Grey Horse Corporation
TSX : GHC

Grey Horse Corporation

November 08, 2006 07:45 ET

Grey Horse Capital Reports Strong First Quarter Earnings

Revenues up 60%; Earnings up 92% 7th consecutive profitable quarter

TORONTO, ONTARIO--(CCNMatthews - Nov. 8, 2006) - Grey Horse Capital Corporation (TSX:GHC) ("Grey Horse" or "the Corporation"), a Canadian financial services firm providing transfer agency and corporate trust services to issuers in the North American capital markets, reported today its financial results for its first quarter ended September 30, 2006.(1)

Financial Highlights

The following unaudited information was determined in accordance with Canadian Generally Accepted Accounting Principles:



------------------------------------------
3 months ended Sept. 30 12 months ended
------------------------------------------
2006 2005 Sept. 30, 2006
---------------------------------------------------------------------------
Consolidated revenue $ 2,396,873 $ 1,496,665 $ 10,067,444
---------------------------------------------------------------------------
Net income 342,677(i) 178,246 $ 1,154,801
---------------------------------------------------------------------------
Earnings per share (EPS),
basic 0.06 0.06 $ 0.27
---------------------------------------------------------------------------
EPS, diluted 0.05 0.05 $ 0.22
---------------------------------------------------------------------------
Cash flow from operations(ii) 461,292 329,235 $ 1,887,631
---------------------------------------------------------------------------
CFFO(ii) per share 0.08 0.11 $ 0.44
---------------------------------------------------------------------------
Annualized return on equity 13% 30% 17%
---------------------------------------------------------------------------
(i) Includes one-time charge of $175,841 related to departure of Equity's
previous president
(ii) Before change in non-cash working capital items


Revenue in the first quarter, derived from Grey Horse's wholly-owned subsidiary Equity Transfer & Trust Company ("Equity"), increased 60% over the previous year and Earnings increased 92%. Earnings per share (EPS) (basic) was $0.06 and $0.05 on a diluted basis. Excluding a one-time charge of $175,841 ($112,538 after tax) related to the departure of Equity's previous president, Net income for the quarter would have been approximately $455,215 (up 155% from the year prior), EPS (basic) $0.08 and ROE 17%.

Grey Horse President and CEO Kevin Reed said, "We are pleased to report continued strong growth in our top and bottom lines in the first quarter resulting from the success in expanding our service offering and client base. We are also eager to further leverage our new federal trust charter to deliver Equity's quality, cost-effective services to a broader range of clients."

Paul G. Smith, Grey Horse's Executive Vice President and Chief Financial Officer added, "The Corporation continues to build its financial strength, which allows it to pursue further internal and external investment opportunities as they arise."

About Grey Horse

Through its wholly owned subsidiary, Equity Transfer & Trust Company, Grey Horse provides transfer agency and corporate trust services to issuers in the North American capital markets.

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's growth, the state of the financial markets, regulatory risks and other factors. Unless otherwise required by applicable securities laws, Grey Horse 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's financial and business results is included in public documents Grey Horse files from time to time with Canadian securities regulatory authorities.

(1) The grant of a federal trust charter to Equity on June 1, 2006 necessitated a change in Equity's fiscal year-end to December 31 in order to comply with the legislation and regulations applicable to federally regulated financial institutions. This change in year-end shortens the fiscal year commencing July 1, 2006 to a six-month period ending December 31, 2006. The subsequent fiscal period will commence January 1, 2007 and end December 31, 2007. In order to simplify accounting procedures for the consolidated financial statements of Grey Horse and Equity, Grey Horse has also changed its fiscal year to match Equity.

GREY HORSE CAPITAL CORPORATION

Management's Discussion and Analysis (MD&A) - First Quarter Ended September 30, 2006

This MD&A for the period ended September 30, 2006 ("first quarter of fiscal year stub 2006") provides an overview of Grey Horse Capital Corporation ("Grey Horse" or "GHC" or "the Corporation"). 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 period 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 audited consolidated financial statements and notes for previous full fiscal year ended June 30, 2006 ("F2006"). Except as otherwise indicated, all financial information related herein is determined in accordance with Canadian Generally Accepted Accounting Principles (GAAP), and all dollar amounts referred to herein are in Canadian dollars.

