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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:4177L
Quest Capital Corporation
02 November 2006
Quest Capital Corp.
Consolidated Financial Statements
(Expressed in thousands of Canadian dollars)
(Unaudited)
September 30, 2006
Quest Capital Corp.
Consolidated Balance Sheets
(expressed in thousands of Canadian dollars)
(Unaudited)
September 30 December 31,
2006 2005
Assets
Cash and cash equivalents $ 12,794 $ 33,739
Marketable securities (note 6) 1,269 945
Loans (note 6 and 7) 246,631 124,551
Investments (note 6) 11,361 17,117
Future income tax asset 7,187 6,488
Restricted cash 2,676 2,265
Prepaid and other receivable 672 739
Resource and fixed assets 510 700
Other assets (note 6) 1,835 2,008
Assets held for disposition (note 5) - 1,051
_____________________________
$ 284,935 $ 189,603
_____________________________
Liabilities
Accounts payable and accrued liabilities $ 3,885 $ 3,734
Income taxes payable (note 13) 1,783 458
Dividend payable - 3,518
Deferred interest and loan fees 4,151 1,685
Asset retirement obligation 1,066 1,884
Debt (note 6 and 8) 10,000 -
Liabilities and provision for loss on assets held - 730
for disposition (note 5) _____________________________
20,885 12,009
_____________________________
Shareholders' Equity
Share capital (note 9) 202,459 138,891
Contributed capital (note 9) 6,366 6,772
Retained earnings 54,106 30,739
Currency translation adjustment 1,119 1,192
_____________________________
264,050 177,594
_____________________________
$ 284,935 $ 189,603
_____________________________
Contingencies and commitments (note 7 and 11)
Approved by the Board of Directors
"Bob Buchan" Director "A. Murray Sinclair" Director
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Retained Earnings
(Expressed in thousands of Canadian dollars)
(Unaudited)
For the period ended
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
_____________________________________________
Retained earnings - Beginning of $ 45,336 $ 18,567 $ 30,739 $ 10,706
period
Net earnings for the period 8,770 4,295 27,680 12,156
Dividends - - (4,313) -
_____________________________________________
Retained earnings - End of period $ 54,106 $ 22,862 $ 54,106 $22,862
_____________________________________________
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Earnings
(Expressed in thousands of Canadian dollars, except per share amounts)
(Unaudited)
For the period ended
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
_____________________________________________
Interest and related fees $ 8,781 $ 4,399 $ 21,994 $ 11,855
Non-interest income
Management and finder's fees 1,051 505 3,499 2,032
Marketable securities and other 413 204 4,083 589
assets trading gains
Realized gains and writedowns 1,904 1,165 9,636 2,429
of investments
Other income - 9 16 665
_______________________________________________
3,368 1,883 17,234 5,715
_______________________________________________
Total interest and non-interest 12,149 6,282 39,228 17,570
income
Provision for losses net of (5) - (238) -
recovery
_______________________________________________
12,144 6,282 38,990 17,570
_______________________________________________
Expenses and other
Salaries and benefits 878 532 2,249 1,466
Bonuses 904 500 4,562 1,350
Stock-based compensation 112 451 393 1,564
Office and other 255 175 747 479
Legal and professional services 432 127 1,182 509
Regulatory and shareholder 119 17 426 186
relations
Director's fees 53 85 214 163
Interest 250 7 265 61
Foreign exchange gain 24 110 59 90
Other expenses relating to 30 24 (173) 162
resource properties
Writedown, gains adjustment to - (37) - (569)
reclamation provision
and settlement of Australian
operations
_______________________________________________
3,057 1,991 9,924 5,461
Earnings before income taxes 9,087 4,291 29,066 12,109
Provision for income taxes 317 - 1,386 -
(note 13)
Non-controlling interest in a - (4) - (47)
subsidiary
Net earnings for the period $ 8,770 $ 4,295 $ 27,680 $ 12,156
