RNS Number:9845G
Quest Capital Corporation
02 November 2007
November 2, 2007 TSX: QC
AMEX/AIM: QCC
QUEST REPORTS ITS FINANCIAL RESULTS
FOR THIRD QUARTER 2007 AND DECLARES DIVIDEND
Vancouver, British Columbia - Quest Capital Corp. ('Quest' or the 'Company'),
announces its unaudited interim consolidated financial results for the third
quarter ended September 30, 2007 (a copy of which is attached hereto and is also
available on SEDAR).
HIGHLIGHTS
* Earnings before income taxes of $7.8 million ($0.05 per share) for the
three months ended September 30, 2007 and $27.8 million ($0.19 per share)
for the nine months ended September 30, 2007, as compared to earnings
before income taxes of $9.1 million ($0.06 per share) and $29.0 million
($0.21 per share) for the comparative periods in 2006; and
* Loans funded during the nine months ended September 30, 2007 totaled
$187.5 million, of which the Company funded $157.2 million. Total loans
outstanding as at September 30, 2007 of $273.1 million compared to $240.1
million at June 30, 2007, representing a 14% increase for the quarter. Total
unfunded loan commitments as of September 30, 2007 were $90.2 million as
compared to $25.2 million at June 30, 2007.
Managing Director, A. Murray Sinclair noted:
Given the state of the credit markets and our cautious stance related thereto,
Quest is pleased to report another profitable quarter. As we are rapidly
utilizing our historical tax assets, management has initiated a review of tax
planning alternatives. The results of this strategic planning exercise and a
related public announcement are anticipated .
Chief Operating Officer, Ken Gordon also commented:
Our loan portfolio increased 14% over the previous quarter and more importantly
our unfunded loan commitments tripled over the same time frame as we continue to
benefit from the strong Canadian economy. In the real estate lending segment,
the principal factor for our success is our commitment to funding quality loans
and we are achieving that objective. To take advantage of this strong demand,
the Company is pursing an increase in its revolving line of credit to fund the
growth in our loan portfolio.
The Board of Directors has today approved payment of the next quarterly dividend
of $0.025 per share on December 27, 2007 to shareholders of record at the close
of business on December 14, 2007. Shareholders should refer to the Company's
website for the tax treatment of these dividends.
About Quest
Quest Capital Corp. is an asset backed lender that focuses on providing
financial services, specifically mortgages and bridge loans. Quest's primary
expertise is providing asset backed loans to companies in real estate,
manufacturing and resource sectors. Quest complements its lending business by
providing corporate finance services through its wholly owned subsidiary, Quest
Securities Corporation.
For more information about Quest, please visit our website
(www.questcapcorp.com) or SEDAR (www.sedar.com) or contact:
Contact in Canada Contacts in London (AIM NOMAD:)
A.Murray Sinclair Canaccord Adams Limited
Managing Director Erin Needra: erin.needra@canaccordadams.com
Tel: (604) 68-QUEST Robert Finlay: robert.finlay@canaccordadams.com
(604) 687-8378
Toll free: (800) 318-3094
Forward Looking Statements
Statements contained in this news release that are not historical facts are
forward-looking statements that involve various risks and uncertainty affecting
the business of Quest. Actual results realized may vary materially from the
information provided in this release. As a result, there is no representation by
Quest that actual results realized in the future will be the same in whole or in
part as those presented herein.
Quest Capital Corp.
Consolidated Financial Statements
September 30, 2007
(Expressed in thousands of Canadian dollars)
(Unaudited)
Quest Capital Corp.
Consolidated Balance Sheets
(Expressed in thousands of Canadian dollars)
(Unaudited)
September 30 Restated
2007 (note 13)
December 31,
2006
-----------------------------
Assets
Cash and cash equivalents $ 5,917 $ 9,506
Marketable securities 3,301 1,865
Loans (notes 4 and 5) 273,141 269,522
Investments 10,410 9,980
Future income taxes 7,863 14,500
Restricted cash 2,038 2,568
Prepaid and other receivables 99 686
Resource and capital assets 622 477
Other assets 903 1,253
-----------------------------
$ 304,294 $ 310,357
=============================
Liabilities
Accounts payable and accrued liabilities $ 4,236 $ 4,290
Income taxes payable 1,193 2,981
Deferred interest and loan fees (note 4) - 4,620
Future income taxes 1,043 1,326
Asset retirement obligation 653 1,011
Debt payable (note 6) 6,000 22,000
-----------------------------
13,125 36,228
==============================
Shareholders' Equity
Share capital (note 7) 205,949 202,513
Contributed capital (note 7) 7,029 6,479
Accumulated other comprehensive income 3,768 2,138
Retained earnings 74,423 62,999
------------------------------
291,169 274,129
------------------------------
$ 304,294 $ 310,357
==============================
Contingencies and commitments (note 10)
Approved by the Board of Directors
"Bob Buchan" Director "Brian E. Bayley" Director
--------------------- ---------------------------
The accompanying notes are an integral part
of these consolidated financial statements.
Quest Capital Corp.
Consolidated Statements of Retained Earnings
For the three and nine months ended September 30, 2007 and 2006
(Expressed in thousands of Canadian dollars)
(Unaudited)
Three Nine
Months Months
Ended Ended
September 30 September 30
2007 2006 2007 2006
---------------------------------------------
Retained earnings - Beginning of $ 72,816 $ 41,104 $ 67,231 $ 26,507
period - as originally reported
Restatement (note 13) - - (4,232) -
---------------------------------------------
Retained earnings - Beginning of 72,816 41,104 62,999 26,507
period - as restated
Adoption of financial instruments - - 1,591 -
standards (note 4)
---------------------------------------------
As restated 72,816 41,104 64,590 26,507
Net earnings for the period 5,264 8,770 20,019 27,680
Dividends (3,657) - (10,186) (4,313)
----------------------------------------------
Retained earnings - End of period $ 74,423 $ 49,874 $ 74,423 $ 49,874
==============================================
The accompanying notes are an integral part
of these consolidated financial statements.
