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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Quest Capital | LSE:QCC | London | Ordinary Share | CA74835U1093 | COM SHS NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 56.50 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
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RNS Number:7893B
Quest Capital Corporation
08 August 2007
QUEST CAPITAL CORP.
August 8, 2007 TSX: QC
AMEX/AIM: QCC
QUEST REPORTS ITS FINANCIAL RESULTS
FOR SECOND QUARTER 2007 AND DECLARES DIVIDEND
Vancouver, British Columbia - Quest Capital Corp. ('Quest' or the 'Company'),
announces its unaudited interim consolidated financial results for the six
months ended June 30, 2007 (a copy of which is attached hereto and is also
available on SEDAR at www.sedar.com).
HIGHLIGHTS
* Earnings before income taxes of $10.7 million ($0.07 per share) for the
three months ended June 30, 2007 and $20.1 million ($0.14 per share) for the
six months ended June 30, 2007, as compared to earnings before income taxes
of $11.7 million ($0.08 per share) and $20.0 million ($0.15 per share) for
the comparative periods in 2006; and
* Loans arranged during the six months ended June 30, 2007 totaled $112.5
million, of which the Company funded $84.5 million. This compares to $112.8
million advanced for the comparative period in 2006, of which the Company
funded $104.5 million. Loans repaid during the six months ended June 30,
2007 totaled $129.8 million, $107.0 million net to the Company. This
compares to $43.7 million repaid for the comparative period in 2006, $33.5
million net to the Company.
Mr. A. Murray Sinclair, the Managing Director, noted:
Earnings from our core lending business increased in the first half of 2007
compared to the first half of 2006, reflecting the strength of our lending model
and balance sheet. Given both the recent increase in long term interest rates
and the continuing downturn in the US sub-prime debt market, Quest continues to
proceed cautiously to expand its lending platform.
Mr. Ken Gordon, Chief Operating Officer, further noted:
In the second quarter, loans funded increased to $63.0 million (net by Quest of
$58.7 million), representing a 27% increase over the prior quarter. There were
additional loans of $25.2 million committed at the end of the quarter with
funding to occur in the upcoming quarters. Looking forward, we are currently
experiencing an increase in loan applications. We are pleased with this growing
demand and we will continue to ensure that all loans funded meet our strict
criteria for both rates of return as well as security of our principal.
The Board of Directors has approved the next quarterly dividend of CAD$0.025 per
share to be paid on September 26, 2007 to shareholders of record at the close of
business on September 14, 2007. Shareholders should refer to the Company's
website for the tax treatment of these dividends.
Further to the Company's press release dated June 25, 2007, the Company has
restated its financial statements as at December 31, 2006 and 2005 and for the
years ended December 31, 2006, 2005 and 2004 and as at March 31, 2007 and the
three months ended March 31, 2007 and 2006. The restated financial statements
and management discussion and analysis are available on the Company's website at
www.questcapcorp.com and on SEDAR.
About Quest
Quest Capital Corp. is an asset backed lender that focuses on providing
financial services, specifically mortgages and bridge loans. Quest's primary
expertise is providing asset backed loans to companies in real estate,
manufacturing and resource sectors. Quest complements its lending business by
providing corporate finance services through its wholly owned subsidiary, Quest
Securities Corporation.
For more information about Quest, please visit our website(www.questcapcorp.com)
or contact:
Contact in Canada Contacts in London
AIM NOMAD:
A.Murray Sinclair, Managing Canaccord Adams Limited
Director
Tel: (604) 68-QUEST Erin Needra:
(604) 687-8378 erin.needra@canaccordadams.com
Toll free: (800) 318-3094 Robert Finlay:
robert.finlay@canaccordadams.com
Forward Looking Statements
Statements contained in this news release that are not historical facts are
forward-looking statements that involve various risks and uncertainty affecting
the business of Quest. Actual results realized may vary materially from the
information provided in this release. As a result, there is no representation by
Quest that actual results realized in the future will be the same in whole or in
part as those presented herein.
Quest Capital Corp.
Consolidated Financial Statements
June 30, 2007
(Expressed in thousands of Canadian dollars)
(Unaudited)
Quest Capital Corp.