The grant of a federal trust charter to Grey Horse's wholly-owned subsidiary, Equity Transfer & Trust Company ("Equity") necessitated a change in Equity's fiscal year-end to December 31 in order to comply with the legislation and regulations applicable to federally regulated financial institutions. In order to simplify accounting procedures for the consolidated financial statements of Grey Horse and Equity, the Corporation has changed its fiscal year to match Equity's. This change in year-end will shorten the fiscal year commencing July 1, 2006 to a six-month period ending December 31, 2006, and the subsequent fiscal period will commence January 1, 2007 and end December 31, 2007.

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 7, 2006.

Overall Performance

Description of the Business

Grey Horse, formerly AFL Capital Ventures Inc., was incorporated in September 2001 and carried on business as a Capital Pool Corporation (CPC) until 2004 when it completed its qualifying transaction as mandated by the regulations governing CPCs. Grey Horse is a publicly traded holding corporation generating internal growth from its operating subsidiary and focused on identifying, acquiring and integrating financial services assets that provide financial and operational services to the corporate and institutional marketplace.

Grey Horse began trading on the Toronto Stock Exchange (TSX:GHC) in March 2006, after previously trading on the TSX Venture Exchange since April 2004.

Equity provides transfer agent and corporate trust services to approximately 500 public issuers in North American capital markets. Founded in 1990, Equity offers transfer agency services to reporting issuers by maintaining lists of registered shareholders and supporting public market activities such as transfers or mailings to shareholders for meetings, dividend distributions, share purchase plans, and issuances of shares from treasury. Equity also acts as subscription agent, exchange agent, escrow agent and scrutineer at shareholder meetings. On June 1, 2006, Equity was continued as a federal trust company and now adds corporate trust services to its suite of products. Equity's corporate trust services include acting as trustee for income trusts, debt instruments and asset-backed securities.

Market Fundamentals

Information released by the Investment Dealers Association (IDA) has indicated that Canadian capital market financings have risen at a robust pace, with positive benefits for Equity's operating results. Calendar 2005 was a record year in the capital markets, with over 2,200 public common equity issuances totaling $22 billion. Financings in the resource sector (i.e. forestry, mining and oil & gas) supported 68% of the total in 2005, and increased 67% year-over-year.

To be successful in the transfer agency industry, a new entrant must build a substantial client base in short order. The new client base must generate sufficient revenue to attract and retain employees from a limited talent pool, and to afford downtown core office space, specialized computer systems, and insurance coverage, which hinges on a demonstrable financial strength.

After consolidation over the years, the transfer agency industry can be divided into two tiers:

- Large National Tier: comprised of two companies serving roughly 75% of all publicly-traded companies in Canada and focused on serving large cap TSX companies.

- Regional Tier: comprised of several companies providing services to small- and mid-cap companies within certain regions of Canada (e.g. B.C., Alberta and Ontario).

Equity is the only large regional transfer agent serving the Ontario market. The company presents itself as an alternative to the large national transfer agents by providing quality service at a reasonable price. With the addition of its federal trust charter, Equity is now expanding its transfer agency services across Canada and adds corporate trust services to its offering.

New Federal Trust Charter

Effective June 1, 2006, Equity was granted letters patent by the Minister of Finance and received an order to commence and carry-on business from the Office of the Superintendent of Financial Institutions (OSFI) to operate as a federal trust company under the Trust and Loan Companies Act (Canada). This represents a salient milestone in Equity's development and a significant extension of its core business. In order to meet federal regulatory requirements, Grey Horse recapitalized its balance sheet by completing a private placement and raising funds sufficient to retire or convert all funded debt and to provide additional working capital for future growth. The retirement of its funded debt eliminated some $800,000 in annual interest expense and amortization, and significantly reduced the Corporation's overall financial risk.

Trust-related Recapitalization

In order to obtain a federal trust charter for Equity, Grey Horse raised additional capital to meet Equity's regulatory capital requirements and repaid or converted outstanding long-term indebtedness:

- On April 20, 2006, the Company retired $300,000 in Convertible Secured Promissory Notes;

- On May 12, 2006, $600,000 in Convertible Secured Promissory Notes were converted into 400,000 common shares of the Corporation at a conversion price of $1.50/share;

- On June 1, 2006 the Corporation retired its Secured Debenture at a cost of $2.4 million funded by cash on hand;

- On June 7, 2006 Grey Horse announced a private placement for proceeds of $100,004 in exchange for 17,392 common shares at a price of $5.75/share;

- On May 4 and June 7, 2006, Grey Horse converted $200,000 and $890,000, respectively of outstanding convertible debt into 726,666 common shares of the Corporation at a conversion price of $1.50/share, and with a concurrent principal payment of $260,000, thereby retired its Convertible Subordinated Debentures;

- And on June 8, 2006, Grey Horse announced the placement of 710,739 units at $5.75 per unit (each unit consisting of one common share of the Corporation together with one-half share purchase warrant) raising proceeds of $4.1 million.

