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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:8967Z
Quest Capital Corporation
16 March 2006
16 March, 2006 TSX: QC
AMEX: QCC
AUDITED FINANCIAL STATEMENTS FOR THE YEAR ENDED
31 DECEMBER 2005
Vancouver, British Columbia, 16 March 2006 - Quest Capital Corp. announce that
it has published its final audited financial results for the year ended 31,
December 2005, following the announcement of its highlights on 6 March, 2006.
Please see that financials for the year ended 31, December, 2005 attached
hereto.
About Quest
Quest Capital Corp. is a merchant bank that focuses on providing financial
services, specifically mortgages and bridge loans. Quest's primary expertise is
providing asset backed loans of between $1,000,000 and $35,000,000 to operations
in real estate, manufacturing, mining and energy. 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 visit www.sedar.com or contact:
A. Murray Sinclair Mark Monaghan
Managing Director Vice President
Tel: 604.689.1428 Tel: 416.367.8383
Toll free: 800.318.3094
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
December 31, 2005 and 2004
(expressed in thousands of Canadian dollars)
Management's Responsibility for Financial Reporting
The accompanying consolidated financial statements of the Company have been
prepared by management in accordance with Canadian generally accepted accounting
principles and reconciled to United States generally accepted accounting
principles. These consolidated financial statements contain estimates based on
management's judgement. Management maintains an appropriate system of internal
controls to provide reasonable assurance that transactions are authorized,
assets safeguarded, and proper records maintained.
The Audit Committee of the Board of Directors, which is composed of a majority
of independent directors, reviews the results of the annual audit and the
consolidated financial statements prior to submitting the consolidated financial
statements to the Board for approval.
The Company's auditors, PricewaterhouseCoopers LLP, are appointed by the
shareholders to conduct an audit and their report follows.
Brian E. Bayley Susan Neale
CEO and President Chief Financial Officer
Vancouver, B.C., Canada
March 3, 2006
Independent Auditors' Report
To the Shareholders of
Quest Capital Corp.
We have audited the consolidated balance sheets of Quest Capital Corp. as at
December 31, 2005 and 2004 and the consolidated statements of earnings, retained
earnings and cash flows for the years ended December 31, 2005, 2004 and 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2005
and 2004 and the results of its operations and its cash flows for the years
ended December 31, 2005, 2004 and 2003 in accordance with Canadian generally
accepted accounting principles.
(Signed) PricewaterhouseCoopers LLP
Chartered Accountants
Vancouver, British Columbia
March 3, 2006
2005 2004
Assets
Cash and cash equivalents $ 33,739 $ 6,607
Marketable securities (note 6) 945 786
Loans (notes 6 and 7) 124,551 76,215
Investments (note 6) 17,117 15,032
Future tax asset (note 16) 6,488 -
Restricted cash (note 9) 2,265 9,941
Prepaid and other receivable 739 796
Resource and fixed assets (note 10) 700 1,993
Other assets (note 6) 2,008 535
Assets held for disposition (note 5) 1,051 -
---- --------- ---- ---------
$ 189,603 $ 111,905
---- --------- ---- ---------
Liabilities
Accounts payable and accrued liabilities $ 4,192 $ 5,975
Dividend payable 3,518 -
Deferred interest and loan fees 1,685 1,044
Asset retirement obligation (note 11) 1,884 5,366
Liabilities and provision for loss on assets
held 730 -
for disposition (note 5)
---- --------- ---- ---------
12,009 12,385
---- --------- ---- ---------
Shareholders' Equity
Share capital (note 12) 138,891 83,388
Contributed capital (note 12) 6,772 4,198
Retained earnings 30,739 10,706
Currency translation adjustment (note 13) 1,192 1,228
---- --------- ---- ---------
177,594 99,520
---- --------- ---- ---------
$ 189,603 $ 111,905
---- --------- ---- ---------
Contingencies and commitments (note 18)
2005 2004 2003
Retained earnings (deficit) $ 10,706 $ (2,041) $ (180,963)
Beginning of year
Net earnings (loss) for the 23,551 12,747 (1,362)
year
Dividends (3,518) - -
Distribution of paid-up - - (5,272)
capital
Cancellation of shares - - (28)
Reduction of capital against
deficit - - 185,584
---- --------- ---- --------- ---- ---------
Retained earnings (deficit)
- End $ 30,739 $ 10,706 $ (2,041)
of year ---- --------- ---- --------- ---- ---------
2005 2004 2003
Interest and $ 17,410 $ 10,948 $ 3,742
related fees ---- --------- ---- --------- ---- ---------
Non-interest income
Management and 4,204 2,200 456
finder's fees
Marketable
securities trading 743 (1,020) 334
gains (losses)
Realized gains and
writedowns 4,171 2,090 3,242
of investments
Other income and 372 3,505 6,380
gold sales ---- --------- ---- --------- ---- ---------
9,490 6,775 10,412
---- --------- ---- --------- ---- ---------
Total interest and
non-interest income 26,900 17,723 14,154
Provision for - (275) (1,472)
losses ---- --------- ---- --------- ---- ---------
26,900 17,448 12,682
---- --------- ---- --------- ---- ---------
Expenses and other
Salaries and 2,108 1,650 521
benefits
Bonuses 2,000 1,500 -
Stock-based 2,142 1,769 2,429
compensation
Office and other 998 771 383
Legal and
professional 820 1,412 1,662
services
Regulatory listing 260 - -
fees
Regulatory and
shareholder 262 285 274
relations
Director's fees 218 151 56
Foreign exchange 96 (275) 2,120
loss (gain)
Gain on dilution
net of
provision for loss 91 - -
on
disposition
Other expenses
relating to 155 467 4,623
resource properties
Writedown, gains
adjustment
to reclamation
provision and 582 (3,349) 1,182
settlement of
Australian
operations
Goodwill impairment - - 430
---- --------- ---- --------- ---- ---------
9,732 4,381 13,680
---- --------- ---- --------- ---- ---------
Earnings (loss)
before income 17,168 13,067 (998)
taxes
(Recovery of)
provision for (6,315) 320 364
income taxes
(note 16)
---- --------- ---- --------- ---- ---------
Non-controlling
interest in a (68) - -
subsidiary
(note 5)
---- --------- ---- --------- ---- ---------
Net earnings (loss)
for the $ 23,551 $ 12,747 $ (1,362)
year ---- --------- ---- --------- ---- ---------
Earnings (loss) per
share
Basic 0.23 0.14 (0.02)
Fully diluted 0.23 0.14 (0.02)
Weighted average
number of shares
outstanding
Basic 100,923,801 87,997,155 58,617,700
Fully diluted 103,563,223 89,205,829 59,655,001
2005 2004 2003
Cash flows from operating
activities
Net earnings (loss) for the $ 23,551 $ 12,747 $ (1,362)
year
Adjustments to determine net
cash flows relating to
operating items
Future tax asset (6,488) - -
Stock-based compensation 2,142 1,769 2,429
Non-controlling interest in (68) - -
subsidiary
Provision for losses - 275 1,472
Amortization of deferred
interest and (4,568) (4,693) (879)
loan fees
Marketable securities trading
(gains) (743) 1,020 (334)
losses
Realized gains and writedowns
of (4,171) (2,090) (3,242)
investments
Gain on dilution and
provision for loss
on disposition of subsidiary 156 - -
and other
assets
Depreciation 128 110 271
Other expenses relating to
resource 155 431 686
properties
Writedowns and gains on sale
of resource
assets and adjustments to 582 (644) 926
retirement
obligations
Goodwill impairment - - 430
Other assets and investments
received as (1,245) (566) -
finder's fees
Deferred interest and loans
fees 3,083 2,117 933
received
Activity in marketable
securities held for trading
Purchases (215) (43) -
Proceeds on sales 2,259 1,171 2,807
Expenditures for reclamation (2,498) (4,747) (3,538)
and closure
Changes in accounts payables
and accrued (1,784) 3,864 (3,310)
liabilities
Changes in receivables and 34 1,353 1,305
inventories ---- --------- ---- --------- ---- ---------
10,310 12,074 (1,406)
---- --------- ---- --------- ---- ---------
Cash flows from financing
activities
Proceeds from shares issued 56,025 2,329 18,451
Shares redeemed and cancelled - - (270)
---- --------- ---- --------- ---- ---------
56,025 2,329 18,181
---- --------- ---- --------- ---- ---------
Cash flows from investing
activities
Activity in loans
Net (increase) decrease in (54,869) (43,400) (17,131)
loans
Net decrease (increase) in
convertible 2,030 (975) (896)
debentures
Activity in Investments
Proceeds on sales 13,865 13,655 8,073
Purchases (4,794) (11,876) (7,181)
Net proceeds on dilution of 592 - -
subsidiary
Change in restricted cash 7,655 2,761 4,115
Cash transferred to purchaser
of (2,500) - -
resource property
Proceeds on sale of resource
and fixed 210 864 811
assets
Expenditures on resource and
fixed (368) (295) (275)
assets
Net other assets acquired (281) - -
Net cash acquired on - - 14,064
arrangement
Cash of subsidiary being held
for (678) - (1,046)
sale/disposed ---- --------- ---- --------- ---- ---------
(39,138) (39,266) 534
---- --------- ---- --------- ---- ---------
Foreign exchange loss on cash (65) (327) (1,390)
held in a
foreign subsidiary
---- --------- ---- --------- ---- ---------
Increase (decrease) in cash
and cash 27,132 (25,190) 15,919
equivalents
Cash and cash equivalents -
Beginning of 6,607 31,797 15,878
year ---- --------- ---- --------- ---- ---------
Cash and cash equivalents - $ 33,739 $ 6,607 $ 31,797
End of year ---- --------- ---- --------- ---- ---------
Currency translation
adjustment (note13)
Supplemental cash flow
information (note20)
1 Nature of operations
Quest Capital Corp., (the Company) was reorganized on June 30, 2003 by way of a
statutory plan of arrangement (the Arrangement) (note 4). The Company's 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.
