UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 2
(Mark One)
---
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995 or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from _________ to __________
Commission file number: 1-12212
CVD FINANCIAL CORPORATION
(Exact Name of Registrant as
Specified in Its Charter)
DELAWARE 95-4426690
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
400 Burrard Street, Suite 1290
Vancouver, British Columbia, Canada V6C 3A6
(Address of Principal Executive Offices) (Zip Code)
(604) 683-5312
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Exchange Act after the distribution of
during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes: X No:___
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Class Outstanding at February 9, 1996
Common Stock, $0.01 2,718,600
par value
Transitional Small Business Disclosure Format (check one): Yes No X
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
<TABLE>
CVD FINANCIAL CORPORATION
Condensed Balance Sheets
ASSETS
<CAPTION> December 31, 1995 June 30, 1995
<S> <C> <C>
CASH AND CASH EQUIVALENTS ............................................................. $12,562,000 $12,145,000
FINANCE RECEIVABLES, net of
allowance for credit losses of $7,103,000
and $14,716,000, respectively ...................................................... 18,308,000 25,112,000
OTHER RECEIVABLE ...................................................................... 1,020,000 --
DEFERRED DEBT ISSUANCE COSTS, net
of accumulated amortization of $478,000
and $376,000, respectively ......................................................... 2,143,000 2,242,000
INVESTMENTS ........................................................................... 7,371,000 453,000
OTHER ASSETS .......................................................................... 541,000 538,000
----------- -----------
$41,945,000 $40,490,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
LIABILITIES:
Bonds Payable, net of bonds held in
treasury of $2,963,000 and $2,719,000,
respectively, in principal amount ................................................. $ 42,037,000 $42,281,000
Interest Payable ..................................................................... 1,892,000 1,955,000
Accounts Payable and Accrued Liabilities ............................................. 876,000 404,000
----------- -----------
44,805,000 44,640,000
=========== ===========
SHAREHOLDERS' DEFICIT:
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding ...................................... -- --
Common Stock, $0.01 par value, 10,000,000 shares
authorized, 4,264,000 shares and 4,264,000 shares,
respectively, issued and outstanding .............................................. 43,000 43,000
Additional Paid-In Capital ........................................................... 17,767,000 17,767,000
Accumulated Deficit .................................................................. (17,614,000) (18,904,000)
------------ ------------
196,000 (1,094,000)
Less -- 1,545,400 and 1,545,400, respectively,
shares held as treasury stock .................................................. (3,056,000) (3,056,000)
------------ -----------
Total shareholders' deficit ....................................................... (2,860,000) (4,150,000)
------------ -----------
$ 41,945,000 $ 40,490,000
============ =============
See accompanying Notes to Condensed Financial Statements
</TABLE>
<TABLE>
CVD FINANCIAL CORPORATION
Condensed Statements of Operations
<CAPTION> For the For the
Six Months Ended Six Months Ended
December 31, 1995 December 31, 1994
<S> <C> <C>
INTEREST AND LOAN FEE INCOME .......................... $ 1,504,000 $ 2,954,000
GAIN ON SALE OF INVESTMENTS ........................... 1,022,000 --
UNREALIZED HOLDING GAINS (LOSS) ....................... 757,000 (71,000)
------------ ------------
Total revenues .................................. 3,283,000 2,883,000
------------ ------------
COSTS AND EXPENSES:
Interest .............................................. 1,996,000 2,682,000
Provision For Credit Losses ........................... (1,528,000) 7,978,000
General and Administrative ............................ 1,642,000 503,000
------------ ------------
Total costs and expenses ........................ 2,110,000 11,163,000
------------ ------------
OPERATING INCOME (LOSS) ............................... 1,173,000 (8,280,000)
INCOME TAXES .......................................... 1,000 --
------------ -------------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN
AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE ..................... 1,172,000 (8,280,000)
EXTRAORDINARY GAIN ON EARLY
EXTINGUISHMENT OF DEBT ............................. 118,000 527,000
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE ............................... -- 190,000
------------ ------------
NET INCOME (LOSS) ..................................... $ 1,290,000 $ (7,563,000)
============ ============
INCOME (LOSS) PER SHARE:
Income (Loss) Before Extraordinary Gain and Cumulative
Effect of a Change in Accounting Principle ......... $ 0.43 $ (3.12)
Extraordinary Gain .................................... 0.04 0.20
Cumulative Effect of a Change
in Accounting Principle ............................ -- 0.07
----------- ------------
NET INCOME (LOSS) ..................................... $ 0.47 $ (2.85)
=========== ============
Weighted Average Number of
Shares Outstanding ................................. 2,718,600 2,657,776
=========== ============
See accompanying Notes to Condensed Financial Statements.