Quest Capital Corp.
Consolidated Statements of Earnings
For the three and nine months ended September 30, 2007 and 2006
(Expressed in thousands of Canadian dollars, except share and per share amounts)
(Unaudited)
Three Nine
Months Months
Ended Ended
September 30 September 30
2007 2006 2007 2006
-----------------------------------------------------
Interest and related $ 10,110 $ 8,781 $ 31,023 $ 21,994
fees
-----------------------------------------------------
Non-interest income
Management and 1,034 1,051 2,176 3,499
finder's fees
Marketable securities (675) 413 1,185 4,083
and other trading
gains (losses)
Realized gains, net of 1,600 1,904 5,475 9,636
writedowns of
investments
Other income 7 - 27 16
1,966 3,368 8,863 17,234
-----------------------------------------------------
Total interest and 12,076 12,149 39,886 39,228
-----------------------------------------------------
non-interest income
Interest on debt (151) (250) (399) (265)
Provision for losses - (5) - (238)
net of recovery -----------------------------------------------------
11,925 11,894 39,487 38,725
-----------------------------------------------------
Expenses and other
Salaries and benefits 1,149 878 3,066 2,249
Bonuses 974 904 3,717 4,562
Stock-based 293 112 859 393
compensation
Office and other 927 255 1,598 747
Legal and professional 527 432 1,239 1,182
services
Regulatory and 118 119 539 426
shareholder relations
Directors' fees 53 53 163 214
Sales tax - - 306 -
Foreign exchange loss 106 24 157 59
Other expenses (4) 30 11 (173)
(recoveries) relating
to resource properties ----------------------------------------------------
4,143 2,807 11,655 9,659
----------------------------------------------------
Earnings before income 7,782 9,087 27,832 29,066
taxes
Provision for income 2,518 317 7,813 1,386
taxes (note 8) ----------------------------------------------------
Net earnings for the $ 5,264 $ 8,770 $ 20,019 $ 27,680
---------------------------------------------------
period
Earnings per share
Basic $ 0.04 $ 0.06 $ 0.14 $ 0.20
Fully diluted $ 0.04 $ 0.06 $ 0.13 $ 0.20
Weighted average
number of shares
outstanding
Basic 146,267,979 143,779,107 145,385,541 135,332,615
Fully diluted 149,867,568 146,746,232 148,731,789 138,460,558
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 three and nine months ended September 30, 2007
(Expressed in thousands of Canadian dollars)
(Unaudited)
Three Nine
Months Months
ended Ended
September September
30, 30,
2007 2007
------------------------------
Net earnings for the period $ 5,264 $ 20,019
------------------------------
Other comprehensive income, net of tax
Unrealized gains on translating financial 117 235
statements of self-sustaining foreign operations
Unrealized gains (losses) on available-for-sale (755) 1,029
financial assets arising during the period
Reclassification adjustment for gains recorded (826) (1,866)
included in net earnings
--------------------------------
Other comprehensive income (1,464) (602)
--------------------------------
Comprehensive income $ 3,800 $ 19,417
================================
Accumulated other comprehensive income - $ 5,232 $ 2,138
Beginning of period (note 4)
Adoption of financial instruments standards - 2,232
(note4)
Other comprehensive income for the period (1,464) (602)
-------------------------------
Accumulated other comprehensive income - End of $ 3,768 $ 3,768
period ===============================
The accompanying notes are an integral part
of these consolidated financial statements.
Quest Capital Corp.
Consolidated Statements of Cash Flows
For the three and nine months ended September 30, 2007 and 2006
(Expressed in thousands of Canadian dollars)
(Unaudited)
Three Nine
Months Months
Ended Ended
September 30 September 30
2007 2006 2007 2006
---------------------------------------------
Cash flows from operating
activities
Net earnings for the period $ 5,264 $ 8,770 $ 20,019 $ 27,680
Items not affecting cash:
Future income taxes 2,074 828 7,307 (700)
Stock-based compensation 293 112 859 393
Provision for losses - - - 386
Amortization of deferred (2,119) (1,332) (6,642) (3,624)
interest and loan fees
Marketable securities and other 675 (413) (1,185) (4,083)
assets trading gains (losses)
Realized gains on investments, (1,600) (1,904) (5,475) (9,636)
net of writedowns
Other assets and investments - (231) - (728)
received as finder's fees
Other 39 72 144 186
Deferred interest and loan fees 1,050 2,553 2,345 5,011
received
Activity in marketable
securities held for trading
Purchases (455) (1,371) (2,892) (3,382)
Proceeds on sales 1,413 1,970 6,402 8,975
Expenditures for reclamation and (148) (208) (265) (821)
closure
Changes in prepaid and other 256 72 584 51
receivables
Changes in accounts payables and 629 (553) (22) 180
accrued liabilities
Changes in income taxes payable (638) (748) (1,621) 1,325
--------------------------------------------
6,733 7,617 19,558 21,213
--------------------------------------------
Cash flows from financing
activities
Proceeds from shares issued 2,423 2,101 3,127 62,768
Dividend payments (3,657) (4,312) (10,186) (7,830)
Proceeds from debt 6,000 27,931 14,000 27,931
Repayment of debt - (17,931) (30,000) (17,931)
----------------------------------------------
4,766 7,789 (23,059) 64,938
----------------------------------------------
Cash flows from investing
activities
Net (increase) decrease in loans (33,220) (55,351) (7,316) (122,466)
Activity in investments
available for sale
Proceeds on sales 2,173 77,627 8,049 91,966
Purchases (488) (75,073) (488) (75,679)
Change in restricted cash 104 17 178 (505)
Proceeds on sale of resource and - - - 103
fixed assets
Expenditures on resource and (246) (2) (259) (73)
fixed assets
Net other assets acquired - (150) - (425)
---------------------------------------------
(31,677) (52,932) 164 (107,079)
--------------------------------------------
Foreign exchange gain (loss) on (68) (32) (252) (17)
cash held in a foreign subsidiary -------------------------------------------
Decrease in cash and cash (20,246) (37,558) (3,589) (20,945)
equivalents
Cash and cash equivalents - 26,163 50,352 9,506 33,739
---------------------------------------------
Beginning of period
Cash and cash equivalents - End $ 5,917 $ 12,794 $ 5,917 $ 12,794
of period ============================================
Supplemental cash flow
information (note 12)
Quest Capital Corp.
Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2007
(Expressed in Canadian dollars; tables in thousands, except share capital information)
(Unaudited)
1. Nature of operations
Quest Capital Corp.'s ("Quest" or the "Company") primary focus is providing
mortgage financings and commercial bridge loans. The Company also provides a
range of services including the raising of capital, consulting, management and
administrative services through its wholly-owned subsidiaries, Quest Management
Corp. and Quest Securities Corporation.
2. Basis of presentation
The accompanying financial information does not include all disclosure required
under generally accepted accounting principles for annual financial statements.
The accompanying financial information reflects all adjustments, consisting
primarily of normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of results for the interim
periods. These consolidated financial statements should be read in conjunction
with the Company's 2006 audited annual financial statements and notes.
3. Significant accounting policies
These interim consolidated financial statements follow the same accounting
policies and methods of application as the Company's annual financial
statements, except as noted below. These interim consolidated financial
statements are prepared in accordance with Canadian generally accepted
accounting principles and include the Company's accounts and those of its
wholly-owned subsidiaries, Quest Management Corp., Quest Securities Corporation,
Viceroy Gold Corporation and its 75% proportionate joint-venture interest in the
Castle Mountain Property.
4. Change in accounting policies
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 currently has had no impact on
the Company. Prior to January 1, 2007, the principal accounting policies
affecting the Company's financial instruments were: 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 loans in default and other assets were valued at the lower of
cost and net realizable value.
The adoption of the Financial Instrument Standards requires the presentation of
a separate statement of comprehensive income. 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 in the consolidated balance sheet 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 have been 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, currency
translation adjustment decreased by $2.1 million and accumulated other
comprehensive income increased by $4.3 million. These movements reflect 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. 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.
5. Loans
a) Loans are repayable over various terms up to 24 months from September
30, 2007, and bear interest at rates of between 10.8% and 13% before commitment
and other fees. Marketable securities, real property, real estate, corporate or
personal guarantees generally are pledged as collateral. At September 30, 2007,
the loan portfolio was comprised of 95% real estate mortgages, 4% in the
resource sectors and 1% in other sectors. At September 30, 2007, the real estate
mortgages were located as follows: 43% in British Columbia, 44% in Alberta, 11%
in Ontario and 2% in other; and 93% were first mortgages and 7% were second
mortgages. As at September 30, 2007, the Company's loan portfolio consisted of
51 loans.
As at September 30, 2007, 60% of the Company's loan portfolio is due within a
year. The Company had six loans totalling approximately $28.2 million in default
as a result of certain principal and/or interest payments being in arrears as at
September 30, 2007. Subsequent to the third quarter, $7.8 million of loans in
default were repaid or cured, reducing the number of loans in default from six
to three. As at September 30, 2007, the Company does not have a provision for
loan losses. The Company monitors the repayment ability of borrowers and the
value of underlying collateral. In determining the provision for possible loan
losses, management considers the length of time the loan has been in arrears,
the overall financial strength of borrowers and the residual value of collateral
pledged. The Company expects to collect the full carrying value of its loan
portfolio.
b) The Company has recorded changes in the allowance for loan losses as
follows:
2007
---------------
Balance - January 1, 2007 $ 586
Add:
Specific provision for the period -
Less:
Loan provision applied (586)
----------------
Balance - September 30, 2007 $ -
================
c) At September 30, 2007, the Company has entered into agreements and/or
commitment letters to advance funds up to $90.2 million. Advances under these
agreements are subject to a number of conditions including due diligence and
completion of documentation.
6. Debt payable
In March 2007, the Company entered into a collateralized revolving debt facility
with the Bank of Nova Scotia for up to $25 million. The facility bears interest
at prime or bankers acceptance notes plus 1.25%. This facility comes due
February 28, 2009 and is collateralized by the Company's loan portfolio.
In August 2006, the Company entered into a short-term unsecured debt facility.
The facility bore interest at prime plus 2% and was payable on demand. The $22
million outstanding as of December 31, 2006 on this facility was repaid in 2007.