Previously, the Company was a natural resource holding company engaged in the
acquisition, exploration, financing, and development and operation of minerals
properties and the financing of junior exploration companies and merchant
banking. The Company owns and is reclaiming its 75% owned Castle Mountain
property and it is expected that by the end of the first quarter of 2006 the
reclamation obligations will have been completed, other than long-term
monitoring and maintenance. The Brewery Creek property was sold in 2005 (note
10).
2 Change in accounting policies
Effective January 1, 2005, the Company has adopted the new Accounting Guideline
15 (AcG-15) "Consolidation of Variable Interest Entities". The new standard
establishes when a company should consolidate a variable entity in its financial
statements. AcG-15 provides the definition of a variable interest entity and
requires a variable interest entity to be consolidated if a company is at risk
of absorbing the majority of the variable interest entity's losses, or is
entitled to receive a majority of the variable interest entity's residual
returns, or both. The impact of this change does not have a significant effect
on the Company's financial results.
Effective January 1, 2004 the Company adopted prospectively the Canadian
Institute of Chartered Accountants (CICA) Section 1100 - Generally Accepted
Accounting Principles as it relates to recognizing revenue. Previously, sales of
precious metals were recorded as the estimated net realizable value when the
metals were available for delivery and unsettled amounts were recorded as
accounts receivable. The Company now recognizes revenue from the sales of
precious metals when title has passed to the purchaser. The impact of this
change does not have a significant effect on the Company's financial results.
3 Significant accounting policies
Generally accepted accounting principles
These consolidated financial statements have been prepared using accounting
principles generally accepted in Canada. Significant differences between
Canadian and U.S. generally accepted accounting principles (GAAP) as they relate
to these financial statements are described in note 21.
Basis of presentation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The Company's significant subsidiaries include Quest
Management Corp., Quest Securities Corporation, Quest Mortgage Corp. (formerly
Viceroy Minerals Corporation), and Viceroy Gold Corporation and its 75%
proportionate joint-venture interest in the Castle Mountain property.
Gold sales from former resource operations have been recorded as "Other Income"
and expenses relating to these operations have been recorded as "Other Expenses
Relating To Resource Properties".
Certain comparative figures have been reclassified to conform to the current
period's presentation. During the year ended December 31, 2005, the Company
amended the presentation to show a non-classified balance sheet.
Use of estimates
The preparation of these consolidated financial statements requires management
to make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent liabilities at the date of the
consolidated financial statements and the reported amount of revenues and
expenses during the period. While management believes that these estimates and
assumptions are reasonable, actual results may differ. Financial statements
items subject to significant management estimation include loan losses,
investment carrying values, fair value of non-cash fees and stock-based
compensation and future income tax assets.
Cash and cash equivalents
Cash and cash equivalents include all highly liquid short-term deposits,
government guaranteed money market investments and corporate paper with a
minimum R-1 mid-grade rating, all of which have a maturity of 90 days or less at
the time of acquisition.
Marketable securities
Marketable securities are carried at the lower of average cost and market value.
Loans
Loans are stated net of an allowance for credit losses on impaired loans.
Loans are classified as impaired when the principal is past due, interest is 90
days in arrears, and when there is no longer reasonable assurance of the timely
collection of principal and interest. A provision for losses incurred on
impaired loans is made to reduce the carrying amount to the estimated realizable
amount.
Investments
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.
Resource and fixed assets
a) Exploration and development
General exploration expenditures and care and maintenance costs of development
properties on hold are expensed in the period incurred.
b) Plant, equipment and other fixed assets
Plant, equipment and other fixed assets are recorded at cost and depreciated on
a straight-line basis.
Provision for asset retirement obligations
The Company recognizes a liability for asset retirement obligations when the
liability is incurred. A liability is recognized initially at fair value if a
reasonable estimate of the fair value can be made and the resulting amount would
be capitalized as part of the asset. The liability is accreted over time through
periodic charges to earnings. In subsequent periods, the Company adjusts the
carrying amounts of the liability for changes in estimates of the amount or
timing of underlying future cash flows. Any adjustments are accounted for in
earnings in the period in which the adjustment is made.
It is possible that the Company's estimates of its ultimate reclamation and site
restoration liability could change as a result of changes in regulations or cost
estimates.
Translation of foreign currencies
Self-sustaining foreign operations are translated using the current rate method.
Under this method, assets and liabilities are translated at the exchange rates
prevailing at the balance sheet date and revenues and expenses at the average
exchange rate during the period. The net effect of foreign currency translation
is deferred and shown as a currency translation adjustment in shareholders'
equity until charged against earnings when the investment in the operation is
reduced.
Integrated foreign operations are translated using the temporal method. Under
this method, monetary items are translated at the exchange rate prevailing at
the balance sheet date, non-monetary items are translated at historical exchange
rates and revenue and expenses are translated at the average rate during the
period.
Revenue recognition
Interest income is recorded on an accrual basis except on loans classified as
impaired. When a loan is classified as impaired, interest income is recognized
on a cash basis only, after specific provisions or write-offs have been
recovered and provided there is no further doubt about the collectability of
remaining principal balances. Loan syndication fees are included in income as
earned over the life of the loan. Loan commitment, origination, restructuring
and renegotiation fees are recorded as interest over the life of the loan.
Interest and fees collected in advance are recorded as deferred revenue and
recognized in income as set out above.
Finder's fees received as compensation for corporate finance business activities
are recorded when performance is complete and the cash or non-monetary
consideration is received or is reasonably assured to be received. Non-monetary
consideration includes shares, broker warrants and/or options and has been
valued using the trading price of the shares at the time they are received and
the Black Scholes option pricing model for warrants. Adjustments are made to the
trading price for liquidity relative to size of the position, hold periods and
other resale restrictions.
Trading revenue and sale of investments are recognized on a settlement basis.
Income taxes
Income taxes are calculated using the asset and liability method of accounting
for income taxes. Accordingly, future tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. Future tax assets and liabilities are measured using enacted or
substantively enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled.
The effect on future taxes for a change in tax rates will be recognized in
income in the period that includes the date of substantive enactment. In
addition, future tax assets are recognized to the extent their realization is
more likely than not.
Stock-based compensation
The Company has a stock option plan as described in note 12(e). In 2003, the
Company elected to apply the fair value method of accounting for stock options
granted to directors, officers and employees on a prospective basis in
accordance with the recommendations of the CICA. Accordingly, effective
January 1, 2003, the fair value of all stock options granted is recorded as a
charge to operations and a credit to fair value of stock options and warrants
over the period the stock options are outstanding. Any consideration paid on
exercise of stock options is credited to share capital.
Earnings (loss) per share
Basic earnings (loss) per share is calculated based on the weighted average
number of common shares issued and outstanding during the year.
Diluted earnings or loss per share is calculated using the treasury stock
method, if dilutive.
4 Reorganization
a) The Company acquired all of the shares of each of Avatar Petroleum
Inc. (Avatar), Quest Management Corp. (QMC) (which was a wholly owned subsidiary
of Arapaho Capital Corp. (Arapaho)) and Quest Investment Corporation (QIC), by
way of three separate share exchanges on June 30, 2003, in exchange for shares
of the Company. Avatar and QIC have been wound up into the Company and the
Company changed its name to Quest Capital Corp. from Viceroy Resource
Corporation ("Arrangement").
The Company altered its share capital to provide for subordinate voting (one
vote per share) common shares (Class A Shares) and variable multiple voting
(between one and five votes per share) common shares (Class B Shares). The
Company consolidated its shares on a one new for three old basis.
Under the terms of the Arrangement:
* holders of Avatar shares received 0.2825 Class A Share for each Avatar
share, and outstanding Avatar warrants were converted at the same ratio,
resulting in 1,836,250 warrants being issued by the Company;
* Arapaho as the sole holder of all of the issued shares of QMC
received 863,857 Class A Shares;
* holders of QIC Class A shares received 1.0514 Class A Shares for
each QIC Class A Share; and
* holders of QIC Class B shares received 1.0514 Class B Shares
for each QIC Class B Share.
These acquisitions have been accounted for using the purchase
method and the following is a breakdown of the net assets
acquired:
QIC QMC Avatar Total
Cash $ 8,516 $ 151 $ 6,187 $ 14,854
Marketable
securities 1,867 - - 1,867
Bridge loans 15,552 - - 15,552
Investments 7,050 400 - 7,450
Prepaids and
other 246 151 21 418
receivables
Resource 232 60 - 292
assets
Other assets 186 226 - 412
Goodwill
impairment - - 430 430
Accounts (1,663) (104) (71) (1,838)
payable ---- -------- ---- -------- ---- -------- ---- --------
Net assets
acquired $ 31,986 $ 884 $ 6,567 $ 39,437
---- -------- ---- -------- ---- -------- ---- --------
Consideration
Number of
securities
issued
Class A 26,101,114 863,857 6,012,219 32,977,190
Shares
Class B 4,276,851 - - 4,276,851
Shares
Warrants - - 1,836,250 1,836,250
Deemed value
Class A
Shares @ $ 26,708 $ 884 $ 6,152 $ 33,744
$1.02
Class B
Shares @ 4,378 - - 4,378
$1.02
Warrants - - 350 350
Transactions 900 - 65 965
costs ---- -------- ---- -------- ---- -------- ---- --------
Total
consideration $ 31,986 $ 884 $ 6,567 $ 39,437
---- -------- ---- -------- ---- -------- ---- --------
During the third quarter of 2003, the Company tested the
goodwill acquired in the purchase of Avatar for impairment and
recognized a goodwill impairment loss of $430,000.
b) As part of the Arrangement, the Company's Argentina
mineral exploration properties and cash were indirectly
transferred from a wholly owned subsidiary to another wholly
owned subsidiary called Viceroy Exploration Ltd. (ViceroyEx).
