RNS Number:2444H
Quest Capital Corporation
03 August 2006
August 3, 2006 TSX: QC
AMEX/AIM: QCC
QUEST REPORTS ITS FINANCIAL RESULTS FOR THE SECOND QUARTER 2006
Vancouver, British Columbia, August 3, 2006 - Quest Capital Corp. ('Quest' or
the 'Company'), announces its unaudited consolidated interim financial results
for the six months ended June 30, 2006 (a copy of which are attached hereto and
are also available on SEDAR at www.sedar.com).
HIGHLIGHTS
* Net earnings of $10.9 million ($0.08 per share) for the three months
ended June 30, 2006 and $18.9 million ($0.14 per share) for the six months
ended June 30, 2006, as compared to net earnings of $4.6 million ($0.05 per
share) and $7.9 million ($0.08 per share), respectively, for the
comparative periods in 2005;
* Net realized gains from sale of marketable securities and
investments during the second quarter of 2006 totaled $6.7 million, as
compared to $0.9 million realized during the comparative period in 2005;
* Loan portfolio increased 54% during the six months ended June 30, 2006 to
$191.3 million, as compared to $124.6 million as at December 31, 2005;
* Total loans arranged during the six months ended June 30, 2006 totaled
$112.8 million, of which the Company funded $104.5 million;
* Equity offering completed during the second quarter of 2006 resulted in net
cash proceeds of $47.3 million.
Managing Director, A. Murray Sinclair commented, "We are clearly pleased with
these results, as they reflect our ability to manage the substantial growth in
assets that we have had over the past 12 months, as well as underlining the
power and viability of our business model".
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 up to approximately $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 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
(Expressed in thousands of Canadian dollars)
(Unaudited)
June 30, 2006
Quest Capital Corp.
Consolidated Balance Sheets
(expressed in thousands of Canadian dollars)
(Unaudited)
June 30, December 31, June 30,
2006 2005 2005
Assets
Cash and cash equivalents $ 50,352 $ 33,739 $ 14,361
Marketable securities (note 6) 720 945 1,038
Loans (note 6 and 7) 191,281 124,551 79,888
Investments (note 6) 11,827 17,117 21,623
Future tax asset 8,016 6,488 -
Restricted cash 2,667 2,265 4,137
Prepaid and other receivable 739 739 388
Resource and fixed assets 573 700 592
Other assets (note 6) 1,716 2,008 1,460
Assets held for disposition (note 5) - 1,051 -
$ 267,891 $ 189,603 $ 123,487
Liabilities
Accounts payable and accrued liabilities $ 4,454 $ 3,734 $ 2,939
Income taxes payable (note 12) 2,531 458 -
Dividend payable 4,313 3,518 -
Deferred interest and loan fees 2,277 1,685 1,878
Asset retirement obligation 1,253 1,884 2,254
Non controlling interest in a subsidiary - - 454
Liabilities and provision for loss on - 730 -
assets held for disposition (note 5)
14,828 12,009 7,525
Shareholders' Equity
Share capital (note 8) 199,558 138,891 90,888
Contributed capital (note 8) 7,053 6,772 5,182
Retained earnings 45,336 30,739 18,567
Currency translation adjustment 1,116 1,192 1,325
253,063 177,594 115,962
$ 267,891 $ 189,603 $ 123,487
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)
For the period ended
Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June, 30 June 30
2006 2005 2006 2005
Retained earnings - Beginning
of period $ 38,767 $ 14,017 $ 30,739 $ 10,706
Net earnings for the period 10,882 4,550 18,910 7,861
Dividends (4,313) - (4,313) -
Retained earnings-End of period $ 45,336 $ 18,567 $ 45,336 $ 18,567
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Earnings
(Expressed in thousands of Canadian dollars, except per share amounts)
(Unaudited)
For the period ended
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30 June 30 June 30 June 30
2006 2005 2006 2005
Interest and related fees $ 7,415 $ 4,004 $ 13,213 $ 7,456
Non-interest income
Management and finder's fees 1,197 1,112 2,448 1,527
Marketable securities trading 1,932 15 3,670 385
gains
Realized gains and writedowns of 4,776 847 7,732 1,264
investments
Other income - 656 16 656
7,905 2,630 13,866 3,832
Total interest and non-interest
income 15,320 6,634 27,079 11,288
Provision for losses net of (233) - (233) -
recovery
