in the less volatile foreign exchange market during the secondquarter fiscal 2011. Year-to-date revenue in Canada was $218.4 million, an increase of 30.7% or$51.3 million from the same period a year ago. First-half fiscal year 2011revenue in the UK was $34.8 million, which remained relatively consistent fromthe same period a year ago. Revenue in the US was $47.8 million, a decrease of16.6% or $9.5 million compared with the first-half of fiscal year 2010. Revenue from Other Foreign Location was $0.2 million compared to $2.1 millionin the six months ended September 30, 2009. Despite the challenging marketconditions, as evidenced by the decrease in revenue in the US operations,overall revenue increased as a result of the growth in investment banking andadvisory fees, as well as higher revenue from the Canaccord Wealth Managementsegment.
Expenses as a percentage of revenue
Three months Quarter- Six months ended September over- ended September YTD-over- 30 quarter 30 YTD in percentage points 2010 2009 change 2010 2009 change Incentive 51.7% (3.6) 48.1% 50.7% (2.6) compensation 48.1% p.p. p.p. Salaries and 11.3% (0.4) 10.7% 10.6% 0.1 p.p. benefits 10.9% p.p. Other overhead 30.7% 34.2% 29.5% 4.7 p.p. expenses(1) 31.6% 0.9 p.p. Total 90.6% (3.1) 90.8% 2.2 p.p. 93.7% p.p. 93.0% Consists of trading costs, premises and equipment, communication and (1) technology, interest, general and administrative, amortization and
development costs. p.p.: percentage points Compensation expensesSecond quarter 2011 vs. second quarter 2010Expenses for the three months ended September 30, 2010 were $135.3 million, anincrease of 16.8% from a year ago.Incentive compensation expense was $71.8 million for the quarter, up 12.3% or$7.9 million, consistent with the net increase in incentive-based revenue.Consolidated incentive compensation as a percentage of total revenue was 48.1%,a decrease of 3.6 percentage points, reflecting the Company's continued effortsto monitor the incentive compensation structure to maximize shareholder value. In addition, reclassification of expense recoveries to compensation poolscontributed to the decrease. Salaries and benefits expense was $16.3 million,an increase of 16.7% in the second quarter of fiscal 2011 from the same perioda year ago, largely attributable to the increase in staffing levels, and alsothe reclassification of certain expenses from development costs to salaries andbenefits expense.
Total compensation (incentive compensation plus salaries) expense as a percentage of consolidated revenue for Q2/11 was 59.0%, a decrease of 3.9 percentage points from 63.0% in Q2/10. As discussed above, this was mainly due to the Company's efforts to review the compensation structure to maximize shareholder value.
First-half fiscal year 2011 vs. first-half fiscal year 2010Expenses for the six months ended September 30, 2010 were $280.0 million, anoverall increase of $42.7 million or 18.0% from a year ago. Incentivecompensation expense was $144.9 million, up 9.4%, which was consistent with theincrease in incentive-based revenue. Consolidated incentive compensation as apercentage of total revenue was 48.1%, a decrease of 2.6 percentage pointsmainly as a result of monitoring of the incentive compensation ratio andreclassification of expense recoveries to compensation pools.Salaries and benefits expense was $32.1 million, an increase of 15.7% in thefirst half of fiscal 2011 compared to the same period a year ago for thereasons mentioned above. The total compensation (incentive compensation plussalaries) expense as a percentage of consolidated revenue was 58.8%, a decreaseof 2.5 percentage points from 61.3% in the same period of the prior year.
Other overhead expenses Three months Quarter- Six months ended September over- ended September YTD-over- 30 quarter 30 YTD (C$ thousands, except % 2010 change 2009 changeamounts) 2009 2010 Trading costs $7,002 $ $14,326 4.3 % $7,241 3.4 % 14,946 Premises and 6,104 12,678 11,986 5.8 % equipment 6,640 8.8 % Communication and 5,245 13,048 10,734 21.6 % technology 6,779 29.2 % Interest 1,673 492 240.0 % 2,289 1,337 71.2 % General and 11,698 31,781 23,586 34.7% administrative 15,990 36.7% Amortization (1) 3,706 1,906 94.4% 6,990 3,827 82.6% Development costs 5,172 5,487 (5.7)% 10,256 11,341 (9.6)% Total other overhead $47,201 24.4% $77,137 19.3%expenses $37,934 $91,988
(1) Includes $1.9 million of amortization of intangible assets in connection
with the acquisition of Genuity Capital Markets for the three months ended
September 30, 2010 and $3.3 million for the six months ended September 30, 2010. Second quarter 2011 vs. second quarter 2010Other overhead expenses increased by 24.4% or $9.3 million from the prior yearto $47.2 million for the second quarter of fiscal 2011 mainly due to a $4.3million increase in general and administrative expense, a $1.8 million increasein amortization expense, a $1.5 million increase in communication andtechnology expense, and a $1.2 million increase in interest expense.Certain expenses were reclassified during the quarter resulting in a decreasein incentive compensation expense, offset by an increase in promotion andtravel, and communication and technology expense. The Company recovers certainexpenses from compensation pools, which were netted against the relatedexpenses in previous periods. Beginning in Q1/11, these expense recoveries werereflected in incentive compensation expense resulting in a decrease in thisexpense. This reclassification largely explains the $1.4 million increase inpromotion and travel expense and the $1.5 million increase in communicationsand technology expense. The main contributor to the increase in general and administrative expense wasan increase in promotion and travel expense due to the reclassificationdiscussed above. The credit provision was up by $1.1 million due to $0.8million of credit recoveries in the Canaccord Wealth Management segment in Q2/10 that did not recur in Q2/11. The remaining increase in general andadministrative expense can be attributed to expenditures on new marketingmaterials, client settlement, and professional fees incurred in the secondquarter of fiscal 2011. Amortization expense increased due to the $1.9 million amortization ofintangible assets acquired through the purchase of Genuity. Interest expensewas increased by $1.2 million, which was attributable to higher interest ratesand additional interest expense incurred by the Fixed Income group.First-half fiscal year 2011 vs. first-half fiscal year 2010Other overhead expenses for the six months ended September 30, 2010 increasedby 19.3% or $14.9 million to $92.0 million from the same period a year ago. Themain contributors were increases in general and administrative expense,amortization expense and communication and technology expense.General and administrative expense increased $8.2 million primarily as a resultof the $4.1 million increase in promotion and travel expense resulting from thereclassification discussed above. In addition, office expense increased by $1.3million due mostly to the printing of new marketing materials. Clientsettlement expense went up by $1.1 million. As per the Company's policy ofreserving against unsecured balances, the Company recognized an additional $1.0million credit provision in the first-half fiscal year 2011 compared to thesame period last year. The remaining increase in overhead expenses was due to the $3.3 millionincrease in amortization of intangible assets acquired through the purchase ofGenuity. Reclassification of certain expense recoveries mentioned above alsoresulted in the increase in communication and technology expense.
Interest expense was also up by $1.0 million resulting from activities in the Fixed Income group. Development costs were down by $1.1 million due to a reduction of hiring incentives in the US operations.
Net income
Second quarter 2011 vs. second quarter 2010Net income for Q2/11 was $9.7 million compared to net income of $6.7 million inthe same period a year ago. Diluted EPS was $0.12 in Q2/11, same as Q2/10. Theincrease in net income was mainly due to stronger revenue performance andreduced compensation ratio in the Canaccord Genuity segment. ROE for Q2/11 was5.7% compared to a ROE of 6.9% in Q2/10. Book value per diluted common sharefor Q2/11 was $8.03 versus $6.78 in Q2/10. Excluding acquisition-relatedexpense items, net income was $11.5 million and diluted EPS was $0.14. The effective tax rate for this quarter was 30.3% compared to 14.2% in the samequarter last year. The lower tax rate in Q2/10 was due to the utilization ofnon-capital loss carryforwards. First-half fiscal year 2011 vs. first-half fiscal year 2010Net income for the first half of fiscal 2011 was $14.6 million compared to$15.9 million for the same period a year ago. Although the acquisition ofGenuity led to an increase in revenue, the Company incurred $14.3 million ofacquisition-related expense items that impacted net income. Diluted EPS was$0.18 compared to $0.28 a year ago, and ROE was 4.7% compared to 8.3% a yearago. Book value per diluted common share at the period end was $8.03, an 18.5%increase from $6.78. Net income excluding acquisition-related expenses was$25.4 million and diluted EPS was $0.32. Income tax expense was $6.6 million in the year to date of fiscal 2011, adecrease of $1.4 million from fiscal 2010. The year-to-date effective tax ratewas 31.1% compared to 33.5% for the same period last year. The change ineffective tax rate was due to lower statutory rates in the current year as wellas changes in valuation allowances as a result of the availability ofunrecognized non-capital loss carryforwards.RESULTS OF OPERATIONS BY BUSINESS SEGMENTCanaccord Genuity(1)(4) Three months Six months ended September 30 ended September 30 Quarter- (C$ thousands, except over- YTD-over-employees and % quarter YTDamounts) 2010 2009 change 2010 2009 change Canaccord Genuity Revenue $96,963 $78,475 23.6% $197,115 $163,972 20.2% Expenses Incentive 87,992 6.2 % compensation 46,818 42,761 9.5% 93,409 Salaries and 6,780 20.6 % benefits 4,154 3,376 23.0% 8,175 Other overhead 38,378 34.9 % expenses 26,590 17,881 48.7% 51,766 Acquisition-related - n.m. costs - - - 10,990 Total expenses $77,562 $64,018 21.2% 164,340 133,150 23.4% Income before income 30,822 6.3% taxes(2) 19,401 14,457 34.2% 32,775 Number of employees 597 482 23.9 % Excluding acquisition-related expense items(3) Total expenses 75,735 64,018 18.3% 150,084 133,150 12.7% Income before income 30,822 52.6%taxes 21,228 14,457 46.8% 47,031
(1) Data is considered to be GAAP except for number of employees and figures
excluding acquisition-related expense items. (2) Income before income taxes excludes Intersegment Allocated Costs. See
"Intersegment Allocated Costs".
(3) Acquisition-related expense items in second quarter 2011 include $1.9
million of amortization of intangible assets in connection with the
acquisition of Genuity Capital Markets. Acquisition-related expense items
during first-half fiscal 2011 include $11.0 million of acquisition-related
costs and $3.3 million amortization of intangible assets in connection with
the acquisition of Genuity Capital Markets. (4) Data includes the results of Genuity since the closing date of April 23, 2010. n.m.: not meaningful
Revenue from Canaccord Genuity is generated from commissions and advisory fees earned in connection with investment banking transactions and institutional sales and trading activity, as well as trading gains and losses from Canaccord's principal and international trading operations.