Strategic Implications of Federal Trust Charter

The federal trust charter allows Equity to extend its transfer agency services across Canada and to further diversify its sources of revenue by adding corporate trust services to its suite of products. The federal trust charter will allow Equity to:

- act as a trustee for income trusts,

- act as indenture trustee and registrar for debt instruments such as bonds, debentures and notes;

- provide issuer trustee or indenture trustee services for asset-backed securitizations including mortgages, credit card receivables, lease receivables and other bundled assets or instruments;

- and expand its transfer agency services to companies across Canada.

Grey Horse's objective is to position itself as a group of operating companies focused on providing financial and operational services to the corporate and institutional marketplaces. The Corporation's business strategy is to pursue aggressive sales and marketing of its core services and to acquire regional trust and transfer agents in Canada and the United States. Equity is currently registered to operate as a trust company in Ontario and Alberta. GHC management is targeting increases in consolidated revenue of approximately 25% per year and in net income of 30% per year.

Results of Operations

First quarter of fiscal year stub2006

During the three months ended September 30, 2006, Grey Horse revenue increased 60% over the previous year and Earnings increased 92%. Earnings per share (EPS) (basic) was $0.06 and $0.05 on a diluted basis. Excluding a one-time charge of approximately $176,000 related to the departure of Equity's previous president, Net income for the quarter would have been $455,000 (up 155% from the year prior), EPS (basic) $0.08 and ROE 17%.

The increase in revenues during the quarter is attributable to an increase in Equity's client base and to higher revenue per client, as well as to the continued successful rollout of the channel partnership with CCNMatthews News Distribution Service.

The following key performance indicators indicate how Grey Horse has significantly increased its consolidated revenue both on a quarterly basis and over the past 12 months, and achieved attractive returns despite one-time prepayment penalties arising from the retirement of GHC's funded debt in June 2006.



-------------------------------------------------------------------
Three months Three months Three months Three months Twelve months
Dec. 31, Mar. 31, June 30, Sept. 30, Sept. 30,
2005 2006 2006 2006 2006
---------------------------------------------------------------------------
Consoli-
dated
revenue $ 1,635,338 $ 2,287,703 $ 3,747,530 $ 2,396,873 $ 10,067,444
---------------------------------------------------------------------------
Increase
in
revenue 22% 66% 59% 60% 53% (1)
---------------------------------------------------------------------------
Net income $ 192,957 $ 329,783 $ 289,384 $ 342,677 $ 1,154,801
---------------------------------------------------------------------------
Net income
per share,
basic $ 0.06 $ 0.10 $ 0.06 $ 0.06 $ 0.27
---------------------------------------------------------------------------
Net income
per share,
diluted $ 0.05 $ 0.07 $ 0.05 $ 0.05 $ 0.22
---------------------------------------------------------------------------
Average
share-
holders'
equity $ 2,533,595 $ 2,838,751 $ 6,757,205 $ 10,648,792 $ 6,632,488
---------------------------------------------------------------------------
Return on
equity
annualized
(ROE) 30% 46% 17% 13% 17%
---------------------------------------------------------------------------
Cash flow
from
operations
(CFFO) (2) $ 358,517 $ 483,358 $ 584,464 $ 461,292 $ 1,887,631
---------------------------------------------------------------------------
CFFO per
share,
basic $ 0.11 $ 0.15 $ 0.13 $ 0.08 $ 0.44
---------------------------------------------------------------------------
(1) Percentage increase in revenue compares with Equity's revenue prior to
Grey Horse's acquisition of Equity in December 2004.
(2) Before changes in non-cash working capital items


The Corporation's financial condition and overall financial risk improved significantly over the past twelve months with the retirement of all funded debt in the quarter ended June 30, 2006, such that the ratio of Long-term debt to Equity has declined significantly and is now zero. The Corporation has also enacted a more stringent policy on the management and collection of accounts receivable, which has significantly improved the Corporation's accounts receivable turnover.

