VANCOUVER, BRITISH COLUMBIA (AMEX: QCC)(AIM: QCC) ("Quest" or
the "Company") today reported its financial results for the year
ended December 31, 2007 and announced its 2008 dividend policy.
2007 FINANCIAL HIGHLIGHTS
- Total loans arranged in 2007 amounted to $328.0 million, of
which the Company funded $250.1 million, as compared to $279.2
million arranged in 2006, of which the Company funded $255.4
million. Total loans arranged in 2007 increased $48.8 million or
17% over the previous year;
- Interest and related fee revenue from the Company's loan
portfolio increased $9.5 million to $42.1 million in 2007, a 29%
increase over 2006;
- The Company realized no loan losses in 2007;
- Earnings before income taxes remained relatively consistent at
$36.0 million in 2007 as compared to $37.0 million in 2006, despite
Quest experiencing approximately $2.0 million of expenses in 2007
which may be considered non-recurring; and
- Net earnings decreased $20.0 million or 46% to $23.7 million
in 2007 from $43.7 million in 2006, primarily as a result of
accounting for taxes, a largely non-cash item.
As a mortgage investment corporation ("MIC"), Quest will be
subject to special Canadian tax treatment. The dividends it pays to
shareholders reduce its taxable income and, if sufficient dividends
are paid, the Company will not pay any Canadian taxes.
A. Murray Sinclair, Quest's Co-Chair, commented:
We are particularly pleased with our ability to have transformed
the Company into a MIC by its 2007 year-end. This provides our
shareholders with clarity with respect to our goals - to become (i)
Canada's largest MIC in terms of the amount of loans generated and
(ii) the country's most profitable publicly traded MIC. Quest
performed well in 2007 despite both the volatile credit market and
the transition to a MIC being quite costly. One time charges
related to the MIC conversion and other regulatory items amounted
to approximately $2.0 million in 2007.
Quest's dividend policy for 2008 is outlined in detail in our
MD&A. The Company's dividend policy going forward will be to
pay sufficient dividends to shareholders to reduce Quest's taxable
income to a negligible amount, after first deducting any
non-capital losses or other deductions carried forward from 2007.
This should translate into a significant yield increase for our
shareholders in 2008 and beyond.
Another positive message is the increase in depth of financial
services experience in our management team, led by Stephen Coffey,
our recently appointed President and new Chief Executive Officer,
effective today's date.
Mr. Stephen Coffey, Quest's President & CEO, commented:
Our objectives for 2008 are clear. As well as increasing
shareholder dividend yield, we will focus on safe, profitable
growth in Quest's mortgage portfolio without shareholder dilution.
Our increased bank lines should give us the leverage for this
growth in 2008 without the need for additional capital.
We are very optimistic about the Company's opportunities.
Despite the malaise in the credit markets, it is a great time for
Quest Capital Corp.
Quest also reports herein that the Company's CFO, Narinder
Nagra, will be leaving Quest to pursue other opportunities. Mr.
Nagra has been a valuable member of the management team and we wish
him success in his future endeavours. Mr. Jim Grosdanis, CA, will
be appointed our new CFO effective after the certification of our
2008 first quarter results. With his previous employer, Mr.
Grosdanis was involved in the successful application for a Schedule
I Bank licence.
About Quest
Quest's expertise is in providing financing for the real estate
sector with emphasis on residentially oriented mortgages primarily
in Western Canada.
For more information about Quest, please visit our website
(www.questcapcorp.com) or SEDAR (www.sedar.com).
Forward Looking Statements
This press release includes certain statements that constitute
"forward-looking statements", and "forward-looking information"
within the meaning of applicable securities laws ("forward-looking
statements" and "forward-looking information" are collectively
referred to as "forward-looking statements", unless otherwise
stated). 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. Forward-looking statements may
relate to the Company's future outlook and anticipated events or
results and may include statements regarding the Company's future
financial position, business strategy, budgets, litigation,
projected costs, financial results, taxes, plans and objectives. We
have based these forward-looking statements largely on our current
expectations and projections about future events and financial
trends affecting the financial condition of our business. These
forward-looking statements were derived utilizing numerous
assumptions regarding expected growth, results of operations,
performance and business prospects and opportunities that could
cause our actual results to differ materially from those in the
forward-looking statements. While the Company considers these
assumptions to be reasonable, based on information currently
available, they may prove to be incorrect. Forward-looking
statements should not be read as a guarantee of future performance
or results. Forward-looking statements are based on information
available at the time those statements are made and/or management's
good faith belief as of that time with respect to future events,
and are subject to risks and uncertainties that could cause actual
performance or results to differ materially from those expressed in
or suggested by the forward-looking statements. To the extent any
forward-looking statements constitute future-oriented financial
information or financial outlooks, as those terms are defined under
applicable Canadian securities laws, such statements are being
provided to describe the current potential of the Company and
readers are cautioned that these statements may not be appropriate
for any other purpose, including investment decisions.
Forward-looking statements speak only as of the date those
statements are made.
Except as required by applicable law, we assume no obligation to
update or to publicly announce the results of any change to any
forward-looking statement contained or incorporated by reference
herein to reflect actual results, future events or developments,
changes in assumptions or changes in other factors affecting the
forward-looking statements. If we update any one or more
forward-looking statements, no inference should be drawn that we
will make additional updates with respect to those or other
forward-looking statements. You should not place undue importance
on forward-looking statements and should not rely upon these
statements as of any other date. All forward-looking statements
contained in this press release are expressly qualified in their
entirety by this cautionary statement.
Quest Capital Corp.
Consolidated Financial Statements
December 31, 2007 and 2006
(expressed in thousands of Canadian dollars)
Management's Responsibility for Financial Reporting
The accompanying consolidated financial statements of the
Company have been prepared by management in accordance with
Canadian generally accepted accounting principles and reconciled to
United States generally accepted accounting principles. These
consolidated financial statements contain estimates based on
management's judgement. Management maintains an appropriate system
of internal controls to provide reasonable assurance that
transactions are authorized, assets safeguarded, and proper records
maintained and that financial information is accurate and
reliable.
The Audit Committee of the Board of Directors, which is composed
of independent directors, reviews the results of the annual audit
and the consolidated financial statements prior to submitting the
consolidated financial statements to the Board for approval.
The Company's auditors, PricewaterhouseCoopers LLP, are
appointed by the shareholders to conduct an audit and their report
follows.
Brian E. Bayley, Chief Executive Officer
Narinder Nagra, Chief Financial Officer
Vancouver, BC, Canada
March 14, 2008
Management's Report on Internal Control over Financial
Reporting
The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting.
Management assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2007.
Management used the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) framework to assess the effectiveness of
the Company's internal control over financial reporting. Based on
that assessment, management concluded that the Company's internal
control over financial reporting was effective as of December 31,
2007.
Based on management's assessment, there were no material
weaknesses in the Company's internal control over financial
reporting as of December 31, 2007.
PricewaterhouseCoopers LLP, independent auditors, who have
audited and issued a report on the consolidated financial
statements of the Company for the year ended December 31, 2007,
have also issued an attestation report on management's assessment
of the Company's internal control over financial reporting. This
attestation report follows.
Brian E. Bayley, Chief Executive Officer
Narinder Nagra, Chief Financial Officer
Vancouver, BC, Canada
March 14, 2008
PricewaterhouseCoopers LLP
Chartered Accountants
PricewaterhouseCoopers Place
250 Howe Street, Suite 700
Vancouver, British Columbia
Canada V6C 3S7
Telephone +1 604 806 7000
Facsimile +1 604 806 7806
March 14, 2008
Independent Auditors' Report
To the Shareholders of Quest Capital Corp.
We have completed an integrated audit of Quest Capital Corp.s'
2007 consolidated financial statements and of its internal control
over financial reporting as of December 31, 2007, and the audits of
Quest Capital Corp.'s consolidated financial statements for 2006
and 2005. Our opinions, based on our audits, are presented
below.
Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of
Quest Capital Corp. as at December 31, 2007 and December 31, 2006,
and the related consolidated statements of earnings, retained
earnings and cash flows for each of the years in the three years
period ended December 31, 2007. We have also audited the statement
of comprehensive income and accumulated other comprehensive income
for the year ended December 31, 2007. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits of the Company's financial statements in
accordance with Canadian generally accepted auditing standards and
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform
an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial
statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. A
financial statement audit also includes assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2007 and December 31,
2006 and the results of its operations and its cash flows for each
of the years in the three year period ended December 31, 2007 in
accordance with Canadian generally accepted accounting
principles.
Internal Control Over Financial Reporting
We have also audited Quest Capital Corp.'s internal control over
financial reporting as at December 31, 2007, based on criteria
established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for
maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management's
Responsibility for Financial Reporting. Our responsibility is to
express an opinion on the effectiveness of the Company's internal
control over financial reporting based on our audit.
We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance
as to whether effective internal control over financial reporting
was maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other
procedures as we consider necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company's
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as at
December 31, 2007 based on criteria established in Internal Control
- Integrated Framework issued by the COSO.
PricewaterhouseCoopers LLP
Chartered Accountants
PricewaterhouseCoopers refers to the Canadian firm of
PricewaterhouseCoopers LLP and the other member firms of
PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity.
Quest Capital Corp.
