Interim Results

9th Nov 2005 07:12

Canaccord Capital Inc. reports record second quarter results Net income up over 150% driven by strong North American capital markets (All dollar amounts are stated in Canadian dollars unless otherwise indicated) VANCOUVER, Nov. 8 /CNW/ - Canaccord Capital Inc. (CCI: TSX & AIM)announced that its revenue for its second quarter of fiscal 2006, endedSeptember 30, 2005, was $118.7 million, up $33.1 million compared to$85.6 million the same period a year ago. Net income of $15.7 million for thesecond quarter of fiscal 2006 was a record for the second quarter, up $9.6million from $6.1 million the same period a year ago, and diluted earnings pershare (EPS) for the quarter were $0.34, up $0.21 from $0.13 for the sameperiod a year ago. "This past quarter, we successfully leveraged a robust North Americancapital markets environment to generate record revenue," said Peter M. Brown,Chairman & CEO. "Our results demonstrate both the talent and hard work of ouremployees and partners and the positive impact of our integrated globalfranchise." Michael G. Greenwood, President & COO, added, "We are pleased thatour ideas and expertise in our key focus sectors are generating benefits forour clients in the marketplace." Highlights of fiscal second quarter 2006 (three months ended September30, 2005), compared to the fiscal second quarter of 2005 (three months endedSeptember 30, 2004): - Revenue of $118.7 million, up 38.6%, or $33.1 million, from $85.6 million - Expenses of $94.4 million, up 25.3%, or $19.1 million, from $75.3 million - Total compensation payout as a percentage of revenue was 58.1%, down from 62.1% in Q2/05 - Net income of $15.7 million, up 157.3%, or $9.6 million, from $6.1 million - Diluted EPS of $0.34, up 161.5%, or $0.21, from $0.13 - Return on equity (ROE) of 27.8%, up from a ROE of 12.2% - A common share dividend of $0.06 per share was declared by the Board on November 8, 2005 to be payable on December 9, 2005, with a record date of November 25, 2005 Highlights for the first half of fiscal 2006 (six months endedSeptember 30, 2005), compared to the first half of fiscal 2005 (six monthsended September 30, 2004): - Revenue of $217.7 million, up 31.0%, or $51.5 million, from $166.2 million - Expenses of $178.0 million, up 24.1%, or $34.6 million, from $143.4 million - Total compensation payout as a percentage of revenue for the first half of fiscal 2006 was 58.3%, down from 59.8% for the same period last year - Net income of $26.8 million, up 84.7%, or $12.3 million, from $14.5 million - Diluted EPS of $0.58, up 65.7%, or $0.23, from $0.35 - ROE of 23.8%, up from a ROE of 15.8% (the slower growth in diluted EPS and ROE than in net income is partially attributable to the issuance of $70 million in common shares resulting from the Initial Public Offering on June 30, 2004) - Book value per common share at the period end increased to $4.82, up $0.50 from $4.32 - In fiscal Q1/06, Canaccord recognized a one time pre-tax gain of $1.6 million, equivalent to approximately $0.03 per diluted share after tax, from the disposal of an investment in the Bourse de Montrĩal Developments: - On September 13, 2005, Canaccord announced the signing of an agreement to acquire 100% of Adams Harkness Financial Group, Inc., a privately-held Boston, Massachusetts based institutional investment bank for US$20 million. In calendar 2006, the acquisition will create Canaccord Adams, a new brand for Canaccord's Global Capital Markets operations worldwide. The agreement is subject to various approvals including shareholders' and regulatory approvals in Canada and the US. This acquisition is expected to close prior to March 31, 2006 - During fiscal Q2/06, Canaccord announced the hiring of seven highly qualified professionals in London, UK - During fiscal Q2/06, Canaccord repurchased and cancelled 401,200 common shares at a weighted average price of $11.25 per share under its existing normal course issuer bid (NCIB) through the facilities of the Toronto Stock Exchange. These repurchases and cancellations were undertaken as part of Canaccord's capital management plan to purchase for cancellation up to 500,000 common shares. The Board of Directors has approved an increase of a further 500,000 common shares that could be purchased for cancellation. Under this expanded plan there are up to 585,800 total common shares that could be purchased for cancellation. As of November 8, 2005, the total number of outstanding common shares remaining available for repurchase under the NCIB is 1,669,715. For more details on the capital management plan, please see page 18 - Also during fiscal Q2/06, Canaccord has disposed of a significant portion of its Immigrant Investor Program, a non-core business - The Board of Directors of Canaccord has approved the issuance of 691,940 common shares at an average price of $9.50 per share. These shares are associated with the recruitment of Global Capital Markets professionals 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 second quarter results conferencecall with analysts and institutional investors live and archived, via theInternet and toll free telephone. The conference call is scheduled for Wednesday, November 9, 2005 at10:00 a.m. (Pacific time). At that time, senior executives will comment on theresults for the second quarter 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: 416-640-4127 (within Toronto), 1-800-814-4859 (toll-free outside Toronto) or00-800-0000-2288 (toll-free from the United Kingdom). A replay of theconference call can be accessed after 6:00 p.m. (Pacific time) on November 9,2005 until midnight November 23, 2005 at 416-640-1917 or 1-877-289-8525 byentering passcode 21135102 followed by the number sign. ABOUT CANACCORD CAPITAL INC.: Through its principal subsidiaries, Canaccord Capital Inc. (CCI) is aleading independent full service investment dealer in Canada and the UnitedKingdom and is publicly traded on both the Toronto Stock Exchange and theAlternative Investment Market (AIM), a market operated by the London StockExchange. Canaccord has operations in two of the principal segments of thesecurities industry: Private Client Services and Global Capital Markets.Together, these operations offer a wide range of complementary investmentproducts, brokerage services and investment banking services to Canaccord'sretail, institutional and corporate clients. Canaccord has approximately 1,275employees worldwide in 28 offices, including Investment Advisors located in 25offices across Canada, and international Global Capital Markets professionalsbased in Vancouver, Calgary, Toronto, Montrĩal and London (UK). FOR FURTHER INFORMATION CONTACT: Anthony Ostler London: Senior Vice President, Investor Bobby Morse/Charles Ryland Relations & Communications Buchanan Communications Phone: 604-643-7647 Phone: +44 (0) 207 466 5000 Email: anthony_ostler(at)canaccord.com Email: bobbym(at)buchanan.uk.com ------------------------------------------------------------------------- None of the information in Canaccord's Web site www.canaccord.com should be considered incorporated herein by reference. ------------------------------------------------------------------------- MESSAGE from the CHAIRMAN & CEO and the PRESIDENT & COO In the second quarter of fiscal 2006, Canaccord generated strong returnsin both of our core business areas. Revenue growth of 43.6% in our PrivateClient Services business and 28.7% in Global Capital Markets over the sameperiod last year was the result of robust North American capital marketsactivity and our ability to deliver quality investment ideas to our clients inour global focus areas. Additionally, we leveraged a revised compensationstructure and continued expense control to contribute to triple digit netprofit growth of 157.3% and diluted EPS growth of 161.5%, compared to overallrevenue growth of 38.6%, all up from the second fiscal quarter last year. Thecredit for this significant progress early in our fiscal year goes to ourentrepreneurial partners, key producers and professional operations staff. Our performance for the year-to-date has been strong, reflecting solidrevenue growth of 31.0%, driven by healthy equity markets, net income growthof 84.7% and diluted EPS growth of 65.7%, when compared to the first half offiscal 2005. The stronger growth in profit relative to the growth in revenuereflects our operational leverage off of our fixed expenses and is also due tothe change in compensation payout that was implemented at the beginning offiscal Q1/06. Overall, we are pleased with our performance for the first halfof fiscal 2006; historically, a less active time of the year in North Americancapital markets. Expanded wealth management product offerings and successful recruitmentdrive revenue growth Our commitment to providing our private clients with superior wealthmanagement strategies in an independent, idea-driven environment paiddividends this quarter. Private Client Services' revenue for the quarter wasup 43.6% from a year ago, reaching a second fiscal quarter record of$52.4 million. Because of our service offerings, we were well positioned tobenefit from the positive market environment over the summer and internallygenerated through our strong advisor force. The combination of these factorsalso resulted in our assets under administration (AUA) reaching a record$11.5 billion, up 32.5% from a year ago. Our recruitment efforts continue toresult in the expansion of our business, with the total number of InvestmentAdvisors (IAs) up a net 21 from a year ago. We continue to invest in newproducts and the development of further tools and services for our IAs toprovide them with the ability to further improve our service to our clients. Strong Global Capital Markets' results led by active Energy markets The integration of our Global Capital Markets operations on April 1,2005, under the leadership of Paul Reynolds and Mark Maybank was designed toincrease our client service and our ability to facilitate more and largertransactions. Our Global Capital Markets group continues to grow at a double-digit rate, posting revenue growth of 28.7% this quarter over a yearago and 33.4% for the year-to-date. Operational highlights include strongactivity in the Energy markets and continued expansion of the Global CapitalMarkets Energy team. The Energy team assembled by Calgary-based Rick Graftonand London-based Nick Clayton, Global Co-Heads of Energy, generatedsignificant value for our clients, through superior market intelligence andtimely, idea-driven transactions enabling access to growth capital. OurInternational Trading business also continued its solid growth, posting a28.2% growth in revenue over the first six months of last fiscal year,reflecting the increased global interest in Canadian-listed equities, mostsignificantly in the Energy sector. Acquisition strategy enhances Global Capital Markets' competitivestrength Canaccord took further steps to expand our global franchise in thequarter, announcing our intention to acquire Adams Harkness Financial Group,Inc., a privately-held Boston, Massachusetts based institutional investmentbank, for US$20 million. In calendar 2006, the acquisition will createCanaccord Adams, a new brand for Canaccord's Global Capital Markets operationsworldwide. This transaction meets our stated acquisition criteria bymaintaining our competitiveness in a changing landscape, furthering our globalstrategy of delivering an international perspective in niche focus sectors,facilitating integration in sector service teams for superior clienttransaction execution and continuing the diversification of our revenue andearnings base. This diversification, by geographies and sectors, will continueto absorb the impact of weakness in any one area. This quarter, strongactivity in the North American markets more than offset a year over yeardecline in market activity in the UK, which enjoyed an exceptionally strongsecond quarter in fiscal 2005. Executing on our global strategy Canaccord is a focused, integrated and global service provider ofinnovative investment ideas and sector expertise. We are continuing to investin our core business lines and focus sectors, enhancing our client servicesand strengthening our presence in our key capital markets. In Private ClientServices, we are adding capacity by recruiting highly qualified IAs, as wellas working to increase our AUA and improve our wealth management productoffering. Our successful track record of integrating acquisitions will benefitour Global Capital Markets operations as we move forward, introducingCanaccord Adams and its improved capabilities to our clients and themarketplace. We are proud of our recent success, and eager to continue working withand for our clients, partners, employees and shareholders. We look forward toupdating you on our progress over the remainder of the year. (signed) (signed) PETER M. BROWN MICHAEL G. GREENWOOD Chairman & Chief Executive Officer President & Chief Operating Officer Management's Discussion and Analysis Second quarter fiscal 2006 ended September 30, 2005 - this document isdated November 8, 2005 The following discussion of the financial condition and results ofoperations for Canaccord Capital Inc. (Canaccord) is provided to enable areader to assess material changes in financial condition and results ofoperations for the three- and six-month periods ended September 30, 2005,compared