7. Share capital
a) Authorized
Unlimited First and Second Preferred Shares
Unlimited common shares without par value
b) Shares issued and outstanding
Number of Amount
Shares
Common shares
------------------------------
Opening balance - January 1, 2007 144,842,628 $ 202,513
Issued on exercise of stock options 370,000 700
Issued on exercise of compensation 1,055,350 2,427
options
Transfer of fair value on exercise - 309
of options -----------------------------
Ending balance - September 30, 2007 146,267,978 $ 205,949
=============================
c) Compensation options issued and outstanding
Number of Exercise Expiry
options price per date
share
-----------------------------------------------
Common shares
Opening balance - January 2007 1,133,775 $ 2.30
Exercised (1,015,750) 2.30 August 23, 2007
(39,600) 2.30 October 26,2007
(1,055,350)
Expired (70,025) 2.30 August 23, 2007
-------------
Ending balance - September 30, 2007 8,400 2.30 October 26, 2007
==============
d) 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 nine months ended September 30, 2007, the change in stock options
outstanding was as follows:
Number of Weighted
shares average
share price
-----------------------------
Common shares
Opening balance 8,981,333 $ 2.01
Granted 2,855,000 3.05
Exercised (370,000) 1.89
Expired or cancelled (332,553) 3.02
---------------------------
Closing balance 11,133,780 $ 2.26
===========================
Options exercisable 9,003,169 $ 2.08
===========================
The following table summarizes information about stock options outstanding and
exercisable at September 30, 2007:
Options outstanding Options exercisable
Range of Options Weighted Weighted Options Weighted
exercise outstanding average average exercisable average
prices
remaining exercise exercise
contracted price price
life
(years)
---------------------------------------------------------------------------
$ 0.81 113,333 0.06 $ 0.81 113,333 $ 0.81
$ 0.82 to $1.51 223,000 1.89 1.51 223,000 1.51
$ 1.52 to $1.95 6,550,000 1.37 1.95 6,550,000 1.95
$ 1.96 to $2.31 1,150,000 3.19 2.30 1,042,170 2.30
$ 2.32 to $3.23 3,097,447 4.32 3.00 1,074,666 2.93
------------------------------------------------------------
11,133,780 2.38 $ 2.26 9,003,169 $ 2.08
============================================================
e) Contributed capital
Opening balance $ 6,479
Stock-based compensation 859
Fair value of stock options exercised (309)
-----------------
Ending balance $ 7,029
================
The fair values of options granted during the nine months ended September 30,
2007 have been estimated using an option pricing model. Assumptions used in the
pricing model are as follows:
Risk-free interest rate 4.10%
Expected life of options 3.0 years
Expected stock price volatility 34.62%
Expected dividend yield 2.74%
Weighted average fair value of options $ 0.72
8. Income taxes
The Company has utilized tax losses in certain of its entities to reduce its
taxable income in Canada. The Company has recognized a future tax asset to the
extent that the amount is more likely than not to be realized from future
earnings.
The provisions for income taxes consists of the following:
Three Nine
Months Months
Ended Ended
September 30 September 30
2007 2006 2007 2006
-------------------------------------------------------
Current
Canada $ 474 $ (711) $ 603 $ 1,886
United States 78 200 78 200
----------------------------------------------------------
Total current expense 552 (511) 681 2,086
Future
Canada 2,057 828 7,223 (700)
United States (91) - (91) -
---------------------------------------------------------
Total future tax expense 1,966 828 7,132 (700)
Total provision for $ 2,518 $ 317 $ 7,813 $ 1,386
income taxes ========================================================
The significant components of the future income tax assets and liabilities are
as follows:
September 30,
2007
------------------
Loss carryforwards $ 4,008
Capital losses 14,967
Resource and fixed assets 3,182
Other 2,141
24,298
Valuation allowance (16,435)
Future tax asset $ 7,863
Deferred gain and other $ 1,043
Future tax liability $ 1,043
9. Related party transactions
a) For the nine months ended September 30, 2007, the Company received
$73,000 (2006 - $580,000) in interest and fees from parties related by virtue of
having certain directors and officers in common.
b) For the nine months ended September 30, 2007, the Company received
$620,000 (2006 - $1,202,000) in advisory, management and finder's fees from
parties related by virtue of having certain directors and officers in common.
Other assets include $205,000 (December 31, 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.
c) For the nine months ended September 30, 2007, the Company received
$55,000 (2006 - $31,000) in syndication loan administration fees from parties
related by virtue of having certain directors and officers in common.
d) Marketable securities and investments include $10,214,000 (December
31, 2006 - $9,143,000) of shares held in publicly traded companies related by
virtue of having certain directors and officers in common. For the nine months
ended September 30, 2007, the Company recorded a gain on disposal of securities
of $2,906,000 (2006 - $9,005,000) from parties related by virtue of having
certain directors and officers in common.
e) Included in accounts payable at September 30, 2007 is $3,182,000
(December 31, 2006 - $3,170,000) due to employees, consultants and officers for
bonuses.
10. Contingencies and commitments
a) Surety bond guarantees totalling US$2,405,000 (CDN$2,392,000) 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
company) and other parties were named as defendants in a lawsuit filed in the
Supreme Court of British Columbia. The plaintiff has claimed approximately
$410,000 plus interest due for consulting services. Management intends to fully
defend this claim. 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:
2007 $ 305
2008 $ 753
2009 $ 753
2010 $ 676
2011 $ 437
2012 $ 401
d) Other commitments and contingencies are disclosed elsewhere in these
consolidated financial statements and notes.
11. Segmented information
The Company has primarily one operating segment, which is financial services.
The Company's geographic location is Canada.
12. Supplemental cash flow information
Non-cash financing and investing activities:
Three Nine
Months Months
Ended Ended
September 30 September 30
2007 2006 2007 2006
------------------------------------------------------
Marketable securities $ 1,204 $ 804 $ 3,375 $ 1,204
and investments
received as loan fees
Investment purchases - (30,899) - (30,899)
funded by brokerage
margin account
Investment proceeds - 30,899 - 30,899
used to repay brokerage
margin accounts
13. Restatement of Financial Statements
During 2007, the Company undertook a review of business alternatives for its
wholly-owned U.S. subsidiary, Viceroy Gold Corporation ("Viceroy Gold"). During
that review, management identified a historical accounting error related to the
failure to recognize future income taxes relating to the differences in the
accounting and tax values of certain assets and liabilities held by Viceroy
Gold. Management thereafter determined that adjustments should be made to
previously issued consolidated financial statements for the error.