Consolidated Balance Sheets
As at December 31, 2007 and 2006
(expressed in thousands of Canadian dollars)
--------------------------------------------------------------------------
2007 2006
-----------------------
Assets
Cash and cash equivalents $ 30,484 $ 9,506
Marketable securities (note 5) - 1,865
Loans (note 6) 277,710 264,902
Investments (note 5) - 9,980
Future income taxes (note 11) 3,916 14,500
Restricted cash (note 7) 12,452 2,568
Prepaid and other receivables 155 686
Resource and capital assets 841 477
Other assets (note 5 and 12) 186 1,253
-----------------------
$ 325,744 $ 305,737
-----------------------
-----------------------
Liabilities
Accounts payable and accrued liabilities (note 12) $ 7,081 $ 4,290
Income taxes payable 188 2,981
Future income taxes (note 11) 904 1,326
Asset retirement obligation (note 9) 572 1,011
Debt payable (notes 5 and 8) 26,365 22,000
-----------------------
35,110 31,608
-----------------------
-----------------------
Shareholders' equity
Share capital (note 10) 207,161 202,513
Contributed capital (note 10) 6,934 6,479
Retained earnings 76,539 65,137
-----------------------
290,634 274,129
-----------------------
$ 325,744 $ 305,737
-----------------------
-----------------------
Contingencies and commitments (notes 6(c) and 13)
Approved by the Board of Directors
"Brian E. Bayley" Director "A. Murray Sinclair" Director
----------------------- -----------------------
Brian E. Bayley A. Murray Sinclair
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Retained Earnings
For the years ended December 31, 2007, 2006 and 2005
(expressed in thousands of Canadian dollars)
--------------------------------------------------------------------------
2007 2006 2005
------------------------------------
Retained earnings - beginning
of year $ 65,137 $ 28,645 $ 8,612
Adoption of financial instruments
standards (note 2) 1,591 - -
Net earnings for the year 23,667 43,701 23,551
Dividends (13,856) (7,209) (3,518)
------------------------------------
Retained earnings - end of year $ 76,539 $ 65,137 $ 28,645
------------------------------------
------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Earnings
For the years ended December 31, 2007, 2006 and 2005
(expressed in thousands of Canadian dollars, except per share amounts)
--------------------------------------------------------------------------
2007 2006 2005
------------------------------------
Interest and related fees (note 12) $ 42,114 $ 32,591 $ 17,410
------------------------------------
Non-interest income
Management and finder's fees
(note 12) 2,445 3,993 4,204
Marketable securities and other assets
trading gains (note 12) 1,475 5,616 743
Realized gains on sale of investments,
net (note 12) 7,079 8,876 4,171
Other income (note 12) 51 14 372
------------------------------------
11,050 18,499 9,490
------------------------------------
Total interest and non-interest income 53,164 51,090 26,900
Interest on debt (666) (1,380) (63)
Provision for loan losses - (238) -
------------------------------------
Net interest and non-interest income 52,498 49,472 26,837
------------------------------------
Non-interest expense
Salaries and benefits 5,042 2,889 2,108
Bonuses 4,056 5,525 2,000
Stock-based compensation 1,085 521 2,142
Office and other 2,271 970 935
Legal and professional services 2,904 1,908 820
Regulatory and shareholder relations 579 478 522
Directors' fees 224 280 218
Sales tax 306 - -
Foreign exchange loss (gain) (18) 59 96
Losses (gains) and other expenses
relating to resource assets 61 (142) 828
------------------------------------
16,510 12,488 9,669
------------------------------------
Earnings before income taxes 35,988 36,984 17,168
Provision for (recovery of) income
taxes (note 11) 12,321 (6,717) (6,315)
Non-controlling interest in a
subsidiary (note 4) - - (68)
------------------------------------
Net earnings for the year $ 23,667 $ 43,701 $ 23,551
------------------------------------
------------------------------------
Weighted average number of shares
outstanding
Basic 145,698,793 137,713,931 100,923,801
Diluted 148,792,349 140,826,503 103,563,223
Earnings per share
Basic $ 0.16 $ 0.32 $ 0.23
Diluted $ 0.16 $ 0.31 $ 0.23
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Comprehensive Income and Accumulated Other
Comprehensive Income
For the year ended December 31, 2007
(expressed in thousands of Canadian dollars)
--------------------------------------------------------------------------
2007
------------
Net earnings for the year $ 23,667
------------
Other comprehensive income (loss)
Reclassification adjustment for gains recorded
included in net earnings (net of income tax of $1,156) (2,232)
------------
Other comprehensive income (loss) (2,232)
------------
Comprehensive income $ 21,435
------------
------------
Accumulated other comprehensive income - beginning of year $ -
Adoption of financial instruments standards (note 2),
(net of income tax of $1,156) 2,232
Other comprehensive income (loss) for the year (2,232)
------------
Accumulated other comprehensive income - end of year $ -
------------
------------
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Consolidated Statements of Cash Flows
For the years ended December 31, 2007, 2006 and 2005
(expressed in thousands of Canadian dollars)
--------------------------------------------------------------------------
2007 2006 2005
------------------------------------
Cash flows from operating activities
Net earnings for the year $ 23,667 $ 43,701 $ 23,551
Adjustments to determine net cash
flows relating to operating items
Future income taxes 11,656 (8,012) (6,488)
Stock-based compensation 1,085 521 2,142
Provision for loan losses - 386 -
Amortization of deferred interest and
loan fees (8,855) (5,539) (4,568)
Marketable securities and other asset
trading gains (1,443) (5,616) (743)
Realized gains on sale of investments (7,079) (8,876) (4,171)
Other assets and investments received
as finder's fees (638) (862) (1,245)
Gains (losses) and other expenses
relating to resource assets 50 (178) 737
Foreign exchange gain related to
investment in foreign subsidiary (236) - -
Other 185 162 216
Deferred interest and loan fees
received 1,348 6,428 3,083
Activity in marketable securities
held for trading
Purchases (4,221) (4,356) (215)
Proceeds on sales 11,648 12,327 2,259
Expenditures for reclamation and
closure (352) (934) (2,498)
Changes in prepaid and other
receivables 567 50 34
Changes in accounts payable and
Accrued liabilities 2,909 555 (1,784)
Changes in income taxes payable (2,522) 552 -
------------------------------------
27,769 30,309 10,310
------------------------------------
Cash flows from financing activities
Proceeds from shares issued 4,018 62,807 56,025
Dividend payment (13,856) (10,727) -
Proceeds from debt 93,865 99,931 -
Repayment of debt (89,500) (77,931) -
------------------------------------
(5,473) 74,080 56,025
------------------------------------
Cash flows from investing activities
Activity in loans
Net increase in loans (8,187) (145,357) (54,869)
Net decrease in convertible debenture - - 2,030
Activity in investments
Proceeds on sales 18,181 124,909 13,865
Purchases (488) (107,752) (4,794)
Net proceeds on dilution of subsidiary - - 592
Change in restricted cash (10,249) (304) 7,655
Cash transferred to purchaser of
resource property - - (2,500)
Proceeds on sale of resource and capital
assets - 356 210
Expenditures on resource and
capital assets (563) (77) (368)
Net other assets acquired - (425) (281)
Net proceeds on sale and windup of
subsidiaries 106 - (678)
------------------------------------
(1,200) (128,650) (39,138)
------------------------------------
Foreign exchange loss on cash held
in a foreign subsidiary (118) 28 (65)
------------------------------------
Increase (decrease) in cash and cash
equivalents 20,978 (24,233) 27,132
Cash and cash equivalents - beginning
of year 9,506 33,739 6,607
------------------------------------
Cash and cash equivalents - end
of year $ 30,484 $ 9,506 $ 33,739
------------------------------------
------------------------------------
Supplemental cash flow information (note 16)
The accompanying notes are an integral part of these consolidated financial
statements.
Quest Capital Corp.
Notes to Consolidated Financial Statements
December 31, 2007 and 2006
(expressed in Canadian dollars; tables in thousands, except
share capital information)
1. Nature of operations
Quest Capital Corp.'s ("Quest" or the "Company") focus is to
provide mortgage financings. Throughout 2007, the Company also
provided 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.
In December 2007, Quest reorganized its business, operations and
assets in order to qualify as a mortgage investment corporation
("MIC") for Canadian income tax purposes. A MIC is a
special-purpose corporation defined under Section 130.1 of the
Income Tax Act (Canada). A MIC does not pay corporate-level taxes
when all taxable income is distributed to shareholders as dividends
during a taxation year and within 90 days of its year end. Taxable
Canadian shareholders will have dividend payments subject to
Canadian tax as interest income. As of January 1, 2008, the Company
must continually meet the following criteria to maintain MIC
eligibility: (i) at least 50% of its assets must consist of
residentially oriented mortgages and/or cash; (ii) it must not
directly hold any foreign assets, including investments secured by
real property located outside of Canada; (iii) it must not engage
in operational activities outside of the business of lending and
investing of funds; and (iv) no person may own more than 25% of the
issued and outstanding shares.
In establishing its status as a MIC, Quest was required to
divest itself of assets deployed in operational activities outside
of the business of real estate lending and investments in Canada.
These divestitures included the sale of loans collateralized by
properties outside of Canada, and the disposition of the Company's
marketable securities and investment portfolios. The Company also
disposed of two wholly-owned subsidiaries, Quest Management Corp.
and Quest Securities Corporation (note 4(a)).
2. Change in accounting policies
Effective January 1, 2007, the Company adopted the Canadian
Institute of Chartered Accountants (CICA) Handbook Section 3855
"Financial Instruments - Recognition and Measurement", Section 3865
"Hedges" and Section 1530 "Comprehensive Income" (the "Financial
Instrument Standards"). As the Company has not undertaken any
hedging activities, adoption of Section 3865 had no impact on the
Company. Prior to January 1, 2007, the principal accounting
policies affecting the Company's financial instruments were as
follows: marketable securities were valued at the lower of average
cost and market value; investments were valued at cost or at cost
less amounts written off to reflect any impairment in value
considered to be other than temporary; loans were stated net of an
allowance for credit losses on impaired loans; and other assets
were valued at lower of cost and net realizable value.
The adoption of the Financial Instrument Standards requires the
presentation of a separate consolidated statement of comprehensive
income, which is comprised of net income, and changes in unrealized
gains or losses related to available-for-sale securities.
Loans are recorded at amortized cost, subject to impairment
reviews. Fees received for originating the loans are netted against
the loans' cost and are recognized in net earnings using the
effective interest rate method. Investments and marketable
securities are recorded at fair value. Fair value is determined
directly by reference to quoted market prices in an active market.
Changes in fair value of marketable securities are recorded in
earnings and changes in the fair value of investments are reported
in other comprehensive income.
The transitional adjustments in respect of these standards have
been made to opening marketable securities, investments and loan
balances and adjusted through retained earnings and accumulated
other comprehensive income as at January 1, 2007. As a consequence
of adopting the Financial Instrument Standards at January 1, 2007,
retained earnings increased by $1.6 million. Accumulated other
comprehensive income increased by $2.2 million (net of income taxes
of $1.1 million). These adjustments represent the net gain on
measuring the fair value of held for trading and available for sale
investments, which had not been recognized on a fair value basis
prior to January 1, 2007. Additional consequences were an increase
of $0.4 million in marketable securities, $3.4 million increase in
investments, a decrease in deferred interest and loan fees of $4.6
million and a decrease in loans of $4.6 million.
3. Significant accounting policies
Generally accepted accounting principles
These consolidated financial statements have been prepared using
accounting principles generally accepted in Canada. Significant
differences between Canadian and United States generally accepted
accounting principles ("GAAP") as they relate to these financial
statements are described in note 17.
Basis of presentation
The consolidated financial statements include the accounts of
the Company and its subsidiaries. As at December 31, 2007, the
Company's subsidiaries include QC Services Inc., Viceroy Capital
Corp., Viceroy Gold Corporation and its 75% proportionate joint
venture interest in the Castle Mountain property.
Certain comparative figures have been reclassified to conform to
the current period's presentation, including a reclassification of
$2.1 million between retained earnings and cumulative translation
adjustment to reflect the correction of an error preceding
2005.
Use of estimates
The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and disclosure of
contingent liabilities at the date of the consolidated financial
statements and the reported amount of revenues and expenses during
the period. While management believes that these estimates and
assumptions are reasonable, actual results may differ. Financial
statement items subject to significant management judgment include
the Company's loan loss provision, investment carrying values, fair
value of non-cash fees and stock-based compensation, asset
retirement obligations and future income tax assets.
Cash and cash equivalents
Cash and cash equivalents include cash balances with a major
Canadian chartered bank and short-term deposits and investments
having maturity terms of 90 days or less at the time of
acquisition. Financial instruments included in cash and cash
equivalents are classified as held for trading and are carried at
fair value.
Marketable securities
Marketable securities are designated as held for trading and,
effective January 1, 2007, are recorded in the consolidated balance
sheet at fair value based on quoted bid prices and consideration of
other available information. Changes in the fair value of
marketable securities since January 1, 2007 are recorded in
non-interest income in the statements of earnings.
Loans
Effective January 1, 2007, loans are recorded at amortized cost,
subject to impairment reviews. Fees received for originating the
loans are netted against the loans' cost and are recognized in net
earnings using the effective interest rate method. Costs include
loan origination fees and other direct and incremental costs.
Loans are classified as impaired when the principal is past due
or interest is 90 days in arrears, and when there is no longer
reasonable assurance of the timely collection of principal and
interest. A provision for losses incurred on impaired loans is
recorded to reduce the carrying amount to the estimated realizable
amount.
Investments
Investments are designated as available for sale and, effective
January 1, 2007, are measured at fair value based on quoted bid
prices and consideration of other available information. When
neither an active market nor independent prices are available, the
Company uses other methods of valuation to establish fair value.
Changes in the fair value of investments are reported in
comprehensive income, until the investment is disposed of or
becomes other than temporarily impaired, at which time it will be
recognized in the statements of earnings.
Provision for asset retirement obligations
The Company recognizes a liability for asset retirement
obligations associated with the retirement of long-lived assets
when the liability is incurred. A liability is recognized initially
at fair value if a reasonable estimate of the fair value can be
made and the resulting amount would be capitalized as part of the
asset. The liability is accreted over time through periodic charges
to earnings. In subsequent periods, the Company adjusts the
carrying amounts of the liability for changes in estimates of the
amount or timing of underlying future cash flows. Any adjustments
are accounted for in earnings in the period in which the adjustment
is made.
It is possible that the Company's estimates of its ultimate
reclamation and site restoration liability could change as a result
of changes in regulations or cost estimates.
