CANACCORD CAPITAL INC.

Transcription

1 Q2 CANACCORD CAPITAL INC. REPORTS second QUARTER RESULTS Second Quarter Fiscal 2008 Report to Shareholders CANACCORD CAPITAL INC. Reports second quarter and first half of fiscal 2008 results (All dollar amounts are stated in Canadian dollars unless otherwise indicated) VANCOUVER, November 1, 2007 Canaccord Capital Inc. s (TSX & AIM: CCI) revenue for the three months ended September 30, 2007 was $154.5 million, down 1.0% from the same quarter a year ago. Net income for the same period was $12.4 million, down 30.3% and diluted earnings per share (EPS) were $0.26, down 29.7% from the same period a year ago. Commenting on the quarter, Paul Reynolds, President and CEO said While this was certainly not our best quarter, we were able to generate a reasonable rate of return in a very challenging market environment. An adjustment of $4.4 million related to third party asset-backed commercial paper has been recorded at September 30, 2007 to reflect management s view of current market conditions and the limited liquidity for these notes. The fair value was estimated by management and the adjustment was recorded as a loss within principal trading revenue for Q2/08. Revenue for the six months ended September 30, 2007 was $400.3 million, up 10.5% from the same period a year ago. Net income was $51.4 million for the six-month period representing an increase of 17.6% from the prior year. Diluted earnings per share were $1.07, up 17.1% from $0.91 for the same period a year ago. Highlights for the three months ended September 30, 2007 compared to the three months ended September 30, 2006: Revenue of $154.5 million, down 1.0% or $1.5 million from $156.0 million Expenses of $135.3 million, up 3.5% or $4.5 million from $130.8 million Net income of $12.4 million, down 30.3% or $5.4 million from $17.8 million Diluted EPS of $0.26, down 29.7% or $0.11 from $0.37 Return on equity (ROE) of 12.8%, down from 22.1% Working capital increased by 12.8% to $294.0 million from $260.6 million Book value per diluted common share for the period end was $7.83, up 14.5% or $0.99 from $6.84 The Board of Directors approved a quarterly dividend of $0.125 per share on November 1, 2007, payable on December 10, 2007 with a record date of November 30, 2007 Highlights for the six months ended September 30, 2007 compared to the six months ended September 30, 2006: Revenue of $400.3 million, up 10.5% or $38.1 million from $362.2 million Expenses of $322.6 million, up 8.3% or $24.9 million from $297.7 million Net income of $51.4 million, up 17.6% or $7.7 million from $43.7 million contents 01 Canaccord Reports second Quarter Results 03 Letter to Shareholders 05 Management s Discussion and Analysis 19 Interim Consolidated Balance Sheets 20 Interim Consolidated Statements of Operations 21 INTERIM CONSOLIDATED STATEMENTS Of CHANGES IN SHAREHOLDERS EQUITY 21 INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 22 Interim Consolidated Statements of Cash Flows 23 Notes to Interim Consolidated Financial Statements

2 REPORT TO SHAREHOLDERS Diluted EPS of $1.07, up 17.1% or $0.16 from $0.91 ROE of 26.9%, down from 28.4% Highlights of Operations: Canaccord Adams ranked seventh in Canada for block trading market share (1) with 5.3% in Q2/08, up from 3.0% in Q2/07 Canaccord Adams has led over $5.5 billion (2) in transactions globally from January 1 to September 30, 2007, surpassing our $4.5 billion total for the entire calendar year 2006 Canaccord Adams ranked number three as bookrunner in Canada by Thomson Financial for raising $3.3 billion in total proceeds from 80 transactions between January 1 and September 30, 2007 Canaccord Adams ranked number one in the Brendan Wood Survey (3) for providing clients with top investment ideas Canaccord Adams ranked number one (4) for 46 completed Private Investment in Public Equity (PIPE) transactions in North America that raised over $1 billion in proceeds Canaccord Adams led 34 transactions (2) globally to raise total proceeds of more than $1.1 billion during Q2/08 Canaccord Adams acted as advisor for Thunder Energy Trust on its $425 million acquisition by Overlord Financial Inc. and Public Sector Pension Investment Board During Q2/08, Canaccord Adams led and co-led the following equity transactions: $500.0 million on TSX for Niko Resources $80.0 million on TSX for Centenario Copper Corp. $60.3 million on AIM for Lewis Charles Romania Property Fund Ltd. $50.3 million on TSX and AIM for Dragonwave Inc. $37.9 million on TSX and AIM for Intermap Technologies Corp. $31.0 million on NASDAQ for Alphatec Including the led and co-led transactions referred to above, Canaccord Adams participated in a total of 80 transactions (2) globally to raise gross proceeds of more than $4.8 billion during Q2/08. Included in these totals: Canada participated in 68 transactions, which raised $4.0 billion UK participated in four transactions, which raised $592.6 million US participated in eight transactions, which raised $194.9 million Assets under administration (AUA) of $15.3 billion, up 10.6% from the same period a year ago and down 2.6% from Q1/08 Assets under management (AUM) (5) of $777 million, up 4.3% from the same period a year ago and down 4.7% from Q1/08 Canaccord had 453 Investment Advisors as of September 30, 2007, up 19 from the same period a year ago and up 13 from Q1/08 (1) Source: Canada Equity (2) Source: FP Infomart and company information. Transactions over $1.5 million (3) Source: Brendan Wood International Equity Research, Sales and Trading Performance in Canada 2007 Report (4) Source: PlacementTracker as of September 30, 2007 (5) AUM has been reclassified commencing in Q1/07 to include all assets managed on a discretionary basis under our programs generally described as or known as the Independence Accounts, Separately Managed Accounts and Advisor Managed Accounts.