As a result, the Company has recorded an adjustment to opening retained earnings
at December 31, 2004 totaling $4.2 million to recognize current and future
income taxes for the period from 2000 to 2003. As this liability is denominated
in U.S. dollars, subsequent change in the foreign exchange rates are reflected
in the accumulated other comprehensive income (previously currency translation
adjustment) account.
The effect of the restatement on the restated consolidated financial statements
is summarized below.
Balance Sheet - December 31, 2006 As Adjustments As restated
previously
reported
---------------------------------------------
Income taxes payable $ 1,009 $ 1,972 $ 2,981
Future income tax liabilities - 1,326 1,326
Retained earnings 67,231 (4,232) 62,999
Other comprehensive income 1,204 934 2,138
There are no changes to the Company's consolidated statement of earnings for the
years ended December 31, 2006, 2005 and 2004, as the error relates to tax
provisions prior to fiscal year 2004.
QUEST CAPITAL CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS
NINE MONTHS ENDED SEPTEMBER 30, 2007
INTRODUCTION
The following information of Quest Capital Corp (the "Company"), prepared as of
October 31, 2007, should be read in conjunction with the Company's unaudited
interim consolidated financial statements as at September 30, 2007 and for the
three months and nine months ended September 30, 2007 and 2006 and its restated
audited annual consolidated financial statements as at December 31, 2006 and
2005 and for the years ended December 31, 2006, 2005 and 2004, and the related
notes attached thereto. These financial statements have been prepared in
accordance with Canadian generally accepted accounting principles ("Cdn GAAP").
All amounts in this management's discussion and analysis ("MD&A") are expressed
in Canadian dollars unless otherwise indicated.
The business of the Company consists of:
* mortgage financings collateralized by first and second real estate
mortgages;
* commercial bridge loans provided primarily to publicly traded
development stage companies;
* financial and corporate assistance in arranging equity offerings for
companies; and
* management and administrative services to public and private
companies.
The Company generates the majority of its revenues through interest it earns on
its loan portfolio. The Company's revenues are subject to the return it is able
to generate on its capital, its ability to reinvest funds as loans mature and
are repaid and the nature and credit quality of its loan portfolio, including
the quality of the collateral security. In addition, the Company generates
revenues from gains on the sale of marketable securities and investments. The
Company also receives fees from its corporate finance activities; these fees are
subject to the number and value of the transactions in which the Company
participates.
The following discussion, analysis and financial review is comprised of the
following sections:
1. RESULTS OF OPERATIONS
2. SUMMARY OF QUARTERLY RESULTS
3. LIQUIDITY
4. RELATED PARTY TRANSACTIONS
5. SUBSEQUENT AND PROPOSED TRANSACTIONS
6. OFF BALANCE SHEET ARRANGEMENTS
7. OUTLOOK
8. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
9. CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION
10. DISCLOSURE OF OUTSTANDING SHARE DATA
11. RISKS AND UNCERTAINTIES
12. FORWARD LOOKING INFORMATION
13. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Additional information about the Company, including its Annual Information Form
and other public filings, are available on SEDAR at www.sedar.com.
1. RESULTS OF OPERATIONS
Total assets as at September 30, 2007 were $304.3 million comprised of $5.9
million of cash and cash equivalents, $3.3 million of marketable securities,
$273.1 million in loans, $10.4 million in investments and $11.6 million of other
assets.
The loan portfolio at September 30, 2007 was comprised of 95% in first and
second real estate mortgages, 4% in the resource sectors and 1% in other
sectors. As at December 31, 2006, the loan portfolio was comprised of 87% in
first and second real estate mortgages, 12% in resource sectors, and 1% in other
sectors. At September 30, 2007, mortgages were located as follows: 43% in
British Columbia, 44% in Alberta, 11% in Ontario and 2% in other areas; of which
93% were first mortgages and 7% were second mortgages. This investment
concentration may vary from time to time depending on the investment
opportunities available; however, in the near term the Company does not expect
any material changes in the composition of its loan portfolio. As at September
30, 2007, the Company's loan portfolio consisted of 51 loans.
For the three months ended September 30, 2007 the Company had consolidated
earnings before taxes of $7.8 million (net earnings of $5.3 million) compared to
$9.1 million (net earnings of $8.8 million) in the comparative period in 2006.
During the nine months ended September 30, 2007, the Company had consolidated
earnings before taxes of $27.8 million or $0.19 basic earnings per share (net
earnings of $20.0 million or $0.13 basic earnings per share) compared to $29.1
million or $0.21 basic earnings per share (net earnings of $27.7 million or
$0.20 basic earnings per share) for the comparable period of the previous year.
Interest and Related Fees
For the three months ended September 30, 2007, the Company earned interest and
fees of $10.1 million compared to $10.1 million for the second quarter and $8.8
million for the three months ended September 30, 2006. During the nine months
ended September 30, 2007, the Company earned interest and related fees of $31.0
million compared to $22.0 million for the same period in 2006, due to the growth
in the loan portfolio year over year. Total loans as at September 30, 2007 were
$273.1 million as compared to $240.1 million and $269.5 million (net of deferred
interest and loan fees) as at June 30, 2007 and December 31, 2006, respectively,
representing an increase of 13 % and 1%.
Included in interest and related fee revenues are interest and related fees
earned on bridge loans totaling $6.2 million during the nine months ended
September 30, 2007 compared to $2.5 million earned during the nine months ended
September 30, 2006.
Non-Interest Income
During the three months ended September 30, 2007, management and finder's fees
totaled $1.0 million, compared to $1.1 million in the comparative period in
2006. During the nine months ended September 30, 2007, management and finder's
fees totaled $2.2 million, compared to $3.5 million in the comparative period in
2006. This decrease is primarily due to a decrease in corporate finance
activities as compared to the comparative period in 2006.