_______________________________________________
Earnings per share
Basic $ 0.06 $ 0.04 $ 0.20 $ 0.13
Fully diluted $ 0.06 $ 0.04 $ 0.20 $ 0.12
Weighted average number of
shares outstanding
Basic 143,779,107 104,715,468 135,332,615 96,048,801
Fully diluted 146,746,232 108,161,718 138,460,558 98,614,661
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
(Unaudited)
For the period ended
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
Cash flows from operating activities
Net earnings for the period $ 8,770 $ 4,295 $ 27,680 $ 12,156
Adjustments to determine net cash
flows relating to operating activities
Future income tax 828 - (700) -
Stock-based compensation 112 451 393 1,564
Non-controlling interest in a
subsidiary - (4) - (47)
Provision for losses - - 386 -
Amortization of deferred interest (1,332) (1,718) (3,624) (3,934)
and loan fees
Marketable securities trading gains (413) (204) (4,083) (589)
Realized gains and writedowns of (1,904) (1,165) (9,636) (2,429)
investments
Gain on dilution in interest of - - - (252)
subsidiary
Depreciation 53 - 128 34
Other expenses relating to resource 19 17 58 135
properties
Gains on sale of resource assets and - (37) - (551)
adjustments to retirement obligations
Other assets and investments received (231) (233) (728) (827)
as finder's fees
Deferred interest and loans fees 2,553 901 5,011 2,461
received
Activity in marketable securities held
for trading
Purchases (1,371) (15) (3,382) (15)
Proceeds on sales 1,970 820 8,975 1,895
Expenditures for reclamation and closure (208) (566) (821) (1,641)
Changes in prepaid and other receivable 72 117 51 521
Changes in accounts payable and accrued (553) 85 180 (2,927)
liabilities
Changes in income taxes payable (748) - 1,325 -
______________________________________
7,617 2,744 21,213 5,554
______________________________________
Cash flows from financing activities
Proceeds from shares issued 2,101 39,606 62,768 47,106
Dividend payment (4,312) - (7,830) -
Proceeds from debt 27,931 - 27,931 3,000
Repayment of debt (17,931) - (17,931) (3,000)
______________________________________
7,789 39,606 64,938 47,106
______________________________________
Cash flows from investing activities
Activity in loans
Net (increase) decrease in loans (55,351) (18,142) (122,466) (26,331)
and convertible debentures
Activity in investments
Purchases (75,073) (966) (75,679) (3,651)
Proceeds on sales 77,627 3,201 91,966 7,320
Net proceeds on dilution of a subsidiary - - - 621
Change in restricted cash 17 (2) (505) 5,900
Cash transferred to purchaser of - - - (2,546)
resource property
Proceeds on sale of resource and fixed - 33 103 166
assets
Expenditures on resource and fixed (2) (86) (73) (102)
assets
Net other assets acquired (150) - (425) -
______________________________________
(52,932) (15,962) (107,079) (18,623)
______________________________________
Foreign exchange loss on cash held in a (32) (21) (17) 84
foreign subsidiary
Increase (decrease) in cash and cash (37,558) 26,367 (20,945) 34,121
equivalents
Cash and cash equivalents - Beginning of 50,352 14,361 33,739 6,607
period
______________________________________
Cash and cash equivalents - End of $ 12,794 $ 40,728 $12,794 $40,728
period
______________________________________
Supplemental cash flow information
(note 12)
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars; tables in thousands, except share capital
information)
(Unaudited)
Nine months ended September 30, 2006 and 2005
1. Nature of operations
Quest Capital Corp.'s ("Quest" or the "Company") primary focus is providing
commercial bridge loans and mortgage financings of up to approximately
$35.0 million. 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 2005 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. 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, Quest Mortgage Corp., Viceroy
Gold Corporation and its 75% proportionate joint-venture interest in the Castle
Mountain Property.
4 Change in accounting policies
No new accounting policies have been adopted during the nine months ended
September 30, 2006.
