Final Results

17th May 2006 14:35

Canaccord Capital Inc. reports record fourth quarter and fiscal year 2006 results Fiscal year 2006 net income up 67.0% and EPS up 56.8% driven by enhanced global distribution capabilities (All dollar amounts are stated in Canadian dollars unless otherwise indicated) VANCOUVER, May 17 /CNW/ - Canaccord Capital Inc. (CCI: TSX & AIM)announced that revenue for its fourth quarter of fiscal 2006, ended March 31,2006, was a record $207.1 million, up $64.1 million from $142.9 million forthe same period a year ago. Net income of $30.1 million for the fourth quarterof fiscal 2006 was up $12.8 million from $17.3 million for the same period ayear ago, and diluted earnings per share (EPS) for the quarter was $0.63, up$0.25, or 65.8% from $0.38 for the same period a year ago. Fiscal year 2006revenue was a record $583.4 million, up $150.6 million from $432.8 million forfiscal year 2005. Net income of $81.2 million for fiscal year 2006 was up$32.6 million, or 67.0% from $48.6 million for fiscal 2005. Diluted EPS forthe year was $1.74, up $0.63, or 56.8% from $1.11 compared to fiscal year2005. "Our record success in fiscal 2006 reflects the continued execution ofour global strategy to be the pre-eminent investment dealer focused on thesmall to mid cap market," said Peter Brown, Chairman & CEO. "We look tocontinue our commitment to growth and operational excellence in fiscal 2007."Michael G. Greenwood, President & COO, added, "We would like to thank ourintegrated team of professionals in Private Client Services and CanaccordAdams worldwide for their continued dedication. Their hard work has grown ourbusiness and increased our shareholders' return to 103% this year, during aperiod of expansion and change." Highlights of the fourth quarter fiscal 2006 results (three months ended March 31, 2006), compared to the fourth quarter fiscal 2005 results (three months ended March 31, 2005): - Revenue of $207.1 million, up 44.9%, or $64.1 million, from $142.9 million - Expenses of $163.6 million, up 39.2%, or $46.1 million, from $117.5 million - Total compensation payout as a percentage of revenue was 58.9%, down 430 basis points from 63.2% - Net income of $30.1 million, up 73.7% , or $12.8 million, from $17.3 million - Diluted EPS of $0.63, up 65.8%, or $0.25, from $0.38 - Return on equity (ROE) of 45.7%, up from 32.2% - Book value per common share at the period end increased to $6.02, up 24.9%, or $1.20 from $4.82 - The Board approved a common share dividend of $0.08 per share on May 16, 2006, payable on June 9, 2006, with a record date of May 26, 2006 Highlights for fiscal 2006 results (year ended March 31, 2006), compared to fiscal 2005 results (year ended March 31, 2005): - Revenue of $583.4 million, up 34.8%, or $150.6 million, from $432.8 million - Expenses of $464.4 million, up 29.0%, or $104.4 million, from $360.0 million - Total compensation payout as a percentage of revenue was 58.5%, down 300 basis points from 61.5% - Net income of $81.2 million, up 67.0%, or $32.6 million, from $48.6 million - Diluted EPS of $1.74, up 56.8%, or $0.63, from $1.11 - ROE of 33.6%, up from 23.9% - In fiscal Q1/06, Canaccord recognized a one time pre-tax gain of $1.6 million, equivalent to approximately $0.03 per share after tax (on a diluted basis), from the disposal of an investment in the Bourse de Montrĩal - Total cash and cash equivalents of $370.5 million at March 31, 2006, up 5.9% from March 31, 2005 - 47,827,350 total issued shares outstanding on a diluted basis as of May 16, 2006 Highlights of Operations: - During Q4/06, our international capital markets team, Canaccord Adams, led the following transactions: - $144 million for a bought deal for UrAsia Energy (BVI) Ltd. (TSX: UUU.V) - $113 million for an AIM IPO for Excapsa Software Inc. (AIM: XCP), a Canadian based online gaming firm - $81 million for a TSX IPO for European Minerals Corp. (TSX: EPM) - $60 million for a bought deal for Viceroy Resources (TSX: VYE) - $51 million for an AIM IPO for Sandvine Corporation (AIM: SAND), a Canadian technology firm - $54 million for a TSX Venture Exchange IPO for Westfield Real Estate Investment Trust (TSXV: WFD.UN) In addition, our team co-lead the following transactions: - $207 million for a best efforts offering for Coalcorp Mining Inc. (TSX: CCJ.V) - $150 million for a TSX initial public offering (IPO) for Eastern Platinum Limited (TSX: ELR) - During Q4/06, we experienced significant growth in market share in Canaccord Adams' Canadian Sales and Trading operations. Market share was 3.7% in terms of TSX-traded volume, up from 2.4% the same quarter a year ago and 3.2% in fiscal Q3/06 - In the 5th Annual StarMine Analyst Awards, an evaluation of analyst accuracy in stock picking and earnings estimation: - Canaccord Adams was the fourth most award-winning firm in Canada, with seven analysts ranked among the top five in their sectors and the 'top stock picker' in the following sectors: Energy Trust; Healthcare; Small Cap; Independent Power Producers and Energy; and Real Estate & REITs - Canaccord Adams had three 'top stock pickers' in the US in the Communications Equipment Industry, Semiconductors & Semiconductors Equipment Industry, and Software Industry - In the Investment Executive's Annual Survey of Investment Advisors 2006 Report, Canaccord was ranked: - Top investment firm in Canada for delivery on promises - Top company for IPOs and new issues corporate finance - In the top-three of all Canadian investment firms in Canadian research - Number one investment firm for trade execution/back office ACCESS TO QUARTERLY RESULTS INFORMATION: Interested investors, the media and others may review this quarterlyearnings release and supplementary financial information at:www.canaccord.com/investor/financialreports. QUARTERLY CONFERENCE CALL AND WEBCAST PRESENTATION: Interested parties can listen to our fourth quarter fiscal 2006 resultsconference call with analysts and institutional investors live and archived,via the Internet and toll free telephone. The conference call is scheduled for Wednesday, May 17, 2006 at 10:00a.m. (Pacific Time (PDT))/1:00 p.m. (Eastern Time (EDT))/6:00 p.m. (UK Time(BST)). At that time, senior executives will comment on the results for thefourth quarter fiscal 2006 and respond to questions from analysts andinstitutional investors. The conference call may be accessed live and archivedon a listen-only basis via the Internet at: - www.canaccord.com/investor/webcast Analysts and institutional investors can call in via telephone at: - 416-644-3424 (within Toronto) - 1-800-814-4941 (toll-free outside Toronto) - 00-800-0000-2288 (toll-free from the United Kingdom) A replay of the conference call can be accessed after 12:00 p.m.(PDT)/3:00 p.m. (EDT)/8:00 p.m. (BST) on May 17, 2006 until 12:00 a.m.(PDT)/3:00 a.m. (EDT)/8:00 a.m. (BST) Friday, June 9, 2006 at 416-640-1917 or1-877-289-8525 by entering passcode 21180116 followed by the number sign. ABOUT CANACCORD CAPITAL INC.: Through its principal subsidiaries, Canaccord Capital Inc. (CCI: TSX &AIM) is a leading independent full service investment dealer in Canada withcapital markets operations in the United Kingdom and the United States ofAmerica. Canaccord is publicly traded on both the Toronto Stock Exchange andAIM, a market operated by the London Stock Exchange. Canaccord has operationsin two of the principal segments of the securities industry: private clientservices and capital markets. Together, these operations offer a wide range ofcomplementary investment products, brokerage services and investment bankingservices to Canaccord's private, institutional and corporate clients.Canaccord has approximately 1,480 employees worldwide in 32 offices, including26 Private Client Services offices located across Canada. Canaccord Adams, theinternational capital markets division, has operations in Toronto, London,Boston, Vancouver, New York, Calgary, Montreal, San Francisco and Houston. FOR FURTHER INFORMATION CONTACT: Anthony Ostler London: Senior Vice President, Investor Bobby Morse or Ben Willey Relations & Communications Buchanan Communications Phone: 604-643-7647 Phone: +44 (0) 207 466 5000 Email: anthony_ostler(at)canaccord.com Email: bobbym(at)buchanan.uk.com ------------------------------------------------------------------------- None of the information in Canaccord's Web site www.canaccord.com should be considered incorporated herein by reference. ------------------------------------------------------------------------- Management's Discussion and Analysis Fourth quarter fiscal 2006 for the three months ended March 31, 2006 - this document is dated May 17, 2006 Canaccord's fourth quarter fiscal 2006 was the three-month period endedMarch 31, 2006, and is also referred to as fourth quarter fiscal 2006 and asQ4/06 in this press release. Canaccord's fiscal year ended on March 31, 2006and is also referred to herein as fiscal year 2006 and as 2006. This pressrelease should be read in conjunction with the Management's Discussion andAnalysis (MD&A) and the audited consolidated financial statements for thefiscal year ended March 31, 2005, in Canaccord's Annual Report dated June 27,2005 (the Annual Report). There has been no material change to the informationcontained in the annual MD&A for fiscal 2005 except as disclosed in this MD&Aand in the MD&As for Q1/06, Q2/06 and Q3/06. Canaccord's financial informationis expressed in Canadian dollars unless otherwise specified. The interimfinancial statements accompanying this document are prepared in accordancewith Canadian generally accepted accounting principles (GAAP) withreconciliation to international financial reporting standards (IFRS) providedin Note 15 to the interim consolidated financial statements. All the financialdata below is unaudited except for the annual fiscal year 2005 data. Caution regarding forward-looking statements This document may contain certain forward-looking statements. Thesestatements relate to future events or future performance and reflectmanagement's expectations or beliefs regarding future events includingbusiness and economic conditions and Canaccord's growth, results ofoperations, performance and business prospects and opportunities. Such forward-looking statements reflect management's current beliefs and are based oninformation currently available to management. In some cases, forward-lookingstatements can be identified by terminology such as "may", "will", "should","expect", "plan", "anticipate", "believe", "estimate", "predict", "potential","continue", "target", "intend" or the negative of these terms or othercomparable terminology. By their very nature, forward-looking statementsinvolve inherent risks and uncertainties, both general and specific, and anumber of factors could cause actual events or results to differ materiallyfrom the results discussed in the forward-looking statements. In evaluatingthese statements, readers should specifically consider various factors whichmay cause actual results to differ materially from any forward-lookingstatement. These factors include, but are not limited to, market and generaleconomic conditions, the nature of the financial services industry and therisks and uncertainties detailed from time to time in Canaccord's interim andannual financial statements and its Annual Report and Annual Information Formfiled on www.sedar.com. These forward-looking statements are made as of thedate of this document, and Canaccord assumes no obligation to update or revisethem to reflect new events or circumstances. Non-GAAP measures Certain non-GAAP measures are utilized by Canaccord as measures offinancial performance. Non-GAAP measures do not have any standardized meaningprescribed by GAAP and are therefore unlikely to be comparable to similarmeasures presented by other companies. Canaccord's capital is represented by common shareholders' equity and,therefore, management uses return on average common equity (ROE) as aperformance measure. Assets under administration (AUA) and assets under management (AUM) arenon-GAAP measures of client assets that are common to the wealth managementaspects of the private client services industry. AUA is the market value ofclient assets administered by Canaccord in respect of which Canaccord earnscommissions or fees. This measure includes funds held in client accounts aswell as the aggregate market value of long and short security positions.Canaccord's method of calculating AUA may differ from the methods used byother companies and therefore may not be comparable to other companies.Management uses this measure to assess operational performance of the PrivateClient Services business segment. AUM are assets discretionarily managed byCanaccord as part of our Independence Accounts program that are beneficiallyowned by clients. Services provided include the selection of investments andthe provision of investment advice. AUM are also administered by Canaccord andare included in AUA. Overview Business environment Canaccord's business is cyclical and experiences considerable variationsin revenue and income from quarter to quarter and year to year due to factorsbeyond Canaccord's control and, accordingly, revenue and net income areexpected to fluctuate as they have historically. Our business is subject tothe overall condition of the North American and the European equity markets,including the seasonal variance in these markets. In general, North Americancapital markets are slower during the first half of our fiscal year, duringwhich we typically generate approximately 35% to 40% of our annual revenue.During the second half of our fiscal year we typically generate 60% to 65% ofour annual revenue. In early fiscal 2007, North American capital markets haveperformed better compared to previous historical seasonality. During fiscal2006, the Morgan Stanley Capital International Inc. (MSCI) Canada Indexreturned 7.96% (in CDN$), and 8.1% (in US$) compared to 5.62% (in CDN$), and6.15% (in US$) for the World Index. Canadian equities comprised 3.42% of theWorld Index in calendar 2005, up from 2.94% the previous year, indicating astrong attraction by foreign