Translation of foreign currencies
Self-sustaining foreign operations are translated using the
current rate method. Under this method, assets and liabilities are
translated at the exchange rates prevailing at the balance sheet
date and revenues and expenses at the average exchange rate during
the period. The net effect of foreign currency translation is
deferred and shown as a currency translation adjustment in
shareholders' equity until charged against earnings when the net
investment in the operation is reduced.
Revenue recognition
Interest income is recorded on an accrual basis except on loans
classified as impaired. When a loan is classified as impaired,
interest income is recognized on a cash basis only, after specific
provisions or write-offs have been recovered and provided there is
no further doubt about the collectability of remaining principal
balances. Loan syndication fees are included in income as earned
over the life of the loan. Loan commitment, origination,
restructuring and renegotiation fees, and interest collected in
advance, are netted against the loan receivable balance and
recognized in income over the life of the loan.
Finder's fees received as compensation for corporate finance
business activities are recorded when performance is complete and
the cash or non-monetary consideration is received or is reasonably
assured to be received. Non-monetary consideration includes shares,
broker warrants and/or options and has been valued using the
trading price of the shares at the time they are received and the
Black Scholes option pricing model for warrants and options.
Adjustments are made to the trading price for hold periods and
other resale restrictions.
Trading revenue and the sale of investments are recognized on a
settlement basis.
Income taxes
Income taxes are calculated using the asset and liability method
of accounting for income taxes. Accordingly, future tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts and the tax bases of existing assets and
liabilities. Future tax assets and liabilities are measured using
enacted or substantively enacted tax rates expected to apply to
taxable income in the years in which those temporary differences
are expected to be recovered or settled.
The effect on future taxes of a change in tax rates will be
recognized in earnings in the period that includes the date of
substantive enactment. In addition, future tax assets are
recognized to the extent their realization is more likely than
not.
Stock-based compensation
The Company recognizes compensation expense for stock option
grants based on the fair value of the stock options issued. The
fair value of awards granted is estimated at the date of grant and
recognized as employee compensation expense on a straight-line
basis over the requisite service period with the offsetting credit
to contributed capital. For awards with service conditions, the
total amount of compensation cost to be recognized is based on the
number of awards expected to vest and is adjusted to reflect those
awards that do ultimately vest.
Earnings per share
Basic earnings per share are calculated using the weighted
average number of common shares outstanding during the period.
Diluted earnings per share are calculated by dividing net earnings
available to common shareholders for the period by the diluted
weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution
from common shares issuable through stock options using the
treasury stock method.
Future accounting changes
a) Financial Instruments
Effective January 1, 2008, the Company is required to adopt CICA
Handbook Sections 3862 "Financial Instruments - Disclosure" and
3863 "Financial Instruments - Presentation", which replaces section
3861 "Financial Instruments - Disclosures and Presentation". These
new standards revise and enhance the disclosure requirements, and
carry forward, substantially unchanged, the presentation
requirements. Sections 3862 and 3863 require disclosure that would
emphasize the significance of financial instruments on the
Company's financial position and performance, the nature and extent
of the risks arising from financial instruments, and how these
risks are managed. These new Sections relate to disclosure and
presentation only and do not impact the Company's financial
results.
b) Capital Disclosures
Effective January 1, 2008, the Company is required to adopt CICA
Handbook Section 1535 "Capital Disclosures". Section 1535 specifies
the disclosure (i) of the Company's objectives, policies, and
processes for managing capital; (ii) of quantitative data regarding
items considered as capital; (iii) of whether the Company has
complied with any capital requirements; and (iv) of it has not
complied, the consequences of such non-compliance. This new Section
relates to disclosure only and does not impact the Company's
financial results.
c) Goodwill and Intangible Assets
In February 2008, the CICA issued Handbook Section 3064
"Goodwill and Intangible Assets". This Section, which replaces
Section 3062 "Goodwill and Other Intangible Assets", and Section
3450 "Research and Development Costs", establishes standards for
the recognition, measurement and disclosure of goodwill and
intangible assets. The provisions relating to the definition and
initial recognition of intangible assets, including internally
generated intangible assets, are equivalent to the corresponding
provisions of International Financial Reporting Standard IAS 38,
"Intangible Assets". The Section will apply to interim and annual
financial statements relating to fiscal years beginning on or after
October 1, 2008.
4. Divestitures
a) Quest Securities Corporation and Quest Management Corp.
In December 2007, the Company disposed of its wholly-owned
subsidiaries Quest Securities Corporation and Quest Management
Corp. The shares of these subsidiaries were sold to parties related
by virtue of having certain directors and officers in common for
cash proceeds of $375,000, representing fair value at the time of
disposition, resulting in a net loss of $12,000.
The following is a breakdown of the subsidiaries' combined net
assets disposed of during 2007:
Assets
Cash $ 269
Marketable securities 52
Capital assets 25
Other assets 192
---------
$ 538
---------
---------
Liabilities
Accounts payable $ 59
Income taxes payable 92
---------
$ 151
---------
---------
Net Assets $ 387
---------
---------
b) Lara Exploration Ltd.
In November 2005, Lara Exploration Ltd. ("Lara"), in which the
Company previously held a 66% interest, agreed to acquire a private
Brazilian company. In return for the assignment of the shares of
the private Brazilian company to Lara, the Company agreed to
transfer its 3,000,000 escrowed shares of Lara to the shareholders
of the private Brazilian company for nominal consideration. In
February 2006, the transaction was completed and a concurrent
private placement was done by Lara. The Company owned less than 10%
of the outstanding shares of Lara after the transaction. The
Company's remaining investment was accounted for using the cost
method, and the following is a breakdown of the net assets disposed
of during 2006:
Assets
Cash $ 678
Resource assets 373
---------
$ 1,051
---------
---------
Liabilities
Accounts payable $ 32
Minority interest 355
Provision for loss on disposition 343
---------
$ 730
---------
---------
Net Assets $ 321
---------
---------
The Company's remaining investment in Lara was disposed of in
2007 for cash proceeds of $1,005,000, resulting in a net gain of
$681,000.
5. Financial instruments
The carrying values of other receivables, accounts payable and
debt 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:
2007 2006
-----------------------------------------
Carrying Fair Carrying Fair
value value value value
Cash $ 30,484 30,484 9,506 $ 9,506
Restricted cash 12,452 12,452 2,568 2,568
Marketable securities - - 1,865 2,301
Loans 277,710 277,710 264,902 264,902
Investments - - 9,980 13,368
Other assets - - 646 646
Marketable securities and investments represent shares in
publicly traded companies. The fair value at December 31, 2006
represented the quoted trading price of the shares. Marketable
securities and investments were sold during the year to related
parties as disclosed in note 12(a). The fair value of the
convertible debenture at December 31, 2006 is estimated to be
approximately equal to the equivalent carrying value as the loan
loss provision applied to the convertible debenture resulted in a
carrying value of $nil (note 6). There was no convertible debenture
as of December 31, 2007. At December 31, 2007, there are no
financial instruments included in other assets. At December 31,
2006, financial instruments included in other assets included
warrants and investments in capital pool companies, which were
restricted from trading and were carried at cost.
6. Loans
a) Generally loans are repayable over terms of 6 to 24 months,
and bear interest at rates of between 10% and 14% per annum before
commitment and other fees. Real property, real estate, and/or
corporate or personal guarantees are generally pledged as security.
The loan portfolio can be broken down as follows:
2007 2006
--------------
Real estate mortgages 94% 87%
Resource sector loans 5% 12%
Other sectors loans 1% 1%
--------------
Total 100% 100%
--------------
--------------
2007 2006
--------------
British Columbia 58% 48%
Alberta 34% 37%
Ontario 6% 13%
Other 2% 2%
--------------
Total 100% 100%
--------------
--------------
2007 2006
--------------
First mortgages 93% 80%
Second mortgages 7% 20%
--------------
Total 100% 100%
--------------
--------------
As at December 31, 2007, 73% of the Company's loan portfolio was
due within a year. The Company had approximately $7.5 million of
loans impaired as at December 31, 2007. The Company's provision for
loan losses is $nil. The Company monitors the repayment ability of
borrowers and the value of underlying security. In determining the
provision for possible loan losses, management considers the length
of time the loans or convertible debenture has been in arrears, the
overall financial strength of borrowers and the residual value of
security pledged. The Company expects to collect the full carrying
value of its loan portfolio.
Loans (including convertible debenture) outstanding as at
December 31, 2007 and 2006 were as follows:
2007
---------------------------------------------
# Term Specific Carrying
Loans loans allowance amount
Unimpaired loans 54 $ 270,210 $ - $ 270,210
Impaired loans 1 7,500 - 7,500
---------------------------------------------
55 $ 277,710 $ - $ 277,710
---------------------------------------------
---------------------------------------------
2006
---------------------------------------------
# Term Specific Carrying
Loans loans allowance amount
Unimpaired loans 50 $ 256,357 $ - $ 251,737
Impaired loans 4 13,165 - 13,165
---------------------------------------------
54 $ 269,522 $ - $ 264,902
Convertible debenture 586 586 -
---------------------------------------------
$ 270,108 $ 586 $ 264,902
---------------------------------------------
---------------------------------------------
b) The Company has recorded an allowance for losses as
follows:
2007 2006 2005
------------------------------------
Balance - Beginning of year $ 586 $ 537 $ 537
Add:
Specific provision for the year - 386 -
Less:
Loan provision applied (586) (337) -
------------------------------------
Balance - End of year $ - $ 586 $ 537
------------------------------------
------------------------------------
c) At December 31, 2007, the Company had entered into agreements
to advance funds of $22.4 million. Advances under these agreements
are subject to the completion of due diligence, no material adverse
change in the assets, business or ownership of the borrower and
other terms. In addition, at December 31, 2007, the Company had
committed to future advances, primarily construction loans, of up
to $75.9 million.
7. Restricted cash
2007 2006
---------------------
Castle Mountain $ 1,999 $ 2,568
Cash held for loans 10,453 -
---------------------
Total $ 12,452 $ 2,568
---------------------
---------------------
a) Castle Mountain
Pursuant to an agreement among the partners of the Castle
Mountain property, the Company is required to set aside restricted
cash of US$2,016,000 ($1,999,000) as at December 31, 2007 (2006 -
US$2,204,000 or $2,568,000) in a fund to fulfill reclamation and
closure obligations at the Castle Mountain property.
b) Cash held for loans
Certain of the Company's loan agreements permit the Company to
withhold a portion of the total loan amount in trust as interest
reserves. These amounts are drawn down as interest payments are
due. Amounts held in trust relating to unearned interest are
recorded as restricted cash.
8. Debt payable
In March 2007, the Company entered into a revolving debt
facility with a major Canadian chartered bank for up to $25
million. In January 2008, the Company completed the refinancing of
this credit facility, with the new facility syndicated among three
major Canadian chartered banks. As a result of this refinancing,
subsequent to December 31, 2007, the Company's access to debt
financing increased from $25 million to $88 million. The facility
bears interest at prime or bankers acceptance rates plus 1.25% per
annum and is collateralized by the Company's loan portfolio. As at
December 31, 2007, $25.0 million was outstanding under the original
facility.
In addition to the revolving debt facility, the Company had
entered into a short-term unsecured debt facility. The facility
bears interest at prime plus 2% and is payable on demand. As at
December 31, 2006, $22 million was outstanding on this facility and
was repaid in 2007. As at December 31, 2007, $1.4 million is
outstanding on this facility.
9. Asset retirement obligation
The Company's asset retirement obligation relates to closure
obligations at its Castle Mountain property.