5 Assets and liabilities and provision for loss on assets
In November 2005, Lara Exploration Ltd. ("Lara"), in which the Company had a 66%
interest, agreed to acquire a private Brazilian company that holds the rights to
nine prospective gold, nickel, copper and zinc properties in Brazil. In return
for the assignment of the shares of the private Brazilian company to Lara, the
Company agreed to transfer its 3,000,000 escrow shares of Lara to the
shareholders of the private Brazilian company for nominal consideration. On
completion of the transaction and a concurrent private placement by Lara, the
Company holds less than 10% of the outstanding shares of Lara and ceased to
exercise control or significant influence of Lara. This transaction was
completed in February 2006 and the Company's remaining investment has been
accounted for using the cost method. The following is a breakdown of the net
assets disposed of:
Assets held for disposition $ 1,051
Liabilities and provision for loss on assets held for 730
disposition
Remaining investment $ 321
6 Financial instruments
The carrying values of cash and cash equivalents, restricted cash, other
receivables accounts payable and debt approximate their fair values due to the
short-term nature of these instruments.
The fair values of the Company's remaining financial assets and liabilities are
as follows:
September30 December 31,
2006 2005
Carrying Fair Carrying Fair
value value value value
____________________________________________________
Marketable securities $ 1,269 1,481 $ 945 1,168
Loans and convertible 246,631 246,631 124,551 124,551
debentures
Investments 11,361 14,199 17,117 24,430
Other assets 1,028 1,028 1,601 1,601
Marketable securities and investments represent shares in publicly traded
companies. The fair value represents the quoted trading price of the shares. The
fair value of loans and debt are estimated to be approximately the equivalent of
carrying value due to the relatively short term of these instruments. The fair
value of convertible debentures is generally considered to be the equivalent of
carrying value unless the trading price of the underlying security exceeds the
conversion price of the debenture. Fair value is then considered to be the
quoted trading price of the underlying security. Financial instruments included
in other assets include securities and investments in capital pool companies,
which are restricted from trading and are carried at cost.
7 Loans and convertible debentures
a) Loans are repayable over various terms up to 22 months from
September 30, 2006, and bear interest at a fixed rate of between 8% and 18%
before commitment and other fees. Marketable securities, real property,
corporate or personal guarantees generally are pledged as security. At
September 30, 2006, the composition of the loan portfolio was 83% real estate
mortgages, 10% in resource sectors, and 7% in other sectors. At
September 30, 2006, mortgages were geographically located; 63% in British
Columbia, 19% in Alberta, 15% in Ontario and 3% in other; and 73% are first
mortgages and 27% are second mortgages.
As at September 30, 2006, 76% of the Company's loan portfolio is due within a
year. The Company had approximately $11.5 million of loans impaired as a result
of certain principal and/or interest payments being in arrears as at
September 30, 2006. The Company's provision for loan losses is $0.6 million. The
Company monitors the repayment ability of borrowers and the value of underlying
security. In determining the provision for possible loan losses, management
considers the length of time the loans or convertible debenture has been in
arrears, the overall financial strength of borrowers and the residual value of
security pledged. The Company expects to collect the full carrying value of its
loan portfolio.
Loan and convertible debenture analysis as at September 30, 2006 is as follows:
Term loans Specific Carrying
allowance amount
___________________________________________
Unimpaired loans $ 235,759 $ - $ 235,759
Impaired loans 10,872 - 10,872
___________________________________________
$ 246,631 $ - $ 246,631
Convertible debentures 586 586 -
___________________________________________
$ 247,217 $ 586 $ 246,631
___________________________________________
b) The Company has recorded an allowance for losses as follows:
September 30,
2006
Balance - Beginning of period $ 537
Additions (Deductions)
Specific provision for the period 238
Specific loans written off for the period (189)
Balance - End of period $ 586
c) At September 30, 2006, the Company has also entered into agreements
to advance funds of $14.6 million of which the Company expects to syndicate a
portion thereof. Advances under these agreements are subject to due diligence,
no material adverse change in the assets, business or ownership of the borrower
and other terms.
8 Debt
In August 2006, the Company entered into a short term unsecured debt facility
for a total amount of $27.9 million. The facility bears interest at prime plus
2%. At September 30, 2006, $10.0 million was owing under this facility.
