Grey Horse Corporation
TSX VENTURE : GHC

Grey Horse Corporation

November 16, 2005 09:05 ET

Grey Horse Capital Reports 1st Quarter Earnings

TORONTO, ONTARIO--(CCNMatthews - Nov. 16, 2005) - Grey Horse Capital Corporation (TSX VENTURE:GHC) ("Grey Horse Capital" or "the Corporation"), a financial services company headquartered in Canada, today reported its first quarter results for the period ended September 30, 2005 ("first quarter F2006").

Revenue for the first quarter F2006 was $1,496,665(1) derived from its wholly-owned subsidiary, Equity Transfer Services Inc. ("Equity"). Net income for the quarter was $178,246 or $0.06 per share and Cash Flow from Operations was $329,235 or $0.11 per share.

On December 2, 2004 Grey Horse Capital acquired all of the issued and outstanding shares of Equity. For the ten-month period since the completion of the transaction, Revenue was $5,732,206, Net Income was $843,901 or $0.27 per share, and Cash flow from Operations was $1,227,024 or $0.39 per share. Prior to the acquisition of Equity, the Corporation carried on business as a Capital Pool Company ("CPC").

"We are very pleased with first quarter results in which Equity's revenues rose 29% over the same period last year," commented Kevin Reed, President and CEO of Grey Horse Capital. "In the past, the 2nd and 4th quarters have been stronger than the other two quarters as a result of the inherent seasonality in the business. The positive results for first quarter of fiscal 2006(2) are related to a broader product offering, new customer additions, the recent strength of capital markets and an increase in the corporate fee schedule."



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Financial Highlights for the Financial Highlights for the
First Quarter ended Ten-Month Period
September 30, 2005 December 2004 to September 2005
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- Revenue: $1,496,665 - Revenue: $5,732,206
- % Increase: 29% - % Increase: 24%
- Q1 Net Income: $178,246 - Net Income: $843,901
- Q1 Earnings per Share: $0.06 - Earnings per Share: $0.27
- Q1 Cash flows from Operations: - Cash Flow from Operations:
$329,235 $1,227,024
- Cash Flow from Operations per - Cash Flow from Operations
Share: $0.11 per Share: $0.39
- Q1 Return on Average Equity: 7.6% - Return on Average Equity: 42.9%

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(1) Readers should note the paragraph below dealing with the change in the presentation of certain service revenues.

(2) Fiscal 2006 refers to the period commencing July 1, 2005 and ending June 30, 2006

"The Corporation's results for the first quarter of fiscal 2006 and for the ten-month period following the acquisition of Equity continue to indicate the strength of Equity's core business." said Paul G. Smith, EVP and Chief Financial Officer, Grey Horse Capital. "EPS is $0.06 for the quarter and $0.27 since the acquisition. Cash Flow from Operations per share(3) is $0.11 for the quarter and $0.39 since the acquisition. And the consolidated cash balance ended the quarter at $600,493, up from an amount of $53,132 when the quarter began."

(3) Cash Flow from Operations per share is derived by dividing Cash flow from Operations by the weighted

Also, for fiscal 2005 ending June 30, 2005, the Corporation benefited from the use and recognition of loss carry-forwards. The Corporation expects no further significant benefits from the recognition of loss carry-forwards during fiscal year 2006 as all such benefits have already been recognized. In this regard, first quarter 2006 includes a charge to the Consolidated Statements of Income (Loss) and Retained Earnings (Deficit) for Current income taxes. For a fuller discussion of this issue, readers should refer to the Corporations MD&A for first quarter of fiscal 2006.

A non-cash adjustment requested by the Corporation's auditor and affecting both the intangible asset and the future income tax liability was reflected in the financial statements at June 30, 2005. The intangible asset was grossed up by $622,800 to recognise the related future income tax effect and the future income tax liability was increased by the same amount. Upon discovering the impact of the audit adjustment, the result of which was a default by the Corporation of one of its covenants, the Corporation and its lenders agreed to amend the covenant in each of its lender agreements to correct the default without prejudice to the Corporation.