</TABLE>
<TABLE>
CVD FINANCIAL CORPORATION
Condensed Statements of Operations
<CAPTION> For the For the
Three Months Ended Three Months Ended
December 31, 1995 December 31, 1994
-------------------- ------------------
<S> <C> <C>
INTEREST AND LOAN FEE INCOME ......................... $ 688,000 $1,564,000
GAIN ON INVESTMENTS .................................. 1,022,000 --
UNREALIZED HOLDING GAINS (LOSS) ...................... 757,000 (262,000)
---------- ---------
Total revenues ................................. 2,467,000 1,302,000
---------- ---------
COSTS AND EXPENSES:
Interest ............................................. 993,000 1,325,000
Provision For Credit Losses .......................... (1,528,000) 7,228,000
General and Administrative ........................... 951,000 238,000
---------- ---------
Total costs and expenses ....................... 416,000 8,791,000
---------- ---------
OPERATING INCOME (LOSS) .............................. 2,051,000 (7,489,000)
INCOME TAXES ......................................... 1,000 190,000
---------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN
AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE .................... 2,050,000 (7,679,000)
EXTRAORDINARY GAIN ON EARLY
EXTINGUISHMENT OF DEBT ............................ 118,000 355,000
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE .............................. -- 80,000
---------- ---------
NET INCOME (LOSS) .................................... $ 2,168,000 (7,244,000)
========== =========
INCOME (LOSS) PER SHARE:
Income (Loss) Before Extraordinary Gain and Cumulative
Effect of a Change in Accounting Principle ........ $ 0.76 $ (3.44)
Extraordinary Gain ................................... 0.04 0.16
Cumulative Effect of a Change
in Accounting Principle ........................... -- 0.04
---------- ----------
NET INCOME (LOSS) .................................... $ 0.80 $ (3.24)
========== ==========
Weighted Average Number of
Shares Outstanding ................................ 2,718,600 2,234,827
========== ==========
See accompanying Notes to Condensed Financial Statements.
</TABLE>
<TABLE>
CVD FINANCIAL CORPORATION
Condensed Statements of Cash Flows
<CAPTION> For the Six For the Six
Months Ended Months Ended
December 31, 1995 December 31, 1994
----------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income (loss) ...................................................................... $ 1,290,000 $(7,563,000
Adjustments to Reconcile Net Loss to Net
Cash Used by Operating Activities - -
Extraordinary gain on early extinguishment of debt ............................... (118,000) (527,000)
Cumulative effect of a change in accounting principle ............................ -- (190,000)
Provision for credit losses ...................................................... (1,528,000) 7,978,000
Unrealized holding gains ......................................................... (757,000) 71,000
Gain on sales of investments ................................................... (1,022,000) --
Amortization of deferred debt issuance costs ..................................... 102,000 103,000
(Increase) decrease in interest receivable ....................................... 144,000 (650,000)
Decrease in commitment fees ...................................................... 178,000 (16,000)
Increase in other assets ......................................................... (667,000) (241,000)
Decrease in interest payable ..................................................... (64,000) 332,000
Increase (decrease) in accounts payable
and accrued liabilities ........................................................ 472,000 (153,000)
----------- ---------
(1,970,000) (856,000)
Purchases of trading securities ........................................................ (7,612,000) --
Proceeds from sales of trading securities .............................................. 1,409,000 --
----------- ---------
Net cash used by operating activities ......................................... (8,173,000) (856,000)
INVESTING ACTIVITIES:
Advances On Finance Receivables ........................................................ (133,000) (21,360,000)
Payments Received On Finance Receivables ............................................... 8,849,000 9,967,000
---------- ----------
Net cash provided (used) by investing activities .............................. 8,716,000 (11,393,000)
---------- ----------
FINANCING ACTIVITIES:
Purchases of Treasury Bonds ............................................................ (126,000) (1,020,000)
Purchases of Treasury Stock ............................................................ -- (146,000)
---------- ----------
Net cash (used) by financing activities ....................................... (126,000) (1,166,000)
---------- ----------
Net increase (decrease) in cash and cash equivalents ......................... 417,000 (13,415,000)
CASH AND CASH EQUIVALENTS,
beginning of period .............................................................. 12,145,000 20,461,000
---------- ----------
CASH AND CASH EQUIVALENTS,
end of period .................................................................... $ 12,562,000 $ 7,046,000
========== ==========
Cash Paid During the Period for:
Interest expense .................................................................... $ 1,957,000 $ 2,246,000
Income taxes ........................................................................ $ 1,000 $ 117,000
========== ==========
</TABLE>
CVD FINANCIAL CORPORATION
Notes to Condensed Financial Statements
December 31, 1995
Note 1. Basis of Presentation
In accordance with Item 310 of Regulation S-B promulgated by the Securities and
Exchange Commission, the financial statements and accompanying notes thereto
have been condensed and therefore do not contain all disclosures required by
generally accepted accounting principles. These condensed financial statements
and accompanying notes thereto should be read in conjunction with the Company's
audited financial statements and notes thereto contained in the Company's Form
10-KSB Annual Report for the fiscal year ended June 30, 1995.