9 Share capital
a) Authorized
Unlimited First and Second Preferred Shares
Unlimited common shares without par value
b) Shares issued and outstanding
Number of Amount
shares
Common shares
Opening balance - January 1, 2006 119,265,568 $ 138,891
Issued for cash 15,625,000 47,311
Issued on exercise of stock options 1,074,500 2,901
Issued on exercise of warrants 8,833,335 13,300
Issued on exercise of compensation 24,225 56
options
___________________________________________
Ending balance - September 30, 2006 144,822,628 $ 202,459
___________________________________________
In April 2006, the Company completed an offering of 15,625,000 shares of the
Company at a price of $3.20 per share for aggregate proceeds of $50,000,000. The
Company also granted the underwriters an over allotment option exercisable to
May 26, 2006 to purchase up to 2,343,750 shares at a price of $3.20 per share,
of which the underwriters exercised no shares. Net proceeds from the equity
offering after expenses were $47,311,000.
c) Warrants issued and outstanding
Number of Exercise Expiry date
warrants price per
share
Common shares
Opening balance comprised of: $ -
Issued pursuant to a private placement 8,333,335 1.50 June 30, 2008
Issued pursuant to a private placement 500,000 1.60 October 20, 2008
____________
Exercised (8,333,335) 1.50
Exercised (500,000) 1.60
____________
Ending balance - September 30, 2006 -
d) Compensation options issued and outstanding
Number of Exercise Expiry date
warrants price per
share
Common shares
Opening balance comprised of: - -
Issued pursuant to a equity placement 1,110,000 $ 2.30 August 23, 2007
Issued pursuant to a equity placement 48,000 2.30 October 26, 2007
____________
Exercised (24,225) 2.30
____________
Ending balance - September 30, 2006 1,133,775
e) 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 nine months ended September 30, 2006, the change in stock options
outstanding was as follows:
Number of Weighted
shares average
share price
Common shares
Opening balance 9,563,333 $ 1.91
Granted 500,000 2.77
Exercised (1,074,500) 1.95
Cancelled (37,500) 2.30
Closing balance 8,951,333 $ 2.01
Options exercisable 7,898,978 $ 1.97
The following table summarizes information about stock options outstanding and
exercisable at September 30, 2006:
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 1.06 $ 0.81 113,333 $ 0.81
$ 1.51 273,000 2.89 1.51 273,000 1.51
$ 1.80 to 1.95 6,890,000 2.36 1.95 6,683,750 1.95
$ 2.30 1,175,000 4.21 2.30 624,209 2.30
$ 2.64 to 3.08 500,000 4.42 2.77 204,686 2.75
8,951,333 2.72 $ 2.01 7,898,978 $ 1.97
f) Contributed capital
Opening balance $ 6,772
Stock-based compensation 393
Fair value of stock options exercised (799)
____________
Ending balance $ 6,366
____________
During the three months ended September 30, 2006, no new grants of stock options
took place.
10 Related party transactions
a) For the nine months ended September 30, 2006, the Company received
$1,202,000 (2005 - $667,000) in advisory, management and finder's fees from
parties related by virtue of having certain directors and officers in common.
Other assets include $479,000 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 nine months ended September 30, 2006,
the Company recorded a write-down of other assets of $74,000 (2005-$Nil) in
parties related by virtue of having certain directors in common.
b) Loans and convertible debentures include $1,000,000 in amounts due
from parties related by virtue of having a director in common. During the nine
months ended September 30, 2006, the Company received $580,000 (2005 -
$1,770,000) in interest and fees from parties related by virtue of having
certain directors and officers in common. During the nine months ended September
30, 2006, the Company has made $386,000 in additional provision for losses on
convertible debentures from parties related by virtue of having a director in
common.
c) For the nine months ended September 30, 2006, the Company received
$31,000 (2005-$96,000) in syndication loan administration fees from parties
related by virtue of having certain directors and officers in common.
d) Marketable securities and investments include $8,920,000 of shares
held in publicly traded companies related by virtue of having certain directors
and officers in common. For the nine months ended September 30, 2006, the
Company recorded a gain on disposal of securities of $10,727,000 (2005 -
$1,072,000) from parties related by virtue of having certain directors and
officers in common. For the nine months ended September 30, 2006, the Company
recorded a write-down of investments of $470,000 in parties related by virtue of
having certain directors in common.
e) Included in accounts payable is an accrual of $2,650,000 payable to
officers and employees under the Company's incentive plan.