to the corresponding periods in the preceding fiscal year, with anemphasis on the most recent three-month period. Canaccord's fiscal year end isMarch 31. Canaccord's second quarter fiscal 2006 was the three-month periodended September 30, 2005, and is also referred to as second quarter 2006 andas Q2/06 in the following discussion. This discussion should be read inconjunction with the unaudited interim consolidated financial statements forthe three- and six-month periods ended September 30, 2005, beginning on page23 of this report, the annual Management's Discussion and Analysis (MD&A), ourAnnual Information Form dated June 10, 2005, and the audited consolidatedfinancial statements for the fiscal year ended March 31, 2005, in Canaccord'sAnnual Report dated June 27, 2005 (the Annual Report). There has been nomaterial change to the information contained in the annual MD&A for fiscal2005 except as disclosed in this MD&A and the MD&A for Q1/06. Canaccord'sfinancial information is expressed in Canadian dollars and is prepared inaccordance with Canadian generally accepted accounting principles (GAAP) withreconciliation to international financial reporting standards (IFRS). All thefinancial data below is unaudited except for the fiscal year 2005 data. Caution regarding forward-looking statements This document may contain certain forward-looking statements. Thesestatements relate to future events or future performance and reflectmanagement's expectations regarding Canaccord's growth, results of operations,performance and business prospects and opportunities. Such forward-lookingstatements reflect management's current beliefs and are based on informationcurrently available to management. In some cases, forward-looking statementscan be identified by terminology such as "may", "will", "should", "expect","plan", "anticipate", "believe", "estimate", "predict", "potential","continue", "target" or the negative of these terms or other comparableterminology. By their very nature, forward-looking statements involve inherentrisks and uncertainties, both general and specific, and a number of factorscould cause actual events or results to differ materially from the resultsdiscussed in the forward-looking statements. In evaluating these statements,readers should specifically consider various factors, which may cause actualresults to differ materially from any forward-looking statement. These factorsinclude, but are not limited to, market and general economic conditions, thenature of the financial services industry and the risks and uncertaintiesdetailed from time to time in Canaccord's interim and annual financialstatements and its Annual Report and Annual Information Form filed onwww.sedar.com. These forward-looking statements are made as of the date ofthis document, and Canaccord assumes no obligation to update or revise them toreflect new events or circumstances. Overview Canaccord is a leading independent full service investment dealer.Canaccord has operations in each of the two principal segments of thesecurities industry: Private Client Services and Global Capital Markets.Together these operations offer a wide range of complementary investmentproducts, brokerage services and investment banking services to Canaccord'sretail, institutional and corporate clients. Canaccord's strong capital base enables the Company to support expansionin Private Client Services and Global Capital Markets and to respond quicklyto competitive changes in the industry. Canaccord's independent ownershipstructure, with a majority of its outstanding shares employee and directorowned, is key to promoting an entrepreneurial culture and providing a distinctrecruiting advantage for attracting and retaining highly qualifiedprofessionals. Non-GAAP measures Certain non-GAAP measures are utilized by Canaccord as measures offinancial performance. Non-GAAP measures do not have any standardized meaningprescribed by GAAP and are therefore unlikely to be comparable to similarmeasures presented by other companies. Canaccord's capital is represented by common shareholders' equity and,therefore, management uses return on average common equity (ROE) as aperformance measure. Assets under administration (AUA) is a non-GAAP measure of client assetsthat is common to the wealth management aspects of the private client servicesindustry. AUA is the market value of client assets administered by Canaccordin respect of which Canaccord earns commissions or fees. This measure includesfunds held in client accounts as well as the aggregate market value of longand short security positions. Canaccord's method of calculating AUA may differfrom the methods used by other companies and therefore may not be comparableto other companies. Management uses this measure to assess operationalperformance of the Private Client Services business segment. Consolidated overview Second fiscal quarter summary data(1) For the three months ended September 30 (C$ thousands, except per share, ----------------------------------- employee and % amounts) 2005 2004 Increase ------------------------------------------------------------------------- Revenue 118,654 85,601 33,053 38.6% Expenses 94,407 75,332 19,075 25.3% Net income 15,754 6,123 9,631 157.3% Earnings per share (EPS) - diluted 0.34 0.13 0.21 161.5% Return on average common equity (ROE) 27.8% 12.2% Book value per common share - period end 4.82 4.32 0.50 11.6% Number of employees 1,282 1,203 79 6.6% ------------------------------------------------------------------------- (1) Some of this data is considered to be non-GAAP. Fiscal second quarter 2006 revenue was a second quarter record of$118.7 million, up $33.1 million, or 38.6%, compared to the same period a yearago and is primarily due to an increase in capital markets activity in NorthAmerica during Q2/06. Total expenses for the three months ending September 30, 2005 were$94.4 million, up $19.1 million, or 25.3%, from a year ago, reflectingincreases in incentive compensation expense and general and administrativeexpense. For the quarter, incentive compensation expense was $59.6 million, up$16.9 million, or 39.5%, largely due to fiscal second quarter record revenueposted by the Private Client Services and Global Capital Markets groups, whichresulted in higher compensation payouts compared to the same quarter a yearago. Also contributing to the increase in incentive compensation expense wasthe implementation of the Company's new Employee Stock Incentive Plan (ESIP),which is an employee retention program for key employees. General andadministrative expense was $9.1 million, up $1.0 million from a year ago, or13.1%. This increase is largely due to an increase in promotion and travelcosts to support the increase in business activity. Net income for the quarter was a record of $15.7 million, up $9.6million, or 157.3%, from a year ago. Diluted EPS were $0.34, up $0.21, or161.5%. For the second quarter of fiscal 2006, ROE was 27.8% compared to a ROEof 12.2% a year ago. Book value per common share increased by 11.6% to $4.82,up $0.50 from $4.32 a year ago, and is primarily a result of additionalretained earnings during the last 12 months. Income taxes were $8.5 million for the quarter, reflecting an effectivetax rate of 35.0% compared to 40.4% a year ago. Due to the alignment ofestimated taxes to actual tax returns filed for fiscal 2004 and fiscal 2005,our effective tax rate increased by 5.3% in fiscal 2004 and 1.9% in fiscal2005. Without this change, our effective tax rates would have been 35.1% and33.1%, respectively, for the quarters. The decrease in the effective tax ratein Q2/06 relative to Q2/05 is related to the geographical composition of netincome for the Company. Our effective tax rate may vary from time to time. Six month year-to-date summary data(1) For the six months ended September 30 (C$ thousands, except per share, ----------------------------------- employee and % amounts) 2005 2004 Increase ------------------------------------------------------------------------- Revenue 217,671 166,166 51,505 31.0% Expenses 177,994 143,426 34,568 24.1% Net income 26,832 14,529 12,303 84.7% EPS - fully diluted(2) 0.58 0.35 0.23 65.7% ROE(2) 23.8% 15.8% Book value per common share - period end 4.82 4.32 0.50 11.6% Number of employees 1,282 1,203 79 6.6% ------------------------------------------------------------------------- (1) Some of this data is considered to be non-GAAP. (2) The slower growth in diluted EPS and ROE than net income for year-to- date fiscal 2006 compared to year-to-date fiscal 2005 partially reflects the issuance of $70 million in equity on June 30, 2004. For the first six months of fiscal 2006, revenue was $217.7 million, up$51.5 million, or 31.0%, compared to the same period a year ago and isprimarily due to an increase in capital markets activity in North Americaduring the first six months of fiscal 2006. Six month expenses were $178.0 million, up $34.6 million, or 24.1%, froma year ago, reflecting increases in incentive compensation expense and generaland administrative expense. Incentive compensation expense was $108.2 million,up $30.4 million, or 39.1%, largely due to fiscal year-to-date record revenuelevels posted by the Global Capital Markets group, which resulted in highercompensation payouts compared to the same period a year ago. General andadministrative expense was $19.1 million, up $5.0 million from a year ago, or35.7%. Of this increase, $2.0 million is due to an increase in promotion andtravel costs; $0.9 million is due to an increase in reserves related tounsecured client balances; $0.8 million is due to an increase in professionalfees; and increases in expenses associated with being a public company,insurance costs and regulatory fees totalled $1.1 million. Net income for the first half of fiscal 2006 was $26.8 million, up$12.3 million, or 84.7%, from a year ago. Diluted EPS were $0.58, up $0.23, or65.7%. For the first half of fiscal 2006, ROE was 23.8% compared to a ROE of15.8% from a year ago. The slower increase in diluted EPS and ROE than netincome partially reflects the additional equity resulting from the issuancefrom treasury of $70 million in common shares from the Initial Public Offering(IPO) on the Toronto Stock Exchange on June 30, 2004. Book value per common share increased by 11.6% to $4.82, up $0.50 from$4.32 a year ago, and is primarily a result of additional retained earningsduring the last 12 months. Income taxes were $12.8 million for the first half of fiscal 2006,reflecting an effective tax rate of 32.4% compared to 36.1% a year ago. Thedecrease in our effective tax rate is a result of a one time gain of$1.6 million resulting from the sale of our investment in the Bourse deMontrĩal during Q1/06. As a capital gain, it is taxed at a lower rate,therefore reducing our effective income tax rate for the year-to-date by 0.7%.Also contributing to the decrease in our consolidated tax rate was a revisedestimate of the European future income tax liability, which reduced oureffective tax rate for the year-to-date by another 0.8%. Offsetting thesereductions was an alignment of estimated taxes for fiscal 2005 to actual taxreturns filed contributing to an increase in the effective tax rate of 1.2%.Without these changes, our effective tax rate would have been 32.7% for thefirst half of fiscal 2006. Business environment Canaccord's business is cyclical and thus experiences considerablevariations in revenue and income from quarter to quarter and year to year dueto the factors discussed on page 6. These factors are beyond Canaccord'scontrol and, accordingly, revenue and net income will fluctuate as they havehistorically. Our business is correlated to the overall condition of the NorthAmerican equity markets, including the seasonal variance in those markets. Ingeneral, North American capital markets are slower during the first half ofthe fiscal year, which generally contributes only about 35% to 40% of annualrevenue, whereas between 60% to 65% of annual revenue has historically beengenerated during the second half of each fiscal year. However, fiscal year-to-date 2006 has been abnormally strong in North America, and thus our first halfrevenue for this fiscal year may be more than the historical average relativeto our annual revenue for this fiscal year. Industry outlook North American equity markets remained buoyant in the third quarter ofcalendar year 2005. In Canada, the S&P/TSX Composite was up 19.1% sinceDecember 31, 2004, and 11.2% since the previous quarter. Strength in equitymarkets continued to gain due to strong demand in the energy sector pushingthe Canadian dollar to a 13-year high of 86 cents to the US dollar. European equity markets have also continued to perform well but slowerthan North American markets in the third quarter of calendar year 2005.Attractive valuations, a positive earnings outlook and a stable interest rateenvironment are all providing support to the equity market. For the thirdquarter of calendar year 2005, the AIM market of the London Stock Exchangelisted 112 companies, a decline of 24% compared to 147 in the second quarterof calendar 2005. During the first nine months of calendar 2005, AIM hasadmitted a total of 389 new issuers and has raised over $6.8 billion, a 22%increase compared to the full 2004 calendar year. Overall, growth in thismarket is largely due to its increasing international awareness and thequality of emerging companies that are