During the quarter and with the concurrence of its auditors, the Corporation adopted the guidance of CICA EIC 123 "Reporting Revenues Gross as Principal Versus Net as an Agent" as it relates to certain service revenues of the Corporation, which were previously reported on a net basis. This change was made because the Corporation acts as principal in these transactions rather than as agent. There is no effect on net income resulting from the presentation change of these service revenues.

About Grey Horse Capital Corporation

Through its wholly owned subsidiary, Equity Transfer Services Inc., Grey Horse Capital provides transfer services to issuers in the North American capital markets. As at November 16, 2005, the Company had 3,133,327 common shares issued and outstanding.

Certain information included in this press release is forward-looking and may involve risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Factors that might cause a difference include, but are not limited to, competitive developments, risks associated with Grey Horse Capital's growth, the state of the financial markets, regulatory risks and other factors. Unless otherwise required by applicable securities laws, Grey Horse Capital disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. More detailed information about potential factors that could affect Grey Horse Capital's financial and business results is included in public documents Grey Horse Capital files from time to time with Canadian securities regulatory authorities.

GREY HORSE CAPITAL CORPORATION

Management's Discussion and Analysis (MD&A) - First Quarter Ended September 30, 2005

This MD&A for the period ended September 30, 2005 ("first quarter F2006") provides readers with an overview of Grey Horse Capital Corporation ("Grey Horse" or "GHC" or "the Corporation"). The Corporation's fiscal year begins July 1 and ends June 30. Fiscal 2006 ("fiscal 2006") refers to the period commencing July 1, 2005 and ending June 30, 2006. The objective of this MD&A is to present readers with a view of GHC through the eyes of management by interpreting the material trends and uncertainties that affected the operating results, liquidity and financial position of the Corporation during the first quarter F2006 or that may affect future results. The MD&A has been prepared with reference to National Instrument 51-102 "Continuous Disclosure Obligations" of the Canadian Securities Administrators, and should be read in conjunction with the unaudited consolidated financial statements and notes for first quarter F2006. All dollar amounts are in Canadian dollars.

Forward-Looking Statements

This MD&A contains forward-looking statements that are based on the Corporation's expectations, estimates and projections regarding its business and the economic environment in which it operates. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to control or predict. Therefore, actual outcomes and results may differ materially from those expressed in these forward-looking statements and readers should not place undue reliance on such statements. Statements speak only as of the date on which they are made.

Date of MD&A

This MD&A is dated November 14, 2005.

Overall Performance

Please refer to the Corporation's MD&A for the fiscal year ended June 30, 2005 ("fiscal 2005) for a review of the historical, economic and industry factors that generally affect the corporation's performance. These factors remain unchanged except as set out hereafter.

The following analysis illustrates several financial metrics of the Corporation since the acquisition of Equity Transfer Services Inc. ("Equity") in early December 2004:



----------------------------------------------------
Third Fourth First Ten
Quarter Quarter Quarter months
March 31, June 30, Sept. 30, Sept. 30,
2005 2005 2005 2005
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Revenue(3) $ 1,377,463 $ 2,352,393 $ 1,496,665 $ 5,732,206
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% increase(4) 1% 42% 29% 24%
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Net income $ 143,318 $ 429,428 $ 178,246 $ 843,901
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Net income per
share (basic) $ 0.05 $ 0.14 $ 0.06 $ 0.27
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Average share-
holders' equity $ 1,724,425 $ 2,038,872 $ 2,345,249 $ 1,968,656
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Return on Equity
(ROE)(5) 8.3% 21.1% 7.6% 42.9%
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Cash flow from
operations (CFFO) $ 357,559 $ 413,879 $ 329,235 $ 1,227,024
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CFFO per share
(basic)(6) $ 0.11 $ 0.13 $ 0.11 $ 0.39
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(3) See paragraph dealing with Change in presentation of certain service revenues below. Revenues from prior periods have been reclassified to allow comparability from one period to the next.

(4) Percentage increase in revenues is based on period prior to Grey Horse's acquisition of Equity

(5) ROE figures are not annualized. If additional equity is raised, among other to fund growth opportunities, it is likely that ROE will decrease in the short- to medium-term.