11 Contingencies and commitments
a) Surety bond guarantees totalling US$2,405,000 have been provided by
Castle Mountain Joint Venture to ensure compliance with reclamation and other
environmental agreements. In April 2006, the Company completed its closure
obligations at the Castle Mountain property, other than for long-term monitoring
and maintenance.
b) On March 22, 2002, Quest Investment Corporation, a predecessor of the
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. Accordingly, 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 income 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:
2006 $ 484,000
2007 406,000
2008 331,000
2009 331,000
2010 254,000
2011 33,000
d) Other commitments and contingencies are disclosed elsewhere in these
consolidated financial statements and notes.
12 Supplemental cash flow information
Non-cash operating, financing and investing activities
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
Marketable securities and $ 804 $ 561 $ 1,204 $ 2,051
investments received as loan
fees
Fair value of compensation - 500 - 500
options issued
Other assets and investments 231 828 728 828
received as finder's fees
Investment purchases funded by (30,899) - (30,899) -
brokerage margin account
Investment proceeds used to 30,899 - 30,899 -
repay brokerage margin account
Loans and debentures settled - - - 4,516
with shares
Shares received as - - - 1,800
consideration for sale of
resource property
13 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 be realized from future earnings.
The provision for (recovery of) income taxes consists of the following as at
September 30, 2006:
Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
Current
Canada $ (711) $ - $ 1,886 $ -
United States 200 - 200 -
Total current expenses (511) - 2,086 -
___________________________________________________
Future
Canada 828 - (700) -
United States - - - -
___________________________________________________
Total future recovery 828 - (700) -
___________________________________________________
Total provision for income $ 317 $ - $ 1,386 $ -
taxes
___________________________________________________
QUEST CAPITAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
INTRODUCTION
The following information, prepared as of October 27, 2006, should be read in
conjunction with the Company's audited annual consolidated financial statements
for the years ended December 31, 2005 and 2004 and related notes attached
thereto, which were prepared in accordance with Canadian generally accepted
accounting principles ("Cdn GAAP"), together with the related management's
discussion and analysis ("MD&A"). All amounts are expressed in Canadian dollars
unless otherwise indicated.
The business of Quest Capital Corp. (the "Company") consists of:
* mortgage financings secured by first and second real estate mortgages;
* providing commercial bridge loans 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 primarily generates 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, 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 sale of marketable securities and investments. The Company also
receives fees from its corporate finance activities. These fees are subject to
the number and dollar amounts of the transactions in which the Company
participates.
The following discussion, analysis and financial review is comprised of 12 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
Additional information about us, including our Revised Annual Information Form
and other public filings, are available on SEDAR at www.sedar.com.
1. RESULTS OF OPERATIONS
Total assets as at September 30, 2006 were $284.9 million comprised of $12.8
million of cash, $1.3 million of marketable securities, $246.6 million in loans;
$11.4 million in investments with a fair value of $14.2 million and $12.8
million of other assets.
The composition of the loan portfolio at September 30, 2006 was 83% in first and
second real estate mortgages, 10% in resource sectors, and 7% in other sectors.
At September 30, 2006, mortgages were geographically located; 63% in British
Columbia, 19% in Alberta, 15% in Ontario and 3% in other areas; and 73% are
first mortgages and 27% are 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.
For the three months ended September 30, 2006, the Company had consolidated net
earnings of $8.8 million ($0.06 per share) compared to net earnings of $4.3
million ($0.04 per share) for the comparative period in 2005. During the nine
months ended September 30, 2006, the Company had consolidated net earnings of
$27.7 million ($0.20 per share) compared to $12.2 million ($0.13 per share) for
the comparative period in 2005.