Second quarter 2011 vs. second quarter 2010Revenue for Canaccord Genuity in Q2/11 was $97.0 million, an increase of 23.6%or $18.5 million from the same quarter a year ago, due to increased activity inour focus sectors as well as the acquisition of Genuity.Revenue from Canadian operationsCanaccord Genuity in Canada generated revenue of $58.2 million in Q2/11, anincrease of 68.8% or $23.7 million from Q2/10. Despite the challenging marketenvironment, revenue increased in this geographic sector, which is a reflectionof the growth in the Canaccord Genuity business as a result of increasedactivity in our focus sectors and the positive impact from the acquisition ofGenuity. Canadian revenue for Canaccord Genuity of $58.2 million represented60.0% (Q2/10: 43.9%) of Canaccord Genuity's total revenue.Revenue from UK and Other Foreign LocationCanaccord Genuity's operations in the UK and Europe include providing sales andtrading, corporate finance and research services to our institutional andcorporate customers. Revenue derived from capital markets activity outside ofCanada, the UK and the US is reported as Other Foreign Location, which includesoperations for Canaccord International Ltd. Revenue in the UK and OtherForeign Location was $18.7 million, which increased 29.7% or $4.3 million fromthe same period a year ago mainly due to stronger capital markets activity inthe UK as well as the result of the addition of a new sales trading team hiredat the end of fiscal 2010. UK and Other Foreign Location revenue of $18.7million was 19.3% (Q2/10: 18.4%) of Canaccord Genuity's total revenue.Revenue from US operationsThe US operations reflect the capital markets activities of Canaccord GenuityInc. Second quarter fiscal 2011 revenue for Canaccord Genuity in the US was$20.1 million (Q2/10: $29.6 million), a decrease of $9.5 million or 32.1%compared to the same period last year primarily due to a declining marketenvironment in the US leading to decreased activity in respect of both publicand private offerings and advisory work. Revenue from the US operationsrepresented 20.7% (Q2/10: 37.7%) of Canaccord Genuity's total revenue.
Expenses
Expenses for Q2/11 were $77.6 million, up 21.2% or $13.5 million. The higherexpenses were mainly attributed to increases in incentive compensation expenseof $4.1 million, communications and technology expense of $1.6 million, generaland administrative expense of $2.9 million, $1.9 million of amortizationexpense and interest expense of $1.2 million.The Company recovers certain expense items from compensation pools. Theseexpense recoveries were previously reflected in the related expense items inprior periods, but these recoveries have been reclassified to incentivecompensation beginning in Q1/11. Therefore, the reclassification has reducedincentive compensation expense and contributed to the increase in promotion andtravel expense of $2.1 million, and communication and technology expense of$1.6 million in Q2/11 compared to the same period a year ago. As a result of the reclassification of expense recoveries discussed above, theincentive compensation ratio decreased to 48.3% from 54.5%. In addition, theCompany has continued to make efforts to monitor the incentive compensationstructure to maximize shareholder value. Salaries and benefits expense was$4.2 million, up $0.8 million or 23.0% compared to the second quarter of fiscal2010. This increase is consistent with the 23.9% growth in headcount in thissegment. General and administrative expense was $8.1 million in Q2/11, up $2.9 millionor 54.7%. Promotion and travel expense increased by $2.1 million or 89.3%,partly as a result of the reclassification discussed above. The increase inpromotion and travel expense is also due to the Company's sales and marketinginitiatives as well as higher staffing levels in this segment. Included in amortization expense in Q2/11 is $1.9 million of amortization ofintangible assets related to the acquisition of Genuity. Interest expense wasup $1.2 million, attributable to additional interest expense incurred from theFixed Income group's activities.Net incomeIncome before income taxes excluding allocated overhead expenses for thequarter was $19.4 million, an increase of $4.9 million or 34.2% from the samequarter a year ago. The acquisition of Genuity as well as stronger business inthe capital markets operations resulted in a higher pre-tax income in Q2/11compared to Q2/10. Excluding acquisition-related expense items, income beforeincome taxes in Q2/11 was $21.2 million compared to $14.5 million in Q2/10.
First-half fiscal year 2011 vs. first-half fiscal year 2010 Revenue for Canaccord Genuity for the first half of fiscal 2011 was $197.1 million, which increased $33.1 million from the same period last year due to higher revenue generated from the Canadian operations.
Revenue from Canadian operationsIn Canada, revenue was $116.2 million, an increase of 63.8% from the sameperiod a year ago. Within Canada, $103.0 million was derived from investmentbanking and equities activity, while $13.3 million was from internationaltrading, registered traders and fixed income operations. The acquisition ofGenuity as well as a strong performance in all focus sectors led to thesignificant increase in revenue in Canada. Overall, Canadian revenuerepresented 59.0% of Canaccord Genuity's total revenue (YTD fiscal 2010:43.3%).Revenue from UK and Other Foreign Location operationsThe UK and Other Foreign Location revenue was $35.0 million, a slight decreaseof $1.8 million from the same period a year ago. Revenue from the UK and OtherForeign Location operations represented 17.8% of Canaccord Genuity's totalrevenue (YTD fiscal 2010: 22.4%).Revenue from US operationsThe US operations experienced a decline in revenue during the first half offiscal 2011, mainly due to decreased activity in respect of both public andprivate offerings and advisory work. Revenue was $45.9 million, a decrease of$10.4 million or 18.4 % compared to the same period a year ago. Revenue fromUS operations represented 23.3% of Canaccord Genuity's total revenue (YTDfiscal 2010: 34.3%).
Expenses
Expenses for first-half fiscal 2011 were $164.3 million, up 23.4% or $31.2million. The higher expenses were mainly attributed to increases in incentivecompensation expense of $5.4 million, salaries and benefits expense of $1.4million, communications and technology expense of $2.7 million, interestexpense of $1.2 million, general and administrative expense of $6.0 million,and amortization of $3.3 million. Acquisition-related expense items of $14.3 million were incurred in relation tothe purchase of Genuity during the first half of fiscal 2011. Acquisition-related expense items include: $6.0 million of severance, $2.8million of lease termination costs, $3.3 million of amortization of intangibleassets, $0.9 million of professional and consulting fees, and $1.3 million ofother expenses.
Incentive compensation ratio decreased to 47.4% from 53.7% due to the Company's continued efforts to maximize shareholder value by monitoring the incentive compensation structure, as well as reclassification of pool recoveries as discussed above. Salaries and benefits expense in first-half fiscal 2011 experienced an increase of $1.4 million consistent with the 23.9% growth in staffing levels.
General and administrative expense was $17.1 million in the six months endingSeptember 30, 2010, up $6.0 million or 53.4%. Promotion and travel expenseincreased by $4.5 million, partially as a result of the reclassificationdiscussed above. Promotion and travel expense also increased as a result ofthe Company's sales and marketing initiatives and higher staffing levels. TheCompany's policy of reserving against unsecured balances led to an increase incredit provision expense by $0.8 million compared to the same period in theprior year. Communication and technology expense also increased by $2.7 million largely dueto the reclassification of pool recoveries. Interest expense was up by $1.2million, which was attributable to the Fixed Income group's activities. Theamortization of intangible assets in connection with the acquisition of Genuityresulted in the $3.3 million increase in amortization expense. Net incomeIncome before income taxes excluding allocated overhead expenses for first-halffiscal 2011 was $32.8 million, an increase of $2.0 million or 6.3% from thesame period a year ago. Income before income taxes was higher for the sixmonths ended September 30, 2010 compared to the same period in the prior yearas a result of the revenue growth in this segment, offset by $14.3 million ofacquisition-related expense items. Excluding acquisition-related expenseitems, income before income taxes in the second quarter ending September 30,2010 was $47.0 million compared to $30.8 million for the same period lastyear.
Canaccord Wealth Management(1)
(C$ thousands, except AUM Three months Six months and AUA, which are in C$ ended Quarter- ended
millions; employees; September 30 over- September 30 YTD-over-Advisory Teams; and % quarter YTDamounts) 2010 2009 change 2010 2009 change Revenue $44,539 $40,138 11.0% $ 91,746 $80,323 14.2% Expenses
Incentive compensation 22,079 19,368 14.0 % 45,563 38,011 19.9 %
Salaries and benefits 4,817 4,360 10.5 % 8,699 8,606 1.1 %
Other overhead expenses 12,223 11,485 6.4 % 24,560 23,764 3.3 % Total expenses $39,119 $35,213 11.1% $ 78,822 $70,381 12.0% Income before income taxes 30.0%(2) 5,420 4,925 10.1% 12,924 9,942 Assets under management 473 453 4.4%
Assets under administration 13,895 11,386 22.0%
Number of Advisory Teams 280 334 (16.2)% Number of employees 665 698 (4.7)%
(1) Data is considered to be GAAP except for AUM, AUA, number of Advisory Teams
and number of employees. (2) Income before income taxes excludes Intersegment Allocated Costs. See
"Intersegment Allocated Costs".
Revenue from Canaccord Wealth Management is generated through traditional commission-based brokerage services, the sale of fee-based products and services, margin interest, and fees and commissions earned in respect of investment banking and venture capital transactions by private clients.
Second quarter 2011 vs. second quarter 2010Revenue from Canaccord Wealth Management was $44.5 million, an increase of $4.4million or 11.0% mainly due to a $2.5 million increase in commission revenue, a$1.9 million increase in investment banking revenue and a $0.3 million increasein interest revenue. These increases were partially offset by a $0.5 milliondecrease in principal trading revenue. The overall growth in revenue isconsistent with the movement in AUA and AUM, and also reflects the Company'sstrategic initiatives in this sector.AUA increased by 22.0% or $2.5 billion to $13.9 billion compared to Q2/10primarily due to higher market values. AUM increased by 4.4% year over year.There were 280 Advisory Teams at the end of the second quarter of fiscal 2011,a decrease of 54 from a year ago due to an ongoing strategic review of theWealth Management division and the conversion of corporate branches to theIndependent Wealth Management (IWM) platform. Canaccord's fee-based revenue wasconsistent with the same quarter of the prior year and accounted for 15.2% ofCanaccord Wealth Management's revenue in both quarters.Expenses for Q2/11 were $39.1 million, an increase of 11.1% or $3.9 million.This change was made up of an increase in incentive compensation expense of$2.7 million and an increase in general and administrative expense of $1.7million, offset by a minor decrease in other overhead expenses. The movement inincentive compensation expense was consistent with the increase in revenue. Incentive compensation ratio was 49.6% in Q2/11 compared to 48.3% in Q2/10.
General and administrative expense was up due to a large credit recovery of $0.8 million in Q2/10 that did not recur in Q2/11 and an increase in office expense of $0.5 million for the printing of marketing materials for this segment.
