CAPVEST Income Corp.
TSX VENTURE : CVS

CAPVEST Income Corp.

November 09, 2005 16:14 ET

CAPVEST Income Corp. 'TSX-V:CVS' Releases 2005 Third Quarter Results

TORONTO, ONTARIO--(CCNMatthews - Nov. 9, 2005) - CAPVEST Income Corp. (TSX VENTURE:CVS) is pleased to announce its results for the three and nine month periods ended September 30, 2005.

Highlights

- The Company's net assets were $5,035,319 at September 30, 2005, an increase from $4,258,436 at June 30, 2005 and $2,817,077 at December 31, 2004.

- The Company recorded net income from investment operations of $728,248 in the third quarter (2004 - loss of $521,580). This higher net income resulted predominantly from a change in unrealized appreciation of investments of $734,197 (2004 - depreciation of $12,998), driven by a rise in the value of the portfolio's holdings of energy and resource income trusts.

- At September 30, 2005, almost 50 per cent of the Company's net assets are invested in oil and gas royalty trusts. The second largest allocation is to resources and resource-based income trusts (23.31 per cent). The balance of the Company's net assets is invested in other income funds, many of which are exposed to or involved in resource-based operations.

- The market value of the Company's shares was $0.26 per share on the TSX Venture Exchange at September 30, 2005, up from $0.18 on June 30, 2005.

Introduction

CAPVEST Income Corp. ("CAPVEST" or the "Company") is an investment corporation which currently invests primarily in oil and gas and other commodity-based income trusts. The investment objective of the Company is to provide investors with monthly dividends and to generate capital appreciation. As an investment corporation the Company is required to distribute not less than 85 per cent of its taxable income. The remaining income and any return of capital would be used to expand its portfolio of income trusts.

Sentry Select Capital Corp. is the Investment Advisor of the Company and is responsible for portfolio selections.

CAPVEST shares trade on the TSX Venture Exchange under the symbol CVS.

Financial Statements

CAPVEST was formed on January 1, 2005, through the amalgamation of two companies: Entech Investments Inc. ("Entech") and Biotech Medical Sciences Inc ("Biotech"). The amalgamation was accounted for as an acquisition of Biotech by Entech.

These financial statements cover the Company's operations for the three- and nine-month periods ending September 30, 2005 and 2004. As the amalgamation of Biotech and Entech has been accounted for as an acquisition of Biotech by Entech the 2004 comparative figures are those of Entech and include the combined financial results of two mutual funds, Sentry Select Focused Technologies Fund and Sentry Select Focused Alternative Energy Fund. The assets of these two mutual funds were acquired June 29, 2004, as part of a series of transactions that led to the creation of Entech. The assets of Sentry Select Focused Biotechnology Fund were acquired June 29, 2004 as part of a series of transactions that led to the creation of Biotech.

Management's Discussion and Analysis

Portfolio Commentary

At September 30, 2005, almost 50 per cent of the Company's net assets are invested in oil and gas royalty trusts. The second largest allocation is to resources and commodity-based income trusts (23.31 per cent). The balance of the Company's net assets is invested in other income funds, many of which are exposed to or involved in commodity-based operations.

The Company's investment portfolio remained virtually unchanged in the third quarter of 2005. The Investment Advisor initiated a position in Baytex Energy Trust and sold the position in Crescent Point Energy Trust.

The oil and gas royalty trust sector posted spectacular returns in the third quarter, underpinned by exceptionally strong commodity prices, with the Scotia Capital Income Trust Index Energy sub-index recording a total return of 24.6 per cent.

Commodity Commentary and Outlook

Since almost half of the Company's portfolio is invested in oil and gas royalty trusts, prices of crude oil and natural gas may have a material effect on the value of the portfolio.

The following commentary reviews the major events that influenced the price of crude oil and natural gas in the third quarter and provides an outlook on the factors that could cause these prices to change.

Crude Oil

West Texas Intermediate (WTI) crude oil averaged US$63.00 per barrel for the third quarter of 2005, up from an average of US$53.10 per barrel for the second quarter and just US$49.68 during the first quarter. For the third quarter of 2004, WTI averaged US$43.65. For the first nine months of 2005, WTI averaged US$55.31, which was 41 per cent above its US$39.08 average for the first nine months of 2004. Light Canadian crude at Edmonton averaged $68.29 for the nine months, up 34 per cent from its $51.11 for the same period last year. For the last week of August, light Canadian crude topped $80.00 per barrel. These are record historical highs for crude oil. (All price data: Woodside Research Ltd.)

While WTI prices above US$55.00 were justified by analysts earlier in the year based on tight markets and fear of supply disruption, the shortage of refining capacity coupled with a busy summer driving season pushed prices to new highs during the third quarter. The final blow came from Hurricanes Katrina in August and Rita in September. These were the two most disruptive storms ever to hit the energy facilities in the U.S. Gulf coast and offshore.