Interest and Related Fees
Net interest income from the Company's lending activities increased during the
three months ended September 30, 2006 as compared to the comparative period in
2005, due to the growth in its loan portfolio year-over-year. Total loans as at
September 30, 2006 were $246.6 million as compared to $98.1 million as at
September 30, 2005, representing a 151% increase. Interest and related fees
during the three months ended September 30, 2006 totaled $8.8 million as
compared to $4.4 million for the comparative period in 2005, representing a 100%
increase. During the nine months ended September 30, 2006, the Company earned
interest and related fees of $22.0 million compared to $11.9 million for the
comparative period in 2005, due to the growth in its loan portfolio
year-over-year.
Non-Interest Income
Net earnings were positively impacted by an increase in management and finder's
fees during the nine months ended September 30, 2006 as compared to the
comparative period in 2005, primarily as a result of increased activity in the
Company's corporate finance business. The fair value of non-monetary
compensation received as finder's fees in the form of shares, broker warrants
and/or options are estimated using the trading price for shares, adjusted for
liquidity, hold periods and other restrictions and the Black-Scholes option
model for warrants.
Marketable securities are carried at the lower of average cost and market value.
Accordingly, trading gains during the three months ended September 30, 2006
resulted in the Company recording a gain of $0.4 million compared to $0.2
million for the comparative period in 2005. During the nine months ended
September 30, 2006, the Company recorded trading gains of $4.1 million as
compared to $0.6 million for the comparative period in 2005.
Net realized gains from the sales and write-downs to carrying value of
investments resulted in the Company recording a net gain of $1.9 million during
the three months ended September 30, 2006 as compared to $1.2 million for the
comparative period in 2005. During the nine months ended September 30, 2006, the
Company realized gains from the sale of investments of $9.6 million as compared
to $2.4 million for the comparative period in 2005.
Expenses and Other
Total expenses and other for the three months ended September 30, 2006 was $3.1
million as compared to $2.0 million for the comparative period in 2005. Total
expenses and other for the nine months ended September 30, 2006 were $9.9
million as compared to $5.5 million for the comparative period in 2005.
Salaries and benefits have increased during the three months and nine months
ended September 30, 2006 as compared to the comparative periods in 2005 as a
result of expansion of the business and the addition of new employees.
Bonuses of $0.9 million during the three months ended September 30, 2006 and
$4.6 million during the nine months ended September 30, 2006, represent amounts
under the incentive plan to officers and employees of the Company. The increase
in bonuses is the result of the realized gain on sale of securities and
increased level of loan activity. The payments and allocations under such plan
are subject to the approval of the Compensation Committee and Board of
Directors. The Company's incentive plan includes discretionary and
non-discretionary components. The non-discretionary components are based on the
Company's corporate finance activities and loan underwritings. The discretionary
components are primarily based on the earnings of the Company.
Stock based compensation decreased during the three months and nine months ended
September 30, 2006 over the comparative period in 2005, as a result of fewer
options being issued and vested.
In April 2006, the Company completed its closure obligations at the Castle
Mountain property, other than for long-term monitoring and maintenance.
Income tax expense was $1.4 million for the nine months ended September 30,
2006. The Company estimates its annual effective tax rate for its Canadian
entities will be 6.5% and nominal for its U.S. entities for 2006. In addition,
income tax expense has been positively impacted by the recognition of a future
tax asset as a result of the likely realization of unused tax losses to be
realized from fiscal earnings beyond 2006. During the quarter the Company was
able to reduce its estimated annual effective tax rate through the use of tax
efficient strategies of acquiring and disposing of investments. The Company
further intends to proceed with a reorganization amongst its wholly owned
entities as an effective tax planning strategy.
