RNS Number:1588C
Quest Capital Corporation
27 April 2006
Quest Capital Corp.
Consolidated Financial Statements
(Expressed in thousands of Canadian dollars)
(Unaudited)
March 31, 2006
Quest Capital Corp.
Consolidated Balance Sheets
(expressed in thousands of Canadian dollars)
(Unaudited)
March 31, December 31
2006 2005
Assets
Cash and cash equivalents $ 18,783 $ 33,739
Marketable securities (note 6) 672 945
Loans (note 6 and 7) 160,141 124,551
Investments (note 6) 14,677 17,117
Future tax asset 6,500 6,488
Restricted cash 3,791 2,265
Prepaid and other receivable 685 739
Resource and fixed assets 676 700
Other assets (note 6) 2,135 2,008
Assets held for disposition (note 5) - 1,051
$ 208,060 $ 189,603
Liabilities
Accounts payable and accrued liabilities 5,245 $ 4,192
Dividend payable - 3,518
Deferred interest and loan fees 2,446 1,685
Asset retirement obligation 1,308 1,884
Liabilities and provision for loss on assets - 730
held for disposition (note 5)
8,999 12,009
Shareholders' Equity
Share capital (note 8) 152,191 138,891
Contributed capital (note 8) 6,908 6,772
Retained earnings 38,767 30,739
Currency translation adjustment 1,195 1,192
199,061 177,594
$ 208,060 $ 189,603
Contingencies and commitments (note 7 and 10)
Approved by the Board of Directors
"Bob Buchan" Director "A. Murray Sinclair" Director
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Retained Earnings
(Expressed in thousands of Canadian dollars)
(Unaudited)
Three months ended March 31
2006 2005
Retained earnings - Beginning of period $ 30,739 $ 10,706
Net earnings for the period 8,028 3,311
Retained earnings - End of period $ 38,767 $ 14,017
Quest Capital Corp.
Consolidated Statements of Earnings
(Expressed in thousands of Canadian dollars, except per share amounts)
(Unaudited)
Three months ended March 31
2006 2005
Interest and related fees $ 5,798 $ 3,452
Non-interest income
Management and finder's fees 1,251 415
Marketable securities trading gains 1,738 370
Realized gains and writedowns of investments 2,956 417
Other income 16 -
5,961 1,202
Total interest and non-interest income 11,759 4,654
Expenses and other
Salaries and benefits 668 350
Bonuses 1,600 400
Stock-based compensation 136 406
Office and other 198 145
Legal and professional services 467 103
Regulatory and shareholder relations 264 58
Director's fees 88 40
Foreign exchange gain (1) (7)
Other expenses relating to resource properties 24 118
Writedown, gains adjustment to reclamation provision - (270)
and settlement of Australian operations
3,444 1,343
Earnings before income taxes 8,315 3,311
Provision for income taxes 287 -
Net earnings for the period $ 8,028 $ 3,311
Earnings per share
Basic $ 0.065 $ 0.037
Fully diluted $ 0.064 $ 0.036
Weighted average number of shares outstanding
Basic 122,932,235 90,465,568
Fully diluted 126,053,811 92,270,620
Quest Capital Corp.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
(Unaudited)
2006 2005
Cash flows from operating activities
Net earnings for the period $ 8,028 $ 3,311
Adjustments to determine net cash flows relating
to operating items
Future tax asset (12) -
Stock-based compensation 136 406
Amortization of deferred interest and loan fees (945) (835)
Marketable securities trading gains (1,738) (370)
Realized gains and writedowns of investments (2,956) (417)
Depreciation 27 17
Other expenses relating to resource properties 34 (189)
Other assets and investments received as finder's (394) -
fees
Deferred interest and loans fees received 1,232 673
Activity in marketable securities held for trading
Purchases (557) -
Proceeds on sales 3,044 936
Expenditures for reclamation and closure (593) (594)
Changes in receivables and other receivables 51 107
Changes in accounts payables and accrued 1,051 (2,799)
liabilities
6,408 246
Cash flows from financing activities
Proceeds from shares issued 13,300 -
Dividend payment (3,518) -
Proceeds from short-term debt - 3,000
9,782 3,000
Cash flows from investing activities
Activity in loans
Net (increase) decrease in loans (35,578) (9,298)
Net (increase) decrease in convertible debentures - (16)
Activity in investments
Purchases (278) (1,478)
Proceeds on sales 6,220 1,196
Change in restricted cash (1,523) 5,632
Cash transferred to purchaser of resource property - (2,546)
Expenditures on resource and fixed assets (13) -
(31,172) (6,510)
Foreign exchange loss on cash held in a 26 125
foreign subsidiary
Increase (decrease) in cash and cash equivalents (14,956) (3,139)
Cash and cash equivalents - Beginning of period 33,739 6,607
Cash and cash equivalents - End of period $ 18,783 $ 3,468
Supplemental cash flow information (note 11)
Quest Capital Corp.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars; tables in thousands, except share capital
information)
(Unaudited)
Three months ended March 31, 2006 and 2005
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
1. Nature of operations
Quest Capital Corp.'s ("Quest" or the "Company") primary focus is providing
commercial bridge loans and mortgage financings of up to approximately
$35.0 million. The Company also provides a range of services including the
raising of capital, consulting, management and administrative services through
its wholly owned subsidiaries, Quest Management Corp. and Quest Securities
Corporation.