seeking admission on AIM. We believe that North American and global growth will remain robust forthe balance of 2005. However, 2006 is likely to see a slowdown in the real,non-headline rate of US economic growth. Next year, continuing high energyprices and inflation, the impact of monetary tightening by the Federal ReserveBoard and flattening house prices will all contribute to a more modest pace ofUS economic growth. Results of operations Revenue Revenue for the three months ended September 30 (C$ thousands, -------------------------------------------- except % amounts) 2005 2004 Increase ------------------------------------------------------------------------- Private Client Services 52,411 44.2% 36,499 42.7% 15,912 43.6% Global Capital Markets 60,048 50.6% 46,671 54.5% 13,377 28.7% Other 6,195 5.2% 2,431 2.8% 3,764 154.8% -------- -------- -------- Total 118,654 85,601 33,053 38.6% Revenue increased by $33.1 million in the second quarter over the samequarter a year ago and reflects growth from Private Client Services and GlobalCapital Markets. Revenue for the six months ended September 30 (C$ thousands, -------------------------------------------- except % amounts) 2005 2004 Increase ------------------------------------------------------------------------- Private Client Services 92,041 42.3% 74,821 45.0% 17,220 23.0% Global Capital Markets 114,505 52.6% 85,842 51.7% 28,663 33.4% Other 11,125 5.1% 5,503 3.3% 5,622 102.2% -------- -------- -------- Total 217,671 166,166 51,505 31.0% Revenue grew by $51.5 million during the first half of fiscal 2006 overthe same period a year ago and reflects growth from Private Client Servicesand Global Capital Markets. Geographic revenue Revenue from the UK and Europe is derived entirely from Global CapitalMarkets activity, while revenue in North America is derived from PrivateClient Services, Global Capital Markets and Other segments. Geographic revenue for the three months ended September 30 (C$ thousands, -------------------------------------------- except % amounts) 2005 2004 Increase (decrease) ------------------------------------------------------------------------- Canada 102,242 86.2% 60,277 70.4% 41,965 69.6% UK 16,412 13.8% 25,324 29.6% (8,912) (35.2)% -------- -------- -------- Total 118,654 85,601 33,053 38.6% Revenue for the second quarter in North America was up by 69.6% from ayear ago due to exceptionally favourable market conditions when compared tothe same quarter a year ago. Private Client Services and Global CapitalMarkets revenue grew by $15.9 million and $13.4 million, respectively,compared to last year. Revenue in the UK was down by 35.2%, reflecting slowercapital markets activity in the UK this quarter when compared to Q2/05, whichwas an exceptionally strong second quarter. The table on page 35 of theinterim unaudited consolidated financial statements provides further detail onCanaccord's geographic results. Geographic revenue for the six months ended September 30 (C$ thousands, -------------------------------------------- except % amounts) 2005 2004 Increase (decrease) ------------------------------------------------------------------------- Canada 178,426 82.0% 124,493 74.9% 53,933 43.3% UK 39,245 18.0% 41,673 25.1% (2,428) (5.8)% -------- -------- -------- Total 217,671 166,166 51,505 31.0% Six month revenue in North America was up $53.9 million, or 43.3%,reflecting strong growth in North American equity markets during the first sixmonths of fiscal 2006 compared to the same period a year ago. In the UK andEurope, revenue was down by $2.4 million, or 5.8%, which is largely due to anunusually strong performance during the comparative Q2/05 period relative tothe slower capital markets activity in the UK this quarter. Expenses Expenses for the three months ended September 30 (C$ thousands, -------------------------------------------- except % amounts) 2005 2004 Increase (decrease) ------------------------------------------------------------------------- Incentive compensation 59,580 50.2%(2) 42,721 49.9%(2) 16,859 39.5% Salaries and benefits 9,409 7.9% 10,414 12.2% (1,005) (9.7)% Other overhead expenses(1) 25,418 21.5% 22,197 25.9% 3,221 14.5% -------- -------- -------- Total 94,407 79.6% 75,332 88.0% 19,075 25.3% (1) Consists of trading costs, premises and equipment, communication and technology, interest, general and administrative expense, amortization, development costs and gain on disposal of investments. (2) Percentages in this column are of revenue. Incentive compensation and salaries and benefits As of April 1, 2005, a new incentive compensation schedule wasimplemented to better integrate our Global Capital Markets team in Canada andEurope. As a result, the compensation structure of Global Capital Markets wasreorganized and is expected to result in a total compensation payout ratio tototal fiscal 2006 revenue for this segment of approximately 55% with anadditional 3% allocated to cover applicable National Health Insurance (NHI)taxes for UK based employees. The change will effectively reduce the overalltotal company compensation expense ratio across the full fiscal year comparedto fiscal 2005's ratio. For the three months ended September 30, 2005, incentive compensation, asa percentage of revenue, increased to 50.2% compared to 49.9% for the samequarter a year ago, reflecting the change to a flat payout structure in GlobalCapital Markets. The dollar amount paid out grew by $16.9 million for thesecond quarter of fiscal year 2006 compared to last year, which largelyreflects the change in payouts and the increased revenue compared to the sameperiod a year ago, and the implementation of the ESIP during this quarter. Salaries and benefits expense was down by $1.0 million for the secondquarter of fiscal 2006, compared to the same quarter a year ago, which isprincipally due to the change in the Global Capital Markets payout structureas explained above. Therefore, the total compensation payout as a percentageof consolidated revenue for Q2/06 was 58.1%, down from 62.1% in Q2/05. Other overhead expenses Other overhead expenses grew by $3.2 million during the second quarter offiscal 2006, compared to the same quarter a year ago. This increase is largelydue to increases in client interest expense, up $1.0 million, general andadministrative expense, up $1.0 million, and trading costs, which were up$0.7 million. General and administrative expense Included as a component of other overhead expenses is general andadministrative expense, which grew by $1.0 million in Q2/06 compared to Q2/05.This increase is largely due to the increase in promotion and travel costs tosupport the overall increase in business travel activity, and increases inpublic company costs as a result of being listed on AIM. Development costs Development costs for the three months ended September 30 ------------------ (C$ thousands) 2005 2004 ------------------------------------------------------------------------- Hiring incentives 1,023 824 Systems development 1,015 1,152 ------------------ Total 2,038 1,976 Also included as a component of other overhead expenses are developmentcosts which include hiring incentives and systems development costs. Hiringincentives are often an element in our recruitment strategy when Canaccordhires new Investment Advisors (IAs) or Global Capital Markets professionals.Systems development costs are expenditures that Canaccord has made inconjunction with the development of its information technology platform. Expenses for the six months ended September 30 (C$ thousands, -------------------------------------------- except % amounts) 2005 2004 Increase (decrease) ------------------------------------------------------------------------- Incentive compensation 108,230 49.7%(2) 77,814 46.8%(2) 30,416 39.1% Salaries and benefits 18,635 8.6% 21,628 13.0% (2,993) (13.8)% Other overhead expenses(1) 51,129 23.5% 43,984 26.5% 7,145 16.2% -------- -------- -------- Total 177,994 81.8% 143,426 86.3% 34,568 24.1% (1) Consists of trading costs, premises and equipment, communication and technology, interest, general and administrative expense, amortization, development costs and gain on disposal of investments. (2) Percentages in this column are of revenue. For the six months ended September 30, 2005, incentive compensation, as apercentage of revenue, increased to 49.7% compared to 46.8% the same quarter ayear ago, reflecting the changes to a flat payout structure in Global CapitalMarkets and the implementation of the ESIP which was offered to key employeesduring Q2/06. The dollar amount paid out grew by $30.4 million for the firstsix months of fiscal year 2006 compared to last year, which reflects thechange in payouts and the increased revenue compared to the same period a yearago. Salaries and benefits expense decreased by $3.0 million during the firsthalf of fiscal 2006, which is largely due to the change in the Global CapitalMarkets payout structure. Therefore, the total compensation payout as apercentage of consolidated revenue for the first half of fiscal 2006 was58.3%, down from 59.8% for the same period last year. Other overhead expenses Other overhead expenses increased by $7.1 million for the first half offiscal 2006. This increase is largely due to increases in general andadministrative expense as described below. General and administrative expense General and administrative expense is included as a component of otheroverhead expenses, which grew by $5.0 million in the first half of fiscal2006. This amount reflects increases in such items as promotion and travelcosts of $2.0 million, reserves of $0.9 million, professional fees of$0.8 million, and public company related expenses, regulatory fees andinsurance costs totalling $1.3 million. Development costs Development costs for the six months ended September 30 (C$ thousands) 2005 2004 ------------------------------------------------------------------------- Hiring incentives 2,032 1,552 Systems development 2,097 2,499 ------------------ Total 4,129 4,051 Net income Net income for the second quarter of fiscal 2006 was $15.7 million, up$9.6 million, or 157.3%, compared to net income of $6.1 million for the sameperiod a year ago. This growth in earnings is mainly due to strong revenuegrowth in Private Client Services and Global Capital Markets, which is largelydue to favourable market conditions in North American equity markets. DilutedEPS for Q2/06 was $0.34, up $0.21, or 161.5%, from a year earlier. Net income for the year-to-date 2006 was $26.8 million, up $12.3 million,or 84.7%, compared to net income of $14.5 million for the same period a yearago. This growth in earnings is mainly due to a strong start to fiscal 2006 inboth primary business segments and continued revenue growth in Global CapitalMarkets largely reflecting favourable market conditions in North America.Diluted EPS for year-to-date of fiscal 2006 was $0.58, up $0.23, or 65.7%,from a year earlier. Also contributing to the year-to-date results was a onetime pre-tax gain of $1.6 million from the disposal of an investment in theBourse de Montrĩal during Q1/06. The gain was equivalent to $1.3 million aftertax and approximately $0.03 per diluted share. Business segment results Private Client Services (C$ thousands, except assets under administration which is Private Client Services summary for in C$ millions, employees, the three months ended September 30 Investment Advisors and ----------------------------------- % amounts) 2005 2004 Increase ------------------------------------------------------------------------- Revenue 52,411 36,499 15,912 43.6% Expenses 37,082 26,685 10,397 39.0% Income before income taxes 15,329 9,814 5,515 56.2% Assets under administration (AUA) 11,495 8,678 2,817 32.5% Number of Investment Advisors (IAs) 441 420 21 5.0% Number of employees 663 638 25 3.9% Private Client Services revenue is principally derived from tradingcommissions generated from a diverse client base of individuals and high networth accounts. Revenue derived from client activity is closely tied togeneral stock market performance and trading activity. Revenue from Private Client Services for the three months endingSeptember 30, 2005 was $52.4 million, up $15.9 million, or 43.6%, from a yearago due to exceptionally strong market activity in North American equitymarkets during the quarter compared to Q2/05. Parallel with this revenuegrowth was a $2.8 billion increase in assets under administration (AUA) to$11.5 billion. The 32.5% growth in AUA since Q2/05 largely reflects thegeneral increase in equity values in North American equity markets and theaddition of assets transferred with newly hired IAs. Similarly, fee-basedrevenue grew over 49% compared to the same quarter a year ago, reflectingefforts to generate more recurring revenue in Private Client Services. Therewere 441 IAs at the end of the second quarter of 2006, a net increase of 21from a year ago. Expenses for Q2/06 were $37.1 million, up $10.4 million, or 39.0%,largely reflecting increases in incentive compensation expense, up $7.7million, which is mainly due to higher payouts due to strong revenue growthfor the quarter but also includes costs from the new ESIP for key employees inthis business segment. Also contributing to the overall increase in expensesfor the quarter is general and administrative expense, up $1.0 million andclient interest expense, up $0.6 million compared to a year ago. Withingeneral and