15,087 6,634 26,846 11,288
Expenses and other
Salaries and benefits 703 584 1,371 934
Bonuses 2,058 450 3,658 850
Stock-based compensation 145 707 281 1,113
Office and other 309 213 507 358
Legal and professional services 283 279 750 382
Regulatory and shareholder relations 43 111 307 169
Director's fees 73 38 161 78
Foreign exchange gain 36 (13) 35 (20)
Other expenses relating to 27 20 51 138
resource properties
Writedown, gains adjustment to (254) (262) (254) (532)
reclamation provision and
settlement of Australian operations
3,423 2,127 6,867 3,470
Earnings before income taxes 11,664 4,507 19,979 7,818
Provision for income taxes (note 12) 782 - 1,069 -
Non-controlling interest in a - (43) - (43)
subsidiary
Net earnings for the period $ 10,882 $ 4,550 $ 18,910 $ 7,861
Earnings per share
Basic $ 0.08 $ 0.05 $ 0.14 $ 0.09
Fully diluted $ 0.08 $ 0.05 $ 0.14 $ 0.08
Weighted average number of shares
outstanding
Basic 139,111,608 92,965,468 131,172,854 91,715,468
Fully diluted 142,406,737 95,411,747 134,381,687 93,841,133
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
(Unaudited)
For the period ended
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
Cash flows from operating activities
Net earnings for the period $ 10,882 $ 4,550 $ 18,910 $ 7,861
Adjustments to determine net cash flows
relating to operating items
Future tax asset (1,516) - (1,528) -
Stock-based compensation 145 707 281 1,113
Non-controlling interest in a subsidiary - (43) - (43)
Provision for losses 386 - 386 -
Amortization of deferred interest and (1,347) (1,381) (2,292) (2,216)
loan fees
Marketable securities trading gains (1,932) (15) (3,670) (385)
Realized gains and writedowns of (4,776) (847) (7,732) (1,264)
investments
Gain on dilution in interest of - (252) - (252)
subsidiary
Depreciation 59 17 86 34
Other expenses relating to resource 5 37 39 118
properties
Gains on sale of resource assets and (254) (244) (254) (514)
adjustments to retirement obligations
Other assets and investments received as (103) (560) (497) (594)
finder's fees
Deferred interest and loans fees received 1,226 853 2,458 1,560
Activity in marketable securities held
for trading
Purchases (1,454) - (2,011) -
Proceeds on sales 3,961 139 7,005 1,075
Expenditures for reclamation and closure (20) (481) (613) (1,075)
Changes in prepaid and other receivable (72) 297 (21) 404
Changes in accounts payable and accrued (776) (213) 275 (3,012)
liabilities
Changes in income taxes payable 2,531 - 2,531 -
6,945 2,564 13,353 2,810
Cash flows from financing activities
Proceeds from shares issued 47,367 7,500 60,667 7,500
Dividend payment - - (3,518) -
Proceeds from short-term debt - (3,000) - -
47,367 4,500 57,149 7,500
Cash flows from investing activities
Activity in loans
Net (increase) decrease in loans and (31,537) 1,125 (67,115) (8,189)
convertible debentures
Activity in investments
Purchases (328) (1,207) (606) (2,685)
Proceeds on sales 8,119 2,923 14,339 4,119
Net proceeds on dilution of a subsidiary - 621 - 621
Change in restricted cash 1,001 270 (522) 5,902
Cash transferred to purchaser of resource - - - (2,546)
property
Proceeds on sale of resource and fixed 346 133 346 133
assets
Expenditures on resource and fixed assets (58) (16) (71) (16)
Net other assets acquired (275) - (275) -
(22,732) 3,849 (53,904) (2,661)
Foreign exchange loss on cash held in a (11) (20) 15 105
foreign subsidiary
Increase in cash and cash equivalents 31,569 10,893 16,613 7,754
Cash and cash equivalents - Beginning of 18,783 3,468 33,739 6,607
period
Cash and cash equivalents - End of period $ 50,352 $ 14,361 $ 50,352 $ 14,361
Supplemental cash flow information (note 11)
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars; tables in thousands, except share capital
information)
(Unaudited)
Six months ended June 30, 2006 and 2005
1. Nature of operations
Quest Capital Corp.'s ("Quest" or the "Company") primary focus is providing
commercial bridge loans and mortgage financings of up to approximately
$35.0 million. The Company also provides a range of services including the
raising of capital, consulting, management and administrative services through
its wholly owned subsidiaries, Quest Management Corp. and Quest Securities
Corporation.