In the opinion of management, the accompanying unaudited condensed financial
statements contain all adjustments necessary to present fairly its financial
position as of December 31, 1995, and the results of its operations and changes
in its financial position for the six months ended December 31, 1995 and 1994.
All adjustments were of a normal recurring nature. Results for interim periods
are not necessarily indicative of those to be expected for the full year.
Certain reclassification have been made to the prior period's financial
statements to conform to the current period's presentation.
The financial statements have been prepared by management in conformity with
generally accepted accounting principals which contemplate continuation of an
entity as a going concern. CVD Financial Corporation ("Company") incurred net
losses of $16,845,000 and $2,059,000 for the years ended June 30, 1995 and 1994,
respectively. For the six months ended December 31, 1995, the Company generated
a net income of $1,290,000. As of December 31, 1995, the Company had incurred
cumulative losses since its inception of $17,614,000 and had a net shareholders'
deficit of $2,860,000 (See Note 2).
These financial statements do not give effect to any adjustments which would be
necessary should the Company be unable to continue as a going concern and
therefor be required to realize its assets and discharge its liabilities in
other than the normal course of business and at amounts different from those
reflected in the accompanying financial statements.
Note 2. Bonds Payable
The Company is required under its Bond indenture to maintain a ratio of
consolidated liabilities to consolidated tangible net worth of not more than
15:1. The Company has not been in compliance with this provision since March 31,
1995. As of December 31, 1995, the Company has a shareholders' deficit of
$2,860,000 and fails to meet the minimum required tangible net worth of
$2,987,000 by $5,847,000. As a result of the Company's failure to satisfy the
net worth ratio requirement, the trustee under the Bond indenture, acting on
behalf of all holders of the Bonds or at the request of holders of at least 25
percent of the principal amount of the outstanding Bonds, is entitled to
exercise certain remedies, including the declaration of a default under the
Bond indenture and the making of a demand that the Bonds be immediately
paid in full if the net worth ratio is not cured within 90 days after receipt
of notice of the event of default. As of February 9, 1996, no event of default
has been declared.
The Company did not make its semi-annual Bond interest payment due on July 25,
1995 until August 22, 1995. The delinquent payment did not result in an event of
default as the payment was made within the 30 day cure period provided for under
the terms of the Bond indenture.
The Company did not make its semi-annual Bond interest payment due on January
25,1996. On February 9, 1996, the Company announced that it will pay the
interest on February 20, 1996, which is made within the 30 day cure period
provided for under the terms of the Bond indenture, and thus, will not result in
an event of default.
Note 3. Adoption of Accounting Standard Regarding Impaired Loans
In May 1993, the Financial Accounting Standards Board issued Statement No. 114,
"Accounting by Creditors for Impairment of a Loan." The statement is effective
for fiscal years beginning after December 15, 1994, and thus, is effective for
the Company beginning on July 1, 1995. However, if the Company had elected to
adopt the statement early for its fiscal year ended June 30, 1995, the
computational provisions of this statement would not have had a material impact
on the Company's June 30, 1995 allowance for credit losses.
Under the provisions of the statement, when a loan is impaired as defined in the
statement, impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or as a practical
expedient, on a loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The effective rate is either the
rate of return implicit in the loan for a loan with fixed interest and principal
repayment terms or the interest rate in effect when the loan first becomes
impaired for a loan with a variable interest rate. The Company has adopted a
measurement method on a loan-by-loan basis. Since the present value of an
impaired loan's expected future cash flows will change from one reporting period
to the next because of the passage of time and also may change because of
revised estimates in the amount or timing of those cash flows, the Company has
established a policy of recognizing these present value changes as either an
increase or decrease in its provision for credit losses as applicable for each
reporting period.
The Company continues to apply FASB Statement No. 5 "Accounting for
Contingencies" to provide an allowance on a pool of unimpaired loans.