investors to Canadian equities, a trend that isexpected to continue should energy and commodity prices maintain or increasefrom their current levels. About Canaccord's operations Canaccord Capital Inc.'s operations are divided into three segments: Thefirst two, Private Client Services and Canaccord Adams, are principallyoperating segments, while the third one, Other, is mainly an administrativesegment. Private Client Services provides brokerage services and investment adviceto retail or private clients primarily in Canada, and to a lesser degree, inthe US. Canaccord Adams (formerly known as Canaccord's Global CapitalMarkets), includes investment banking, research and trading activities onbehalf of corporate, institutional and government clients as well as principaltrading activities in Canada, the United Kingdom and the United States ofAmerica. Canaccord acquired 100% of Adams Harkness Financial Group, Inc. (engagedprimarily in capital markets activities in the US), on January 3, 2006. As aresult of this acquisition, the Adams Harkness Financial Group, Inc. operatingsubsidiary was renamed Canaccord Adams Inc. and Canaccord's Global CapitalMarkets (Canada, UKand US) was re-branded globally as Canaccord Adams.Canaccord Adams Inc. together with Canaccord Capital Corporation (USA), Inc.,which includes US Private Client Services and Other operations, constituteCanaccord's US geographic segment. In addition, Canaccord Capital (Europe) Limited (engaged primarily incapital markets activities in the United Kingdom), was renamed Canaccord AdamsLimited and it constitutes Canaccord's UK geographic segment. The division of Canaccord Capital Corporation that is engaged in capitalmarkets activities in Canada was branded as Canaccord Adams, and together withCanadian Private Client Services and Other operations, they constituteCanaccord's Canada geographic segment. Other includes correspondent brokerage services, interest and foreignexchange revenue and expenses not specifically allocable to Private ClientServices and Canaccord Adams. Consolidated operating results Fourth fiscal quarter and fiscal 2006 summary data(1) ------------------------------------------------------------------------- Three months ended Year-over- Year ended Year-over- (C$ thousands, except per March 31 year March 31 year share, employee and % increase increase amounts) 2006 2005 (decrease) 2006 2005 (decrease) ------------------------------------------------------------------------- Canaccord Capital Inc. Revenue(2) Commissions 88,846 54,598 62.7% 239,461 168,978 41.7% Investment banking 87,977 69,558 26.5% 266,206 214,450 24.1% Principal trading 13,677 7,795 75.5% 27,388 13,584 101.6% Interest 11,424 7,723 47.9% 36,914 26,488 39.4% Other 5,150 3,255 58.2% 13,446 9,278 44.9% ------------------------------------------------ Total Revenue 207,074 142,929 44.9% 583,415 432,778 34.8% Expenses Incentive compensation 108,296 77,191 40.3% 299,188 220,454 35.7% Salaries and benefits 13,716 13,130 4.5% 42,019 45,715 (8.1)% Other overhead expenses(3) 41,607 27,181 53.1% 123,178 93,853 31.2% ------------------------------------------------ Total Expenses 163,619 117,502 39.2% 464,385 360,022 29.0% Income before income taxes 43,455 25,427 70.9% 119,030 72,756 63.6% Net income 30,070 17,307 73.7% 81,150 48,579 67.0% Earnings per share (EPS) - diluted(4) 0.63 0.38 65.8% 1.74 1.11 56.8% Return on average common equity (ROE)(4) 45.7% 32.2% 13.5% 33.6% 23.9% 9.7% Book value per share - period end 6.02 4.82 24.9% Number of employees 1,488 1,260 18.1% ------------------------------------------------------------------------- US geographic segment(5) Revenue 20,106 - n.m. 20,106 - n.m. Expenses - n.m. - n.m. Incentive compensation 9,134 - n.m. 9,134 - n.m. Salaries and benefits 1,613 - n.m. 1,613 - n.m. Other overhead expenses(3) 6,797 - n.m. 6,797 - n.m. ------------------------------------------------ Total Expenses 17,544 - n.m. 17,544 - n.m. Income before income taxes 2,562 - n.m. 2,562 - n.m. Net income 1,716 - n.m. 1,716 - n.m. ------------------------------------------------------------------------- Canaccord Capital Inc. excluding US geographic segment Revenue 186,968 142,929 30.8% 563,309 432,778 30.2% Expenses Incentive compensation 99,162 77,191 28.5% 290,054 220,454 31.6% Salaries and benefits 12,103 13,130 (7.8)% 40,406 45,715 (11.6)% Other overhead expenses(3) 34,810 27,181 28.1% 116,381 93,853 24.0% ------------------------------------------------ Total Expenses 146,075 117,502 24.3% 446,841 360,022 24.1% Income before income taxes 40,893 25,427 60.8% 116,468 72,756 60.1% Net income 28,354 17,307 63.8% 79,434 48,579 63.5% ------------------------------------------------------------------------- (1) Some of this data is considered to be non-GAAP. (2) To enhance our disclosure and to facilitate comparisons with other companies in the industry, consolidated revenue has been changed from 'revenue by business segment' to 'revenue by activity'. For revenue by business segment information please refer to the Results of Operations section on page 12. (3) Consists of trading costs, premises and equipment, communication and technology, interest, general and administrative expense, amortization, development costs and gain on disposal of investment. (4) The slower growth in diluted EPS and ROE than net income for fiscal 2006 partially reflects the issuance of $70 million in equity on June 30, 2004, and the issuance of shares in association with stock- based compensation activities. (5) Starting on January 3, 2006, revenues and expenses for Canaccord Capital Corporation (USA), Inc. and Canaccord Adams Inc. are disclosed together under the US geographic segment. Therefore, US geographic segment results are not to be interpreted as generated exclusively from Canaccord Adams Inc. or as a result of the acquisition of Adams Harkness Financial Group, Inc. Includes revenue associated with Canaccord Capital Corporation (USA), Inc. n.m.: not meaningful Geographic distribution of revenue ------------------------------------------------------------------------- Three months ended Year ended March 31 Year-over- March 31 Year-over- (C$ thousands, year year except % amount) 2006 2005 increase 2006 2005 increase ------------------------------------------------------------------------- Canada(1) 145,194 110,094 31.9% 437,409 316,688 38.1% UK(2) 41,774 32,835 27.2% 125,900 116,090 8.5% US(3) 20,106 - n.m. 20,106 - n.m. ------------------------------------------------------------------------- (1) Canada geographic segment includes operations for Private Client Services, Canaccord Adams (a division of Canaccord Capital Corporation) and Other business segments. (2) UK geographic segment includes operations for Canaccord Adams Limited. (3) Commencing on January 3, 2006, as a result of the acquisition of Adams Harkness Financial Group, Inc., US geographic segment includes operations for Canaccord Adams Inc. and Canaccord Capital Corporation (USA), Inc., which also includes operations from Private Client Services and Other business segments. n.m.: not meaningful Three-month summary Revenue was a fourth quarter record of $207.1 million, up $64.1 million,or 44.9%, compared to the same period a year ago. Revenue increased across alllines of business due to favourable activity in capital markets in Canada andin the UK during the quarter. Also, our growth initiatives including theacquisitions of Enermarket Solutions Ltd. and Adams Harkness Financial Group,Inc., contributed to the increase in revenue during Q4/06. On a consolidatedbasis, revenue is generated through five activities: commissions, investmentbanking, principal trading, interest, and other. Overall, fourth quarter 2006revenue would have been $187.0 million, up $44.0 million, or 30.8% compared tofiscal 2005, excluding the contribution of the US geographic segment (seefootnote (5) on page 6). Revenue generated from commissions for the fourth quarter of fiscal 2006was $88.8 million, up $34.3 million, or 62.7% from the same period a year ago,in part due to higher transaction volumes, growth in client assets in Canada,and the addition of Canaccord Adams Inc. in the US. Investment banking revenue was $88.0 million, up $18.4 million, or 26.5%mainly due to greater contributions from larger private placementtransactions, initial public offerings and secondary offerings; increase inproceeds from the sale of fee shares received as compensation for investmentbanking transactions; and the contribution of Canaccord Adams Inc. in the US. Principal trading revenue was $13.7 million, up $5.9 million, or 75.5%mainly due to favourable market conditions and increased activity in CanaccordAdams. Canaccord Adams traders operate by taking principal positions andmaking markets in equity securities. Interest revenue was $11.4 million, up $3.7 million, or 47.9% mainly dueto an increase in the number and size of margin accounts and the increase ininterest rates in Canada since Q4/05. Other revenue was $5.2 million, up $1.9 million, or 58.2% mainly due toincreases in foreign exchange gains. Fourth quarter revenue in Canada increased to $145.2 million, up $35.1million, or 31.9% from a year ago, reflecting robust market activity inCanadian equity markets, largely due to rising global demand for commoditiesand related equities. Similarly, revenue in the UK increased to $41.8 million,up $8.9 million, or 27.2%, as the result of high levels of activity on AIM,resulting in increased corporate finance revenue. Fiscal 2006 revenue in the US was $20.1 million; this represents revenuegenerated during the fourth fiscal quarter only, and includes revenuegenerated by Canaccord Capital Corporation (USA), Inc. and Canaccord AdamsInc., as a result of the acquisition of Adams Harkness Financial Group, Inc.,which closed on January 3, 2006. Consequently, our US operations became areportable segment for the first time. ------------------------------------------------------------------------- Expenses as a percentage of revenue Three months ended March 31 Year-over-year Increase (decrease) in percentage increase points 2006 2005 (decrease) ------------------------------------------------------------------------- Incentive compensation 52.3% 54.0% (1.7)% Salaries and benefits 6.6% 9.2% (2.6)% Other overhead expenses(1) 20.1% 19.0% 1.1% -------------------------------------- Total 79.0% 82.2% (3.2)% ------------------------------------------------------------------------- (1) Consists of trading costs, premises and equipment, communication and technology, interest, general and administrative expense, amortization, development costs and gain on disposal of investment. Expenses were $163.6 million, up $46.1 million, or 39.2%, from a yearago. In addition to the $17.5 million of expenses incurred from the USgeographic segment, this increase is largely attributable to an increase inincentive compensation, trading costs, and general and administrative expense,which collectively grew at a slower pace than revenue. Overall, fourth quarter2006 expenses would have been $146.1 million, up $28.6 million, or 24.3%,compared to Q4/05 excluding the expenses incurred from the US geographicsegment. For the quarter, incentive compensation expense was $108.3 million, up$31.1 million, or 40.3%, largely due to the increase in fiscal fourth quarterrevenue posted by the Private Client Services and Canaccord Adams divisions.However, incentive compensation as a percentage of revenue, decreased to 52.3%compared to 54.0% for the same quarter a year ago, largely due to thereorganization of the compensation structure of Canaccord Adams in Q1/06. Thisincludes a 3% National Health Insurance (NHI) tax applicable for UK-basedemployees. Salaries and benefits expense increased by $0.6 million for the fourthquarter of fiscal 2006, compared to the same quarter a year ago. In Q4/06,total compensation expense increased due to the addition of salaries andbenefits expenses associated with Canaccord Adams Inc. in the US. Totalcompensation payout as a percentage of consolidated revenue for Q4/06 was58.9%, down from 63.2% in Q4/05. ------------------------------------------------------------------------- Other overhead expenses Three months ended March 31 Year-over-year (C$ thousands) 2006 2005 increase ------------------------------------------------------------------------- Trading costs 7,615 4,493 69.5% Premises and equipment 5,068 3,025 67.5% Communication and technology 5,087 3,719 36.8% Interest 3,577 2,125 68.3% General and administrative 14,726 10,866 35.5% Amortization 1,969 952 106.8% Development cost 3,565 2,001 78.2% Gain on disposal of investment - - - -------------------------------------- Total other overhead expenses 41,607 27,181 53.1% ------------------------------------------------------------------------- Other overhead expenses increased by $14.4 million during the fourthquarter of fiscal 2006, compared to the same quarter a year ago. This increaseis largely attributable to the increase in trading costs, up $3.1 millionmainly due to the increase in activity in our US geographic segment; interest,up by $1.5 million; premises and equipment costs, up by $2.0 million due tothe move of our Toronto office into larger premises and the addition of rentand leasing costs for Canaccord Adams Inc.; and general and administrativeexpense, up $3.9 million. Reflecting the strong revenue growth and increase in business activity,general and administrative expense was $14.7 million, up $3.9 million, or35.5%, from a year ago. The largest increases in general and administrativeexpense were in professional fees, up $1.1 million; client expenses, up $1.6million; and public company costs, up $0.6 million, related to Canaccord'sadmission into AIM. Offsetting these increases was a reduction in reserves of$1.5 million, related to unsecured client balances, reflecting changes inclient activity and market conditions. ------------------------------------------------------------------------- Development costs Three months ended March 31 Year-over-year (C$ thousands, except % amounts) 2006 2005 increase ------------------------------------------------------------------------- Hiring