During the three months ended September 30, 2007, the Company recorded net
trading losses on marketable securities and other assets of $0.7 million
compared to net trading gains of $0.4 million in the comparative period in 2006.
During the nine months ended September 30, 2007, the Company recorded net
trading gains on marketable securities and other assets of $1.2 million as
compared to $4.1 million in the comparative period in 2006. The decrease in net
trading gains is the result of fewer broker warrants being exercised and
subsequent sale of securities. In 2006, net trading gains and losses reported
represent only realized gains and losses, compared to 2007 whereby unrealized
trading gains and losses are also recognized due to the adoption of CICA
Handbook Section 3855 Financial Instruments, effective January 1, 2007.
Net realized gains from the sales of investments resulted in the Company
recording gains of $1.6 million in 2007 compared to gains of $1.9 million in the
comparative period in 2006. During the nine months ended September 30, 2007, the
Company realized gains from the sale of investments of $5.5 million as compared
to $9.6 million in the comparative period in 2006.
Expenses and Other
Total expenses and other for the three months ended September 30, 2007 were $4.1
million as compared to $2.8 million in the comparative period in 2006. Total
expenses and other for the nine months ended September 30, 2007 were $11.7
million as compared to $9.7 million in the comparative period in 2006.
Salaries and benefits increased to $1.1 million for the three months ended
September 30, 2007 compared to $0.9 million in the comparative period in 2006.
Salaries and benefits for the nine months ended September 30, 2007 totaled $3.1
million as compared to $2.2 million in the comparative period for 2006. The
increase is due to the addition of new employees, primarily in the loan
administration functions.
Bonuses for the three months ended September 30, 2007 were $1.0 million as
compared to $0.9 million in the comparative period in 2006. Bonuses for the nine
months ended September 30, 2007 totaled $3.7 million as compared to $4.6 million
in the comparative period for 2006. The decrease in bonuses is primarily the
result of a decrease in corporate finance activities, which is a component of
the Company's incentive plan. Bonus accruals and payments are in accordance with
the Company's incentive plan, and are subject to the approval of the
Compensation Committee and the Board of Directors.
Office and other expenses for the three months ended September 30, 2007 were
$0.9 million as compared to $0.3 million for the comparative period in 2006.
Office and other expenses for the nine months ended September 30, 2007 were $1.6
million as compared to $0.7 million in the comparative period in 2006. The
increase is due to higher insurance costs from the underwriting of a Directors &
Officers coverage policy, higher travel costs as a result of increasing
shareholder relations, increase in rent due to the expiry of the Company office
lease and new premises and interest and penalties associated with certain tax
filings.
During the nine months ended September 30, 2007, the Company recorded a $0.3
million sales tax expense related to certain tax filings.
Income tax expense for the three months ended September 30, 2007 was $2.5
million compared to $0.3 million in the comparative period in 2006. Income tax
expense for the nine months ended September 30, 2007 was $7.8 million compared
to an expense of $1.4 million in the comparative period in 2006. Income tax
expense reported for the nine months ended in 2007 includes $0.7 million in
current income taxes payable and $7.1 million in the net draw down of future
income taxes, which is a non-cash item.
Additionally, the Company has recognized a $1.8 million future tax asset during
the nine months ended September 30, 2007, based on the likely realization of
certain time released tax deductions which are expected to be utilized against
future taxable earnings.
Comprehensive Income
The Company is reporting comprehensive income, having adopted the new accounting
standards for financial reporting which were effective for Canadian companies
with calendar year-ends effective on January 1, 2007. In the Company's case, the
two significant components of other comprehensive income are the unrealized
mark-to-market gains on the Company's investments, classified under the
available-for-sale investment category for financial instruments, and currency
translation adjustments.
2. SUMMARY OF QUARTERLY RESULTS
(In thousands of Canadian dollars, except per share amounts)
3rd 2nd 1st 4th 3rd 2nd 1st 4th
Qtr Qtr Qtr Qtr Qtr Qtr Qtr Qtr
2007 2007 2007 2006 2006 2006 2006 2005
-------------------------------------------------------------------
Interest and 10,110 10,106 10,807 10,597 8,781 7,415 5,798 5,555
related fees
Non-interest 1,966 4,014 2,883 1,265 3,368 7,905 5,961 4,028
income
Earnings 7,782 10,735 9,315 7,918 9,087 11,664 8,315 5,059
before taxes
Net earnings 5,264 7,366 7,398 16,021 8,770 10,882 8,028 11,395
Basic 0.04 0.05 0.05 0.12 0.06 0.08 0.07 0.10
Earnings Per
Share
Total Assets 304,294 295,798 294,025 310,357 284,935 267,891 208,060 189,603
Total 13,125 7,487 10,267 36,228 24,048 17,987 12,284 15,309
Liabilities
The Company's interest and related fees will fluctuate as the loan portfolio
changes from quarter to quarter.
Non-interest income varies by quarter depending on the management, advisory and
finder's fees earned, marketable securities' trading gains and losses and
realized gains, net of write-downs of investments. Quarter to quarter
comparisons of financial results are not necessarily meaningful and should not
be relied upon as an indication of future performance.
During the fourth quarter of 2005, second quarter of 2006 and fourth quarter of
2006, net earnings were positively impacted by the recognition of a future tax
asset of $6.0 million, $0.8 million and $7.7 million, respectively, as a result
of the likely realization of unused tax losses from future earnings. In 2007,
net earnings are reduced by the net drawdowns of these future tax assets, as
previously recognized; however, this impact is a non-cash item.
3. LIQUIDITY
The Company's cash resources at September 30, 2007 were $5.9 million as compared
to $9.5 million as at December 31, 2006. The Company's cash resources are
invested in financial instruments issued by major Canadian chartered banks and
the Company does not invest in asset-backed commercial paper.