3 Letter to Shareholders Like many of our peers in the financial services industry, we found the July to September 2007 period to be among the most challenging periods in recent memory. The business environment across all of our geographies during Canaccord s Q2/08 was marked by dramatic swings in market valuations, investor sentiment and credit market liquidity. Although the sharp downturn in August presented us with a number of challenges in terms of risk management and liquidity constraints, it also demonstrated the underlying strength of Canaccord s global platform. While we are certainly not pleased with our financial performance for the quarter, we did continue to generate revenues and profits for shareholders. Moreover, we led one of our largest equity transactions ever, and continued to invest in our capabilities across our geographies. Asset-Backed Commercial PAPER market During Q2/08, a sharp contraction in credit market liquidity arose as a result of worsening conditions in the US sub-prime mortgage market. In reaction to those events, credit providers retreated and most third party asset-backed commercial paper (ABCP) trusts in Canada were unable to refinance maturing obligations thereby inhibiting liquidity for many note holders. In mid-august 2007, Canaccord s clients held approximately $275 million of ABCP notes in their accounts at Canaccord. Canaccord held $32 million in cash and cash equivalents and $11 million in its principal trading accounts classified under securities owned. In September 2007 we announced our support of and participation in the Pan-Canadian Investors Committee for ABCP, which was formed to seek options for an equitable restructuring of ABCP trusts or conduits. Canaccord has taken a very active role in the Investors Committee as part of our ongoing efforts to protect our clients interests and those of all private note holders. The standstill agreement put in place in August has been extended until December 14, 2007 and we were encouraged to see the successful restructuring of the Skeena conduit in October. We will continue our efforts as an active member of this committee and an advocate for our clients until all of our clients regain access to liquidity for their investments. An adjustment of $4.4 million has been recorded in principal trading as of September 30, Canaccord estimates the fair value of the ABCP by discounting expected future cash flows considering the best available data. Canaccord expects resolution, a liquidity event and clarity with respect to the ABCP within the next six months. We continue to believe that the valuation issues relate to liquidity and not underlying asset quality. Challenging capital markets environment The credit tightening that took place during the second quarter of fiscal 2008 in Canadian, US and UK financial markets led to sharp, though short-lived, corrections in equity markets. These downturns were very pronounced in Canaccord s core areas of expertise, notably mid-market growth equities, and impacted both our principal trading and investment banking operations. Revenues, after the mark-to-market of the ABCP position, decreased 1.0% to $154.5 million. Expenses advanced 3.5% as we continued to make ongoing investments in our business, particularly in US banking capabilities. As a result, net income for Q2/08 was $12.4 million, a 30.3% decrease. Diluted earnings per share declined 29.7% to $0.26 from $0.37 in Q2/07. stable Capital Markets Activity Canaccord Adams aggregate year-over-year performance was good during the second quarter, especially in light of the challenges of prevailing equity market conditions. Our teams led 34 transactions globally that raised total proceeds of $1.1 billion. Two transactions were particularly notable: a $500 million TSX transaction for Niko Resources, which we led, and the $425 million acquisition of Thunder Energy Trust by Overlord Financial and Public Sector Pension Investment Board, on which we acted as advisor. In Canada, Canaccord Adams investment banking revenues advanced 1.8% to $39.2 million compared to Q2/07. This was significantly lower than the record first quarter of the current fiscal year due to uncertainties surrounding the direction of equity markets as well as seasonality factors typical in the summer months. Principal trading was also negatively affected during the second quarter by weaker Canadian markets for mid-market growth equities and by trading losses. In the United Kingdom, year-over-year revenues decreased approximately 4% to $20.8 million in the second quarter. While the UK markets remained sluggish during the quarter and confidence was taxed by a temporary liquidity crisis in the UK, we remain well positioned, as a leading broker and Nominated Adviser (Nomad), to benefit from increased underwriting interest in growth equities.