The Company distributed to its pre-merger shareholders
approximately 81% of the shares that it held of ViceroyEx and,
as a result, the Company ceased to exercise control. The
Company's remaining investment in ViceroyEx has been accounted
for using the cost method. The following is a breakdown of the
net assets disposed of:
Cash $ 550
Resource assets 5,255
Accounts payable (45)
---- ---------
Investment in ViceroyEx 5,760
Distributed to shareholders (4,653)
---- ---------
Remaining investment $ 1,107
---- ---------
During the second half of 2003, the Company disposed of its
remaining investment.
c) In June 2003, the Company transferred to 650399 BC
Ltd. cash and interests in certain properties located in British
Columbia and granted an option to explore and acquire the
Brewery Creek Mine in exchange for 6,000,000 shares or 50% of
650399 BC Ltd. The assets were transferred at their estimated
fair market value and a gain was recognized to the extent of the
arm's length ownership in 650399 BC Ltd.
Carrying value of assets disposed of
Cash $ 500
Mineral properties -
---------
500
Consideration
Investment in 650399 BC Ltd. 1,000
---------
Gain $ 500
---------
d) As part of the Arrangement, the Company's shares of
650399 BC Ltd. were exchanged for shares of SpectrumGold Inc
(SpectrumGold) on a one-for-one basis. The Company distributed
to its pre-merger shareholders approximately 68% of the shares
that it held of SpectrumGold and, as a result, the Company
ceased to exercise significant influence. The Company's
remaining investment had been accounted for using the cost
method.
Investment in SpectrumGold $ 1,000
Distributed to shareholders (619)
---- ---------
Remaining investment $ 381
---- ---------
During the second half of 2003, the Company disposed of its
remaining investment.
5 Assets and liabilities and provision for loss on
assets
In May 2005, the Company's wholly-owned subsidiary Lara
Exploration Ltd. (Lara) completed an Initial Public Offering
(IPO) of 2,000,000 units consisting of one common share and one
transferable share purchase warrant. The Company did not
participate in the IPO and its interest in Lara was diluted to
66% resulting in the Company recording a gain of $252,000. The
Company did not receive any cash proceeds from this transaction
(nor is it required to make any payments in connection with it).
In November 2005, Lara 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 has 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 will hold approximately 9% of the outstanding shares of
Lara and will cease to exercise control or significant influence
of Lara and has recorded a provision for a loss on the
disposition of $343,000. The transaction was completed
subsequent to year end and has been recorded as follows:
Assets held for disposition
Cash $ 678
Resource assets 373
---- ---------
$ 1,051
---- ---------
Liabilities and provision for loss on assets
held for disposition
Accounts payable $ 32
Minority interest 355
Provision for loss on disposition 343
---- ---------
$ 730
---- ---------
6 Financial instruments
The carrying values of cash and cash equivalents, restricted
cash, other receivables, and accounts payable approximate their
fair values due to the short-term nature of these instruments.
The fair value of the Company's remaining financial assets and
liabilities is as follows:
2005 2004
--------- --------- --------- --- ---------
Carrying value Fair Carrying value Fair
value value
Marketable $ 945 1,168 $ 786 $ 1,047
securities
Investments 17,117 24,430 15,032 20,537
Loans and
convertible 124,551 124,551 76,215 76,215
debentures
Other 1,601 1,601 128 128
assets
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 is
estimated to be approximately the equivalent of carrying value
due to the relatively short term of these loans. 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
24 months from December 31, 2005, and bear interest at a fixed
rate of between 9.75% and 15% before commitment and other fees.
Marketable securities, real property, real estate, corporate or
personal guarantees generally are pledged as security. At
December 31, 2005, the composition of the loan portfolio was 89%
mortgages, 6% in the energy sector, and 5% in other types of
companies. The convertible debenture interest rate is 8% and due
September 2006.
Loan and convertible debenture analysis as at December 31, 2005
and 2004 is as follows:
2005
--------- ---- --------- ---- ---------
Term loans Specific Carrying amount
allowance
Unimpaired $ 118,041 $ - $ 118,041
loans
Impaired 6,461 337 6,124
loans ---- --------- ---- --------- ---- ---------
$ 124,502 $ 337 $ 124,165
Convertible
debentures 586 200 386
---- --------- ---- --------- ---- ---------
$ 125,088 $ 537 $ 124,551
---- --------- ---- --------- ---- ---------
2004
--------- ---- --------- ---- ---------
Term loans Specific Carrying amount
allowance
Unimpaired $ 70,763 $ - $ 70,763
loans
Impaired 3,387 337 3,050
loans ---- --------- ---- --------- ---- ---------
$ 74,150 $ 337 $ 73,813
Convertible
debentures 2,602 200 2,402
---- --------- ---- --------- ---- ---------
$ 76,752 $ 537 $ 76,215
---- --------- ---- --------- ---- ---------
As at December 31, 2005, 66% of the Company's loan portfolio is
due within a year. At December 31, 2005, loans and convertible
debentures of $2,810,000 (2004 - $402,400) net of allowances
were in U.S. dollars. Accordingly, the Company is exposed to
foreign currency risk in this regard.
Subsequent to year end $3,000,000 of impaired loans were repaid
or the default cured.
b) The Company monitors the repayment ability of
borrowers and the value of underlying security.
Certain of the Company's loans are in arrears and realization by
the Company on its security may result in a shortfall. In
determining the provision for possible loan losses, management
considers the length of time the loans have been in arrears, the
overall financial strength of borrowers and the residual value
of security pledged. The Company has recorded an allowance for
losses as follows:
2005 2004 2003
Balance - $ 537 $ 1,472 $ -
Beginning of
year
Add
Specific - 275 1,446
provision for
the year
Interest - - 26
provision for ---- --------- ---- --------- ---- ---------
the year
537 1,747 1,472
Less: Loan - (1,210) -
write-offs ---- --------- ---- --------- ---- ---------
net of
recoveries
Balance - End $ 537 $ 537 $ 1,472
of year ---- --------- ---- --------- ---- ---------
c) At December 31, 2005, the Company has also entered
into agreements to advance funds of $7,091,000, of which the
Company expects to syndicate $897,000. 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 Joint venture
The Company owns a 75% interest in Castle Mountain Joint Venture
(Castle Mountain) which owns the Castle Mountain property which
is being reclaimed.
The Company's 75% interest in the joint venture is summarized as
follows:
2005 2004 2003
Cash and cash $ 1,276 $ 478 $ 392
equivalents
Restricted 2,274 5,076 8,892
cash and
other assets
Resource 141 274 679
assets
Accounts (741) (630) (539)
payable
Asset (1,884) (3,186) (6,605)
retirement ---- --------- ---- --------- ---- ---------
obligations
Net assets $ 1,066 $ 2,012 $ 2,819
---- --------- ---- --------- ---- ---------
Interest and $ 111 $ 92 $ 77
related fees
Other income 364 3,235 6,009
and gold
sales
Other
expenses (120) (281) (4,294)
relating to
resource
operations
Write-down,
gains, (835) 565 (664)
adjustment to ---- --------- ---- --------- ---- ---------
reclamation
provision
(Loss) $ (480) $ 3,611 $ 1,128
earnings ---- --------- ---- --------- ---- ---------
before income
taxes
Cash flows
from:
Operating $ (1,695) $ 1,671 $ 1,342
activities
Investing $ 2,853 $ 3,144 $ (481)
activities
9 Restricted cash
Pursuant to an agreement amongst the partners of the Castle
Mountain property, the Company was required to set aside
restricted cash of $2,265,000 (2004 - $4,941,000) as at December
31, 2005 in a fund to fulfil reclamation and closure obligations
at the Castle Mountain property.
In 2004, restricted cash also included $5,000,000 that was
pledged as security for licenses and permits for letters of
credit to fulfil reclamation and closure obligations at the
Brewery Creek property. The terms of the letter of credit
required the amount to be restricted. The restricted cash was
released upon the sale of the Brewery Creek property in 2005
(see note 10).
10 Resource and fixed assets
2005 2004
--- ------- --- ------- --- ------- ------- --- ------- --- -------
Cost Accumulated Net Cost Accumulated Net
depreciation, depreciation,
depletion depletion
and and
writedowns writedowns
Castle
Mountain
property $ 57,826 $ (57,685) $ 141 $ 78,331 $ (78,057) $ 274
Brewery
Creek - - - 64,260 (63,203) 1,057
property --- ------- --- ------- --- ------- --- ------- --- ------- --- -------
57,826 (57,685) 141 142,591 (141,260) 1,331
Other 855 (296) 559 784 (122) 662
--- ------- --- ------- --- ------- --- ------- --- ------- --- -------
$ 58,681 $ (57,981) $ 700 $ 143,375 $ (141,382) $ 1,993
--- ------- --- ------- --- ------- --- ------- --- ------- --- -------
In 2005, the Company sold its 100% interest in the Brewery Creek
property (Brewery Creek) located in the Yukon to a private
company in consideration for $1,800,000 paid in 2.7 million
common shares of the private company at the time for a gain of
$361,000 (note 15(a)). The shares received represent less than
20% of the outstanding shares of the private company and were
recorded at cost in investments. Pursuant to the purchase and
sale agreement, the purchaser assumed all of the reclamation and
closure obligations of Brewery Creek. The purchaser received
$2,500,000 of the $5,000,000 cash posted as security for the
remaining reclamation and closure obligations at Brewery Creek
and the remaining $2,500,000 was released to the Company.
11 Asset retirement obligation
The Company's asset retirement obligation relates to closure
obligations at its Castle Mountain property.