As of December 31, 1995, the Company has identified impaired finance receivables
with a recorded investment totalling $20,362,000 and has established a specific
allowance for credit losses totalling $6,139,000 in connection therewith. The
activity with regard to the allowance for credit losses during the quarter and
six months ended December 31, 1995 is as follows:
<TABLE>
<CAPTION> Quarter Six Months
<S> <C> <C>
Balance, beginning of period $14,616,000 $14,716,000
Reduction in provision (1,528,000) (1,528,000)
Charge-offs (5,985,000) (6,085,000)
------------- ------------
Balance, end of period $ 7,103,000 $ 7,103,000
============= ============
Consisted of:
Specific allowance under FASB statement No. 114 $ 6,139,000
General allowance under FASB statement No. 5 964,000
-------------
$ 7,103,000
=============
</TABLE>
<TABLE>
<CAPTION>
The following table summarized the calculation of net receivables as at December
31, 1995:
<S> <C>
Total recorded investments in loans $26,111,000
Less: reimbursable costs
and deferred loan fees 700,000
----------
Finance receivable, gross 25,411,000
Less: allowance for credit losses 7,103,000
----------
Finance receivable, net $18,308,000
==========
Note 4. Reimbursable Costs
Reimbursable costs represent out-of-pocket disbursements in connection with
review, approvals and collections of loans, and are to be reimbursed by
borrowers in accordance with the terms of the loans. The reimbursable costs are
included in other assets, but form part of recorded investment in the loan. Any
uncollectible amount, which is determined in accordance with either FASB
Statements 5 or 114, whichever is applicable, is included in the allowance for
credit losses.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations - Six Months Ended December 31, 1995
For the six months ended December 31, 1995, CVD Financial Corporation
("Company") reported net income of $1,290,000, after recognizing an
extraordinary gain on the early extinguishment of debt of $118,000. The net
income in the current period is primarily due to (i) reduction in the provision
for credit losses of $1.5 million and (ii) investment gains totalling $1.7
million. Such higher income was offset in part by higher general and
administrative expenses incurred during the current period. The net loss in the
comparative period in 1994 was $7,563,000, after recognizing an extraordinary
gain on the early extinguishment of debt of $527,000 and a $190,000 gain on the
cumulative effect of a change in accounting principle.
Interest and loan fee income decreased to $1,504,000 in the six months ended
December 31, 1995, from $2,954,000 in the comparative period. The Company's
loans generally earn interest at a major bank's ("Bank") prime rate (8.5% and
8.5% at December 31, 1995 and 1994, respectively) plus 5.00% to 7.00%. The
Bank's prime rate decreased from 9.00% to 8.50% during the six months ended
December 31, 1995 as compared to increasing from 7.25% to 8.50% during the
quarter ended December 31, 1994. The $1,450,000 decrease in interest and loan
fee income is primarily the result of a lesser dollar amount of performing loans
offset in part by higher interest rates during the six months ended December 31,
1995 as compared to the comparative period in 1994.
As a result of the Company's implementation on July 1, 1994 of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company recognized $71,000 in unrealized holding losses
and a gain of $190,000 from the cumulative effect of a change in accounting
principle during the six months ended December 31, 1994 in connection with
certain warrants the Company's holds to acquire shares of common stock of its
various borrowers. FASB Statement No. 115 requires the Company to recognize in
the income statement any change in the fair value of its investments in trading
securities. During the six months ended December 31, 1995, the Company
recognized $757,000 in unrealized holding gains, most of which were realized in
the quarter ended March 31, 1996. The Company does not anticipate that it will
recognize significant unrealized holding gains or losses in future periods. The
Company realized a total gain on sale of investments of $1,020,000, of which
$960,000 was attributable to the sale of warrants received from a borrower.
Interest expense decreased to $1,996,000 in the six month period ended December
31, 1995, from $2,682,000 in the comparative period in 1994. The $686,000
decrease results primarily from the lower minimum interest rate (9.00% per annum
and 12.00% per annum for the six months ended December 31, 1995 and 1994,
respectively) being used to accrue interest on the Company's 15 Year Variable
Rate Bonds ("Bonds").
Provision for credit losses was reduced by $1,528,000 for the six months ended
December 31, 1995, as compared to a provision of $7,978,000 for the comparative
period. The allowance for credit losses was $7,103,000 and $9,811,000 as at
December 31, 1995 and 1994, respectively.
General and administrative expenses were $1,642,000 and $503,000 for the six
months ended December 31, 1995 and 1994, respectively. The $1,139,000 increase
is due primarily to higher legal fees incurred in the first half of fiscal 1996
as compared to the first half of fiscal 1995. The general and administrative
expenses in 1995 also included the settlement costs of $250,000 for a class
action involving the Company and others. (See Item 1 under Part 2--Legal
Proceedings)
The Company incurred operating income of $1,173,000 and operating loss of
$8,280,000 for the six months ended December 31, 1995 and 1994, respectively.
No income tax provision was recognized in the six months ended December 31,
1995, except for the payment of minimum tax of $1,000. The provision for income
taxes on the current period's income was eliminated by the net operating loss
carried forward from the prior periods. The deferred tax benefit on these net
operating loss carried forwards were not recognized in prior periods because
there was no assurance that they would be realized.