2. Basis of presentation
The accompanying financial information does not include all disclosure required
under generally accepted accounting principles for annual financial statements.
The accompanying financial information reflects all adjustments, consisting
primarily of normal recurring adjustments, which are, in the opinion of
management necessary for a fair presentation of results for the interim periods.
These consolidated financial statements should be read in conjunction with the
Company's 2005 audited annual financial statements and notes.
3. Significant accounting policies
These interim consolidated financial statements follow the same accounting
policies and methods of their application as the Company's annual financial
statements. These interim consolidated financial statements are prepared in
accordance with Canadian generally accepted accounting principles and include
the Company's accounts and those of its wholly-owned subsidiaries, Quest
Management Corp., Quest Securities Corporation, Viceroy Gold Corporation and its
75% proportionate joint-venture interest in the Castle Mountain Property.
4. Change in accounting policies
No new accounting policies have been adopted during the three months ended March
31, 2006.
5. Assets and liabilities and provision for loss on assets
In November 2005, Lara Exploration Ltd. ("Lara"), in of which the Company had a
66% interest, agreed to acquire a private Brazilian company that holds the
rights to nine prospective gold, nickel, copper and zinc properties in Brazil.
In return for the assignment of the shares of the private Brazilian company to
Lara, the Company agreed to transfer its 3,000,000 escrow shares of Lara to the
shareholders of the private Brazilian company for nominal consideration. On
completion of the transaction and a concurrent private placement by Lara, the
Company holds approximately 9% of the outstanding shares of Lara and ceased to
exercise control or significant influence of Lara. This transaction was
completed in February 2006 and the Company's remaining investment has been
accounted for using the cost method. The following is a breakdown of the net
assets disposed of:
Assets held for disposition $ 1,051
Liabilities and provision for loss
on assets held for disposition 730
Remaining investment $ 321
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:
March 31, December
2006 31, 2005
Carrying Fair Carrying Fair
value value value value
Marketable securities $ 672 1,060 $ 945 1,168
Loans and convertible 160,141 160,141 124,551 124,551
debentures
Investments 14,677 28,617 17,117 24,430
Other assets 1,729 1,729 1,601 1,601
Marketable securities and investments represent shares in publicly traded
companies. The fair value represents the quoted trading price of the shares. The
fair value of loans 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 28 months from March 31,
2006, and bear interest at a fixed rate of between 8.75% and 15% before
commitment and other fees. Marketable securities, Real property, corporate or
personal guarantees generally are pledged as security. At March 31, 2006, the
composition of the loan portfolio was 90% mortgages, 4% in the energy sector,
and 6% in other types of companies. The convertible debenture interest rate is
8% and due September 2006.
Loan and convertible debenture analysis as at March 31, 2006 is as follows:
Term Specific Carrying
loans allowance amount
Unimpaired loans $ 152,881 $ - $ 152,881
Impaired loans 7,203 337 6,866
$ 160,084 $ 337 $ 159,747
Convertible debentures 594 200 394
$ 160,678 $ 537 $ 160,141
As at March 31, 2006, 70% of the Company's loan portfolio is due within a year.