Consolidated Balance Sheets
(Expressed in thousands of Canadian dollars)
(Unaudited)
June 30, Restated Restated
2007 December June 30,
31, 2006 2006
------------------------------------
Assets
Cash and cash equivalents $ 26,163 $ 9,506 $ 50,352
Marketable securities 3,621 1,865 720
Loans (note 5) 240,055 269,522 191,281
Investments 12,646 9,980 11,827
Future tax asset 9,000 14,500 8,016
Restricted cash 2,279 2,568 2,667
Prepaid and other receivables 356 686 739
Resource and capital assets 416 477 573
Other assets 1,262 1,253 1,716
-------------------------------------
$ 295,798 $ 310,357 $ 267,891
======================================
Liabilities
Accounts payable and accrued $ 3,606 $ 4,290 $ 4,454
liabilities
Income taxes payable 1,829 2,981 4,421
Dividend payable - - 4,313
Deferred interest and loan fees - 4,620 2,277
Future income taxes 1,212 1,326 1,269
Asset retirement obligation 840 1,011 1,253
Debt payable (note 6) - 22,000 -
-------------------------------------
7,487 36,228 17,987
-------------------------------------
Shareholders' Equity
Share capital (note 7) 203,590 202,513 199,558
Contributed capital (note 7) 6,673 6,479 7,053
Accumulated other comprehensive 5,232 2,138 2,189
income
Retained earnings 72,816 62,999 41,104
-------------------------------------
288,311 274,129 249,904
-------------------------------------
$ 295,798 $ 310,357 $ 267,891
=====================================
Contingencies and commitments (note
10)
Approved by the Board of Directors
"Bob Buchan" Director "Brian E. Bayley" Director
---------------------------------- ----------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Retained Earnings
Six months ended June 30, 2007 and 2006
(Expressed in thousands of Canadian dollars)
(Unaudited)
Three Six
Months Months
Ended Ended
June 30 June 30
---------------------------------------------
2007 2006 2007 2006
---------------------------------------------
Retained earnings - Beginning of $ 69,080 $ 34,535 $ 62,999 $ 26,507
period - as originally reported
Adoption of financial instruments - - 1,591 -
standards (note 4)
--------------------------------------------
As restated 69,080 34,535 64,590 26,507
Net earnings for the period 7,366 10,882 14,755 18,910
Dividends (3,630) (4,313) (6,529) (4,313)
---------------------------------------------
Retained earnings - End of period $ 72,816 $ 41,104 $ 72,816 $ 41,104
=============================================
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Earnings
For the six months ended June 30, 2007 and 2006
(Expressed in thousands of Canadian dollars, except share and per share amounts)
(Unaudited)
Three Six
Months Months
Ended Ended
June 30 June 30
2007 2006 2007 2006
Interest and related $ 10,106 $ 7,415 $ 20,913 $ 13,213
fees
Non-interest income
Management and finder's 416 1,197 1,142 2,448
fees
Marketable securities 819 1,932 1,860 3,670
and other trading gains
Realized gains, net of 2,759 4,776 3,875 7,732
writedowns of
investments
Other income 20 - 20 16
------------------------------------------------------
4,014 7,905 6,897 13,866
-------------------------------------------------------
Total interest and 14,120 15,320 27,810 27,079
non-interest income ------------------------------------------------------
Interest on debt (18) - (248) -
Provision for losses net - (233) - (233)
of recovery ------------------------------------------------------
14,102 15,087 27,562 26,846
-----------------------------------------------------
Expenses and other
Salaries and benefits 1,018 703 1,917 1,371
Bonuses 1,393 2,058 2,743 3,658
Stock-based compensation 366 145 566 281
Office and other 357 309 671 507
Legal and professional 352 283 712 750
services
Regulatory and 150 43 421 307
shareholder relations
Directors' fees 44 73 110 161
Sales tax (344) - 306
Foreign exchange loss 32 36 51 35
Other expenses relating (1) (227) 15 (203)
to resource properties -----------------------------------------------------
3,367 3,423 7,512 6,867
====================================================
Earnings before income 10,735 1,664 20,050 19,979
taxes
Provision for income 3,369 782 5,295 1,069
taxes (note 8) -------------------------------------------------------
Net earnings for the $ 7,366 $ 10,882 $ 14,755 $ 18,910
period =======================================================
Earnings per share
Basic $ 0.05 $ 0.08 $ 0.10 $ 0.14
Fully diluted $ 0.05 $ 0.08 $ 0.10 $ 0.14
Weighted average number
of shares outstanding
Basic 145,118,549 139,111,608 145,037,733 131,172,854
Fully diluted 148,718,138 142,406,737 148,735,913 134,381,687
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statement of Comprehensive Income and Accumulated Other
Comprehensive Income
For the six months ended June 30, 2007
(Expressed in thousands of Canadian dollars)
(Unaudited)
Three Six
Months Months
Ended Ended
June 30, June 30,
2007 2007
------------------------
Net earnings for the period $ 7,366 $ 14,755
Other comprehensive income, net of tax ------------------------
Unrealized gains on translating financial statements 109 118
of self-sustaining foreign operations
Unrealized gains (losses) on available-for-sale (178) 1,784
financial assets arising during the period
Reclassification adjustment for gains recorded (1,061) (1,040)
included in net income ------------------------
Other comprehensive income (1,130) 862
------------------------
Comprehensive income $ 6,236 $ 15,617
========================
Accumulated other comprehensive income - Beginning of $ 2,138
period (note 4)
Adoption of financial instruments standards (note 4) 2,232
Other comprehensive income for the period 862
----------
Accumulated other comprehensive income - $ 5,232
End of period ============
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Cash Flows
For the six months ended June 30, 2007 and 2006
(Expressed in thousands of Canadian dollars)
(Unaudited)
Three Six
Months Months
Ended Ended
June 30 June 30
----------------------------------------------
2007 2006 2007 2006
----------------------------------------------
Cash flows from operating
activities
Net earnings for the period $ 7,366 $ 10,882 $ 14,755 $ 18,910
Items not affecting cash:
Future tax asset 3,554 (1,516) 5,233 (1,528)
Stock-based compensation 366 145 566 281
Provision for losses - 386 - 386
Amortization of deferred (2,691) (1,347) (4,523) (2,292)
interest and loan fees
Marketable securities and other (819) (1,932) (1,860) (3,670)
assets trading gains
Realized gains, net of (2,759) (4,776) (3,875) (7,732)
writedowns of investments
Other 61 (190) 105 (129)
Other assets and investments - (103) - (497)
received as finder's fees
Deferred interest and loans fees 1,069 1,226 1,295 2,458
received
Activity in marketable
securities held for trading
Purchases (752) (1,454) (2,437) (2,011)
Proceeds on sales 2,079 3,961 4,989 7,005
Expenditures for reclamation and (62) (20) (117) (613)
closure
Changes in prepaid and other (36) (72) 328 (21)
receivables
Changes in accounts payables and (2,162) (776) (651) 275
accrued liabilities
Changes in income taxes payable (212) 2,531 (985) 2,531