By the end of September, 97.8 per cent of normal daily oil (about 1.5 million barrels per day) and 79.4 per cent of daily gas production (about eight billion cubic feet per day) was shut in. The U.S. offshore normally accounts for 28.7 per cent of total U.S. crude production and 20.0 per cent of natural gas production. The region also accounts for 47.4 per cent of U.S. refining capacity and handles 60.4 per cent of its crude imports. Katrina and Rita destroyed some 109 offshore production platforms and damaged another 50. They also destroyed at least five drilling rigs. Another 19 rigs were damaged and at least 19 more were adrift and not yet evaluated, and with a few unaccounted for at the end of September. (Source: The Minerals Management Service (MMS), a bureau of the U.S. Department of the Interior).

These two hurricanes also temporarily cut off crude imports (6.5 million barrels per day) and shut storage facilities, pipeline terminals and refineries (over 2 million barrels per day of refining capacity at September 30). Crude oil inventories dipped sharply as a result of these disruptions but remained above normal levels. However, gasoline, diesel and heating oil all dropped well below normal. In response to this 'natural disaster,' Washington made crude oil available from the Strategic Petroleum Reserve, the Organization of the Petroleum Exporting Countries (OPEC) promised to pump whatever volumes would be needed and the Paris-based International Energy Agency "allocated" additional crude and refined products to the U.S. market - its first emergency intervention in decades.

Many observers are convinced that we have moved to a new plateau of higher oil prices. China and India combined now import nearly 6 million barrels per day compared to net-zero imports as late as 1993. Demand from all of Asia is expected to continue to put pressure on supplies. For the near future, oil production will operate at or near physical capacity and all new demand growth plus losses from the annual depletion of existing fields will have to be met from newly developed fields. This is a tall order and the issue of how and from where the next 10, 20 or 30 million barrels per day of production can be developed (or if it can!) has sparked a lively debate among analysts.

The underlying concern is that very high prices will be necessary to slow global demand growth and generate the capital needed to grow production and expand delivery infrastructure, such as pipelines, docks, terminals and tankers.

Natural Gas

The average price of natural gas at the Henry Hub in Louisiana in the third quarter was US$8.814 per million British thermal units (mmbtu) compared to the second quarter at US$6.939 per mmbtu and US$6.416 for the first quarter. For the first nine months of 2005, Henry Hub gas averaged US$7.450 versus US$5.725 for the same period of 2004. The average price of natural gas at the AECO Hub in southeast Alberta for the third quarter of 2005 was $9.792 per gigajoule compared to $5.871 for the third quarter of 2004. For the first nine months AECO gas averaged $7.727, up 25 per cent from $6.183 for the first nine months of 2004.

Weather was the most important factor in the higher gas prices. A warmer than normal summer meant large volumes of gas were used to generate electricity for air conditioning and as a result, less was available for injection into storage. At the close of last winter, U.S. gas storage stood at 1,455 billion cubic feet (bcf), 18.6 per cent above the previous year's winter close and well above the norm. By the end of September, these same storage facilities were at 2,929 bcf, 4.9 per cent below last year's September close.

Worse, U.S. gas production for the first seven months of 2005 (pre-hurricane) was slightly below the same periods in both 2004 and 2003. In contrast, there were 16 percent more gas wells completed for the first eight months of 2005 compared to 2004 and 39 per cent more than in the same eight months of 2003. The U.S. is drilling more gas wells but not growing production. (Source: The U.S. International Energy Agency).

This production shortfall is made even more serious by the disruption caused by Hurricanes Katrina and Rita. Total U.S. gas production for 2005 will fall well below recent years. At the end of September, the U.S. offshore had 79.4 of its gas production shut-in, this for a region that normally produces 20.0 per cent of all U.S. natural gas. (Source: MMS)

Nearly every analyst now believe that unless the coming winter is surprisingly mild, we will continue to experience these elevated gas prices (US$10 to US$14 per mmbtu at Henry Hub since the end of August) through at least the next six months.

When gas prices spiked in the winter of 2000-2001, caused by the California energy crisis plus market manipulation - as we later learned, there was widespread 'demand destruction' by the industrial sector. Big energy-consuming companies cut output or closed facilities, and in some cases, moved operations overseas permanently.

The commercial (malls and office buildings) and residential sectors respond slowly to high prices and the power sector has continued to add new capacity based on burning clean natural gas. As a consequence, there are few options in the U.S. economy to adjust gas demand to these high prices. Supplies from Alaska or the Canadian Arctic are years away and liquefied gas imports are growing slowly.

As in the global oil sector, North American natural gas demand is bumping up against supply constraints.

Portfolio Performance

The Company's net assets were $5,035,319 at September 30, 2005, an increase from $4,258,436 at June 30, 2005 and $2,817,077 at December 31, 2004.