Income before income taxes excluding allocated overhead expenses for thequarter was $5.4 million compared to an income of $4.9 million from the sameperiod a year ago. Revenue growth during Q2/11 compared to Q2/10 resulted inthe higher income before income taxes.First-half fiscal year 2011 vs. first-half fiscal year 2010Revenue from Canaccord Wealth Management was $91.7 million, an increase of$11.4 million. This increase was attributed to an increase in commissionrevenue of $7.7 million, and an increase in investment banking revenue of $5.4million, offset by a decline in principal trading revenue of $2.1 million. Fee-related revenue as a percentage of total Canaccord Wealth Managementrevenue remained relatively consistent at 14.6% compared to 14.5% in the sameperiod last year. Expenses for the six months ended September 30, 2010 were $78.8 million, up$8.4 million or 12.0%. Incentive compensation expense increased by $7.6 millionor 19.9%, in line with the 14.2% growth in total revenue. The totalcompensation expense payout as a percentage of revenue for the first six monthsof fiscal 2011 was 59.1%, an increase of 1.1 percentage points from 58.0% forthe same period a year ago. General and administrative expense increased $1.6 million or 24.7%. Generaland administrative expense was up as a result of an increase in office expenseof $0.9 million resulting from the printing of marketing materials, as well asa $1.0 million increase in client settlement expense. This was offset by a $0.4million decrease in promotion and travel expense resulting from this segment'sefforts to reduce spending. The increase in expenses was partially offset by a decrease in trading costsexpense of $0.5 million or 11.1% and communication and technology expense of$0.4 million or 12.4%. The lower expenses were a result of this segment's costreduction efforts. Income before income taxes excluding allocated overhead expenses for the firsthalf of fiscal 2011 was $12.9 million compared to $9.9 million from the sameperiod a year ago. Corporate and Other(1) Three months Six months ended ended September 30 Quarter- September 30 over- YTD-over-
(C$ thousands, except quarter YTDemployees and % amounts) 2010 2009 change 2010 2009 change Revenue $7,783 $5,131 51.7% 12,341 16,912 (27.0)% Expenses Incentive (7.5) % compensation 2,926 1,837 59.3 % 5,942 6,426 Salaries and 23.1 % benefits 7,351 6,247 17.7 % 15,264 12,399 Other overhead 4.4 % expenses 8,388 8,568 (2.1) % 15,662 14,995 Total expenses $ 18,665 $16,652 12.1 % 36,868 33,820 9.0 % Loss before income taxes 45.1 %(2) (10,882) (11,521) 5.5 % (24,527) (16,908) Number of employees 369 359 2.8 %
(1) Data is considered to be GAAP except for number of employees. (2) Income before income taxes excludes Intersegment Allocated Costs. See
"Intersegment Allocated Costs". This segment, described as Corporate and Other, includes revenues and expensesassociated with providing correspondent brokerage services, bank and otherinterest revenue, foreign exchange gains and losses, and expenses notspecifically allocable to either the Canaccord Genuity or Canaccord WealthManagement divisions. Also included in this segment are Canaccord's operationsand support services, which are responsible for front and back-officeinformation technology systems, compliance and risk management, operations,finance, and all administrative functions.Second quarter 2011 vs. second quarter 2010Revenue for the three months ended September 30, 2010 was $7.8 million, anincrease of 51.7% or $2.7 million from the same quarter a year ago. The changewas mainly related to a $1.9 million increase in foreign exchange gains and a$0.8 million increase in interest revenue. Foreign exchange gains relate tofluctuations in the foreign exchange rates and interest revenue was up due tohigher interest rates. Expenses for Q2/11 were $18.7 million, an increase of $2.0 million or 12.1%.Incentive compensation expense increased by $1.1 million due to compensationbased on higher group profitability. Salaries and benefits expense increased by$1.1 million, partly due to additional employees hired for this segment toenhance the Company's operations and support services. Salaries and benefitexpense relating to systems development were also reclassified from developmentcost to salaries and benefit expense. This also explains the $0.5 milliondecrease in development costs.
Overall, loss before income taxes was $10.9 million in Q2/11 compared to $11.5 million in the same quarter a year ago.
First-half fiscal year 2011 vs. first-half fiscal year 2010Revenue was $12.3 million, down $4.6 million, primarily attributed to lowerforeign exchange gains in first-half fiscal year 2011. There were significantfluctuations in the foreign exchange rates during the first quarter of fiscalyear 2010 resulting in exceptionally high gains reported by the Company. Expenses for the first half of fiscal 2011 were $36.9 million, an increase of$3.0 million. Incentive compensation decreased by $0.5 million or 7.5% as partof the Company's initiative to monitor its compensation structure. This dropwas offset by a $2.9 million or 23.1% increase in salaries and benefits mainlydue to higher staffing levels and reclassification of salaries and benefitsexpense related to systems development as discussed above. Thisreclassification also resulted in a decrease in development costs. Premisesand equipment expense was up by $1.0 million or 48.0% due to additional leasecommitments assumed by the Company from the acquisition of Genuity.
Overall, loss before income taxes was $24.5 million compared to $16.9 million for the same period a year ago.
INTERSEGMENT ALLOCATED COSTSIncluded in the Corporate and Other segment are certain trade processing,support services, research and other expenses that have been incurred tosupport the activities within the Canaccord Genuity and Canaccord WealthManagement segments. Excluding executive incentive compensation and certainadministrative support, foreign exchange gains and losses, and net interest,management has determined that allocable costs from Corporate and Other toCanaccord Wealth Management were $9.4 million for the three months endingSeptember 30, 2010 and to Canaccord Genuity such allocable costs were $2.9million. For the six months ending September 30, 2010, $18.9 million wasallocated to Canaccord Wealth Management and $5.6 million to Canaccord Genuity.FINANCIAL CONDITIONBelow are specific changes in selected balance sheet items.
Assets
Cash and cash equivalents were $636.9 million on September 30, 2010 compared to$731.9 million on March 31, 2010. Refer to the Liquidity and Capital Resourcessection below for more details. Securities owned were $1.3 billion compared with $362.8 million on March 31,2010, mainly attributable to an increase in corporate and government debt. This increase is mainly attributable to growth in fixed income activity, andincreased holdings in equities and convertible debentures and corporate financebought deal positions. The increase in fixed income holdings was a result ofthe continuing corporate initiative to expand the Fixed Income group, whichdeals in the primary and secondary markets for many fixed income products.Accounts receivable were $3.0 billion at September 30, 2010 compared to $2.0billion at March 31, 2010, mainly due to increases in receivables from brokersand investment dealers resulting from the expansion of the Fixed Incomegroup.
Goodwill was $242.1 million and intangible assets were $75.8 million, representing the goodwill and intangible assets acquired from the purchase of Genuity.
Other assets consisting of income taxes receivable, future income taxes, equipment and leasehold improvements, and investments, were $63.2 million compared to $56.3 million at March 31, 2010 mainly due to an increase in income taxes receivable at September 30, 2010.
Liabilities
Bank overdrafts and call loan facilities utilized by Canaccord may varysignificantly on a day-to-day basis and depend on securities trading activity. At September 30, 2010 Canaccord has available credit facilities with banks inCanada and the UK in the aggregate amount of $414.0 million [March 31, 2010 -$411.4 million]. These credit facilities, consisting of call loans, letters ofcredit and daylight overdraft facilities are collateralized by either unpaidclient securities and/or securities owned by the Company. On September 30,2010 there was bank indebtedness of $64.7 million compared to $29.4 million onMarch 31, 2010 related to these facilities.
Securities sold short were $1.2 billion at September 30, 2010 compared to $364.1 million at March 31, 2010. This increase was a result of the Company's initiative to expand the Fixed Income group.
Accounts payable were $3.3 billion compared to $2.3 billion at March 31, 2010. The increase in accounts payable to brokers and investment dealers resultingfrom the growth of the Fixed Income group explains most of the increase inaccounts payable. Non-current future income tax liability was $21.3 million largely due to therecognition of a future income tax liability in connection with the intangibleassets acquired through the purchase of Genuity.
Other liabilities were $15.0 million at September 30, 2010 and $20.4 million at March 31, 2010. At September 30, 2010 the Company had a nil income taxes payable balance outstanding while it was $5.4 million at March 31, 2010.
OFF-BALANCE SHEET ARRANGEMENTSA subsidiary of the Company has entered into irrevocable secured standbyletters of credit from a financial institution totalling $2.4 million (US$2.3million) [March 31, 2010 - $2.3 million (US$2.3 million)] as rent guaranteesfor its leased premises in Boston, New York and San Francisco.LIQUIDITY AND CAPITAL RESOURCESCanaccord has a capital structure comprised of share capital, retained earningsand accumulated other comprehensive loss. On September 30, 2010 cash and cashequivalents were $636.9 million, a decrease of $95.0 million from $731.9million as of March 31, 2010. During the six months ended September 30, 2010financing activities provided cash in the amount of $7.5 million mainly due tothe $35.3 million increase in bank indebtedness, partially offset by theacquisition of common shares for LTIP and dividends paid. Investing activitiesused cash in the amount of $50.0 million primarily related to the acquisitionof Genuity Capital Markets. Operating activities used cash in the amount of$55.6 million, which was due to changes in working capital balances. Anincrease in cash of $3.1 million was attributed to the effect of foreignexchange on cash balances. In total, there was a decrease in net cash of $95.0million compared to March 31, 2010.Canaccord's business requires capital for operating and regulatory purposes.The majority of current assets reflected on Canaccord's balance sheet arehighly liquid. The majority of the positions held as securities owned arereadily marketable and all are recorded at their fair value. The fair value ofthese securities fluctuates daily as factors such as changes in marketconditions, economic conditions and investor outlook affect market prices.Client receivables are secured by readily marketable securities and arereviewed daily for impairment in value and collectibility. Receivables andpayables from brokers and dealers represent the following: current opentransactions that generally settle within the normal three-day settlementcycle; collateralized securities borrowed and/or loaned in transactions thatcan be closed within a few days on demand; and balances on behalf ofintroducing brokers representing net balances in connection with their clientaccounts.The following table summarizes Canaccord's long-term contractual obligations onSeptember 30, 2010. Contractual obligations payments due by period Fiscal Fiscal 2013- 2015- Fiscal Fiscal Fiscal (C$ thousands) Total 2012 2014 2016 Thereafter Premises and equipment 24,001 40,219 32,703operating leases 129,102 32,179 OUTSTANDING SHARE DATA Outstanding shares as of September 30 2010 2009 Issued shares excluding unvested shares(1) 74,551,609 48,681,034 Issued shares outstanding (2) 82,552,764 55,359,489 Issued shares outstanding - diluted (3) 84,532,360 57,226,445 Average shares outstanding - basic 70,836,180 48,420,751 Average shares outstanding - diluted 79,577,578 55,444,791
(1) Excludes 4,744,750 unvested shares that are outstanding relating to share
purchase loans for recruitment and retention programs and 3,256,405
unvested shares purchased by an employee benefit trust for the long term incentive plan (LTIP).
(2) Includes 4,744,750 unvested shares that are outstanding relating to share
purchase loans for recruitment and retention programs and 3,256,405 unvested shares purchased by an employee benefit trust for the LTIP.
(3) Includes 1,979,596 of share issuance commitments.