2. Basis of presentation
The accompanying financial information does not include all disclosure required
under generally accepted accounting principles for annual financial statements.
The accompanying financial information reflects all adjustments, consisting
primarily of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair presentation of results for the interim
periods. These consolidated financial statements should be read in conjunction
with the Company's 2005 audited annual financial statements and notes.
3. Significant accounting policies
These interim consolidated financial statements follow the same accounting
policies and methods of application as the Company's annual financial
statements. These interim consolidated financial statements are prepared in
accordance with Canadian generally accepted accounting principles and include
the Company's accounts and those of its wholly-owned subsidiaries, Quest
Management Corp., Quest Securities Corporation, Quest Mortgage Corp., Viceroy
Gold Corporation and its 75% proportionate joint-venture interest in the Castle
Mountain Property.
4. Change in accounting policies
No new accounting policies have been adopted during the six months ended June
30, 2006.
5. Assets and liabilities and provision for loss on assets
In November 2005, Lara Exploration Ltd. ("Lara"), in which the Company had a 66%
interest, agreed to acquire a private Brazilian company that holds the rights to
nine prospective gold, nickel, copper and zinc properties in Brazil. In return
for the assignment of the shares of the private Brazilian company to Lara, the
Company agreed to transfer its 3,000,000 escrow shares of Lara to the
shareholders of the private Brazilian company for nominal consideration. On
completion of the transaction and a concurrent private placement by Lara, the
Company holds less than 10% of the outstanding shares of Lara and ceased to
exercise control or significant influence of Lara. This transaction was
completed in February 2006 and the Company's remaining investment has been
accounted for using the cost method. The following is a breakdown of the net
assets disposed of:
Assets held for disposition $ 1,051
Liabilities and provision for loss on assets held for 730
disposition
Remaining investment $ 321
6. Financial instruments
The carrying values of cash and cash equivalents, restricted cash, other
receivables, 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:
June 30, December 31,
2006 2005
Carrying Fair Carrying Fair
value value value value
Marketable securities $ 720 1,483 $ 945 1,168
Loans and convertible 191,281 191,281 124,551 124,551
debentures
Investments 11,827 19,517 17,117 24,430
Other assets 1,716 1,716 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 25 months from June 30,
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 June 30, 2006, the
composition of the loan portfolio was 98% mortgages, 1% in the energy sector,
and 1% in other types of companies. At June 30, 2006, mortgages were
geographically located; 62% in British Columbia, 17% in Alberta, 19% in Ontario
and 2% in other; and 75% take first priority and 25% take second priority. The
convertible debenture interest rate is 8% and due September 2006, which has been
fully provided for.
Loan and convertible debenture analysis as at June 30, 2006 is as follows:
Term loans Specific Carrying
allowance amount
Unimpaired loans $ 183,488 $ - $ 183,488
Impaired loans 7,793 - 7,793
$ 191,281 $ - $ 191,281
Convertible debentures 586 586 -
$ 191,867 $ 586 $ 191,281
b) As at June 30, 2006, 68% of the Company's loan portfolio is due
within a year. The Company had approximately $8.4 million of loans impaired as a
result of certain principal and/or interest payments being in arrears as at June
30, 2006. The Company's provision for loan losses is $0.6 million. The Company
expects to collect the full carrying value of its loan portfolio. 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:
June 30,
2006
Balance - Beginning of period $ 537
Additions (Deductions)
Specific provision for the period 233
Specific loans written off for the period (184)
Balance - End of period $ 586
c) At June 30, 2006, the Company has also entered into agreements to
advance funds of $13.1 million of which the Company expects to syndicate $5.6
million. 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 for cash 15,625,000 47,311
Issued on exercise of warrants 8,833,335 13,300
Issued on exercise of compensation 24,225 56
options
Ending balance - June 30, 2006 143,748,128 $ 199,558
In April 2006, the Company completed an offering of 15,625,000 shares of the
Company at a price of $3.20 per share for aggregate proceeds of $50,000,000. The
Company also granted the underwriters an over allotment option exercisable to
May 26, 2006 to purchase up to 2,343,750 shares at a price of $3.20 per share,
of which the underwriters exercised no shares. Net proceeds from the equity
offering after expenses were $47,311,000.