4 Letter to shareholders We continue to see good traction in the United States as we build out our banking capabilities to serve key sectors of the entrepreneurial economy. Even though business volumes were affected by uncertainties in the US credit and equity markets, second quarter revenues advanced by 12.1% to $19.8 million compared to the second quarter of fiscal We have been an active participant in Private Investment in Public Equity (PIPE) transactions, completing 46 North American transactions so far in calendar 2007 with an aggregate value of over $1 billion. We expect that our dedicated PIPE team in the US will continue to build on the business momentum they have created for the balance of this fiscal year. During the quarter we announced the formation of a dedicated M&A group to provide strategic advice to growth companies in the Technology, Life Sciences and Consumer sectors. The newly hired team, based in Boston, extends Canaccord s proven M&A capability beyond its strength in the resource sectors. In August, Canaccord Adams held its 27th Annual Global Growth Conference, one of the longest-running conferences focused exclusively on emerging growth companies. The event brought together more than 1,000 participants that led to over 1,600 scheduled meetings between corporate and institutional clients, and Canaccord bankers and traders. Steady performance in Private Client Services Overall revenue growth in Private Client Services (PCS) was significantly impacted by the weak North American equity markets that prevailed throughout much of the second quarter of fiscal Nevertheless, our PCS team took advantage of stronger markets earlier in the period, which helped increase revenues by 3% to $57.4 million an increase of $1.8 million over Q2/07. Expenses advanced 6.5%, driven primarily by two factors. Salaries and benefits increased due to the hiring and training of 10 additional rookie Investment Advisors (IAs) year over year, part of a longer term strategy to build our retail business. Interest expense also rose as clients held higher average cash balances in their accounts during the quarter. As a result, income before income taxes and corporate allocations declined 6.3% to $13.4 million compared to Q2/07. Assets under administration grew $1.5 billion to $15.3 billion compared to Q2/07. Assets under management rose 4.3% to $777 million. Despite the continuing challenge of cost-effective recruiting of new IAs in Canada, on a net basis we added 13 new professionals since Q1/08, bringing Canaccord s total number of IAs to 453. During Q2/08 we hired 13 new IAs and had 10 rookies complete their training and become licensed, and hence they are now included in the total number of IAs. Business Outlook We experienced one of the sharpest corrections in recent history during Q2/08. We owe much to our dedicated employees and their commitment to provide clients with ideas that count in any market environment. While the downturn exposed areas of our operations that require more attention, our financial performance for the quarter shows that the Company has developed fundamentally strong businesses that are remarkably resilient in their ability to produce revenues and profits for Canaccord shareholders. This is an excellent endorsement of our longer term strategy to diversify our business by geography and business line and to be a leading global dealer, focused on the mid-market. Looking forward, we are already seeing a growing pipeline of new business, improved market liquidity, and commodities such as gold and oil at or near historic highs. Sentiment is improving and with it, we believe, will come an increased appetite for the specialized expertise that Canaccord can bring to private and institutional investors and to small- and mid-cap companies looking for opportunities to enhance their prospects for growth. Paul D. Reynolds president & chief executive officer

5 management s discussion and analysis Fiscal second quarter 2008 for the three months and six months ended September 30, 2007 this document is dated November 1, 2007 The following discussion of the financial condition and results of operations for Canaccord Capital Inc. (Canaccord) is provided to enable the reader to assess material changes in such financial condition and to assess results for the three- and six-month periods ended September 30, 2007 compared to the corresponding periods in the preceding fiscal year. The threeand six-month periods ended September 30, 2007 are also referred to as the second quarter 2008, Q2/08, fiscal Q2/08 and first-half fiscal year 2008 in the following discussion. This discussion should be read in conjunction with the unaudited interim consolidated financial statements for the three- and six-month periods ended September 30, 2007 beginning on page 19 of this report; our Annual Information Form dated June 26, 2007; and the 2007 annual Management s Discussion and Analysis (annual MD&A) including the audited consolidated financial statements for the fiscal year ended March 31, 2007 in Canaccord s Annual Report dated June 26, 2007 (the Annual Report). There has been no material change to the information contained in the annual MD&A for fiscal 2007 except as disclosed in this MD&A. Canaccord s financial information is expressed in Canadian dollars unless otherwise specified. The financial information presented in this document is prepared in accordance with Canadian generally accepted accounting principles (GAAP) unless specifically noted. All the financial data below is unaudited except for certain fiscal year data from our 2007 audited financial statements. Caution regarding forward-looking statements This document may contain certain forward-looking statements. These statements relate to future events or future performance and reflect management s expectations or beliefs regarding future events including business and economic conditions and Canaccord s growth, results of operations, performance and business prospects and opportunities. Such forward-looking statements reflect management s current beliefs and are based on information currently available to management. In some cases, forward-looking statements can be identified by terminology such as may, will, should, expect, plan, anticipate, believe, estimate, predict, potential, continue, target, intend or the negative of these terms or other comparable terminology. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and a number of factors could cause actual events or results to differ materially from the results discussed in the forward-looking statements. In evaluating these statements, readers should specifically consider various factors that may cause actual results to differ materially from any forward-looking statement. These factors include, but are not limited to, market and general economic conditions, the nature of the financial services industry and the risks and uncertainties detailed from time to time in Canaccord s interim and annual consolidated financial statements and its Annual Report and Annual Information Form filed on sedar.com. These forward-looking statements are made as of the date of this document, and Canaccord assumes no obligation to update or revise them to reflect new events or circumstances. Non-GAAP measures Certain non-gaap measures are utilized by Canaccord as measures of financial performance. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. Canaccord s capital is represented by common shareholders equity and, therefore, management uses return on average common equity (ROE) as a performance measure. Assets under administration (AUA) and assets under management (AUM) are non-gaap measures of client assets that are common to the wealth management aspects of the private client services industry. AUA is the market value of client assets administered by Canaccord from which Canaccord earns commissions or fees. This measure includes funds held in client accounts as well as the aggregate market value of long and short security positions. Canaccord s method of calculating AUA may differ from the methods used by other companies and therefore may not be comparable to other companies. Management uses this measure to assess operational performance of the Private Client Services business segment. In Q1/08, our AUM definition was reclassified to include all assets managed on a discretionary basis under our programs generally described as or known as the Independence Accounts, Separately Managed Accounts and Advisor Managed Accounts. AUM including all these programs have been reclassified commencing in Q1/07 on this basis. Services under these programs include the selection of investments and the provision of investment advice. AUM are also administered by Canaccord and are included in AUA.