incentives 2,314 995 132.6% Systems development 1,251 1,006 24.4% -------------------------------------- Total 3,565 2,001 78.2% ------------------------------------------------------------------------- Development costs are also included as a component of other overheadexpenses and include hiring incentives and systems development costs. Hiringincentives are one of our tools to recruit new Investment Advisors (IAs) orcapital markets professionals. The increase in hiring incentives in Q4/06 ismainly due to the costs associated with the hiring and retention of PrivateClient Service's employees in Canada, and the costs associated with AdamsHarkness Financial Group, Inc.'s employees. Systems development costs areexpenditures that Canaccord has made related to enhancing its informationtechnology platform. Net income was a fourth quarter record of $30.1 million, up by $12.8million, or 73.7%, from a year ago. Diluted EPS was $0.63, up by $0.25, or65.8%, and ROE was 45.7% compared to a ROE of 32.2% a year ago. The slowerincrease in EPS and ROE compared to the increase in net income is partiallyassociated with the issuance of 77,646 shares for the purchase of EnermarketSolutions Ltd., on November 11, 2005, the issuance of 691,940 shares under theincentive plan for recruiting purposes, and the issuance of 1,342,696 commonshares for the acquisition of Adams Harkness Financial Group, Inc., on January3, 2006. Book value per common share increased by 24.9% to $6.02, up $1.20from $4.82 a year ago reflecting an increase in retained earnings and sharecapital. The US geographic segment generated quarterly net income of $1.7 million,equivalent to 5.7% of Canaccord's overall net income of $30.1 million. Income taxes were $13.4 million for the quarter, reflecting an effectivetax rate of 30.8% compared to 31.9% a year ago. The decrease in the effectivetax rate in Q4/06 relative to Q4/05 is related to the geographical compositionof Canaccord's net income. Our effective tax rate will vary depending on thegeographic composition of our operating activities. Year-end summary Revenue was $583.4 million, up $150.6 million, or 34.8%, compared tofiscal 2005. Fiscal 2006 revenue would have been $563.3 million, up $130.5million, or 30.2%, excluding the contribution of the US geographic segment. On a consolidated basis, revenue generated from commissions for fiscal2006 was $239.5 million, up $70.5 million, or 41.7% for the same period a yearago, in part due to strong market activity in North America, growth in clientassets, capital appreciation, and the addition of Canaccord Adams Inc. in theUS. Investment banking revenue was $266.2 million, up $51.8 million, or24.1%, due to increased market activity and larger transactions. Furthermore,gains on the proceeds from the sale of securities received as compensation andsecondary offerings also contributed to the increase in investment bankingrevenue. Principal trading revenue was $27.4 million, up $13.8 million, or 101.6%due to favourable market conditions and increased trading activity. Interest revenue was $36.9 million, up $10.4 million, or 39.4% mainly dueto the increase in the number and size of margin accounts and the increase ininterest rates in Canada throughout the year. Other revenue was $13.4 million, up $4.2 million, or 44.9% partially dueto an increase in activity in our correspondent brokerage services businessunder the name of Pinnacle Correspondent Services, and also due to an increasein foreign exchange gains. Revenue in Canada was $437.4 million, up $120.7 million, or 38.1%,reflecting rising demand for commodities and related equities during fiscalyear 2006 compared to fiscal 2005. In the UK, revenue was $125.9 million, upby $9.8 million, or 8.5%, which is largely due to favourable market conditionsin the UK during the last six months of calendar 2005, particularly in theEnergy and Mining sectors. Revenue in the US was $20.1 million, representingrevenue generated during the fourth fiscal quarter by Canaccord Adams Inc.(formerly Adams Harkness Financial Group, Inc., acquired on January 3, 2006)and Canaccord Capital Corporation (USA), Inc. ------------------------------------------------------------------------- Expenses as a percentage of revenue Year ended March 31 Year-over-year Increase (decrease) in percentage increase points 2006 2005 (decrease) ------------------------------------------------------------------------- Incentive compensation 51.3% 50.9% 0.4% Salaries and benefits 7.2% 10.6% (3.4)% Other overhead expenses 21.1% 21.7% (0.6)% -------------------------------------- Total 79.6% 83.2% (3.6)% ------------------------------------------------------------------------- Expenses were $464.4 million, up $104.4 million, or 29.0%, from a yearago. The increase reflects growth in incentive compensation expense (variablewith revenue), trading costs, premises and equipment, and general andadministrative expenses. Overall, fiscal 2006 expenses would have been $446.8million, up $86.8 million, or 24.1%, excluding the contribution of expensesfrom the US geographic segment. Incentive compensation expense was $299.2 million, up $78.7 million, or35.7%, and incentive compensation, as a percentage of revenue, increased to51.3% compared to 50.9% in fiscal 2005. The percentage increase is largely dueto the increase in profit based incentive payouts in fiscal 2006. Increasedrevenue resulted in higher total compensation payouts compared to last fiscalyear. Salaries and benefits expense was $42.0 million, down $3.7 million, or8.1% from fiscal 2005, which is largely due to the change in the CanaccordAdams division's payout structure discussed on page 8. Therefore, the totalcompensation payout as a percentage of revenue for fiscal year 2006 was 58.5%,down from 61.5% for fiscal 2005. ------------------------------------------------------------------------- Other overhead expenses Year ended March 31 Year-over-year (C$ thousands) 2006 2005 increase ------------------------------------------------------------------------- Trading costs 20,615 16,863 22.2% Premises and equipment 15,843 11,849 33.7% Communication and technology 16,598 14,037 18.2% Interest 10,914 7,824 39.5% General and administrative 46,227 32,171 43.7% Amortization 4,817 3,185 51.2% Development cost 9,797 7,924 23.6% Gain on disposal of investment (1,633) - n.m. -------------------------------------- Total other overhead expenses 123,178 93,853 31.2% ------------------------------------------------------------------------- n.m.: not meaningful Other overhead expenses increased by $29.3 million for fiscal year 2006but decreased as a percentage of revenue by 0.6% compared to fiscal 2005. Theincrease in other overhead expenses is largely attributed to increases intrading costs, up $3.8 million, mainly incurred by Canaccord Adams' operationsin the US; premises and equipment expenses, up $4.0 million; interest, up $3.1million; and communications and technology expenses, up $2.6 million, largelydue to the relocation of the Toronto office to larger premises and upgrades tocorporate-wide office information technology systems. General andadministrative expense increased by $14.1 million from a year ago. Thegreatest increases in general and administrative expense were in promotion andtravel, up $5.6 million, or 50.0%, to support the overall increase in businessactivity due to increased market activity and corporate expansion. Other itemsinclude: client expenses, up $3.0 million; public company costs up $1.5million, as a result of the AIM admission and other fees; and client reserve,up $1.4 million, related to unsecured client balances, reflecting changes inclient activity and market conditions. ------------------------------------------------------------------------- Development costs Year ended March 31 Year-over-year increase (C$ thousands, except % amounts) 2006 2005 (decrease) ------------------------------------------------------------------------- Hiring incentives 5,404 3,344 61.6% Systems development 4,393 4,580 (4.1)% -------------------------------------- Total 9,797 7,924 23.6% ------------------------------------------------------------------------- The increase in hiring incentives in fiscal 2006 is due to employeeincentive costs associated with Adams Harkness Financial Group, Inc. as aresult of the acquisition, on January 3, 2006, and the recruitment of otherprofessionals in both Canaccord Adams and Private Client Services in Canada. Net income for fiscal year 2006 was $81.2 million, up $32.6 million, or67.0%, from a year ago. Diluted EPS was $1.74, up $0.63, or 56.8%. ROE was33.6% compared to a ROE of 23.9% last year. The slower increase in diluted EPSand ROE compared to the increase in net income reflects the issuance of sharesfrom treasury for acquisitions and recruiting purposes as discussed in thethree-month summary and the additional equity resulting from the issuance fromtreasury of 6,829,268 common shares in connection with the Initial PublicOffering (IPO) on the Toronto Stock Exchange on June 30, 2004. Income taxes were $37.9 million for fiscal year 2006, reflecting aneffective tax rate of 31.8% compared to 33.2% a year ago. Our effective taxrate is dependent on the geographic composition of our operating activities.In addition, the decrease in our effective tax rate is partially the result ofa one time gain of $1.6 million resulting from the sale of our investment inthe Bourse de Montrĩal during Q1/06. Capital gains are taxed at a lower rate,therefore reducing our effective income tax rate for the year by 0.24%. Alsocontributing to the decrease in our consolidated tax rate was a revisedestimate of the UK income tax liability, which reduced our effective tax ratefor the year by an additional 0.25%. Offsetting these reductions was analignment of estimated taxes for fiscal 2005 to actual tax returns filedcontributing to an increase in the effective tax rate of 0.39%. Reflecting thegeographic composition of our operations and without these changes, oureffective tax rate would have been 31.9% for fiscal 2006. Results of operations Private Client Services ------------------------------------------------------------------------- Three months ended Year ended March 31 March 31 (C$ thousands, except assets under administration and assets under management, which are in C$ millions, Year-over- Year-over- employees, Investment year year Advisors and % amounts) 2006 2005 increase 2006 2005 increase ------------------------------------------------------------------------- Revenue 78,422 56,391 39.1% 225,194 178,176 26.4% Expenses Incentive compensation 37,372 26,660 40.2% 105,283 84,396 24.7% Salaries and benefits 4,405 3,359 31.1% 13,053 11,158 17.0% Other overhead expenses 14,208 9,728 46.1% 45,640 31,950 42.8% ----------------------------------------------- Total Expenses 55,985 39,747 40.9% 163,976 127,504 28.6% Income before income taxes 22,437 16,644 34.8% 61,218 50,672 20.8% Assets under management (AUM) 613 380 61.3% Assets under administration (AUA) 14,310 9,967 43.6% Number of Investment Advisors (IAs) 430 412 4.4% Number of employees 689 657 4.9% ------------------------------------------------------------------------- Revenue from Private Client Services is generated through traditionalcommission based brokerage services; the sale of fee-based products andservices; client-related interest; and fees and commissions earned by IAs inrespect of corporate finance and venture capital transactions by privateclients. Three months ended March 31, 2006, compared with three months ended March 31, 2005 Revenue from Private Client Services was $78.4 million, up $22.0 million,or 39.1%, from a year ago due to strong activity in the North American equitymarkets, particularly in Canada within the resource sectors during fiscalQ4/06. Parallel with this revenue growth was a $4.3 billion increase in assetsunder administration (AUA) to a total of $14.3 billion. The 43.6% increase inAUA since fiscal Q4/05 reflects the strong increase in market values in NorthAmerican equity markets, the addition of assets through transfers with newlyhired IAs and additional assets added to existing accounts since Q4/05. Therewere 430 IAs at the end of the fourth quarter of 2006, a net increase of 18from a year ago in an extremely competitive recruiting environment. Fee-related revenue as a percentage of total Private Client Services revenueincreased 0.8 percentage points to 18.3% compared to the same period a yearago. Expenses for Q4/06 were $56.0 million, up $16.2 million, or 40.9%. Thelargest increases in expenses were recorded in incentive compensation expense,up $10.7 million, or 40.2%, mainly due to the increase in revenue for thequarter; salaries and benefits, up $1.0 million, or 31.1%, mainly due toincreases in benefits costs due to increased incentive compensation payoutsand the addition of the Employee Stock Purchase Plan (ESPP) which wasimplemented in April 2005; interest, up $1.6 million, or 131.4%; anddevelopment costs, up $0.6 million, or 75.2%. General and administrativeexpense increased by $1.4 million, or 59.9%, compared to Q4/05. The componentsof the increase in general and administrative expense were: client expenses,up $1.3 million; professional fees, up $0.6 million; promotion and travel, up$0.4 million, to support the overall increase in business activity due tocorporate expansion. Costs were offset by client reserves, down $1.6 million,related to unsecured client balances, reflecting changes in client activityand market conditions. Income before income taxes for the quarter was $22.4 million, up 34.8%from the same period a year ago. Year ended March 31, 2006, compared with the year ended March 31, 2005 Fiscal 2006 revenue from Private Client Services was $225.2 million, up$47.0 million, or 26.4% compared to fiscal 2005, largely reflecting sustainedmarket activity in North American equity markets relative to the same previousyear. Similarly, fee-related revenue as a percentage of total revenueincreased 2.5 percentage points to 20.2% from the same period a year ago. Expenses for fiscal 2006 were $164.0 million, up $36.5 