c) Warrants issued and outstanding
Number of Exercise Expiry date
warrants price per
share
Common shares
Opening balance comprised of: $ -
Issued pursuant to a private placement 8,333,335 1.50 June 30, 2008
Issued pursuant to a private placement 500,000 1.60 October 20,
2008
Exercised (8,333,335) 1.50
Exercised (500,000) 1.60
Ending balance - June 30, 2006 -
d) Compensation options issued and outstanding
Number of Exercise Expiry date
warrants price per
share
Common shares
Opening balance comprised of: - -
Issued pursuant to a private placement 1,110,000 $ 2.30 August 23,
2007
Issued pursuant to a private placement 48,000 2.30 October 26,
2007
Exercised (24,225) 2.30
Ending balance - June 30, 2006 1,133,775
e) Stock options outstanding
The Company has a stock option plan under which the Company may grant options to
its directors, employees and consultants for up to 10% of the issued and
outstanding common shares. The exercise price of each option is required to be
equal to or higher than the market price of the Company's common shares on the
day of grant. Vesting and terms of the option agreement are at the discretion of
the Board of Directors.
During the six months ended June 30, 2006, the change in stock options
outstanding was as follows:
Number of Weighted
shares average
share price
Common shares
Opening balance 9,563,333 $ 1.91
Granted 500,000 2.77
Closing balance 10,063,333 $ 2.01
Options exercisable 8,708,635 $ 1.96
The following table summarizes information about stock options outstanding and
exercisable at June 30, 2006:
Options outstanding Options exercisable
Range of Options Weighted Weighted Options Weighted
exercise outstanding average average exercisable average
prices remaining exercise exercise
contracted price price
life
(years)
$ 0.81 113,333 1.31 $ 0.81 113,333 $ 0.81
$ 1.51 300,000 3.14 1.51 295,309 1.51
$ 1.80 to 7,900,000 2.59 1.95 7,590,625 1.95
1.95
$ 2.30 1,250,000 4.45 2.30 551,556 2.30
$ 2.64 to 500,000 4.67 2.77 157,812 2.74
3.08
10,063,333 2.92 $ 2.01 8,708,635 $ 1.96
f) Contributed capital
Opening balance $ 6,772
Stock-based compensation 281
Ending balance $ 7,053
The fair values of options for the three months ended June 30, 2006 have been
estimated using an option-pricing model. Assumptions used in the pricing model
are as follows:
Risk-free interest rate 4.19%
Expected life of options 3 years
Expected stock price volatility 38%
Expected dividend yield 2%
Weighted average fair value of options $ 0.88
9. Related party transactions
a) For the six months ended June 30, 2006, the Company received $612,000
(2005 - $443,000) in advisory, management and finder's fees from parties related
by virtue of having certain directors and officers in common. Other assets
include $535,000 of non-transferable securities held in either private or
publicly traded companies related by virtue of having certain directors and
officers in common. For the six months ended June 30, 2006, the Company recorded
a write-down of other assets of $74,000 (2005-$Nil) in parties related by virtue
of having certain directors in common.
b) Loans and convertible debentures include $1,383,000 in amounts due
from parties related by virtue of having certain directors and officers in
common. During the six months ended June 30, 2006, the Company received $551,000
(2005 - $1,012,000) in interest and fees from parties related by virtue of
having certain directors and officers in common. During the six months ended
June 30, 2006, the Company has made $386,000 in additional provision for losses
on loans and convertible debentures from parties related by virtue of having
certain directors in common.
c) For the six months ended June 30, 2006, the Company received $28,000
(2005-$18,000) in syndication loan administration fees from parties related by
virtue of having certain directors and officers in common.
d) Marketable securities and investments include $9,586,000 of shares
held in publicly traded companies related by virtue of having certain directors
and officers in common. For the six months ended June 30, 2006, the Company
recorded a gain on disposal of securities of $9,005,000 (2005 - $755,000) from
parties related by virtue of having certain directors and officers in common.