Change of Auditors

Manning Elliott, Chartered Accountants, were first appointed auditor of the Corporation effective June 23, 2003. Management determined that it would more beneficial to the Corporation, and more efficient, to have its auditors located in the same city as the Corporation's head office. Accordingly, and at the Corporation's request, Manning Elliot, Chartered Accountants resigned as the Corporation's auditors effective as of September 29, 2006. BDO Dunwoody LLP was appointed to replace them.

Subsequent Events

On October 4, 2006 Grey Horse appointed its EVP & Chief Financial Officer, Paul G. Smith, as President of Equity replacing Richard Barnowski.

Summary of Quarterly Results

The following tables set out financial performance highlights for the past eight quarters.



-------------------------------------------------------------
GHC Corp GHC Corp GHC Corp GHC Corp
First Quarter Fourth Quarter Third Quarter Second Quarter
Sept. 30, 2006 June 30, 2006 Mar. 31, 2006 Dec. 31, 2005
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Revenue $ 2,396,873 $ 3,747,530 $ 2,287,703 $ 1,635,338
---------------------------------------------------------------------------
Expenses 1,844,525 3,254,295 1,767,392 1,301,522
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Income before
income taxes 552,348 493,235 520,311 333,816
---------------------------------------------------------------------------
Taxes, current
and future 209,671 203,851 190,528 140,859
---------------------------------------------------------------------------
Net income
(loss) 342,677 289,384 329,783 192,957
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Net income
per share,
basic 0.06 0.06 0.10 0.06
---------------------------------------------------------------------------
Net income
per share,
diluted 0.05 0.05 0.07 0.05
---------------------------------------------------------------------------
Cash flow
from
operations
(CFFO) (1) 461,292 584,464 483,358 358,517
---------------------------------------------------------------------------
Cash and
cash
equivalents,
end of
period 4,166,065 3,662,440 1,287,557 921,216
---------------------------------------------------------------------------
Assets 12,520,957 12,562,649 9,692,350 8,847,141
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Long-term
liabilities 391,515 391,044 4,857,706 4,960,706
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Dividends 0 0 0 0
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-------------------------------------------------------------
GHC Corp GHC Corp GHC Corp GHC Corp
First Quarter Fourth Quarter Third Quarter Second Quarter
Sept. 30, 2005 June 30, 2005 Mar. 31, 2005 (2)
Dec. 31, 2004
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Revenue $ 1,496,665 $ 2,352,393 $ 1,377,463 $ 506,752
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Expenses 1,201,116 2,011,993 1,234,145 555,276
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Income before
income taxes 295,549 340,400 143,318 (48,524)
---------------------------------------------------------------------------
Taxes, current
and future (3) 117,303 (89,028) 0 0
---------------------------------------------------------------------------
Net income
(loss) 178,246 429,428 143,318 (48,524)
---------------------------------------------------------------------------
Net income
(loss) per
share, basic 0.06 0.14 0.05 (0.02)
---------------------------------------------------------------------------
Net income
(loss) per
share, diluted 0.05 0.09 0.04 NA
---------------------------------------------------------------------------
Cash flow
from
operations
(CFFO) (1) 329,235 413,879 357,558 (10,466)
---------------------------------------------------------------------------
Cash and cash
equivalents,
end of period 600,493 53,132 89,384 19,048
---------------------------------------------------------------------------
Assets 8,553,202 8,232,946 7,102,176 7,059,574
---------------------------------------------------------------------------
Long-term
liabilities 5,043,669 4,990,027 5,279,185 5,433,715
---------------------------------------------------------------------------
Dividends 0 0 0 0
---------------------------------------------------------------------------
(1) Before change in non-cash working capital items
(2) Includes consolidation of one month of Equity
(3) The earnings attained during the Third Quarter ended March 31, 2005
were not considered by management to result in Grey Horse 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 Grey Horse 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.


Liquidity

As at September 30, 2006, Grey Horse's working capital was $4,736,585 ($4,358,387 at fiscal year end June 30, 2006), and cash at the end of the first quarter of the shortened year 2006 was $4,166,065 ($3,662,440 at June 30, 2006).

Bank of Montreal provides Grey Horse and Equity with an operating line of credit of up to $750,000 subject to certain terms and conditions. As at September 30, 2006, no amount was outstanding against the line of credit.