million, or 28.6%.The largest increases in expenses were recorded in incentive compensation, up$20.9 million, or 24.7%; general and administrative expense up $7.1 million,or 139.4%; and interest was up $3.5 million, or 93.9%. The greatest increases in general and administrative expenses in fiscal2006 were recorded in client expenses, up $2.6 million, or 176.4%;professional fees, up $0.9 million, or 139.3%; and reserves, up $1.6 million,related to unsecured client balances, changes in client activity and marketconditions. Income before income taxes for fiscal 2006 was $61.2 million, up 20.8%from the same period a year ago reflecting the stronger market activity thisyear and the contribution from IAs recruited in the past year. Canaccord Adams ------------------------------------------------------------------------- Three months ended Year-over- Year ended Year-over- March 31 year March 31 year (C$ thousands, except increase increase employees and % amounts) 2006 2005 (decrease) 2006 2005 (decrease) ------------------------------------------------------------------------- Canaccord Adams(1) Revenue 120,243 81,444 47.6% 333,666 239,654 39.2% Expenses Incentive compensation 63,800 46,578 37.0% 175,604 125,030 40.4% Salaries and benefits 3,603 4,825 (25.3)% 8,435 16,577 (49.1)% Other overhead expenses 18,039 9,679 86.4% 47,644 32,128 48.3% ----------------------------------------------- Total Expenses 85,442 61,082 39.9% 231,683 173,735 33.4% Income before income taxes 34,801 20,362 70.9% 101,983 65,919 54.7% Number of employees 464 279 66.3% ------------------------------------------------------------------------- US geographic segment(2) Revenue 18,692 - n.m. 18,692 - n.m. Expenses - n.m. - n.m. Incentive compensation 8,547 - n.m. 8,547 - n.m. Salaries and benefits 1,613 - n.m. 1,613 - n.m. Other overhead expenses 5,925 - n.m. 5,925 - n.m. ----------------------------------------------- Total Expenses 16,085 - n.m. 16,085 - n.m. Income before income taxes 2,607 - n.m. 2,607 - n.m. Number of employees 150 - n.m. ------------------------------------------------------------------------- Canaccord Adams excluding the US geographic segment Revenue 101,551 81,444 24.7% 314,974 239,654 31.4% Expenses Incentive compensation 55,253 46,578 18.6% 167,057 125,030 33.6% Salaries and benefits 1,990 4,825 (58.8)% 6,822 16,577 (58.8)% Other overhead expenses 12,114 9,679 25.2% 41,719 32,128 29.9% ----------------------------------------------- Total Expenses 69,357 61,082 13.5% 215,598 173,735 24.1% Income before income taxes 32,194 20,362 58.1% 99,376 65,919 50.8% Number of employees 314 279 12.5% ------------------------------------------------------------------------- (1) Includes the global capital markets division of Canaccord Capital Corporation in Canada; Canaccord Adams Limited in the UK; and Canaccord Adams Inc. and Canaccord Capital Corporation (USA), Inc. in the US. (2) US geographic segment includes the operations of Canaccord Adams Inc. and Canaccord Capital Corporation (USA), Inc.'s capital markets activities only. n.m.: not meaningful Revenue in this business segment is generated from commissions and feesearned in connection with investment banking transactions and institutionalsales and trading activity, as well as trading gains and losses fromCanaccord's principal and international trading operations. Contribution toCanaccord Adams' revenue comes from three regions: Canada, the UK and mostrecently, from the US through the acquisition of Adams Harkness FinancialGroup, Inc. Three months ended March 31, 2006, compared with three months ended March 31, 2005 Revenue from Canaccord Adams in Q4/06 was a quarterly record of$120.2 million, up $38.8 million, or 47.6%, compared to the same quarter ayear ago due to strong capital markets activity in Canada and in the UK.Excluding the contribution of the US geographic segment, Q4/06 revenue wouldhave been $101.6 million, up $20.1 million, or 24.7%, compared to Q4/05. Revenue from Canadian operations The quarterly record revenue from Canaccord Adams in Canada was derivedfrom four business sub-segments: Capital Markets ($44.9 million, up$5.1 million, or 12.9%); International Trading ($7.8 million, up $3.1 million,or 66.0%); Registered Traders ($4.1 million, up $2.2 million, or 118.6%); andFixed Income ($2.9 million, up $0.7 million, or 31.3%). The increase in thissector is primarily due to an increase in market activity in Canadian equitymarkets during Q4/06, largely due to rising global demand for commodities andCanadian equities. Revenue from UK operations Operations related to Canaccord Adams Limited in the UK includeinstitutional sales and trading, corporate finance and research teams. Revenuein this business was $41.8 million, up $8.9 million, or 27.2% from Q4/05. Thisincrease is a result of Canaccord Adams' leadership position as a NominatedAdvisor/Broker on AIM, increasing liquidity and international interest in thatmarket, and the successful expansion of our global securities distributionplatform. Revenue from US operations The US geographic segment's results reflect the contribution of CanaccordCapital Corporation (USA), Inc. and Canaccord Adams Inc. (formerly AdamsHarkness Financial Group, Inc., acquired on January 3, 2006). Operationalresults for this new geographic segment are being reported separately as ofJanuary 3, 2006 and therefore have no historical data for comparativepurposes. Q4/06 revenue for Canaccord Adams Inc. and Canaccord CapitalCorporation (USA), Inc. in the USwas $18.7 million. Expenses for Q4/06 were $85.4 million, up $24.4 million, or 39.9%.Excluding expenses from the US geographic segment, expenses would have been$69.4 million, up $8.3 million, or 13.6%. The largest increases in non-compensation expenses were in trading costs, up $2.6 million, or 133.9%reflecting the addition of Canaccord Adams Inc.; premises and equipment, up$1.4 million, or 154.2%; and general and administrative expense, up$1.9 million, or 41.9%. The increase in incentive compensation for the quarter by $17.2 million,or 37.0%, is largely attributed to the 47.6% increase in revenue, whichresulted in higher payouts for the period. Also contributing to this increasewas the introduction of Canaccord's Employee Stock Incentive Plan (ESIP) inQ2/06, which was primarily offered to key Canaccord Adams' employees. Salaryand benefits expense for the quarter decreased by 25.3% compared to a year agodespite the fact that the US geographic segment added $1.6 million in newsalaries and benefits for the quarter. The overall decrease is largelyattributed to the changes in the variable compensation structure introduced onApril 1, 2005. For the quarter, the total compensation expense payout as apercentage of revenue was 56.1%, down 7.0 percentage points compared to 63.1%for the same period a year ago. The greatest increases in general and administrative expense were inpromotion and travel, up $0.8 million, or 29.3%, to support the overallincrease in business activity due to corporate expansion; professional fees,up $0.4 million, or 61.4%; and office expenses, up $0.3 million, or 48.7%. Income before income taxes for the quarter was $34.8 million, up$14.4 million, or 70.9%, compared to the same quarter a year ago. Year ended March 31, 2006, compared with the year ended March 31, 2005 Fiscal 2006 revenue for Canaccord Adams was a record compared to all pastfiscal year periods. Combined revenue (Canada, UK and US) for fiscal 2006 was$333.7 million, up $94.0 million, or 39.2%, compared to the same period a yearago due to sustained capital markets activity in North America and increasedactivity in the UK. Excluding the contribution of the US geographic segment,revenue would have been $315.0 million, up $75.3 million, or 31.4%. Revenue from Canadian operations Revenue from Canaccord Adams in Canada for the fiscal year 2006 was arecord $189.1 million, up $65.5 million, or 53.0%, when compared to the sameperiod a year ago. This revenue was derived from: Capital Markets($150.5 million, up $54.9 million, or 57.5%); International Trading($20.9 million, up $5.5 million, or 35.5%); Registered Traders ($9.1 million,up $4.8 million, or 113.4%); and Fixed Income ($8.5 million, up $0.3 million,or 3.2%). The increase in this sector is primarily due to robust marketactivity in Canadian equity markets, largely due to rising global demand forcommodities and related equities, record energy prices and a buoyant Canadianeconomy. Revenue from UK operations Revenue from Canaccord Adams Limited in the UK for fiscal 2006 was$125.9 million, an increase of $9.8 million, or 8.5% compared to fiscal year2005. The relative slower growth in revenue from UK operations for fiscal 2006compared to fiscal 2005 is due to the increase in value of the Canadian dollarrelative to the British Pound by approximately 22.5%. Revenue from US operations Revenue from Canaccord Adams' US operations for fiscal 2006 was$18.7 million. The addition of the Canaccord Adams Inc. sector mix hasincreased Canaccord's competitive position within the Life Sciences, Consumerand Technology sectors. Expenses for fiscal 2006 were $231.7 million, up $57.9 million, or 33.4%.Excluding expenses incurred by the US geographic segment, expenses would havebeen $215.6 million, up $41.9 million, or 24.1%. The largest increases in non-compensation expenses were in interest, up $1.2 million, or 192.8%; andgeneral and administrative expense, up $6.6 million, or 48.7%. The ratio of total fiscal 2006 compensation payout to total revenue was55.2%, down by 3.9 percentage points from a ratio of 59.1% for fiscal 2005.The total compensation payout ratio includes a 3% allocation to coverapplicable National Health Insurance (NHI) taxes for UK-based employees.Salary and benefits expense for the fiscal year 2006 decreased by 49.1%,compared to a year ago. This decrease is also largely attributed to the recentchange in the variable compensation structure. However, the increase inincentive compensation for the fiscal year 2006, is largely due to theincrease in revenue, which resulted in higher payouts for the period and inthe introduction of the ESIP in Q2/06. The greatest increases in general and administrative expense were inpromotion and travel, up $4.5 million, or 62.1%, to support the overallincrease in business activity due to corporate expansion; and professionalfees, up $0.8 million, or 49.9%. Income before income taxes for the year ended March 31, 2006, was afiscal-year record $102.0 million, up $36.1 million, or 54.7%, when comparedto the same period a year ago. Other segment ------------------------------------------------------------------------- Three months ended Year ended March 31 Year-over- March 31 Year-over- (C$ thousands, except year year employees and % amounts) 2006 2005 increase 2006 2005 increase ------------------------------------------------------------------------- Revenue 8,409 5,094 65.1% 24,555 14,948 64.3% Expenses Incentive compensation 7,124 3,953 80.2% 18,301 11,028 66.0% Salaries and benefits 5,708 4,946 15.4% 20,531 17,980 14.2% Other overhead expenses 9,360 7,774 20.4% 29,894 29,775 0.4% ------------------------------------------------- Total Expenses 22,192 16,673 33.1% 68,726 58,783 16.9% (Loss) before income taxes (13,783) (11,579) 19.0% (44,171) (43,835) 0.8% Number of employees 335 324 3.4% ------------------------------------------------------------------------- The Other segment includes correspondent brokerage services, interest,foreign exchange revenue and expenses not specifically allocable to thePrivate Client Services and Canaccord Adams divisions. Also included in thissegment are Canaccord's operations and support services, which are responsiblefor front and back office information technology systems, compliance and riskmanagement, operations, finance and all administrative functions. Three months ended March 31, 2006, compared with three months ended March 31, 2005 Revenue for the three months ended March 31, 2006 was $8.4 million, up$3.3 million, or 65.1%, compared to the same quarter a year ago and isprimarily attributed to an increase in foreign exchange revenue, bank interestand security rebate revenue. Expenses for Q4/06 were $22.2 million, up $5.5 million, or 33.1%. Thelargest increases in expenses were recorded in incentive compensation, up$3.2 million, or 80.2%; and salaries and benefits, up $0.8 million, or 15.4%.Expenses for Q4/06 in this segment were offset by a reduction in interestexpense of $0.5 million due to the sale of the remaining business related tothe Immigrant Investor Program of Quĩbec in Q3/06. General and administrative expense increased by $0.5 million, or 13.8%,mainly attributable to increases in promotion and travel, up $0.4 million, or74.1%. Loss before income taxes was $13.8 million in the fourth quarter offiscal 2006, up $2.2 million, or 19.0% compared to a loss of $11.6 million inthe same quarter a year ago. Year ended March 31, 2006, compared with the year ended March 31, 2005 Revenue for the fiscal year 2006 was $24.6 million, up $9.6 million, or64.3%, compared to the same period a year ago and is largely attributed to anincrease of $4.1 million from bank interest revenue; $2.7 million from foreignexchange revenue; and $1.9 million from securities and rebates. Fiscal 2006 expenses were $68.7 million, up $9.9 million, or 16.9%. Theincrease in expenses is largely attributable to an increase in incentivecompensation of $7.3 million, which includes costs related to the ESIP for keyemployees of this business segment. Also contributing to the increase inexpenses are salaries and benefits up by $2.6 million, or 14.2%; premises andequipment up by $1.3 million, or 39.7%; and public company costs due toCanaccord's admission to AIM, up by $1.5 million, or 331.8%, compared tofiscal 2005. However, fiscal year 2006 interest expense and professional feesdecreased by $1.6 million, or 44.9%, and $1.6 million, or 35.6%, respectively.Expenses were also reduced by a one time gain of $1.6 million in Q1/06resulting from the sale of our investment in the Bourse de Montrĩal. This gainwas equivalent to $1.3 million after tax and approximately $0.03 