As discussed under "Liquidity and Capital Resources," during the six months
ended December 31, 1994, the Company repurchased $1,641,000 in principal amount
of its Bonds. As a result of these repurchases, the Company recognized $527,000
of extraordinary gains on the early extinguishment of debt during the first
quarter of fiscal 1995. The Company repurchased $244,000 in principal amount of
its Bonds during the current period, recognizing $118,000 income.
Results of Operations - Three Months Ended December 31, 1995
For the three months ended December 31, 1995, the Company reported net income of
$2,168,000, after recognizing an extraordinary gain on early extinguishment of
debt of $118,000. The net income in the current quarter is primarily due to (i)
reduction in the provision for credit losses of $1.5 million and (ii) investment
gains totalling $1.7 million. Such higher income was offset in part by higher
general and administrative expenses incurred during the current quarter. During
the comparable quarter in 1994, the Company incurred a net loss of $7,244,000
after recognizing an extraordinary gain on the early extinguishment of debt of
$355,000 and a $80,000 gain on the cumulative effect of a change in accounting
principle.
Interest and loan fee income decreased to $688,000 in the three months ended
December 31, 1995, from $1,564,000 in the comparative quarter. The Company's
loans generally earn interest at a major bank's ("Bank") prime rate (8.5% and
8.5% at December 31, 1995 and 1994, respectively) plus 5.00% to 7.00%. The
Bank's prime rate decreased from 8.75% to 8.50% during the quarter ended
December 31, 1995 as compared to increasing from 7.75% to 8.50% during the
quarter ended December 31, 1994. The $876,000 decrease in interest and loan fee
income is primarily the result of a lesser dollar amount of performing loans
offset in part by higher interest rates during the quarter ended December 31,
1995 as compared to the comparative quarter in 1994.
As a result of the Company's implementation on July 1, 1994 of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," the Company recognized $757,000 in unrealized holding gains
and $262,000 in unrealized holding losses during the current quarter and
comparative quarter, respectively. The Company realized a total gain on
investments of $1,022,000, of which $960,000 was attributable to the sale of
warrants received from a borrower.
Interest expense decreased to $993,000 in the current quarter from $1,325,000 in
the comparative quarter. The $332,000 decrease results primarily from the lower
minimum interest rate (9.00% per annum and 12.00% per annum for the quarters
ended December 31, 1995 and 1994, respectively) being used to accrue interest on
the Company's 15 Year Variable Rate Bonds ("Bonds").
Provision for credit losses was reduced by $1,528,000 for the current quarter,
as compared to a provision of $7,228,000 for the comparative quarter.
General and administrative expenses were $951,000 and $238,000 for the current
and comparative quarters, respectively. The $713,000 increase is due primarily
to higher legal fees incurred in the current quarter as compared to the
comparative quarter. The general and administrative expenses in current quarter
also included the settlement cost of $250,000 for a class action filed against
the Company and others. (See Item 1 under Part 2--Legal Proceedings)
The Company incurred operating income of $2,051,000 and operating loss of
$7,489,000 for the three months ended December 31, 1995 and 1994, respectively.
No income tax provision was recognized in the current quarter, except for the
minimum tax. The provision for income taxes on the current quarter's income was
eliminated by the net operating loss carried forward from the prior periods. The
deferred tax benefit on these net operating loss carried forwards were not
recognized in prior periods because there was no assurance that they would be
realized. In the comparative quarter, the Company recognized a provision for
income taxes of $190,000.
As discussed under "Liquidity and Capital Resources," during the three months
ended December 31, 1995 and 1994, the Company repurchased $244,000 and $530,000,
respectively, in principal amount of its Bonds. As a result of these
repurchases, the Company recognized $118,000 and $355,000 of extraordinary gains
on the early extinguishment of debt, net of income taxes, in the current and
comparative quarters, respectively.
Liquidity and Capital Resources.
The Company's cash and cash equivalents at December 31, 1995, are $12,562,000
which represents a increase of $417,000 since June 30, 1995.
Net cash used by operations for the six month period ended December 31, 1995 was
$8,173,000 as compared to net cash used by operations of $856,000 for the
comparative period ended December 31, 1994. The $7,317,000 increase in cash used
by operations between the corresponding periods principally results from: (i)
the purchases of investment grade bonds; (i) significantly greater legal fees
paid during the current period in connection with the greater amount of
nonperforming loans during the period; and (iii) as a result of a greater amount
of nonperforming loans, interest income collected during the current period
decreased as compared to the comparative period in 1994, contributing to this
increase in cash used by operations. Offsetting these increases in cash used by
operations during the fiscal 1996 period was a reduction in the amount of the
Bond interest payment made during the period as compared to fiscal 1995 because
of a lower rate being paid and a reduced amount of Bond principal outstanding
during the fiscal 1996 period. The Company used cash to acquire investment grade
corporate bonds as they provide better yields than bank deposits and are highly
liquid investments as a result of an active secondary market. The Company does
not intend to hold these bonds until maturity, but will liquidate these
investments to supply cash as required in the conduct of the Company's business.