The Company takes on short-term debt from time to time to fund its investments
and loan operations. In March 2007, the Company established a $25 million
revolving line of credit with a major Canadian chartered bank. The Company's
primary focus is to provide loans, and its cash and debt balances will vary
depending on the timing of loans advanced and repaid.
During the nine months ended September 30, 2007, the Company funded $187.5
million of new loans, $157.2 million net to the Company. During the third
quarter of 2007, the Company funded $75.0 million in new loans, $72.7 million
net to the Company.
During the nine months ended September 30, 2007, $200.9 million of loans were
repaid, $157.4 net to the Company. During the third quarter of 2007, $71.1
million of loans were repaid, $50.4 million net to the Company.
As at September 30, 2007, the Company had executed commitment letters to advance
funds of up to $90.2 million. Advances under these agreements are subject to a
number of conditions including due diligence and completion of documentation.
The Company's loan portfolio as at September 30, 2007 was $273.1 million
comprised of 95% real estate mortgages, 4% in the resource sectors and 1% in
other sectors. As at September 30, 2007, 60% of the loan portfolio is scheduled
to mature within a year.
The Company had six loans totalling approximately $28.2 million in default as a
result of certain principal and/or interest payments being in arrears as at
September 30, 2007. Subsequent to the third quarter, $7.8 million of loans in
default were repaid or cured, reducing the number of loans in default from six
to three. For the nine months ended September 30, 2007, cash flow from
operations provided $19.6 million as compared to $21.2 million for the
comparative period in 2006.
Management is not aware of any trends or expected fluctuations that would create
any liquidity deficiencies. The Company believes that cash flow from continuing
operations and existing cash resources will be sufficient to meet the Company's
short-term requirements, as well as ongoing operations, and will be able to
generate sufficient capital to support the Company's business.
The Company has contractual obligations for its leased office space in Vancouver
and Toronto. The total minimum lease payments for the years 2007 to 2012 are
$3.3 million.
Obligation due by period
Type of Contractual Total Less than 1 1-3 Years 3 - 5 More than
Obligation Year Years 5 Years
-------------------------------------------------------------------------------
Office Leases $3,325,000 $305,000 $2,182,000 $838,000 $-
Loan Commitments $90,200,0000 $90,200,000 - - -
-------------------------------------------------------------------------------
Total $93,525,000 $90,505,000 $2,182,000 $838,000 $-
===============================================================================
4. RELATED PARTY TRANSACTIONS
For the nine months ended September 30, 2007, the Company received $0.1 million
(2006 - $0.6 million) in interest and fees from related parties by virtue of
having certain directors and officers in common.
For the nine months ended September 30, 2007, the Company received $0.6 million
(2006 - $1.2 million) in advisory, management and finder's fees from parties
related by virtue of having certain having directors and officers in common.
Other assets include $0.2 million (December 31, 2006 - $0.2 million) 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 nine months ended September 30, 2007, the Company received $55,000 (2006
- $31,000) in syndication loan administration fees from parties related by
virtue of having certain directors and officers in common.
Marketable securities and investments include $10.2 million (December 31, 2006 -
$9.1 million) of shares held in publicly traded companies related by virtue of
having certain directors and officers in common. For the nine months ended
September 30, 2007, the Company recorded a gain on disposal of marketable
securities and investments of $2.9 million (2006 - $9.0 million) from parties
related by virtue of having certain directors and officers in common.
Included in accounts payable at September 30, 2007 is $3.2 million (December 31,
2006 - $3.17 million) due to employees, consultants and officers related to
incentive plan compensation.
5. SUBSEQUENT AND PROPOSED TRANSACTIONS
The Company has no subsequent and proposed transactions to report.
6. OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
7. OUTLOOK
Real estate markets in Canada continue to perform well especially in the Western
provinces. Growth in British Columbia continues at record pace. Price increases
in Alberta have moderated somewhat, and Saskatchewan, in particular Regina and
Saskatoon, have become the new hot real estate market. Although Canada does not
have a huge sub-prime mortgage market, the impact of the meltdown in sub-prime
lending in the United States is having an impact on the Canadian lending
markets. Credit is tightening and spreads are widening. In many cases, major
lending institutions have curtailed their lending programs and in some cases
cancelled them altogether.
This has presented an opportunity for Quest, as the number of loans-in-progress
is at a record high. As a result, the Company is able to achieve its lending
goals, while being in a position to be more selective in terms of the location
of loans and loan product-mix. The Company continues to maintain its mandate to
mitigate risk by focusing on borrower quality.
As at September 30, 2007, the Company had $5.9 million of cash on hand. In
addition, the Company has a $25.0 million revolving line of credit with the Bank
of Nova Scotia of which $6.0 million has been drawn upon. The Company is not
planning any material changes in the make-up of its lending business, although
the precise composition of its loan portfolio may vary somewhat from the
currently existing percentages as loans are made in the context of market
conditions. During the upcoming year, the Company may hire additional employees
and raise equity or additional debt required to fund the growth of the Company's
loan portfolio (also refer to Liquidity).
8. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's accounting policies are described in Note 3 of its restated
audited consolidated financial statements as at December 31, 2006 and 2005 and
for the years ended December 31, 2006, 2005 and 2004. Management considers the
following policies to be the most critical in understanding the judgments and
estimates that are involved in the preparation of its consolidated financial
statements and the uncertainties which could materially impact its results,
financial condition and cash flows. Management continually evaluates its
assumptions and estimates; however, actual results could differ materially from
these assumptions and estimates.
Provision for Loan Losses
Loans are stated net of an allowance for credit losses on loans in default. Such
allowances reflect management's best estimate of the credit losses in the
Company's loan portfolio and judgments about economic conditions. The evaluation
process involves estimates and judgments, which could change in the near term,
and result in a significant change to a recognized allowance.