2. SUMMARY OF QUARTERLY RESULTS
(In thousands of Canadian dollars, except per share amounts)
3rd 2nd 1st 4th 3rd 2nd 1st 4th
Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
2006 2006 2006 2005 2005 2005 2005 2004
_______________________________________________________________________________
Interest & 8,781 7,415 5,798 5,555 4,399 4,004 3,452 2,941
related
fees
Non-interest 3,368 7,905 5,961 4,028 1,883 2,377 1,202 1,502
income
Earnings 9,087 11,664 8,315 5,059 4,291 4,507 3,311 529
before taxes
Net earnings 8,770 10,882 8,028 11,395 4,295 4,550 3,311 212
Basic and
Diluted 0.06 0.08 0.06 0.10 0.04 0.05 0.04 0.00
Earnings Per
Share
_______________________________________________________________________________
Total
Assets 284,935 267,891 208,060 189,603 166,928 123,487 114,030 111,905
Total
Liabilities 20,885 14,828 8,999 12,009 6,718 7,525 10,684 12,385
_______________________________________________________________________________
The Company's interest and related fees have continued to increase for the past
eight quarters as the Company's loan portfolio grows.
Non- interest income will vary 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, net earnings were positively impacted by the
recognition of a Future Tax Asset of $6.4 million as a result of the likely
realization of unused tax losses from future earnings.
During the fourth quarter of 2004, net earnings were impacted by the provision
of $1.5 million for the 2004 bonuses. In 2005 and 2006, provisions for bonuses
have been made on a quarterly basis.
3. LIQUIDITY
The Company's cash resources at September 30, 2006 were $12.8 million as
compared to $33.7 million as at December 31, 2005. The Company's primary focus
is to provide loans and its cash balances will vary depending on the timing of
loans advanced and repaid.
As at September 30, 2006, the Company had commitments under existing loan
agreements to lend further funds of $14.6 million of which the Company expects
to syndicate a portion thereof. Advances under these agreements are subject to a
number of conditions, including due diligence and no material adverse change in
the assets, business or ownership of the borrower.
The Company's loan portfolio as at September 30, 2006 was $246.6 million
comprised of 83% real estate mortgages, 10% in resource sectors, and 7% in other
sectors. As at September 30, 2006, 76% of the loan value is scheduled to mature
within a year. The Company had approximately $11.5 million of loans impaired as
a result of certain principal and/or interest payments being in arrears as at
September 30, 2006 against which the Company has a provision of $0.6 million.
The Company expects to collect the full carrying value of its loan portfolio.
During the nine months ended September 30, 2006, cash flow from operations
provided $21.2 million as compared to $5.6 million for the comparative period in
2005, as a result of higher earnings and proceeds received from the sale of
marketable securities.
In April 2006, the Company completed an equity offering of 15,625,000 common
shares and received net proceeds of $47.3 million.
During the nine months ended September 30, 2006, the Company's loan portfolio
increased by $122.1 million to $246.6 million as compared to December 31, 2005.
In the nine months ended September 30, 2006, the Company had arranged $205.1
million of new loans (net to Company - $184.9 million) and $70.8 million of
loans (net to the Company - $58.2 million) were repaid.
As part of the Company's effective tax planning strategies significant
acquisitions and disposals of investments occurred during the current quarter
funding by internal sources and the use of margin accounts. During the upcoming
quarter, the Company will continue with similar type of transactions.
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. However, Quest
assumes short-term debt from time to time to fund its investments and loan
operations. In addition, Quest is reviewing the implementation of various term
debt facilities.
The Company has contractual obligations for its leased office space in Vancouver
and Toronto. The total minimum lease payments for the years 2006 - 2010 are
$1,839,000.
Obligation due by period
Type of Contractual Total Less than 1 1 - 3 Years 3 - 5 More
Obligation Year Years than
5
Years
Office Leases $1,839,000 $484,000 $1,068,000 $287,000 -
Loan Commitments $14,600,000 $14,600,000 - - -
Total $16,439,000 $15,084,000 $1,068,000 $287,000 -
4. RELATED PARTY TRANSACTIONS
For the nine months ended September 30, 2006, the Company received $1,202,000 (
2005 - $667,000) in advisory, management and finder's fees from parties related
by virtue of having certain directors and officers in common. Other assets
include $479,000 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 nine months ended September 30, 2006, the Company
recorded a write-down of other assets of $74,000 (2005-$Nil) in parties related
by virtue of having certain directors in common.