The Company may continue to purchase investment grade bonds to increase the
yield on its cash holdings.
Cash provided by investing activities was $8,716,000 during the current period
as compared to cash used by investing activities of $11,393,000 during the
comparative period 1994. Lending activity during the current period in 1995
decreased significantly as compared to the comparative period in 1994 as the
Company was still building its initial loan portfolio during the earlier period.
In addition, during the fiscal 1996 first half a significantly greater amount of
the Company's loan portfolio was nonperforming also contributing to the reduced
activity.
For the comparative period ended December 31, 1994, $1,166,000 in cash was used
by financing activities to repurchase 78,400 shares and $1,641,000 in principal
amount of the Company's Common Stock and Bonds, respectively, under a $4.5
million discretionary repurchase program established in April 1994 (the "April
Repurchase Program"). During the current period, the Company used $126,000 to
repurchase $244,000 in the principal amount of the Company's Bonds. As of
December 31, 1995, the Company has repurchased 1,190,361 shares of its Common
Stock and $2,963,000 in principal amount of its Bonds at costs of $2,219,000 and
$1,970,000 (including $79,000 in prepaid interest), respectively, under its
April Repurchase Program. As of February 9, 1996, the Company has $311,000
available under the April Repurchase Program for additional discretionary
purchases of its Common Stock and Bonds.
The Company did not make its semi-annual Bond interest payment due on July 25,
1995 until August 22, 1995. The delinquent payment did not result in an event of
default as the payment was made within the 30 day cure period provided for under
the terms of the Bond indenture.
The Company did not make its semi-annual Bond interest payment due on January
25,1996. On February 9, 1996, the Company announced that it will pay the
interest on February 20, 1996, which is made within the 30 day cure period
provided for under the terms of the Bond indenture, and thus, will not result in
an event of default..
The Company is required under its Bond indenture to maintain a ratio of
consolidated liabilities to consolidated tangible net worth of not more than
15:1. The Company has not been in compliance with this provision since March 31,
1995. As of December 31, 1995, the Company has a shareholders' deficit of
$2,860,000 and fails to meet the minimum required tangible net worth of
$2,987,000 by $5,847,000. As a result of the Company's failure to satisfy the
net worth ratio requirement, the trustee under the Bond indenture, acting on
behalf of all holders of the Bonds or at the request of holders of at least 25
percent of the principal amount of the outstanding Bonds, is entitled to
exercise certain remedies, including the declaration of a default under the Bond
indenture and the making of a demand that the Bonds be immediately paid in full
if the net worth ratio is not cured within 90 days after receipt of notice of
the event of default. As of February 9, 1996, no event of default has been
declared.
The Bond indenture also requires mandatory redemption of the Bonds in
certain instances including upon a change in control of the Company which is
defined in the Bond indenture to include the acquisition by any person or group
(other than by the company, or its affiliates, which originally formed the
Company in 1993) of 35.0% or more of the combined voting power of the then
outstanding voting securities of the Company. Based upon filings made with the
Securities and Exchange Commission, the Company is aware that Gibralt Holdings
Ltd. and Ballinger Corporation ("Ballinger") own approximately 15.2% and 34.6%,
respectively, of the Company's Common Stock. If there were a change in control
of the Company as defined in the Bond indenture, the Company would not be able
to satisfy its obligation to immediately redeem the Bonds as a result thereof
and would be forced to explore all options available to it, including attempting
to raise additional capital, a merger, a sale of assets, and the possibility of
reorganizing under federal bankruptcy laws.
Although no event of default with regard to the Bonds has been declared and no
change in control has occurred, the Company is exploring alternatives in
conjunction with a restructuring of the outstanding Bonds. During the period
ended December 31, 1995, the Company announced that it intended to effect an
exchange offer ("Offer") with holders of the Bonds. The Company offered to
exchange each $1,000 in principal amount of its Bonds, including accrued
interest to date, for 472 shares of the Company's Common Stock and a warrant to
acquire an additional 472 shares exercisable at $2.00 per share. On February 9,
1996, the Company announced the termination of the Offer. The reason for the
termination of the Offer is because the Company is unable to issue sufficient
additional common shares to complete the Offer as the Company had not held its
shareholders' meeting whereat approval for the increase in authorized shares was
sought. In addition, the delay in holding the shareholders' meeting had caused
the January 25, 1996 interest payment to be paid prior to the completion of the
proposed Offer. This and other consideration have changed the economics of the
proposed transaction for the Company and its bondholders.