The following table summarizes Grey Horse's contractual obligations:



---------------------------------------------------------
Payments due by period
---------------------------------------------------------
less than After
Total 1 year 1-3 years 4-5 years 5 years
---------------------------------------------------------------------------
Office space
lease
agreements $ 3,806,320 $345,968 $ 741,504 $ 741,504 $1,977,344
---------------------------------------------------------------------------
Long-term debt 0 0 0 0 0
---------------------------------------------------------------------------
Total contractual
obligations $ 3,806,320 $345,968 $ 741,504 $ 741,504 $1,977,344
---------------------------------------------------------------------------


Management believes that Grey Horse has sufficient capital reserves to maintain its current operations and to service its contractual obligations over the next twelve months.

Capital Resources

Grey Horse may require further capital from time to time to pursue strategic initiatives; however, the company considers current resources sufficient to execute on its business plan.

Off-Balance Sheet Arrangements

Grey Horse has no off-balance sheet arrangements.

Transactions with Related Parties

During the quarter ended September 30, 2006, Grey Horse incurred charges of $29,913 (2005 - $17,765) from a law firm, a partner of which is a director of the Corporation. Included in accounts payable and accrued liabilities was $18,966 (June 30, 2006 - $126,176) owing to this firm.

Included in selling, general and administration expenses for the three months ended September 30, 2006 were $3,714 (2005 - $4,083) accrued or paid for professional services to three companies, a director of which was also a director of Grey Horse. Included in accounts payable and accrued liabilities were $3,260 (June 30, 2006 - $7,013) owing to these companies.

During the three month period ended September 30, 2006, Grey Horse incurred charges of $9,000 (2005 - $0) for consulting services by a director of the Corporation. Included in accounts payable and accrued liabilities are $0 (June 30, 2006 - $0) owing to this director.

Transactions with related parties were conducted on terms that approximate market and are measured at the exchange amounts

Proposed Transactions

There is no imminent decision by the board of directors of Grey Horse regarding any material transactions.

Critical Accounting Estimates

The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results may differ from those estimates. Significant estimates and assumptions include those related to the allowance for doubtful accounts, the recognition and measurement of future income tax assets and liabilities, the estimated useful lives of fixed assets, amortization of intangibles, valuation of goodwill and intangibles and valuation of stock based compensation.

Changes in Accounting Policies

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

Financial and Other Instruments

The Company's financial instruments include cash, accounts receivable, accounts payable, and a lease obligation. In management's opinion the Company is not exposed to significant interest rate, currency exchange rate or credit risk arising from these financial instruments. The fair values of these financial instruments approximate their carrying values because of their nature. The Company is not exposed to derivative financial instruments.

Stock appreciation rights, including options and warrants, issued as part of a compound equity or debt instrument are valued and recorded separately based on the relative fair values of the components of the financial instrument at the time of issue.

Disclosure Controls and Procedures

Management has evaluated the effectiveness of the Company's disclosure controls and procedures and concluded that they provide reasonable assurance that material information relating to the Company is disclosed on a timely basis as of the end the most recent period.

Internal Control over Financial Reporting

There has been no change in the Company's internal control over financial reporting in the most recent interim period that has materially affected, or is reasonably likely to materially affect, the Company's control over internal reporting.

Disclosure of Outstanding Share Data

Grey Horse shares trade on the Toronto Stock Exchange under the symbol GHC. The Corporation is authorized to issue an unlimited number of no par value common shares. On November 3, 2006, GHC had 6,053,286 shares outstanding; 508,440 warrants expiring in 2006 and 2008, and 429,000 stock options with a weighted average exercise price of $1.59 expiring from 2009 to 2016.

Two officers each have the right to be granted options equal to 5% of common shares issued. Subject to regulatory and shareholder approval, 305,329 options are issuable to these two officers as a result of the additional common shares issued up to November 3, 2006. The exercise price of these options will equal the prevailing market price of the shares at the time the options are granted. Any stock based compensation arising from the granting of options under these rights will be recorded at the time options are granted and according to the vesting period.

Additional Information

Additional information relating to Grey Horse, including the Company's most recent Annual Information Form, is available on its website at www.greyhorsecapital.com and on the SEDAR website at www.sedar.com.

The Toronto Stock 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
    Website: www.greyhorsecapital.com