--------------------------------------------
5,002 6,945 12,823 13,353
------------------------------------------
Cash flows from financing
activities
Proceeds from shares issued 275 47,367 704 60,667
Dividend payment (3,630) - (6,529) (3,518)
Proceeds from debt - - 8,000 -
Repayment of debt - - (30,000) -
-------------------------------------------
(3,355) 47,367 (27,825) 57,149
-------------------------------------------
Cash flows from investing
activities
Net (increase) decrease in loans 10,279 (31,537) 25,904 (67,115)
Activity in investments
available for sale
Proceeds on sales 4,574 8,119 5,876 14,339
Purchases - (328) - (606)
Change in restricted cash 103 1,001 74 (522)
Proceeds on sale of resource and - 346 - 346
fixed assets
Expenditures on resource and (7) (58) (13) (71)
fixed assets
Net other assets acquired - (275) - (275)
--------------------------------------------
14,949 (22,732) 31,841 (53,904)
--------------------------------------------
Foreign exchange gain (loss) on (176) (11) (182) 15
cash held in a foreign subsidiary --------------------------------------------
Increase in cash and cash 16,420 31,569 16,657 16,163
equivalents
Cash and cash equivalents - 9,743 18,783 9,506 33,739
Beginning of period ------------------------------------------
Cash and cash equivalents - End $ 26,163 $ 50,352 $ 26,163 $ 50,352
of period ==============================================
Supplemental cash flow
information (note12)
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Notes to Consolidated Financial Statements
Six months ended June 30, 2007
(Expressed in Canadian dollars; tables in thousands, except share capital
information)
(Unaudited)
1. Nature of operations
Quest Capital Corp.'s ("Quest" or the "Company") primary focus is providing
commercial bridge loans and mortgage financings. The Company also provides a
range of services including the raising of capital, consulting, management and
administrative services through its wholly owned subsidiaries, Quest Management
Corp. and Quest Securities Corporation.
2. Basis of presentation
The accompanying financial information does not include all disclosure required
under generally accepted accounting principles for annual financial statements.
The accompanying financial information reflects all adjustments, consisting
primarily of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of results for the interim
periods. These consolidated financial statements should be read in conjunction
with the Company's 2006 audited annual financial statements and notes.
3. Significant accounting policies
These interim consolidated financial statements follow the same accounting
policies and methods of application as the Company's annual financial
statements, except as noted below. These interim consolidated financial
statements are prepared in accordance with Canadian generally accepted
accounting principles and include the Company's accounts and those of its
wholly-owned subsidiaries, Quest Management Corp., Quest Securities Corporation,
Viceroy Gold Corporation and its 75% proportionate joint-venture interest in the
Castle Mountain Property.
4. Change in accounting policies
Effective January 1, 2007, the Company adopted the Canadian Institute of
Chartered Accountants (CICA) Handbook Section 3855 Financial Instruments -
Recognition and Measurement, Section 3865 Hedges and Section 1530 Comprehensive
Income (the "Financial Instrument Standards"). As the Company has not undertaken
any hedging activities, adoption of Section 3865 currently has no impact on the
Company. Prior to January 1, 2007, the principal accounting policies affecting
the Company's financial instruments were: marketable securities were valued at
the lower of average cost and market value, investments were valued at cost or
at cost less amounts written off to reflect any impairment in value considered
to be other than temporary, loans were stated net of an allowance for credit
losses on loans in default and other assets were valued at lower of cost and net
realizable value.
The adoption of the Financial Instrument Standards requires the presentation of
a separate statement of comprehensive income. Loans are recorded at amortized
cost, subject to impairment reviews. Fees received for originating the loans are
netted against the loans' cost and are recognized in net earnings using the
effective interest rate method. Investments and marketable securities are
recorded in the consolidated balance sheet at fair value. Fair value is
determined directly by reference to quoted market prices in an active market.
Changes in fair value of marketable securities are recorded in earnings and
changes in the fair value of investments have been reported in other
comprehensive income. The transitional adjustments in respect of these standards
have been made to opening marketable securities, investments and loan balances
and adjusted through retained earnings and accumulated other comprehensive
income as at January 1, 2007.
As a consequence of adopting the Financial Instrument Standards at
January 1, 2007, retained earnings increased by $1.6 million, currency
translation adjustment decreased by $2.1 million and accumulated other
comprehensive income increased by $4.3 million. These movements reflect an
increase of $0.4 million in marketable securities, $3.4 million increase in
investments, a decrease in deferred interest and loan fees of $4.6 million and a
decrease in loans of $4.6 million. These adjustments represent the net gain on
measuring the fair value of held for trading and available for sale investments,
which had not been recognized on a fair value basis prior to January 1, 2007.
5. Loans
a) Loans are repayable over various terms up to 24 months from June 30,
2007, and bear interest at a fixed rate of between 8.75% and 18% before
commitment and other fees. Marketable securities, real property, real estate,
corporate or personal guarantees generally are pledged as collateral. At June
30, 2007, the loan portfolio was comprised of 88% real estate mortgages, 10% in
the resource sectors and 2% in other sectors. At June 30, 2007, the real estate
mortgages were located as follows: 51% in British Columbia, 37% in Alberta, 10%
in Ontario and 2% in other; and, 84% were first mortgages and 16% were second
mortgages. As at June 30, 2007, the Company's loan portfolio consisted of 48
loans.
As at June 30, 2007, 61% of the Company's loan portfolio is due within a year.
The Company had approximately $23.0 million of loans in default as a result of
certain principal and/or interest payments being in arrears as at June 30, 2007.
The Company does not have a provision for loan losses. The Company monitors the
repayment ability of borrowers and the value of underlying collateral. In
determining the provision for possible loan losses, management considers the
length of time the loan has been in arrears, the overall financial strength of
borrowers and the residual value of collateral pledged. The Company expects to
collect the full carrying value of its loan portfolio. As at June 30, 2007, the
Company had 4 loans in default.