The largest factor in the increase in net assets for the third quarter was net income from investment operations of $728,248 (2004 - loss of $521,580). This higher net income resulted predominantly from a change in unrealized appreciation of investments of $734,197 (2004 - depreciation of $12,998), driven by a rise in the value of the portfolio's holdings of energy and resource income trusts.

The Company had a net realized gain on sale of investments of $20,842 for the three months ended September 30, 2005 (2004 - loss of $457,645).

The market value of the Company's shares was $0.26 per share on the TSX Venture Exchange at September 30, 2005, up from $0.18 on June 30, 2005.

Results from Operations

The Company earned $100,742 in gross investment income in the third quarter of 2005, mostly from dividends and royalties. In the third quarter of 2004, the comparative figure was $4,863. For the first nine months of 2005, gross investment income was $303,600 (2004 - $17,524). This increase primarily reflects the type of securities held by the portfolio: in 2005, the portfolio was largely invested in income and royalty trusts that pay out monthly distributions, whereas in 2004, the mutual funds largely held common shares with the objective of capital appreciation.

As noted in the section titled 'Portfolio Performance,' the Company had net income from investment operations of $728,248 (2004 - loss of $521,580), a net realized gain on sale of investments of $20,842 (2004 - loss of $457,645) and return of capital of $19,030 (2004 - nil) in the third quarter.

For the first nine months of 2005, the Company had net income from investment operations of $891,099 (2004 - loss of $273,534), a net realized gain on sale of investments of $64,661 (2004 - loss of $406,916) and return of capital of $52,551 (2004 - nil).

Management and Investment Advisory Fees

Management and investment advisory fees were $18,851 in the third quarter of 2005 (2004 - $11,640) and $51,910 in the first nine months of 2005 (2004 - $55,505). The increase is due to higher average net assets during 2005 as a result of the amalgamation with Biotech.

For the three months ended September 30, 2005, the Company recorded an incentive stock option expense of $48,635 related to the grant on August 18 of options to purchase up to an aggregate of 2,263,800 common shares of the Company exercisable at a price of $0.25. A total of 1,078,800 of these stock options were granted to Directors and Officers.

During the nine months ended September 30, 2004, expenses of $120,697 were absorbed by Sentry Select Capital Corp., the investment advisor of the Company, and at that time the manager of the mutual funds.

Fund Administration and Trustee Fees

Fund administration and trustee fees were $12,604 in the third quarter of 2005, down from $21,225 in the same period in 2004. For the first nine months of 2005, these fees totaled $30,658, compared to $112,052 in the same period of 2004.

The Company now pays a set fee structure based on the amount of net assets. In prior years, the fees were charged on a fixed fee basis.

Forward-Looking Statements

This disclosure includes statements about expected future events and/or financial results that are forward-looking in nature and subject to substantial risks and uncertainties. For those statements, CAPVEST Income Corp. cautions that actual performance will be affected by a number of factors, many of which are beyond its control. These include general economic conditions in Canada and the United States; industry conditions including changes in laws and regulations; changes in income tax regulations; increased competition; and fluctuations in commodity prices, foreign exchange and interest rates. In addition, there are numerous risks and uncertainties associated with oil and natural gas operations and the evaluation of oil and natural gas reserves, as well as those of other commodity based operations. As a result, future events and results may vary substantially from what CAPVEST Income Corp. currently foresees.



Capvest Income Corp.
3rd Quarter Report 2005

Balance Sheets

As at September 30, 2005 As at As a
(unaudited) and December 31, 2004 September 30, December 31,
(audited) 2005 2004
---------------------------------------------------------------------

Assets
Investments at market value $ 4,949,832 $ -
Cash and cash equivalents 24,571 1,854,226
Dividends and interest receivable 43,038 1,076
Receivable on sale on investments - 985,129
Deferred financing charges (Note 9) 79,649 -
---------------------------------------------------------------------
Total assets $ 5,097,090 $ 2,840,431
---------------------------------------------------------------------
---------------------------------------------------------------------

Liabilities
Accounts payable and accrued liabilities $ 50,919 $ 19,402
Issue costs payable 4,418 -
Management fee payable 6,434 3,952
---------------------------------------------------------------------
Total liabilities 61,771 23,354
---------------------------------------------------------------------

Shareholders' Equity (Note 4)
Equity 4,144,220 5,736,449
Surplus (deficit) (Note 2) 891,099 (2,919,372)
---------------------------------------------------------------------
Total shareholders' equity 5,035,319 2,817,077
---------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 5,097,090 $ 2,840,431
---------------------------------------------------------------------
---------------------------------------------------------------------
Number of shares outstanding 28,697,475 18,876,562
---------------------------------------------------------------------
---------------------------------------------------------------------


Approved on behalf of the Board of Directors


(Signed) John F. Driscoll (Signed) Richard Zarzeczny
------------------------- --------------------------
Director Director

The accompanying notes are an integral part of these financial
statements


Statements of Operations

For the For the For the For the
three three nine nine
months months months months
ended ended ended ended
Septem- Septem- Septem- Septem-
ber 30, ber 30, ber 30, ber 30,
(unaudited) 2005 2004 2005 2004
---------------------------------------------------------------------