A reconciliation of the asset retirement obligation is as
follows:
2007 2006 2005
----------------------------------
Balance - beginning of year $ 1,011 $ 1,884 $ 5,366
Liabilities settled during the year (352) (935) (2,498)
Liabilities disposed of during the year - (2,078)
Accretion expense 50 75 155
Revisions in estimated cash flows - - 943
Currency translation adjustment (137) (13) (4)
----------------------------------
Balance - end of year $ 572 $ 1,011 $ 1,884
----------------------------------
----------------------------------
10. Share capital
a) Authorized
Unlimited First and Second Preferred Shares
Unlimited common shares without par value
Previously the Company had Class A Voting Shares and Class B
Voting Shares. Effective April 19, 2005, the Class B Shares were
cancelled and the designation of the Class A Shares was changed to
common shares.
b) Shares issued and outstanding
2007 2006 2005
-------------------- -------------------- --------------------
Number Number of Number of
of shares Amount shares Amount shares Amount
--------------------------------------------------------------
Common Shares
Opening
balance 144,842,628 $202,513 119,265,568 $138,891 - $ -
Issued
for cash - - 15,625,000 50,000 24,300,000 51,890
Share issue
costs - (2,684) - (3,587)
Issued on
exercise of
stock
options 883,333 1,571 1,094,500 2,135 - -
Issued on
exercise of
warrants - - 8,833,335 13,300 4,500,000 7,200
Issued on
exercise of
compensation
options 1,063,750 2,447 24,225 56 - -
Fair value of
options
exercised - 630 - 815 - -
Exchanged for
Class A
Shares - - - - 90,465,568 83,388
--------------------------------------------------------------
Closing
balance 146,789,711 $207,161 144,842,628 $202,513 119,265,568 $138,891
--------------------------------------------------------------
--------------------------------------------------------------
2007 2006 2005
-------------------- -------------------- --------------------
Number Number of Number of
of shares Amount shares Amount shares Amount
--------------------------------------------------------------
Class A Shares
Opening balance - - - - 90,465,568 83,388
Exchanged
for
common
shares - - - - (90,465,568) (83,388)
--------------------------------------------------------------
Closing
balance - - - - - -
--------------------------------------------------------------
Total share
capital $207,161 $202,513 $138,891
--------------------------------------------------------------
--------------------------------------------------------------
In April 2006, the Company completed a public offering of
15,625,000 shares of the Company at a price of $3.20 per share for
aggregate proceeds of $50,000,000. Net proceeds from the equity
offering after expenses were $47,316,000.
In August 2005, the Company completed a public offering of
18,500,000 shares of the Company at a price of $2.30 per share for
aggregate proceeds of $42,550,000. The Company also granted the
underwriters an over-allotment option exercisable to October 23,
2005 to purchase up to an additional 2,775,000 shares at a price of
$2.30 per share, of which the underwriters acquired 800,000 shares.
In addition, the underwriters were granted 1,158,000 compensation
options expiring August 23, 2007 and October 26, 2007. Each
compensation option was exercisable at $2.30 per common share. Net
proceeds from the equity offering and over allotment after expenses
were $40,803,000.
In May 2005, the Company completed a private placement of
5,000,000 shares at a price of $1.50 per share for aggregate
proceeds of $7,500,000.
c) Warrants issued and outstanding
Exercise
Number of price per
warrants share Expiry date
--------------------------------------
Class A Shares
Opening balance - January 1,
2005 13,333,335
Exercised (4,500,000) $1.60 October 20, 2008
----------
Closing balance - December 31,
2005 8,833,335
Exercised (8,333,335) 1.50 June 30, 2008
Exercised (500,000) 1.60 October 20, 2008
----------
Closing balance - December 31,
2006 and 2007 -
----------
----------
d) Compensation options issued and outstanding
Exercise
Number of price per
options share Expiry date
--------------------------------------
Common shares
Opening balance - January 1,
2005 -
Issued pursuant to a public
offering 1,110,000 $2.30 August 23, 2007
Issued pursuant to a public
offering 48,000 2.30 October 26, 2007
---------
Closing balance - December 31,
2005 1,158,000
Exercised (24,225) 2.30 August 23, 2007
---------
Closing balance - December 31,
2006 1,133,775
Exercised (1,015,750) 2.30 August 23, 2007
Exercised (48,000) 2.30 October 26, 2007
Expired (70,025) 2.30 August 23, 2007
---------
Closing balance - December 31,
2007 -
---------
---------
e) Stock options outstanding
The Company has a stock option plan under which the Company may
grant options to its directors, employees and consultants for up to
10% of the issued and outstanding common shares. The exercise price
of each option is required to be equal to or higher than the market
price of the Company's common shares on the day of grant. Vesting
and terms of the option agreement are at the discretion of the
Board of Directors.
During the years ended December 31, 2007, 2006 and 2005, the
changes in stock options outstanding are as follows:
2007 2006 2005
------------------------------------------------------------
Weighted Weighted Weighted
average average average
Number of share Number share Number of share
shares price of shares price shares price
------------------------------------------------------------
Common shares
Opening
balance 8,981,333 $ 2.02 9,563,333 $ 1.97 - $ -
Granted 2,855,000 3.05 550,000 2.79 2,350,000 2.14
Exercised (883,333) 1.78 (1,094,500) 1.95 - -
Expired (400,000) 3.04 - - (160,415) 1.89
Cancelled - - (37,500) 2.30 - -
Exchanged for
Class A share
options - - - - 7,373,748 1.91
------------------------------------------------------------
Closing
balance 10,553,000 $ 2.28 8,981,333 $ 2.02 9,563,333 $1.97
------------------------------------------------------------
------------------------------------------------------------
Options
exercisable
at year-end 8,794,480 $ 2.13 8,151,630 $ 1.98 8,096,146 $1.93
------------------------------------------------------------
------------------------------------------------------------
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2007:
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
--------------------------------------------------------------------------
$ 1.51 223,000 1.64 $ 1.51 223,000 $ 1.51
$ 1.52 to 1.95 6,150,000 1.14 1.95 6,150,000 1.95
$ 1.96 to 2.31 1,150,000 2.96 2.30 1,150,000 2.30
$ 2.32 to 3.24 3,030,000 4.07 3.00 1,271,480 2.93
---------------------------------------------------------
10,553,000 2.19 $ 2.28 8,794,480 $ 2.13
---------------------------------------------------------
---------------------------------------------------------
f) Contributed capital
2007 2006 2005
----------------------------------
Opening balance $ 6,479 $ 6,772 $ 4,198
Fair value of options exercised (630) (814) -
Stock-based compensation 1,085 521 2,142
Other - - (90)
Compensation options - - 522
----------------------------------
Ending balance $ 6,934 $ 6,479 $ 6,772
----------------------------------
----------------------------------
The fair values of options for 2007, 2006 and 2005 have been
estimated using an option pricing model. Assumptions used in the
pricing model are as follows:
2007 2006 2005
------------------------------------
Risk-free interest rate 4.10% 3.73% 3.18%
Expected life of options 3.0 years 2.5 years 2.3 years
Expected stock price volatility 35% 33% 33%
Expected dividend yield 2.74% 2.81% 0%
Weighted average fair value of options $ 0.72 $ 0.62 $ 0.42
11. Income taxes
a) The provision for (recovery of) income taxes consist of the
following:
2007 2006 2005
-----------------------------------
Current
Canada $ 489 $ 1,184 $ 488
United States 176 111 (315)
-----------------------------------
Total current expenses 665 1,295 173
-----------------------------------
Future
Canada 11,898 (8,012) (6,488)
United States (242)
-----------------------------------
Total future expenses (recoveries) 11,656 (8,012) (6,488)
-----------------------------------
Total provision for (recovery of)
Income taxes $ 12,321 $ (6,717) $ (6,315)
-----------------------------------
-----------------------------------
b) The reconciliation of the statutory income tax rates to the
effective tax rates on the earnings (loss) before income taxes is
as follows:
2007 2006 2005
---------------------------------------
Income taxes at statutory rates $ 12,278 $ 14,925 $ 5,985
Increase (decrease) in taxes from:
Non-deductible differences 4,709 (193) 938
Difference in foreign tax rates 4 (173) (92)
Change in enacted tax rates 3,502 - -
Benefits of timing differences not
previously recognized (2,091) (2,162) (426)
Recognition of prior year tax
losses (6,081) (19,114) (12,720)
------------------------------------
$ 12,321 $ (6,717) $ (6,315)
---------------------------------------
---------------------------------------
c) The Company has non-capital losses to reduce future taxable
income in Canada of approximately $6,729,000. These losses expire
in 2015.
d) The significant components of the future income tax assets
and liabilities are as at December 31, 2007 as follows:
2007 2006
-------------------------
Loss carryforwards $ 2,116 $ 8,524
Capital losses 9,186 16,669
Resource and capital assets 1,133 7,071
Investments and marketable
securities - 1,071
Other 2,168 3,029
-------------------------
14,603 36,364
Valuation allowance (10,687) (21,864)
-------------------------
Future income tax asset $ 3,916 $ 14,500
-------------------------
-------------------------
Deferred gain and other $ 904 $ 1,326
-------------------------
Future tax liability $ 904 $ 1,326
-------------------------
-------------------------
12. Related party transactions
Other than as reported elsewhere in these statements, related
party transactions are as follows:
a) Marketable securities and investments as at December 31, 2007
include $nil (2006 - $9,143,000) of shares held in publicly traded
companies related by virtue of having certain directors and
officers in common. For the year ended December 31, 2007, the
Company recorded a gain on disposal of securities and investments
of $3,604,000 (2006 - $10,627,000, 2005 - $3,854,000) in companies
related by virtue of having certain directors and officers in
common. These transactions were recorded at the exchange amount
which management believes to be a fair approximation of fair value.
Included in the above gain is $0.5 million (2006 - $nil, 2005 -
$nil) related to marketable securities and investments sold to
certain directors and officers. For the year ended December 31,
2007, the Company recorded a write-down of investments of $nil
(2006 - $1,207,000, 2005 - $nil) in companies related by virtue of
having certain directors in common.
b) For the year ended December 31, 2007, the Company borrowed
and repaid $nil (2006 - $20,000,000, 2005 - $nil) from related
parties. Interest paid on these borrowings totalled $nil (2006 -
$110,000, 2005 - $nil).
c) Included in accounts payable is $4,620,000 (2006 -
$3,170,000) due to employees and officers for bonuses payable.
d) For the year ended December 31, 2007, the Company received
$807,000 (2006 - $1,507,000, 2005 - $1,614,000) in management and
finder's fees from parties related by virtue of having certain
directors and officers in common. Other assets as at December 31,
2007 includes $nil (2006 - $245,000) 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
year ended December 31, 2007, the Company recorded a write-down of
other assets of $37,000 (2006 - $74,000, 2005 - $nil) in parties
related by virtue of having certain directors in common.
e) During the year ended December 31, 2007, the Company received
$98,000 (2006 - $607,000, 2005 - $2,111,000) in interest and fees
from related parties by virtue of having certain directors and
officers in common. During the year ended December 31, 2007, the
Company has made $nil in additional provision for losses on loans
and convertible debenture (2006 - $386,000, 2005 - $nil) from a
party related by virtue of having a director in common.
f) For the year ended December 31, 2007, the Company received
$41,000 (2006 - $24,000, 2005 - $128,000) in syndication loan
administration fees from related parties.
13. Contingencies and commitments
a) Surety bond guarantees totalling US$2,405,000 have been
provided by Castle Mountain Joint Venture for compliance with
reclamation and other environmental agreements.
b) On March 22, 2002, Quest Investment Corporation, a
predecessor corporation, and other parties were named as defendants
in a lawsuit filed in the Supreme Court of British Columbia. The
plaintiff has claimed approximately $410,000 plus interest due for
consulting services. Management intends to fully defend this claim.
Accordingly, no provision has been made for this claim in the
consolidated financial statements. The ultimate outcome of this
claim is not determinable at the time of issue of these
consolidated financial statements and the costs, if any, will be
charged to earnings 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:
2008 $ 625
2009 625
2010 548
2011 395
2012 395
d) Other commitments and contingencies are disclosed elsewhere
in these consolidated financial statements and notes.
14. Risk management
The primary goals of the Company's risk management are to ensure
that the outcomes of activities involving elements of risk are
consistent with the Company's objectives and risk tolerance, and to
maintain an appropriate risk/reward balance while protecting the
Company's balance sheet from events that have the potential to
materially impair its financial strength. Balancing risk and reward
is achieved through aligning risk appetite with business strategy,
diversifying risk, pricing appropriately for risk, mitigating risk
through preventative controls and transferring risk to third
parties.