6 MANAGEMENT S DISCUSSION AND ANALYSIS Overview Canaccord s business is cyclical and experiences considerable variations in revenue and income from quarter to quarter and year to year due to factors beyond Canaccord s control. In addition to general economic conditions and international market factors, our business is affected by the overall condition of the North American and European equity markets, including the seasonal variance in these markets. Business environment During fiscal Q2/08, the reduction in credit market liquidity pushed credit spreads to extremely high levels and increased volatility in equity markets. Financial firms, particularly in Canada, came under pressure for holding investments in third party asset-backed commercial paper (ABCP). This ABCP became illiquid during the quarter as a result of the credit market conditions, and is part of a larger global credit problem. Canaccord has taken a seat on the Pan-Canadian Investors Committee for ABCP to represent and defend our clients interest and the interest of all private unitholders in the marketplace. There has recently been an extension of the standstill agreement until December 14, It is our view that this situation remains a liquidity issue and not a deterioration of underlying asset quality. Also during the quarter the Canadian economy saw the dollar increase to parity with the US dollar for the first time in over 30 years. Despite the pressures of this appreciation, the Canadian economy is expected to handle this headwind in the long term given its strong commodity prices plus a low interest rate environment relative to Canadian historical levels. The US economy is struggling with both the global credit crunch and the continued downturn in the US housing market. To reduce the risk of an economic slowdown, the US Federal Reserve lowered interest rates in September for the first time in four years. The UK economy has also been troubled by the global credit conditions, including a run on deposits of a large financial institution that was only stabilized after significant central bank and regulatory intervention. Furthermore, the UK Treasury cited weakness in the UK housing market, which will likely prompt a slowdown in consumer spending to a three-year low. The impact of these conditions was generally unfavourable for our businesses across our geographies during Q2/08. However, we are cautiously optimistic over the near to mid-term that markets will return to more normal conditions. Market data Both trading volumes and financing values on the TSX, TSX Venture, and AIM were higher during Q2/08 relative to Q2/07. Trading volume on the NASDAQ declined slightly year over year while the total value of financings increased. Financing values for Canaccord s focus sectors on the AIM increased year over year; however, Q2/07 represents an unusually low base. Further issuance in all focus sectors except for biotech drove the year-over-year increase. Trading volume by exchange (billions of shares) Increase Increase Fiscal (decrease) from (decrease) from July 2007 August 2007 September 2007 Q2/08 fiscal Q2/07 fiscal Q1/08 TSX % (7.7)% TSX Venture % (17.9)% AIM % (12.1)% NASDAQ (5.0)% 8.0% Total financing value by exchange Increase (Decrease) Fiscal from from July 2007 August 2007 September 2007 Q2/08 fiscal Q2/07 fiscal Q1/08 TSX and TSX Venture (C$ billions) % (44.2)% AIM ( billions) % (52.9)% NASDAQ (US$ billions) % (42.6)% Financing value for relevant AIM industry sectors Increase (Decrease) Fiscal (decrease) from from ( millions, except for percentage amounts) July 2007 August 2007 September 2007 Q2/08 fiscal Q2/07 fiscal Q1/08 Oil and gas % (48.5)% Mining % (60.8)% Biotech (47.3)% (36.1)% Media % (71.3)% Technology % (54.5)% Total % (60.4)% Source: TSX Statistics, LSE AIM Statistics, Thomson One, and Equidesk

7 MANAGEMENT S DISCUSSION AND ANALYSIS CANACCORD Capital inc About Canaccord s operations Canaccord Capital Inc. s operations are divided into two business segments: Canaccord Adams (our capital markets operations) and Private Client Services. Revenue from Canaccord Adams is generated from commissions and fees earned in connection with investment banking transactions and institutional sales and trading activity as well as trading gains and losses from Canaccord s principal and international trading operations. Revenue from Private Client Services is generated through traditional commission-based brokerage services; the sale of feebased products and services; client-related interest; and fees and commissions earned by Investment Advisors (IAs) in respect of investment banking and venture capital transactions by private clients. Canaccord s administrative segment, described as Corporate and Other, includes correspondent brokerage services, bank and other interest, and foreign exchange revenue and expenses not specifically allocable to either the Private Client Services or Canaccord Adams divisions. Also included in this segment are Canaccord s operations and support services, which are responsible for front- and back-office information technology systems, compliance and risk management, operations, finance and all administrative functions. Corporate structure canaccord capital inc. Canaccord Capital Corporation (Canada) Canaccord Adams Limited (UK) Canaccord Capital Corporation (USA), Inc. (US) Canaccord Adams Inc. (US) Canaccord International Ltd. (Other Foreign Location) Private Client Services Canaccord Adams Corporate and Other Canaccord Adams Private Client Services Canaccord Adams Canaccord Adams Consolidated operating results Second quarter and first-half fiscal 2008 summary data (1) Three months ended September 30 Six months