Investment Income
Distributions:
Royalties and
dividends $ 81,658 $ 1,961 $ 241,675 $ 13,047
Return of capital 19,030 - 52,551 -
Foreign withholding
tax on dividends - (680) - (2,080)
Interest 54 3,582 9,374 6,557
---------------------------------------------------------------------
100,742 4,863 303,600 17,524
---------------------------------------------------------------------

Expenses
Management and
investment advisory
fees 18,851 11,640 51,910 55,505
Incentive stock
options expense
(Note 4) 48,635 - 48,635 -
Legal, listing and
filing fees (7,817) 16,704 17,469 21,363
Audit fees 18,115 2,674 43,756 8,950
Fund administration
and Trustee fees 12,604 21,225 30,658 112,052
Securityholder
reporting 18,115 4,814 34,646 25,103
---------------------------------------------------------------------
Total expenses 108,503 57,057 227,074 222,973
Less:
Expenses absorbed by
Manager - - - (120,697)
---------------------------------------------------------------------
Net expenses 108,503 57,057 227,074 102,276
---------------------------------------------------------------------
Net investment
income (loss) (7,761) (52,194) 76,526 (84,752)
---------------------------------------------------------------------
---------------------------------------------------------------------

Realized and unrealized
gain (loss) on
investments and
other net assets
Net realized gain
(loss) on sale of
investments 20,842 (457,645) 64,661 (406,916)
Net realized gain on
foreign exchange - 1,257 - 2,646
Return of capital (19,030) - (52,551) -
Change in unrealized
appreciation
(depreciation) of
investments 734,197 (12,998) 802,463 215,488
---------------------------------------------------------------------
736,009 (469,386) 814,573 (188,782)
---------------------------------------------------------------------

Net income (loss)
from investment
operations for the
period $728,248 $(521,580) $891,099 $(273,534)
---------------------------------------------------------------------
---------------------------------------------------------------------

Earnings per share -
basic (Note 7) $ 0.03 $ (0.03) $ 0.03 $ (0.01)
---------------------------------------------------------------------

Earnings per share -
fully diluted (Note 7) $ 0.03 $ (0.03) $ 0.03 $ (0.01)
---------------------------------------------------------------------

The accompanying notes are an integral part of these financial
Statements


Statements of
Shareholders' Equity

For the For the For the For the
three three nine nine
months months months months
ended ended ended ended
Septem- Septem- Septem- Septem-
ber 30, ber 30, ber 30, ber 30,
(unaudited) 2005 2004 2005 2004
---------------------------------------------------------------------

Shareholders'
equity, beginning
of period $4,258,436 $3,075,378 $2,817,077 $3,933,049
---------------------------------------------------------------------

Issuance of shares
to Biotech
shareholders (Note 4) - - 1,370,095 -
Issue costs (Note 4) - - (95,000) -
Issuance of equity
shares - 12,908 3,413 170,062
Issuance of incentive
stock options 48,635 - 48,635 -
Merger transaction
(Note 1) - 220,970 - 220,970
Cost of issue - (36,084) - (36,084)
Payment for units
redeemed - - - (1,262,871)
Net income (loss)
from investment
operations for the
period 728,248 (521,580) 891,099 (273,534)
---------------------------------------------------------------------

Shareholders' equity,
end of period $5,035,319 $2,751,592 $5,035,319 $2,751,592
---------------------------------------------------------------------
---------------------------------------------------------------------

The accompanying notes are an integral part of these financial
statements


Statements of Net Realized Gain
(Loss) on Sale of Investments

For the For the For the For the
three three nine nine
months months months months
ended ended ended ended
Septem- Septem- Septem- Septem-
ber 30, ber 30, ber 30, ber 30,
(unaudited) 2005 2004 2005 2004
---------------------------------------------------------------------

Proceeds from sale
of investments $184,376 $3,198,852 $3,054,812 $4,138,753
---------------------------------------------------------------------

Cost of investments,
beginning of period 4,168,528 3,113,207 - 4,002,379
Return of capital (19,030) - (52,551) -
Purchases during the
period 161,404 2,772,648 7,190,070 2,772,648
---------------------------------------------------------------------
4,310,902 5,885,855 7,137,519 6,775,027
Cost of investments
end of period 4,147,368 2,229,358 4,147,368 2,229,358
---------------------------------------------------------------------
Cost of investments
sold during the
period 163,534 3,656,497 2,990,151 4,545,669
---------------------------------------------------------------------

Net realized gain
(loss) on sale of
investments $ 20,842 $ (457,645) $ 64,661 $ (406,916)
---------------------------------------------------------------------
---------------------------------------------------------------------

The accompanying notes are an integral part of these financial
statements


Statement of Investment Portfolio

As at September 30, 2005
(unaudited)
% of
# of Units/ Average Market Net
Securities Shares Cost Value Assets
---------------------------------------------------------------------
Income Funds