At March 31, 2006, loans and convertible debentures of $394,000 (2005 -
$2,810,000) net of allowances were in U.S. dollars. Accordingly, the Company is
exposed to foreign currency risk in this regard.
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:
March 31,
2006
Balance - Beginning of period $ 537
Add
Specific provision for the period -
Balance - End of period $ 537
c) At March 31, 2006, the Company has also entered into agreements to
advance funds of $7.6 million (includes $1.5 million provided in the form of a
letter of credit which has been classified as "restricted cash") of which the
Company expects to syndicate $530,000. 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. Share capital
a) Authorized
Unlimited First and Second Preferred Shares
Unlimited common shares without par value
b) Shares issued and outstanding
Number of Amount
shares
Common shares
Opening balance - January 1, 2006 119,265,568 $ 138,891
Issued on exercise of warrants 8,833,335 13,300
Ending balance - March 31, 2006 128,098,903 $ 152,191
c) Warrants issued and outstanding
Number of Exercise Expiry date
warrants price per
share
Common shares
Opening balance comprised of: $ -
Issued pursuant to a private 8,333,335 1.50 June 30, 2008
placement
Issued pursuant to a private 500,000 1.60 October 20, 2008
placement
Exercised (8,333,335) 1.50
Exercised (500,000) 1.60
Ending balance - March 31, 2006 -
d) Compensation options issued and outstanding
Number of Exercise Expiry date
warrants price per
share
Common shares
Opening balance comprised of: - -
Issued pursuant to a private 1,110,000 $ 2.30 August 23, 2007
placement
Issued pursuant to a private 48,000 2.30 October 26, 2007
placement
Ending balance - March 31, 2006 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 three months ended March 31, 2006, the change in stock options
outstanding was as follows:
Number of Weighted
shares average
share
price
Common shares
Opening balance 9,563,333 $ 1.91
Granted 350,000 2.64
Closing balance 9,913,333 $ 1.99
Options exercisable 8,420,364 $ 1.94
The following table summarizes information about stock options outstanding and
exercisable at March 31, 2006:
Options outstanding Options exercisable
Range of Options Weighted Weighted Options Weighted
exercise outstanding average average exercisable average
prices remaining exercise exercise
contracted price price
life
(years)
$0.81 113,333 1.50 $ 0.81 113,333 $ 0.81
$1.51 300,000 3.30 1.51 290,625 1.46
$1.80 to 1.95 7,900,000 2.79 1.95 7,487,500 1.95
$2.30 to 2.64 1,600,000 4.70 2.37 528,906 2.36
9,913,333 3.10 $ 1.99 8,420,364 $ 1.94
f) Contributed capital
Opening balance $ 6,772
Stock-based compensation 136
Ending balance $ 6,908
The fair values of options for the three months ended March 31, 2006 have been
estimated using an option pricing model. Assumptions used in the pricing model
are as follows:
Risk-free interest rate 3.50%
Expected life of options 2.5 years
Expected stock price volatility 30%
Expected dividend yield 2.75%
Weighted average fair value of options $ 0.50
9. Related party transactions
a) For the three months ended March 31, 2006, the Company received
$262,000 (2005 - $293,000) in advisory, management and finder's fees from
parties related by virtue of having certain directors and officers in common.
Other assets include $480,000 of non-transferable securities held in either
private or publicly traded companies related by virtue of having certain
directors and officers in common.
b) Loans and convertible debentures include $5.7 million in amounts due
from parties related by virtue of having certain directors and officers in
common. The Company often requires the ability to nominate at least one member
to the board of directors of a company 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 three months
ended March 31, 2006, the Company received $376,000 (2005 - $441,000) in
interest and fees from parties related by virtue of having certain directors and
officers in common. During the three months ended March 31, 2006, the Company
has made no additional provision for losses on loans and convertible debentures
from parties related by virtue of having certain directors in common.
c) For the three months ended March 31, 2006, the Company received
$12,000 (2005-$11,000) in syndication loan administration fees from parties
related by virtue of having certain directors and officers in common.
d) Marketable securities and investments include $12.8 million of shares
held in publicly traded companies related by virtue of having certain directors
and officers in common. For the three months ended March 31, 2006, the Company
recorded a gain on disposal of securities of $3.6 million (2005 - $377,000) from
parties related by virtue of having certain directors and officers in common.
e) Included in accounts payable is $3.3 million due to officers for
bonuses and salaries payable.