(6) Cash Flow from Operations per Share is derived by dividing Cash flow from Operations by the weighted average number of common shares outstanding during the quarter.

Management is pleased with first quarter F2006 results in which Equity's revenues rose 29% over the same period last year. In the past, the 2nd and 4th quarters have been stronger than the other two quarters as a result of the inherent seasonality in the business. The positive results for first quarter F2006 are related to a broader product offering, new customer additions, the recent strength of capital markets and an increase in the corporate fee schedule.

The Corporation's cash balance improved significantly during first quarter F2006 as a result of cash management by the Corporation and the significant reduction in the Accounts receivable balance at June 30, 2005. As such, the consolidated cash balance ended the quarter at $600,493, up from an amount of $53,132 when the quarter began.

Readers of this MD&A should also note the paragraph below entitled "Change in the presentation of certain service revenues," outlining the change in the presentation of certain service revenues, which the Corporation adopted during the quarter with the concurrence of the Corporation's auditors, to comply with the principles outlined in CICA EIC 123. This change is also referenced in Note 1 of the Company's interim consolidated financial statements. Revenues from prior periods have been reclassified in this MD&A to allow comparability from one period to the next. There is no effect on net income resulting from the presentation change of these revenues.

Also, for fiscal 2005, the Corporation benefited from the use and recognition of loss carry-forwards that increased Net Income and ROE. The Corporation expects no further significant benefits from the recognition of loss carry-forwards during fiscal 2006 as all such benefits have already been recognized. In this regard, first quarter F2006 includes a charge to the Consolidated Statements of Income (Loss) and Retained Earnings (Deficit) for Current income taxes. With this charge, and a minor amount for Future income taxes, Net income per share (basic) for the first quarter F2006 was $ 0.06 and Cash flow from operations per share (basic) was $0.11. The table below sets out, by quarter since March 31, 2005, the effect of income taxes on the Corporation's financial results and on a per share basis:



---------------------------------------------
Third Fourth First Ten
Quarter Quarter Quarter months
March 31, June 30, Sept. 30, Sept. 30,
2005 2005 2005 2005
---------------------------------------------
Earnings Before Tax $ 143,318 $ 340,400 $ 295,549 $ 872,176
Taxes (Current and
Future)(7) - ($ 89,028) $ 117,303 $ 28,275
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Net income $ 143,318 $ 429,428 $ 178,246 $ 843,901
Weighted average
common shares 3,133,327 3,133,327 3,133,327 3,133,327
outstanding (basic)
Earnings before tax
per share (basic) $ 0.05 $ 0.11 $ 0.09 $ 0.28
Taxes (Current and
Future) per share - ($ 0.03) $ 0.03 $ 0.01
(basic)
---------------------------------------------
Net income per share
(basic) $ 0.05 $ 0.14 $ 0.06 $ 0.27
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(7) The earnings attained during the Third Quarter ended March 31, 2005 were not considered by management to result in the Corporation being more likely than not to benefit from all of its future income tax assets arising from various temporary differences. Accordingly, the Corporation only recognized the benefit of those future income tax assets required to offset the Third Quarter tax provision. During the Fourth Quarter ended June 30, 2005 the Corporation recognized and recorded the benefit related to all of the remaining future income tax assets as management considered it more likely than not that these benefits would be realized.

Operating Subsidiary

Please refer to the Corporation's MD&A for fiscal 2005 for a review of the historical, economic and industry factors that generally affect Equity's performance. These factors remain unchanged except as set out hereafter.

During fiscal 2005, the Corporation reviewed the benefits of obtaining a federal trust charter for Equity, which was deemed positive, and commenced the application process with the Office of the Superintendent of Financial Institutions (OSFI). That process has continued during the first quarter F2006. Management is hopeful for a favourable outcome from the application process during the current fiscal year. With the addition of the federal trust charter, Equity will be able to offer trust and transfer agency services to income trusts and to offer trustee services to corporate and governmental issuers. Management is also examining the possibility of opening offices in other geographical locations during fiscal 2006.

On July 18, 2005 Grey Horse announced the appointment of Stephen J. Headford as Vice President, Business Development.