Energy
Viking Energy Royalty Trust 30,000 $ 209,904 $ 293,700 5.83%
Bonavista Energy Trust 7,000 205,917 260,400 5.17%
Zargon Energy Trust 7,400 193,102 257,150 5.11%
ARC Energy Trust 10,600 196,539 255,460 5.07%
Penn West Energy Trust 6,900 200,100 251,919 5.00%
Vermilion Energy Trust 7,800 171,767 226,980 4.51%
Esprit Energy Trust 14,400 184,607 208,656 4.14%
Acclaim Energy Trust 9,500 139,827 194,750 3.87%
Focus Energy Trust 7,800 171,645 187,512 3.72%
Baytex Energy Trust 10,000 160,939 185,500 3.69%
StarPoint Energy Trust 6,800 130,356 163,064 3.24%
---------------------------------------------------------------------
1,964,703 2,485,091 49.35%
---------------------------------------------------------------------
Resources
Canadian Oil Sands Trust 2,700 202,164 346,815 6.89%
Fording Canadian Coal Trust 5,250 204,185 260,243 5.17%
Labrador Iron Ore Royalty
Income Fund 6,400 170,112 171,712 3.41%
Noranda Income Fund Cl. A 13,500 168,034 164,565 3.27%
TimberWest Forest Corp. 10,200 163,506 154,122 3.06%
SFK Pulp Fund 17,400 125,060 76,386 1.51%
---------------------------------------------------------------------
1,033,061 1,173,843 23.31%
---------------------------------------------------------------------
Utilities & Infrastructure
Keyera Facilities Income
Fund 12,900 184,703 243,294 4.83%
Inter Pipeline Fund Cl. A 13,900 128,054 139,000 2.76%
---------------------------------------------------------------------
312,757 382,294 7.59%
---------------------------------------------------------------------
Consumer
Rogers Sugar Income Fund 36,700 174,121 146,800 2.92%
---------------------------------------------------------------------

Industrials
CCS Income Trust 8,800 207,057 272,624 5.41%
Great Lakes Carbon Income
Fund 17,000 216,841 182,750 3.63%
PRT Forest Regeneration
Income Fund 12,700 129,964 138,430 2.75%
---------------------------------------------------------------------
553,862 593,804 11.79%
---------------------------------------------------------------------
Equities
Energy
Canadian Natural
Resources Limited 3,200 108,864 168,000 3.34%
---------------------------------------------------------------------
Total portfolio of investments $ 4,147,368 $ 4,949,832 98.30%
Cash and other assets,
net of liabilities 85,487 1.70%
---------------------------------------------------------------------

Total net assets $ 5,035,319 100.00%
---------------------------------------------------------------------
---------------------------------------------------------------------

Note: Percentage of net assets shown relates to
investments at market value to total net assets
of the Company


The accompanying notes are an integral part of these financial
statements


CAPVEST Income Corp.

Notes to Financial Statements

September 30, 2005 and 2004

(unaudited)

NOTE 1 - ORGANIZATION

CAPVEST Income Corp. ("CAPVEST", or the "Company") was created through the amalgamation of Biotech Medical Sciences Inc. ("Biotech") and Entech Investments Inc. ("Entech") effective January 1, 2005. Special Meetings of Shareholders of Entech and Biotech were held on December 21, 2004 at which time all resolutions in regards to the amalgamation were passed. Sentry Select Capital Corp. ("Sentry Select") is the Investment Advisor (the "Investment Advisor") of the Company. Sentry Select had served as the Investment Advisor of Biotech and Entech.

The directors and officers of Biotech and Entech continued as directors and officers of CAPVEST. Common shares of CAPVEST began trading on January 6, 2005 on the TSX Venture Exchange under the symbol CVS.

On March 12, 2004, Sentry Select and Inter Energy Corp. ("Inter Energy") announced a proposal to transfer the assets from Sentry Select Focused Technologies Fund ("Technologies Fund") and Sentry Select Focused Alternative Energy Fund ("Energy Fund"), two mutual funds administered by Sentry Select, to Inter Energy in exchange for common shares and warrants of Inter Energy. Sentry Select had served as the manager of the mutual fund trusts. In connection with the approval of this transaction, Inter Energy's shareholders approved a change of the corporate name to Entech Investments Inc. Unitholders of the two mutual funds approved the asset transfer transaction at special meetings called for that purpose on April 30, 2004. Effective June 29, 2004, Entech acquired all of the outstanding units of the mutual funds in exchange for 15,376,562 common shares and 15,376,562 common share purchase warrants, each entitling a warrant holder to purchase one common share at a price of $0.20 per share for a 12-month period. The completion of the asset transfer transaction was accepted by the TSX Venture Exchange (the "Exchange") as a "Qualifying Transaction". Entech began trading as a regular Tier 2 issuer on the Exchange effective July 16, 2004. The carrying value of the net assets of Entech was $220,970 on June 29, 2004.

