FOR: QUEST CAPITAL CORP.
TSX SYMBOL: QC
AMEX, AIM SYMBOL: QCC
April 27, 2006
Quest Reports its Financial Results for the First Quarter 2006
VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - April 27, 2006) - Quest Capital Corp. ('Quest' or the 'Company')
(TSX:QC)(AMEX:QCC)(AIM:QCC) announces its unaudited consolidated interim financial results for the three months
ended March 31, 2006 (a copy of which are attached hereto).
HIGHLIGHTS
- Earnings before taxes of $8.3 million ($0.06 per share) or net earnings of $8.0 million ($0.06 per share), as
compared to earnings before taxes of $3.3 million ($0.04 per share) or net earnings of $3.3 million ($0.04 per
share) for the comparative period in 2005;
- Loan portfolio increased 29% during the three months ended March 31, 2006 to $160.1 million, as compared to
$124.6 million as at December 31, 2005;
- Total loans arranged during the three months ended March 31, 2006 totaled $52.3 million;
- Net Assets increased during the three months ended March 2006 by 12% to $199.1 million, as compared to $177.6
million as at December 31, 2005;
- Warrants exercised during the three months ended March 31, 2006 resulted in cash proceeds of $13.3 million;
- Realized gains from sale of marketable securities and investments during the three months ended March 31,
2006 totaled $4.7 million, as compared to $0.8 million realized during the three months ended March 31, 2005.
Managing Director, A. Murray Sinclair commented, "Our ability to source quality loans that meet our lending
criteria gave us the confidence to increase our equity base and subsequent to quarter end completing a
successful $50 million equity offering. Consequently, we now have a capital base of approximately $250 million,
increased visibility and a higher level of quality deal flow."
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.
Forward-Looking Statements
Statements contained in this news release that are not historical facts are forward-looking statements that
involve various risks and uncertainties 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.
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)
/T/
First Fourth Third Second
Qtr Qtr Qtr Qtr
2006 2005 2005 2005
----------------------------------
Interest and related fees 5,798 5,555 4,399 4,004
Non-interest income 5,961 4,028 1,883 2,377
Earnings before taxes 8,315 5,059 4,291 4,507
Net earnings 8,028 11,395 4,295 4,550
Basic and Diluted 0.06 0.10 0.04 0.05
Earnings Per Share
Total Assets 208,060 189,603 166,928 123,487
Total Liabilities 8,999 12,009 6,718 7,525
---------------------------------------------------------------------
---------------------------------------------------------------------
First Fourth Third Second
Qtr Qtr Qtr Qtr
2005 2004 2004 2004
----------------------------------
Interest and related fees 3,452 2,941 3,194 2,168
Non-interest income 1,202 1,502 1,439 2,425
Earnings before taxes 3,311 529 3,782 5,836
Net earnings 3,311 212 3,766 5,834
Basic and Diluted 0.04 0.00 0.04 0.07
Earnings Per Share
Total Assets 114,030 111,905 106,578 104,356
Total Liabilities 10,684 12,385 9,928 11,509
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---------------------------------------------------------------------
/T/
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.
/T/
Obligation due by period
-----------------------------------------------------
Type of More
Contractual Less than than 5
Obligation Total 1 Year 1-3 Years 3-5 Years 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 -
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/T/
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
/T/
----------------------------------------------------------
Number Of Options Exercise Price Expiry 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
-----------------
-----------------
/T/
Outstanding Compensation Options
/T/
---------------------------------------------------------
Number Of Options Exercise Price Expiry Date
---------------------------------------------------------
1,085,775 $2.30 August 23, 2007
---------------------------------------------------------
48,000 $2.30 October 26, 2007
---------------------------------------------------------
1,133,775
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-----------------
/T/
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.
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.
/T/
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
held for disposition (note 5) - 730
-----------------------
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
-----------------------
-----------------------
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)
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 and settlement of Australian
operations - (270)
-----------------------
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
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)
Three months ended March 31
--------------------------------------------------------------------
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 fees (394) -
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 liabilities 1,051 (2,799)
-----------------------
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
foreign subsidiary 26 125
-----------------------
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)
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)
Three months ended March 31, 2006 and 2005
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/T/
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:
/T/
Assets held for disposition $ 1,051
Liabilities and provision for loss
on assets held for disposition 730
-------
Remaining investment $ 321
-------
-------
/T/
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:
/T/
March 31, 2006 December 31, 2005
------------------ ------------------
Carrying Fair Carrying Fair
value value value value
Marketable securities $ 672 1,060 $ 945 1,168
Loans and convertible
debentures 160,141 160,141 124,551 124,551
Investments 14,677 28,617 17,117 24,430
Other assets 1,729 1,729 1,601 1,601
--------------------------------------------------------------------
/T/
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:
/T/
Specific Carrying
Term 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
----------------------------------
----------------------------------
/T/
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:
/T/
March 31, 2006
Balance - Beginning of period $ 537
Add
Specific provision for the period -
--------------
Balance - End of period $ 537
--------------
--------------
/T/
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
/T/
Number of shares Amount
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
------------------------------
------------------------------
/T/
c) Warrants issued and outstanding
/T/
Exercise
Number of price
warrants per share Expiry date
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
- March 31, 2006 -
---------
---------
/T/
d) Compensation options issued and outstanding
/T/
Exercise
Number of price
warrants per share Expiry date
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
---------
Ending balance
- March 31, 2006 1,158,000
---------
---------
/T/
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:
/T/
Weighted
average
Number of shares 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
------------------------------
------------------------------
/T/
The following table summarizes information about stock options outstanding and exercisable at March 31, 2006:
/T/
Options outstanding Options exercisable
----------------------------------------------- --------------------
Weighted
average
remaining Weighted Weighted
contracted average average
Range of Options life exercise Options exercise
exercise prices outstanding (years) price exercisable price
$ 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
----------------------------------------------------
----------------------------------------------------
/T/
f) Contributed capital
/T/
Opening balance $ 6,772
Stock-based compensation 136
-------
Ending balance $ 6,908
-------
-------
/T/
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:
/T/
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
/T/
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 totaling 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:
/T/
2006 $ 462,000
2007 307,000
2008 230,000
2009 230,000
2010 154,000
/T/
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
/T/
Three months Three months
ended ended
March 31, March 31,
2006 2005
--------------------------
Marketable securities and investments
received as loan fees 475 749
Other assets and investments received
as finder's fees 394 34
Loans and debentures settled with shares - 4,516
Shares received as consideration for
sale of resource property - 1,800
/T/
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:
/T/
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 taxes $ 287 $ -
--------------------------
--------------------------
/T/
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.
-30-
FOR FURTHER INFORMATION PLEASE CONTACT:
Quest Capital Corp.
A. Murray Sinclair
Managing Director
(604) 689-1428 or Toll Free: (800) 318-3094
OR
Quest Capital Corp.
Mark Monaghan
Vice President
(416) 367-8383
www.questcapcorp.com
-0-
Quest Capital Corp.
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