The Company acquired 100% of Genuity for consideration consisting of 26.5million Canaccord common shares and cash of $58.0 million. At November 3, 2010Canaccord had 82,552,764 common shares issued and outstanding, an increase of27,193,275 common shares from September 30, 2009 due to shares issued inconnection with the acquisition of Genuity and stock compensation plans. SeeNote 5 of the Unaudited Interim Consolidated Financial Statements for moreinformation regarding the acquisition of Genuity. STOCK-BASED COMPENSATION PLANSStock optionsThe Company grants stock options to purchase common shares of the Company toindependent directors and senior managers. The independent directors andsenior managers have been granted options to purchase up to an aggregate of2,599,993 common shares of the Company. The stock options vest over a four- tofive-year period and expire seven years after the grant date. The weightedaverage exercise price of the stock options is $9.82 per share.In May 2010 the Company granted an aggregate of 150,000 stock options to sixindependent directors with an exercise price of $8.39 per share. The optionsvest over a four-year period and expire seven years after the grant date or 30days after the participant ceases to be a director. Long term incentive planUnder the LTIP, eligible participants are awarded restricted share units(RSUs), which vest over three years. For employees in Canada, an employeebenefit trust (the Trust) has been established, and either (a) the Company willfund the Trust with cash which will be used by a trustee to purchase on theopen market common shares of the Company that will be held in trust by thetrustee until RSUs vest or (b) the Company will issue common shares fromtreasury to participants following vesting of RSUs. For employees in the US andthe UK, at the time of each RSU award, the Company will allot common shares andthese shares will be issued from treasury at the time they vest for eachparticipant. INTERNATIONAL FINANCIAL CENTRECanaccord is a member of the International Financial Centre British ColumbiaSociety and it operates an international financial centre in Montreal, both ofwhich provide certain tax and financial benefits pursuant to the InternationalBusiness Activity Act of British Columbia and the Act Respecting InternationalFinancial Centres of Quebec. Accordingly, Canaccord's overall income tax rateis less than the rate that would otherwise be applicable.FOREIGN EXCHANGECanaccord manages its foreign exchange risk by periodically hedging pendingsettlements in foreign currencies. Realized and unrealized gains and lossesrelated to these transactions are recognized in income during the year. OnSeptember 30, 2010 forward contracts outstanding to sell US dollars had anotional amount of US$10.8 million, a decrease of $0.8 million from a year ago.Forward contracts outstanding to buy US dollars had a notional amount ofUS$10.1 million, an increase of US$3.1 million compared to a year ago. The fairvalue of these contracts was nominal. Some of Canaccord's operations in the USand UK are conducted in the local currency; however, any foreign exchange riskin respect of these transactions is generally limited as pending settlements onboth sides of the transaction are typically in the local currency.RELATED PARTY TRANSACTIONSSecurity trades executed for employees, officers and directors of Canaccord aretransacted in accordance with terms and conditions applicable to all clients.Commission income on such transactions in the aggregate is not material inrelation to the overall operations of Canaccord.CRITICAL ACCOUNTING ESTIMATESAs a result of adopting Canadian Institute of Chartered Accountants (CICA)Handbook Sections 1582 "Business Combinations", Handbook Section 1601"Consolidated Financial Statements" and Handbook Section 1602 "Non-controllingInterests", and the completion of the acquisition of Genuity Capital Markets(Genuity), the Company has the following critical accounting estimates inaddition to those described in Canaccord's 2010 Annual Report:Goodwill and other intangible assetsAs a result of the acquisition of Genuity Capital Markets, Canaccord acquiredgoodwill and other intangible assets. Goodwill is the cost of the acquiredcompanies in excess of the fair value of their net assets, including otherintangible assets, at the acquisition date. The identification and valuation ofother intangible assets required management to use estimates and makeassumptions. Goodwill is assessed for impairment at least annually or whenevera potential impairment may arise as a result of an event or change incircumstances to ensure that the fair value of the reporting unit to whichgoodwill has been allocated is greater than or at least equal to its carryingvalue. Fair value is determined using valuation models that take into accountsuch factors as projected earnings, earnings multiples, discount rates, otheravailable external information and market comparables. The determination offair value requires management to apply judgment in selecting the valuationmodels and assumptions and estimates to be used in such models and valuedeterminations. These judgments affect the determination of fair value and anyresulting impairment charges.The useful lives of intangible assets are assessed to be either finite orindefinite. Intangible assets with finite lives are amortized over the usefuleconomic life and assessed for impairment whenever there is an indication thatthe intangible asset's carrying value may not be recoverable. The amortizationperiods for intangible assets are reviewed annually. Intangible assets withindefinite lives are not amortized, but are tested for impairment annually, ormore frequently if there is an indication the asset may be impaired.
CHANGE IN ACCOUNTING POLICIES
Business Combinations and Consolidated Financial StatementsEffective April 1, 2010, the Company adopted Canadian Institute of CharteredAccountants (CICA) Handbook Section 1582 "Business Combinations", HandbookSection 1601 "Consolidated Financial Statements", and Handbook Section 1602"Non-controlling Interests", which replace CICA Handbook Section 1581 "BusinessCombinations" and Handbook Section 1600 "Consolidated Financial Statements". Handbook Section 1582 harmonizes Canadian guidance to International FinancialReporting Standards (IFRS) 3 "Business Combinations". CICA Handbook Section1601 carries forward guidance from CICA Handbook Section 1600 except for thestandards relating to the accounting for non-controlling interests, which areaddressed separately in Section 1602. Section 1602 substantially harmonizesCanadian standards with amended International Accounting Standard (IAS ) 27"Consolidated and Separate Financial Statements". This Canadian standardprovides guidance on accounting for non-controlling interests in a subsidiaryin the consolidated financial statements subsequent to a business combination. The adoption of these sections is required for the Company's interim financialstatements beginning April 1, 2011. Earlier adoption of these sections waspermitted and required that all three sections be adopted concurrently. TheCompany early adopted all three standards concurrently for the acquisition ofGenuity effective April 1, 2010.
Business combinations from April 1, 2010
As a result of adoption of Handbook Section 1582, business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. Acquisition costs are expensed as incurred.
Goodwill is initially measured at cost, being the excess of the considerationtransferred over the Company's net identifiable assets acquired and liabilitiesassumed. If this consideration is lower than the fair value of the net assetsof the subsidiary acquired, the difference is recognized in the statement ofoperations. After initial recognition, goodwill is measured at cost less any accumulatedimpairment losses. For the purpose of impairment testing, goodwill acquired ina business combination is, from the acquisition date, allocated to each of theCompany's cash-generating units that are expected to benefit from thecombination, irrespective of whether other assets or liabilities of theacquiree are assigned to those units.
Business combinations prior to April 1, 2010
In comparison to the above-mentioned requirements, the following differences continue to apply:
Business combinations were accounted for using the purchase method. Transaction costs directly attributable to the acquisition formed part of theacquisition costs and consideration transferred was measured at theannouncement date. The accounting treatment for business combinations prior toApril 1, 2010 have not been restated to comply with the new accountingpolicies. RECENT ACCOUNTING PRONOUNCEMENTSInternational Financial Reporting Standards (IFRS)The Canadian Accounting Standards Board (AcSB) has confirmed that the use ofIFRS will be required commencing in 2011 for publicly accountable,profit-oriented enterprises. The Company will issue its first annual andinterim consolidated financial statements prepared under IFRS for the yearended March 31, 2012 and the three months ended June 30, 2011, respectively,with restatement of comparative information presented.We have presented a detailed discussion of the project plan and significantdifferences between Canadian GAAP and IFRS in the 2010 Annual Report, whichshould be read in conjunction with the following IFRS update. The following isa status update of the IFRS conversion plan based on work undertaken during thefirst half of fiscal year 2011.
IFRS Conversion Plan Status Update
The Company is in the final stages of the design and planning phase of its changeover plan.
During the six months ended September 30, 2010 the Company completed the following:
· Prepared and presented mock IFRS financial statements to theAudit Committee which highlighted notes disclosure and presentation differences· Selected accounting policies under IFRS and discussed withauditors· Determined the exceptions and exemptions that will be
elected by the Company under IFRS 1 "First time Adoption of International Financial Reporting Standards"
· Identified key areas with quantitative impact and began
calculations for the opening balance sheet adjustments
· Reviewed changes for regulatory capital reporting
Over the next quarter, we will be finalizing our opening balance sheet quantitative impacts. We will continue to evaluate the impact of IFRS conversion on our information technology and data systems, internal control of financial reporting, or disclosure controls and procedures as well as any business impacts. We do not expect significant changes in our information technology and data systems, the design of our disclosure controls and procedures, or our internal controls of financial reporting based on our operations as of today.
Summary of Key Differences
Key differences identified to date between IFRS and Canadian GAAP are summarized below. Further differences may be identified as the Company completes its implementation analysis.
Accounting Key Differences in Accounting Potential Key Impacts Policy Area Treatment Share-based Canadian GAAP Expected impact to IFRS payments opening Consolidated Balance
Expense recognition: Amortization of Sheet: share-based payments may be expensed either on a straight-line basis or a The difference in incentive graded basis. compensation expense as a result of using the graded Forfeiture rate: Canadian GAAP amortization and
estimating
provides an option to either estimate a forfeiture rate for any a forfeiture rate at the grant date or unvested share-based recognize forfeitures as they occur. payments will result in a change in our opening IFRS retained earnings. Expense recognition: Share-based payments must be amortized on a graded basis. Forfeiture rate: A forfeiture rate must be estimated at the grant date. Analysis Amortization of our share-based payments must be recognized on a graded basis with a forfeiture rate estimated at grant date. The forfeiture rate will be reviewed on an annual basis. Financial Canadian GAAP Expected impact to IFRS instruments opening Consolidated Balance Financial assets are initially Sheet: measured at fair value, and they are classified as held for trading, held The Company is currently to maturity, loans and receivables, or assessing the impact to IFRS available for sale. opening Consolidated Balance Sheet. IFRS Financial assets are initially measured at fair value and classified as either amortized cost or fair value. Analysis Under Canadian GAAP, any gains or losses from available for sale assets are recognized in other comprehensive income; however, this classification does not exist under IFRS. Any changes in fair value or amortization of amortized cost financial assets are recognized into net income directly. The Company also reviewed the difference in accounting treatment of transaction costs and noted that Canadian GAAP and IFRS are consistent in expensing transaction costs incurred for financial instruments classified as held for trading or fair value. Impairment Canadian GAAP Expected impact to IFRS of assets opening Consolidated Balance Goodwill Sheet: Impairment should be tested annually or more frequently if events or The Company recently changes in circumstances indicate that acquired goodwill and the asset might be impaired. intangible assets as part of Impairment is based on discounted cash its acquisition of Genuity flows only if the asset's undiscounted Capital Markets. The cash flows are below its carrying Company has not