The Company is exposed to potential loss from various risks,
including interest rate risk and credit risk.
Interest Rate Risk
Fluctuations in interest rates have a direct impact on the
market valuation of the Company's loan portfolio. Generally, the
Company's interest income will be reduced during sustained periods
of lower interest rates as higher yielding loans mature and the
proceeds are invested in loans with lower rates. During periods of
rising interest rates, the market value of the Company's existing
loan portfolio will generally decline.
Credit Risk
Credit risk is the risk that one party to a financial instrument
fails to discharge an obligation and causes financial loss to
another party. The Company is exposed to credit risk concentrated
in its loan portfolio.
The Company's risk management strategy is to lend money to high
net worth borrowers and to limit the amount of credit exposure with
respect to any one borrower. The Company attempts to limit credit
exposure by considering credit quality.
15. Segmented information
The Company has primarily one operating segment, which is to
provide mortgage financings. The Company's geographic location is
Canada.
16. Supplemental cash flow information
a) Cash received or paid
2007 2006 2005
---------------------------------------
Interest received (non-loan) $ 680 $ 1,380 $ 543
Interest paid 493 1,081 33
Income tax instalments 696 - -
Income taxes paid, related to
previous years 2,718 - -
b) Non-cash financing and investing activities
2007 2006 2005
---------------------------------------
Marketable securities and
investments received as loan
fees $ 3,964 $ 2,157 $ 2,005
Investment purchases funded by
brokerage margin account - (30,899) -
Investment proceeds funded by
brokerage margin account - 30,899 -
Property and other assets
received as loan fees - - 121
Loans and debenture settled with
shares - - 4,516
Shares received as consideration
for sale of resource property - - 1,800
17. United States generally accepted accounting principles
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP")
in Canada which differ, in certain respects, from GAAP in the
United States of America. Material measurement differences related
to these consolidated financial statements are as follows:
a) Reduction of stated capital
At the Company's Annual General Meeting in June 2003,
shareholders approved a reduction of stated capital. This practice
is allowed under Canadian GAAP. Under United States GAAP, companies
are not allowed to record a reduction of stated capital in these
circumstances. This GAAP difference has no net impact on total
shareholders' equity reported.
b) Unrealized holding gains (losses)
Under United States GAAP, securities are classified as
held-for-trading assets and investments are classified as
available-for-sale assets. Unrealized holding gains and losses for
trading securities are included in earnings. Unrealized holding
gains and losses for long-term available-for-sale investments are
excluded from earnings and reported as a net amount in a separate
component of shareholders' equity until realized.
Prior to January 1, 2007, marketable securities were recorded at
the lower of average cost and market value under Canadian GAAP and
investments were valued at cost or at cost less amounts written off
to reflect any impairment in value considered to be other than
temporary under Canadian GAAP. These differences were eliminated as
a result of the adoption of the Financial Instruments Standards
under Canadian GAAP, as described in Note 2.
c) Fair value of conversion option
For United States GAAP purposes, the conversion option of a
debenture into shares is considered an embedded derivative to the
holder of the debenture and changes in the fair value of such
derivative is reported in the statements of earnings.
Prior to January 1, 2007, derivatives embedded within hybrid
instruments generally were not separately accounted for under
Canadian GAAP. This difference was eliminated as a result of the
adoption of the Financial Instruments Standards under Canadian
GAAP, as described in Note 2.
d) Dilution gains
Under Canadian GAAP, the Company recognizes a gain or loss on
the dilution of its interests in subsidiaries upon the issue of new
shares by the subsidiary to third parties. Under United States
GAAP, such gains related to development stage subsidiaries are
accounted for as an equity transaction.
e) Shareholders' equity
Under United States GAAP, accumulated other comprehensive income
is recorded as a separate component of shareholder's equity. Prior
to January 1, 2007, Canadian GAAP did not permit presentation of
other comprehensive income. This difference was eliminated as a
result of the change in accounting principles under Canadian GAAP,
as described in Note 2.
d) Reconciliation to United States GAAP
The application of the above described United States GAAP
differences would have the following effect on earnings and
comprehensive income (loss), earnings per share, marketable
securities, investments, and total shareholders' equity for United
States GAAP purposes:
2007 2006 2005
----------------------------------
Earnings
As reported in accordance with Canadian
GAAP $ 23,667 $ 43,701 $ 23,551
Adjustment for unrealized (loss) gain
on trading securities - 213 (38)
Gain on dilution of shares - - (252)
Fair value adjustment for derivatives - - (250)
----------------------------------
Net earnings under United States GAAP 23,667 43,914 23,011
Other comprehensive income
Adjustment for unrealized holding gains
(losses) - (2,545) 1,233
----------------------------------
Comprehensive income $ 23,667 $ 41,369 $ 24,496
----------------------------------
----------------------------------
Earnings per share under United States
GAAP
Basic $ 0.16 $ 0.30 $ 0.24
Diluted $ 0.16 $ 0.29 $ 0.24
Marketable securities
Under Canadian GAAP $ - $ 1,865 $ 945
Adjusted for fair market value
(note 17(b)) - 436 223
----------------------------------
Under United States GAAP $ - $ 2,301 $ 1,168
----------------------------------
----------------------------------
Investments
Under Canadian GAAP $ - $ 9,980 $ 17,117
Adjusted for fair market value
(note 17(b)) - 3,388 7,313
----------------------------------
Under United States GAAP $ - $ 13,368 $ 24,430
----------------------------------
----------------------------------
Total shareholders' equity
Share capital
Under Canadian GAAP $ 207,161 $ 202,513 $ 138,891
Adjusted for reduction of stated
capital (note 17(a)) 185,584 185,584 185,584
----------------------------------
Under United States GAAP $ 392,745 $ 388,097 $ 324,475
----------------------------------
Warrants and options
Under Canadian and United States GAAP $ 6,934 $ 6,479 $ 6,772
----------------------------------
Retained earnings (deficit)
Under Canadian GAAP $ 76,539 $ 65,137 $ 26,645
Cumulative adjustments to deficit (185,584) (185,148) (185,361)
----------------------------------
Under United States GAAP $ (109,045) $ (120,011) $ (156,716)
----------------------------------
Cumulative other comprehensive income
Under Canadian GAAP $ - $ - $ -
Adjusted for fair value of investments - 2,232 4,777
----------------------------------
Under United States GAAP $ - $ 2,232 $ 4,777
----------------------------------
Total shareholders' equity under
United States GAAP $ 290,634 $ 276,797 $ 179,308
----------------------------------
----------------------------------
Statement of Cash Flows From
Operating activities under Canadian and
United States GAAP $ 27,769 $ 30,309 $ 10,310
Financing activities under Canadian and
United States GAAP $ (5,473) $ 74,080 $ 56,025
Investing activities under Canadian and
United States GAAP $ (1,200) $ (128,650) $ (39,138)
g) Significant accounting changes
In July 2006, the Financial Accounting Standards Board "FASB"
issued Interpretation No. 48 "FIN 48", "Accounting for Uncertainty
in Income Taxes". FIN 48 was issued to address financial statement
recognition and measurement by an enterprise of a tax position
taken or expected to be taken in a tax return. The Company adopted
this standard on January 1, 2007. This new standard did not have
any impact on its consolidated financial statements.
h) Impact of recently issued accounting standards
(i) In September 2006, FASB issued SFAS No. 157 "Fair Value
Measurements" ("SFAS No. 157"), effective for periods beginning
after November 15, 2007. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair
value measurements. In December 2007, FASB issued SFAS 157-b, which
provided for a one-year deferral of the implementation of SFAS No.
157 for financial assets and liabilities. However, SFAS No. 157 is
still required to be adopted effective January 1, 2008, for
financial assets and liabilities that are carried at fair value.
The Company is currently evaluating the impact of the adoption of
this standard on its consolidated financial statements.
(ii) In February 2007, FASB issued FASB Statement No. 159, The
Fair Value for Financial Assets and Financial Liabilities Including
an amendment of FASB No. 115, which provides an option to elect to
treat certain financial assets and liabilities on a fair value
basis. This standard is effective for the Company's 2008 financial
statements. The Company is currently evaluating the impact of the
adoption of this standard on its consolidated financial
statements.
(iii) In December 2007, FASB issued SFAS 141� "Business
Combinations" and SFAS 160 "Non-controlling Interest in
Consolidated Financial Statements" which are both effective for
fiscal years beginning after December 15, 2008. SFAS 141� which
will replace FAS 141, is applicable to business combinations
consummated after the effective date of December 15, 2008. The
Company is currently evaluating the impact of the adoption of this
standard on its consolidated financial statements.
i) Adjustment to comparative figures
Comparative figures have been adjusted due to prior period
disclosure errors relating to cumulative translation adjustment and
other comprehensive income.
QUEST CAPITAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2007
INTRODUCTION
The following information, prepared as of March 12, 2008, should
be read in conjunction with the audited annual consolidated
financial statements of Quest Capital Corp. ("Quest" or the
"Company") as at December 31, 2007 and 2006 and for the years ended
December 31, 2007, 2006 and 2005 and related notes attached
thereto, which were prepared in accordance with Canadian generally
accepted accounting principles ("GAAP"). All amounts are expressed
in Canadian dollars unless otherwise indicated.
Additional information relating to the Company, including the
Company's Annual Information Form, is available on SEDAR at
www.sedar.com.
BUSINESS PROFILE AND STRATEGY
In December 2007, Quest reorganized its business, operations and
assets in order to qualify as a mortgage investment corporation
("MIC") for Canadian income tax purposes. A MIC is a
special-purpose corporation defined under Section 130.1 of the
Income Tax Act (Canada) (the "Tax Act"). A MIC does not pay
corporate-level taxes when all taxable income is distributed to
shareholders as dividends during a taxation year and within 90 days
of its year end. Taxable Canadian shareholders will have dividend
payments subject to Canadian tax as interest income. As of January
1, 2008, the Company must continually meet the following criteria
to maintain MIC eligibility: (i) at least 50% of its assets must
consist of residentially oriented mortgages and/or cash; (ii) it
must not directly hold any foreign assets, including investments
secured by real property located outside of Canada; (iii) it must
not engage in operational activities outside of the business of
lending and investing of funds; and (iv) no person may own more
than 25% of the issued and outstanding shares.
These steps represent the culmination of Quest's evolution into
a mortgage lender, concentrating on residentially oriented
properties in Canada. Whereas in the past, Quest had engaged in
bridge loan financings to resource companies, corporate finance
transactions and had made investments outside of Canada, as at
December 31, 2007, the Company has streamlined and simplified its
operations to conform to the MIC qualification rules under the Tax
Act.
The Company's primary lending activities are hereafter
anticipated to be in first mortgages on Canadian real estate,
concentrating on residentially oriented loans. In general, a loan
is residentially oriented if, at the time the loan is made, greater
than 80% of the real estate by which the loan is secured, is, or is
intended to be, devoted to residential purposes. This includes
developing or financing single family, apartment, condominium,
social housing and nursing/retirement residences.
The strategy of the Company is to produce a significant dividend
yield for shareholders, while at the same time profitably growing
the mortgage portfolio. To this end, Quest completed a financing in
early January 2008 which provides it with an $88.0 million
revolving debt facility to be used to increase its mortgage
portfolio. This is considered to be growth through leverage. The
Company plans to pursue other avenues for increasing leverage in
the future.
NON-GAAP MEASURES
Basic earnings per share ("EPS") before taxes, return on equity
before taxes, return on assets before taxes and payout ratio on
earnings before taxes do not have standardized meanings prescribed
by GAAP and, therefore, may not be comparable to similar measures
presented by other companies. The fact that tax expense is for the
most part a non-cash item is the major reason the Company
calculates and highlights various ratios on a before tax basis.