10. 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, a predecessor of the
Company, and other parties were named as defendants in a lawsuit filed in the
Supreme Court of British Columbia. The plaintiff has claimed approximately
$410,000 plus interest due for consulting services. Management intends to fully
defend this claim. Accordingly, no provision has been made for this claim in the
consolidated financial statements. The ultimate outcome of this claim is not
determinable at the time of issue of these consolidated financial statements and
the costs, if any, will be charged to income in the period(s) in which they are
finally determined.
c) The Company has entered into operating leases for office premises.
Minimum annual lease payments required are approximately as follows:
2006 $ 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.
11. Supplemental cash flow information
Non-cash operating, financing and investing activities
Three months Three months
ended ended
March 31, March 31,
2006 2005.
Marketable securities and investments 475 749
received as loan fees
Other assets and investments received as 394 34
finder's fees
Loans and debentures settled with - 4,516
shares
Shares received as consideration for - 1,800
sale of resource property
12. Income taxes
The Company has utilized tax losses in certain of its entities to reduce its
taxable income in Canada. The Company has recognized a future tax asset to the
extent that the amount is more likely than not be realized from future earnings.
The provision for (recovery of) income taxes consists of the following:
Three months Three months
ended ended
March 31, March 31,
2006 2005
Current
Canada $ 299 $ -
United States - -
Total current expenses 299 -
Future
Canada (12) -
United States - -
Total future recovery (12) -
Total (recovery of) provision for income $ 287 $ -
taxes
13. Subsequent events
On April 6, 2006, the Company entered into a binding commitment with a syndicate
of underwriters which agreed to purchase, on a bought-deal basis, 15,625,000
common shares of the Company at a purchase price of $3.20 per common share, for
total gross proceeds of $50 million. The underwriters also have an option,
exercisable for a period of 30 days following the closing date, to purchase up
to an additional 2,343,750 shares to cover over-allotments and for
market-stabilization purposes. This offering is expected to close on April 27,
2006.
QUEST CAPITAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE THREE MONTHS ENDED MARCH 31, 2006
INTRODUCTION
The following information, prepared as of April 21, 2006, should be read in
conjunction with the Company's audited annual consolidated financial statements
for the years ended December 31, 2005 and 2004 and related notes attached
thereto, which were prepared in accordance with Canadian generally accepted
accounting principles ("Cdn GAAP"), together with the related management's
discussion and analysis ("MD&A"). All amounts are expressed in Canadian dollars
unless otherwise indicated.
The business of Quest Capital Corp. (the "Company") consists of:
*mortgage 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.
The Company primarily generates revenues through interest it earns on its loan
portfolio. The Company's revenues are subject to the return it is able to
generate on its capital, its ability to reinvest funds as loans mature and are
repaid, the nature and credit quality of its loan portfolio, including the
quality of the collateral security. In addition, the Company receives fees from
its corporate finance activities. These fees are subject to the number and
dollar amounts of the transactions in which the Company participates.
The following discussion, analysis and financial review is comprised of 12 main
sections:
1. RESULTS OF OPERATIONS
2. SUMMARY OF QUARTERLY RESULTS
3. LIQUIDITY
4. RELATED PARTY TRANSACTIONS
5. SUBSEQUENT AND PROPOSED TRANSACTIONS
6. OUTLOOK
7. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
8. CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
9. DISCLOSURE OF OUTSTANDING SHARE DATA
10. RISKS AND UNCERTAINTIES
11. FORWARD LOOKING INFORMATION
12. INTERNAL DISCLOSURE CONTROLS AND PROCEDURES
Additional information about us, including our Revised Annual Information Form
and other public filings, are available on SEDAR at www.sedar.com.
1. RESULTS OF OPERATIONS
Total assets as at March 31, 2006 were $208.1 million comprised of $18.8 million
of cash, $0.7 million of marketable securities, $160.1 million in loans; $14.7
million in investments with a fair value of $28.6 million and $13.8 million of
other assets.
The composition of the loan portfolio at March 31, 2006 was 90% in first and
second real estate mortgages, 4% in the energy sector, and 6% in other types of
companies. This investment concentration may vary from time to time depending on
the investment opportunities available, however in the near term the Company
does not expect any material changes in the composition of its loan portfolio.