per share ona diluted basis. Loss before income taxes was $44.2 million for fiscal year 2006, anincrease of $0.3 million, or 0.8%, compared to a loss of $43.8 million in thesame period a year ago. Liquidity and capital resources Canaccord has a capital structure underpinned by shareholders' equity,which is comprised of share capital, retained earnings and cumulative foreigncurrency translation adjustments. As of March 31, 2006, total cash and cashequivalents were $370.5 million, up $20.8 million from $349.7 million as ofMarch 31, 2005. During the fiscal year ended March 31, 2006, financingactivities used cash in the amount of $68.6 million, which was primarily dueto a decrease in notes payable of $41.6 million, payment of dividends of$14.5 million and $14.5 million for the increase in unvested common sharepurchase loans(+) related to Canaccord's ESIP and other stock plans. Investingactivities used cash for the acquisition of Adams Harkness Financial Group,Inc. and Enermarket Solutions Ltd. in the amount of $15.7 million, and$16.6 million for the purchase of equipment and leaseholds improvement. Afurther reduction in cash of $9.6 million was attributed to the effect offoreign exchange on cash balances. Operating activities provided cash in theamount of $83.4 million, which was due to net changes in non-cash workingcapital items, net income and items not affecting cash. Investing activitiesalso provided cash in the amount of $11.0 million, due to the decrease ofnotes receivable in the amount of $41.6 million, and proceeds of $1.6 millionreceived from the sale of our investment in the Bourse de Montrĩal. Canaccord's business requires capital for operating and regulatorypurposes. The current assets reflected on Canaccord's balance sheet are highlyliquid. The majority of the positions held as securities owned are readilymarketable and all are recorded at their market value. The market value ofthese securities fluctuates daily as factors such as changes in marketconditions, economic conditions and investor outlook affect market prices.Client receivables are secured by readily marketable securities and arereviewed daily for impairment in value and collectibility. Receivables andpayables from brokers and dealers represent the following: current opentransactions which generally settle within the normal three-day settlementcycle; collateralized securities that are borrowed and/or loaned intransactions that can be closed within a few days on demand; and balances dueto introducing brokers representing net balances in connection with theirclient accounts. Outstanding share data ------------------------------------------------------------------------- Outstanding shares as of March 31 2006 2005 ------------------------------------------------------------------------- Issued shares outstanding - basic(1) 45,746,033 45,413,311 Issued shares outstanding - diluted(2)(3) 47,827,350 46,129,268 Average shares outstanding - basic 44,606,134 41,634,920 Average shares outstanding - diluted(4) 46,699,304 44,188,297 ------------------------------------------------------------------------- (1) Excludes 1,804,541 unvested shares that are outstanding relating to share purchase loans for recruitment and retention programs and 276,776 shares related to stock-based compensation plans. (2) Includes 1,804,541 unvested shares relating to share purchase loans for recruitment and retention programs and 276,776 shares related to stock-based compensation plans referred to in footnote (1) above. (3) Excludes 49,163 common shares earned during Q4/06 associated with the retention of key employees after the acquisition of Adams Harkness Financial Group, Inc. These shares have not yet been issued and remain in treasury. (4) Includes the weighted average balance of 11,853 common shares associated with footnote (3) above. As of March 31, 2006, Canaccord had 47,827,350 common shares issued andoutstanding on a diluted basis, up 1,698,082 common shares from March 31,2005, comprised of 1,420,342 common shares issued in connection withacquisitions, and 691,940 common shares issued as part of the employeetreasury stock purchase plan offset by a reduction of 414,200 common shares,which were purchased and cancelled during fiscal year 2006 through the normalcourse issuer bid (NCIB). -------------------- (+) These are forgivable loans granted to key employees in connection to the purchase of common stock in the open market under the ESIP and other incentive plans. Issuance of share capital ------------------------------------------------------------------------- Nine months ended Increase (decrease) number of shares Q4/06 December 31 ------------------------------------------------------------------------- Total common shares issued and outstanding as of March 31, 2005 - diluted 46,129,268 ----------------------- Shares issued for acquisitions Enermarket Solutions Ltd. 77,646 Adams Harkness Financial Group, Inc. 1,342,696 Shares issued for employee treasury stock purchase plan 691,940 Shares purchased and cancelled under NCIB (414,200) ----------------------- Total common shares issued and outstanding as of March 31, 2006 - diluted 47,827,350 ------------------------------------------------------------------------- Canaccord's Board originally approved the implementation of the NCIB tofacilitate the purchase, for purposes of either subsequent resale orcancellation of common shares released from escrow. Through this capitalmanagement plan, the Board approved the further usage of the NCIB to alsoacquire for the purpose of cancellation, shares to utilize capital that hasbeen generated in the last year. Although the amount and timing of any suchpurchases will be determined by Canaccord, the Board of Directors approved atthe beginning of Q2/06 the purchase of up to 500,000 common shares through theNCIB for cancellation by the end of the fiscal year, subject to tradingblackouts and availability of shares. At the beginning of Q3/06, the Board ofDirectors approved an increase of 500,000 common shares, in the number ofshares that could be purchased for cancellation. Therefore, under thisexpanded plan, Canaccord may purchase up to a maximum of 1,000,000 commonshares in total, subject to a maximum of up to 130,000 shares daily. Duringfiscal year 2006, 414,200 common shares were cancelled at a weighted averageprice of $11.18 per share; consequently there remain up to 585,800 commonshares that could be purchased for cancellation. On December 22, 2005, Canaccord renewed its NCIB for one year commencingon December 29, 2005 and ending on December 28, 2006. The NCIB allows forpurchases of up to 5% of Canaccord's issued and outstanding shares at the timeof the renewal. As of May 16, 2006, there are 2,324,233 common sharesavailable for purchase under the NCIB. Canaccord has agreed with the relevantregulators to update its shareholders at a minimum rate of every two weeks andwill update shareholders immediately if more than 1% of its outstanding sharesare purchased in one day. Going forward and from time to time, Canaccord maypurchase its common shares for the purpose of resale or cancellation. On January 3, 2006, Canaccord closed the acquisition of Adams HarknessFinancial Group, Inc., which was a privately held Boston, Massachusetts-basedinstitutional investment bank. The consideration consisted of US$8 million incash and the issuance of 1,342,696 common shares from treasury valued atUS$12 million. These shares will be held in escrow, with annual releases ofone-third per year, beginning on June 30, 2006 and ending on June 30, 2008. Shares reserved for issuance as retention payment for Adams Harkness' employees ------------------------------------------------------------------------- Increase (decrease) number of shares Q4/06 ------------------------------------------------------------------------- Original allotment of shares reserved for issuance from treasury for Adams Harkness employees 1,118,952 Shares forfeited by departed employees (72,733) Shares earned from achievement of target performance (unissued) (49,163) Total remaining unearned shares available to be issued at the end of the vesting period in January 2009 997,056 ------------------------------------------------------------------------- In addition, 1,118,952 common shares are reserved for issuance fromtreasury as a retention incentive at an estimated cost of up toUS$10.0 million for certain key employees of Adams Harkness Financial Group,Inc. to be paid after a three-year vesting period. The total number of sharesto be vested is also based on revenue earned by Canaccord Adams Inc.subsequent to the date of acquisition. The aggregate number of common shareswhich will vest and therefore issued at the end of the vesting period will bethat number, which is equal to the revenue earned by Canaccord Adams Inc.during the vesting period divided by US$250.0 million multiplied by 1,118,952subject to the maximum of 1,118,952 common shares adjusted for forfeitures andcancellations. As such revenue levels are achieved during the vesting period,the associated proportion of the retention payment will be recorded asdevelopment costs and the applicable number of retention shares will beincluded in weighted average diluted common shares outstanding. Of the1,118,952 common shares, 49,163 common shares have been added to diluted sharecapital as a result of revenue earned to the end of Q4/06. The associatedproportion of the retention payment for 49,163 shares was $513,755 and hasbeen recorded as a development cost. As of May 16, 2006, Canaccord had47,827,350 common shares outstanding on a diluted basis. On May 16, 2006, the Board approved two separate share issuances relatedto stock-based compensation: (1) The issuance (subject to regulatory andshareholder approval) of 25,000 shares at $14.00 per share to Arpad A. Bussonas stock based compensation for his becoming a director of Canaccord CapitalInc. during fiscal 2006. These shares are subject to a two year escrow; 50%will be released at the end of the first year and the balance at the end ofthe second year; and (2) Pursuant to a one-time obligation which arose whenthe approximate market price of the Company's shares was $20.13, the Board ofDirectors of Canaccord has approved the issuance of 17,431 common shares at$20.13 per share. These shares are associated with the recruitment ofCanaccord Adams professionals. This issue is subject to regulatory approval,and 14,526 of these shares are restricted from sale until March 20, 2009. Dividend policy Although dividends are expected to be declared and paid quarterly, theBoard of Directors, in its sole discretion, will determine the amount andtiming of any dividends. All dividend payments will depend on general businessconditions, Canaccord's financial condition, results of operations and capitalrequirements and such other factors as the Board determines to be relevant. Infiscal year 2006, Canaccord paid a quarterly dividend of $0.06 per share perquarter in respect of each of the first two quarters. However, Canaccord'soperating results as the year progressed supported a dividend increase of$0.02 per share, or 33.3% to the regular quarterly common share dividend inQ3/06. Canaccord intends to continue to pay a $0.08 regular quarterly commonshare dividend in respect of Q4/06 and for each quarter in fiscal year 2007. Dividend declaration For the fourth quarter of fiscal 2006, the Board of Directors declared acommon share dividend of $0.08 per share, which is payable on June 9, 2006, toshareholders of record on May 26, 2006. The common share dividend payment tocommon shareholders will total approximately $3.8 million, or approximately12.7% of fourth quarter net income. Risks The securities industry and Canaccord's activities are by their verynature subject to a number of inherent risks. Economic conditions, competitionand market factors such as volatility in the Canadian and internationalmarkets, interest rates, commodity prices, market prices, trading volumes andliquidity will have a significant impact on Canaccord's profitability. Aninvestment in the common shares of Canaccord involves a number of risks,including market, liquidity, credit, operational, legal and regulatory risks,which could be substantial and are inherent in Canaccord's business. PrivateClient Services' revenue is dependent on trading volumes and, as such, isdependent on the level of market activity and investor confidence. CanaccordAdams' revenue is dependent on financing activity by corporate issuers and thewillingness of institutional clients to actively trade and participate incapital markets transactions. There may also be a lag between marketfluctuations and changes in business conditions and the level of Canaccord'smarket activity and the impact that these factors have on Canaccord'soperating results and financial position. Furthermore, Canaccord may notachieve its growth plans associated with the acquisition and integration ofAdams Harkness Financial Group, Inc. In addition to the risks previouslymentioned above, other risks have not changed substantially from those set outin the Annual Report of June 27, 2005. Additional information A comprehensive discussion of our business, strategies, objectives andrisks is available in the Management's Discussion and Analysis, AnnualInformation Form and audited annual financial statements in Canaccord's 2005Annual Report which are available on our Web site atwww.canaccord.com/investor and on SEDAR at www.sedar.com. Additional information relating to Canaccord, including Canaccord'sAnnual Information Form and interim filings can also be found on our Web siteand on SEDAR at www.sedar.com. Interim Consolidated Financial Statements Canaccord Capital Inc. Unaudited For the three and twelve months ended March 31, 2006 (Expressed in Canadian dollars) Canaccord Capital Inc. INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands of dollars) As at March 31, March 31, 2006 2005 $ $ ------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 370,507 349,700 Securities owned, at market (note 2) 203,020 160,348 Accounts receivable (notes 4 and 10) 1,539,998 1,068,757 ------------------------------------------------------------------------- Total current assets 2,113,525 1,578,805 Equipment and leasehold improvements 25,750 13,750 Notes receivable (note 5) - 41,618 Future income taxes 10,769 3,992 Goodwill and other intangible assets (notes 6 and 7) 27,929 - ------------------------------------------------------------------------- 2,177,973 1,638,165 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Call loans 4,684 - Securities sold short, at market (note 2) 37,169 105,527 Accounts payable and accrued liabilities (notes 4 and 10) 1,832,956 1,262,072 Income taxes payable 15,334 6,737 ------------------------------------------------------------------------- Total current liabilities 1,890,143 1,374,336 Notes payable (note 5) - 41,618 ------------------------------------------------------------------------- Total liabilities 1,890,143 1,415,954 ------------------------------------------------------------------------- Contingencies (note 12) Shareholders' equity Share capital (note 8) 157,644 151,030 Cumulative foreign currency translation adjustment (6,277) (1,383) Retained earnings 136,463 72,564 ------------------------------------------------------------------------- Total shareholders' equity 287,830 222,211 ------------------------------------------------------------------------- 2,177,973 1,638,165 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes Canaccord Capital Inc. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Unaudited) (in thousands of dollars, except per share amounts) For the three For the twelve months ended months ended ---------------------- ---------------------- March 31, March 31, March 31, March 31, 2006 2005 2006 2005 $ $ $ $ ------------------------------------------------- ---------------------- REVENUE Commission 88,846 54,598 239,461 168,978 Investment banking 87,977 69,558 266,206 214,450 Principal trading 13,677 7,795 27,388 13,584 Interest 11,424 7,723 36,914 26,488 Other 5,150 3,255 13,446 9,278 ------------------------------------------------- ---------------------- 207,074 142,929 583,415 432,778 ------------------------------------------------- ---------------------- EXPENSES Incentive compensation 108,296 77,191 299,188 220,454 Salaries and benefits 13,716 13,130 42,019 45,715 Trading costs 7,615 4,493 20,615 16,863 Premises and equipment 5,068 3,025 15,843 11,849 Communication and technology 5,087 3,719 16,598 14,037 Interest 3,577 2,125 10,914 7,824 General and administrative 14,726 10,866 46,227 32,171 Amortization 1,969 952 4,817 3,185 Development costs 3,565 2,001 9,797 7,924 Gain on disposal of investment (note 13) - - (1,633) - ------------------------------------------------- ---------------------- 163,619 117,502 464,385 360,022 ------------------------------------------------- ---------------------- Income before income taxes 43,455 25,427 119,030 72,756 Income tax expense (recovery) Current 21,404 10,278 44,657 29,142 Future (8,019) (2,158) (6,777) (4,965) ------------------------------------------------- ---------------------- Net income for the period 30,070 17,307 81,150 48,579 Retained earnings, beginning of period 110,220 64,482 72,564 38,013 Cash dividends (3,827) (9,225) (14,455) (13,835) Excess on redemption of common shares (note 8 (iii)) - - (2,796) (193) ------------------------------------------------- ---------------------- Retained earnings, end of period 136,463 72,564 136,463 72,564 ------------------------------------------------- ---------------------- ------------------------------------------------- ---------------------- Basic earnings per share (note 8 (v)) 0.66 0.38 1.82 1.17 Diluted earnings per share (note 8 (v)) 0.63 0.38 1.74 1.11 ------------------------------------------------- ---------------------- ------------------------------------------------- ---------------------- See accompanying notes Canaccord Capital Inc. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands of dollars) For the three For the twelve months ended months ended ---------------------- ---------------------- March 31, March 31, March 31, March 31, 2006 2005 2006 2005 $ $ $ $ ------------------------------------------------- ---------------------- OPERATING ACTIVITIES Net income for the period 30,070 17,307 81,150 48,579 Items not affecting cash Amortization 1,807 1,030 5,174 3,863 Future income tax recovery (8,019) (2,158) (6,777) (4,965) Gain on disposal of investment - - (1,633) - Changes in non-cash working capital Decrease (increase) in securities owned 15,653 24,547 (43,851) 216,099 Increase in accounts receivable (449,072) (349,061) (491,473) (70,620) Increase (decrease) in securities sold short (95,312) 15,494 (68,359) (176,196) Increase in accounts payable and accrued liabilities 640,731 399,490 599,930 213,677 Increase (decrease) in income taxes payable 7,605 3,478 9,223 (10,168) ------------------------------------------------- ---------------------- Cash provided by operating activities 143,463 110,127 83,384 220,269 ------------------------------------------------- ---------------------- FINANCING ACTIVITIES Increase (decrease) in notes payable - 563 (41,618) 12,853 Redemption of convertible debentures - - - (20) Decrease in subordinated debt - - - (10,000) Issuance of share capital (net of issuance costs) - 340 6,574 71,865 Decrease (increase) in unvested common share purchase loans 309 (466) (14,463) (1,415) Redemption of share capital - - (4,631) (379) Dividends paid (3,827) (9,225) (14,455) (13,835) ------------------------------------------------- ---------------------- Cash provided by (used in) financing activities (3,518) (8,788) (68,593) 59,069 ------------------------------------------------- ---------------------- INVESTING ACTIVITIES Purchase of equipment and leasehold improvements (4,852) (798) (16,630) (4,562) Decrease (increase) in notes receivable - (563) 41,618 (12,853) Proceeds on disposal of investment - - 1,639 - Acquisition of subsidiaries (note 6) (11,674) - (15,669) - ------------------------------------------------- ---------------------- Cash provided by (used in) investing activities (16,526) (1,361) 10,958 (17,415) ------------------------------------------------- ---------------------- Effect of foreign exchange on cash balances 1,369 (125) (9,626) (1,648) ------------------------------------------------- ---------------------- Increase in cash position 124,788 99,853 16,123 260,275 Cash position, beginning of period 241,035 249,847 349,700 89,425 ------------------------------------------------- ---------------------- Cash position, end of period 365,823 349,700 365,823 349,700 ------------------------------------------------- ---------------------- ------------------------------------------------- ---------------------- Cash position is comprised of: Cash and cash equivalents 370,507 349,700 370,507 349,700 Call loans 4,684 - 4,684 - ------------------------------------------------- ---------------------- 365,823 349,700 365,823 349,700 ------------------------------------------------- ---------------------- ------------------------------------------------- ---------------------- Supplemental cash flow information Interest paid 3,525 278 9,495 1,495 Income taxes paid 7,379 13,163 30,192 37,756 ------------------------------------------------- ---------------------- ------------------------------------------------- ---------------------- See accompanying notes Canaccord Capital Inc. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the three and twelve months ended March 31, 2006 (in thousands of dollars, except per share amounts) Canaccord Capital Inc. (the "Company") is an independent full serviceinvestment dealer. The Company has operations in each of the two principalsegments of the securities industry: private client services and capitalmarkets. Together these operations offer a wide range of complementaryinvestment products, brokerage services and investment banking services to theCompany's retail, institutional and corporate clients. Historically, the Company's operating results are characterized by aseasonal pattern and it earns the majority of its revenue in the last twoquarters of its fiscal year. However, during the first half of fiscal 2006,North American capital markets performed better than compared to previoushistorical seasonality. 1. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation and principles of consolidation These interim unaudited consolidated financial statements have been prepared by the Company in accordance with Canadian generally accepted accounting principles ("GAAP") with respect to interim financial statements, applied on a consistent basis. These interim unaudited consolidated financial statements follow the same accounting principles and methods of application as those disclosed in Note 1 to the Company's audited consolidated financial statements as at and for the year ended March 31, 2005 ("Audited Annual Consolidated Financial Statements") except as noted below. Accordingly, they do not include all the information and footnotes required for compliance with Canadian GAAP for annual financial statements. These interim unaudited consolidated financial statements and notes thereon should be read in conjunction with the Audited Annual Consolidated Financial Statements. The preparation of these interim unaudited consolidated financial statements and the accompanying notes requires management to make estimates and assumptions that affect the amounts reported. In the opinion of management, these interim unaudited consolidated financial statements reflect all adjustments (which include only normal, recurring adjustments) necessary to state fairly the results for the periods presented. Actual results could vary from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. Stock-based compensation plans Stock-based compensation represents the cost related to stock-based awards granted to employees. The Company uses the fair value method to account for such awards. Under this method, the Company measures the fair value of stock-based awards as of the grant date and recognizes the cost as an expense over the applicable vesting period with a corresponding increase in contributed surplus. In the case where vesting is also dependent on performance criteria, the cost is recognized over the vesting period in accordance with the rate at which such performance criteria are achieved (net of estimated forfeitures). Otherwise, the cost is recognized on a straight-line basis over the vesting period. When stock-based compensation awards vest contributed surplus is reduced by the applicable amount and share capital is increased by the same amount. 2. SECURITIES OWNED AND SECURITIES SOLD SHORT March 31, 2006 March 31, 2005 ----------------------- ----------------------- Securities Securities Securities Securities owned sold short owned sold short $ $ $ $ ------------------------------------------------------------------------- Corporate and government debt 40,784 14,319 124,395 82,001 Equities and convertible debentures 162,236 22,850 35,953 23,526 ------------------------------------------------------------------------- 203,020 37,169 160,348 105,527 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at March 31, 2006, corporate and government debt maturities range from 2006 to 2053 (March 31, 2005 - 2005 to 2051) and bear interest ranging from 2.05% to 14.00% (March 31, 2005 - 2.05% to 14.00%). 3. FINANCIAL INSTRUMENTS Foreign exchange risk Foreign exchange risk arises from the possibility that changes in the price of foreign currencies will result in losses. The Company periodically trades certain foreign exchange contracts to manage and hedge foreign exchange risk on pending settlements in foreign currencies. Realized and unrealized gains and losses related to these contracts are recognized in income during the year. Forward contracts outstanding at March 31, 2006: Notional amounts Average Fair value (millions price (millions of USD) (CAD/USD) Maturity of USD) ------------------------------------------------------------------------- To sell US dollars $90.85 $1.16 April 5, 2006 $0.1 To buy US dollars $ 7.00 $1.16 April 3, 2006 ($0.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Forward contracts outstanding at March 31, 2005: Notional amounts Average Fair value (millions price (millions of USD) (CAD/USD) Maturity of USD) ------------------------------------------------------------------------- To sell US dollars $22.75 $1.21 April 5, 2005 $0.1 To buy US dollars $10.25 $1.21 April 5, 2005 ($0.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 4. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts receivable March 31, March 31, 2006 2005 $ $ ------------------------------------------------------------------------- Brokers and investment dealers 567,308 353,734 Clients 607,118 406,769 RRSP cash balances held in trust 320,766 293,595 Other 44,806 14,659 ------------------------------------------------------------------------- 1,539,998 1,068,757 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accounts payable and accrued liabilities March 31, March 31, 2006 2005 $ $ ------------------------------------------------------------------------- Brokers and investment dealers 397,733 358,711 Clients 1,172,511 719,195 Other 262,712 184,166 ------------------------------------------------------------------------- 1,832,956 1,262,072 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accounts payable to clients include $320.8 million (March 31, 2005 - $293.6 million) payable to clients for RRSP cash balances held in trust. Client security purchases are entered into on either a cash or margin basis. In the case of a margin account, the Company extends a loan to a client for the purchase of securities, using securities purchased and/or other securities in the client's account as collateral. Amounts loaned to any client are limited by margin regulations of the Investment Dealers Association of Canada and other regulatory authorities and are subject to the Company's credit review and daily monitoring procedures. Amounts due from and to clients are due by the settlement date of the trade transaction. Margin loans are due on demand and are collateralized by the assets in the client accounts. Interest on margin loans and amounts due to clients is based on a floating rate (March 31, 2006 - 7.50% and 2.50%, respectively, and March 31, 2005 - 6.25% and 1.25%, respectively). 