Subsequent to the second quarter, $4.7 million of loans in default were repaid,
reducing the number of loans in default from four to two.
b) The Company has recorded changes in the allowance for loan losses as
follows:
2007
-------------
Balance - Beginning of period $ 586
Add:
Specific provision for the period -
Less:
Loan write-offs (586)
--------------
Balance - End of period $ -
==============
c) At June 30, 2007, the Company has entered into agreements to advance
funds up to $25.2 million. Advances under these agreements are subject to a
number of conditions including due diligence and completion of documentation.
6. Debt facility
In March 2007, the Company entered into a collateralized revolving debt facility
with the Bank of Nova Scotia for up to $25 million. The facility bears interest
at prime or bankers acceptance notes plus 1.25%.
7. Share capital
a) Authorized
Unlimited First and Second Preferred Shares
Unlimited common shares without par value
b) Shares issued and outstanding
Number of
Shares Amount
---------------------------
Common shares
Opening balance - January 1, 2007 144,842,628 $ 202,513
Issued on exercise of stock options 270,000 505
Issued on exercise of compensation 86,850 200
options
Transfer of fair value on exercise - 372
of stock options
-------------------------
Ending balance - June 30, 2007 145,199,478 $ 203,590
==========================
c) Compensation options issued and outstanding
Number of Exercise
options price per
share Expiry Date
--------------------------------------
Common shares
Opening balance - January - -
1, 2007
Issued pursuant to a equity 1,085,775 $ 2.30 August 23, 2007
placement
Issued pursuant to a equity 48,000 2.30 October 26, 2007
placement ---------
1,133,775
Exercised (86,850) 2.30
----------
Ending balance - June 30, 1,046,925
2007 =========
d) Stock options outstanding
The Company has a stock option plan under which the Company may grant options to
its directors, employees and consultants for up to 10% of the issued and
outstanding common shares. The exercise price of each option is required to be
equal to or higher than the market price of the Company's common shares on the
day of grant. Vesting and terms of the option agreement are at the discretion of
the Board of Directors.
During the six months ended June 30, 2007, the change in stock options
outstanding was as follows:
Number of Weighted
shares average
share price
----------------------------
Common shares
Opening balance 8,981,333 $ 2.01
Granted 2,370,000 3.15
Exercised (270,000) 1.87
Expired or cancelled (75,000) 2.88
--------------------------
Closing balance 11,006,333 $ 2.26
--------------------------
Options exercisable 8,633,285 $ 2.04
==========================
The following table summarizes information about stock options outstanding and
exercisable at June 30, 2007:
Options outstanding Options exercisable
-------------------------------------------------- -----------------------
Range of Options Weighted Weighted Options Weighted
exercise outstanding average average exercisable average
prices remaining exercise exercise
contracted price price
life
(years)
$ 0.81 113,333 0.31 0.81 113,333 0.81
$1.40 to $2.29 6,873,000 1.64 1.94 6,873,000 1.94
$2.30 to $3.19 3,100,000 3.99 2.75 1,539,040 2.54
$3.20 to $3.23 920,000 4.82 3.22 107,912 3.22
------------------------------------------------------------
11,006,333 2.55 2.26 8,633,285 2.04
============================================================
e) Contributed capital
Opening balance $ 6,479
Stock-based compensation 566
Fair value of stock options exercised (372)
---------------
Ending balance $ 6,673
===============
The fair values of options granted during the six months ended June 30, 2007
have been estimated using an option pricing model. Assumptions used in the
pricing model are as follows:
Risk-free interest rate 4.03%
Expected life of options 3.0 years
Expected stock price volatility 35%
Expected dividend yield 2.62%
Weighted average fair value of options $ 0.76
8. Income taxes
The Company has utilized tax losses in certain of its entities to reduce its
taxable income in Canada. The Company has recognized a future tax asset to the
extent that the amount is more likely than not to be realized from future
earnings.
The provisions for income taxes consists of the following:
Three Six
Months Months
Ended Ended
June 30 June 30
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Current
Canada $ 31 $ 2,298 $ 129 $ 2,597
----------------------------------------------------
Total current 31 2,298 129 2,597
expenses ----------------------------------------------------
Future
Canada 3,338 (1,516) 5,166 (1,528)
----------------------------------------------------
Total future recovery 3,338 (1,516) 5,166 (1,528)
---------------------------------------------------
Total provision for $ 3,369 $ 782 $ 5,295 $ 1,069
income taxes ===================================================
9. Related party transactions
a) For the six months ended June 30, 2007, the Company received $nil
(2006 - $551,000) in interest and fees from related parties by virtue of having
certain directors and officers in common.
b) For the six months ended June 30, 2007, the Company received $348,000
(2006 - $612,000) in advisory, management and finder's fees from parties related
by virtue of having certain directors and officers in common. Other assets
include $455,000 of non-transferable securities held in either private or
publicly traded companies related by virtue of having certain directors and
officers in common.
c) For the six months ended June 30, 2007, the Company received $40,000
(2006 - $28,000) in syndication loan administration fees from parties related by
virtue of having certain directors and officers in common.
d) Marketable securities and investments include $12,008,000 (December
31, 2006 - $9,143,000) of shares held in publicly traded companies related by
virtue of having certain directors and officers in common. For the six months
ended June 30, 2007, the Company recorded a gain on disposal of securities of
$2,156,000 (2006 - $9,005,000) from parties related by virtue of having certain
directors and officers in common.
e) Included in accounts payable at June 30, 2007 is $2,375,000 due to
employees, consultants and officers for bonuses.