On January 1, 2003, the Company adopted the new standard of
accounting for asset retirement obligations which harmonizes
with U.S. GAAP. The new standard requires the recognition of a
liability for obligations associated with the retirement of
fixed assets when the liability is incurred. A liability is
recognized initially at fair value if a reasonable estimate of
the fair value can be made and the resulting amount would be
capitalized as part of the asset. The liability is accreted over
time through periodic charges to earnings. In subsequent
periods, the Company adjusts the carrying amounts of the
liability for changes in estimates of the amount or timing of
underlying future cash flows. Any adjustments are accounted for
in earnings in the period in which the adjustment is made.
A reconciliation of the provision for reclamation is as follows:
2005 2004 2003
Balance $ 5,366 $ 10,492 $ 14,051
-Beginning of
year
Liabilities (2,498) (4,747) (3,538)
settled during
the year
Liabilities
disposed of (2,078) - -
during the year
(see note 10)
Accretion 155 431 686
expense
Revisions in 943 (644) 854
estimated cash
flows
Currency (4) (166) (1,561)
translation --------- ---- --------- ---- ---------
adjustment
Balance -End of $ 1,884 $ 5,366 $ 10,492
year --------- ---- --------- ---- ---------
The provision for reclamation is based on the following key
assumptions:
* total undiscounted cash flows of $1,997,000
* the expected timing of payment of the cash flows
ranging in the years 2006 to 2018
* a credit adjusted risk free rate at which the
estimated cash flows have been discounted by 6.5%.
12 Share capital
a) Authorized
Unlimited First and Second Preferred Shares
Unlimited common shares without par value
Previously the Company had Class A Voting Shares and
Class B Voting Shares. Effective April 19, 2005, the
Class B Shares were cancelled and the designation of the
Class A Shares was changed to common shares.
In June 2004, the shareholders approved the amendments
to the Company's Class A subordinate voting shares and
Class B multiple voting shares (the Class A and Class B
amendments). The general effect of the Class A and Class
B amendments was, among other things, to amend the
voting rights of the Class B Shares to one vote per
share and allow the Class B shareholders to convert each
Class B Share into 1.25 Class A share. The Class A and
Class B Share amendments also provided the Company with
the right to give notice of conversion of each Class B
Share into 1.25 Class A Share.
In October 2004, the Company gave notice of conversion
of each Class B Share into 1.25 Class A Share and all
remaining Class B Shares at that time were converted to
Class A Shares.
b) Shares issued and outstanding
2005 2004 2003
------- --- ------- ------- --- ------- ------- --- -------
Number of Amount Number of Amount Number of Amount
shares shares shares
Common
shares
Opening - $ - - $ - 34,369,948 $ 213,364
balance
Issued for 24,300,000 51,890 - - - -
cash
Share issue
costs - (3,587) - - - -
Issued on
exercise of
stock - - - - 966,667 534
options
Issued on
exercise of
warrants 4,500,000 7,200 - - 2,578,333 1,547
Treasury
shares
cancelled - - - - (759,200) (3,405)
Exchanged
for 90,465,568 83,388 - - (37,155,748) (212,040)
Class A ------- --- ------- ------- --- ------- ---------- -------
Shares
Closing 119,265,568 $ 138,891 - $ - - $ -
balance ------- --- ------- ------- --- ------- -------- ------
Class A
Shares
Opening 90,465,568 $ 83,388 83,194,934 $ 76,330 - $ -
balance
Issued for - - - - 13,333,335 16,432
cash
Share issue
costs - - - - - (62)
Issued on
exercise of
warrants - - 1,924,583 2,330
Fair value
of
warrants on - - - 350
exercise
Exchanged
for
Class B - - 5,346,051 4,378 - -
Shares
Exchanged
for (90,465,568) (83,388) - - 37,155,748 212,040
common
shares
Issued
pursuant to
the
Arrangement
(note4) - - - - 32,977,190 33,744
Reduction
of
stated
capital - - - - - (185,584)
against
deficit
Shares - - - - (245,782) (218)
redeemed
Shares
cancelled - - - - (25,557) (22)
------- --- ------- ------- --- ------- --------- -------
Closing - $ - 90,465,568 $ 83,388 83,194,934 $ 76,330
balance ------- --- ------- ------- --- ------- ---------- -------
Class B
Shares
Opening - $ - 4,276,851 $ 4,378 - $ -
balance
Exchanged
for - - (4,276,851) (4,378)
Class A ------- --- ------- ------- --- ------- ------- -------
Shares
Issued
pursuant to
the
Arrangement - - - - 4,276,851 4,378
(note 4)
------- --- ------- ------- --- ------- ------- -------
Closing - - - - 4,276,851 4,378
balance ------- --- ------- ------- --- ------- ------- -------
Own shares
acquired
Opening - - - - (759,200) (3,405)
balance
Shares
cancelled - - - - 759,200 3,405
------- --- ------- ------- --- ------- ------- -------
Closing - - - - - -
balance ------- --- ------- ------- --- ------- ------- -------
Total share
capital $ 138,891 $ 83,388 $ 80,708
--- ------- --- ------- -------
As part of the Arrangement in 2003 (note 4), the common
shares were consolidated on a three-for-one basis. All share
figures in the above table and earnings per share
disclosures have been restated to reflect the share
consolidation as if it had occurred at the beginning of the
earliest period presented.
In August 2005, the Company completed an offering of
18,500,000 shares of the Company at a price of $2.30 per
share for aggregate proceeds of $42,550,000. The Company
also granted the underwriters an over-allotment option
exercisable to October 23, 2005 to purchase up to an
additional 2,775,000 shares at a price of $2.30 per share,
of which the underwriters exercised 800,000 shares. In
addition, the underwriters were granted 1,158,000
compensation options expiring August 23, 2007 and October
26, 2007. Each compensation option is exercisable at $2.30
per common share. Net proceeds from the equity offering and
over allotment after expenses were $40,803,000.
In May 2005, the Company completed a private placement of
5,000,000 shares at a price of $1.50 per share for aggregate
proceeds of $7,500,000.
In October 2003, the Company completed a non-brokered
private placement for 5,000,000 units at $1.28 per unit for
total proceeds of approximately $6,400,000. Each unit
consisted of one Class A Share of the Company and one Class
A Share purchase warrant entitling the holder to purchase
one additional Class A Share of the Company for a period of
five years at a price of $1.60 subject to a reduction in the
exercise period to 20 business days if the Class A Shares
close at or above $2.25 for 20 consecutive trading days
commencing after June 30, 2004. No value has been attributed
to these warrants.
In August 2003 as part of the Arrangement, the Company
redeemed 245,782 Class A Shares for $1.10 per share and
cancelled 25,557 Class A Shares.
In June 2003, the Company completed a non-brokered private
placement of 8,333,335 units of Class A Shares at a price of
$1.20 per unit. Each unit comprised one Class A Share and
one Class A Share purchase warrant. Each warrant is
exercisable for five years at $1.50 per Class A Share,
subject to a reduction in the exercise period to 20 business
days if the Class A Shares close at or above $2.25 for 20
consecutive trading days commencing after December 31, 2003.
The Company received net proceeds of $9,938,000. No value
has been allocated to the warrants.
c) Warrants issued and outstanding
Number of Exercise price Expiry date
warrants per share
Class A Shares
Opening - $ -
balance -
January 1,
2003
Exchanged
pursuant to
the
Arrangement 88,333 0.60 June 13,
2004
Issued
pursuant to
the
Arrangement 1,836,250 1.24 December 23,
2004
Issued
pursuant to a
private 8,333,335 1.50 June 30,
placement 2008
Issued
pursuant to a
private 5,000,000 1.60 October 20,
placement --------- 2008
Closing
balance -
December 31,
2003 15,257,918
Exercised (88,333) 0.60
Exercised (1,836,250) 1.24
---------
Closing
balance -
December 31,
2004 13,333,335
Exercised (4,500,000) 1.60
---------
Closing
balance
-December 31, 8,833,335
2005 ---------
Subsequent to year-end all of the warrants outstanding were
exercised.
d) Compensation options issued and outstanding
Number of Exercise price Expiry date
warrants per share
Common shares
Opening balance - -
- January 1,
2003, 2004 and
2005
Issued
pursuant to a
private
placement 1,110,000 $ 2.30 August 23,
2007
Issued
pursuant to a
private
placement 48,000 2.30 October 26,
--------- 2007
Closing
balance -
December 31,
2005 1,158,000
---------
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 years ended December 31, 2005, 2004 and 2003, the
change in stock options outstanding was as follows:
2005 2004 2003
Number of Weighted Number of Weighted Number of Weighted
shares average share shares average share shares average
price price share
price
Common
shares
Opening - $ - - $ - 4,115,002 $ 0.45
balance
Granted 2,350,000 2.14 - - - -
Exercised - - - - (2,900,000) 0.18
Expired (160,415) 1.89 - - (17,000) 2.17
Cancelled - - - - (160,000) 2.75
Exchanged
for
Class A 7,373,748 1.91 - - (1,038,002) 0.98
share ------- --- ------- ------- --- ------- ------- -------
options
Closing 9,563,333 $ 1.97 - $ - - $ -
balance ------- --- ------- ------- --- ------- ------ -------
Options
exercisable
at 8,096,146 $ 1.93 3,478,953 $ - - $ -
year-end ------- --- ------- ------- --- ------- ------ -------
Class A
Shares
Opening 7,373,748 $ 1.91 7,725,828 $ 1.97 - $ -
balance
Exchanged
for
common (7,373,748) 1.91 - - 345,996 2.94
share
options
Granted - - 300,000 1.95 7,412,500 1.95
Expired - - (652,080) 2.42 (32,668) 7.13
------- --- ------- ------- --- ------- ------- -------
- $ - 7,373,748 $ 1.91 7,725,828 $ 1.97
------- --- ------- ------- --- ------- ------- -------
Options
exercisable
at - $ - 5,236,748 $ 1.90 3,478,953 $ 1.99
year-end ------- --- ------- ------- --- ------- ------- -------
The following table summarizes information about stock
options outstanding and exercisable at December 31, 2005:
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 1.80 $ 0.81 113,333 $ 0.81
$ 1.51 300,000 3.60 1.51 285,938 1.51
$ 1.80 7,900,000 2.99 1.95 7,384,375 1.95
to 1.95
$ 2.30 1,250,000 4.88 2.30 312,500 2.30
-------- --- -------- --- -------- --- -------- --- --------
9,563,333 3.25 $ 1.97 8,096,146 $ 1.93
-------- --- -------- --- -------- --- -------- --- --------
f) Contributed capital
2005 2004 2003
Opening $ 4,198 $ 2,779 $ -
balance
Fair value
of warrants - (350) 350
(exercised)
issued
pursuant to
the
Arrangement
(note 4)
Stock-based 2,142 1,769 2,429
compensation
Other (90) - -
Compensation 522 - -
options ---- --------- ---- --------- ---- ---------
Ending $ 6,772 $ 4,198 $ 2,779
balance ---- --------- ---- --------- ---- ---------
The fair values of options for 2005, 2004 and 2003 have been
estimated using an option pricing model. Assumptions used in
the pricing model are as follows:
2005 2004 2003
Risk-free interest rate 3.18% 2.90% 3.11%
Expected life of options 2.3 3 years 2.1
years years
Expected stock price 33% 48% 67%
volatility
Expected dividend yield 0% 0% 0%
Weighted average fair
value of $ 0.42 $ 0.54 $ 0.77
options
13 Currency translation adjustment
This adjustment represents the net foreign currency
translation adjustment (CTA) on the Company's net investment
in self-sustaining foreign operations.