ended September 30 Year-over-year Year-over-year (C$ thousands, except per share, employee and % amounts) increase (decrease) increase (decrease) Canaccord Capital Inc. Revenue Commission $ 65,728 $ 63, % $ 151,503 $ 141, % Investment banking 73,731 70, % 202, , % Principal trading (8,324) 5,390 n.m. (1,511) 13,174 n.m. Interest 16,273 14, % 32,583 27, % Other 7,062 2, % 15,409 6, % Total revenue $ 154,470 $ 156,031 (1.0)% $ 400,340 $ 362, % Expenses Incentive compensation $ 71,416 $ 74,974 (4.7)% $ 192,822 $ 179, % Salaries and benefits 12,649 10, % 26,918 23, % Other overhead expenses (2) 51,277 45, % 102,822 94, % Total expenses $ 135,342 $ 130, % $ 322,562 $ 297, % Income before income taxes 19,128 25,250 (24.2)% 77,778 64, % Net income 12,411 17,806 (30.3)% 51,440 43, % Earnings per share (EPS) diluted (29.7)% % Return on average common equity (ROE) 12.8% 22.1% (9.3)p.p. 26.9% 28.4% (1.5)p.p. Book value per share period end $ 7.83 $ % Number of employees 1,689 1, % (1) Data is considered to be GA AP except for ROE, book value per share and number of employees. (2) Consists of trading costs, premises and equipment, communication and technology, interest, general and administrative, amortization and development costs. p.p.: percentage points n.m.: not meaningful

8 MANAGEMENT S DISCUSSION AND ANALYSIS Geographic distribution of revenue (1) Three months ended September 30 Six months ended September 30 Year-over-year Year-over-year (C$ thousands, except % amounts) increase (decrease) increase (decrease) Canada $ 112,876 $ 108, % $ 274,969 $ 241, % UK 20,807 21,643 (3.9)% 68,308 70,535 (3.2)% US 20,737 18, % 47,159 42, % Other Foreign Location 50 7,235 n.m. 9,904 7, % Total $ 154,470 $ 156,031 (1.0)% $ 400,340 $ 362, % (1) For a business description of Canaccord s geographic distribution please refer to the About Canaccord s Operations section on page 7. n.m.: not meaningful Second quarter 2008 vs. second quarter 2007 Revenue is generated through five activities: commissions and fees associated with agency trading and private client wealth management activity, investment banking, principal trading, interest and other. Revenue for the three months ended September 30, 2007 was $154.5 million, down $1.5 million compared to the same period a year ago. For the second quarter of fiscal 2008, revenue generated from commissions was $65.7 million, up 3.4% compared to the same period a year ago and is largely due to strength in market activity early in the quarter. Investment banking revenue was $73.7 million, up $3.6 million primarily due to increased activity from Canadian equity markets and merger and acquisition fees. Principal trading experienced a loss of $8.3 million compared to a gain of $5.4 million during the same period a year ago. The primary focus of Canaccord s principal trading activity is in small- to mid-cap equities, which experienced significant valuation challenges during the quarter due to the credit contraction and its related impact on the equity markets. The lower valuations and wider bid-ask spreads resulted in mark-to-market losses, much of which was unrealized at the end of the quarter. Canaccord has re-focused its principal trading operations to reduce certain market exposures through rebalancing internal capital allocations. Capital is being prudently managed and allocations to various businesses will expand and contract based on market conditions and expectations. Also contributing to the loss in principal trading was an adjustment of $4.4 million. This adjustment reflects the current illiquidity of Canaccord s ABCP and the uncertainty in market conditions, and is referred to in the Critical Accounting Estimates section on page 15. Interest revenue was $16.3 million, up 14.1% mainly due to higher client interest revenue. Second quarter revenue in Canada was $112.9 million, up 4.1% or $4.5 million from the same period a year ago. Our operations in Canada benefited from greater activity in the Canadian equity markets early in the quarter. Revenue in the UK was $20.8 million, down 3.9% from the same period a year ago. In the US, revenue was $20.7 million, up 10.6% from Q2/07. First-half fiscal year 2008 vs. first-half fiscal year 2007 Revenue for the six months ended September 30, 2007 was $400.3 million, up 10.5% or $38.2 million compared to the same period a year ago. Revenue generated from commissions increased by 7.0% to $151.5 million compared to the same period a year ago largely due to healthier market conditions in Q1/08 and in early Q2/08. Investment banking revenue was $202.3 million, up 17.0% primarily due to increased financing activity in Canadian equity markets and from higher merger and acquisition fees. Principal trading experienced a loss of $1.5 million compared to a gain of $13.2 million last year with Q2/08 contributing to these results as explained above. Interest revenue was $32.6 million, up 16.8% for the same reasons mentioned above. Year-to-date revenue in Canada was $275.0 million, up 13.8% or $33.3 million from the same period a year ago. Our operations in Canada benefited from greater activity in the first four months of this period in the Canadian equity markets, largely due to the continued global demand for commodities and related equities. First half of fiscal 2008 revenue in the UK was $68.3 million, down $2.2 million from the same period a year ago. Revenue from Other Foreign Location was $9.9 million, up $2.7 million year over year, and in the US revenue was $47.2 million, up $4.4 million from the same period a year ago. Expenses as a percentage of revenue Three months ended September 30 Six months ended September 30 Year-over-year Year-over-year in percentage points increase (decrease) increase (decrease) Incentive compensation 46.2% 48.1% (1.9)p.p. 48.2% 49.7% (1.5)p.p. Salaries and benefits 8.2% 6.8% 1.4p.p. 6.7% 6.4% 0.3p.p. Other overhead expenses (1) 33.2% 28.9% 4.3p.p. 25.7% 26.1% (0.4)p.p. Total 87.6% 83.8% 3.8p.p. 80.6% 82.2% (1.6)p.p. (1) Consists of trading costs, premises and equipment, communication and technology, interest, general and administrative, amortization and development costs. p.p.: percentage points