For the three months ended March 31, 2006, the Company had consolidated net
earnings of $8.0 million ($0.06 per share) compared to net earnings of $3.3
million ($0.04 per share) for the comparative period in 2005.
Interest and Related Fees
Net interest income from the Company's lending activities increased during the
three months ended March 31, 2006 as compared to the comparative period in 2005,
due to the growth in its loan portfolio year-over-year. Total loans as at March
31, 2006 were $160.1 million as compared to $81.0 million as at March 31, 2005.
Interest and related fees during the three months ended March 31, 2006 totaled
$5.7 million as compared to $3.5 million in the comparative period in 2005,
representing at 63% increase.
Non-Interest Income
Net earnings were positively impacted by an increase in management and finder's
fees during the three months ended March 31, 2006 as compared to the comparative
period in 2005, primarily as a result of increased activity in the Company's
corporate finance business. During the three months ended March 31, 2006, 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 $394,000 as compared
to $34,000 in the comparative period in 2005. 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; adjustments are made to trading prices for liquidity, hold periods and
other restrictions.
Marketable securities are carried at the lower of average cost and market value.
Accordingly, trading gains during the three months ended March 31, 2006 resulted
in the Company recording a gain of $1.7 million compared to $0.4 million in the
comparative period in 2005.
Net realized gains from the sales and write-downs to carrying value of
investments resulted in the Company recording a net gain of $3.0 million during
the three months ended March 31, 2006 as compared to gains of $0.4 million in
the comparative period in 2005.
Expenses and Other
Total expenses and other for the three months ended March 31, 2006 was $3.4
million as compared to $1.3 million in the comparative period in 2005.
Salaries and benefits have increased during the three months ended March 31,
2006 as compared to the comparative period in 2005 as a result of expansion of
the business and the addition of new employees.
Bonuses of $1.6 million during the three months ended March 31, 2006 primarily
represent an accrual for an incentive plan payable to officers and employees of
the Company. The current period expense includes an accrual of $1.3 million for
the three months ended March 31, 2006 and $300,000 related to 2005. The increase
in bonuses was impacted by the sale of securities and increased level of
activity. The payments and allocations under such plan are subject to the
approval of the Compensation Committee and Board of Directors.
Stock based compensation decreased during the three months ended March 31, 2006
over the comparative period in 2005, as a result of fewer options being issued
and vested. The Company records stock based compensation when options are
granted and vested, and generally recorded over a 2.5 year expected life. The
fair value of the Company's options has been estimated using the Black-Scholes
option pricing model. Assumptions used for the 2006 options include a risk free
rate of 3.50%, an expected life of 2.5 years, a dividend yield of 2.75%, and a
volatility rate of 30% which result in the options having a weighted average
fair value of $0.50 per option.
Legal and professional fees and regulatory and shareholder relations costs
increased during the three months ended March 31, 2006 as compared to the
comparative period in 2005, primarily as a result of listing our shares on the
AMEX and AIM.
In April 2006, the Company completed its closure obligations at the Castle
Mountain property, other than for long-term monitoring and maintenance.
2. SUMMARY OF QUARTERLY RESULTS
(In thousands of Canadian dollars, except per share amounts)
First Fourth Third Second First Fourth Third Second
Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
2006 2005 2005 2005 2005 2004 2004 2004
Interest & 5,798 5,555 4,399 4,004 3,452 2,941 3,194 2,168
related
fees
Non-interest 5,961 4,028 1,883 2,377 1,202 1,502 1,439 2,425
income
Earnings 8,315 5,059 4,291 4,507 3,311 529 3,782 5,836
before
taxes
Net 8,028 11,395 4,295 4,550 3,311 212 3,766 5,834
earnings
Basic and 0.06 0.10 0.04 0.05 0.04 0.00 0.04 0.07
Diluted
Earnings Per
Share
Total 208,060 189,603 166,928 123,487 114,030 111,905 106,578 104,356
Assets
Total 8,999 12,009 6,718 7,525 10,684 12,385 9,928 11,509
Liabilities
The Company's interest and related fees have generally continued to increase for
the past eight quarters as the Company's loan portfolio grows.