2005 2004
Opening balance $ 1,228 $ 1,654
Unrealized loss from (36) (426)
change in exchange rates ---- --------- ---- ---------
Closing balance $ 1,192 $ 1,228
---- --------- ---- ---------
14 Other expenses relating to resource properties
Other expenses relating to resource properties are as
follows:
2005 2004 2003
Cost of $ - $ - $ 3,544
sales
Depreciation - - 232
and
depletion
Royalties - - (37)
Accretion 155 431 686
(note 11)
Exploration - 36 198
---- --------- ---- --------- ---- ---------
$ 155 $ 467 $ 4,623
---- --------- ---- --------- ---- ---------
15 Writedowns, gains, adjustment to reclamation
provision and settlement of Australian operations
a) During the years ended December 31, 2005, 2004
and 2003, the Company made the following writedowns, gains,
adjustment to reclamation provision and settlement of
Australian operations:
2005 2004 2003
Writedown $ - $ - $ 450
of resource
assets
Changes in
asset 943 (644) 854
retirement
obligations
(note 11)
Gain on (361) (561) (378)
disposition
of resource
assets
Settlement - (2,144) 256
of ---- --------- ---- --------- ---- ---------
Australian
operations
$ 582 $ (3,349) $ 1,182
---- --------- ---- --------- ---- ---------
b) Settlement of Australian operations
In 2004, the Company received net proceeds of $2,144,000
from the settlement of the Company's legal claim in
Australia against Australian Mining Consultants PTY Ltd.
In 2003, the Company reached an agreement with Forrestania
Gold NL to terminate the dispute with respect to the Bounty
Nickel Joint Venture agreement. The Company made a cash
payment of AUS$250,000 and in return received a 1.5% net
smelter return royalty.
16 Income taxes
a) The provisions for (recovery of ) income taxes
consists of the following:
2005 2004 2003
Current
Canada $ 488 $ (88) $ 293
United (315) 408 71
States ---- --------- ---- --------- ---- ---------
Total 173 320 364
current ---- --------- ---- --------- ---- ---------
expenses
Future
Canada (6,488) - -
United - - -
States ---- --------- ---- --------- ---- ---------
Total (6,488) - -
future ---- --------- ---- --------- ---- ---------
recovery
Total
(recovery $ (6,315) $ 320 $ 364
of) ---- --------- ---- --------- ---- ---------
provision
for
income
taxes
b) The reconciliation of the statutory income tax
rates to the effective tax rates on the earnings (loss)
before income taxes is as follows:
2005 2004 2003
Income taxes $ 5,985 $ 4,541 $ (513)
at statutory
rates
Increase
(decrease) in
taxes from:
Non-deductible 938 923 1,165
differences
Difference in (92) 142 40
foreign tax
rates
Benefits of
timing (426) (174) (175)
differences
not
previously
recognized
Recognition of (12,720) (4,953) (363)
prior year tax
losses
Large - (159) 210
corporations ---- --------- ---- --------- ---- ---------
tax
$ (6,315) $ 320 $ 364
---- --------- ---- --------- ---- ---------
c) The Company has losses in various jurisdictions
as set out below.
i) Canada
The Company has non-capital losses to reduce future taxable
income in Canada of approximately $55,381,000. These losses
expire between 2006 and 2015.
ii) United States
The Company has estimated net operating losses available to
reduce future regular tax in the United States aggregating
US $457,000. These losses expire between 2006 and 2022.
d) The significant components of the future income
tax assets as at December 31, 2005 are as follows:
2005 2004
Loss carryforwards $ 19,487 $ 8,673
Capital losses 10,127 10,352
Resource and fixed assets 10,117 34,680
Investment in subsidiaries 6,208 7,048
Investments and marketable 2,489 515
securities
Other 2,546 2,511
---- --------- ---- ---------
50,974 63,779
Valuation allowance (44,486) (63,779)
---- --------- ---- ---------
Future tax asset $ 6,488 $ -
---- --------- ---- ---------
17 Related party transactions
a) For the year ended December 31, 2005, the Company
received $1,614,000 (2004 - $1,534,000, 2003 - $456,000) in
advisory, management and finder's fees from related parties
by virtue of certain directors and officers in common. Other
assets includes $623,000 (2004-$128,000) of non-transferable
securities held in either private or publicly traded
companies related by virtue of certain directors and
officers in common.
b) Loans and convertible debentures include
$5,740,000 (2004 - $10,184,000) in amounts due from related
parties by virtue of certain directors and officers in
common. The Company often requires the ability to nominate
at least one member to the board of directors of companies
to which it provides a loan. The nominee may be an employee,
officer or director of the Company and accordingly, the
borrower has been considered related to the Company. During
the year ended December 31, 2005, the Company received
$2,111,000 (2004 - $1,094,000, 2003 - $119,500) in interest
and fees from related parties by virtue of certain directors
and officers in common. During the year ended December 31,
2005, the Company has made no additional provision for
losses on loans and convertible debentures (2004 - $200,000,
2003 - $84,000) from related parties by virtue of certain
directors in common.
c) For the year ended December 31, 2005, the Company
received $128,000 (2004-$15,000, 2003 -$39,000) in
syndication loan administration fees from related parties by
virtue of certain directors and officers in common.
d) Marketable securities and investments include
$14,032,000 (2004 - $10,450,000) of shares held in publicly
traded companies related by virtue of certain directors and
officers in common. For the year ended December 31, 2005,
the Company recorded a gain on disposal of securities of
$3,854,000 (2004 - $317,000, 2003 - $2,609,000) from related
parties by virtue of certain directors and officers in
common.
e) Included in accounts payable is $2,017,000 (2004
- $1,844,000) due to officers for bonuses and salaries
payable.
18 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.
b) On March 22, 2002, Quest Investment Corporation
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 $ 462,000
2007 307,000
2008 230,000
2009 230,000
2010 154,000
d) Other commitments and contingencies are disclosed
elsewhere in these consolidated financial statements and
notes.
19 Segmented information
a) The Company's reportable operating segments are as follows:
2005
--- ------- --- -------- --- ------- --- ------- --- -------
Revenue Expenses and Income tax Net Total assets
other expense earnings
Financial
services $ 26,425 $ 8,904 $ (6,000) $ 23,521 $ 184,211
Resource
operations
and 475 828 (315) 30 5,392
other --- ------- --- -------- --- ------- --- ------- --- -------
$ 26,900 $ 9,732 $ (6,315) $ 23,551 $ 189,603
--- ------- --- -------- --- ------- --- ------- --- -------
2004
--- ------- --- -------- --- ------- --- ------- --- -------
Revenue Expenses and Income tax Net Total assets
other (expense) earnings
recovery
Financial
services $ 14,121 $ 6,925 $ (88) $ 7,284 $ 98,108
Resource
operations
and 3,327 (2,544) 408 5,463 13,797
other --- ------- --- -------- --- ------- --- ------- --- -------
$ 17,448 $ 4,381 $ 320 $ 12,747 $ 111,905
--- ------- --- -------- --- ------- --- ------- --- -------
2003
--- ------- --- -------- --- ------- --- -------
Revenue Expenses and Income tax Loss
other recovery
Financial
services $ 6,412 $ 7,305 $ 292 $ (1,185)
Resource
operations
and 6,270 6,375 72 (177)
other --- ------- --- -------- --- ------- --- -------
$ 12,682 $ 13,680 $ 364 $ (1,362)
--- ------- --- -------- --- ------- --- -------
20 Supplemental cash flow information
a) Cash (paid) for
2005 2004 2003
Interest $ 19,585 $ 12,405 $ 4,726
Income taxes (387) (334) 93
b) Non-cash operating, financing and investing activities
2005 2004 2003
Marketable securities
and investments $ 2,005 $ 3,006 $ 553
received as loan fees
Other assets and
investments received as 1,245 566 -
finder's fees
Property and other
assets received as loan 121 35 -
fees
Loans and debentures 4,516 145 -
settled with shares
Investments acquired on
disposal of a - - 500
mineral and exploration
property
Shares received as
consideration for sale 1,800 - -
of
resource property
Fair value of 522 - -
compensation options
issued
Issue of shares
pursuant to the - - 38,472
Arrangement
(note 4(a))
Distribution to
shareholders (notes 4 - - 5,272
(b) and
4(d))
21 United States generally accepted accounting
principles
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles
(GAAP) in Canada which differ, in certain respects, from
GAAP in the United States of America. Material measurement
differences to these consolidated financial statements are
as follows:
a) Reduction of stated capital
At the Company's Annual General Meeting in June 2003,
shareholders approved a reduction of stated capital. This
practice is allowed under Canadian GAAP. Under United States
GAAP, companies are not allowed to record a reduction of
stated capital in these circumstances. This GAAP difference
has no net impact on total shareholders' equity reported.
b) Unrealized holding gains (losses)
Under U.S. GAAP, securities are classified as trading
marketable securities or available-for-sale securities
depending upon the Company's intentions. Unrealized holding
gains and losses for trading securities are included in
earnings. Unrealized holding gains and losses for long-term
available-for-sale securities are excluded from earnings and
reported as a net amount in a separate component of
shareholders' equity until realized.
c) Fair value of conversion option
For U.S. GAAP purposes, the conversion option of a debenture
into shares is considered an embedded derivative to the
holder of the debenture and changes in the fair value of
such derivative is reported in the statements of earnings.