10. Contingencies and commitments
a) Surety bond guarantees totalling US$2,405,000 have been provided by
Castle Mountain Joint Venture for compliance with reclamation and other
environmental agreements.
b) On March 22, 2002, Quest Investment Corporation (a predecessor
company) and other parties were named as defendants in a lawsuit filed in the
Supreme Court of British Columbia. The plaintiff has claimed approximately
$410,000 plus interest due for consulting services. Management intends to fully
defend this claim. No provision has been made for this claim in the consolidated
financial statements. The ultimate outcome of this claim is not determinable at
the time of issue of these consolidated financial statements and the costs, if
any, will be charged to earnings in the period(s) in which they are finally
determined.
c) The Company has entered into operating leases for office premises.
Minimum annual lease payments required are approximately as follows:
2007 $ 305
2008 $ 753
2009 $ 753
2010 $ 676
2011 $ 437
2012 $ 401
d) Other commitments and contingencies are disclosed elsewhere in these
consolidated financial statements and notes.
11. Segmented information
The Company has primarily one operating segment, which is financial services.
The Company's geographic location is Canada.
12. Supplemental cash flow information
Non-cash financing and investing activities
Three Six
Months Months
Ended Ended
June 30 June 30
----------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------
Marketable securities $ 1,554 $ (75) $ 2,171 $ 400
and investments
received as loan fees
QUEST CAPITAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SIX MONTHS ENDED JUNE 30, 2007
INTRODUCTION
The following information, prepared as of July 30, 2007, should be read in
conjunction with Quest Capital Corp.'s (the "Company") interim consolidated
financial statements as at June 30, 2007 and for the six months ended June 30,
2007 and 2006 and its restated audited annual consolidated financial statements
as at December 31, 2006 and 2005 and for the years ended December 31, 2006, 2005
and 2004 and related notes attached thereto. These statements, together with the
related management's discussion and analysis ("MD&A"), have been prepared in
accordance with Canadian generally accepted accounting principles ("Cdn GAAP").
All amounts are expressed in Canadian dollars unless otherwise indicated.
The business of the Company consists of:
* mortgage financings secured by first and second real estate
mortgages;
* commercial bridge loans provided primarily to publicly traded
development stage companies;
* financial and corporate assistance in arranging equity offerings
for companies; and
* management and administrative services to public and private
companies.
The Company generates the majority of its revenues through interest it earns on
its loan portfolio. The Company's revenues are subject to the return it is able
to generate on its capital, its ability to reinvest funds as loans mature and
are repaid and the nature and credit quality of its loan portfolio, including
the quality of the collateral security. In addition, the Company generates
revenues from gains on the sale of marketable securities and investments. The
Company also receives fees from its corporate finance activities; these fees are
subject to the number and value of the transactions in which the Company
participates.
The following discussion, analysis and financial review is comprised of 13 main
sections:
1. RESULTS OF OPERATIONS
2. SUMMARY OF QUARTERLY RESULTS
3. LIQUIDITY
4. RELATED PARTY TRANSACTIONS
5. SUBSEQUENT AND PROPOSED TRANSACTIONS
6. OFF BALANCE SHEET ARRANGEMENTS
7. OUTLOOK
8. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
9. CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
10. DISCLOSURE OF OUTSTANDING SHARE DATA
11. RISKS AND UNCERTAINTIES
12. FORWARD LOOKING INFORMATION
13. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Additional information about the Company, including its Annual Information Form
and other public filings, are available on SEDAR at www.sedar.com.
1. RESULTS OF OPERATIONS
Total assets as at June 30, 2007 were $295.8 million comprised of $26.2 million
of cash, $3.6 million of marketable securities, $240.0 million in loans, $12.6
million in investments and $13.4 million of other assets.
The loan portfolio at June 30, 2007 was comprised of 88% in first and second
real estate mortgages, 10% in the resource sectors and 2% in other sectors. As
at December 31, 2006, the loan portfolio was comprised of 87% in first and
second real estate mortgages, 12% in resource sectors, and 1% in other sectors.
At June 30, 2007, mortgages were located as follows: 51% in British Columbia,
37% in Alberta, 10% in Ontario and 2% in other areas; of which 84% were first
mortgages and 16% were second mortgages. This investment concentration may vary
from time to time depending on the investment opportunities available; however,
in the near term the Company does not expect any material changes in the
composition of its loan portfolio. As at June 30, 2007, the Company's loan
portfolio consisted of 48 loans.
For the three months ended June 30, 2007 the Company had consolidated earnings
before taxes of $10.7 million (net earnings of $7.4 million) compared to $11.7
million (net earnings of $10.9 million) in the comparative period in 2006.
During the first half of 2007, the Company had consolidated earnings before
taxes of $20.1 million or $0.14 per share (net earnings of $14.8 million or
$0.10 per share) compared to $20.0 million or $0.15 per share (net earnings of
$18.9 million or $0.14 per share.
Interest and Related Fees
During the first half of 2007, the Company earned interest and related fees of
$20.9 million compared to $13.2 million in the first half of 2006, due to the
growth in the loan portfolio over the past twelve months. Total loans as at June
30, 2007 were $240.0 million as compared to $264.9 million (net of deferred
interest and loan fees) as at December 31, 2006, representing a decrease of 9%,
due to loans being repaid on or before maturity during the first half of 2007.
Included in interest and related fees is interest and related fees earned on
bridge loans totaling $4.5 million during the six months ended June 30, 2007
compared to $1.7 million earned during the six months ended June 30, 2006.
Non-Interest Income
During the three months ended June 30, 2007, fees recorded from management and
finder's fees totaled $0.4 million, compared to $1.2 million in the comparative
period in 2006. This decrease is primarily due to a decrease in corporate
finance services rendered as compared to the second quarter in 2006.