On March 12, 2004, Sentry Select and Rita Capital Corp. ("Rita Capital") announced a proposal to transfer the assets from Sentry Select Focused Biotechnology Fund, a mutual fund administered by Sentry Select, to Rita Capital in exchange for common shares and warrants of Rita Capital. Sentry Select had served as the manager of the mutual fund trust. Unitholders of Sentry Select Focused Biotechnology Fund approved the asset transfer transaction at a special meeting called for that purpose on April 30, 2004. In connection with the approval of this transaction, Rita Capital's shareholders approved a change of the corporate name to Biotech Medical Sciences Inc. Effective June 29, 2004, Biotech acquired all of the outstanding units of Sentry Select Focused Biotechnology Fund in exchange for 7,640,738 common shares and 7,640,738 common share purchase warrants, each entitling a warrant holder to purchase one common share at a price of $0.20 per share for a 12-month period. The completion of the asset transfer transaction was accepted by the TSX Venture Exchange as a "Qualifying Transaction". Biotech began trading as a regular Tier 2 issuer on the Exchange effective July 19, 2004.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

The amalgamation of Biotech and Entech has been accounted for as an acquisition of Biotech by Entech. The comparative figures represent the financial statements of Entech and the retained deficit of $2,919,372 on the date of amalgamation was adjusted against equity.

The financial statements are prepared in accordance with Canadian generally accepted accounting principles, which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses during the reporting period. Actual results could differ from these estimates.

A summary of significant accounting policies used in the preparation of these financial statements is as follows:

a. Valuation of Investments

Investments are valued at market value, which is determined by the closing sale price on the recognized stock exchange on which the investments are listed or principally traded. If no closing price was reported, the most recent closing price, if it is between the bid and ask price, or the average of the closing bid and closing ask prices, is used.

Portfolio investments for which reliable quotations are not readily available are valued at management's best estimate of fair value, as determined pursuant to procedures established by the Investment Advisor. The types of securities that are subject to such valuations are delisted securities that are valued at the lower of the last traded price of the security and the Investment Advisor's best estimate of fair value.

b. Investment Transactions and Income Recognition

Investment transactions are accounted for on the date following the date on which the investments are purchased or sold. Dividend income is recognized on the ex-dividend date and interest income is recognized daily on an accrual basis. Realized gains or losses arising from the sale of investments, and unrealized appreciation and depreciation on investments, are calculated on an average-cost basis. Brokerage commissions incurred for portfolio transactions are included in the cost of portfolio investments purchased or as a reduction of the proceeds received upon the sale of portfolio investments.

c. Return of capital

Distributions that are treated as a return of capital for income tax purposes are included in investment income and are adjusted for in the Statements of Operations and are used to reduce the average cost of the underlying investments on the Statement of Investment Portfolio.

d. Foreign Currency Translation

The market value of foreign currency denominated investments, currency holdings and other assets and liabilities denominated in a foreign currency are translated into Canadian dollars using the prevailing rate of exchange on each valuation date. Income, expenses and investment transactions in foreign currencies are translated into Canadian dollars at the rate of exchange prevailing on the respective dates of such transactions.

The portion of the results of operations arising from changes in foreign exchange rates on portfolio investments is not isolated from the fluctuations arising from changes in market prices. Such fluctuations are included in "Net realized gain (loss) on sale of investments" in the statement of operations.

e. Cash and Cash Equivalents

Cash and cash equivalents include cash and short term investments with an original maturity of three months or less from the date of their acquisition.

f. Income Taxes

The Company follows the liability method of accounting for income taxes. Under this method, income tax assets and liabilities are recognized for the estimated tax consequences attributable to differences between the amounts reported in the financial statements and their respective tax bases, using substantively enacted income tax rates. The effect of a change in income tax rates on future tax assets and liabilities is recognized in income in the period that the change occurs.

g. Incentive Stock Options

The Company has an incentive stock option plan as described in Note 4. The Company follows the fair value method of accounting for the expense associated with the plan, whereby an estimate of the fair value of the stock options granted is measured and recorded as an expense over the vesting period or at the date of grant if options vest immediately, with the related offset recorded as contributed surplus. The effect of actual forfeitures of a previously granted option are recognized as they occur. Any consideration paid to the Company with respect to the exercise of stock options is credited to share capital. At each reporting date, the incentive stock option expense is adjusted to reflect the then fair market value of unvested stock options granted to non-employees. For the purpose of accounting for these incentive stock options Directors of the Company are considered employees and officers of the Company and other parties are considered non-employees.

NOTE 3 - INVESTMENT MANAGEMENT AND SERVICING FEES

The Investment Advisor is responsible for the management of the Company's portfolio of investments and earns a management fee equal to 1.10 per cent per annum on the net asset value of the Company. Prior to June 29, 2004, the Investment Advisor also paid a servicing fee to eligible dealers equal to 0.40 per cent of the net asset value of each mutual fund trust.