5. IMMIGRANT INVESTOR PROGRAM OF QUEBEC The Company sponsored an immigrant investor program that provided assistance to Canadian immigrant applicants under the investor category and to their professional consultants and advisors. Included in these services was a program that enabled immigrant investors to borrow, through a credit facility arranged by the Company, the requisite funds for making a qualifying investment for immigration purposes. The Company borrowed as notes payable the investment funds through a non-recourse bank facility, loaned the borrowed funds to the immigrant investor by way of notes receivable and then pledged the notes receivable to the lending bank as collateral for the notes payable. Effective September 15, 2005, the Company sold a significant portion of all outstanding notes receivable under this program for total proceeds of $34.4 million and repaid all corresponding outstanding notes payable in the amount of $34.8 million for a net loss on disposition of $0.4 million. Effective December 23, 2005, the Company irrevocably assigned the remaining outstanding notes receivable and notes payable under this program at book value of $10.0 million. (i) Notes receivable Interest revenue of $nil and $1.4 million, respectively, for the three and twelve months ended March 31, 2006 ($0.6 million and $2.1 million, respectively, for the three and twelve months ended March 31, 2005) on these loans is included in Other revenue. (ii) Notes payable Interest expense of $nil and $1.8 million, respectively, for the three and twelve months ended March 31, 2006 ($0.6 million and $2.1 million, respectively, for the three and twelve months ended March 31, 2005) on these loans is included in Interest expense. 6. ACQUISITIONS (i) Enermarket Solutions Ltd. On November 11, 2005, the Company acquired a 100% interest in Enermarket Solutions Ltd. ("Enermarket"), a property acquisition and divestiture advisory services firm focused on the Energy sector and based in Calgary, Alberta. The aggregate purchase price was $5.1 million including cash of $4.0 million (comprised of $3.1 million and a working capital adjustment of $0.9 million), $0.9 million comprised of 77,646 common shares of the Company at $11.90 per share and costs related to the acquisition of $0.2 million. The entity will operate as part of the Company's Canaccord Adams group as Canaccord Enermarket. The assets and liabilities of Enermarket have been included in the consolidated balance sheet of the Company as of November 11, 2005 and its operating results have been included in the consolidated statement of operations of the Company since that date. In connection with the acquisition, retention payments up to a total of $0.3 million will be paid to key employees of Enermarket and its senior management. The retention payments will involve the issuance of up to 25,210 common shares of the Company which will be paid after a two year vesting period. These retention payments will be recorded as development costs over the vesting period on a straight-line basis. (ii) Adams Harkness Financial Group, Inc. On January 3, 2006, the Company acquired a 100% interest in Adams Harkness Financial Group, Inc. ("Adams Harkness"), the parent company of Adams Harkness, Inc., an institutional investment bank based in Boston, Massachusetts. The aggregate purchase price was US$21.8 million (C$25.6 million) including cash of US$8.0 million (C$9.5 million), common shares of the Company valued at US$12.0 million (C$14.1 million) comprised of 1,342,696 common shares of the Company at C$10.50 per share and costs related to the acquisition of US$1.8 million (C$2.0 million). The common shares are held in escrow to be released as to one-third per year beginning on June 30, 2006. On completion of the acquisition, Adams Harkness, Inc. changed its name to Canaccord Adams Inc. Canaccord Adams Inc. will operate as part of the Company's capital markets operations, which commenced operations under the global brand name of Canaccord Adams coincidental with the acquisition. The assets and liabilities of Adams Harkness have been included in the consolidated balance sheet of the Company as of January 3, 2006 and its operating results have been included in the consolidated statement of operations of the Company since that date. In connection with the acquisition, retention payments up to an estimated total of US$10.0 million will be paid to key employees of Adams Harkness. The retention payments will involve the issuance of up to 1,118,952 common shares of the Company after a three year vesting period. The total number of common shares to be vested is also based on revenue earned by Canaccord Adams Inc. subsequent to the date of the acquisition (Note 9). The aggregate consideration paid and the fair value of the net assets acquired in respect of these acquisitions are: Adams Harkness Enermarket Acquisition date January 3, November 11, 2006 2005 $ $ ------------------------------------------------------------------------- Aggregate consideration Cash, including acquisition costs 11,533 4,136 Issuance of common shares 14,098 924 ------------------------------------------------------------------------- 25,631 5,060 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Fair value of net assets acquired Cash and cash equivalents 4,542 232 Securities owned 1,063 - Accounts receivable 23,320 677 Future income taxes 7,440 (321) Equipment and leasehold improvements 2,704 124 Intangible assets apart from goodwill 4,650 1,000 Call loans (2,559) - Accounts payable (21,250) (247) Taxes payable (433) (72) Subordinated debt (4,113) - Accrued lease impairment (8,719) - ------------------------------------------------------------------------- 6,645 1,393 ------------------------------------------------------------------------- Goodwill 18,986 3,667 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 7. GOODWILL AND OTHER INTANGIBLE ASSETS March 31, March 31, 2006 2005 $ $ ------------------------------------------------------------------------- Goodwill 22,653 - ------------------------------------------------------------------------- Other intangible assets Balance at beginning of year - - Acquisitions 5,650 - Amortization 374 - ------------------------------------------------------------------------- Balance at end of year 5,276 - ------------------------------------------------------------------------- 27,929 - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Other intangible assets reflect assigned values related to acquired brand names, customer relationships and technology and are amortized on a straight-line basis over their estimated useful life of four years. Goodwill and other intangible assets relate to the Canaccord Adams operating segment. 8. SHARE CAPITAL On June 21, 2004, the Company's shareholders approved a two-for-one subdivision of the Company's outstanding Class A, Class B and Class C common shares. All common share and per share data included herein have been adjusted to reflect the two-for-one subdivision as if it had occurred at the beginning of the periods reflected. March 31, March 31, 2006 2005 $ $ ------------------------------------------------------------------------- Issued and fully paid Share capital Common shares 173,282 153,061 Unvested share purchase loans (20,577) (2,929) Contributed surplus 4,939 898 ------------------------------------------------------------------------- 157,644 151,030 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Share capital of Canaccord Capital Inc. is comprised of the following: (i) Authorized Unlimited common shares without par value Unlimited preferred shares without par value (ii) Issued and fully paid Common shares Common Shares Class B No. of Amount No. of Amount shares $ shares $ ------------------------------------------------------------------------- Balance, March 31, 2004 - - 26,751,482 51,292 Shares issued for cash - - 897,454 3,568 Shares cancelled - - (95,826) (186) Shares issued on conversion of Class 4 preferred shares Series A - - 82,816 190 Shares issued on conversion of convertible debentures - - 7,378,660 20,357 Exchange into common shares(1) 39,266,210 86,757 (35,014,586) (75,221) Shares issued in connection with initial public offering(2) 6,829,268 66,170 - - Shares issued for cash(3) 33,790 134 - - ------------------------------------------------------------------------- Balance, March 31, 2005 46,129,268 153,061 - - Shares issued for cash 691,940 6,574 - - Shares issued in connection with acquisitions 1,420,342 15,022 - - Shares cancelled (414,200) (1,375) - - ------------------------------------------------------------------------- Balance, March 31, 2006 47,827,350 173,282 - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Class C Total No. of Amount No. of Amount shares $ shares $ ------------------------------------------------------------------------- Balance, March 31, 2004 3,809,524 10,000 30,561,006 61,292 Shares issued for cash 442,100 1,536 1,339,554 5,104 Shares cancelled - - (95,826) (186) Shares issued on conversion of Class 4 preferred shares Series A - - 82,816 190 Shares issued on conversion of convertible debentures - - 7,378,660 20,357 Exchange into common shares(1) (4,251,624) (11,536) - - Shares issued in connection with initial public offering(2) - - 6,829,268 66,170 Shares issued for cash(3) - - 33,790 134 ------------------------------------------------------------------------- Balance, March 31, 2005 - - 46,129,268 153,061 Shares issued for cash - - 691,940 6,574 Shares issued in connection with acquisitions - - 1,420,342 15,022 Shares cancelled - - (414,200) (1,375) ------------------------------------------------------------------------- Balance, March 31, 2006 - - 47,827,350 173,282 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Pursuant to an order obtained on June 22, 2004 from the Supreme Court of British Columbia, a capital reorganization which included the creation of a class of common shares and the exchange of all Class B and C common shares for common shares was approved. (2) Net of share issue costs. Final costs were $3.8 million. (3) Sale of shares held by a subsidiary in the group. Pursuant to the Company's normal course issuer bid, as approved by the Toronto Stock Exchange, the Company was entitled to acquire up to 2,306,463, or 5.0%, of its shares from December 29, 2004 to December 28, 2005. Under the normal course issuer bid, the Company has purchased for resale a total of 222,548 common shares between December 29, 2004 and March 31, 2005 and purchased for cancellation 414,200 common shares during the twelve months ended March 31, 2006 with a book value of $1.3 million for aggregate cash consideration of $4.6 million. The excess has been recorded to contributed surplus and retained earnings. The Company has renewed its normal course issuer bid and is entitled to acquire from December 29, 2005 to December 28, 2006, up to 2,324,233 of its shares, which represents 5% of its shares outstanding as of December 20, 2005. There were no share transactions under the NCIB between December 20, 2005 and March 31, 2006. Preferred shares Class 4 Series A No. of Amount shares $ ------------------------------------------------------------------------- Balance, March 31, 2004 190,477 190 Exchange into common shares(1) (190,477) (190) ------------------------------------------------------------------------- Balance, March 31, 2005 and 2006 - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Pursuant to an order obtained on June 22, 2004 from the Supreme Court of British Columbia, a capital reorganization which included the creation of a class of common shares and the exchange of all preferred shares for common shares was approved. (iii) Excess on redemption of common shares The excess on redemption of common shares represents amounts paid to shareholders, by the Company and its subsidiaries, on redemption of their shares in excess of the book value of those shares at the time of redemption. The excess on redemption of common shares has been charged against contributed surplus ($0.5 million) and retained earnings ($2.8 million). For the three For the twelve months ended months ended ---------------------- ---------------------- March 31, March 31, March 31, March 31, 2006 2005 2006 2005 $ $ $ $ ------------------------------------------------------------------------- Redemption price - - 4,631 379 Book value - - 1,375 186 ------------------------------------------------------------------------- Excess on redemption of common shares - - 3,256 193 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (iv) Distribution of acquired common shares On November 24, 2005, the Company repurchased 132,000 common shares from departed employees at cost for total cash consideration of $0.5 million. These shares were subsequently distributed to existing employees at an average market price of $14.00 per share for total cash proceeds of $1.8 million. This excess on distribution of $1.3 million has been credited to contributed surplus. Contributed Surplus $ ------------------------------------------------------------------------- Balance, March 31, 2005 898 Unvested share purchase loans 3,186 Excess on redemption of common shares (460) Excess on distribution of acquired common shares 1,315 ------------------------------------------------------------------------- Balance, March 31, 2006 4,939 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (v) Earnings per share For the three For the twelve months ended months ended ---------------------- ---------------------- March 31, March 31, March 31, March 31, 2006 2005 2006 2005 $ $ $ $ ------------------------------------------------------------------------- Basic earnings per share Net income for the period 30,070 17,307 81,150 48,579 