During the three months ended June 30, 2007, the Company recorded trading gains
of $0.8 million compared to gains of $1.9 million in the comparative period in
2006. During the first half of 2007, the Company recorded trading gains of $1.9
million as compared to $3.7 million in the first half of 2006. The decrease in
trading gains is the result of fewer broker warrants being exercised and
subsequent sale of securities.
Net realized gains from the sales of investments resulted in the Company
recording gains of $2.8 million in 2007 compared to gains of $4.8 million in the
comparative period in 2006. During the first half of 2007, the Company realized
gains from the sale of investments of $3.9 million as compared to $7.7 million
in the first half of 2006.
Expenses and Other
Total expenses and other for the three months ended June 30, 2007 were $3.4
million as compared to $3.4 million in the comparative period in 2006. Total
expenses and other for the six months ended June 30, 2007 were $7.5 million as
compared to $6.9 million in the comparative period in 2005.
Salaries and benefits increased to $1.0 million for the three months ended June
30, 2007 compared to $0.7 million in the comparative period in 2006 as a result
of expansion of the business and the addition of new employees.
Bonuses for the three months ended June 30, 2007 were $1.4 million as compared
to $2.1 million in the comparative period in 2006. The decrease in bonuses is a
direct result of a decrease in the exercise and sale of broker warrants, which
is a component of the incentive plan. Bonus accruals and payments are in
accordance with the Company's incentive plan, and are subject to the approval of
the Compensation Committee and Board of Directors.
Income tax expense was $3.4 million for the six months ended June 30, 2007,
compared to an expense of $0.8 million in the comparative period in 2006. The
Company has recognized an additional $1.3 million future tax asset during the
six months ended June 30, 2007, based on the likely realization of certain time
released tax deductions which will be utilized against future taxable earnings.
Income tax expense reported in 2007 includes $0.1 million in current income
taxes payable and $5.2 million in the net draw down of future income taxes,
which is a non-cash item.
During the six months ended June 30, 2007, the Company has recorded $0.3 million
as a sales tax expense, related to certain tax filings. The change of $0.3
million in sale tax expense, as previously reported during the three months
ended March 31, 2007, relates to management assessment and completion of certain
sale tax filings.
Comprehensive Income
The Company is reporting comprehensive income for the first time in 2007, having
adopted the new accounting standards for financial reporting which were
effective for Canadian companies on January 1, 2007. The two significant
components of other comprehensive income are the unrealized mark-to-market gains
on the Company's investments, classified under the available-for-sale investment
category, and currency translation adjustments.
2. SUMMARY OF QUARTERLY RESULTS
(In thousands of Canadian dollars, except per share amounts)
Second First Fourth Third Second First Fourth Third
Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
2007 2007 2006 2006 2006 2006 2005 2005
Interest 10,106 10,807 10,597 8,781 7,415 5,798 5,555 4,399
and related
fees
Non-interest 4,014 2,883 1,265 3,368 7,905 5,961 4,028 1,883
income
Earnings 10,735 9,315 7,918 9,087 11,664 8,315 5,059 4,291
before taxes
Net earnings 7,366 7,398 16,021 8,770 10,882 8,028 11,395 4,295
Basic 0.05 0.05 0.12 0.06 0.08 0.07 0.10 0.04
Earnings Per
Share
Total 295,798 294,025 310,357 284,935 267,891 208,060 189,603 166,928
Assets
Total 7,487 10,267 36,228 24,048 17,987 12,284 15,309 10,008
Liabilities
===============================================================================
The Company's interest and related fees have generally continued to increase for
the past eight quarters as the Company's loan portfolio grows.
Non-interest income varies by quarter depending on the management, advisory, and
finder's fees received, marketable securities' trading gains/(losses) and
realized gains and write-down of investments. Quarter to quarter comparisons of
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
During the fourth quarter of 2005, second quarter of 2006 and fourth quarter of
2006, net earnings were positively impacted by the recognition of a future tax
asset of $6.0 million, $0.8 million and $7.7 million, respectively, as a result
of the likely realization of unused tax losses from future earnings. In 2007,
net earnings are reduced by the net drawdowns of these future tax assets, as
previously recognized; however, this impact is a non-cash item.
3. LIQUIDITY
The Company's cash resources at June 30, 2007 were $26.2 million as compared to
$9.5 million as at December 31, 2006. The Company assumes short-term debt from
time to time to fund its investments and loan operations. In March 2007, the
Company established a $25 million revolving line of credit with Bank of Nova
Scotia. The Company's primary focus is to provide loans and its cash and debt
balances will vary depending on the timing of loans advanced and repaid.
During the six months ended June 30, 2007, the Company arranged $112.5 million
of new loans, $84.5 million net of the Company. During the second quarter of
2007, the Company arranged $63.0 million in new loans, $58.7 million net to the
Company.
During the six months ended June 30, 2007, $129.8 million of loans were repaid,
$107.0 net to the Company. During the second quarter of 2007, $83.0 million of
loans were repaid, $68.1 million net of the Company.
As at June 30, 2007, the Company had entered into agreements to advance funds up
to $25.2 million. Advances under these agreements are subject to a number of
conditions including due diligence and completion of documentation.
The Company's loan portfolio as at June 30, 2007 was $240.0 million comprised of
88% real estate mortgages, 10% in the resource sectors and 2% in other sectors.
As at June 30, 2007, 61% of the loan portfolio is scheduled to mature within a
year.
The Company had approximately $23.0 million of loans in default as a result of
certain principal and/or interest payments being in arrears as at June 30, 2007.
The Company has not made any allowance for credit losses, as the Company expects
to collect the full carrying value of its loan portfolio. Subsequent to the
second quarter, $4.7 million of loans in default were repaid, reducing the
number of loans in default from four to two.