administrative expense, there was an increase of $0.8 million inreserves, which is largely due to fluctuations in client activity and marketconditions, and an increase of $0.1 million in promotion and travel expenses. Income before income taxes for the quarter was $15.3 million, up 56.2%from the same period a year ago, reflecting the fact that revenue grew fasterthan expenses for reasons stated above. (C$ thousands, except assets under administration which is Private Client Services summary for in C$ millions, employees, the six months ended September 30 Investment Advisors and ----------------------------------- % amounts) 2005 2004 Increase ------------------------------------------------------------------------- Revenue 92,041 74,821 17,220 23.0% Expenses 68,102 54,969 13,133 23.9% Income before income taxes 23,939 19,852 4,087 20.6% AUA 11,495 8,678 2,817 32.5% IAs 441 420 21 5.0% Number of employees 663 638 25 3.9% Six month revenue from Private Client Services was $92.0 million, up$17.2 million, or 23.0%, largely reflecting strong market activity in NorthAmerican equity markets during Q2/06 relative to the same quarter a year ago. Six month expenses were $68.1 million, up $13.1 million, or 23.9%,largely reflecting increases in incentive compensation expense, up $7.5million, general and administrative expense, up $2.8 million, and clientinterest expense, which was up $1.1 million compared to a year ago. Withingeneral and administrative expense, there was an increase of $2.1 million inreserves, which is largely due to fluctuations in client activity and marketconditions, and an increase of $0.6 million in professional fees. Income before income taxes for the first half of fiscal 2006 was$23.9 million, up 20.6% from the same period a year ago reflecting thestronger market activity so far this year and the contribution from IAs thathave been recruited in the past year. Global Capital Markets Global Capital Markets summary for the three months ended September 30 (C$ thousands, except employees ----------------------------------- and % amounts) 2005 2004 Increase ------------------------------------------------------------------------- Revenue 60,048 46,671 13,377 28.7% Expenses 41,392 35,470 5,922 16.7% Income before income taxes 18,656 11,201 7,455 66.6% Number of employees 283 251 32 12.7% Global Capital Markets revenue is generated from commissions and feesearned in connection with investment banking transactions and institutionalsales and trading activity as well as net trading gains and losses fromCanaccord's principal and international trading operations. Accordingly, thisrevenue is directly affected by the level of corporate and institutionalactivity and general economic, market and business conditions in Canada andinternationally. Revenue from Global Capital Markets for the three months endingSeptember 30, 2005 was up $13.4 million, or 28.7%, compared to the samequarter a year ago due to exceptionally strong capital markets activity inNorth America. For the current quarter, revenue from North American marketswas $43.6 million, up $22.3 million, or 104.4%, when compared to the samequarter a year ago. However, in European markets, revenue was down $8.9million, or 35.2%, which was largely due to an exceptionally strongcomparative second quarter in fiscal 2005. Total advisory fees earned by ourGlobal Capital Markets team for the quarter totalled $1.0 million, down$0.8 million from the same period a year ago. Revenue from the Registered Trading business was up $1.8 million thisquarter, or more than ten times higher than the same quarter a year ago. On September 13, 2005, Canaccord reached an agreement to acquire 100% ofAdams Harkness Financial Group, Inc., a privately-held Boston, Massachusettsbased institutional investment bank for US$20 million which consists ofUS$8 million in cash and US$12 million in approximately 1.34 million commonshares of Canaccord Capital Inc., which will come from a combination of sharesacquired from selling shareholders and issuance of treasury shares.Furthermore, an additional US$10 million retention pool in Canaccord commonshares will be established to retain key Adams Harkness employees and itssenior management. The retention pool involves the issuance of approximately1.12 million common shares of Canaccord Capital Inc., to be paid after athree-year vesting period. The total number of shares to be vested is alsobased on achievement of revenue targets. The agreement is subject toregulatory approvals in Canada and the US and is subject to approval by theshareholders of Adams Harkness and the customary closing conditions. Thisacquisition is expected to close prior to March 31, 2006. As of April 1, 2005, a new incentive compensation schedule wasimplemented to better integrate our Global Capital Markets teams in Canada andEurope. As a result, the total compensation payout ratio to total fiscal 2006revenue is expected to be approximately 55% with an additional 3% allocated tocover applicable National Health Insurance (NHI) taxes for UK based employees.Starting Q1/06, salary and benefits expense is now allocated directly to theGlobal Capital Markets incentive compensation pool for employees of thissegment, with the exception of a portion of the salary and benefits costs fromResearch, which are allocated to Private Client Services for services used byour IAs. The change will effectively reduce the Company's overall totalcompensation expense ratio across the full fiscal year compared to fiscal2005's ratio. Incentive compensation for the quarter was $30.7 million, up 31.2%compared to the same quarter a year ago, and is largely due to the continuedgrowth in revenue resulting in higher payouts for the period. Alsocontributing to this increase was the introduction of Canaccord's key employeeretention program, or the ESIP, which was primarily offered to key GlobalCapital Markets employees among others during the quarter. Salary and benefits expense for the quarter was $1.8 million, down 53.0%compared to a year ago despite the fact that a total of 32 new employees werehired over the same quarter a year ago in Corporate Finance and Research inEurope and in Canada. The decrease in expenses is largely attributed to therecent change in the compensation structure where the majority of salary andbenefits expense is now covered through Global Capital Markets incentivecompensation pool. For the quarter, the total compensation expense payout as apercentage of revenue was 54.1%, down 4.2% compared to 58.3% a year ago. Thelower payout ratio reflects the change to a flat annual payout structure inGlobal Capital Markets in fiscal 2006. General and administrative expense was up $0.4 million, or 9.8%, and islargely due to an increase in promotion and travel costs, which were up$0.7 million compared to the same quarter a year ago and is related to theoverall increase in business travel activity required to support the growth inthe business. Income before income taxes for the quarter was up $7.5 million, or 66.6%,when compared to the same quarter a year ago and is largely due to revenuegrowth significantly exceeding expense growth. Global Capital Markets summary for the six months ended September 30 (C$ thousands, except employees ----------------------------------- and % amounts) 2005 2004 Increase ------------------------------------------------------------------------- Revenue 114,505 85,842 28,663 33.4% Expenses 80,856 61,595 19,261 31.3% Income before income taxes 33,649 24,247 9,402 38.8% Number of employees 283 251 32 12.7% Six month revenue from Global Capital Markets was up $28.7 million, or33.4%, compared to the same period a year ago due to exceptionally strongcapital markets activity in North America. For the first half of fiscal 2006,revenue from North American markets was $75.3 million, up $31.1 million, or70.4%, when compared to the same period a year ago. Whereas in Europeanmarkets, revenue was $39.2 million, down 5.8% compared to the first half offiscal 2005. Total advisory fees earned by our Global Capital Markets team forthe first half of fiscal 2006 totalled $4.5 million, up $2.1 million comparedto the same period a year ago. Six month revenue from the Registered Trading business was up $2.4million, more than 24 times higher than the same period a year ago, whichreflects additional capital allocation procedures and other controlsimplemented with this group, and more favourable trading conditions for NorthAmerican equities. Incentive compensation for the first six months of fiscal 2006 was$59.5 million, up 54.6% compared to the same quarter a year ago, and islargely due to the continued growth in revenue resulting in higher payouts forthe period and the introduction of Canaccord's key employee retention program,ESIP, which was offered during the quarter. Salary and benefits expense for the first half of fiscal 2006 was$3.1 million, down 59.7%, compared to a year ago. This decrease is largelyattributed to the recent change in the compensation structure where themajority of salary and benefits expense is now covered through the GlobalCapital Markets incentive compensation pool. For the first half of fiscal2006, the total compensation payout as a percentage of revenue for GlobalCapital Markets was 54.6%, up 0.9% compared to 53.7% in the same period in2005. For the full fiscal year of 2006, this ratio is expected to be lowerthan the full fiscal year 2005 payout ratio of 59.1% reflecting the change toa flat annual payout structure in Global Capital Markets. Year-to-date general and administrative expense was up $1.5 million, or22.5%, and is primarily due to an increase in promotion and travel costs andis due to the overall increase in business travel activity to support thegrowth in the business. Income before income taxes for the six months period was up $9.4 million,or 38.8%, when compared to the same quarter a year ago and is largely due topositive equity markets. Other segment Other segment summary for the three months ended September 30 ----------------------------------- (C$ thousands, except employees Increase and % amounts) 2005 2004 (decrease) ------------------------------------------------------------------------- Revenue 6,195 2,431 3,764 154.8% Expenses 15,933 13,177 2,756 20.9% (Loss) before income taxes (9,738) (10,746) 1,008 9.4% Number of employees 336 314 22 7.0% The Other segment includes correspondent brokerage services, interest,foreign exchange revenue and expenses not specifically allocable to PrivateClient Services and Global Capital Markets. Also included in this segment areCanaccord's operations and support services, which are responsible for frontand back office information technology systems, compliance and riskmanagement, operations, finance and all administrative functions. Revenue for the three months ending September 30, 2005 was $6.2 million,up $3.8 million, or 154.8%, compared to the same quarter a year ago and islargely attributed to an increase of $1.8 million from bank interest revenueresulting from the issuance of common shares from our IPO on June 30, 2004,foreign exchange revenue, up $0.9 million and from an increase of $0.7 millionfrom our correspondent services division, Pinnacle. Expenses for the quarter were $15.9 million, up $2.8 million, or 20.9%,and are largely due to an increase in incentive compensation expense of$1.9 million, up 94.9% compared to the same period a year ago, which islargely due to strong market activity resulting in higher payouts but alsopartially due to the introduction of the ESIP program during the quarter.Salary and benefits expense increased by $0.6 million and is related to theincrease in 22 net new employees that were hired since last year. Loss before income taxes was $9.7 million in the second quarter of fiscal2006, a $1.0 million, or 9.4% improvement compared to a loss of $10.7 millionin the same quarter a year ago. Other segment summary for the six months ended September 30 ----------------------------------- (C$ thousands, except employees Increase and % amounts) 2005 2004 (decrease) ------------------------------------------------------------------------- Revenue 11,125 5,503 5,622 102.2% Expenses 29,036 26,862 2,174 8.1% (Loss) before income taxes (17,911) (21,359) 3,448 16.1% Number of employees 336 314 22 7.0% Revenue for the first half of fiscal 2006 was $11.1 million, up$5.6 million, or 102.2%, compared to the same period a year ago and is largelyattributed to an increase of $2.8 million from bank interest revenue resultingfrom the issuance of common shares from our IPO on June 30, 2004, foreignexchange revenue, up $1.3 million and from an increase of $1.3 million fromour correspondent services division, Pinnacle. Six month expenses were up $2.2 million despite a one-time gain in Q1/06on disposal of investment of $1.6 million resulting from the sale of ourinvestment in Bourse de Montrĩal. This gain, recorded as a negative expense,was equivalent to $1.3 million after tax and approximately $0.03 per dilutedshare. This gain was partially offset by the increase in incentivecompensation, up $1.9 million, and includes costs related to the ESIP for keyemployees of this business segment. Also contributing increase in year-to-dateexpenses is salary and benefits expense, up $1.0 million, and general andadministrative expense, which was up $0.8 million from a year ago. Withingeneral and administrative expense, increases were primarily