For the six months ended June 30, 2006, the Company recorded a write-down of
investments of $470,000 in parties related by virtue of having certain directors
in common.
e) Included in accounts payable is $3.4 million due to officers and
employees 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. In April 2006, the Company completed its closure
obligations at the Castle Mountain property, other than for long-term monitoring
and maintenance.
b) On March 22, 2002, Quest Investment Corporation, a predecessor of the
Company, and other parties were named as defendants in a lawsuit filed in the
Supreme Court of British Columbia. The plaintiff has claimed approximately
$410,000 plus interest due for consulting services. Management intends to fully
defend this claim. Accordingly, no provision has been made for this claim in the
consolidated financial statements. The ultimate outcome of this claim is not
determinable at the time of issue of these consolidated financial statements and
the costs, if any, will be charged to income in the period(s) in which they are
finally determined.
c) The Company has entered into operating leases for office premises.
Minimum annual lease payments required are approximately as follows:
2006 $ 484,000
2007 406,000
2008 331,000
2009 331,000
2010 254,000
2011 33,000
d) Other commitments and contingencies are disclosed elsewhere in these
consolidated financial statements and notes.
11. Supplemental cash flow information
Non-cash operating, financing and investing activities
Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
Marketable securities and $ (75) $ 741 $ 400 $ 1,490
investments received as loan
fees
Other assets and investments 103 - 497 34
received as finder's fees
Loans and debentures settled - - - 4,516
with shares
Shares received as - - - 1,800
consideration for 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 as at
June 30, 2006:
Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
Current
Canada $ 2,298 $ - $ 2,597 $ -
United States - - - -
Total current expenses 2,298 - 2,597 -
Future
Canada (1,516) - (1,528) -
United States - - - -
Total future recovery (1,516) - (1,528) -
Total provision for income $ 782 $ - $ 1,069 $ -
taxes
QUEST CAPITAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE SIX MONTHS ENDED JUNE 30, 2006
INTRODUCTION
The following information, prepared as of August 1, 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 primarily to publicly traded
development stage companies;
*financial and corporate assistance in arranging equity offerings for
companies; and
*management and administrative services to public and private companies.
The Company primarily generates revenues through interest it earns on its loan
portfolio. The Company's revenues are subject to the return it is able to
generate on its capital, its ability to reinvest funds as loans mature and are
repaid, the nature and credit quality of its loan portfolio, including the
quality of the collateral security. In addition, the Company generates revenues
from gains on sale of marketable securities and investments. The Company also
receives fees from its corporate finance activities. These fees are subject to
the number and dollar amounts of the transactions in which the Company
participates.
The following discussion, analysis and financial review is comprised of 12 main
sections:
1. RESULTS OF OPERATIONS
2. SUMMARY OF QUARTERLY RESULTS
3. LIQUIDITY
4. RELATED PARTY TRANSACTIONS
5. SUBSEQUENT AND PROPOSED TRANSACTIONS
6. OFF BALANCE SHEET ARRANGEMENTS
7. OUTLOOK
8. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
9. CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
10. DISCLOSURE OF OUTSTANDING SHARE DATA
11. RISKS AND UNCERTAINTIES
12. FORWARD LOOKING INFORMATION
Additional information about us, including our Revised Annual Information Form
and other public filings, are available on SEDAR at www.sedar.com.
1. RESULTS OF OPERATIONS
Total assets as at June 30, 2006 were $267.9 million comprised of $50.4 million
of cash, $0.7 million of marketable securities, $191.3 million in loans; $11.8
million in investments with a fair value of $19.5 million and $13.7 million of
other assets.
The composition of the loan portfolio at June 30, 2006 was 98% in first and
second real estate mortgages, 1% in the energy sector, and 1% in other types of
companies. At June 30, 2006, mortgages were geographically located; 62% in
British Columbia, 17% in Alberta, 19% in Ontario and 2% in other; and 75% take
first priority and 25% take second priority. 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 June 30, 2006, the Company had consolidated net
earnings of $10.9 million ($0.08 per share) compared to net earnings of $4.6
million ($0.05 per share) for the comparative period in 2005. During the first
half of 2006, the Company had consolidated net earnings of $18.9 million ($0.14
per share) compared to $7.9 million ($0.08 per share) in the first half of 2005.
Interest and Related Fees
Net interest income from the Company's lending activities increased during the
three months ended June 30, 2006 as compared to the comparative period in 2005,
due to the growth in its loan portfolio year-over-year. Total loans as at June
30, 2006 were $191.3 million as compared to $79.9 million as at June 30, 2005.
Interest and related fees during the three months ended June 30, 2006 totaled
$7.4 million as compared to $4.0 million in the comparative period in 2005,
representing an 85% increase. During the first half of 2006, the Company earned
interest and related fees of $13.2 million compared to $7.5 million in the first
half of 2005, due to the growth in its loan portfolio year-over-year.