For the six months ended June 30, 2007, cash flow from operations provided $12.8
million as compared to $13.4 million for the comparative period in 2006.
Management is not aware of any trends or expected fluctuations that would create
any liquidity deficiencies. The Company believes that cash flow from continuing
operations and existing cash resources will be sufficient to meet the Company's
short-term requirements, as well as ongoing operations, and will be able to
generate sufficient capital to support the Company's business.
The Company has contractual obligations for its leased office space in Vancouver
and Toronto. The total minimum lease payments for the years 2007 - 2012 are
$3,325,000.
Obligation due by period
Type of Contractual Total Less than 1 1 - 3 Years 3 - 5 More than
Obligation Year Years 5 Years
Office Leases $ 3,325,000 $305,000 $2,182,000 $838,000 $-
Loan Commitments $25,200,000 $25,200,000 - - -
-------------------------------------------------------------------------------
Total $28,525,000 $25,505,000 $2,182,000 $838,000 $-
==================================================================
4. RELATED PARTY TRANSACTIONS
For the six months ended June 30, 2007, the Company received $nil (2006 - $0.6
million) in interest and fees from related parties by virtue of having certain
directors and officers in common.
For the six months ended June 30, 2007, the Company received $0.3 million (2006
- $0.6 million) in advisory, management and finder's fees from parties related
by virtue of having certain having directors and officers in common. Other
assets include $0.4 million of non-transferable securities held in either
private or publicly traded companies related by virtue of having certain
directors and officers in common.
For the six months ended June 30, 2007, the Company received $40,000
(2006-$28,000) in syndication loan administration fees from parties related by
virtue of having certain directors and officers in common.
Marketable securities and investments include $12.0 million (December 31, 2006 -
$9.1 million) of shares held in publicly traded companies related by virtue of
having certain directors and officers in common. For the six months ended June
30, 2007, the Company recorded a gain on disposal of securities of $2.2 million
(2006 - $9.0 million) from parties related by virtue of having certain directors
and officers in common.
Included in accounts payable at June 30, 2007 is $2.4 million due to employees,
consultants and officers related to incentive plan compensation.
5. SUBSEQUENT AND PROPOSED TRANSACTIONS
The Company has no subsequent and proposed transactions to report.
6. OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
7. OUTLOOK
As at June 30, 2007, the Company had $26.2 million of cash on hand. Reinvestment
of the Company's cash as loans are repaid is the primarily focus of management.
The Company is not planning any material changes in the make-up of its lending
business, although the precise composition of its loan portfolio may vary
somewhat from the currently existing percentages as loans are made in the
context of market conditions. The Canadian mortgage markets remain stable
however given the uncertainty with the US economy, management has adopted more
stringent loan screening and due diligence guidelines and will hold cash and
other liquid investments rather than invest in loans that do not meet these
requirements.
During the upcoming year, the Company may hire additional employees and raise
equity or debt required to fund the growth of the Company's loan portfolio (also
refer to Liquidity).
8. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's accounting policies are described in Note 3 of its restated
audited consolidated financial statements for the years ended December 31, 2006
and 2005. Management considers the following policies to be the most critical in
understanding the judgments and estimates that are involved in the preparation
of its consolidated financial statements and the uncertainties which could
materially impact its results, financial condition and cash flows. Management
continually evaluates its assumptions and estimates; however, actual results
could differ materially from these assumptions and estimates.
Provision for Loan Losses
Loans are stated net of an allowance for credit losses on loans in default. Such
allowances reflect management's best estimate of the credit losses in the
Company's loan portfolio and judgments about economic conditions. The evaluation
process involves estimates and judgments, which could change in the near term,
and result in a significant change to a recognized allowance.
The Company's Credit Committee reviews its loan portfolio at least on a
quarterly basis and specific provisions are established on a loan-by-loan basis.
In determining the provision for possible loan losses, the Company considers the
following:
* length of time the loans have been in arrears;
* the overall financial strength of the borrowers;
* the nature and quality of collateral and, if applicable,
guarantees;
* secondary market value of the loans and the collateral; and
* the borrower's plan, if any, with respect to restructuring the
loans.
Valuation of Investments
The Company's investments are primarily held in public companies. Effective
January 1, 2007, investments are recorded on the balance sheet at their fair
value. Fair value is determined directly by reference to quoted market price in
an active market.
Future Tax Assets and Liabilities
The Company has recognized a future tax asset based on the likely realization of
tax losses which are to be utilized against future earnings. The Company will
reassess at each balance sheet date its existing future income tax assets, as
well as potential future income tax assets that have not been previously
recognized. In determining whether an additional future income tax asset is to
be recognized, the Company will assess its ability to continue to generate
future earnings based on its current loan portfolio, expected rate of return,
the quality of the collateral security and ability to reinvest the funds. If an
asset has been recorded and the Company assesses that the realization of the
asset is no longer viable, the asset will be written down. Conversely, if the
Company determines that there is an unrecognized future income tax asset which
is more-likely-than-not to be realized, it will be recorded in the balance sheet
and statement of earnings.
The Company has also recognized a future tax liability related to its former
U.S. based operations.
9. CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
Effective January 1, 2007, the Company adopted the Canadian Institute of
Chartered Accountants (CICA) Handbook Section 3855 Financial Instruments -
Recognition and Measurement, Section 3865 Hedges and Section 1530 Comprehensive
Income (the "Financial Instrument Standards"). As the Company has not undertaken
any hedging activities, adoption of Section 3865 currently has no impact on the
Company. Prior to January 1, 2007, the principal accounting policies affecting
the Company's financial instruments were: marketable securities were valued at
the lower of average cost and market value, investments were valued at cost or
at cost less amounts written off to reflect any impairment in value considered
to be other than temporary, loans were stated net of an allowance for credit
losses on loans in default and other assets were valued at their net realizable
value.