Prior to 2003, the change in fair value was not considered
material and the cumulative adjustment has been recorded in
2004.
d) Dilution gains
Under Canadian GAAP, the Company recognizes a gain or loss
on the dilution of its interests in subsidiaries upon the
issue of new shares by the subsidiary to third parties.
Under U.S. GAAP, such gains related to development stage
subsidiaries are accounted for as an equity transaction.
e) Revenue recognition
Effective January 1, 2004, for Canadian GAAP purposes, the
Company has prospectively adopted recognizing revenues from
precious metals when title has passed. Previously, the
Company recognized revenues from precious metals when the
metals were available for delivery and revenue amounts
recognized but not settled were classified as accounts
receivable. Under U.S. GAAP, revenue is not recorded before
title has passed.
f) Asset retirement obligations
Effective January 1, 2003, the Company has adopted Statement
of Financial Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated
asset retirement costs. It requires that the fair value of a
liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying
amount of the long-lived asset. For Canadian GAAP purposes
this change in accounting policy was applied retroactively
and accordingly, the financial statements of prior periods
were restated. For U.S. GAAP purposes the Company would
record a cumulative effect adjustment in the statements of
earnings for the difference between the amounts recognized
prior to the adoption of SFAS No. 143 and the net amount
recognized according to SFAS No. 143.
g) Gain on sale of investments
During 2003, the Company disposed of its remaining shares in
ViceroyEx (note 4(b)), under U.S. GAAP, this disposal would
result in an additional gain of $1,006,000 as a result of
the Company's net investment being lower under U.S. GAAP.
Under U.S. GAAP, the capitalized expenditures of the
resource properties would have been expensed in the period
incurred.
h) Currency translation adjustment
The Company has a self-sustaining foreign operation and as
such accounts for movements in exchange rates within this
account. Under U.S. GAAP, exchange gains or losses arising
from translation of self sustaining operations are included
in other comprehensive earnings.
i) Reconciliation to U.S. GAAP
The application of the above described U.S. GAAP differences
would have the following effect on earnings (loss), earnings
(loss) per share, marketable securities and total
shareholders' equity for U.S. GAAP purposes:
2005 2004 2003
Earnings
(loss)
As reported
in accordance $ 23,551 $ 12,747 $ (1,362)
with
Canadian GAAP
Adjustment
for (38) (78) (164)
unrealized
(loss)gain on
trading
securities
Revenue - 820 21
recognition
Gain on sale - - 1,006
of investment
Gain on (252) - -
dilution of
shares
Fair value
adjustment (250) 250 -
for ---- --------- ---- --------- ---- ---------
derivatives
Net earnings
(loss) under
U.S. 23,011 13,739 (499)
GAAP before
cumulative
catch-up
adjustment
Cumulative
effect - - 1,734
adjustment --------- ---- --------- ---- ---------
for
the adoption
of SFAS 143
Net earnings 23,011 13,739 1,235
under U.S.
GAAP
Other
comprehensive
income
Adjustment
for 1,808 (3,472) 8,968
unrealized
holding
gains
Currency (36) (426) (2,107)
translation ---- --------- ---- --------- ---- ---------
adjustment
Comprehensive $ 24,783 $ 9,841 $ 8,096
earnings ---- --------- ---- --------- ---- ---------
Earnings
(loss) per
share under
U.S. GAAP
Basic and
dilutive - $ 0.23 $ 0.15 $ (0.01)
before ---- --------- ---- --------- ---- ---------
cumulative
catch-up
adjustment
Basic and $ 0.23 $ 0.15 $ 0.02
dilutive ---- --------- ---- --------- ---- ---------
Marketable
securities
Under $ 945 $ 786 $ 1,097
Canadian GAAP
Adjusted for
fair market 223 261 339
value ---- --------- ---- --------- ---- ---------
(note21(b))
Under U.S. $ 1,168 $ 1,047 $ 1,436
GAAP ---- --------- ---- --------- ---- ---------
Accounts
receivable
Under $ - $ - $ 853
Canadian GAAP
Adjusted for - - (853)
revenue ---- --------- ---- --------- ---- ---------
recognition
Under U.S. $ - $ - $ -
GAAP ---- --------- ---- --------- ---- ---------
Inventories
Under $ - - 72
Canadian GAAP
Adjusted for - - 33
revenue ---- --------- ---- --------- ---- ---------
recognition
Under U.S. $ - $ - $ 105
GAAP ---- --------- ---- --------- ---- ---------
Investments
Under $ 17,117 $ 15,032 $ 12,969
Canadian GAAP
Adjusted for 7,313 5,505 8,977
fair value ---- --------- ---- --------- ---- ---------
Under U.S. $ 24,430 $ 20,537 $ 21,946
GAAP ---- --------- ---- --------- ---- ---------
Loans and
convertible
debentures
Under $ 124,551 $ 76,215 $ 32,259
Canadian GAAP
Adjusted for - 250 -
fair value ---- --------- ---- --------- ---- ---------
Under U.S. 124,551 76,465 32,259
GAAP ---- --------- ---- --------- ---- ---------
Asset
retirement
obligations
Under 1,884 5,366 10,492
Canadian and ---- --------- ---- --------- ---- ---------
U.S. GAAP
Total
shareholders'
equity
Share capital
Under $ 138,891 $ 83,388 $ 80,708
Canadian GAAP
Adjusted for
reduction of 185,584 185,584 185,584
stated ---- --------- ---- --------- ---- ---------
capital (note
21(a))
Under U.S. 324,475 268,972 266,292
GAAP ---- --------- ---- --------- ---- ---------
Warrants and
options
Under 6,772 4,198 2,779
Canadian and ---- --------- ---- --------- ---- ---------
U.S. GAAP
Retained
earnings
(deficit)
Under 30,739 10,706 (2,041)
Canadian GAAP
Adjustments (185,361) (185,073) (186,065)
to deficit ---- --------- ---- --------- ---- ---------
Under U.S. (154,622) (174,367) (188,106)
GAAP ---- --------- ---- --------- ---- ---------
Cumulative
other
comprehensive
income
Under - - -
Canadian GAAP
Adjusted for
fair value of 7,313 5,505 8,977
investments
Currency 1,192 1,228 1,654
translation ---- --------- ---- --------- ---- ---------
adjustment
Under U.S. 8,505 6,733 10,631
GAAP ---- --------- ---- --------- ---- ---------
---- --------- ---- --------- ---- ---------
Total $ 185,130 $ 105,536 $ 91,596
shareholders'
equity under
U.S. GAAP
---- --------- ---- --------- ---- ---------
Statement of
Cash Flows
From
Operating
activities $ 10,310 $ 12,074 $ (1,406)
under
Canadian and
U.S. GAAP
Financing
activities $ 56,025 $ 2,329 $ 18,181
under
Canadian and
U.S. GAAP
Investing
activities $ (39,138) $ (39,266) $ 534
under
Canadian and
U.S. GAAP
j) Impact of recently issued accounting standards
In January 2005, the CICA issued three new standards:
"Financial Instruments - Recognition and Measurement."
"Hedges,"and "Comprehensive Income." The main consequences
of implementing these standards are described below. The new
standards will be effective for interim and annual financial
statements commencing in 2007. Earlier adoption is
permitted. Most significantly for the Company, the new
standards will require presentation of a separate statement
of comprehensive income. Investments and marketable
securities will be recorded in the consolidated balance
sheet at fair value. Changes in fair value of marketable
securities will be recorded in income and changes in the
fair value of investments will be reported in comprehensive
income. The Company is undertaking its analysis of the
impact of the new standards.
QUEST CAPITAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2005
Description of Business, Operations and Financial Condition
The following information, prepared as of March 3, 2006,
should be read in conjunction with the Company's audited
consolidated financial statements for the years ended
December 31, 2005 and 2004 and related notes attached
thereto, which are prepared in accordance with Canadian
generally accepted accounting principles ("Cdn GAAP"). All
amounts are expressed in Canadian dollars unless otherwise
indicated.
The business of Quest Capital Corp. (the "Company") consists
of:
* mortgage financing secured by first and second real
estate mortgages;
* providing commercial bridge loans 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.
Total assets as at December 31, 2005 were
$189.6 million comprised of $33.7 million of
cash, $0.9 million of marketable securities,
$124.6 million in loans; $17.1 million in
investments with a fair value of $24.4
million and $13.3 million of other assets.