Non-Interest Income
Management and finder's fees earned during the three months ended June 30, 2006
were comparable to the comparative period in 2005. During the three months ended
June 30, 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
$103,000 with no comparative amount in 2005. During the first half of 2006,
management and finder's fees were positively impacted, primarily as a result of
increased activity in the Company's corporate finance business. The fair value
of these non-monetary compensation payments received is estimated using the
trading price for shares 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 June 30, 2006 resulted
in the Company recording a gain of $1.9 million compared to $15,000 in the
comparative period in 2005. During the three months ended June 30, 2006, $1.5
million of these gains was from sale of securities issued pursuant to exercising
broker warrants received from the Company's corporate finance activities. During
the first half of 2006, the Company recorded trading gains of $3.7 million as
compared to $0.4 million in the first half of 2005.
Net realized gains from the sales and write-downs to carrying value of
investments resulted in the Company recording a net gain of $4.8 million during
the three months ended June 30, 2006 as compared to gains of $847,000 in the
comparative period in 2005. During the first half of 2006, the Company realized
gains from the sale of investments of $7.7 million as compared to $1.3 million
in the first half of 2005.
Expenses and Other
Total expenses and other for the three months ended June 30, 2006 was $3.4
million as compared to $2.1 million in the comparative period in 2005. Total
expenses and other for the six months ended June 30, 2006 were $6.9 million as
compared to $3.5 million in the comparative period in 2005.
Salaries and benefits have increased during the three months and six months
ended June 30, 2006 as compared to the comparative periods in 2005 as a result
of expansion of the business and the addition of new employees.
Bonuses of $2.1 million during the three months ended June 30, 2006 and $3.7
million during the six months ended June 30, 2006, primarily represent an
accrual for an incentive plan payable to officers and employees of the Company.
The increase in bonuses was a result of the gain on sale of securities and
increased level of loan activity. The payments and allocations under such plan
are subject to the approval of the Compensation Committee and Board of
Directors. The Company's incentive plan includes discretionary and
non-discretionary components. The non-discretionary components are based on the
Company's corporate finance activities and loan underwritings. The discretionary
components are based on the earnings of the Company.
Stock based compensation decreased during the three months and six months ended
June 30, 2006 over the comparative period in 2005, as a result of fewer options
being issued and vested.
In April 2006, the Company completed its closure obligations at the Castle
Mountain property, other than for long-term monitoring and maintenance.
Income tax expense was $1.1 million for the first half of 2006. One of the
Company's entities has utilized all of its unused tax losses resulting in an
estimated tax payable of $2.5 million. The Company intends to proceed with a
reorganization amongst its wholly owned entities to utilize unused tax losses.
The reorganization is expected to occur prior to fiscal year end and the
utilization of those losses is reflected in the estimated annual effective tax
rate of 10%. In addition, income tax expense has been impacted positively by the
recognition of a future tax asset as a result of the likely realization of
unused taxes losses to be realized from fiscal earnings beyond 2006.
2. SUMMARY OF QUARTERLY RESULTS
(In thousands of Canadian dollars, except per share amounts)
2nd 1st 4th 3rd 2nd 1st 4th 3rd
Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
2006 2006 2005 2005 2005 2005 2004 2004
Interest and 7,415 5,798 5,555 4,399 4,004 3,452 2,941 3,194
related fees
Non-interest 7,905 5,961 4,028 1,883 2,377 1,202 1,502 1,439
income
Earnings 11,664 8,315 5,059 4,291 4,507 3,311 529 3,782
before taxes
Net earnings 10,882 8,028 11,395 4,295 4,550 3,311 212 3,766
Basic and 0.08 0.06 0.10 0.04 0.05 0.04 0.00 0.04
Diluted
Earnings Per
Share
Total Assets 267,891 208,060 189,603 166,928 123,487 114,030 111,905 106,578
Total 14,828 8,999 12,009 6,718 7,525 10,684 12,385 9,928
Liabilities
The Company's interest and related fees have continued to increase for the past
seven 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 June 30, 2006 were $50.4 million as compared to
$33.7 million as at December 31, 2005. The Company's primary focus is to provide
loans and its cash balances will vary depending on the timing of loans advanced
and repaid.