The adoption of the Financial Instrument Standards requires the presentation of
a separate statement of comprehensive income. Loans are recorded at amortized
cost, subject to impairment reviews. Fees received for originating the loan are
netted against the loan's cost and is recognized in net earnings using the
effective interest method. Investments and marketable securities are recorded in
the consolidated balance sheet at fair value. Fair value is determined directly
by reference to quoted market prices in an active market. Changes in fair value
of marketable securities are recorded in income and changes in the fair value of
investments have been reported in other comprehensive income. The transitional
adjustments in respect of these standards have been made to the opening
marketable securities, investments and loan balances and adjusted through
retained earnings and accumulated other comprehensive income, as at January 1,
2007. Prior periods have not been restated.
As a consequence of adopting the Financial Instrument Standards at January 1,
2007, retained earnings increased by $1.6 million, currency translation
adjustment decreased by $2.1 million and accumulated other comprehensive income
increased by $4.3 million. These movements reflect an increase of $0.4 million
in marketable securities, $3.4 million increase in investments, a decrease in
deferred interest and loan fees of $4.6 million and a decrease in loans of $4.6
million. These adjustments represent the net gain on measuring the fair value of
held for trading and available for sale investments, which had not been
recognized on a fair value basis prior to January 1, 2007.
10. DISCLOSURE OF OUTSTANDING SHARE DATA
As at August 2, 2007, the Company had the following common shares, stock options
and compensation options outstanding:
Common shares 146,031,978
Stock options 10,804,250
Compensation options 214,425
-----------
Fully diluted shares outstanding 157,050,653
===========
Dividends
As a reflection of the continued profitability in the Company's business, on May
9, 2007 its board of directors approved an increase in its quarterly dividend
rate from $0.02 to $0.025.
11. RISKS AND UNCERTAINTIES
Additional risks factors are disclosed under "Risk Factors" in the Annual
Information Form filed on SEDAR at www.sedar.com.
Liquidity Risk
The Company maintains a sufficient amount of liquidity to fund its obligations
as they come due under normal operating conditions. As at June 30, 2007, 61% of
the value of the loan portfolio is scheduled to mature within a year.
Credit Risk
Credit risk management is the management of all aspects of borrower risk
associated with the total loan portfolio, including the risk of loss of
principal and/or interest from the failure of the borrowers to honour their
contractual obligations to the Company.
The Company generally provides real estate mortgages to approximately 75% of the
value of the security and generally provides commercial bridge loans to
primarily publicly traded development stage companies to approximately 50% of
the value of guarantees and security (also refer to results of operations for
current loan composition details). The Company provides for loan losses on a
specific loan basis and has no provision as at June 30, 2007.
12. FORWARD LOOKING INFORMATION
These materials include certain statements that constitute "forward-looking
statements" within the meaning of Section 27A of the United States Securities
Act of 1933 and Section 21E of the United States Securities Exchange Act of
1934. These statements appear in a number of places in this document and include
statements regarding our intent, belief or current expectation and that of our
officers and directors. Such forward-looking statements involve known and
unknown risks and uncertainties that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. When
used in this document, words such as "believe", "anticipate", "estimate",
"project", "intend", "expect", "may", "will", "plan", "should", "would"
"contemplate", "possible", "attempts", "seek", and similar expressions are
intended to identify these forward-looking statements. These forward-looking
statements are based on various factors and were derived utilizing numerous
assumptions that could cause our actual results to differ materially from those
in the forward-looking statements. Accordingly, you are cautioned not to put
undue reliance on these forward-looking statements. Forward-looking statements
include, among others, statements regarding our expected financial performance
in future periods, our plan of operations and our business strategy and plans or
budgets.
13. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Internal Disclosure Controls and Procedures
The Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") are
responsible for establishing and maintaining adequate disclosure controls and
procedures. Disclosure controls and procedures are designed to ensure that
information required to be disclosed in the Company's filings under securities
legislation is accumulated and communicated to management, including the CEO and
CFO as appropriate, to allow timely decisions regarding public disclosure. They
are designed to provide reasonable assurance that all information required to be
disclosed in these filings is recorded, processed, summarized and reported
within the time periods specified in securities legislation. The Company reviews
its disclosure controls and procedures; however, it cannot provide an absolute
level of assurance because of the inherent limitations in control systems to
prevent or detect all misstatements due to error or fraud.
As of December 31, 2006, the Company's management, including the CEO and CFO,
concluded an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on this evaluation, the CEO
and CFO were of the view that the Company's disclosure controls and procedures
were effective.
Subsequent to December 31, 2006, this evaluation was revisited in connection
with the preparation of the restated financial statements for the years ended
December 31, 2006, 2005 and 2004 and three months ended March 31, 2007. In view
of the restatement of financial statements described above, the CEO and CFO have
concluded that a material weakness existed in the Company's internal disclosure
controls and procedures as of December 31, 2006, related specifically to certain
tax filings and computation of future tax provisions. Management recognizes that
improvements are required and is taking appropriate action to remediate
deficiencies by the end of 2007.
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP. Internal control over financial
reporting includes those policies and procedures that: (1) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect
the transactions and dispositions of the assets of the Company, (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts
and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company, and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements.
The Company's management has evaluated the effectiveness of internal control
over financial reporting. Based on this evaluation, management has concluded
that internal control over financial reporting was not wholly effective as of
December 31, 2006, specifically as it related to the determination of tax
provisions, as noted in "Internal Disclosure Controls and Procedures".
This information is provided by RNS
The company news service from the London Stock Exchange
END
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