The Company primarily generates revenues
through interest it receives from its loan
portfolio. The Company's revenues are
subject to the return it is able to generate
on its capital, the ability to reinvest
funds as loans mature and are repaid, the
nature and credit quality of the loan
portfolio, including the quality of the
collateral security. In addition, the
Company receives fees from its corporate
finance activities, these fees are subject
to the number and dollar amount of the
transactions that the Company participates
in.
The composition of the loan portfolio at
December 31, 2005 was 89% in first and
second real estate mortgages, 6% in the
energy sector, and 5% in other types of
companies. This investment concentration may
vary from time to time depending on the
investment opportunities available.
SELECTED ANNUAL INFORMATION
(In thousands of Canadian dollars, except per share amounts)
For the year ended December 31,
2005 2004 2003
Interest and related fees 17,410 10,948 3,742
Non-interest income 9,490 6,775 10,412
Expenses and other 9,732 4,381 13,680
Earnings/(Loss) before income taxes 17,168 13,067 (998)
Net Earnings/(Loss) 23,551 12,747 (1,362)
Basic and Diluted Earnings/(Loss)
Per Share 0.23 0.14 (0.02)
Total Assets 189,603 111,905 96,110
Total Liabilities 12,009 12,385 13,010
Cash Semi-Annual Dividend Declared
Per Share $0.03 - -
Since the reorganization in June 2003, as described
in Note 4 to the audited consolidated financial
statements, the Company's primary focus has been to
expand its asset backed lending and merchant banking
business. The Company also continues to reclaim its
resource property. Prior to the reorganization in
2003, the Company's business activities included the
acquisition, exploration, financing development and
operation of mineral properties and the financing of
junior exploration companies and merchant banking.
The Company's loan portfolio continued to grow in
2005 to $124.6 million which is a 63% increase as
compared to the previous year. As compared to the
previous the year, the Company has also experienced
a shift in its loan portfolio with an increase in
number and value of first and second real estate
mortgages. These loans are characterized by slightly
lower interest rates and fees that the Company would
realize from commercial loans to publicly traded
development stage companies.
In 2004, the Company through its wholly owned
subsidiary Quest Securities Corporation, expanded
its services to include corporate finance services
in return for fees. In 2005, fees realized from
these activities increased 90% as compared to 2004
when Quest Securities was in its infancy.
The Company's results for 2004 and 2003 have been
impacted by the former resource operations,
resulting in a positive impact of $5.4 million in
2004 and a negative impact in 2003 of $0.2 million.
Results for 2005 were nominally impacted from the
final sale of gold ounces, a gain realized on the
sale of the Brewery Creek property which was
partially offset by an increase in costs to complete
the remaining closure obligations at the Castle
Mountain property. The Company expects that it will
complete its closure obligations at the Castle
Mountain property by the end of the first quarter of
2006, other than long-term monitoring and
maintenance.
In 2005, net earnings were also positively impacted
by the recognition of a Future Tax Asset of $6.4
million as result of the likely realization of
unused tax losses from future earnings. Going
forward, this asset will be reduced as earnings are
realized or if the Company assesses that realization
is no longer more likely than not. In addition, the
Company will evaluate its ability to realize the
remaining unrecognized future tax asset of $44.5
million and if appropriate, record a portion on the
balance sheet and statement of earnings.
CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL
ADOPTION
Variable Interest Entities
Effective January 1, 2005, the Company has adopted
the new Accounting Guideline (AcG-15) "Consolidation
of Variable Interest Entities". The new standard
establishes when a company should consolidate a
variable interest entity in its financial
statements. AcG-15 provides the definition of a
variable interest entity to be consolidated if a
company is at risk of absorbing the variable
interest entity's expected losses, or is entitled to
receive a majority of the variable interest entity's
returns or both. Adoption of this guideline resulted
in no changes to the balance sheets and income
statement accounts and no change to earnings or
retained earnings.
Revenue Recognition
Effective January 1, 2004, the Company adopted
prospectively the new standard CICA 1100, "Generally
Accepted Accounting Principles" as it relates to
recognizing revenue. The Company now recognizes
revenue from sales of precious metals when title has
passed to the purchaser. Previously sales of
precious metals were recorded at the estimated net
realizable value when the metals were available for
delivery and unsettled amounts were recorded as
accounts receivable. Adoption of this new standard
resulted in no changes to the balance sheets and
income statement accounts and no change to earnings
or retained earnings.
Financial Instruments
In January 2005, the CICA issued Section 3855,
"Financial Instruments - Recognition and
Measurement," Section 1530, "Comprehensive Income"
and Section 3865, "Hedges". The new standards will
be effective for interim and annual financial
statements commencing in 2007. Earlier adoption is
permitted. Most significantly for the Company, the
new standards will require presentation of a
separate statement of comprehensive income.
Investments will be recorded in the balance sheet at
fair value and changes in the fair value of
investments will be reported in comprehensive
income. The Company is assessing the impact of the
new standards.
RESULTS OF OPERATIONS
For the year ended December 31, 2005 the Company had
consolidated net earnings of $23.6 million ($0.23
per share) compared to net earnings of $12.7 million
($0.14 per share) in 2004 and a net loss of $1.4
million ($0.02 per share) in 2003. In 2005, the
Company has concluded the likely realization of a
portion of its unused taxes from future earnings, as
required by Cdn GAAP earnings were favourably
impacted by the recognition of a future tax recovery
and future tax asset of $6.4 million.
Interest and Related Fees
Net interest income from the lending activities
increased for 2005 as compared to 2004 and 2003 due
to the growth in the loan portfolio year-over-year.
Total loans as at December 31, 2005 were $124.6
million as compared to $76.2 million as at December
31, 2004.
Non-Interest Income
Net earnings were positively impacted by an increase
in management and finder's fees in 2005 as compared
to 2004 and 2003 primarily as a result of increased
activity in the Company's corporate finance
business. During 2005, the Company received
non-monetary compensation for finder's fees in the
form of shares, broker warrants and/or options with
a fair value of $1.2 million as compared to $0.6
million in 2004. The fair value of these
non-monetary compensation payments received is
estimated using the trading price of the shares at
the time received and the Black-Scholes option model
for warrants.
Marketable securities are carried at lower of
average cost and market value. Accordingly, trading
gains/(losses) in 2005 resulted in the Company
recording a gain of $0.7 million compared to loss in
2004 of $1.0 million and a gain in 2003 of $0.3
million.
Net realized gains from the sale and write-downs to
carrying value of investments resulted in the
Company recording a net gain of $4.2 million in 2005
as compared to gains of $2.1 million in 2004 and
$3.2 million in 2003. Included in the net gain in
2005 is a write-down in the amount of $1.2 million.
Other income primarily relates to the proceeds from
the sale of precious metals from the former resource
operations.
Expenses and Other
Total expenses and other for the year ended December
31, 2005 was $9.7 million as compared to $4.4
million in 2004 and $13.7 million in 2003.
Salaries and benefits have increased in 2005 as
compared to 2004 and 2003 as a result of expansion
of the business and the addition of new employees
over the three years.
Bonuses of $2.0 million in 2005 primarily represent
an accrual for an incentive plan payable to officers
and employees of the Company. The payment and
allocation under such plan is subject to the
approval of the Compensation Committee and Board of
Directors.
Stock based compensation increased in 2005 over 2004
as a result of additional options being granted and
vesting during 2005. The fair value of the Company's
options has been estimated using the Black-Scholes
option pricing model. Assumptions used for the 2005
options include a risk free rate of 3.18%, an
expected life of 2.3 years, and a volatility rate of
33% which result in the options having a weighted
average fair value of $0.42 per option.
Legal and professional fees decreased in the 2005 as
compared to 2004 and 2003 primarily as a result of
resolving the legal claim in Australia in the second
quarter of 2004.
During the first half of 2004, the Company reduced
its foreign exchange risk and converted its cash
balances denominated in United States dollars held
by its Canadian subsidiaries into Canadian dollars
resulting in a foreign exchange gain of $0.3
million. In 2003, the strengthening Canadian dollars
against the US dollars resulted in the Company
recording an unrealized loss of $2.1 million on
funds and loans denominated in United States
dollars.
Other expenses relating to resource properties are
described in Note 14 to the audited consolidated
financial statements and decreased primarily as a
result of cessation of commercial production of gold
in 2003. In 2004, the incremental costs of
recovering gold during the decommissioning of the
Castle Mountain property became nominal and have
been included in the Company's estimated asset
retirement obligation.
Writedowns, gains, adjustments to asset retirement
obligations and settlement of Australian operations
are described in Note 15 to the audited consolidated
financial statements. Revisions to the estimated
assets retirement obligations resulted in the
Company recording a charge against earnings of $0.9
million in 2005 compared to reduction in 2004 of
$0.6 million and a charge in 2003 of $0.9 million.
In 2005, the Company realized a gain on the
disposition of resource assets of $0.4 million
compared to a gain of $0.6 million in 2004 and $0.4
million in 2003. In 2004, the Company received net
proceeds of approximately $2.1 million from the
settlement of the Company's legal claim in Australia
and paid $0.3 million in 2003 to terminate a dispute
with respect to a joint venture agreement on the
Australian properties.
In 2003, the Company recorded $0.4 million of
goodwill as part of the assets acquired in the
reorganization. During the third quarter of 2003,
the Company recorded a goodwill impairment loss of
$0.4 million.