9 MANAGEMENT S DISCUSSION AND ANALYSIS CANACCORD Capital inc Second quarter 2008 vs. second quarter 2007 Expenses for the three months ended September 30, 2007 were $135.3 million, up 3.5% or $4.6 million from a year ago. The overall increase in expenses is largely due to higher salaries and benefits, up $2.0 million; development costs, up $2.4 million; and general and administrative expenses, up $1.5 million. Incentive compensation expense was $71.4 million for the quarter, down 4.7% due to a restructuring of certain elements of our incentive compensation program which provides for an equitybased compensation component which vests over a three-year period. This change to our incentive compensation program resulted in a 1.9 percentage point decline to 46.2% in consolidated incentive compensation as a percentage of total revenue. Salaries and benefits expense was $12.6 million in the second quarter of fiscal 2008, up 18.8% from the same period a year ago largely due to the increased contribution by the firm towards the Employee Stock Purchase Plan (ESPP), which is discussed in our fiscal year 2007 Annual Report. In May 2007 the matching contribution by the firm increased from a maximum of $1,500 per eligible employee to a contribution of $3,000. Also contributing to the increase in salaries and benefits expense is the overall hiring increase of 115 net new employees across all areas of the firm. The total compensation (incentive compensation plus salaries) payout as a percentage of consolidated revenue for Q2/08 was 54.4%, down from 54.9% in Q2/07. First-half fiscal year 2008 vs. first-half fiscal year 2007 Expenses for the six months ended September 30, 2007 were $322.6 million, up $24.8 million or 8.3% from a year ago. Incentive compensation expense was $192.8 million, up 7.2% due to the increase in incentive-based revenue. Consolidated incentive compensation as a percentage of total revenue was 48.2%, down 1.5 percentage points for reasons discussed previously. Salaries and benefits expense was $26.9 million, up 16.3% in the first half of fiscal 2008 compared to the same period a year ago for the same reasons mentioned above. The total compensation (incentive compensation plus salaries) payout as a percentage of consolidated revenue was 54.9%, down from 56.1% in the first six months of fiscal Other overhead expenses Three months ended September 30 Six months ended September 30 Year-over-year Year-over-year (C$ thousands, except % amounts) increase (decrease) increase (decrease) Trading costs $ 7,249 $ 6, % $ 14,207 $ 14,678 (3.2)% Premises and equipment 5,735 5,814 (1.4)% 10,994 11,751 (6.4)% Communication and technology 5,813 5, % 11,552 10, % Interest 6,413 5, % 12,581 10, % General and administrative 15,755 14, % 34,026 33, % Amortization 2,146 2,366 (9.3)% 4,123 4,355 (5.3)% Development costs 8,166 5, % 15,339 9, % Total other overhead expenses $ 51,277 $ 45, % $ 102,822 $ 94, % Second quarter 2008 vs. second quarter 2007 Other overhead expenses increased 13.5% to $51.3 million for the second quarter of fiscal 2008 compared to the same period a year ago. Contributing to the overall increase in other overhead expenses were development costs, which increased by 41.1% largely due to Canaccord s growth across all geographies. Trading costs rose 18.5% due to higher trading volumes in Canada and the US. Interest expense was also up by 18.7% due to higher interest rates, larger cash balances in client accounts and subordinated debt entered into on March 30, General and administrative expense was up $1.5 million in Q2/08. This was largely due to an increase in promotion and travel expense resulting from increased business travel as a result of our geographically diverse business and from business development costs such as conferences and seminars. Development costs for Q2/08 were $8.2 million, up 41.1% or $2.4 million from the previous year, and include hiring incentives and systems development costs. Hiring incentives are one of our tools to recruit new IAs and capital markets professionals. Hiring incentives also includes retention costs related to the acquisition of Adams Harkness Financial Group, Inc. Systems development costs are expenditures to enhance our information technology platform. Hiring incentives increased by 43.3% this quarter largely due to increased recruitment of Canaccord Adams professionals in the US. Systems development costs increased by 32.2% due to enhancements to our technological platform associated with our growth. Net income for Q2/08 was $12.4 million, down $5.4 million from a year ago. Diluted EPS were $0.26, down $0.11 or 29.7%. ROE for Q2/08 was 12.8% compared to an ROE of 22.1% a year ago. The decrease in EPS is largely due to the decline in net income resulting from investments made across our global operations and from unfavourable market conditions in August and September. Book value per common share for Q2/08 was up 14.5% year over year to $7.83. Income taxes were $6.7 million for the quarter reflecting an effective tax rate of 35.1%, up from 29.5% a year ago. The increase in the effective tax rate in Q2/08 relative to Q2/07 is related to the geographical composition of Canaccord s net income.