recognized
value. Impairment losses may not be any impairment as of the reversed. date of this MD&A. Indefinite lived intangible assets The Company will prepare its Impairment should be tested annually annual impairment
testing
or more frequently if events or under Canadian GAAP
during
changes in circumstances indicate that the second half of
fiscal
the asset might be impaired. An 2011. The Company will impairment loss is recognized when the assess any quantitative carrying amount exceeds its fair difference from IFRS at that value. Impairment losses may not be time. reversed. Finite lived intangible assets Intangible assets should be tested for impairment if events or changes in circumstances indicate that the asset might be impaired. Impairment losses are recognized when the carrying amount exceeds its fair value. Impairment losses may not be reversed. IFRS Goodwill Impairment is tested annually or more frequently if events or circumstances indicate that the asset might be impaired. IFRS requires a one-step impairment test for identifying and measuring impairment, comparing an asset's carrying value to the higher of its value in use and fair value less cost to sell. Impairment losses may not be reversed in future periods. Indefinite lived intangible assets Impairment is determined by comparing the carrying amount with the recoverable amount and is tested annually or more frequently if circumstances indicate an asset may be impaired. Impairment is recognized when the carrying amount exceeds the higher of the asset's fair value less cost to sell or its value in use. Impairment losses may be reversed in the future not exceeding the carrying amount that would have been determined if there was no impairment loss. Finite lived intangible assets Impairment is determined by comparing the carrying amounts with the recoverable amount and is tested only if circumstances indicate an asset may be impaired. Impairment is recognized when the carrying amount exceeds the higher of the asset's fair value less cost to sell or its value in use. Impairment losses may be reversed in the future not exceeding the carrying amount that would have been determined if there was no impairment loss. Analysis These differences may lead to additional impairment charges under IFRS. Income Canadian GAAP Expected impact to IFRS
taxes Future income tax asset and liability opening Consolidated Balance
can be classified as either current or Sheet: non-current asset or liability on the balance sheet. The Company is currently assessing the impact to IFRS IFRS opening Consolidated
Balance
Future income tax assets and Sheet. liabilities must be classified as non-current on the balance sheet. Analysis: Presentation of the balance sheet will be different as all future income tax asset or liability will be classified as non-current under IFRS. There may also be other future income tax impact on any transition adjustments resulting from the conversion to IFRS. IFRS 1 - First-Time Adoption
IFRS 1 "First-time Adoption of International Financial Reporting Standards" states that IFRS is to be applied retrospectively with some optional exemptions and mandatory exceptions to this requirement. The significant exemption options are summarized in the table below:
Business The Company will elect not to apply IFRS 3: "Business
combinations Combinations" to all business combinations that occur before April
1, 2010. The Company has early adopted HB Section 1582 which
is
harmonized with IFRS 3 for all business combinations
subsequent to
April 1, 2010. The Company will elect this exemption option to not restate all business combinations that occurred prior to April 1, 2010. Share-based The Company may elect not to apply IFRS 2: "Share Based Payments" payments retrospectively to its share-based payments that have vested as of the IFRS transition date. Currency The Company will elect to reclassify all cumulative translation translation differences for self-sustaining foreign subsidiaries in differences accumulated other comprehensive income into retained earnings on transition. The Audit Committee was provided IFRS updates each quarter during fiscal 2010and this will continue through fiscal 2011 until date of changeover. The AuditCommittee has been kept up to date on the progress of the conversion and anysignificant impacts, including potential quantitative impacts, have beendisclosed to the Audit Committee. The Audit Committee is involved in theapproval of accounting policy choices and IFRS 1 optional exemptions, openingbalance sheet adjustments, and changes to presentation and disclosures offinancial statements during fiscal 2011. BUSINESS COMBINATIONOn March 4, 2010 the Company announced that it had signed a definitiveagreement to acquire 100% control of Genuity, a leading independent advisoryand restructuring firm in Canada. The transaction was completed on April 23,2010 for consideration consisting of 26.5 million Canaccord common sharesvalued at $271.9 million and cash of $30.0 million. The share price of $10.26was based on the closing share price as of April 22, 2010, the date before thetransaction closed. In addition, the vendors received $28.0 million as aworking capital adjustment subsequent to closing. All of the Canaccord commonshares issued as part of the purchase price were placed in escrow at closingand will be released ratably over five years.This transaction has been accounted for in accordance with CICA Handbook 1582"Business Combinations" using the acquisition method. The consolidatedstatement of operations includes the results of Genuity since the closing dateof April 23, 2010. See Note 5 of the Interim Unaudited Consolidated FinancialStatements. DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIALREPORTINGDisclosure controls and proceduresBased on an evaluation performed as of March 31, 2010, the President & CEO andthe Executive Vice President & CFO concluded that the design and operation ofour disclosure controls and procedures were effective as defined under NationalInstrument 52-109. During the six months ended September 30, 2010 there wereno changes that would have materially affected, or are reasonably likely tomaterially affect, Canaccord's disclosure controls and procedures. Changes in internal control over financial reportingAn evaluation of the Company's internal control over financial reporting wasperformed as of March 31, 2010. Based on this evaluation, the President & CEOand the Executive Vice President & CFO concluded that our internal control overfinancial reporting is designed and operating effectively as defined underNational Instrument 52-109 and that there are no material weaknesses. Therewere no changes in internal control over financial reporting that occurredduring the six months ended September 30, 2010 that have materially affected,or are reasonably likely to materially affect, Canaccord's internal controlover financial reporting.DIVIDEND POLICYAlthough dividends are expected to be declared and paid quarterly, the Board ofDirectors, in its sole discretion, will determine the amount and timing of anydividends. All dividend payments will depend on general business conditions,Canaccord's financial condition, results of operations, capital requirementsand such other factors as the Board determines to be relevant.DIVIDEND DECLARATIONOn November 2, 2010 the Board of Directors considered the dividend policy andapproved a quarterly dividend of $0.05 per share payable on December 10, 2010with a record date of November 19, 2010.HISTORICAL QUARTERLY INFORMATIONCanaccord's revenue from an underwriting transaction is recorded only when thetransaction has closed. Consequently, the timing of revenue recognition canmaterially affect Canaccord's quarterly results. The expense structure ofCanaccord's operations is geared towards providing service and coverage in thecurrent market environment. If general capital markets activity were to dropsignificantly, Canaccord could experience losses.The following table provides selected quarterly financial information for thenine most recently completed financial quarters ended September 30, 2010. Thisinformation is unaudited but reflects all adjustments of a recurring nature,which are, in the opinion of management, necessary to present a fair statementof the results of operations for the periods presented. Quarter-to-quartercomparisons of financial results are not necessarily meaningful and should notbe relied upon as an indication of future performance. (C$ thousands, Fiscal 2011 Fiscal 2010 Fiscal 2009 except per share amounts) Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Revenue Canaccord 96,963 100,152 83,496 116,090 78,475 85,497 64,972 49,250 58,336 Genuity Canaccord 44,539 47,207 54,990 51,733 40,138 40,185 37,255 33,532 43,844 Wealth Management Corporate 7,783 4,558 4,647 5,374 5,131 11,781 4,769 4,406 8,649 and Other
Total revenue 149,285 151,917 143,133 173,197 123,744 137,463 106,996 87,188 110,829
Net income 9,711 4,875 7,526 15,113 6,746 9,112 3,666 (62,378) (5,398)
EPS - basic 0.13 0.07 0.15 0.31 0.14 0.19 0.07 (1.27) (0.11) EPS - diluted 0.12 0.06 0.14 0.27 0.16 0.07 (1.27) (0.11) 0.12 RISKSThe Company's ability to maintain and successfully execute its businessstrategy depends upon the personal reputation, judgment, business generationcapabilities and project execution skills of its senior professionals. Anymanagement disruption or difficulties in integrating Canaccord and Genuity'sprofessionals could result in a loss of clients and customers, or revenues fromclients and customers, and could significantly affect the Company's businessand results of operations. The securities industry and Canaccord's activities are by their very naturesubject to a number of inherent risks. Economic conditions, competition andmarket factors such as volatility in the Canadian and international markets,interest rates, commodity prices, market prices, trading volumes and liquiditywill have a significant impact on Canaccord's profitability. An investment inthe common shares of Canaccord involves a number of risks, including market,liquidity, credit, operational, legal and regulatory risks, which could besubstantial and are inherent in Canaccord's business. Canaccord is alsodirectly exposed to market price risk, liquidity risk and volatility risk as aresult of its principal trading activities in equity securities and to specificinterest rate risk as a result of its principal trading in fixed incomesecurities. Canaccord Wealth Management revenue is dependent on trading volumesand, as such, is dependent on the level of market activity and investorconfidence. Canaccord Genuity's revenue is dependent on financing activity bycorporate issuers and the willingness of institutional clients to activelytrade and participate in capital markets transactions. There may also be a lagbetween market fluctuations and changes in business conditions and the level ofCanaccord's market activity and the impact that these factors have onCanaccord's operating results and financial position.The financial services business is subject to extensive regulation in Canada,the US, the UK and elsewhere. Compliance with many of the regulationsapplicable to Canaccord involves a number of risks, particularly in areas whereapplicable regulations may be subject to interpretation and change. Changingregulations and interpretations could have a significant impact on its businessand profitability. The Company has a capital management framework to maintainthe level of capital that will meet the firm's regulated subsidiaries' targetratios as set out by the respective regulators, fund current and futureoperations, ensure that the firm is able to meet its financial obligations asthey come due, and support the creation of shareholder value. The regulatorybodies that some of the Company's subsidiaries are subject to are listed inNote 15 of the March 31, 2010 Audited Annual Consolidated FinancialStatements.
Further discussion regarding risks can be found in our Annual Information Form.
ADDITIONAL INFORMATIONA comprehensive discussion of our business, strategies, objectives and risks isavailable in our Annual Information Form and Management's Discussion andAnalysis, including our Audited Annual Consolidated Financial Statements inCanaccord's 2010 Annual Report, which are available on our website at www.canaccordfinancial.com/EN/IR/FinReports/Pages/default.aspx and on SEDAR
at www.sedar.com.
Interim Consolidated Financial Statements
Canaccord Financial Inc.UnauditedFor the three months and six months ended September 30, 2010(Expressed in Canadian dollars) Canaccord Financial Inc.
INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands of dollars) As at September 30, March 31, 2010 2010 $ $ ASSETS Current Cash and cash equivalents 636,908 731,852 Securities owned [note 3] 1,268,897 362,755 Accounts receivable [notes 4 and 11] 2,987,415 1,972,924 Income taxes receivable 5,567 - Future income taxes 15,136 13,190 Total current assets 4,913,923 3,080,721 Investment 5,000 5,000 Equipment and leasehold improvements 37,463 38,127 Intangible assets [note 6] 75,784 - Goodwill [note 6] 242,074 - 5,274,244 3,123,848
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Bank indebtedness 64,733 29,435 Securities sold short [note 3] 1,236,229
364,137
Accounts payable and accrued liabilities [notes 4 and 3,257,737 2,308,146 11] Income taxes payable - 5,385 Subordinated debt [note 8] 15,000 15,000 Total current liabilities 4,573,699 2,722,103 Future income taxes 21,273 - 4,594,972 2,722,103
Commitments and contingencies [note 14]
Shareholders' equity Common shares [note 9] 457,870 185,691 Contributed surplus 52,079 57,351 Retained earnings 200,237 194,007 Accumulated other comprehensive loss (30,914) (35,304) Total shareholders' equity 679,272 401,745 5,274,244 3,123,848 See accompanying notesCanaccord Financial Inc.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands of dollars, except per share amounts) For the three months For the six months ended ended September September September September 30, 30, 30, 30, 2010 2009 2010 2009 $ $ $ $ REVENUE Commission 63,002 56,628 125,258 112,084 Investment banking 51,236 32,366 107,137 78,956 Advisory fees 13,215 15,254 33,936 24,550 Principal trading 9,597 11,589 15,555 23,059 Interest 5,436 3,121 8,580 6,597 Other 6,799 4,786 10,736 15,961 149,285 123,744 301,202 261,207 EXPENSES Incentive compensation 71,823 63,966 144,914 132,429 Salaries and benefits 16,322 13,983 32,138 27,785 Trading costs 7,241 7,002 14,946 14,326 Premises and equipment 6,640 6,104 12,678 11,986 Communication and technology 6,779 5,245 13,048 10,734 Interest 1,673 492 2,289 1,337 General and administrative 15,990 11,698 31,781 23,586 Amortization [note 6] 3,706 1,906 6,990 3,827 Development costs 5,172 5,487 10,256 11,341
Acquisition-related costs [note - - 10,990
-5] 135,346 115,883 280,030 237,351 Income before income taxes 13,939 7,861 21,172 23,856
Income tax expense (recovery)
[note 7] Current 3,234 (201) 5,880 4,360 Future 994 1,316 706 3,638 4,228 1,115 6,586 7,998 Net income for the period 9,711 6,746 14,586 15,858
Basic earnings per share [note 0.13 0.14 0.20
0.339[iv]] Diluted earnings per share 0.12 0.12 0.18 0.28[note 9[iv]] See accompanying notesCanaccord Financial Inc.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) (in thousands of dollars) For the three months ended For the six months ended September 30, September 30, September 30, September 30, 2010 2009 2010 2009 $ $ $ $ Net income for the 9,711 6,746 14,586 15,858period Other comprehensive income (loss), net of taxes Net change in (186) (10,304) 4,390 (10,019) unrealized losses on translation of self-sustaining foreign operations Comprehensive income 9,525 (3,558) 18,976 5,839(loss) for the period INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (in thousands of dollars) As at and for the six months ended September September 30, 30, 2010 2009 $ $ Common shares, opening 185,691 183,619
Shares issued in connection with the acquisition of 271,900
-Genuity Capital Markets [note 5] Shares issued in connection with the long-term incentive 5,162 3,296plan (LTIP) [note 10] Acquisition of common shares for LTIP [note 10] (14,688)
(5,237)
Release of vested common shares from employee benefit 14,518 8,880trust [note 10]
Unvested share purchase loans (4,713)
2,733 Common shares, closing 457,870 193,291 Contributed surplus, opening 57,351
44,383
Stock-based compensation [note 10] (7,782)
(393)
Unvested share purchase loans 2,510
403
Contributed surplus, closing 52,079 44,393 Retained earnings, opening 194,007 160,868 Net income for the period 14,586 15,858 Dividends (8,356) - Retained earnings, closing 200,237 176,726 Accumulated other comprehensive loss, opening (35,304)
(16,166)
Other comprehensive income (loss) for the period 4,390
(10,019)
Accumulated other comprehensive loss, closing (30,914) (26,185) Shareholders' equity 679,272 388,225 See accompanying notesCanaccord Financial Inc.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands of dollars) For the three For the six months months ended ended September September September September 30, 30, 30, 30, 2010 2009 2010 2009 $ $ $ $ OPERATING ACTIVITIES Net income for the period 9,711 6,746 14,586 15,858 Items not affecting cash Amortization 3,706 1,906 6,990 3,827 Stock-based compensation expense 5,281 5,807 12,569 11,075 Future income tax expense 994 1,316 706 3,638
Changes in non-cash working capital
Increase in securities owned (433,892) (349,400) (900,138) (384,189)
Increase in accounts receivable (793,641) (830,505) (996,617) (925,543)
(Increase) decrease in income taxes (2,286) 15,623 (16,343) 19,354receivable
Increase in securities sold short 533,129 326,489 871,743 303,167
Increase in accounts payable and 771,550 818,244 950,916 960,473accrued liabilities Cash provided by (used in) operating 94,552 (3,774) (55,588) 7,660activities FINANCING ACTIVITIES
Acquisition of common shares for LTIP (10,331) (776) (14,688) (5,237)
Decrease (increase) in unvested common 4,230 1,790 (4,713) 3,136share purchase loans Dividends paid (4,209) - (8,356) - Change in bank indebtedness (18,259) (20,188) 35,298 10,000 Repayment of subordinated debt - - -
(10,000)
Cash (used in) provided by financing (28,569) (19,174) 7,541 (2,101)activities INVESTING ACTIVITIES
Acquisition of Genuity Capital Markets - - (37,997)
-
Net liabilities acquired from Genuity - - (11,227)
-Capital Markets Purchase of equipment and leasehold (424) (113) (763) (565)improvements Proceeds on net redemption of - 867 - 1,761investment in ABCP Cash (used in) provided by investing (424) 754 (49,987) 1,196activities Effect of foreign exchange on cash 1,396 (2,619) 3,090 1,527balances
Increase (decrease) in cash position 66,955 (24,813) (94,944) 8,282
Cash position, beginning of period 569,953 734,268 731,852 701,173 Cash position, end of period 636,908 709,455 636,908 709,455
Supplemental cash flow information
Interest paid 1,547 436 2,048 1,227 Income taxes paid 3,629 1,179 19,746 2,003 See accompanying notesCanaccord Financial Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the three and six months ended September 30, 2010 (in thousands of dollars, except per share amounts)
Through its principal subsidiaries, Canaccord Financial Inc. (the Company) is aleading independent, full-service investment dealer in Canada with capitalmarkets operations in the United Kingdom (UK) and the United States of America(US). The Company has operations in each of the two principal segments of thesecurities industry: capital markets and wealth management services. Together,these operations offer a wide range of complementary investment products,brokerage services and investment banking services to the Company's private,institutional and corporate clients.The Company's business is cyclical and experiences considerable variations inrevenue and income from quarter to quarter and year to year due to factorsbeyond the Company's control. The Company's business is affected by theoverall condition of the North American and European equity and debt markets,including the seasonal variance in these markets.
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principles of consolidation
These unaudited interim consolidated financial statements have been prepared bythe Company in accordance with Canadian generally accepted accountingprinciples (GAAP) with respect to interim financial statements, applied on aconsistent basis. These interim unaudited consolidated financial statementsfollow the same accounting principles and methods of application as thosedisclosed in Note 1 to the Company's audited consolidated financial statementsas at and for the year ended March 31, 2010 as filed on SEDAR on May 19, 2010(Audited Annual Consolidated Financial Statements) except for the changes inaccounting policies as described in Note 2. Accordingly, they do not includeall the information and footnotes required for compliance with Canadian GAAPfor annual financial statements. These unaudited interim consolidated financialstatements and notes thereon should be read in conjunction with the AuditedAnnual Consolidated Financial Statements.The preparation of these unaudited interim consolidated financial statementsand the accompanying notes requires management to make estimates andassumptions that affect the amounts reported. In the opinion of management,these unaudited interim consolidated financial statements reflect alladjustments necessary to state fairly the results for the periods presented.Actual results could vary from these estimates and the operating results forthe interim periods presented are not necessarily indicative of results thatmay be expected for the full year.As a result of adopting Canadian Institute of Chartered Accountants (CICA)Handbook Sections 1582 "Business Combinations", Handbook Section 1601"Consolidated Financial Statements" and Handbook Section 1602 "Non-controllingInterests", and the completion of the acquisition of Genuity Capital Markets(Genuity), the Company is disclosing the following accounting policies inaddition to those previously disclosed in the Audited Annual ConsolidatedFinancial Statements.
Goodwill
Goodwill represents the excess of the purchase price paid for an acquisitionover the fair value of the net tangible and identifiable intangible assetsacquired. Following the initial recognition, goodwill is measured at cost lessany accumulated impairment losses.
Intangible assets
The cost of identifiable intangible assets acquired in a business combination is the fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses.
The useful lives of intangible assets are assessed to be either finite orindefinite. Intangible assets with finite lives are amortized over the usefuleconomic life and assessed for impairment whenever there is an indication thatthe intangible asset's carrying value may not be recoverable. The amortizationperiods for intangible assets are reviewed annually. Intangible assets withindefinite lives are not amortized, but are tested for impairment annually, ormore frequently if there is an indication the asset may be impaired.Impairment testing of goodwill and intangible assets with indefinite livesIn accordance with CICA Handbook Section 3064 "Goodwill and Intangible Assets",the Company is required to annually evaluate goodwill and intangible assetswith indefinite lives to determine whether they are impaired. Goodwill andintangible assets with indefinite lives should also be tested for impairmentwhenever a potential impairment may arise as a result of an event or change incircumstances to ensure that the fair value of the reporting unit to whichgoodwill and intangible assets with indefinite lives have been allocated isgreater than or at least equal to its carrying value. Where the carrying amountof an asset exceeds its recoverable amount, the asset is considered impairedand written down to its recoverable amount. Any impairment of goodwill orintangible assets with indefinite lives will be recognized as an expense in theperiod of impairment, and subsequent reversals of impairments are prohibited.
Recent accounting pronouncements
International Financial Reporting Standards (IFRS)
The Canadian Accounting Standards Board (AcSB) has confirmed that the use ofIFRS will be required commencing in 2011 for publicly accountable,profit-oriented enterprises. IFRS will replace Canadian GAAP currently followedby the Company. The purpose of this adoption is to increase the comparabilityof financial reporting among countries and to improve transparency. TheCompany will be required to begin reporting under IFRS for its fiscal yearended March 31, 2012 and will be required to provide information that conformswith IFRS for the comparative periods presented.The Company is currently in the process of evaluating the potential impact ofIFRS to the consolidated financial statements. This is an ongoing process asthe International Accounting Standards Board (IASB) and the AcSB continue toissue new standards and recommendations. The Company's consolidated financialperformance and financial position as disclosed in the current Canadian GAAPfinancial statements may differ significantly when presented in accordance withIFRS. Some of the significant differences identified between IFRS and CanadianGAAP may have a material impact on the Company's consolidated financialstatements.
2. CHANGE IN ACCOUNTING POLICIES
Business Combinations and Consolidated Financial Statements
Effective April 1, 2010, the Company adopted CICA Handbook Section 1582"Business Combinations", Handbook Section 1601 "Consolidated FinancialStatements" and Handbook Section 1602 "Non-controlling Interests", whichreplace CICA Handbook Section 1581 "Business Combinations" and Handbook Section1600 "Consolidated Financial Statements". Handbook Section 1582 harmonizesCanadian guidance to IFRS 3 "Business Combinations". CICA Handbook Section1601 carries forward guidance from CICA Handbook Section 1600 except for thestandards relating to the accounting for non-controlling interests, which areaddressed separately in Section 1602. Section 1602 substantially harmonizesCanadian standards with amended International Accounting Standard (IAS) 27"Consolidated and Separate Financial Statements". This Canadian standardprovides guidance on accounting for non-controlling interest in a subsidiary inthe consolidated financial statements subsequent to a business combination.
The adoption of these sections is required for the Company's interim financial statements beginning April 1, 2011. Earlier adoption of these sections was permitted and required that all three sections be adopted concurrently. The
Company early adopted all three standards concurrently for the acquisition of Genuity [Note 5] effective April 1, 2010.
Business combinations from April 1, 2010
As a result of adoption of Handbook Section 1582, business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. Acquisition costs are expensed as incurred.
Goodwill is initially measured at cost, being the excess of the considerationtransferred over the Company's net identifiable assets acquired and liabilitiesassumed. If this consideration is lower than the fair value of the net assetsof the subsidiary acquired, the difference is recognized in the statement ofoperations. After initial recognition, goodwill is measured at cost less any accumulatedimpairment losses. For the purpose of impairment testing, goodwill acquired ina business combination is, from the acquisition date, allocated to each of theCompany's cash-generating units that are expected to benefit from thecombination, irrespective of whether other assets or liabilities of theacquiree are assigned to those units.
The adoption of these standards had a significant impact on how the Company accounted for the business combination with Genuity. The impact was as follows:
· Transaction costs were not capitalized as part of the
purchase consideration and instead were expensed as incurred. As a result, the Company expensed approximately $5.0 million during the year ended March 31, 2010 and $11.0 million during the three months ended June 30, 2010.
· Measurement date for equity instruments issued by theCompany as consideration for the acquisition was the date of acquisition (April22, 2010 closing price) and not at the average of a few days before and afterthe terms were agreed to and announced (March 4, 2010). Therefore, the Companyused a share price of $10.26 versus a share price of $9.49 to value theconsideration, increasing the purchase consideration for the businesscombination by $20.3 million and increasing goodwill being recorded on theconsolidated balance sheet by the same amount.
Business combinations prior to April 1, 2010
In comparison to the above-mentioned requirements, the following differences continue to apply:
Business combinations were accounted for using the purchase method. Transaction costs directly attributable to the acquisition formed part of theacquisition costs and consideration transferred was measured at theannouncement date. The accounting treatment for business combinations prior toApril 1, 2010 have not been restated to comply with the accounting policiesdescribed above.