Non-GAAP measures used in this management's discussion and analysis
("MD&A") are calculated as follows:
- basic earnings per share before taxes - earnings before taxes
divided by number of common shares outstanding for basic EPS
purposes;
- return on equity before taxes - earnings before taxes divided
by average shareholders' equity;
- return on assets before taxes - earnings before taxes divided
by average total assets; and
- payout ratio on earnings before taxes - dividends paid divided
by earnings before taxes.
Readers are cautioned not to view non-GAAP measures as
alternatives to financial measures calculated in accordance with
GAAP.
2007 FINANCIAL HIGHLIGHTS
Among the major financial highlights for 2007 was Quest's
ability to increase its lending capacity in terms of human capital,
credit adjudication and funding processes. The Company's systems
and processes have been developed to allow for a significant
increase in its mortgage lending operations. At the end of 2007,
Quest completed its transformation into a MIC. To do this, it shed
itself of certain of its previous operating activities in its
management and corporate services areas, as well as its investments
in other public companies. The decrease in non-interest income in
2007 from that in 2006 reflects this decrease in activity. As well,
the Company invested heavily in professional services for legal and
taxation advice and a great deal of resources were devoted to
complying with the Sarbanes-Oxley ("SOX") regulations of the United
States ("US") securities regulators and with the ongoing corporate
governance and disclosure requirements of the Canadian securities
regulatory authorities. These significant non-recurring expenses
inflated the Company's non-compensation expenses above normal
levels; details of this are included in the "results of operations"
section of this MD&A.
The Company recorded significant tax expenses in 2007 as a
result of drawing down on future tax assets set up in prior years.
In the Company's case, taxes are non-cash items for the most part;
however, the reversal of tax assets set up in prior years has
caused a significant increase in tax expense and a decrease in the
Company's 2007 net earnings from those of 2006. The fact that tax
expense is for the most part a non-cash item is the major reason
the Company calculates and highlights various ratios on a before
tax basis.
The following table highlights certain aspects of Quest's 2007
financial performance and should be read in conjunction with the
"Results of Operations" section of this MD&A.
FINANCIAL PERFORMANCE
Table 1 - Selected Annual Financial Information(2)
($ thousands, except per share amounts)
Change
from 2006
2007 2006 2005 $ %
------------------------ -------------
Key Performance Indicators
Interest and related fees 42,114 32,591 17,410 9,523 29%
Non-interest income 11,050 18,499 9,490 (7,449) (40%)
Net interest and non-interest
income 52,498 49,472 26,837 3,026 6%
Earnings before income taxes 35,988 36,984 17,168 (996) (3%)
Earnings per share before
taxes(1) 0.25 0.27 0.17 (0.02) (7%)
Net earnings 23,667 43,701 23,551 (20,034) (46%)
Earnings per share - basic 0.16 0.32 0.23 (0.16) (49%)
Earnings per share - diluted 0.16 0.31 0.23 (0.15) (49%)
Return on equity before taxes(1) 13% 16% 13%
Return on assets before taxes(1) 11% 15% 11%
Dividends per share 0.095 0.050 0.030
Payout ratio on earnings before
taxes(1) 38% 19% 18%
Total assets 325,744 305,737 187,918 20,007 7%
Total liabilities 35,110 31,608 13,624 3,502 11%
Shareholders' equity 290,634 274,129 174,294 16,505 6%
Book value per share 1.98 1.89 1.46
1. See page 2 for a discussion on non-GAAP measures.
2. The amounts presented reflect the adoption of financial instruments
standards retroactively without restatement, refer to note 2 to the
Company's financial statements.
DIVIDEND POLICY FOR 2008
Dividend payments reduce the taxable income of a MIC. These
dividends are taxed as interest in the hands of shareholders.
Consistent with its MIC status for taxation purposes, Quest's
dividend policy is to distribute sufficient dividends to
shareholders throughout 2008 and within 90 days after the end of
2008 to reduce its taxable income to a negligible amount, after
first deducting all available loss carry forwards and other
deductions against 2008 taxable income. It is expected that this
will result in a significant increase in dividends above 2007
levels.
OUTLOOK
Quest's primary focus for 2008 is twofold. The first is to
utilize its tax status as a MIC to pay negligible income taxes and
in the process enhance the dividend yield for shareholders. The
second is to grow its mortgage portfolio profitably and safely
using leverage, that is, through using its revolving debt facility
rather than through earnings retained in the business. The Company
expects to be able to decrease certain of its general and
administrative expenses. Staff growth will be contained as the
human resources platform at the end of 2007 is expected to be
sufficient to manage the expected growth in the loan portfolio.
Non-interest income will be negligible in 2008 as the Company
divested itself of the operations producing this income at the end
of 2007 as part of its process to become MIC eligible.
RESULTS OF OPERATIONS
Table 3 - Condensed Income Statement
($ thousands)
2007 2006 2005
----------- ----------- -----------
$ % $ % $ %
- - - - - -
Income net of interest expense and
provisions
Interest and related fees 42,114 80 32,591 66 17,410 65
Non-interest income 11,050 21 18,499 37 9,490 35
Interest on debt (666) (1) (1,380) (3) (63) -
Provision for loan losses - - (238) - - -
----------- ----------- -----------
52,498 100 49,472 100 26,837 100
----------- ----------- -----------
Expenses
Salaries 5,042 30 2,889 23 2,108 22
Bonuses 4,056 24 5,525 44 2,000 21
Stock-based compensation 1,085 7 521 4 2,142 22
Legal and professional services 2,904 18 1,908 16 820 9
Other 3,423 21 1,645 13 2,531 26
----------- ----------- -----------
16,510 100 12,488 100 9,601 100
----------- ----------- -----------
Earnings before income taxes 35,988 36,984 17,236
Income taxes (recovery) 12,321 (6,717) (6,315)
------ ------ ------
Net earnings 23,667 43,701 23,551
------ ------ ------
------ ------ ------
Interest and related fees
Interest and related fees increased $9.5 million or 29% to $42.1
million for 2007 as compared to $32.6 million in 2006 and $17.4
million in 2005. This increase was largely due to greater average
loan balances in 2007 as compared to 2006 resulting from an
increase in Quest's market penetration related to the hiring of two
additional loan originators. Measured on a quarterly basis, the
average outstanding loan portfolio was $260.3 million in 2007, a
$47.9 million or 23% increase over the $212.4 million average
balance outstanding in 2006. Based on these average outstanding
portfolio balances, interest and related fee yields were 16.2% in
2007 compared to 15.3% in 2006.
Non-interest income
The Company's non-interest income largely relates to its
marketable securities and investments, and to its management and
corporate finance services operations. As explained elsewhere in
this MD&A, the Company divested itself of these operations
during 2007 in part to attain MIC eligibility. Consequently,
revenues from these activities in 2007 decreased $7.4 million or
40% to $11.1 million from $18.5 million in 2006 and $9.5 million in
2005.
Interest expense and provision for loan losses
Interest expense relates to interest on Quest's revolving debt
facility and other debt and is intermittent in nature. The Company
plans to utilize its revolving debt facility to a greater extent in
future periods. There was no provision for loan losses in 2007
compared to a provision on one loan for $0.6 million in 2006.
Salaries and bonuses
Salaries and benefits increased $2.2 million or 75% to $5.0
million in 2007 compared to $2.9 million in 2006 and $2.1 million
in 2005 as a result of the addition of new employees to manage the
increase in the average portfolio outstanding and to meet
regulatory and more sophisticated procedural demands. Total head
count, in Quest's lending business, as at December 31, 2007 was 21
compared to 13 as at December 31, 2006. At the time Quest
Management Corp. and Quest Securities Corporation were disposed of
in December 2007, all 10 employees engaged in management and
corporate finance services were terminated. A total of $0.6 million
in severance charges have been recorded in 2007 compared to $nil in
2006 and 2005.
Bonuses for the year ended December 31, 2007 were $4.1 million,
a decrease of $1.5 million or 27% from $5.5 million in 2006 and
$2.0 million in 2005, primarily due to a decrease in bonuses paid
to employees in the corporate finance operations. Bonuses represent
amounts under the Company's incentive plans paid to officers and
employees of the Company. The Company's incentive plans include
discretionary and non-discretionary components. Discretionary
payments and allocations are subject to the approval of the
Compensation Committee and the Board of Directors.
Stock based compensation
Stock based compensation increased $0.6 million or 108% in 2007
to $1.1 million as compared to $0.5 million in 2006 and $2.1
million in 2005 as a result of a greater number of options being
granted to employees and directors. In 2007, 2,855,000 options were
granted to employees and directors, in 2006 the number of options
granted was 550,000. The expense related to options is recorded on
a straight line basis over the expected vesting term of the option
(usually three years), therefore the 2007 expense relates to
options vesting over a three year period.
Legal and professional fees
Legal and professional fees increased $1.0 million or 52% to
$2.9 million in 2007 as compared to $1.9 million in 2006 and $0.8
million in 2005, primarily due to several non-recurring advisory
expenses in 2007 related to the following: $0.4 million in tax
planning and advisory fees relating to the Company's conversion to
a MIC; $0.8 million in advisory services related to SOX compliance,
including the provision of an internal audit function by external
consultants; $0.2 million in tax compliance fees related to the
re-filing of prior year's US tax returns.
Other expenses
Other expenses include general and office expenses, directors'
remuneration, regulatory and other miscellaneous expenses. These
expenses have increased $1.8 million or 108% to $3.4 million in
2007 from $1.6 million in 2006 and $2.5 million in 2005. The 2007
increase is largely a result of costs associated with increased
staff levels and loan activities during 2007. Also included in 2007
other expenses is a $0.3 million non-recurring charge related to
sales tax.
Provision for income taxes
For fiscal years 2005 and 2006, the Company recognized a future
tax asset based on the likely realization of tax losses which were
to be utilized against future taxable earnings. In 2005, a future
tax asset (and a reduction in income tax expense) of $6.5 million
was recognized and in 2006 an additional $8.0 million was
recognized. As a result of the recognition of these future tax
assets in 2005 and 2006, net earnings increased by $6.5 million and
$8.0 million, respectively.
In 2007, net earnings were reduced through the recording of a
tax provision as a result of the utilization of the future tax
assets set up in 2006 and 2005. The tax assets are comprised of
losses carried forward and other tax deductions (see Critical
Accounting Policies and Estimates - Future Tax Asset). In 2007, tax
assets were reduced and transferred to the provision for taxes on
the statements of earnings in the amount of $11.9 million. The
balance of the 2007 provision represents current tax expenses
related to the Company's subsidiaries. In 2008, the future tax
asset will be further utilized to reduce taxable income. The set up
and utilization of these tax assets are non-cash items.
Net earnings
For the year ended December 31, 2007, the Company had
consolidated net earnings of $23.7 million (or $0.16 basic EPS)
compared to consolidated net earnings of $43.7 million (or $0.32
basic EPS) in 2006 and $23.6 million (or $0.23 basic EPS) in 2005.
As discussed in the above section on income taxes, much of the
decrease in net earnings is attributable to the manner by which
income taxes, a non-cash item for the most part, has been accounted
for.
Comprehensive income
At December 31, 2007, the Company has no available for sale
assets or liabilities whose fair values differ from their original
carrying value. As a result, there is no accumulated other
comprehensive income to report as at December 31, 2007. The
transition adjustment of $2.2 million at January 1, 2007 relating
to investments was reversed due to dispositions of all of these
assets during 2007, resulting in comprehensive income of $21.4
million.
FINANCIAL POSITION
Table 4 - Asset Components
($ thousands)
2007 2006 2005
------------- ------------- -------------
Asset mix $ % $ % $ %
- - - - - -
Cash and cash equivalents 30,484 9% 9,506 3% 33,739 18%
Marketable securities and
investments - - 11,845 4% 18,062 9%
Loans 277,710 85% 264,902 87% 124,551 66%
Future tax asset 3,916 1% 14,500 5% 6,488 3%
Other 13,634 5% 4,984 1% 6,763 4%
------------- ------------- -------------
325,744 100% 305,737 100% 189,603 100%
------------- ------------- -------------
------------- ------------- -------------
Cash, marketable securities and investments
The Company's cash resources at December 31, 2007 were $30.5
million as compared to $9.5 million as at December 31, 2006. Cash
and cash equivalents include cash balances with a major Canadian
chartered bank, and do not include any investments in commercial
paper.