related to publiccompany related expenses and insurance costs. Loss before income taxes was $17.9 million in the first half of fiscal2006, an improvement of $3.4 million, or 16.1%, compared to a loss of$21.4 million in the same period a year ago. Financial conditions Below are certain changes in selected balance sheet items. Accounts receivable Client security purchases are entered into either on a cash or marginbasis. When securities are purchased on margin, Canaccord extends a loan tothe client for the purchase of securities, using securities purchased and/orsecurities in the client's account as collateral. Therefore, client accountsreceivable balances, which were $451.8 million as at September 30, 2005, mayvary significantly on a day-to-day basis and are based on trading volumes andmarket activity. As at September 30, 2005, total accounts receivable were$1,138.9 million compared with $1,068.5 million as at March 31, 2005. Alsoincluded in total accounts receivable are receivables from brokers andinvestment dealers totalling $394.5 million and $267.3 million in RRSP cashbalances held in trust. Cash and cash equivalents Cash and cash equivalents were $223.9 million as of September 30, 2005compared to $349.7 million as of March 31, 2005. Significant cash sources oruses of cash include an increase in accounts receivable of $88.7 million,decrease in securities sold short of $45.9 million, and the payment ofdividends of $7.8 million. Liquidity and capital resources Canaccord has a capital structure completely underpinned by shareholders'equity, which is comprised of share capital, retained earnings and cumulativeforeign currency translation adjustments. As at September 30, 2005, total cashand cash equivalents were $223.9 million, compared to $349.7 million as ofMarch 31, 2005. For the six months ended September 30, 2005, operatingactivities used cash in the amount of $93.0 million, which was primarily dueto net changes in non-cash working capital items, net income and items notaffecting cash. For the six months ended September 30, 2005, financingactivities used cash in the amount of $52.1 million, which was primarily dueto decreases in notes payable, payment of dividends of $7.8 million and$4.6 million for the redemption and cancellation of 414,200 common shares.Investing activities were a source of cash in the amount of $28.5 million,primarily due to a decrease in notes receivable and proceeds of $1.6 millionreceived upon the sale of our investment in the Bourse de Montrĩal and offsetby the purchase of equipment and leasehold improvements totalling$4.3 million. The offsetting non-recourse notes payable and notes receivableconnected with Canaccord's Immigrant Investor Program of Quĩbec havesignificantly decreased as part of a program to divest this business line. Inaddition, the effect of the decline in the British pound sterling compared tothe Canadian dollar since March 31, 2005, had the effect of a decrease in cashof $9.1 million, relating primarily to the valuation of our European netassets. Canaccord's business requires capital for operating and regulatorypurposes. The current assets reflected on Canaccord's balance sheet are highlyliquid. The majority of the positions held as securities owned are readilymarketable and are recorded at their market value. The market value of thesesecurities fluctuates daily as factors (such as changes in market conditions,economic conditions and investor outlook) affect market prices. Marginreceivables are secured by readily marketable securities and are revieweddaily for impairment in value and collectibility. Receivables and payablesfrom brokers and dealers represent the following: current open transactionswhich normally settle within the normal three-day settlement cycle,collateralized securities that are borrowed and/or loaned in transactions thatcan be closed within a few days on demand and balances due to our introducingbrokers representing net balances in connection with their client accounts. Notes payable and notes receivable As of September 30, 2005, the offsetting non-recourse notes payable andnotes receivable were reduced to $10.0 million by the sale of notes receivablefor total proceeds of $34.4 million and repayment of notes payables for$34.8 million. The revenue from this business is not significant, and afterexpenses, the return on capital was insufficient to justify continuing thisnon-core business. Canaccord has credit facilities with Canadian and UK banks in anaggregate amount of $304.9 million. These credit facilities, consisting ofcall loans, letters of credit and daylight overdraft facilities, arecollateralized by either unpaid securities and/or securities owned byCanaccord. As at September 30, 2005, there were no amounts outstanding inrespect of these credit facilities. Outstanding share data Outstanding shares as of September 30 -------------------------------- 2005 2004 ------------------------------------------------------------------------- Shares outstanding - basic(1) 44,189,759 45,305,345 Shares outstanding - diluted(2) 46,407,008 46,129,268 Average shares outstanding - basic 44,479,068 45,305,345 Average shares outstanding - diluted 46,402,995 46,095,478 (1) Excludes 1,525,309 unvested shares outstanding, which relate to share purchase loans. (2) Includes 1,525,309 unvested shares referred to in footnote (1) above and pending issuance of 691,940 shares committed to ESIP. As of September 30, 2005, Canaccord had 46.4 million common sharesoutstanding on a diluted basis, up 277,740 common shares, comprised of 691,940common shares pending issuance and committed to ESIP and offset by 414,200common shares, which were purchased and cancelled during the first half offiscal 2006 under the terms of the NCIB. On December 29, 2004, Canaccord commenced a normal course issuer bid(NCIB) to purchase up to 2,306,463 of its common shares through the facilitiesof the Toronto Stock Exchange. Under British Columbia corporate legislation,Canaccord is permitted to purchase and hold its own shares without anyrequirement for cancellation. The total number of shares which may berepurchased under this program is 5% of Canaccord's total outstanding commonshares. The purchase of common shares under the normal course issuer bid willenable the Company to acquire shares for resale to employees and forcancellation. Such purchases may continue until December 28, 2005, under theterms of the NCIB. For the quarter ended September 30, 2005, 401,200 common shares werepurchased and cancelled under the NCIB at a weighted average price of $11.25per share. During the first half of fiscal 2006, 414,200 common shares werecancelled at a weighted average price of $11.18 per share. As of November 8,2005, there are 1,669,715 common shares available for purchase under the NCIB.Going forward and from time to time, the Company may purchase its commonshares for the purpose of resale or cancellation. Although the amount andtiming of any such purchases will be determined by the Company, the Board ofDirectors approved at the beginning of fiscal Q2/06 a capital management planto purchase up to 500,000 common shares through the NCIB for cancellation bythe end of the fiscal year, subject to trading blackouts and availability ofshares. The Board of Directors has approved an increase of a further 500,000common shares that could be purchased for cancellation. Under this expandedplan there are up to 585,800 total common shares that could be purchased forcancellation. Canaccord's Board originally approved the NCIB to facilitate theresale of common shares coming out of escrow. Through this capital managementplan, the Board has now approved the further usage of the NCIB to also cancelshares to help utilize capital that has been generated in the last year. Underthis capital management plan, Canaccord can purchase between zero and 130,000shares a day, up to a maximum of 1,000,000 in total, with room of 585,800 leftunder this plan. Canaccord has agreed with the relevant regulators to updateits shareholders at a minimum rate of every two weeks to satisfy regulatoryreporting requirements and will update shareholders immediately if more than1% of its shares outstanding are purchased in one day. Canaccord has receivedapproval from its board to apply to renew the NCIB when the current NCIBexpires on December 28, 2005. Pursuant to an obligation which arose when the approximate market priceof the Company's shares was $9.50, the Board of Directors of Canaccord hasapproved the issuance of 691,940 common shares at $9.50 per share. Theseshares are associated with the recruitment of Global Capital Marketsprofessionals. Furthermore, the issuance of shares associated with the acquisition ofAdams Harkness Financial Group, Inc., a privately-held Boston, Massachusettsbased institutional investment bank for US$20 million is pending. Theagreement consists of US$8 million in cash and US$12 million in approximately1.34 million common shares of Canaccord Capital Inc., which will come from acombination of shares acquired from selling shareholders and issuance oftreasury shares. Furthermore, an additional US$10 million retention pool inCanaccord common shares will be established to retain key Adams Harknessemployees and its senior management. The retention pool involves the issuanceof approximately 1.12 million common shares of Canaccord Capital Inc., to bepaid after a three-year vesting period. The total number of shares to bevested is also based on achievement of revenue targets. International Financial Centres Canaccord is a member of the International Financial Centres of bothBritish Columbia and Quĩbec, which provide certain tax and financial benefitspursuant to the International Financial Activity Act of British Columbia andthe Act Respecting International Financial Centres of Quĩbec. As such,Canaccord's overall income tax rate is less than the rate that would otherwisebe applicable. Foreign exchange Canaccord manages its foreign exchange risk by periodically hedgingpending settlements in foreign currencies. Realized and unrealized gains andlosses related to those contracts are recognized in income during the year. Asof September 30, 2005, forward contracts outstanding to sell US dollars had anotional amount of US$36.0 million, up $26.6 million from a year ago. Forwardcontracts outstanding to buy US dollars had a notional amount ofUS$8.5 million, up US$0.5 million compared to a year ago. The fair value ofthese contracts was nominal. Certain of Canaccord's operations in London,England are conducted in British pounds sterling; however, any foreignexchange risk in respect of these transactions is generally limited as pendingsettlements on both sides of the transaction are typically in British poundsterling. In anticipation of acquiring Adams Harkness Financial Group, Inc.,which was announced in Q2/06, Canaccord entered into foreign exchangecontracts totalling US$8.0 million to hedge against the cash component of thisagreement. Hedge accounting has been applied for these contracts andaccordingly, there is no recognition of unrealized gains and losses related tothese contracts in income during the period. Critical accounting estimates The following is a summary of Canaccord's critical accounting estimates.Canaccord's accounting policies are in accordance with Canadian GAAP and aredescribed in Note 1 to the audited consolidated financial statements for theyear ended March 31, 2005. The accounting policies described below requireestimates and assumptions that affect the amounts of assets, liabilities,revenues and expenses recorded in the financial statements. Because of theirnature, estimates require judgement based on available information. Actualresults or amounts could differ from estimates and the difference could have amaterial impact on the financial statements. Revenue recognition and valuation of securities Securities held, including share purchase warrants and options, arerecorded at market value and, accordingly, the interim consolidated financialstatements reflect unrealized gains and losses associated with suchsecurities. In the case of publicly traded securities, market value isdetermined on the basis of market prices from independent sources such aslisted exchange prices or dealer price quotations. Adjustments to marketprices are made for liquidity relative to the size of the position and holdingperiods and other resale restrictions, if applicable. Investments in illiquidor non-publicly traded securities are valued on a basis determined bymanagement using information available and prevailing market prices ofsecurities with similar qualities and characteristics, if known. There is inherent uncertainty and imprecision in estimating the factorswhich can affect value and in estimating values generally. The extent to whichvaluation estimates differ from actual results will affect the amount ofrevenue or loss recorded for a particular security position in any particularperiod. With Canaccord's security holdings consisting primarily of publiclytraded securities, its procedures for obtaining market prices from independentsources, the validation of estimates through actual settlement of transactionsand the consistent application of its approach from period to period,Canaccord believes that the estimates of market value recorded are reasonable. Provisions Canaccord records provisions related to pending or outstanding legalmatters and