10 MANAGEMENT S DISCUSSION AND ANALYSIS First-half fiscal year 2008 vs. first-half fiscal year 2007 Other overhead expenses for the six months ended September 30, 2007 were up 8.6% or $8.2 million to $102.8 million from the same period a year ago. Contributing to the overall increase in other overhead expenses were development costs, which increased by 58.9% or $5.7 million to $15.3 million, and communications and technology costs up $1.1 million. These increases are largely related to Canaccord s growth across all geographies. Additionally, interest expense was up $2.2 million compared to the same period a year ago due to higher interest rates, larger cash balances in client accounts and subordinated debt entered into on March 30, Offsetting the increase in overhead expenses were lower premises and equipment costs, down 6.4%. General and administrative expense was up $0.6 million. The increase in general and administrative expense for the first half of fiscal 2008 was largely due to an increase in promotion and travel expense, up 22.0%, which is largely due to an increase in business travel as a result of our geographically diverse business. This increase was offset by decreases in reserves and client expenses. Development costs were $15.3 million, up 58.9% or $5.7 million from the previous year, and include hiring incentives and systems development costs. A large portion of the 68.5% increase in hiring incentives is for the recruitment of Canaccord Adams professionals and for the retention plan associated with the acquisition of Adams Harkness Financial Group Inc. Overall systems development costs for the first six months of fiscal 2008 increased 37.1% due to enhancements to our technological platform associated with our growth. Net income for the first half of fiscal 2008 was $51.4 million, up 17.6% or $7.7 million from the same period a year ago. Diluted EPS were $1.07, up $0.16 and ROE was 26.9% compared to an ROE of 28.4% a year ago. The increase in EPS is largely due to growth in net income and the investments made across our global operations. Book value per common share was up 14.5% to $7.83. Income taxes were $26.3 million for the first half of fiscal 2008 reflecting an effective tax rate of 33.9%, up from 32.1% a year ago. results of operations Canaccord Adams Three months ended September 30 Six months ended September 30 Year-over-year Year-over-year (C$ thousands, except employees and % amounts) increase (decrease) increase Canaccord Adams Revenue Canada Investment Banking and equities $ 39,210 $ 38, % $ 101,759 $ 81, % Canada International Trading, Registered Traders and Fixed Income 8,031 7, % 17,869 18,779 (4.8)% Total Canada $ 47,241 $ 46, % $ 119,628 $ 100, % UK 20,807 21,643 (3.9)% 68,308 70,535 (3.2)% Other Foreign Location 50 7,235 n.m. 9,904 7, % US 19,827 17, % 45,108 40, % Total revenue $ 87,925 $ 93,033 (5.5)% $ 242,948 $ 218, % Expenses Incentive compensation 42,205 45,305 (6.8)% 118, , % Salaries and benefits 3,194 2, % 7,213 5, % Other overhead expenses 27,583 23, % 53,710 45, % Total expenses $ 72,982 $ 70, % $ 179,331 $ 162, % Income before income taxes (1) 14,943 22,330 (33.1)% 63,617 55, % Number of employees % (1) Income before income taxes excludes allocated overhead expenses that are included in Corporate and Other segment expenses. n.m.: not meaningful Revenue from Canaccord Adams (our capital markets segment) is generated from commissions and fees earned in connection with investment banking transactions and institutional sales and trading activity as well as trading gains and losses from Canaccord s principal and international trading operations. Second quarter 2008 vs. second quarter 2007 Revenue Total revenue for Canaccord Adams in Q2/08 was $87.9 million, down $5.1 million from the same quarter a year ago due to challenging market conditions as described in the Business environment section on page 6. Despite these market challenges our Canadian operations generated fiscal second quarter revenue of $47.2 million, up 1.7% compared to a year ago. Within this revenue, $39.2 million is derived from Investment Banking and equities activity while $8.0 million is derived from our International Trading, Registered Traders and Fixed Income operations. This revenue is offset by a $1.1 million adjustment of the total $4.4 million adjustment for the corporately held ABCP in securities owned. Canadian growth is largely due to the continued global demand for Canadian equities, particularly in the earlier part of the quarter.

11 MANAGEMENT S DISCUSSION AND ANALYSIS CANACCORD Capital inc Our Canadian revenue represents 53.7% of Canaccord Adams total revenue. Revenue from our UK operations was $20.8 million, down 3.9% from the same period a year ago due to a general slowdown in the market. UK revenue of $20.8 million represents 23.7% of Canaccord Adams total revenue. In the US, revenue was $19.8 million, up 12.1% from a year ago, and represents 22.6% of Canaccord Adams total revenue. Revenue in Other Foreign Location declined to $50 thousand in Q2/08, down from $7.2 million a year ago. In any quarter, revenue in this region represents a small number of transactions and is therefore very irregular. Expenses Expenses for Q2/08 were $73.0 million, up $2.3 million. The largest increases in non-compensation expenses were in development costs, up $2.3 million, general and administrative expense, up $1.4 million. Within general and administrative expense, promotion and travel rose by 38.0% largely due to business development costs, including conferences and seminars. The increase in general and administrative expense was offset by a decrease in reserves expense. The decrease in incentive compensation for the quarter of $3.1 million is largely attributable to the decline in revenue during the quarter. Salary and benefits expense for the quarter was up 43.4% to $3.2 million compared to a year ago. This increase is largely due to the higher contributions made by the firm towards the ESPP and the hiring of 41 net new Canaccord Adams employees across all geographies compared to last year. The total compensation expense payout as a percentage of revenue for the quarter was 51.6%, which is down 0.5 percentage points from Q2/07. Income before income taxes and corporate overhead allocations for the quarter was $14.9 million, down $7.4 million or 33.1%, from the same quarter a year ago. First-half fiscal year 2008 vs. first-half fiscal year 2007 Revenue for Canaccord Adams for the first half of fiscal 2008 was $242.9 million, up $24.8 million from the same period last year due to relatively strong capital markets in all geographies, particularly during the first four months of fiscal In Canada, revenue was $119.6 million, up 19.6% from the same period a year ago. Within Canada, $101.7 million is derived from Investment Banking and equities activity while $17.9 million is from our International Trading, Registered Traders and Fixed Income operations. This revenue is offset by a $1.1 million adjustment in Q2/08 for the ABCP. The overall growth in Canada is largely due to our growing market share and from the continued global demand for commodities and for Canadian equities relative to the same period a year ago. Overall, our Canadian revenue represents 49.2% of Canaccord Adams total revenue. Our UK revenue was $68.3 million, down $2.2 million from the same period a year ago due to slower market conditions compared to the same period a year ago. UK revenue of $68.3 million represents 28.1% of Canaccord Adams total revenue. In the US, revenue was $45.1 million, representing 18.6% of Canaccord Adams total revenue. Revenue from Other Foreign Location was $9.9 million, representing 4.1% of Canaccord Adams total revenue. Expenses Expenses for the first half of fiscal 2008 were $179.3 million, up $17.1 million. The largest increases in non-compensation expenses were in development costs, up $5.3 million, and general and administrative expense, up $3.1 million. Within general and administrative expense, promotion and travel was up 33.9% or $3.0 million. The increase in incentive compensation for the period of $7.2 million is mainly attributable to the increase in incentive-based revenue growth during the first half of fiscal Salary and benefits expense for the first half of fiscal 2008 was up by $1.8 million from a year ago for the same reasons mentioned above. The total compensation expense payout as a percentage of revenue for the first-half of fiscal 2008 was 51.7%, down 1.8 percentage points from 53.5% for the same period a year ago. Income before income taxes and corporate overhead allocations for the period was $63.6 million, up $7.7 million from the same period a year ago. Private Client Services (C$ thousands, except assets under administration Three months ended September 30 Six months ended September 30 and assets under management, which are in C$ millions; Year-over-year Year-over-year employees; Investment Advisors; and % amounts) increase (decrease) increase (decrease) Revenue $ 57,415 $ 55, % $ 133,498 $ 127, % Expenses Incentive compensation 25,351 24, % 63,031 58, % Salaries and benefits 3,510 2, % 7,559 6, % Other overhead expenses 15,178 13, % 30,597 32,026 (4.5)% Total expenses $ 44,039 $ 41, % $ 101,187 $ 96, % Income before income taxes (1) 13,376 14,280 (6.3)% 32,311 31, % Assets under management (AUM) % Assets under administration (AUA) 15,288 13, % Number of Investment Advisors (IAs) % Number of employees % (1) Income before income taxes excludes allocated overhead expenses that are included in Corporate and Other segment expenses.