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares (number) 45,716,195 45,352,770 44,606,134 41,634,920 Basic earnings per share ($) 0.66 0.38 1.82 1.17 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings per share Net income for the period 30,070 17,307 81,150 48,579 Income effect of convertible debentures - - - 282 ------------------------------------------------------------------------- Adjusted net income for the period 30,070 17,307 81,150 48,861 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares (number) 45,716,195 45,352,770 44,606,134 41,634,920 Dilutive effect of convertible debentures (number) - - - 1,817,000 Dilutive effect of preferred shares (number) - - - 20,420 Dilutive effect of unvested shares (number) 1,804,541 715,957 1,903,119 715,957 Dilutive effect of stock-based compensation plans (number) (note 9) 324,846 - 190,051 - ------------------------------------------------------------------------- Adjusted weighted average number of common shares (number) 47,845,582 46,068,727 46,699,304 44,188,297 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings per share ($) 0.63 0.38 1.74 1.11 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 9. STOCK-BASED COMPENSATION PLANS Retention Plans As described under Notes 6(i) and 6(ii), in connection with the acquisitions of Enermarket and Adams Harkness, the Company established two retention plans. The plan for Enermarket consists of the issuance of up to 25,210 common shares of the Company which will be paid after a two year vesting period. The plan for Adams Harkness provides for the issuance of up to 1,118,952 common shares of the Company after a three year vesting period. The total number of shares which will vest is also based on revenue earned by Canaccord Adams Inc. during the vesting period. The aggregate number of common shares which vest will be that number which is equal to the revenue earned by Canaccord Adams Inc. during the vesting period divided by US$250.0 million multiplied by 1,118,952 subject to the maximum of 1,118,952 common shares adjusted for forfeitures and cancellations. As such revenue levels are achieved during the vesting period, the associated proportion of the retention payment will be recorded as a development cost and the applicable number of retention shares will be included in diluted common shares outstanding (Note 8(v)). Employee Treasury Stock Purchase Plan In August 2005 the Company established an employee treasury stock purchase plan under which the Company made a forgivable loan to an employee for the purpose of paying 40% of the aggregate purchase price of common shares of the Company issued from treasury. A repayable loan in the amount of 35% of the aggregate purchase price of the common shares was also made to the employee. Subject to continued employment one-third of the number of common shares purchased utilizing the forgivable loan portion of the aggregate purchase will vest on each anniversary of the date of the purchase and the forgivable loan portion related to amounts vested will be forgiven. The applicable number of shares under this employee treasury stock purchase plan will be included in diluted common shares outstanding (Note 8(v)). The following table details the activity under the Company's retention plans and employee treasury stock purchase plan: For the three For the twelve months ended months ended ---------------------- ---------------------- March 31, March 31, March 31, March 31, 2006 2005 2006 2005 ---- ---- ---- ---- Number of common shares subject to the Enermarket retention plan: Beginning of period 25,210 - - - Grants - - 25,210 - ------------------------------------------------------------------------- End of period 25,210 - 25,210 - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Number of common shares subject to the Adams Harkness retention plan: Beginning of period - - - - Grants 1,118,952 - 1,118,952 - Forfeitures (72,733) - (72,733) - ------------------------------------------------------------------------- End of period 1,046,219 - 1,046,219 - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Number of common shares subject to the employee treasury stock purchase plan: Beginning of period 276,776 - - - Issued - - 276,776 - ------------------------------------------------------------------------- End of period 276,776 - 276,776 - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Under the fair value method the aggregate cost of the grants made under the retention plans are estimated to be $12.0 million - $0.3 million relating to Enermarket and $11.7 million (US$10.0 million) for Adams Harkness. The cost of the retention plans will be recognized in the financial statements of the Company in accordance with the vesting terms of the respective plans. The forgivable loan amount in respect of the common shares issued under the employee treasury stock purchase plan is $2.6 million. This amount will be recognized in the financial statements of the Company over the vesting period on a straight-line basis. 10. RELATED PARTY TRANSACTIONS Security trades executed by the Company for employees, officers and shareholders are transacted in accordance with the terms and conditions applicable to all clients. Commission income on such transactions in the aggregate is not material in relation to the overall operations of the Company. Accounts receivable and accounts payable and accrued liabilities include the following balances with related parties: March 31, March 31, 2006 2005 $ $ ------------------------------------------------------------------------- Accounts receivable 34,582 31,698 Accounts payable and accrued liabilities 88,506 54,691 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 11. SEGMENTED INFORMATION The Company has two operating segments: Private Client Services - provides brokerage services and investment advice to retail or private clients in Canada. Canaccord Adams - includes investment banking, research and trading activities on behalf of corporate, institutional and government clients as well as principal trading activities in Canada, the United Kingdom and the United States of America. Corporate and Other includes correspondent brokerage services, interest and foreign exchange revenue and expenses not specifically allocable to Private Client Services and Canaccord Adams. The Company's industry segments are managed separately because each business offers different services and requires different personnel and marketing strategies. The Company evaluates the performance of each business based on income (loss) before income taxes. The Company does not allocate total assets or equipment and leasehold improvements to the segments. Amortization is allocated to the segments based on square footage occupied. There are no significant inter-segment revenues. For the three months ended March 31, 2006 2005 ------------------------------------------------------------------ Private Corporate Private Corporate Client Canaccord and Client Canaccord and Services Adams Other Total Services Adams Other Total $ $ $ $ $ $ $ $ ------------------------------------------------------------------------- Revenues 78,422 120,243 8,409 207,074 56,391 81,444 5,094 142,929 Expenses 54,107 83,601 20,377 158,085 38,621 60,517 15,411 114,549 Amortiz- ation 462 800 707 1,969 318 331 303 952 Development, restruct- uring and other costs 1,416 1,041 1,108 3,565 808 234 959 2,001 ------------------------------------------------------------------------- Income (loss) before income taxes 22,437 34,801 (13,783) 43,455 16,644 20,362 (11,579) 25,427 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the twelve months ended March 31, 2006 2005 ------------------------------------------------------------------ Private Corporate Private Corporate Client Canaccord and Client Canaccord and Services Adams Other Total Services Adams Other Total $ $ $ $ $ $ $ $ ------------------------------------------------------------------------- Revenues 225,194 333,666 24,555 583,415 178,176 239,654 14,948 432,778 Expenses 158,235 228,534 63,002 449,771 123,619 171,849 53,445 348,913 Amortiz- ation 1,439 1,910 1,468 4,817 1,087 1,204 894 3,185 Development, restruct- uring and other costs 4,302 1,239 4,256 9,797 2,798 682 4,444 7,924 ------------------------------------------------------------------------- Income (loss) before income taxes 61,218 101,983 (44,171) 119,030 50,672 65,919 (43,835) 72,756 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company's business operations are grouped into three geographic segments as follows: For the three For the twelve months ended months ended ---------------------- ---------------------- March 31, March 31, March 31, March 31, 2006 2005 2006 2005 $ $ $ $ ------------------------------------------------- ---------------------- Canada Revenue 145,194 110,094 437,409 316,688 Net income 17,406 11,193 49,442 28,211 Equipment and leasehold improvements 21,635 11,888 21,635 11,888 Goodwill and other intangible assets 4,584 - 4,584 - United States Revenue 20,106 - 20,106 - Net income 1,716 - 1,716 - Equipment and leasehold improvements 2,576 - 2,576 - Goodwill and other intangible assets 23,345 - 23,345 - United Kingdom Revenue 41,774 32,835 125,900 116,090 Net income 10,948 6,114 29,992 20,368 Equipment and leasehold improvements 1,539 1,862 1,539 1,862 ------------------------------------------------- ---------------------- ------------------------------------------------- ---------------------- 12. CONTINGENCIES During the period, there have been no material changes to the Company's contingencies from those described in note 16 of the March 31, 2005 Audited Annual Consolidated Financial Statements. 13. GAIN ON DISPOSAL OF INVESTMENT During the three months ended June 30, 2005, the Company recognized a gain of $1.6 million from the sale of its investment in shares of the Bourse de Montrĩal. 14. SUBSEQUENT EVENT Dividend On May 16, 2006, the Board of Directors declared a common share dividend of $0.08 per share payable on June 9, 2006, with a record date of May 26, 2006. 15. CANADIAN AND INTERNATIONAL FINANCIAL REPORTING STANDARDS DIFFERENCES These consolidated financial statements have been prepared in accordance with Canadian GAAP with respect to interim financial statements. In certain respects, International Financial Reporting Standards ("IFRS") adopted by the International Accounting Standards Board differ from those applied in Canada. If IFRS were employed, there would be no material adjustment to net income or earnings per share and consolidated shareholders' equity of the Company for the twelve months ended March 31, 2006 and 2005. The area of material difference between GAAP and IFRS and its impact on the consolidated financial statements of the Company is in the consolidated statement of changes in shareholders' equity. IFRS requires the inclusion of a consolidated statement of changes in shareholders' equity for each statement of income year, as follows: March 31, March 31, 2006 2005 $ $ ------------------------------------------------------------------------- ISSUED AND PAID SHARE CAPITAL Common shares Balance at the beginning of the year 153,061 61,292 Shares issued for cash 6,574 5,104 Shares cancelled (1,375) (186) Shares issued on conversion of Class 4 preferred shares Series A - 190 Shares issued on conversion of serial debentures - 20,357 Shares issued in connection with initial public offering - 66,170 Shares issued for cash - 134 Shares issued in connection with acquisitions 15,022 - ------------------------------------------------------------------------- Balance at the end of the year 173,282 153,061 ------------------------------------------------------------------------- Unvested share purchase loans Balance at the beginning of the year (2,929) (1,514) Movements during the year (17,648) (1,415) ------------------------------------------------------------------------- Balance at the end of the year (20,577) (2,929) ------------------------------------------------------------------------- Preferred shares Balance at the beginning of the year - 190 Exchange into common shares - (190) ------------------------------------------------------------------------- Balance at the end of the year - - ------------------------------------------------------------------------- Contributed surplus Balance at the beginning of the year 898 441 Movements during the year 4,041 457 ------------------------------------------------------------------------- Balance at the end of the year 4,939 898 ------------------------------------------------------------------------- 157,644 151,030 ------------------------------------------------------------------------- ------------------------------------------------------------------------- March 31, March 31, 2006 2005 $ $ ------------------------------------------------------------------------- CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT Balance at the beginning of the year (1,383) 265 Movements during the year (4,894) (1,648) ------------------------------------------------------------------------- Balance at the end of the year (6,277) (1,383) ------------------------------------------------------------------------- ------------------------------------------------------------------------- RETAINED EARNINGS Balance at the beginning of the year 72,564 38,013 Net income for the year 81,150 48,579 Excess on redemption of common shares (2,796) (193) Cash dividends (14,455) (13,835) ------------------------------------------------------------------------- Balance at the end of the year 136,463 72,564 ------------------------------------------------------------------------- 16. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the fiscal 2006 annual financial statement presentation. For further information: Anthony Ostler, Senior Vice President, InvestorRelations & Communications, Phone: (604) 643-7647, Email:anthony_ostler(at)canaccord.com; London: Bobby Morse or Ben Willey, BuchananCommunications, Phone: +44 (0) 207 466 5000, Email: bobbym(at)buchanan.uk.com (CCI.) ENDCANACCORD CAPITAL INC.

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