doubtful accounts related to client receivables, loans, advancesand other receivables. Provisions in connection with legal matters aredetermined on the basis of management's judgement in consultation with legalcounsel considering such factors as the amount of the claim, the validity ofthe claim, the possibility of wrongdoing by an employee of Canaccord andprecedents. Client receivables are generally collateralized by securities and,therefore, any impairment is generally measured after considering the marketvalue of the collateral. Provisions in connection with other doubtful accountsare generally based on management's assessment as to the likelihood ofcollection and the recoverable amount. Provisions are also recorded utilizingdiscount factors in connection with syndicate participation. Tax Accruals for income tax liabilities require management to make estimatesand judgements with respect to the ultimate outcome of tax filings andassessments. Actual results could vary from these estimates. Canaccordoperates within different tax jurisdictions and is subject to assessment inthese different jurisdictions. Tax filings can involve complex issues, whichmay require an extended period of time to resolve in the event of a dispute orre-assessment by tax authorities. Canaccord believes that adequate provisionsfor income taxes have been made for all years. Related party transactions Security trades executed by Canaccord for employees, officers andshareholders of Canaccord are conducted in accordance with terms andconditions applicable to all clients of Canaccord. Commission income on suchtransactions in the aggregate is not material in relation to the overalloperations of Canaccord. Dividend policy In respect of fiscal year 2006, Canaccord intends to pay a quarterlydividend of $0.06 per share per quarter. Although dividends are expected to bedeclared and paid quarterly, the Board of Directors, in its sole discretion,will determine the amount and timing of any dividends. All dividend paymentswill depend on general business conditions, Canaccord's financial condition,results of operations and capital requirements and such other factors as theBoard determines to be relevant. Dividend declaration For the second quarter of fiscal 2006, the Board of Directors declared acommon share dividend of $0.06 per share, which is payable on December 9,2005, to shareholders of record on November 25, 2005. The common sharedividend payment to common shareholders will total approximately $2.8 million,or approximately 17.7% of second quarter net income. Historical quarterly information Canaccord's business is cyclical and may experience considerablevariations in revenue and income from quarter to quarter and year to year dueto the risk factors discussed in the risk section. In addition to overallmarket cycles, Canaccord's revenue is generally seasonal over the fiscal year,where historically, 60% to 65% of industry revenue has occurred in the lasttwo fiscal quarters of the year. Therefore, historically, revenue during thefirst two fiscal quarters has approximately averaged 35% to 40% of the annualrevenue for the industry. Canaccord's experience follows that of the industry.However, the fiscal year-to-date 2006 has been abnormally strong in NorthAmerica, and thus our first half revenue for the fiscal year may be closermore than the historical average relative to our annual revenue for thisfiscal year. Furthermore, Canaccord's revenue from an underwriting transactionis recorded only when the transaction has closed. Consequently, the timing ofrevenue recognition can materially affect Canaccord's quarterly results. Theexpense structure of Canaccord's operations is geared towards providingservice and coverage in the current market environment. If general capitalmarkets activity were to drop significantly, Canaccord would experience lossesif it could not change its expense structure quickly enough. The following table provides selected quarterly financial information forthe nine most recently completed fiscal quarters ended September 30, 2005.This information is unaudited, but reflects all adjustments of a recurringnature, which are, in the opinion of management, necessary to present a fairstatement of the results of operations for the periods presented. Quarter-to-quarter comparisons of financial results are not necessarily meaningful andshould not be relied upon as an indication of future performance. (C$ thousands, Fiscal 2006 Fiscal 2005 except per share ----------- ----------- amounts) Q2 Q1 Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Revenue Private Client Services 52,411 39,630 56,391 46,964 36,499 38,322 Global Capital Markets 60,048 54,457 81,444 72,368 46,671 39,171 Other 6,195 4,930 5,094 4,351 2,431 3,072 ----------------------------------------------------- Total revenue 118,654 99,017 142,929 123,683 85,601 80,565 Net income (loss) 15,754 11,078 17,307 16,743 6,123 8,406 EPS - basic 0.35 0.24 0.38 0.37 0.14 0.28 EPS - diluted 0.34 0.24 0.38 0.36 0.13 0.23 (C$ thousands, Fiscal 2004 except per share ----------- amounts) Q4 Q3 Q2 ---------------------------------------------- Revenue Private Client Services 60,667 48,540 39,144 Global Capital Markets 85,425 66,515 39,001 Other 4,595 3,584 3,258 -------------------------- Total revenue 150,687 118,639 81,403 Net income (loss) 20,992 11,267 8,601 EPS - basic 0.74 0.40 0.31 EPS - diluted 0.58 0.32 0.24 Risks The securities industry and Canaccord's activities are by their verynature subject to a number of inherent risks. Economic conditions, competitionand market factors such as volatility in the Canadian and internationalmarkets, interest rates, commodity prices, market prices, trading volumes andliquidity will have a significant impact on Canaccord's profitability. Aninvestment in the common shares involves a number of risks, including market,liquidity, credit, operational, legal and regulatory risks, which could besubstantial and are inherent in Canaccord's business. Revenue from PrivateClient Services activity is dependent on trading volumes and, as such, isdependent on the level of market activity and investor confidence. Revenuefrom Global Capital Markets activity is dependent on financing activity bycorporate issuers and the willingness of institutional clients to activelytrade and participate in capital markets transactions. There may also be a lagbetween market fluctuations and changes in business conditions and the levelof Canaccord's market activity and the impact that these factors have onCanaccord's operating results and financial position. Risks have not changedsubstantially from those set out in the Annual Report of June 27, 2005. Additional information A comprehensive discussion of our business, strategies, objectives andrisks is available in the Management's Discussion and Analysis, AnnualInformation Form and audited annual financial statements in Canaccord's 2005Annual Report which are available on our Web site atwww.canaccord.com/investor and on SEDAR at www.sedar.com. Additional information relating to Canaccord, including Canaccord'sProspectus of June 2004, Annual Information Form and interim filings can alsobe found on our Web site and on SEDAR. Interim Consolidated Financial Statements Canaccord Capital Inc. Unaudited For the six months ended September 30, 2005 (Expressed in Canadian dollars) Canaccord Capital Inc. INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands of dollars) As at September March September 30, 2005 31, 2005 30, 2004 $ $ $ ------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 223,914 349,700 158,560 Securities owned, at market (note 2) 157,334 160,348 305,611 Accounts receivable (notes 4 and 7) 1,138,934 1,068,537 1,011,210 Income taxes recoverable - - 701 Future income taxes 3,557 3,992 1,609 ------------------------------------------------------------------------- Total current assets 1,523,739 1,582,577 1,477,691 Equipment and leasehold improvements 15,937 13,750 12,373 Notes receivable (note 5) 10,023 41,618 39,251 Deferred charges 314 220 632 ------------------------------------------------------------------------- 1,550,013 1,638,165 1,529,947 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Call loans - - 677 Securities sold short, at market (note 2) 59,602 105,527 190,796 Accounts payable and accrued liabilities (notes 4 and 7) 1,254,396 1,262,072 1,099,731 Income taxes payable 2,374 6,737 - ------------------------------------------------------------------------- Total current liabilities 1,316,372 1,374,336 1,291,204 Notes payable (note 5) 10,023 41,618 39,251 ------------------------------------------------------------------------- Total liabilities 1,326,395 1,415,954 1,330,455 ------------------------------------------------------------------------- Contingencies (note 9) Shareholders' equity Share capital (note 6) 141,160 151,030 150,881 Cumulative foreign currency translation adjustment (6,303) (1,383) (1,433) Retained earnings 88,761 72,564 50,044 ------------------------------------------------------------------------- Total shareholders' equity 223,618 222,211 199,492 ------------------------------------------------------------------------- 1,550,013 1,638,165 1,529,947 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 For the three months ended six months ended ---------------------- ----------------------- September September September September 30, 2005 30, 2004 30, 2005 30, 2004 $ $ $ $ ------------------------------------------------- ----------------------- REVENUE Private client services 52,411 36,499 92,041 74,821 Global capital markets 60,048 46,671 114,505 85,842 Other 6,195 2,431 11,125 5,503 ------------------------------------------------- ----------------------- ------------------------------------------------- ----------------------- 118,654 85,601 217,671 166,166 ------------------------------------------------- ----------------------- EXPENSES Incentive compensation 59,580 42,721 108,230 77,814 Salaries and benefits 9,409 10,414 18,635 21,628 Trading costs 4,247 3,540 8,559 7,993 Premises and equipment 3,067 2,920 6,693 5,949 Communication and technology 3,798 3,573 7,488 6,794 Interest 2,405 1,436 4,896 3,709 General and administrative 9,063 8,013 19,079 14,057 Amortization 800 739 1,918 1,431 Development costs 2,038 1,976 4,129 4,051 Gain on disposal of investment (note 10) - - (1,633) - ------------------------------------------------- ----------------------- ------------------------------------------------- ----------------------- 94,407 75,332 177,994 143,426 ------------------------------------------------- ----------------------- Income before income taxes 24,247 10,269 39,677 22,740 Income tax expense (recovery) Current 7,941 4,110 12,410 10,793 Future 552 36 435 (2,582) ------------------------------------------------- ----------------------- Net income for the period 15,754 6,123 26,832 14,529 Retained earnings, beginning of period 78,568 46,226 72,564 38,013 Cash dividends (2,765) (2,305) (7,839) (2,305) Excess on redemption of common shares (note 6 (iii)) (2,796) - (2,796) (193) ------------------------------------------------- ----------------------- Retained earnings, end of period 88,761 50,044 88,761 50,044 ------------------------------------------------- ----------------------- ------------------------------------------------- ----------------------- Basic earnings per share (note 6 (iv)) 0.35 0.14 0.60 0.38 Diluted earnings per share (note 6 (iv)) 0.34 0.13 0.58 0.35 ------------------------------------------------- ----------------------- ------------------------------------------------- ----------------------- See accompanying notes Canaccord Capital Inc. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands of dollars) For the For the three months ended six months ended ---------------------- ----------------------- September September September September 30, 2005 30, 2004 30, 2005 30, 2004 $ $ $ $ ------------------------------------------------- ----------------------- OPERATING ACTIVITIES Net income for the period 15,754 6,123 26,832 14,529 Items not affecting cash Amortization 1,071 859 2,265 1,665 Future income taxes (recovery) 552 36 435 (2,582) Gain on sale of investment - - (1,633) - Changes in non-cash working capital Decrease (increase) in securities owned (35,169) 72,178 1,927 70,836 Decrease (increase) in accounts receivable (288,680) 41,199 (88,714) (13,589) Decrease (increase) in income taxes recoverable 1,364 (701) 578 (701) Increase (decrease) in securities sold short 10,423 (79,432) (45,925) (90,927) Increase in accounts payable and accrued liabilities 257,186 142,369 15,559 51,336 Increase (decrease) in income taxes payable 2,374 (2,742) (4,363) (16,905) ------------------------------------------------- ----------------------- Cash provided by (used in) operating activities (35,125) 179,889 (93,039) 13,662 ------------------------------------------------- ----------------------- FINANCING ACTIVITIES Increase (decrease) in notes payable (32,708) 3,896 (31,595) 10,486 Redemption of convertible debentures - - - (20) Decrease in subordinated debt - (10,000) - (10,000) Issuance of share capital (net of issuance costs) - (347) - 71,309 Decrease (increase) in unvested common share purchase loans (8,223) 242 (8,036) (1,008) Redemption of share capital (4,514) - (4,631) (379) Dividends paid (2,765) (2,305) (7,839) (2,305) ------------------------------------------------- ----------------------- Cash provided by (used in) financing activities (48,210) (8,514) (52,101) 68,083 ------------------------------------------------- ----------------------- INVESTING ACTIVITIES Purchase of equipment and leasehold improvements (2,724) (930) (4,290) (1,431) Decrease (increase) in notes receivable 32,708 (3,896) 31,595 (10,486) Decrease (increase) in deferred charges (441) - (464) 328 Proceeds on disposal of investment - - 1,639 - ------------------------------------------------- ----------------------- Cash provided by (used in) investing activities 29,543 (4,826) 28,480 (11,589) ------------------------------------------------- ----------------------- Effect of foreign exchange on cash balances (3,960) (1,929) (9,126) (1,698) ------------------------------------------------- ----------------------- Increase (decrease) in cash position (57,752) 164,620 (125,786) 68,458 Cash position, beginning of period 281,666 (6,737) 349,700 89,425 ------------------------------------------------- ----------------------- Cash position, end of period 223,914 157,883 223,914 157,883 ------------------------------------------------- ----------------------- ------------------------------------------------- ----------------------- Cash position is comprised of: Cash and cash equivalents 223,914 158,560 223,914 158,560 Call loans - (677) - (677) ------------------------------------------------- ----------------------- 223,914 157,883 223,914 157,883 ------------------------------------------------- ----------------------- ------------------------------------------------- ----------------------- Supplemental cash flow information Interest paid 1,895 136 3,580 1,059 Income taxes paid 4,408 6,087 17,030 20,388 ------------------------------------------------- ----------------------- ------------------------------------------------- ----------------------- See accompanying notes Canaccord Capital Inc. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For the six months ended September 30, 2005 (in thousands of dollars, except per share amounts) Canaccord Capital Inc. (the "Company") is an independent full service investment dealer. The Company has operations in each of the two principal segments of the securities industry: Private Client Services and Global Capital Markets. Together these operations offer a wide range of complementary investment products, brokerage services and investment banking services to the Company's retail, institutional and corporate clients. Historically, the Company's operating results are characterized by a seasonal pattern and it earns the majority of its revenue in the last two quarters of its fiscal year. 1. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation and principles of consolidation These interim unaudited consolidated financial statements have been prepared by the Company in accordance with Canadian generally accepted accounting principles ("GAAP") with respect to interim financial statements, applied on a consistent basis. These interim unaudited consolidated financial statements follow the same accounting principles and methods of application as those disclosed in Note 1 to the Company's audited consolidated financial statements as at and for the year ended March 31, 2005 ("Audited Annual Consolidated Financial Statements") except as noted below. Accordingly, they do not include all the information and footnotes required for compliance with Canadian GAAP for annual financial statements. These interim unaudited consolidated financial statements and notes thereon should be read in conjunction with the Audited Annual Consolidated Financial Statements. The preparation of these interim unaudited consolidated financial statements and the accompanying notes requires management to make estimates and assumptions that affect the amounts reported. In the opinion of management, these interim unaudited consolidated financial statements reflect all adjustments (which include only normal, recurring adjustments) necessary to state fairly the results for the periods presented. Actual results could vary from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. 2. SECURITIES OWNED AND SECURITIES SOLD SHORT September 30, 2005 March 31, 2005 September 30, 2004 ------------------ -------------- ------------------ Securi- Securi- Securi- Securi- ties Securi- ties Securi- ties ties sold ties sold ties sold owned short owned short owned short $ $ $ $ $ $ ------------------------------------------------------------------------- Corporate and government debt 87,604 37,176 124,395 82,001 219,794 146,829 Equities and convertible debentures 69,730 22,426 35,953 23,526 85,817 43,967 ------------------------------------------------------------------------- 157,334 59,602 160,348 105,527 305,611 190,796 ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at September 30, 2005, corporate and government debt maturities range from 2005 to 2053 (March 31, 2005 - 2005 to 2051 and September 30, 2004 - 2004 to 2051) and bear interest ranging from 2.05% to 14.00% (March 31, 2005 - 2.05% to 14.00% and September 30, 2004 - 1.75% 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 September 30, 2005: Notional amounts Average Fair value (millions price (millions of USD) (CAD/USD) Maturity of USD) ------------------------------------------------------------------------- To sell US dollars $36.05 $1.17 October 3, 2005 $0.1 To buy US dollars $ 8.45 $1.17 October 3, 2005 ($0.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Forward contracts outstanding at March 31, 2005: Notional amounts Average Fair value (millions price (millions of USD) (CAD/USD) Maturity of USD) ------------------------------------------------------------------------- To sell US dollars $22.75 $1.21 April 5, 2005 $0.1 To buy US dollars $10.25 $1.21 April 5, 2005 ($0.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Forward contracts outstanding at September 30, 2004: Notional amounts Average Fair value (millions price (millions of USD) (CAD/USD) Maturity of USD) ------------------------------------------------------------------------- To sell US dollars $9.50 $1.27 October 5, 2004 $0.1 To buy US dollars $8.00 $1.27 October 5, 2004 ($0.1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company has also entered into foreign exchange contracts for the purposes of acquiring a foreign subsidiary (see Note 11). The Company has applied hedge accounting for these contracts in accordance with CICA Accounting Guideline 13, "Hedging Relationships" ("AcG-13"). Accordingly, there is no recognition of unrealized gains and losses relating to these contracts in income during the period. Notional amounts Average Fair value (millions price (millions of USD) (CAD/USD) Maturity of USD) ------------------------------------------------------------------------- To buy US dollars $8.00 $1.18 December 9, 2005 $0.1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 4. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts receivable September March September 30, 2005 31, 2005 30, 2004 $ $ $ ------------------------------------------------------------------------- Brokers and investment dealers 394,513 353,734 428,111 Clients 451,752 406,769 352,354 RRSP cash balances held in trust 267,299 293,595 214,974 Other 25,370 14,439 15,771 ------------------------------------------------------------------------- 1,138,934 1,068,537 1,011,210 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accounts payable and accrued liabilities September March September 30, 2005 31, 2005 30, 2004 $ $ $ ------------------------------------------------------------------------- Brokers and investment dealers 287,164 358,711 347,529 Clients 767,915 719,195 686,015 Other 199,317 184,166 66,187 ------------------------------------------------------------------------- 1,254,396 1,262,072 1,099,731 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Accounts payable to clients include $267.3 million (March 31, 2005 - $293.6 million and September 30, 2004 - $215.0 million) payable to clients for RRSP cash balances held in trust. Client security purchases are entered into on either a cash or margin basis. In the case of a margin account, the Company extends a loan to a client for the purchase of securities, using securities purchased and/or other securities in the client's account as collateral. Amounts loaned to any client are limited by margin regulations of the Investment Dealers Association of Canada and other regulatory authorities and are subject to the Company's credit review and daily monitoring procedures. Amounts due from and to clients are due by the settlement date of the trade transaction. Margin loans are due on demand and are collateralized by the assets in the client accounts. Interest on margin loans and amounts due to clients is based on a floating rate (September 30, 2005 - 6.50% and 1.50%, respectively, March 31, 2005 - 6.25% and 1.25%, respectively, and September 30, 2004 - 6.00% and 1.00%, respectively). 5. IMMIGRANT INVESTOR PROGRAM OF QUEBEC The Company sponsors an immigrant investor program that provides assistance to Canadian immigrant applicants under the investor category and to their professional consultants and advisors. Included in these services is a program that enables 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 borrows as notes payable the investment funds through a non-recourse bank facility, loans the borrowed funds to the immigrant investor by way of notes receivable and then pledges 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. (i) Notes receivable Under the provisions of the Immigrant Investor Program of Quĩbec, funds have been advanced to various immigrant investors by Canaccord Capital Credit Corporation ("CCCC"), a wholly owned subsidiary of the Company. The immigrant investors sign a note receivable for the principal amount advanced plus accrued interest, which are both due on the fifth anniversary from the date the funds were advanced to the investors. The terms of the notes receivable, including interest rate and maturity date, are identical to the notes payable and are ultimately pledged to guarantee the obligations of CCCC. The recourse of notes payable is limited, ultimately, to these notes receivable and is not against CCCC, any related company or any of their respective assets. Interest revenue of $0.5 million and $1.3 million, respectively, for the three and six months ended September 30, 2005 ($0.5 million and $1.0 million, respectively, for the three and six months ended September 30, 2004) on these loans is included in Other revenue. (ii) Notes payable Notes payable are collateralized by the notes receivable with interest capitalized annually and repayable at maturity. The notes payable bear interest ranging from 5.48% to 6.55% (weighted average at September 30, 2005 - 6.21%) and mature in 2007 (March 31, 2005 - 4.57% to 7.27% with a weighted average of 5.81%, maturing between 2007 and 2010, respectively, and September 30, 2004 - 4.57% to 7.27% with a weighted average of 5.83%, maturing between 2007 and 2010, respectively). The notes payable, including accrued interest, are due as follows: September March September 30, 2005 31, 2005 30, 2004 $ $ $ ------------------------------------------------------------------------- 2007 10,023 6,808 6,594 2008 - 12,710 12,357 2009 - 10,919 10,645 2010 - 11,181 9,655 ------------------------------------------------------------------------- 10,023 41,618 39,251 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Interest expense of $0.9 million and $1.7 million, respectively, for the three and six months ended September 30, 2005 ($0.5 million and $1.0 million, respectively, for the three and six months ended September 30, 2004) on these loans is included in Interest expense. 6. 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. September March September 30, 2005 31, 2005 30, 2004 $ $ $ ------------------------------------------------------------------------- Issued and fully paid Share capital Common shares 151,686 153,061 152,962 Unvested share purchase loans (11,640) (2,929) (2,600) Contributed surplus 1,114 898 519 ------------------------------------------------------------------------- 141,160 151,030 150,881 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 66,205 - - ------------------------------------------------------------------------- Balance, September 30, 2004 46,095,478 152,962 - - Initial public offering costs adjustment(2) - (35) - - Shares issued for cash(3) 33,790 134 - - ------------------------------------------------------------------------- Balance, March 31, 2005 46,129,268 153,061 - - Shares cancelled (414,200) (1,375) - - ------------------------------------------------------------------------- Balance, September 30, 2005 45,715,068 151,686 - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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 66,205 ------------------------------------------------------------------------- Balance, September 30, 2004 - - 46,095,478 152,962 Initial public offering costs adjustment(2) - - - (35) Shares issued for cash(3) - - 33,790 134 ------------------------------------------------------------------------- Balance, March 31, 2005 - - 46,129,268 153,061 Shares cancelled - - (414,200) (1,375) ------------------------------------------------------------------------- Balance, September 30, 2005 - - 45,715,068 151,686 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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 is entitled to acquire up to 2,306,463, or 5.0%, of its shares from December 29, 2004 to December 28, 2005. Under the normal course issuer bid, the Company has purchased for resale or cancellation a total of 222,548 common shares between December 29, 2004 and March 31, 2005 and 414,200 common shares during the six months ended September 30, 2005 with a book value of $1.4 million for aggregate consideration of $4.6 million. The excess has been recorded to contributed surplus and retained earnings. 