The Company's management team has developed a business plan which emphasizes
financial services and merchant banking activities, including acquiring
controlling interests in operating companies. Under this plan, it is likely that
the Company will originate few, if any, asset based commercial loans in the
future.
It is anticipated in the future that with the completion of the shareholders'
meeting, which has now been scheduled for April 1996, the Company will have
sufficient common shares reserved in its capital to complete a future exchange
offer if it remains in the best interest of the Company. In the event that the
future exchange offer and related stock sale are not completed, the Company
intends to seek other methods to raise additional capital, although there can be
no assurance that such capital will be available or, if available, pursuant to
satisfactory terms. If the Company is unsuccessful in raising additional
capital, it will explore all other options available to it including a merger, a
sale of assets and the possibility of reorganizing under federal bankruptcy
laws.
At December 31, 1995, the Company has no outstanding unfunded loan commitments.
During the year ended June 30, 1995 and six month period ended December 31,
1995, the Company used $1.8 million and $2.0 million, respectively, in the
operating activities, before any activities in trading securities. As at
December 31, 1995, the Company had $12.6 million in cash and cash equivalent,
and $7.4 million in marketable securities, most of which are highly liquid
investment grade bonds. There were no new loan approved or committed during the
current period, and the management tried to collect from and/or settle and
restructure the loans with the borrowers. Therefore, subject to the
contingencies described in the foregoing paragraphs, the management anticipates
that the cash and investment on hand and its expected loan interest and
principal collections will be sufficient to service its debt costs and cover the
day-to-day general and administrative expenses during the ensuing twelve
months..
Finance Receivables.
The Company's loan portfolio at December 31, 1995, aggregated $25,411,000 in
finance receivables (principal plus interest less unamortized commitment fees)
due from 12 borrowers. The portfolio is comprised of loans with principal
amounts due from a single borrower ranging from $400,000 to $4,000,000 and the
average principal outstanding per borrower is approximately $2.1 million. The
largest industry concentrations as a percent of finance receivables outstanding
at December 31, 1995, are energy (three borrowers totalling 32.5%),
environmental clean up (two borrowers totalling 25.1%), electronics (one
borrower totalling 10.3%) and venture capital (two borrowers totalling 10.2%).
No other industry classification represents more than 10.0% of finance
receivables.
CVD designates finance receivables as nonperforming when interest and/or
principal payments are more than 90 days contractually delinquent or earlier if
the Company has material evidence of the borrower's inability to meet its
commitments under the loan agreement (e.g., the borrower files for bankruptcy
protection). Nonperforming assets have a significant negative effect on interest
margin since the Company does not recognize income on these loans, but does
incur holding costs (primarily interest expense). At December 31, 1995, loans to
six borrowers with finance receivables totalling $14,134,000 representing 55.6%
of the outstanding portfolio have been classified as nonperforming. Five of
these borrowers with nonperforming finance receivables totalling $7,220,000
representing 28.4% of the outstanding portfolio have filed voluntary petitions
for bankruptcy protection. The Company also has additional nonperforming finance
receivables totalling $2,757,000, 10.8% of the Company's portfolio, due from the
parent of one of the entities which has filed for bankruptcy protection. The
parent company had distinct operations from its subsidiary in an unrelated
business and in February 1995 the parent company effectively ceased its
operations.
During the quarter and six months ended December 31, 1995, no loans were newly
designated as nonperforming and no loans which were previously designated as
nonperforming were brought into compliance such that the Company redesignated
them as performing. However during the quarter ended December 31, 1995, loans to
four borrowers which were previously designated as nonperforming at both June
30, 1995 and September 30, 1995 with finance receivables totalling $8,336,000
and $8,224,000, respectively, at those dates were settled through either the
sale of the underlying collateral or the sale of the loans themselves. The four
borrowers are Joseph Land Group, Inc.; Bratcher Industries, Inc.; North American
Recycling Systems, Inc.; and, EIA Technologies. The Company had established
specific reserves totalling $5,579,000 in connection with these loans as of both
June 30, 1995 and September 30, 1995, and the total ultimate write off during
the quarter ended December 31, 1995 in connection therewith was $5,609,000. No
similar transactions occurred during the quarter ended September 30, 1995.