3. SECURITIES OWNED AND SECURITIES SOLD SHORT
September 30, 2010 March 31, 2010 Securities Securities Securities Securities owned sold short owned sold short $ $ $ $ Corporate and government debt 1,079,216 1,215,920 282,686 342,916 Equities and convertible 188,607 20,309 79,098 21,221debentures Investment in asset-backed 1,074 - 971 -commercial paper 1,268,897 1,236,229 362,755 364,137
As at September 30, 2010 corporate and government debt maturities range from 2010 to 2060 [March 31, 2010 - 2010 to 2060] and bear interest ranging from 0.50% to 14.00% [March 31, 2010 - 0.50% to 14.00%].
4. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts receivable September 30, March 31, 2010 2010 $ $
Brokers and investment dealers 1,811,125 932,408
Clients 628,048 503,733
RRSP cash balances held in trust 490,352 475,220
Other 57,890 61,563 2,987,415 1,972,924
Accounts payable and accrued liabilities
September 30, March 31, 2010 2010 $ $
Brokers and investment dealers 1,637,579 949,595
Clients 1,384,721 1,188,545 Other 235,437 170,006 3,257,737 2,308,146 Amounts due from and to brokers and dealers include balances from resale andrepurchase agreement, securities loaned and borrowed, as well as brokers anddealers counterparties. The Company employs securities lending and borrowingprimarily to facilitate the securities settlement process. These arrangementsare typically short term in nature, with interest being received when cash isdelivered and interest being paid when cash is received. Securities borrowedand securities loaned are carried at the amounts of cash collateral deliveredand received in connection with the transactions. Securities borrowedtransactions require the Company to deposit cash, letters of credit or othercollateral with the lender. For securities loaned, the Company receivedcollateral in the form of cash or other collateral in an amount generally inexcess of the market value of the securities loaned. The Company monitors thefair value of the securities borrowed and loaned against the cash collateral ona daily basis and, when appropriate, the Company may require counterparties todeposit additional collateral or it may return collateral pledged to ensuresuch transactions are adequately secured. Securities purchased underagreements to resell and securities sold under agreements to repurchaserepresent collateralized financing transactions. The Company receivessecurities purchased under agreements to resell, makes delivery of securitiessold under agreements to repurchase, monitors the market value of thesesecurities on a daily basis and delivers or obtains additional collateral asappropriate.Client security purchases are entered into on either a cash or margin basis. Inthe case of a margin account, the Company extends a loan to a client for thepurchase of securities, using securities purchased and/or other securities inthe client's account as collateral. Amounts loaned to any client are limited bymargin regulations of the Investment Industry Regulatory Organization of Canada(IIROC) and other regulatory authorities and are subject to the Company'scredit 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 [September 30, 2010 - 6.00%-6.25% and 0.00%-0.05%, respectively; March 31, 2010 - 5.25%-6.25% and 0.05%-0.00%, respectively].
5. BUSINESS COMBINATION
On March 4, 2010 the Company announced that it had signed a definitiveagreement to acquire 100% control of Genuity, a leading independent advisoryand restructuring firm in Canada. The transaction was completed on April 23,2010 for consideration consisting of 26.5 million Canaccord common sharesvalued at $271.9 million and cash of $30.0 million. The shares issued werevalued at $10.26 per share based on the closing share price as of April 22,2010, the date before the transaction closed. In addition, the vendorsreceived $28.0 million as a working capital adjustment subsequent to closing. All of the Canaccord common shares issued as part of the purchase price wereplaced in escrow at closing and will be released ratably over five years.This transaction has been accounted for in accordance with CICA Handbook 1582"Business Combinations" [Note 2], using the acquisition method. Theconsolidated statement of operations includes the results of Genuity since theclosing date of April 23, 2010. The Company has not disclosed the amounts ofrevenue and net income contributed by Genuity for the six months endedSeptember 30, 2010 as required by CICA Handbook Section 1582 as the Company hasdetermined that it is impracticable to provide such disclosure. The Companyhas fully integrated Genuity's operations and accounting records into itsexisting Canaccord Genuity operating segment, and as such, the Company is notable to separately identify the revenue and net income from Genuity since theacquisition on April 23, 2010.
Total costs related to this transaction were $11.0 million for the six months ended September 30, 2010. These costs include professional and consulting fees, lease termination costs and staff restructuring incurred for this acquisition.
Acquisition-related costsSeverance $5,968 Lease termination costs 2,800
Professional and consulting fees 869
Other 1,353 Total $10,990
The purchase price, determined by the fair value of the consideration given atthe date of the acquisition, and the fair value of the net assets acquired onthe date of the acquisition was as follows:
Consideration paid
Cash $58,000
Common shares issued (26.5 million shares @ $10.26 per share) 271,900
$329,900 Net assets acquiredNet tangible assets $28,212
Identifiable intangible assets 79,050
Future income tax liability (19,436) Goodwill 242,074 $329,900
The net tangible assets acquired included accounts receivable of $8.8 million. The goodwill of $242.1 million represents the value of expected synergies arising from the acquisition. Goodwill is not deductible for tax purposes.
The above amounts are estimates, which were made by management at the time ofthe preparation of these unaudited interim financial statements based oninformation then available. Amendments may be made to these amounts as valuessubject to estimates are finalized. No such amendments were recorded duringthe six- month period ended September 30, 2010.
6. GOODWILL AND INTANGIBLE ASSETS
Identifiable intangible assets Goodwill Brand Customer Sales Non-competition Total names relationships backlog $ $ $ $ $ $ Gross amount Balance, April - - - - - -1, 2010 Additions 242,074 44,930 25,450 1,633 7,037 79,050 Balance, 242,074 44,930 25,450 1,633 7,037 79,050September 30, 2010 Amortization Balance, - - - - - -April 1, 2010 Amortization - - (1,015) (1,633) (618) (3,266) Balance, - - (1,015) (1,633) (618) (3,266)September 30, 2010 Net book value
September 30, 242,074 44,930 24,435 - 6,419
75,7842010
Intangible assets reflect assigned values related to acquired brand names, customer relationships, sales backlogs and non-competition agreements. Customer relationships, sales backlogs and non-competition agreements have a finite life and are amortized on a straight-line basis over their estimated useful lives. The estimated amortization periods of these amortizable intangible assets are as follows:
· Customer relationships 11 years· Sales backlogs 0.4 years· Non-competition 5 yearsThe amortization of intangible assets is recognized in the statement ofoperations as part of amortization expense. Amortization of intangible assetswas $1.9 million and $3.3 million for the three and six months ended September30, 2010, respectively.
Brand names are considered to have an indefinite life as they will provide benefit to the Company over a continuous period.
Impairment testing of goodwill and intangible assets
Goodwill and intangible assets acquired through the acquisition of Genuity havebeen allocated to the Canadian portion of the Canaccord Genuity cash-generatingunit for impairment testing. There have been no changes to circumstances orevents that would indicate the carrying value of goodwill and intangibles hasbeen impaired at September 30, 2010. As a result, no interim impairmenttesting has been performed. The annual impairment testing for goodwill andintangible assets with indefinite lives will be performed at March 31, 2011.
7. INCOME TAXES
The Company's income tax expense differs from the amount that would be computedby applying the combined federal and provincial/state income tax rates as aresult of the following: For the For the six three months ended months ended September September 30, September September 30, 30, 2010 2009 30, 2010 2009 $ $ Income taxes at the estimated 3,895 2,330 5,910 7,204statutory rate
Less: Difference in tax rates (197) 265 (49)
55in foreign jurisdictions
Non-deductible items affecting 309 342 912
674
the determination of taxable
income
Change in valuation allowance (343) (1,879) (1,494) (2,696) related to US operating losses
Change in future income tax 230 194 257 1,426asset - reversal period of temporary differences Change in accounting and tax 334 (137) 1,050 1,335base estimate Income tax expense - current 4,228 1,115 6,586 7,998and future 8. SUBORDINATED DEBT September March 30, 31, 2010 2010 $ $ Loan payable, interest payable monthly at prime + 4% per 15,000 15,000annum, due on demand
The loan payable is subject to a subordination agreement and may only be repaid with the prior approval of the IIROC.
9. COMMON SHARES September 30, 2010 March 31, 2010 Number of Amount $ Number of shares Amount $ shares Common shares 82,552,764 531,615 55,571,133 254,553 Unvested share purchase (4,744,750) (39,993) (4,475,468) (35,280)loans Held for long term incentive (3,256,405) (33,752) (3,201,274) (33,582)plan [note 10] 74,551,609 457,870 47,894,391 185,691
Share capital of Canaccord Financial Inc. is comprised of the following:
[i] Authorized
Unlimited common shares without par value
Unlimited preferred shares without par value
[ii] Issued and fully paidCommon shares Number of Amount shares $ Balance, September 30, 2009 55,359,489 252,715 Shares issued in connection with stock compensation plans 253,080 2,009[note 10] Shares cancelled (41,436) (171) Balance, March 31, 2010 55,571,133 254,553 Shares issued in relation to the acquisition of Genuity, net 26,500,000 271,900of issuance costs [note 5] Shares issued in connection with stock compensation plans 481,631 5,162[note 10] Balance, September 30, 2010 82,552,764 531,615
[iii] Common share purchase loans
The Company provides forgivable common share purchase loans to employees inorder to purchase common shares. The unvested balance of forgivable commonshare purchase loans is presented as a deduction from share capital. Theforgivable common share purchase loans are amortized over a vesting period upto five years. The difference between the unvested and unamortized values isincluded in contributed surplus.[iv] Earnings per share For the three months ended For the six months ended September 30, September 30, September 30, September 30, 2010 2009 2010 2009 Basic earnings per share Net income for the period $9,711 $6,746 $14,586 $15,858 Weighted average number of common 74,235,155 48,536,387 70,836,180 48,420,751shares (number) Basic earnings per share $0.13 $0.14 $0.20 $0.33 Diluted earnings per share Net income for the period $9,711 $6,746 $14,586 $15,858 Weighted average number of common 74,235,155 48,536,387 70,836,180 48,420,751shares (number) Dilutive effect of unvested shares 4,744,750 3,746,523 4,744,750 3,746,523(number)
Dilutive effect of stock options 184,745 24,909
152,550 10,734(number) [note 10]
Dilutive effect of unvested shares 3,476,002 3,020,875 3,526,132 3,061,594 purchased by employee benefit trust
(number) [note10]
Dilutive effect of share issuance 335,047 261,418 317,966 205,189commitment in connection with long term incentive plan (number) [note
10] Adjusted weighted average number of 82,975,699 55,590,112 79,577,578 55,444,791common shares (number) Diluted earnings per share $0.12 $0.12 $0.18 $0.28
10. STOCK-BASED COMPENSATION PLANS
Stock options
The Company grants stock options to purchase common shares of the Company toindependent directors and senior management. Stock options to independentdirectors vest over a four-year period and expire seven years after the grantdate or 30 days after the participant ceases to be a director. Stock optionsto senior management vest over a five-year period and expire on the earliestof: (a) seven years from the grant date; (b) three years after death or anyother event of termination of employment; (c) after any unvested optionedshares held by the optionee are cancelled for any reason (other than earlyretirement but including resignation without entering into a formal exitagreement and termination for cause); and (d) in the case of early retirement,after a determination that the optionee has competed with the Company orviolated any non-competition, non-solicitation or non-disclosure obligations. The exercise price is based on the fair market value of the common shares atgrant date. The weighted average exercise price of the stock options was $9.82at September 30, 2010.
In May 2010 the Company granted an aggregate of 150,000 stock options to six independent directors with an exercise price of $8.39 per share.