Non- interest income will vary by quarter depending on the management, advisory,
and finder's fees received, marketable securities trading gains/(losses) and
realized gains and write-down of investments. Quarter to quarter comparisons of
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
During the fourth quarter of 2005, net earnings were impacted by the recognition
of a Future Tax Asset of $6.4 million as a result of the likely realization of
unused tax losses from future earnings.
During the fourth quarter of 2004, net earnings were impacted by the provision
of $1.5 million for the 2004 bonuses. In 2005 and 2006, a provision for bonuses
has been made on a quarterly basis.
3. LIQUIDITY
The Company's cash resources at March 31, 2006 were $18.8 million as compared to
$33.7 million as at December 31, 2005. The Company's primary focus is to provide
loans and its cash balances vary depending on the timing of loans advanced and
repaid.
As at March 31, 2006, the Company had commitments under existing loan agreements
to lend further funds of $7.6 million of which the Company expects to syndicate
$530,000. 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 March 31, 2006 was $160.1 million comprised
of 90% real estate mortgages, 4% in the energy sector, and 6% in other types of
companies. As at March 31, 2006, 70% of the loan value in the Company's loan
portfolio is scheduled to mature within a year. The Company had approximately
$7.2 million of loans impaired as a result of certain principal and/or interest
payments being in arrears as at March 31, 2006. No additional provision for loan
losses was made in the first quarter of 2006 and the Company's provision for
loan losses remains at $0.6 million. The Company expects to collect the full
carrying value of its loan portfolio.
During the three months ended March 31, 2006, cash flow from operations provided
$6.4 million as compared to $246,000 for the comparative period in 2005.
During the three months ended March 31, 2006, the Company received $13.3 million
from the exercise of 8,833,335 warrants.
During the three months ended March 31, 2006, the Company's loan portfolio
increased by $35.6 million to $160.1 million as compared to the start of the
year. In the first three months of 2006, the Company had arranged $52.3 million
of new loans (net to Company - $53.7 million - increase due to the Company
paying out a syndicate partner's share) and $19.4 million of loans (net to the
Company - $18.1 million) were repaid.
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. Please
refer to the section entitled "Subsequent and Proposed Transactions" in this
MD&A.
The Company has contractual obligations for its leased office space in Vancouver
and Toronto. The total minimum lease payments for the years 2006 - 2010 are
$1,383,000.
Obligation due by period
Type of Contractual Total Less than 1 1 - 3 3 - 5 More
Obligation Year Years Years than 5
Years
Office Leases $1,383,000 $462,000 $767,000 $154,000 -
Loan Commitments -
Net of Syndication $7,068,000 $7,068,000 - - -
Total $8,451,000 $7,530,000 $767,000 $154,000 -
4. RELATED PARTY TRANSACTIONS
For the three months ended March 31, 2006, the Company received $262,000 (2005 -
$293,000) in advisory, management and finder's fees from parties related by
virtue of having certain directors and officers in common. Other assets include
$480,000 of non-transferable securities held in either private or publicly
traded companies related by virtue of having certain directors and officers in
common.
Loans and convertible debentures include $5.7 million in amounts due from
parties related by virtue of having certain directors and officers in common.
The Company often requires the ability to nominate at least one member to the
board of directors of a company 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 three months ended March
31, 2006, the Company received $376,000 (2005 - $441,000) in interest and fees
from parties related by virtue of having certain directors and officers in
common. During the three months ended March 31, 2006, the Company has made no
additional provision for losses on loans and convertible debentures from parties
related by virtue of having certain directors in common.
For the three months ended March 31, 2006, the Company received $12,000
(2005-$11,000) in syndication loan administration fees from parties related by
virtue of having certain directors and officers in common.
Marketable securities and investments include $12.8 million of shares held in
publicly traded companies related by virtue of having certain directors and
officers in common. For the three months ended March 31, 2006, the Company
recorded a gain on disposal of securities of $3.6 million (2005 - $377,000) from
parties related by virtue of having certain directors and officers in common.
Included in accounts payable is $3.3 million due to officers for bonuses and
salaries payable.
5. SUBSEQUENT AND PROPOSED TRANSACTIONS
On April 6, 2006, the Company entered into a binding commitment with a syndicate
of underwriters which agreed to purchase, on a bought-deal basis, 15,625,000
common shares of the Company at a purchase price of $3.20 per common share, for
total gross proceeds of $50 million. The underwriters also have an option,
exercisable for a period of 30 days following the closing date, to purchase up
to an additional 2,343,750 shares to cover over-allotments and for
market-stabilization purposes. This offering is expected to close on April 27,
2006.