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, September 30 and March 31, 2005 and September 30, 2004 - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Pursuant to an order obtained on June 22, 2004 from the Supreme Court of British Columbia, a capital reorganization which included the creation of a class of common shares and the exchange of all preferred shares for common shares was approved. (iii) Excess on redemption of common shares The excess on redemption of common shares represents amounts paid to shareholders, by the Company and its subsidiaries, on redemption of their shares in excess of the book value of those shares at the time of redemption. The excess on redemption of common shares has been charged against contributed surplus ($0.5 million) and retained earnings ($2.8 million). For the For the three months ended six months ended ---------------------- ----------------------- September September September September 30, 2005 30, 2004 30, 2005 30, 2004 $ $ $ $ ------------------------------------------------------------------------- Redemption price 4,514 - 4,631 379 Book value 1,331 - 1,375 186 ------------------------------------------------------------------------- Excess on redemption of common shares 3,183 - 3,256 193 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (iv) Earnings per share For the For the three months ended six months ended ---------------------------- --------------------------- September 30, September 30, September 30, September 30, 2005 2004 2005 2004 $ $ $ $ ------------------------------------------------------------------------- Basic earnings per share Net income for the period 15,754 6,123 26,832 14,529 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares (number) 44,479,068 45,305,345 44,541,101 37,846,992 Basic earnings per share ($) 0.35 0.14 0.60 0.38 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings per share Net income for the period 15,754 6,123 26,832 14,529 Income effect of convertible debentures - - - 282 ------------------------------------------------------------------------- Adjusted net income for the period 15,754 6,123 26,832 14,811 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares (number) 44,479,068 45,305,345 44,541,101 37,846,992 Dilutive effect of convertible debentures (number) - - - 3,624,070 Dilutive effect of preferred shares (number) - - - 40,729 Dilutive effect of unvested shares (number) 1,525,309 790,133 1,525,309 790,133 Dilutive effect of share issuance commitment (number) 398,618 - 200,398 - ------------------------------------------------------------------------- Adjusted weighted average number of common shares (number) 46,402,995 46,095,478 46,266,808 42,301,924 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Diluted earnings per share ($) 0.34 0.13 0.58 0.35 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 7. 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: September 30, March 31, September 30, 2005 2005 2004 $ $ $ ------------------------------------------------------------------------- Accounts receivable 35,137 31,698 28,554 Accounts payable and accrued liabilities 65,910 54,691 44,357 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 8. SEGMENTED INFORMATION The Company operates in two industry segments as follows: Private Client Services - provides brokerage services and investment advice to retail or private clients. Global Capital Markets - includes investment banking, research and trading activities on behalf of corporate, institutional and government clients as well as principal trading activities. Corporate and Other includes correspondent brokerage services, interest and foreign exchange revenue and expenses not specifically allocable to Private Client Services and Global Capital Markets. The Company's industry segments are managed separately because each business offers different services and requires different personnel and marketing strategies. The Company evaluates the performance of each business based on income (loss) before income taxes. The Company does not allocate total assets or capital assets to the segments. Amortization is allocated to the segments based on square footage occupied. There are no significant inter-segment revenues. For the three months ended September 30, 2005 --------------------------------------- Private Global Corporate Client Capital and Services Markets Other Total $ $ $ $ ------------------------------------------------------------------------- Revenues 52,411 60,048 6,195 118,654 Expenses 35,904 41,004 14,661 91,569 Amortization 273 300 227 800 Development, restructuring and other costs 905 88 1,045 2,038 ------------------------------------------------------------------------- Income (loss) before income taxes 15,329 18,656 (9,738) 24,247 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2004 --------------------------------------- Private Global Corporate Client Capital and Services Markets Other Total $ $ $ $ ------------------------------------------------------------------------- Revenues 36,499 46,671 2,431 85,601 Expenses 25,856 34,898 11,864 72,617 Amortization 253 291 195 739 Development, restructuring and other costs 576 281 1,118 1,976 ------------------------------------------------------------------------- Income (loss) before income taxes 9,814 11,201 (10,746) 10,269 ------------------------------------------------------------------------- ------------------------------------------------------------------------- For the six months ended September 30, 2005 --------------------------------------- Private Global Corporate Client Capital and Services Markets Other Total $ $ $ $ ------------------------------------------------------------------------- Revenues 92,041 114,505 11,125 217,671 Expenses 65,662 79,868 26,417 171,947 Amortization 653 745 520 1,918 Development, restructuring and other costs 1,787 243 2,099 4,129 ------------------------------------------------------------------------- Income (loss) before income taxes 23,939 33,649 (17,911) 39,677 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2004 Private Global Corporate Client Capital and Services Markets Other Total $ $ $ $ ------------------------------------------------------------------------- Revenues 74,821 85,842 5,503 166,166 Expenses 53,215 60,677 24,052 137,944 Amortization 495 556 380 1,431 Development, restructuring and other costs 1,259 362 2,430 4,051 ------------------------------------------------------------------------- Income (loss) before income taxes 19,852 24,247 (21,359) 22,740 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company's business operations are grouped into two geographic segments as follows: For the For the three months ended six months ended ---------------------------- --------------------------- September 30, September 30, September 30, September 30, 2005 2004 2005 2004 $ $ $ $ -------------------------------------------- --------------------------- Canada Revenue 102,242 60,277 178,426 124,493 Net income 12,668 2,679 18,628 7,362 Equipment and leasehold improvements 14,242 10,824 14,242 10,824 United Kingdom Revenue 16,412 25,324 39,245 41,673 Net income 3,086 3,444 8,204 7,167 Equipment and leasehold improvements 1,695 1,549 1,695 1,549 -------------------------------------------- --------------------------- -------------------------------------------- --------------------------- 9. CONTINGENCIES During the period, there have been no material changes to the Company's contingencies from those described in the March 31, 2005 Audited Annual Consolidated Financial Statements. 10. 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. 11. ACQUISITION On September 13, 2005, the Company announced an agreement to acquire a 100% interest in Adams Harkness Financial Group, Inc. ("Adams Harkness"), a US investment bank based in Boston, Massachusetts. The total consideration for the acquisition will be approximately US$20.0 million, consisting of cash consideration of US$8.0 million and US$12.0 million in approximately 1.34 million common shares of the Company, which will be a combination of shares acquired from selling shareholders and shares issued from treasury. These shares will be held in escrow until June 30, 2008, with annual releases of one-third per year commencing on June 30, 2006. In addition, retention payments up to a maximum of US$10.0 million in the form of common shares of the Company will be paid to certain key employees of Adams Harkness and its senior management. The retention payments will involve the issuance of approximately 1.12 million common shares of the Company which will be paid after a three-year vesting period subject to achievement of revenue targets. The transaction is expected to close prior to the end of the fiscal fourth quarter, being March 31, 2006, and is subject to approval by the shareholders of Adams Harkness as well as regulatory approvals. The Company will consolidate the financial results of Adams Harkness commencing with the closing of this transaction. The Company has entered into foreign exchange contracts with respect to the cash consideration required for this transaction (see Note 3). 12. SUBSEQUENT EVENT Dividend On November 8, 2005, the Board of Directors declared a common share dividend of $0.06 per share payable on December 9, 2005, with a record date of November 25, 2005. 13. CANADIAN AND INTERNATIONAL FINANCIAL REPORTING STANDARDS DIFFERENCES These consolidated financial statements have been prepared in accordance with 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 six months ended September 30, 2005 and 2004. The area of material difference between GAAP and IFRS and its impact on the consolidated financial statements of the Company is in the consolidated statement of changes in shareholders' equity. IFRS requires the inclusion of a consolidated statement of changes in shareholders' equity for each statement of income year, as follows: September 30, September 30, 2005 2004 $ $ ------------------------------------------------------------------------- ISSUED AND PAID SHARE CAPITAL Common shares Balance at the beginning of the period 153,061 61,292 Shares issued for cash - 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 - 66,205 ------------------------------------------------------------------------- Balance at the end of the period 151,686 152,962 ------------------------------------------------------------------------- Unvested share purchase loans Balance at the beginning of the period (2,929) (1,514) Movements during the period (8,711) (1,086) ------------------------------------------------------------------------- Balance at the end of the period (11,640) (2,600) ------------------------------------------------------------------------- September 30, September 30, 2005 2004 $ $ ------------------------------------------------------------------------- Preferred shares Balance at the beginning of the period - 190 Exchange into common shares - (190) ------------------------------------------------------------------------- Balance at the end of the period - - ------------------------------------------------------------------------- Contributed surplus Balance at the beginning of the period 898 441 Movements during the period 216 78 ------------------------------------------------------------------------- Balance at the end of the period 1,114 519 ------------------------------------------------------------------------- 141,160 150,881 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CUMULATIVE FOREIGN CURRENCY TRANSLATION ADJUSTMENT Balance at the beginning of the period (1,383) 265 Movements during the period (4,920) (1,698) ------------------------------------------------------------------------- Balance at the end of the period (6,303) (1,433) ------------------------------------------------------------------------- ------------------------------------------------------------------------- RETAINED EARNINGS Balance at the beginning of the period 72,564 38,013 Net income for the period 26,832 14,529 Excess on redemption of common shares (2,796) (193) Cash dividends (7,839) (2,305) ------------------------------------------------------------------------- Balance at the end of the period 88,761 50,044 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 14. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the fiscal 2005 annual financial statement presentation. For further information: Contact: Anthony Ostler, Senior Vice President,Investor Relations & Communications, Phone: (604) 643-7647, Email:anthony_ostler(at)canaccord.com; London: Bobby Morse, Charles Ryland, BuchananCommunications, Phone: +44 (0) 207 466 5000, Email: bobbym(at)buchanan.uk.com (CCI CCI.) ENDCANACCORD CAPITAL INC.

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