As at June 30, 2006, the Company had commitments under existing loan agreements
to lend further funds of $13.1 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 June 30, 2006 was $191.3 million comprised of
98% real estate mortgages, 1% in the energy sector, and 1% in other types of
companies. As at June 30, 2006, 68% of the loan value is scheduled to mature
within a year. The Company had approximately $8.4 million of loans impaired as a
result of certain principal and/or interest payments being in arrears as at June
30, 2006. During the three months ended June 30, 2006, an additional provision
for loan losses of $386,000 was recorded, which has been offset by $153,000 from
the sale of the underlying security for an impaired loan that had a full loan
loss provision recorded against it. The Company's provision for loan losses is
now $0.6 million. The Company expects to collect the full carrying value of its
loan portfolio.
During the six months ended June 30, 2006, cash flow from operations provided
$13.4 million as compared to $2.8 million for the comparative period in 2005, as
a result of higher earnings.
During the three months ended June 30, 2006, the Company completed an equity
offering of 15,625,000 common shares and received net proceeds of $47.3 million.
During the six months ended June 30, 2006, the Company's loan portfolio
increased by $66.7 million to $191.3 million as compared to the start of the
year. In the first half of 2006, the Company had arranged $112.8 million of new
loans (net to Company - $104.5 million) and $43.7 million of loans (net to the
Company - $33.5 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.
The Company has contractual obligations for its leased office space in Vancouver
and Toronto. The total minimum lease payments for the years 2006 - 2010 are
$1,839,000.
Obligation due by period
Type of Contractual
Obligations
Total Less than 1 1 - 3 Years 3 - 5 More
Year Years than 5
Years
Office Leases $1,839,000 $484,000 $1,068,000 $287,000 -
Loan Commitments - Net of $7,500,000 $7,500,000 - - -
Syndication
Total $9,339,000 $7,984,000 $1,068,000 $287,000 -
4. RELATED PARTY TRANSACTIONS
For the six months ended June 30, 2006, the Company received $612,000 (2005 -
$443,000) in advisory, management and finder's fees from parties related by
virtue of having certain directors and officers in common. Other assets include
$535,000 of non-transferable securities held in either private or publicly
traded companies related by virtue of having certain directors and officers in
common. For the six months ended June 30, 2006, the Company recorded a
write-down of other assets of $74,000 (2005-$Nil) in parties related by virtue
of having certain directors in common.
Loans and convertible debentures include $1,383,000 million in amounts due from
parties related by virtue of having certain directors and officers in common.
During the six months ended June 30, 2006, the Company received $551,000 (2005 -
$1,012,000) in interest and fees from parties related by virtue of having
certain directors and officers in common. During the six months ended June 30,
2006, the Company has provided an additional allowance of $386,000 for a loss on
a convertible debenture from a party related by virtue of having certain
directors in common.
For the six months ended June 30, 2006, the Company received $28,000
(2005-$18,000) in syndication loan administration fees from parties related by
virtue of having certain directors and officers in common.
Marketable securities and investments include $9,586,000 of shares held in
publicly traded companies related by virtue of having certain directors and
officers in common. For the six months ended June 30, 2006, the Company recorded
a gain on disposal of securities of $9,005,000 (2005 - $755,000) from parties
related by virtue of having certain directors and officers in common. For the
six months ended June 30, 2006, the Company recorded a write-down of investments
of $470,000 in parties related by virtue of having certain directors in common.
As at June 30, 2006 included in accounts payable is $3.4 million due to officers
and employees for bonuses and salaries payable.
5. SUBSEQUENT AND PROPOSED TRANSACTIONS
Nothing to report.
6. OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
7. OUTLOOK
As at June 30, 2006, the Company had $50.4 million of cash on hand. 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. During the upcoming year, the Company may hire additional
employees and raise debt as is required to fund the growth of the Company's loan
portfolio.
8. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's accounting policies are described in Note 3 of its audited
consolidated financial statements for the years ended December 31, 2005 and
2004. Management considers the following policies to be the most critical in
understanding the judgments and estimates that are involved in the preparation
of its consolidated financial statements and the uncertainties, which could
materially impact its results, financial condition and cash flows. Management
continually evaluates its assumptions and estimates; however, actual results
could differ materially from these assumptions and estimates.
Provision for Loan Losses
Loans are stated net of an allowance for credit losses on impaired loans. Such
allowances reflect management's best estimate of the credit losses in the
Company's loan portfolio and judgments about economic conditions. The evaluation
process involves estimates and judgments, which could change in the near term,
and result in a significant change to a recognized allowance.