6. OUTLOOK
As at March 31, 2006, the Company had $18.8 million of cash on hand. As
previously disclosed, the Company will be completing an offering for gross
proceeds of up to $57.5 million. The prudent deployment of the Company's cash is
the paramount focus of management. The Company is not planning any material
changes in the make-up of its lending business, although the precise composition
of its loan book may vary somewhat from the currently existing percentages as
loans are made in the context of market conditions. In this regard, the Company
plans to further exploit its market niche by growing its loan portfolio from the
deployment of additional capital raised and increasing its marketing efforts to
grow its customer base. During the upcoming year, the Company will hire
additional employees and raise debt as is required to fund the Company's loan
growth.
7. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's accounting policies are described in Note 3 of its audited
consolidated financial statements for the years ended December 31, 2005 and
2004. Management considers the following policies to be the most critical in
understanding the judgments and estimates that are involved in the preparation
of its consolidated financial statements and the uncertainties which could
materially impact its results, financial condition and cash flows. Management
continually evaluates its assumptions and estimates; however, actual results
could differ materially from these assumptions and estimates.
Provision for Loan Losses
Loans are stated net of an allowance for credit losses on impaired loans. Such
allowances reflect management's best estimate of the credit losses in the
Company's loan portfolio and judgments about economic conditions. The evaluation
process involves estimates and judgments, which could change in the near term,
and result in a significant change to a recognized allowance.
The Company 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:
* the trend of the quoted market price and trading volume;
* the financial position of the company and its results;
* changes in or reorganization of the business plan of the investment; and
* the current fair value of the investment (based upon an appraisal
thereof) relative to its carrying value.
Future Tax Asset
The Company has recognized a future tax asset to the extent that the amount is
more likely than not to be realized from future earnings. The Company will
reassess at 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 which is more likely than
not to be realized, it will be recorded in the balance sheet and statement of
earnings.
Asset Retirement Obligations
The amounts recorded for asset retirement obligations are based on the fair
value of the estimated future costs to obtain final closure from regulatory
agencies of the Company's remaining resource property.
8. CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
No new accounting policies have been adopted during the three months ended March
31, 2006.
9. DISCLOSURE OF OUTSTANDING SHARE DATA
Share Position
As at April 21, 2006, Quest's issued and outstanding share position was
128,123,128 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
1,085,775 $2.30 August 23, 2007
48,000 $2.30 October 26, 2007
1,133,775
Dividends
The Board of Directors declared its first semi-annual dividend of $0.03 per
share which was paid on January 4, 2006 to shareholders of record on December
19, 2005.
10. RISKS AND UNCERTAINTIES
Additional risks factors are disclosed under "Risk Factors" in the Revised
Annual Information Form filed on SEDAR at www.sedar.com.
Liquidity Risk
The Company maintains a sufficient amount of liquidity to fund its obligations
as they come due under normal operating conditions.
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 March 31, 2006 was 90% in first and
second real estate mortgages, 4% in the energy sector, and 6% in other types of
companies. The Company generally receives security equal to approximately 75% of
the loan value for real estate mortgages 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 March 31, 2006.
11. FORWARD LOOKING INFORMATION
These materials include certain statements that constitute "forward-looking
statements" within the meaning of Section 27A of the United States Securities
Act of 1933 and Section 21E of the United States Securities Exchange Act of
1934. These statements appear in a number of places in this document and include
statements regarding our intent, belief or current expectation and that of our
officers and directors. Such forward-looking statements involve known and
unknown risks and uncertainties that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. When
used in this document, words such as "believe", "anticipate", "estimate",
"project", "intend", "expect", "may", "will", "plan", "should", "would",
"contemplate", "possible", "attempts", "seeks", and similar expressions are
intended to identify these forward-looking statements. These forward-looking
statements are based on various factors and were derived utilizing numerous
assumptions that could cause our actual results to differ materially from those
in the forward-looking statements. Accordingly, you are cautioned not to put
undue reliance on these forward-looking statements. Forward-looking statements
include, among others, statements regarding our expected financial performance
in future periods, our plan of operations and our business strategy and plans or
budgets.
12. 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 March 31, 2006 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
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