NOTE 4 - SHARE CAPITAL

Authorized

The authorized share capital of CAPVEST consists of an unlimited number of common shares, Class A Preference shares, Class B Preference shares and Class C Preference shares. All Preference shares are issuable in series.

Issued

In connection with the amalgamation, each shareholder of Biotech and Entech received common shares of CAPVEST in exchange for common shares of Biotech or Entech held. The exchange ratios, determined by an independent valuator, were as follows.

One (1) Entech share equals One (1) CAPVEST Income Corp share.

One (1) Biotech share equals 0.88 CAPVEST Income Corp share.

Upon the completion of the amalgamation, 28,680,411 CAPVEST common shares were issued of which 18,876,562 and 9,803,849 shares were issued to the shareholders of Entech and Biotech, respectively. There were also 22,100,411 warrants outstanding, 15,376,562 issued through the purchase of Entech, and 6,723,849 issued through the purchase of Biotech.

As at September 30, 2005 there are no Preference shares issued.



Common shares outstanding:

Shares Outstanding 2005
------------------------------------------------

Beginning -
Shares issued upon amalgamation 28,680,411
Warrants exercised 17,064
Ending 28,697,475
------------------------------------------------


Stock Option Plan

As of September 30, 2005 there were 404,200 outstanding and fully vested options that are exchangeable into CAPVEST shares that were originally issued in 2003 by Biotech and Entech. These options were fully vested prior to January 1, 2005, the date of the amalgamation of Entech and Biotech. In 2003, Biotech and Entech each issued 215,000 options. Each Biotech option entitles the holder to acquire .88 CAPVEST common shares at a price of $0.20 until November 18, 2007. Each Entech option entitles the holder to acquire one (1) CAPVEST common share at a price of $0.20 until November 18, 2007.

Pursuant to the amalgamation of Biotech and Entech shareholders of both companies approved a new stock option plan for CAPVEST (the "New Plan"). The New Plan provides that the Board of Directors may from time to time, in its discretion, and in accordance with the TSX Venture Exchange requirements, grant to bona fide directors, officers, employees and technical consultants to the Company, non-transferable options to purchase CAPVEST shares, provided that the number of CAPVEST shares reserved for issuance, together with any options issued to Eligible Charitable Organizations, will not exceed 10% of the issued and outstanding CAPVEST shares and no more than 5% of the issued and outstanding CAPVEST shares may be granted to any one eligible person in any 12 month period. Such options will be exercisable for a period of up to 5 years from the date of grant. The number of CAPVEST shares reserved for issuance under the New Plan is as follows:

1. to any individual director or officer will not exceed five percent of the issued and outstanding shares;

2. to each technical consultants will not exceed two percent of the issued and outstanding shares;

3. to all investor relations consultants, shall not exceed two percent of the issued and outstanding shares; and

4. to all Eligible Charitable Organizations will not exceed one percent of the issued and outstanding shares.

The exercise price for options granted under the New Plan cannot be less than the Market Price defined as the greater of:

1. the closing price on the day immediately preceding the date of the grant of the options; and

2. the lowest price permitted pursuant to the rules of the stock exchange or trading system upon which CAPVEST shares are listed and posted for trading (currently, the TSX Venture Exchange).

On August 18, 2005 the Company granted incentive stock options to purchase up to an aggregate of 2,263,800 common shares of the Company exercisable at a price of $0.25 per share. A total of 528,800 of these stock options were granted to directors and 550,000 were granted to officers of the Company, the balance of 1,185,000 were granted to consultants. The options are exercisable for a period of five years pursuant to a vesting schedule of one-third upon the date of the grant (the "Grant Date"), one-third following the first anniversary of the Grant Date and the remaining one-third following the second anniversary of the Grant Date.

During the three months ended September 30, 2005 the compensation cost that has been charged against income, in respect of the New Plan, was $48,635.

The fair value of the incentive stock options granted were estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield 0%; expected volatility 15%; risk-free interest rate of 3.63%; and expected life of five years.

A summary of the status of the stock option plan as of September 30, 2005 and changes during the period is presented below:

Employee incentive stock options



For the nine months period ended September 30, 2005

Weighted Exercise
Average Shares Price
---------------------------------------------------------------------
Outstanding, beginning of period 404,200 $ 0.200
Granted 528,800 $ 0.250
---------------------------------------------------------------------
Outstanding, end of period 933,000 $ 0.228
---------------------------------------------------------------------
Exercisable, end of period 580,467 $ 0.215
---------------------------------------------------------------------

Non-employee incentive stock options

For the nine months period ended September 30, 2005

Weighted Exercise
Average Shares Price
---------------------------------------------------------------------
Outstanding, beginning of period - $ -
Granted 1,735,000 $ 0.250
---------------------------------------------------------------------
Outstanding, end of period 1,735,000 $ 0.250
---------------------------------------------------------------------
Exercisable, end of period 578,333 $ 0.250
---------------------------------------------------------------------