The following is a summary of the Company's stock options awarded to directorsand senior management as at September 30, 2010 and changes during the sixmonths period then ended: Number of options Weighted average exercise price ($) Balance, September 30, 2009 2,499,993 9.91 Granted - - Balance, March 31, 2010 2,449,993 9.91 Granted 150,000 8.39 Balance, September 30, 2010 2,599,993 9.82 Options outstanding Options exercisable
Range of Number of Weighted average Weighted Number of Weighted
exercise options remaining average options average price contractual life exercise exercisable exercise ($) price price ($) ($) 23.13 100,000 1 year $23.13 75,000 $23.13 7.21-9.48 2,499,993 3.85 years 9.28 93,750 8.51 7.21-23.13 2,599,993 3.74 years $9.82 168,750 $15.01
The fair value of each stock option grant has been estimated on grant date using the Black-Scholes option pricing model. The following assumptions were used for the options granted in May 2010:
May 2010 grant Dividend yield 2.00% Expected volatility 44.00%
Risk-free interest rate 1.94%
Expected life 4 years Option pricing models require the input of highly subjective assumptionsincluding the expected price volatility. Changes in the subjective assumptionscan materially affect the fair value estimate and, therefore, the existingmodels do not necessarily provide a reliable single measure of the fair valueof the Company's stock options.
Compensation expense of $0.5 million and $0.9 million has been recognized for the three and six months ended September 30, 2010 ($0.2 million and $0.3 million for the three and six months ended September 30, 2009).
Long term incentive plan
Under the long term incentive plan (LTIP), eligible participants are awardedrestricted share units (RSUs) which vest over three years. For employees inCanada, an employee benefit trust (the Trust) has been established, and either(a) the Company will fund the Trust with cash, which will be used by a trusteeto purchase on the open market common shares of the Company that will be heldin trust by the trustee until RSUs vest or (b) the Company will issue commonshares from treasury to participants following vesting of RSUs. For employeesin the US and the UK, at the time of each RSU award, the Company will allotcommon shares and these shares will be issued from treasury at the time theyvest for each participant. The costs of the RSUs are amortized over the vesting period of three years. Compensation expense of $4,825 and $11,678 has been recognized for the threeand six months ended September 30, 2010 ($5,611 and $10,818 for the three andsix months ended September 30, 2009). For the three months ended For the six months ended September 30, September
30, September 30, September 30,
2010 2009 2010 2009 Number of awards outstanding, beginning of period 5,769,872 4,974,663 5,317,945 4,602,385 Granted 76,658 995,136 1,625,499 1,903,460 Vested (717,832) (522,548) (1,799,995) (1,058,594) Forfeitures (39,142) - (53,893) - Awards outstanding, end of period 5,089,556 5,447,251 5,089,556 5,447,251 For the three months ended For the six months ended September 30, September 30, September 30, September 30, 2010 2009 2010 2009
Number of common shares held by Trust, beginning of period 2,858,544
3,252,159 3,201,274 3,075,300 Acquired 952,953 76,652 1,451,953 648,581 Released on vesting (555,092) (396,879) (1,396,822) (791,949)
Common shares held by Trust, end of period 3,256,405
2,931,932 3,256,405 2,931,932
11. RELATED PARTY TRANSACTIONS
Security trades executed by the Company for employees, officers and directorsare transacted in accordance with the terms and conditions applicable to allclients. Commission income on such transactions in the aggregate is notmaterial in relation to the unaudited interim consolidated financialstatements.
Accounts receivable and accounts payable and accrued liabilities include the following balances with the related parties described above:
September 30, March 31, 2010 2010 $ $ Accounts receivable 32,626 39,534
Accounts payable and accrued liabilities 88,346 82,299
12. SEGMENTED INFORMATION
The Company has two operating segments:
Canaccord Genuity - includes investment banking, research and trading
activities on behalf of corporate, institutional and government clients
as well as principal trading activities in Canada, the UK and the US.
Canaccord Wealth Management - provides brokerage services and investment
advice to retail or private clients in Canada and the US.
Corporate and Other includes correspondent brokerage services, interest and foreign exchange revenue and expenses not specifically allocable to Canaccord Genuity and Canaccord Wealth Management.
The Company's industry segments are managed separately because each business offers different services and requires different personnel and marketing strategies. The Company evaluates the performance of each business based on income (loss) before income taxes.
The Company does not allocate total assets or equipment and leasehold improvements to the segments. Amortization of equipment and leasehold improvements is allocated to the segments based on square footage occupied.
Amortization of identifiable intangible assets is allocated to CanaccordGenuity as it relates to the acquisition of Genuity. There are no significantintersegment revenues. For the three months ended September 30, 2010 September 30, 2009 Canaccord Corporate Canaccord Corporate Wealth Canaccord Wealth and Canaccord Wealth and Genuity Management Other Total Genuity Management Other Total $ $ $ $ $ $ $ $ Revenues 96,963 44,539 7,783 149,285 78,475 40,138 5,131 123,744 Expenses 72,603 36,119 17,746 126,468 61,305 31,982 15,203 108,490 excluding undernoted Amortization 2,788 575 343 3,706 926 618 362 1,906 Development 2,171 2,425 576 5,172 1,787 2,613 1,087 5,487 costs Income (loss) before income 19,401 5,420 (10,882) 13,939 14,457 4,925 (11,521) 7,861 taxes For the six months ended September 30, 2010 September 30, 2009 Canaccord Corporate Canaccord Corporate Wealth Canaccord Wealth and Canaccord Wealth and Genuity Management Other Total Genuity Management Other Total $ $ $ $ $ $ $ $ Revenues 197,115 91,746 12,341 301,202 163,972
80,323 16,912 261,207
Expenses excluding 143,762 72,770 35,262 251,794 126,535 64,643 31,005 222,183 undernoted Amortization 5,136 1,194 660 6,990 1,884
1,220 723 3,827
Development costs 4,452 4,858 946 10,256 4,731 4,518 2,092 11,341
Acquisition-related 10,990 - - 10,990 - - - - costs [note 5] Income (loss) before income taxes 32,775 12,924 (24,527) 21,172 30,822 9,942 (16,908) 23,856
The Company's business operations are grouped into the following four geographic segments (revenue is attributed to geographic areas on the basis of the underlying corporate operating results):
For the three months ended For the six months ended September 30, September 30, September 30, September 30, 2010 2009 2010 2009 $ $ $ $ Canada Revenue 109,493 79,190 218,411 167,124 Equipment and 27,712 29,533 27,712 29,533leasehold improvements Goodwill and other 317,858 - 317,858 -intangible assets United Kingdom Revenue 18,338 13,775 34,783 34,700 Equipment and 4,667 5,843 4,667 5,843leasehold improvements United States Revenue 21,093 30,137 47,799 57,316 Equipment and 5,084 6,342 5,084 6,342leasehold improvements Other Foreign Location Revenue 361 642 209 2,067 13. CAPITAL MANAGEMENTThe Company's business requires capital for operating and regulatory purposes,including funding current and future operations. The Company's capitalstructure is underpinned by shareholders' equity, which is comprised of commonshares, contributed surplus, retained earnings and accumulated othercomprehensive loss, and is further complemented by subordinated debt. Thefollowing tables summarize our capital as at September 30, 2010:Type of capital Carrying amount As a percentage of capital $ September 30, 2010 Common shares 457,870 65.9% Contributed surplus 52,079 7.5% Retained earnings 200,237 28.9%
Accumulated other comprehensive (30,914)
(4.5)% loss Shareholders' equity 679,272 97.8% Subordinated debt 15,000 2.2% 694,272 100.0% March 31, 2010 Common shares 185,691 44.6% Contributed surplus 57,351 13.8% Retained earnings 194,007 46.6%
Accumulated other comprehensive (35,304)
(8.5)% loss Shareholders' equity 401,745 96.5% Subordinated debt 15,000 3.5% 416,745 100.0% The Company's capital management framework is designed to maintain the level ofcapital that will:· Meet the Company's regulated subsidiaries' target ratios asset out by the respective regulators· Fund current and future operations· Ensure that the Company is able to meet its financial
obligations as they become due
· Support the creation of shareholder value
The following subsidiaries are subject to regulatory capital requirements in the respective jurisdictions by the listed regulators:
· Canaccord Genuity Corp. is subject to regulation in
Canada
primarily by the IIROC
· Canaccord Genuity Limited is regulated in the UK by the
Financial Services Authority and is a member of the London Stock Exchange
· Canaccord Genuity Inc. and Genuity Capital Markets USA
Corp.
are registered as broker dealers in the US and are subject to regulation
primarily by the Financial Industry Regulatory Authority
· Canaccord Wealth Management (USA) Inc. is registered as a
broker dealer in the US and is subject to regulation primarily by the Financial Industry Regulatory Authority
· Canaccord International Ltd. is regulated in Barbados by theCentral Bank of BarbadosMargin requirements in respect of outstanding trades, underwriting dealrequirements and/or working capital requirements cause regulatory capitalrequirements to fluctuate on a daily basis. Compliance with these requirementsmay require the Company to keep sufficient cash and other liquid assets on handto maintain regulatory capital requirements rather than using these liquidassets in connection with its business or paying them out in the form of cashdisbursements. There were no significant changes in the Company's capitalmanagement policy during the current year. The Company's subsidiaries were incompliance with all of the minimum regulatory capital requirements during thesix months ended September 30, 2010
14. COMMITMENTS AND CONTINGENCIES
Commitments
Subsidiaries of the Company are committed to approximate minimum lease paymentsfor premises and equipment over the next five years and thereafter as follows: $ 2012 24,001 2013 21,432 2014 18,787 2015 17,496 2016 14,683 Thereafter 32,703 129,102 Contingencies
During the period, there have been no material changes to the Company's contingencies from those described in Note 16 of the Audited Annual Consolidated Financial Statements as filed on SEDAR on May 19, 2010 except for the following:
Genuity has been named as co-defendant in an action alleging impropersolicitation of the plaintiffs' employees, conspiracy, inducing breach ofcontract, interference with commercial relations, breach of fiduciary duties,misuse of confidential information and misappropriation of corporateopportunities. The claim against Genuity is for general damages to bedetermined by the court and an accounting of benefits received by all theparties as a result of these alleged activities. There is also a claim againstall the parties for $10.0 million for punitive and exemplary damages. Management believes these claims can be wholly defended and no liability willbe determined against Genuity. As Canaccord Genuity Corp. assumed all theassets and liabilities of Genuity, it may be subject to any judgment that maybe made against Genuity in connection with this litigation.
15. SUBSEQUENT EVENT
On November 2, 2010 the Board of Directors considered the dividend policy andapproved a quarterly dividend of $0.05 per share payable on December 10, 2010with a record date of November 19, 2010.
16. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the fiscal 2011 interim financial statement presentation.
For further information: Investor relations Joint Broker: North American media: inquiries: Oliver Hearsey or Scott Davidson Jamie Kokoska Nick Triggs Managing Director, Global Manager, Investor Relations Keefe, Bruyette & Head of & Woods Limited Marketing & Communications Communications Phone: +44 (0) 20 Phone: 416-869-3875 Phone: 416-869-3891 7663 5400, Email: Email: Email:
[email protected] [email protected] [email protected]
London media: Nominated Adviser and Joint Bobby Morse or Ben Romney Broker: Buchanan Communications Marc Milmo or Carl Holmes (London) Charles Stanley Securities
Phone: +44 (0) 207 466 5000 Phone: +44 020 7149 6764,
Email: Email: [email protected] [email protected] (CF.)
vendorRelated Shares:
CF..L