12 MANAGEMENT S DISCUSSION AND ANALYSIS Revenue from Private Client Services is generated through traditional commission-based brokerage services; the sale of fee-based products and services; client-related interest; and fees and commissions earned by IAs in respect of investment banking and venture capital transactions by private clients. Second quarter 2008 vs. second quarter 2007 Revenue from Private Client Services was $57.4 million, up $1.8 million mainly due to favourable market conditions in North America at the beginning of the quarter. AUA increased by $1.5 billion to $15.3 billion compared to Q2/07. AUM grew by 4.3% year over year. There were 453 IAs at the end of the second quarter of fiscal 2008, up from 434 a year ago. Despite an extremely competitive recruiting environment we successfully recruited net 19 IAs, including 10 additional rookie IAs. Fee-related revenue as a percentage of total Private Client Services revenue was up 1.7 percentage points to 28.5% from the same period last year. Expenses for Q2/08 were $44.0 million, up $2.7 million. For the quarter the largest increases in expenses were in interest expense, up 22.6% due to higher interest rates and larger cash balances in our client accounts this year versus last year, general and administrative expense, up 39.8% resulting from increases in reserves expense, up $0.4 million, and an increase in client expenses of $0.4 million. Salaries and benefits expense was 23.0% higher this quarter largely due to the increase in the number of net new employees compared to the same period a year ago. A large part of the increase in new employees was due to the hiring of rookie IAs, who receive a salary in their first year. Another large part of the increase in salaries and benefits expense is due to the increased contribution by the firm towards the ESPP. The total compensation expense payout as a percentage of revenue for the quarter was 50.3%, up 0.4 percentage points from 49.9% for the same period a year ago. Income before income taxes and corporate allocations for the quarter was $13.4 million, down 6.3% from the same period a year ago. First-half fiscal year 2008 vs. first-half fiscal year 2007 Revenue from Private Client Services was $133.5 million, up $5.6 million mainly due to favourable market conditions in North America during the first four months of fiscal Fee-related revenue as a percentage of total Private Client Services revenue was up 2.6 percentage points to 25.5% from the same period last year. Expenses for the six months ended September 30, 2007 were $101.2 million, up $4.6 million. The largest increases in expenses were in incentive compensation expenses, up $4.8 million, and interest expense, up $1.8 million due to higher interest rates and larger cash balances in our client accounts this year versus last year. This increase was offset by a decrease in general and administrative expense, down $2.3 million largely related to provisions made in Q2/07. The total compensation expense payout as a percentage of revenue for the first six months of fiscal 2008 was 52.9%, up 2.4 percentage points from 50.5% for the same period a year ago. Income before income taxes and corporate allocations for the first half of fiscal 2008 was $32.3 million, up 3.1% from the same period a year ago. Corporate and Other Three months ended September 30 Six months ended September 30 Year-over-year Year-over-year (C$ thousands, except employees and % amounts) increase (decrease) increase (decrease) Revenue $ 9,130 $ 7, % $ 23,894 $ 16, % Expenses Incentive compensation 3,860 4,784 (19.3)% 11,383 10, % Salaries and benefits 5,945 5, % 12,146 11, % Other overhead expenses 8,516 8, % 18,515 17, % Total expenses $ 18,321 $ 18,732 (2.2)% $ 42,044 $ 38, % (Loss) before income taxes (9,191) (11,360) (19.1)% (18,150) (22,838) (20.5)% Number of employees % Canaccord s administrative segment, described as Corporate and Other, includes correspondent brokerage services, bank and other interest, and foreign exchange revenue and expenses not specifically allocable to either the Private Client Services or Canaccord Adams divisions. Also included in this segment are Canaccord s operations and support services, which are responsible for front- and back-office information technology systems, compliance and risk management, operations, finance, and all administrative functions. Second quarter 2008 vs. second quarter 2007 Revenue for the three months ended September 30, 2007 was $9.1 million, up $1.7 million from the same quarter a year ago largely due to increases in interest rates and correspondent business revenue. This revenue is offset by a $3.3 million adjustment of the $4.4 million total adjustment related to the corporately held ABCP originally in treasury.