Recent Events

On September 23, 2005 Grey Horse announced the appointment to its Board of Directors of Doug Swartout, Chairman, President and CEO of Aon Reed Stenhouse Inc. and member of the Canadian Council of Chief Executives. On October 25, the Corporation announced the additional appointment of Thomas W. Cryer, FCA, a recently retired Partner with Deloitte and Touche LLP, having held, among other, the positions of Global Managing Partner of Audit and Accounting, and CEO and Chairman of Deloitte Canada.

On September 27, 2005 Grey Horse announced it had entered into an exclusive channel partnership with XP Innovations Inc. for its DisclosureNet service, which will provide Equity customers with unlimited access to the product. DisclosureNet is a powerful search technology designed to rapidly scan security filing repositories, such as SEDAR and EDGAR, and to retrieve relevant information on a wide variety of topics from any document filed by a public company or mutual fund. Searches are both text- and category-based providing the user with real-time access to even the most obscure and difficult-to-find references. The business arrangement between the two companies has a five-year renewable term and is exclusive to Equity in the transfer agency industry in Canada with for the potential to extend the exclusivity to the United States as well pending certain events.

Results of Operations

First Quarter F2006

Grey Horse's financial results in fiscal 2006 are not meaningfully comparable to those of the previous year due to the acquisition of Equity in December 2004 and to the significant change in operations from a CPC. With revenues of nearly $1.5 million and expenses of over $1.3 million, the Corporation produced net income of $178,246 or $0.06 per share (basic). During the same period in 2004, GHC operated as a CPC and did not have significant revenue.

Summary of Quarterly Results

The following tables set out financial performance highlights for the past eight quarters, prepared in accordance with Canadian GAAP.



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Grey Horse Capital Corporation
-----------------------------------------------
First Fourth Third Second
Quarter Quarter Quarter Quarter
Sept. 30, June 30, March 31, Dec. 31,
2005 2005 2005 2004(a)
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Revenues(8) $ 1,496,665 $ 2,352,393 $ 1,377,463 $ 505,685
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Expenses 1,318,419 2,013,061 1,234,145 554,209
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Net income (loss) 178,246 429,428 143,318 (48,524)
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Net income per
share basic 0.06 0.14 0.05 (0.02)
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Net income per
share diluted 0.05 0.09 0.04 NA
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Cash flow from
operations 329,235 413,879 312,559 (10,456)
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Cash, end of period 600,493 53,132 89,384 19,408
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Assets 8,553,202 8,384,683 7,102,176 7,059,574
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Long-term
liabilities 5,043,669 5,141,764 5,279,185 5,433,715
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Dividends 0 0 0 0
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(a) Includes consolidation of two months of AFL Capital Ventures
results

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AFL Capital Ventures Inc.
-----------------------------------------------
First Fourth Third Second
Quarter Quarter Quarter Quarter
Sept. 30, June 30, March 31, Dec. 31,
2004 2004 2004 2003
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Revenues 0 0 0 0
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Expenses 38,106 119,284 13,627 19,301
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Net loss (38,106) (119,284) (13,627) (19,301)
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Net loss per share
basic (0.01) (0.06) (0.02) (0.03)
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Net loss per share
diluted NA NA NA NA
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Cash flow from
operations (38,106) (92,574) (13,627) (19,301)
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Cash and cash
equivalents, end of
period 118,298 284,150 37,420 48,051
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Assets 556,680 413,085 71,187 78,218
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Long-term
liabilities 0 0 0 0
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Dividends 0 0 0 0
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(8) See paragraph dealing with Change in presentation of certain service revenues below. Revenues from prior periods beginning with the Second Quarter ended December 31, 2004 have been reclassified to allow comparability from one period to the next.

Liquidity

As at September 30, 2005 Grey Horse's working capital was $713,014 ($642,451 at fiscal year end June 30, 2005), and cash at end of the first quarter was $600,493 ($53,132 - June 30, 2005).

In order to complete the acquisition of Equity in December 2004, the Corporation raised over $4.6 million (net of legal and other expenses related to the raising of funds) through a combination of debt and equity financing, described in the Corporation's MD&A for fiscal 2005.