Loans and convertible debentures include $1,000,000 in amounts due from parties
related by virtue of having a director in common. During the nine months ended
September 30, 2006, the Company received $580,000 (2005 - $1,770,000) in
interest and fees from parties related by virtue of having certain directors and
officers in common. During the nine months ended September 30, 2006, the Company
has provided an additional allowance of $386,000 for a loss on a convertible
debenture from a party related by virtue of having a director in common.
For the nine months ended September 30, 2006, the Company received $31,000
(2005-$96,000) in syndication loan administration fees from parties related by
virtue of having certain directors and officers in common.
Marketable securities and investments include $8,920,000 of shares held in
publicly traded companies related by virtue of having certain directors and
officers in common. For the nine months ended September 30, 2006, the Company
recorded a gain on disposal of securities of $10,727,000 (2005 - $1,072,000)
from parties related by virtue of having certain directors and officers in
common. For the nine months ended September 30, 2006, the Company recorded a
write-down of investments of $470,000 in parties related by virtue of having
certain directors in common.
As at September 30, 2006 included in accounts payable is an accrual of
$2,650,000 payable to officers and employees under the Company's incentive plan.
5. SUBSEQUENT AND PROPOSED TRANSACTIONS
Nothing to report.
6. OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
7. OUTLOOK
As at September 30, 2006, the Company had $12.8 million of cash on hand.
Reinvestment of the Company's cash as loans mature is the paramount 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. During the upcoming year, the Company may hire
additional employees and raise equity or debt as is 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 audited
consolidated financial statements for the years ended December 31, 2005 and
2004. 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 impaired loans. 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 on a monthly 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. Investments
are recorded at cost or at cost less amounts written off to reflect any
impairment in value that is considered to be other than temporary. The Company
regularly reviews the carrying value of its portfolio positions. A decline in
market value may be only temporary in nature or may reflect conditions that are
more permanent. Declines may be attributable to general market conditions,
either globally or regionally, that reflect prospects of the economy as a whole
or prospects of a particular industry or a particular company. Such declines
may or may not reflect the likelihood of ultimate recovery of the carrying
amount of an investment.
In determining whether the decline in value of the investment is other than
temporary, quoted market price is not the only factor considered, particularly
for thinly traded securities, large block holdings and restricted shares.
Other factors considered include:
* the trend of the quoted market price and trading volume;
* the financial position of the company and its results;
* changes in or reorganization of the business plan of the investment; and
* the current fair value of the investment (based upon an appraisal thereof)
relative to its carrying value.
Future Tax Asset
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 Company will
reassess at eachbalance sheet date its existing future income tax assets, as
well as potential future income tax assets that have not been previously
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 realization 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 its more likely
than not to be realized, it will be recorded in the balance sheet and
statement of earnings.
Asset Retirement Obligations
The amounts recorded for asset retirement obligations are based on the fair
value of the estimated future costs to obtain final closure from regulatory
agencies of the Company's remaining resource property.
9. CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
No new accounting policies have been adopted during the nine months ended
September 30, 2006.
10. DISCLOSURE OF OUTSTANDING SHARE DATA
As at October 27, 2006, the Company had the following common shares, stock
options and compensation options outstanding:
Common shares 144,822,628
Stock options 8,951,333
Compensation options 1,133,775
Fully diluted shares outstanding 154,907,736
Dividends
The Board of Directors declared its second semi-annual dividend of $0.03 per
share which was paid on July 6, 2006 to shareholders of record on June 21, 2006.
11. RISKS AND UNCERTAINTIES
Additional risks factors are disclosed under "Risk Factors" in the Revised
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 September 30, 2006,
76% 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 composition of the loan portfolio at September 30, 2006 was 83% in first and
second real estate mortgages, 10% in resource sectors, and 7% in other sectors.
At September 30, 2006, mortgages were geographically located; 63% in British
Columbia, 19% in Alberta, 15% in Ontario and 3% in other; and 73% are first
mortgages and 27% are second mortgages. 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. The
Company provides for loan losses on a specific loan basis and has a provision of
$0.6 million as at September 30, 2006.
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.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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