The following table summarizes information about the stock options
outstanding as of September 30, 2005:

As at September 30, 2005:
Outstanding Exercisable
Number Expiry Number of Exercise
of Shares Date Shares Price
----------------------------------------------------------
404,200 November 18, 2007 404,200 $ 0.20
2,263,800 August 17, 2010 754,600 $ 0.25
----------------------------------------------------------


Warrants

In the first and second quarters of 2005 a total of 17,064 warrants were exercised to purchase common shares at a price of $0.20 per share. This conversion of warrants added $3,413 to shareholders' equity. On June 29, 2005 all warrants expired.

NOTE 5 - COMPARATIVE FIGURES

Comparative information in the income statement for the three month and nine month periods ended September 30, 2004 include the combined results of the Sentry Select Focused Technologies Fund and the Sentry Select Focused Alternative Energy Fund up to June 29, 2004, which, for accounting purposes are considered as the on-going entity (see Note 1). Comparative information as at December 31, 2004, reflects the balance sheet of Entech. Certain information from the prior years may have been reclassified to conform with the changes between reporting requirements of a mutual fund trust and those of a corporation.



NOTE 6 - INCOME TAXES

The following is a reconciliation of income tax expense to statutory
tax rates.

For the three For the nine
months ended months ended
September 30, September 30,
2005 2005
-------------------------------

Net income from investment operations $ 728,248 $ 891,099

Combined Federal and Provincial Tax Rate 36.12% 36.12%

Expected income tax 263,043 321,865
Unrealized appreciation of investments (265,192) (289,850)
Share issue costs (6,359) (6,359)
Loss carryforwards 8,508 (25,656)
-------------------------------
Income tax expense $ - $ -
-------------------------------
-------------------------------


No comparative information is provided as the 2004 results are substantially the combined results of Technologies Fund and Energy Fund which qualified as mutual fund trusts under the Income Tax Act (Canada) and, accordingly are subject to tax on income including net realized capital gains, which is not paid or payable unitholders at the end of the tax year. There was no undistributed income, as such the mutual funds were not subject to income taxes.

The Company has non-capital losses of approximately $581,925. These losses were originally incurred by Entech. The breakdown of these losses is as follows:



Non-Capital Losses

Date Expiry Amount
2002 2009 $ 27,769
2003 2010 28,088
2004 2014 526,068
----------------------------------
$581,925


Biotech had non-capital losses of $486,640 at December 31, 2004. These losses expired as of January 1, 2005 due to the amalgamation of Entech and Biotech.

A future tax asset relating to these items has not been recognized on the balance sheet due to the uncertainty of realization.

NOTE 7 - EARNINGS PER SHARE

The table below details the calculation of both basic and diluted earnings per share:



For the For the For the For the
three three nine nine
months months months months
ended ended ended ended
Septem- Septem- Septem- Septem-
ber 30, ber 30, ber 30, ber 30,
(unaudited) 2005 2004 2005 2004
---------------------------------------------------------------------

Numerator
Net income (loss)
from investment
operations for
the period $ 728,248 $ (521,580) $ 891,099 $ (273,534)

Denominator
Weighted average
number of shares
- basic 28,697,475 18,876,562 28,690,550 18,628,386
Dilutive effect of
employee stock
options 80,840 - 19,248 -
Weighted average
number of shares
- diluted 28,778,315 18,876,562 28,709,798 18,628,386

Earnings per share
Basic $0.03 $(0.03) $0.03 $(0.01)
Diluted $0.03 $(0.03) $0.03 $(0.01)
---------------------------------------------------------------------


NOTE 8 - INVESTMENTS IN RELATED PARTIES

The Company is permitted to invest in other trusts that are managed by the Investment Advisor or entities under common control as the Investment Advisor, subject to some restrictions, up to a total limit of 5 per cent.

As of September 30, 2005, the Company held 13,900 (December 31: Nil) units in Inter Pipeline Fund having a market value of $139,000 (December 31: Nil) which represents 2.76 % (December 31: Nil) of the Company's net asset value.

NOTE 9 - SUBSEQUENT EVENTS

On October 28, 2005, the Company filed a preliminary prospectus to issue common shares and convertible debentures of the Company. The costs incurred in connection with this offering have been recorded as deferred financing charges on the Balance Sheet.



The Exchange Tower
130 King Street West
Suite 2850, P.O. Box 104
Toronto, Ontario M5X 1A4



Contact Information

  • Sentry Select Corp.
    Investor Services
    (investor enquiries)
    1-888-246-6656
    416-364-1197 (FAX)
    or
    Sentry Select Corp.
    Brian McOstrich
    (media enquiries)
    1-888-246-6656
    416-364-1197 (FAX)
    info@sentryselect.com
    www.sentryselect.com