As part of financing arrangements related to the Qualifying Transaction in December 2004, Grey Horse and Equity entered into an agreement with the Bank of Montreal providing for an operating line of credit in an amount of up to $750,000 subject to certain terms and conditions. As at September 30, 2005 no amount was outstanding against the line of credit, which is secured in part by a guarantee for a maximum of $150,000 from two of the Corporation's Directors and Officers - Kevin D. Reed and Paul G. Smith.

Management believes that Grey Horse has sufficient capital reserves to maintain its current operations in fiscal 2006 and to service its current debt obligations.

A non-cash adjustment requested by the Corporation's auditor and affecting both the intangible asset and the future income tax liability was reflected in the financial statements at June 30, 2005. The intangible asset was grossed up by $622,800 to recognise the related future income tax effect and the future income tax liability was increased by the same amount. Upon discovering the impact of the audit adjustment, the result of which was a default by the Corporation of one of its covenants, the Corporation and its lenders agreed to amend the covenant in each of its lender agreements to correct the default without prejudice to the Corporation.

Capital Resources

The Corporation will require further capital from time to time as it executes on its strategic plan. In pursuing the federal trust charter, the Corporation will require additional capital to meet regulatory requirements. The Corporation is also reviewing acquisition opportunities that may also require further capital.

Off-Balance Sheet Arrangements

Grey Horse has no off-balance sheet arrangements.

Transaction with Related Parties

During the period, the Grey Horse paid $13,335 (2005: $175,791) to a law firm, a partner of which is a director of the Corporation, and included in accounts payable and accrued liabilities were $8,748 (2004: $175,791) owing to this firm.

Officers and Directors were reimbursed, $30,022 (2005: $2,511) for expenses incurred on behalf of the Corporation, and included in accounts payable and accrued liabilities were $3,899 (2005: $0) owing to these Officers and Directors.

Included in selling, general and administration expenses was $1,408 (2005: $0) accrued or paid to three companies for professional services. A Director and Officer of Grey Horse is also a Director of these companies, and included in accounts payable and accrued liabilities were $287 (2005: $0) owing to these companies.

Two Officers have provided guarantees totaling $150,000 as security for the bank credit facility described above and they have not been specifically compensated for providing this guarantee.

Proposed Transactions

There is no imminent decision by the board of directors of Grey Horse regarding any material transactions other than the application for a federal trust charter.

Critical Accounting Estimates

Grey Horse did not rely on any critical accounting estimates in the most recent fiscal period.

Changes in Accounting Policies

There were no significant changes to accounting policies in the most recent fiscal period.

Change in presentation of certain service revenues

During the quarter and with the concurrence of its auditor, the Corporation adopted the guidance of CICA EIC 123 "Reporting Revenues Gross as Principal Versus Net as an Agent" as it relates to certain service revenues of the Corporation, which were previously reported on a net basis. This change was made because the Corporation acts as principal in these transactions rather than as agent. There is no effect on net income resulting from the presentation change of these service revenues. In this document, revenues from prior periods beginning with the Second Quarter ended December 31, 2004 have been reclassified to allow comparability from one period to the next.

Financial and Other Instruments

Grey Horse does not use financial instruments other than debt and banking arrangements as disclosed in other sections of this MD&A and in notes to the interim consolidated financial statements.

Disclosure of Outstanding Share Data

Grey Horse is traded on the TSX Venture Exchange under the symbol GHC. The Corporation is authorized to issue an unlimited number of common shares. On November 14, 2005 there were 3,133,327 common shares outstanding, 999,994 warrants convertible into one common share each at an exercise price of $1.75 per common share outstanding, and 574,500 stock options convertible into one common share each with a weighted average exercise price of $1.09 per common share outstanding.

Additional Information

Additional information relating to the Corporation is available on its website at www.greyhorsecapital.com, and on the SEDAR website located at www.sedar.com.

The TSX Venture Exchange has neither approved nor disapproved the contents of this press release.

Contact Information

  • Grey Horse Capital Corporation
    Kevin Reed
    President & CEO
    (416) 361-0930
    or
    Grey Horse Capital Corporation
    Paul G. Smith
    EVP & Chief Financial Officer
    (416) 361-0930
    www.greyhorsecapital.com