Management reviews its loan portfolio on a monthly basis and recommends to the
Credit Committee, where applicable, that specific provisions for loan loss be
established. In determining the provision for possible loan losses, the Company
considers the following:
* length of time the loans have been in arrears;
* the overall financial strength of the borrowers;
* the nature and quality of collateral and, if applicable,
guarantees;
* secondary market value of the loans and the collateral; and
* the borrower's plan, if any, with respect to restructuring the
loans.
At September 30, 2007, the Company has no provision for loan losses (December
31, 2006 - $0.6 million).
Valuation of Marketable Securities and Investments
The Company's marketable securities and investments are primarily held in public
companies. Effective January 1, 2007, marketable securities and investments are
recorded on the balance sheet at their fair value. Fair value is determined
directly by reference to quoted market price in an active market.
Future Tax Assets and Liabilities
The Company has recognized a future tax asset based on the likely realization of
tax losses which are 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 the 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.
9. 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 (the "Financial Instrument Standards"). As the Company has not undertaken
any hedging activities, adoption of Section 3865 currently has 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 loans in default; and other assets were valued at their net
realizable value.
The adoption of the Financial Instrument Standards requires the presentation of
a separate statement of comprehensive income. Loans are recorded at amortized
cost, subject to impairment reviews. Fees received for originating the loan are
netted against the loan's cost and is recognized in net earnings using the
effective interest method. Investments and marketable securities are recorded in
the consolidated balance sheet 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 income and changes in the fair value of
investments have been reported in other comprehensive income. The transitional
adjustments in respect of these standards have been made to the opening
marketable securities, investments and loan balances and adjusted through
retained earnings and accumulated other comprehensive income, as at January 1,
2007. Prior periods have not been restated.
As a consequence of adopting the Financial Instrument Standards at January 1,
2007, retained earnings increased by $1.6 million, currency translation
adjustment decreased by $2.1 million and accumulated other comprehensive income
increased by $4.3 million. These movements reflect 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. 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.
10. DISCLOSURE OF OUTSTANDING SHARE DATA
As at October 31, 2007, the Company had the following common shares and stock
options outstanding:
Common shares 146,551,378
Stock options 10,791,333
----------------
Fully diluted shares outstanding 157,342,711
================
Dividends
As a reflection of the continued profitability in the Company's business, on May
9, 2007 its board of directors approved an increase in its quarterly dividend
rate from $0.02 to $0.025.
11. RISKS AND UNCERTAINTIES
Additional risks factors are disclosed under "Risk Factors" in the Annual
Information Form filed on SEDAR at www.sedar.com.
Liquidity Risk
The Company maintains a sufficient amount of liquidity to fund its obligations
as they come due under normal operating conditions. As at September 30, 2007,
60% of the value of the loan portfolio is scheduled to mature within a year.
Credit Risk
Credit risk management is the management of all aspects of borrower risk
associated with the total loan portfolio, including the risk of loss of
principal and/or interest from the failure of the borrowers to honour their
contractual obligations to the Company.
The Company generally provides real estate mortgages to approximately 75% of the
value of the security and generally provides commercial bridge loans to
primarily publicly traded development stage companies to approximately 50% of
the value of guarantees and security (also refer to results of operations for
current loan composition details). The Company provides for loan losses on a
specific loan basis and has no provision as at September 30, 2007.
13. FORWARD LOOKING INFORMATION
These materials include certain statements that constitute "forward-looking
statements" within the meaning of Section 27A of the United States Securities
Act of 1933 and Section 21E of the United States Securities Exchange Act of
1934. These statements appear in a number of places in this document and include
statements regarding our intent, belief or current expectation and that of our
officers and directors. Such forward-looking statements involve known and
unknown risks and uncertainties that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. When
used in this document, words such as "believe", "anticipate", "estimate",
"project", "intend", "expect", "may", "will", "plan", "should", "would"
"contemplate", "possible", "attempts", "seek", and similar expressions are
intended to identify these forward-looking statements. These forward-looking
statements are based on various factors and were derived utilizing numerous
assumptions that could cause our actual results to differ materially from those
in the forward-looking statements. Accordingly, you are cautioned not to put
undue reliance on these forward-looking statements. Forward-looking statements
include, among others, statements regarding our expected financial performance
in future periods, our plan of operations and our business strategy and plans or
budgets.
14. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
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 securities
legislation is 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.
As of December 31, 2006, the Company's management, including the CEO and CFO,
concluded an evaluation of the effectiveness of the design and operation 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.
Subsequent to December 31, 2006, this evaluation was revisited in connection
with the preparation of the restated financial statements for the years ended
December 31, 2006, 2005 and 2004 and three months ended March 31, 2007. In view
of the restatement of financial statements described above, the CEO and CFO have
concluded that a material weakness existed in the Company's internal disclosure
controls and procedures as of December 31, 2006, related specifically to certain
tax filings and computation of future tax provisions. Management recognizes that
improvements are required and is taking appropriate action to remediate
deficiencies by the end of 2007.
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.
The Company reviews its controls and procedures over financial reporting.
However, because of the inherent limitations in a control system, any control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that it will prevent or detect all misstatements, due to
error or fraud, from occurring in the financial statements.
Based on an evaluation of the Company's internal controls over financial
reporting, management has concluded that internal control over financial
reporting was not wholly effective as of December 31, 2006, specifically as it
related to the determination of tax provisions, as noted in "Internal Disclosure
Controls and Procedures".
In taking appropriate action to remediate deficiencies by the end of 2007,
management has engaged third party advisors to assist in the design,
documentation, and testing of internal controls. As of September 30, 2007,
changes have been made to the implementation of the Company's internal control
over financial reporting to facilitate remediation.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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