The Company's Credit Committee reviews its loan portfolio on a monthly basis and
specific provisions are established on a loan-by-loan basis. In determining the
provision for possible loan losses, the Company considers the following:
* length of time the loans have been in arrears;
* the overall financial strength of the borrowers;
* the nature and quality of collateral and, if applicable,
guarantees;
* secondary market value of the loans and the collateral; and
* the borrower's plan, if any, with respect to
restructuring the loans.
Valuation of Investments
The Company's investments are primarily held in public companies. Investments
are recorded at cost or at cost less amounts written off to reflect any
impairment in value that is considered to be other than temporary. The Company
regularly reviews the carrying value of its portfolio positions. A decline in
market value may be only temporary in nature or may reflect conditions that
are more permanent. Declines may be attributable to general market conditions,
either globally or regionally, that reflect prospects of the economy as a whole
or prospects of a particular industry or a particular company. Such declines
may or may not reflect the likelihood of ultimate recovery of the carrying
amount of an investment.
In determining whether the decline in value of the
investment is other than temporary, quoted market price is
not the only factor considered, particularly for thinly
traded securities, large block holdings and restricted
shares. Other factors considered include:
* the trend of the quoted market price and trading volume;
* the financial position of the company and its results;
* changes in or reorganization of the business plan of the investment; and
* the current fair value of the investment (based upon an appraisal thereof)
relative to its carrying value.
Future Tax Asset
The Company has recognized a future tax asset to the extent that the amount is
more likely than not to be realized from future earnings. The Company will
reassess at 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 its more likely
than not to be realized, it will be recorded in the balance sheet and statement
of earnings.
Asset Retirement Obligations
The amounts recorded for asset retirement obligations are based on the fair
value of the estimated future costs to obtain final closure from regulatory
agencies of the Company's remaining resource property.
9. CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
No new accounting policies have been adopted during the six months ended
June 30, 2006.
10. DISCLOSURE OF OUTSTANDING SHARE DATA
As at August 1, 2006, the Company had the following common shares, stock options
and warrants outstanding:
Common shares 143,748,128
Stock options 10,063,333
Compensation options 1,133,775
Fully diluted shares outstanding 154,945,236
Dividends
The Board of Directors declared its second semi-annual dividend of $0.03 per
share, which was paid on July 6, 2006 to shareholders of record on June 21,
2006.
11. RISKS AND UNCERTAINTIES
Additional risks factors are disclosed under "Risk Factors" in the Revised
Annual Information Form filed on SEDAR at www.sedar.com.
Liquidity Risk
The Company maintains a sufficient amount of liquidity to fund its obligations
as they come due under normal operating conditions.
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 June 30, 2006 was 98% in first and
second real estate mortgages, 1% in the energy sector, and 1% in other types of
companies. At June 30, 2006, mortgages were geographically located; 62% in
British Columbia, 17% in Alberta, 19% in Ontario and 2% in other; and 75% take
first priority and 25% take second priority. The Company generally provides real
estate mortgages equal to approximately 75% of the value of the security and
generally provides commercial bridge loans to primarily publicly traded
development stage companies equal to approximately 50% of the value of
guarantees and security. The Company provides for loan losses on a specific loan
basis and has a provision of $0.6 million as at June 30, 2006.
12. FORWARD LOOKING INFORMATION
These materials include certain statements that constitute "forward-looking
statements" within the meaning of Section 27A of the United States Securities
Act of 1933 and Section 21E of the United States Securities Exchange Act of
1934. These statements appear in a number of places in this document and include
statements regarding our intent, belief or current expectation and that of our
officers and directors. Such forward-looking statements involve known and
unknown risks and uncertainties that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. When
used in this document, words such as "believe", "anticipate", "estimate",
"project", "intend", "expect", "may", "will", "plan", "should", "would"
"contemplate", "possible", "attempts", "seek", and similar expressions are
intended to identify these forward-looking statements. These forward-looking
statements are based on various factors and were derived utilizing numerous
assumptions that could cause our actual results to differ materially from those
in the forward-looking statements. Accordingly, you are cautioned not to put
undue reliance on these forward-looking statements. Forward-looking statements
include, among others, statements regarding our expected financial performance
in future periods, our plan of operations and our business strategy and plans or
budgets.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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