QUARTERLY INFORMATION
(In thousands of Canadian dollars, except per share amounts)
Fourth Third Second First
Qtr 2005 Qtr 2005 Qtr 2005 Qtr 2005
Interest and related fees 5,555 4,399 4,004 3,452
Non-interest income 4,028 1,883 2,377 1,202
Earnings/(Loss) before taxes 5,059 4,291 4,507 3,311
Net Earnings/(Loss) 11,395 4,295 4,550 3,311
Basic and Diluted Earnings/(Loss)
Per Share 0.10 0.04 0.05 0.04
Total Assets 189,603 166,928 123,487 114,030
Total Liabilities 12,009 6,718 7,525 10,684
Fourth Third Second First
Qtr 2004 Qtr 2004 Qtr 2004 Qtr 2004
Interest and related fees 2,941 3,194 2,168 2,645
Non-interest income 1,502 1,439 2,425 1,409
Earnings/(Loss) before taxes 529 3,782 5,836 2,920
Net Earnings/(Loss) 212 3,766 5,834 2,935
Basic and Diluted Earnings/(Loss) Per Share 0.00 0.04 0.07 0.03
Total Assets 111,905 106,578 104,356 99,208
Total Liabilities 12,385 9,928 11,509 12,783
The Company's interest income has continued to increase for
the past four 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 indication of future performance.
During the fourth quarter of 2005, net earnings were also
impacted by the recognition of a Future Tax Asset of $6.4
million as result of the likely realization of unused tax
losses from future earnings.
Net earnings in the fourth quarter of 2004 were impacted by
the provision of $1.5 million for the 2004 bonuses. In 2005,
a provision for bonuses was made on a quarterly basis.
FOURTH QUARTER
For the quarter ending December 31, 2005, the Company had
earnings of $5.1 million before tax or net earnings of $11.4
million. Net interest income increased as compared to the
previous three quarters due to the growth in the loan
portfolio quarter over quarter In addition during the fourth
quarter, Quest Securities had an active quarter realizing
$1.9 million of fees from its corporate finance activities.
Earnings were also positively impacted by the recognition of
a future tax asset as a result of the likely realization of
unused tax losses from future earnings.
LIQUIDITY
The Company's cash resources at December 31, 2005 were $33.7
million as compared to $6.6 million as at December 31, 2004.
The Company's primary focus is to provide loans and its cash
balances vary depending on the timing of loans advanced and
repaid.
As at December 31, 2005, the Company had commitments under
existing loan agreements to lend further funds of $7.1
million of which the Company expects to syndicate $0.9
million. 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 December 31, 2005 was
$124.6 million comprised of 89% real estate mortgages, 6% in
the energy sector, and 5% in other types of companies. As at
December 31, 2005, 66% of the loan value in the Company's
loan portfolio is scheduled to mature within a year. The
Company had approximately $6.4 million of loans impaired as
a result of certain principal and/or interest payments being
in arrears as at December 31, 2005. No additional provision
for loan losses was made in 2005 and the Company's provision
for loan losses remains at $0.3 million. Subsequent to year
end $3.1 million of the impaired loans were repaid or the
defaults cured. The Company expects to collect the full
carrying value of its loan portfolio.
For 2005, cash flow from operations provided $10.3 million
as compared to $12.1 million for the same period in 2004.
The decrease is primarily due to repayment of syndicate
funds received just prior to 2004 year end and returned to
syndicate participants in 2005.
During 2005, the Company received $56.0 million in net
proceeds from issuing an aggregate 28.8 million shares by
way of a private placement, a public equity offering and the
exercise of warrants. Subsequent to year end the Company
accelerated the expiry date of its outstanding warrants and
has received an additional $13.3 million of cash.
During 2005, the Company's loan portfolio increased by $48.3
million to $124.6 million as compared to the start of the
year. In 2005, the Company had arranged $173.7 million of
new loans in 2005 (net to Company - $116.8 million) and
$127.2 million of loans (net to the Company - $68.4 million)
were repaid.
As a result of the sale of the Brewery Creek property in the
first quarter of 2005, $5.0 million of restricted cash was
released to the Company of which $2.5 million was
transferred to the purchaser on the sale of the property. In
addition, $2.6 million was used from the restricted funds to
fund ongoing reclamation and closure expenditures at the
Castle Mountain property. As at December 31, 2005, the
Company had restricted cash of $2.5 million to fund its
remaining reclamation obligations at the Castle Mountain
property estimated to be approximately $1.9 million.
Management is not aware of any trends or expected
fluctuations in its liquidity that would create any
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 2006 - 2010 is $1,383,000.
Obligation due by period
Type of Total Less than 1 1 - 3 Years 3 - 5 Years More
Contractual Year than
Obligation 5
Years
Office $1,383,000 $462,000 $767,000 $154,000 -
Leases
Loan
Commitments
Net of $6,194,000 $6,194,000 - - -
Syndication
Total $7,577,000 $6,656,000 $767,000 $154,000 -
TRANSACTIONS WITH RELATED PARTIES
The Company had loans and convertible debentures of $5.8
million due from parties related by virtue of having certain
directors and officers in common as at December 31, 2005.
The Company often requires the ability to nominate at least
one member to the board of directors of companies to which
it provides a loan. The nominee may be an employee, officer
or director of the Company and accordingly, the borrower is
considered related to the Company. During the year the
Company received $2.1 million in interest and related fees
from parties related by virtue of having certain directors
and officers in common.
The Company engages in the syndication of loans and received
syndication fees from parties related by virtue of having
certain directors and officers in common.
As at December 31, 2005, the Company held $14.0 million of
shares in publicly traded companies related by virtue of
having certain directors and officers in common. The Company
recorded a $3.9 million net gain on disposal of shares after
write-downs in companies related by virtue of having certain
directors and officers in common.
For 2005, the Company received $1.6 million in advisory,
management and finder's fees from companies related by
virtue of having certain directors and officers in common.
Other assets include $0.6 million of non-transferable
securities in publicly traded or private companies related
by virtue of having certain directors and officers in
common.
SUBSEQUENT AND PROPOSED TRANSACTIONS
Subsequent to the year end, the Company received $13.3
million, as result a of the exercise of all of the
outstanding warrants.
CRITICAL ACCOUNTING ESTIMATES
The Company's accounting policies are described in Note 3 of
its audited consolidated financial statements. 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
estimates and assumptions.
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 reviews its loan portfolio on a regular basis
and specific provisions are established on 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:
*trend of the quoted market price and trading volume;
*financial position of the company and 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 each balance
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 for which it 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
complete the decommissioning and closure obligations
included in the Company's closure plan for its remaining
resource property. Estimates are based on management's
estimate of the remaining work that is required.
Environmental laws and regulations continue to evolve in the
region in which the decommissioning of the Company's
resource property is taking place.
RISKS & UNCERTAINITIES
Additional risks factors are disclosed under "Risk Factors"
in the Revised Initial Annual Information Form and Final
Short Form Prospectus 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.
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 December 31, 2005
was 89% in first and second real estate mortgage, 6% in the
energy sector, and 5% in other types of companies. The
Company generally receives security equal to approximately
75% of the loan value for the real estate mortgage and at
least 50% security on commercial bridge loans to publicly
traded development stage companies. The Company provides for
loan losses on a specific loan basis and has a provision of
$0.6 million as at December 31, 2005.
OUTLOOK
As at year end the Company had $33.7 million of cash on hand
and received additional $13.3 million of cash from the
exercise of warrants subsequently. The prudent deployment of
the Company's cash is the paramount focus of management. The
Company plans to further exploit its market niche by growing
its loan portfolio and stepping up the marketing efforts to
grow its customer base. The Company will bring on additional
employees, raise additional debt and/or capital as the need
is required to fund the loan growth.
OTHER DATA
Additional information related to the Company is available
for viewing on SEDAR at www.sedar.com .
Share Position
As at March 3, 2006, Quest's issued outstanding share
position was 128,098,903 Common shares. Previously, the
Company had Class A Voting Shares and Class B Voting Shares.
Effective April 19, 2005, the Class B shares were cancelled
and the designation of the Class A Shares was changed to
common shares.
Outstanding Stock Options
Number Exercise Expiry
Of Options Price Date
113,333 $0.81 October 22, 2007
300,000 $1.51 August 19, 2009
6,800,000 $1.95 November 20, 2008
1,100,000 $1.95 April 7, 2010
175,000 $2.30 November 1, 2010
75,000 $2.30 November 15, 2010
1,000,000 $2.30 December 21, 2010
350,000 $2.64 February 1, 2011
9,913,333
Outstanding Compensation Options
Number Exercise Expiry
Of Options Price Date
1,110,000 $2.30 August 23, 2007
48,000 $2.30 October 26, 2007
1,158,000
Dividends
The Board of Directors declared its first semi-annual
dividend of $0.03 per share paid on January 4, 2006 to
shareholders of record on December 19, 2005.
FORWARD LOOKING INFORMATION
These materials include certain "forward-looking statements"
within the meaning of the United States Private Securities
Litigation Reform Act of 1995. Other than statement of
historical fact, all statements in this material, including,
without limitation, statements regarding fair values of
marketable securities, investments, loans, convertible
debentures, estimated asset retirement obligations, and
future plans and objectives of the Company, are forward
-looking statements that involve various known and unknown
risks, uncertainties and other factors. There can be no
assurance that such statements will prove accurate. Actual
results and future events could differ materially from those
anticipated in such statements. Readers are cautioned not to
place undue reliance on these forward-looking statements
that speak only as of the date of these materials. Important
factors that could cause actual results to differ materially
from the Company's expectations include, without limitation,
the level of loans completed, the nature and credit quality
of the collateral security, the sufficiency of cost
estimates for remaining reclamation obligations as well as
those factors discussed in the Company's documents filed
from time to time with the Toronto Stock Exchange, Canadian
securities regulators and other regulatory authorities. All
subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by this notice.
INTERNAL DISCLOSURE CONTROLS AND PROCEDURES
We have evaluated the effectiveness of our disclosure
controls and procedures and have concluded, based on our
evaluation that they are sufficiently effective as of
December 31, 2005 to provide reasonable assurance that
material information relating to the Company and its
consolidated subsidiaries is made known to management and
disclosed in accordance with applicable securities
regulations.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR UNOKRNKROARR
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