As the Company's focus is to provide loans, its cash balances
will vary depending on the timing of loans advanced and repaid.
As explained elsewhere in this MD&A, the Company disposed of
its marketable securities and investments during 2007 in order to
attain MIC eligibility.
Loans
The Company's loan portfolio continued to grow in 2007 to $277.7
million at year end representing a 5% increase over the previous
year's portfolio balance. As at December 31, 2007, 94% of the
Company's loan portfolio was comprised of mortgages on real estate,
compared to 87% as at December 31, 2006.
As at December 31, 2007, Quest's loan portfolio consisted of 55
loans of which 49 were mortgages secured by real estate and 6 were
bridge loans secured by various mining and energy related assets.
The following table highlights the evolution of the portfolio by
asset type over the last three years:
Table 5 - Loan Portfolio
($ thousands)
2007 2006 2005
------------- ------------- -------------
$ % $ % $ %
- - - - - -
Principal Outstanding
Mortgages
Land under development 151,607 52% 138,181 49% 61,337 49%
Real estate - residential 22,752 8% 5,600 2% 5,091 4%
Real estate - commercial 51,123 18% 80,678 29% 36,152 29%
Construction 54,162 18% 15,590 6% 10,045 8%
------------- ------------- -------------
Total mortgages 279,644 96% 240,049 86% 112,625 90%
Bridge loans 10,549 4% 38,824 14% 13,278 10%
------------- ------------- -------------
Total principal outstanding 290,193 100% 278,873 100% 125,903 100%
---- ---- ----
Prepaid and accrued interest (8,877) (9,391) (981)
Deferred loan fees and other (3,606) (4,580) (371)
------- ------- -------
As recorded on balance sheet 277,710 264,902 124,551
------- ------- -------
------- ------- -------
On a gross basis (including loans syndicated), the Company
funded $328.0 million in loans in 2007, an increase of $48.8
million or 17% over the gross loans funded of $279.2 million in
2006. The Company funded (net of syndications) $250.1 million of
loans during 2007 compared to a net of $255.4 million funded during
2006. As mentioned above, the Company will syndicate a loan, in
certain instances, if it does not have sufficient cash resources to
fund the entire loan itself or if it wishes to reduce its exposure
to a borrower.
The following table illustrates loan continuity on a net basis.
The increase in repayments and other in 2007 to $238.8 million from
$102.4 million in 2006 is due to the short terms of loans offered
to borrowers. The Company charges commitment fees each time a loan
is funded or renewed, hence the shorter the loan term, the greater
the capacity to fund new loans and earn commitment fees.
Table 6 - Loan Principal Continuity
($ thousands)
2007 2006 2005
--------------------------
--------------------------
$ $ $
- - -
Principal balance, beginning of year 278,873 125,903 76,179
Loans funded (net) 250,123 255,373 116,884
Loans repaid and other (net) (238,803) (102,403) (67,160)
--------------------------
Principal balance, end of year 290,193 278,873 125,903
--------------------------
--------------------------
As at December 31, 2007 the portfolio was comprised of 93% first
mortgages and 7% second mortgages. In the case of second mortgages,
the overall loan to value including Quest's second and others'
prior first charges generally do not exceed 75%. The following
table outlines Quest's continuing evolution towards concentrating
on first mortgages:
Table 7 - Priority of Mortgage Security Charges(1)
($ thousands)
2007 2006 2005
------------- ------------- -------------
Principal secured by: $ % $ % $ %
- - - - - -
1st charges 259,344 93% 193,144 80% 75,923 67%
2nd charges 20,300 7% 46,905 20% 36,702 33%
------------- ------------- -------------
Total mortgages 279,644 100% 240,049 100% 112,625 100%
------------- ------------- -------------
------------- ------------- -------------
1. Includes mortgage portion of loan portfolio only.
As at December 31, 2007, the mortgage portfolio is concentrated
in western Canada, orientated with loans in British Columbia
representing 58% of the portfolio, 34% in Alberta and 8% in Ontario
and other. The Company expects that the portfolio will continue to
be weighted in favour of western Canada for the near term
reflecting in part the economic strength of the region.
The following table indicates the geographical concentration of
the Company's mortgages at the stated year ends.
Table 8 - Geographic Location of Mortgages(1)
($ thousands)
2007 2006 2005
------------- ------------- -------------
Principal outstanding $ % $ % $ %
- - - - - -
British Columbia 160,986 58% 115,111 48% 56,602 50%
Alberta 94,440 34% 88,913 37% 30,995 28%
Ontario 17,500 6% 31,140 13% 20,198 18%
Other 6,718 2% 4,885 2% 4,830 4%
------------- ------------- -------------
Total mortgages 279,644 100% 240,049 100% 112,625 100%
------------- ------------- -------------
------------- ------------- -------------
1. Includes mortgage portion of loan portfolio only.
Management reviews the loan portfolio's geographical portfolio
composition on a regular basis and adjusts its targets to reflect
market conditions and company requirements.
Credit quality and impaired loans
As part of the Company's security, full corporate and/or
personal guarantees may be required from the borrower. Where in
Quest's opinion the real estate security alone is not as strong as
management may require, additional collateral is obtained by way of
collateral charges on other real estate owned by the borrower or by
letters of credit. Management reviews the portfolio on a regular
basis to confirm whether the quality of the underlying security is
maintained and that, if credit conditions have deteriorated,
suitable action is taken.
As at December 31, 2007, the Company had one non-performing loan
in the amount of $7.5 million on which remedial action has been
undertaken. In management's estimate, the underlying security on
this loan is of sufficient value to ensure recovery of the
Company's investment.
Quest has no exposure to US sub-prime mortgages or to any
structured investment vehicles. Quest also has no derivative
instruments.
Future income taxes and other assets
The Company has recognized a future tax asset based on the
likely realization of tax losses to be utilized against future
taxable income. In 2007, the provision for income taxes on the
statements of earnings was charged for the amount of this asset, as
represented by tax losses carried forward, required to reduce
taxable income to nil and transferred the amount of $11.9 million
from future income tax asset to current year tax expense. The
Company has also recognized a future tax liability related to its
former U.S. based operations.
Other assets at December 31, 2007 include $12.5 million of
restricted cash, of which $10.5 million was held in trust to fund
borrower's future interest payments.
Liabilities
Total liabilities at December 31, 2007 were $35.1 million as
compared to $31.6 million, as at December 31, 2006 representing an
11% increase. The largest component of total liabilities was the
Company's revolving debt facility. At year end, the Company had a
$25.0 million revolving debt facility, which the Company had fully
drawn upon. In January 2008, this facility was increased to $88.0
million. This facility is used to fund loans, as well as to bridge
any gap between loan advances and loan repayments.
Capital management
Quest's shareholders' equity as at December 31, 2007 of $290.6
million is $16.5 million or 6% greater than that as at December 31,
2006. During 2007, the Company paid out $13.9 million in dividends,
approximately 39% of its earnings before taxes. As discussed above,
as a MIC, the Company intends to pay out sufficient dividends in
2008 to reduce taxable income to a negligible amount, after first
deducting available losses and other tax deductions carried forward
from 2007. The Company's current strategy is to grow through use of
leverage and not through further accumulation of earnings. To this
effect, as stated above, it has negotiated an increase in its
revolving debt facility to $88 million in early January 2008.
Contractual obligations
The Company has contractual obligations for its leased office
space in Vancouver and Toronto. The Company's Calgary office is
leased on a month to month basis. The total minimum lease payments
for the years 2008 - 2012 are $2.6 million. As well, the Company
has committed to fund loan principal as at December 31, 2007 in the
amount of $98.3 million. The following table illustrates these
obligations by period due:
Table 9 - Contractual obligations
($ thousands)
Obligation due by period
--------------------------------------------
Less More
than 1 - 3 3 - 5 than 5
Type of Contractual Obligation Total 1 Year Years Years Years
---------------------------------------------------------------------------
Office Leases $ 2,588 $ 625 $ 1,173 $ 790 -
Loan Commitments 98,300 98,300 - - -
---------------------------------------------------------------------------
Total $100,888 $ 98,925 $ 1,173 $ 790 -
---------------------------------------------------------------------------
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OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
SUMMARY OF QUARTERLY AND FOURTH QUARTER RESULTS
Table 10 - Summary Of Quarterly Results
($ thousands, except per share amounts)
Fourth Third Second First Fourth Third Second First
Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
2007 2007 2007 2007 2006 2006 2006 2006
---------------------------------------------------------------
$ $ $ $ $ $ $ $
------- ------- ------- ------- ------- ------- ------- -------
Interest
and related
fees 11,091 10,110 10,106 10,807 10,597 8,781 7,415 5,798
Non-interest
income 2,187 1,966 4,014 2,883 1,265 3,368 7,905 5,961
Earnings
before taxes 8,156 7,782 10,735 9,315 7,918 9,087 11,664 8,315
Net earnings 3,648 5,264 7,366 7,389 16,021 8,770 10,882 8,028
Basic
Earnings
Per Share 0.02 0.04 0.05 0.05 0.12 0.06 0.08 0.06
Total
Assets 325,744 304,294 295,798 244,025 301,117 280,784 265,614 205,614
Total
Liabilities 35,110 13,125 7,487 6,999 36,228 25,036 20,264 11,445
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The Company's interest and related fees have generally continued
to increase for the past eight quarters as the Company's loan
portfolio has grown.
Non-interest income varies by quarter depending on the amount of
management, advisory, and finder's fees received, marketable
securities' trading gains/(losses) and realized gains and
write-down of investments. During the second quarter of 2006 and
fourth quarter of 2006, net earnings were positively impacted by
the recognition of a future tax asset of $0.8 million and $7.7
million, respectively, as a result of the likely realization of
unused tax losses from future earnings.
Fourth Quarter
Interest and related fees increased $0.5 million or 5% to $11.1
million during the fourth quarter of 2007 as compared to $10.6
million in the fourth quarter of 2006.
Non-interest income increased $0.9 million or 73% to $2.2
million during the fourth quarter of 2007 as compared to $1.3
million in the fourth quarter of 2006. This increase was due to the
sale of all of the Company's marketable securities and investments
to enable Quest to become MIC eligible.
Earnings before taxes increased $0.2 million or 3% to $8.2
million during the fourth quarter of 2007 as compared to $7.9
million in the fourth quarter of 2006.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's accounting policies are described in Note 3 of its
audited consolidated financial statements as at December 31, 2007
and 2006 and for the years ended December 31, 2007, 2006 and 2005.
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, where
required, 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. This 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 at
least a quarterly basis and specific provisions are established
where required on a loan-by-loan basis. In determining the
provision for possible loan losses, the Company considers the
following:
- the nature and quality of collateral and, if applicable, any
guarantee;
- secondary market value of the loan and the related
collateral;
- the overall financial strength of the borrower;
- the length of time that the loan has been in arrears; and
- the borrower's plan, if any, with respect to restructuring the
loan.
Future Tax Assets and Liabilities
The Company has recognized a future tax asset based on its
likely realization of tax losses to be utilized against 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. In
determining whether an additional future income tax asset is to be
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 funds. If an asset has been recorded and the
Company assesses that the realization of the asset 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. The Company has
also recognized a future tax liability related to its former U.S.
based operations.
CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
Effective January 1, 2007, the Company adopted the Canadian
Institute of Chartered Accountants (CICA) Handbook Section 3855
Financial Instruments - Recognition and Measurement, Section 3865
Hedges and Section 1530 Comprehensive Income. As a result of
adopting these new standards, a separate consolidated statement of
comprehensive income is presented in the Company's financial
statements, comprised of net earnings and changes in unrealized
gains or losses related to available-for-sale investments.
The Company will be adopting four new accounting of
pronouncements, namely, Section 3862 "Financial Instruments -
Disclosure", Section 3863 "Financial Instruments - Presentation",
Section 1535 "Capital Disclosures" and Section 3064 "Goodwill and
intangible assets". For further details, refer to Note 3 of the
Company's audited consolidated financial statements as at December
31, 2007 and 2006, and for the years ended December 31, 2007, 2006,
and 2005.
TRANSACTIONS WITH RELATED PARTIES
The Company's related party transactions are described in Notes
4 and 12 of its audited consolidated financial statements as at
December 31, 2007 and 2006 and for the years ended December 31,
2007, 2006 and 2005. Historically, certain directors or officers of
Quest joined the boards of companies in which Quest had invested or
to which Quest had provided bridge loan financing to ensure Quest's
interests were represented. This strategy resulted in related party
transactions. As mentioned above, Quest Securities Corporation and
Quest Management Corp. were sold to certain officers and directors
of Quest. These transactions were reviewed and approved by a
valuation committee of the Board, comprised of three independent
directors.
DISCLOSURE OF OUTSTANDING SHARE DATA
As at March 12, 2008, the Company had the following common
shares and stock options outstanding:
Common shares 146,789,711
Stock options 11,753,000
--------------------------------------------------------------------------
Fully diluted shares outstanding 158,542,711
--------------------------------------------------------------------------
RISKS AND UNCERTAINTIES
Additional risk factors are disclosed under "Risk Factors" in
the Annual Information Form filed on SEDAR at www.sedar.com.
Risk Management
The success of Quest is dependent upon its ability to assess and
manage all forms of risk that affect its operations. Like other
financial institutions, Quest is exposed to many factors that could
adversely affect its business, financial conditions or operating
results. Developing policies and procedures to identify risk and
the implementation of appropriate risk management policies and
procedures is the responsibility of senior management and the Board
of Directors. The Board directly, or through its committees,
reviews and approves these policies and procedures, and monitors
their compliance with them through ongoing reporting
requirements.
Credit Risk Management
Credit risk is the risk that a borrower will not honour its
commitments and a loss to the Company may result. Senior management
is committed to several processes to ensure that this risk is
appropriately mitigated. These include:
- the employment of qualified and experienced loan originators
and underwriters;
- the investigation of the creditworthiness of all
borrowers;
- the engagement of qualified independent consultants such as
lawyers, quantity surveyors, real estate appraisers and insurance
consultants dedicated to protecting the Company's interests;
- the segregation of duties to ensure that a qualified funding
manager is satisfied with all due diligence requirements prior to
funding; and
- the prompt initiation of recovery procedures for all overdue
loans.
The Board of Directors has the responsibility of ensuring that
credit risk management is adequate. The Board has delegated much of
this responsibility to its Credit Committee, which is comprised of
three independent directors. They are provided monthly with a
detailed portfolio analysis including a report on all overdue and
impaired loans, and meet on a quarterly basis, to review and assess
the risk profile of the loan portfolio. The Credit Committee is
required to approve all loan applications between $15 million and
$25 million, and any loan application for amounts greater than $25
million must be approved by the Board. The Board has delegated
approval authority for all loans less than $15 million to an
approval committee comprised of senior management. In addition, the
Company does not allow any one loan to exceed 10% of the Company's
loan portfolio and restricts lending to any one borrower to 20% or
less of the Company's loan portfolio. As at December 31, 2007, the
largest loan in the Company's loan portfolio was $24.1 million (8%
of the Company's loan portfolio); this was also the largest
aggregate amount owing by any one borrower. The Company continually
reviews its policies regarding its lending limits and expects to
reduce the aggregate limit available to any one borrower in the
view of the expected growth of its loan portfolio.
Liquidity Risk
Liquidity risk is the risk that the Company will not have
sufficient cash to meet its obligations as they become due. This
risk arises from fluctuations in cash flows from making loan
advances and receiving loan repayments. The goal of liquidity
management is to ensure that adequate cash is available to honour
all future loan commitments. As well, effective liquidity
management involves determining the timing of such commitments to
ensure cash resources are optimally utilized. Quest manages its
liquidity risk by monitoring scheduled mortgage fundings and
repayments, and whenever necessary, accessing its debt facility to
bridge any gaps in loan maturities and funding obligations.
Market Risk
Market risk arises as a result of changes in conditions which
affect real estate values. These market changes may be regional or
national in nature or may revolve around a specific product type.
Risk is incurred if the value of real estate securing the Company's
loans falls to a level approaching the loan amounts. Quest is
subject to risks in its construction lending business if borrowers
are not able to absorb rising costs of labour and materials. In
addition, the Company has loaned funds to a number of companies,
which funds are used for development including the re-zoning in
respect of the relevant project. Any decrease in real estate values
may delay the development process and will adversely affect the
value of the Company's security. To manage these risks, management
ensures that its mortgage origination team is aware of the market
conditions that affect each mortgage application and the impact
that any changes may have on security for a particular loan.
Management and the Board monitor changes in the market on an
ongoing basis and adjust the Company's lending practices and
policies when necessary to reduce the impact of the above
risks.
Interest Rate Risk
Interest rate risk is the risk that a lender's earnings are
exposed to volatility as a result of sudden changes in interest
rates. This occurs, in most circumstances, when there is a mismatch
between the maturity (or re-pricing characteristics) of loans and
the liabilities or resources used to fund the loans. Quest has
traditionally used equity to fund its loans and therefore has not
been exposed to interest rate risk. With the advent of funding
loans using its debt facility priced off the bank prime rate, the
Company will incur interest rate risk. The Company manages this
risk through matching of its lending rate and its borrowing rate
and the pricing of certain loans is based upon bank prime rate. The
Company is also exposed to changes in the value of a loan when that
loan's interest rate is at a rate other than current market rate.
Quest currently mitigates this risk by lending for short terms,
with terms at the inception of the loan varying from six months to
two years. The average remaining term of the Company's loan
portfolio at December 31, 2007 is less than one year.
INTERNAL DISCLOSURE CONTROLS AND PROCEDURES
Internal Disclosure Controls and Procedures
The Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO") are responsible for establishing and maintaining adequate
disclosure controls and procedures. Disclosure controls and
procedures are designed to ensure that information required to be
disclosed in the Company's filings under applicable securities
legislation is properly accumulated and communicated to management,
including the CEO and CFO as appropriate, to allow timely decisions
regarding public disclosure. They are designed to provide
reasonable assurance that all information required to be disclosed
in these filings is recorded, processed, summarized and reported
within the time periods specified in securities legislation. The
Company reviews its disclosure controls and procedures; however, it
cannot provide an absolute level of assurance because of the
inherent limitations in control systems to prevent or detect all
misstatements due to error or fraud.
During the preparation of Note 17(f) "Reconciliation to US GAAP"
of the Company's 2007 consolidated financial statements, management
identified disclosure errors in the calculation of cumulative other
comprehensive income. Adjustments were made to comparative figures,
specifically relating to cumulative translation adjustment and
adjusted fair value of investments. As a result of these findings,
the CEO and CFO have concluded that the Company's disclosure
controls and procedures were not wholly effective for the 2006 and
2005 comparative years included in the December 31, 2007
consolidated financial statements.
Throughout 2007, the Company's management has taken appropriate
action to remediate disclosure control deficiencies, and as at
December 31, 2007, management, including the CEO and CFO, performed
an evaluation of the design and operating effectiveness of the
Company's disclosure controls and procedures. Based on this
evaluation, the CEO and CFO were of the view that the Company's
disclosure controls and procedures were effective to provide
reasonable assurance that the information required to be disclosed
by the Company is recorded, processed, summarized and reported
using the appropriate forms and within the appropriate time
periods.
Internal Control over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with GAAP. Internal control over financial
reporting includes those policies and procedures that: (1) pertain
to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets
of the Company, (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company, and (3)
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial
statements.
Management recognizes that the effectiveness of internal
controls over financial reporting were not wholly effective in
previous years, due to disclosure errors in US GAAP reconciling
items. However, due to initiatives taken by management to improve
its internal control over financial reporting during 2007, the CEO
and CFO have concluded that internal control over financial
reporting was effective as at December 31, 2007.
ECONOMIC OUTLOOK
Canada's credit markets have entered one of the most uncertain
times in recent memory. Interest rates are expected to fall, while
credit spreads widen. Global credit markets are in disarray. At the
same time, Canada's Western provinces are expected to weather the
economic storms better than the Central provinces. These factors
are viewed as opportunities by the Company given what management
believes is its ability to extend credit quickly and efficiently in
its' predominately British Columbia and Alberta niche markets.
Quest recognizes, however, that uncertainty can evolve into a
rapidly deteriorating credit climate regardless as to the health of
underlying economic fundamentals and has resolved to increase its
vigilance as to the credit quality of its loans.
The current credit difficulties which large lending institutions
are experiencing may lead to more loan applications being presented
to Quest for its consideration. This in turn should allow the
Company to be more selective about the loans that it chooses to
fund. The Company expects to be able to expand its mortgage
portfolio, in 2008, through the utilization of its revolving debt
facility, with loans which meet the Company's credit and yield
criteria.
FORWARD LOOKING INFORMATION
This MD&A includes certain statements that constitute
"forward-looking statements", and "forward-looking information"
within the meaning of applicable securities laws ("forward-looking
statements" and "forward-looking information" are collectively
referred to as "forward-looking statements", unless otherwise
stated). These statements appear in a number of places in this
MD&A and include statements regarding our intent, beliefs or
current expectations 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 MD&A, 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.
Forward-looking statements may relate to the Company's future
outlook and anticipated events or results and may include
statements regarding the Company's future financial position,
business strategy, budgets, litigation, projected costs, financial
results, taxes, plans and objectives. We have based these
forward-looking statements largely on our current expectations and
projections about future events and financial trends affecting the
financial condition of our business. These forward-looking
statements were derived utilizing numerous assumptions regarding
expected growth, results of operations, performance and business
prospects and opportunities that could cause our actual results to
differ materially from those in the forward-looking statements.
While the Company considers these assumptions to be reasonable,
based on information currently available, they may prove to be
incorrect. Forward-looking statements should not be read as a
guarantee of future performance or results. Forward-looking
statements are based on information available at the time those
statements are made and/or management's good faith belief as of
that time with respect to future events, and are subject to risks
and uncertainties that could cause actual performance or results to
differ materially from those expressed in or suggested by the
forward-looking statements. To the extent any forward-looking
statements constitute future-oriented financial information or
financial outlooks, as those terms are defined under applicable
Canadian securities laws, such statements are being provided to
describe the current potential of the Company and readers are
cautioned that these statements may not be appropriate for any
other purpose, including investment decisions. Forward-looking
statements speak only as of the date those statements are made.
Except as required by applicable law, we assume no obligation to
update or to publicly announce the results of any change to any
forward-looking statement contained or incorporated by reference
herein to reflect actual results, future events or developments,
changes in assumptions or changes in other factors affecting the
forward-looking statements. If we update any one or more
forward-looking statements, no inference should be drawn that we
will make additional updates with respect to those or other
forward-looking statements. You should not place undue importance
on forward-looking statements and should not rely upon these
statements as of any other date. All forward-looking statements
contained in this MD&A are expressly qualified in their
entirety by this cautionary statement.
Contacts: Quest Capital Corp. - Contact in Canada A. Murray
Sinclair Co-Chairman (604) 68-QUEST, (604) 687-8378 or Toll Free:
1-800-318-3094 (604) 682-3941 (FAX) Quest Capital Corp. - Contact
in Canada Stephen Coffey President & CEO (416) 367-8383 (416)
367-4624 (FAX) Website: www.questcapcorp.com Quest Capital Corp. -
Contacts in London AIM NOMAD: Canaccord Adams Limited Ryan Gaffney
011.44.20.7050.6500 Quest Capital Corp. - Contacts in London AIM
NOMAD: Canaccord Adams Limited Robert Finlay
011.44.20.7050.6500
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