The remaining nonperforming loans at December 31, 1995 are as follows:
</TABLE>
<TABLE>
<CAPTION> Outstanding Finance Receivables as of --
December 31, 1995 June 30, 1995
<S> <C> <C>
American Blood
Institute, Inc. $ 1,346,000 $ 1,346,000
Clean-Up
Technology, Inc.
and subsidiaries 3,434,000 3,634,000
Conversion
Industries Inc. 2,150,000 2,150,000
Enviropur Waste
Refining and
Technology, Inc. 4,158,000 4,158,000
Heartland, Inc. 2,009,000 2,009,000
Statordyne Corporation 1,037,000 1,037,000
---------- ------------
$14,134,000 $ 14,334,000
=========== ============
</TABLE>
In January 1996, the Company reached agreement with the management of American
Blood Institute, Inc. ("ABI") and its creditors committee whereby the Company
will receive $625,000 in cash and a note for $1,150,000 in connection with ABI's
reorganization. The note will be payable in equal quarterly installments over
3.5 years and collateralized with essentially the same collateral that the
Company now holds on its existing loans to ABI. Interest on the new note will be
payable monthly in arrears at 14.00%. The plan was confirmed by the bankruptcy
court on January 24, 1996 and the Company received its $625,000 cash payment on
February 6, 1996.
On February 5, 1996, the Company received $1,050,000 in cash as full settlement
of all amounts due from Statordyne Corporation.
In addition to the nonperforming loans, in November 1995, the Company declared
events of default for failure to comply with certain loan covenants with respect
to the Company's loan to Beta Well Service Inc. ("Beta") and as a consequence
demanded immediate repayment of all principal and interest. In connection with
this action, the Company terminated the remaining $7.0 million of its unfunded
loan commitment to Beta. Beta has disputed the Company's actions and as of
February 9, 1996 has not repaid the Company its principal and interest. Beta is
a publicly traded company headquartered in Calgary, Alberta, Canada primarily
engaged in oil well service, oil production, and oil field equipment
manufacturing. At December 31, 1995, finance receivables owed by Beta total
$3,064,000 and the Company made its first advance to Beta in February 1994. At
the time of this first advance, Conversion Industries Inc., the Company's former
parent, had a 9% ownership interest in Beta and also had in excess of a 47%
ownership interest in the Company. (As of October 1994, Conversion Industries
Inc. no longer had any ownership interest in the Company.) The Company believes
that another lender to Beta has a security position in most of Beta's assets and
hence the recovery from Beta is uncertain. The Company's loan is personally
guaranteed by Beta's chairman who has pledged 300,000 shares of Beta common
stock to collateralize his guaranty. The Company has notified the guarantor of
the default, demanded immediate repayment in accordance with the guaranty and
has informed the guarantor that the Company may sell the pledged shares at any
time after December 4, 1995. (As of February 9, 1996, none of the pledged shares
have been sold by the Company.) In December 1995, the Company obtained a
temporary restraining order prohibiting Beta from selling any assets. Beta has
responded to the Company's actions by alleging damages from the Company's
failure to fund and subsequent withdrawal of the remaining $7.0 million unfunded
loan commitment. As provided under the terms of the loan agreement, the Company
and Beta are preparing to enter into a formal arbitration process.
The Company maintains an allowance for credit losses at an amount estimated to
cover potential losses on finance receivables which have experienced an event of
impairment or for which future collection of outstanding principal and interest
has become doubtful. Amounts deemed to be uncollectible are charged against the
allowance. Subsequent recoveries, if any, are credited to the allowance. The
amount of the allowance is based on management's evaluation of numerous factors
including adequacy of collateral supporting the loans, the operating
environments of the various borrowers and the historical experience of the
various borrowers' management and reflects the Company's best estimate of the
necessary level of the allowance for credit losses. The activity with regard to
the allowance for credit losses during the quarter and six months ended December
31, 1995 is as follows:
<TABLE>
<CAPTION> Quarter Six Months
<S> <C> <C>
Balance, beginning of period $14,616,000 $14,716,000
Reduction in provision (1,528,000) (1,528,000)
Charge-offs (5,985,000) (6,085,000)
------------- -------------
Balance, end of period $ 7,103,000 $ 7,103,000
============= ============
Consisted of:
Specific allowance under FASB statement No. 114 $ 6,139,000
General allowance under FASB statement No. 5 964,000
------------
$ 7,103,000
============
</TABLE>
On July 1, 1995, the Company adopted the Financial Accounting Standards Board's
Statement No. 114, "Accounting by Creditors for Impairment of a Loan." If the
Company had elected to adopt the statement early for its fiscal year ended June
30, 1995, the computational provisions of this statement would not have had a
material impact on the Company's June 30, 1995 allowance for credit losses.
Under the provisions of the statement, when a loan is impaired as defined in the
statement, impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or as a practical
expedient, on a loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The Company has adopted a
measurement method on a loan- by-loan basis. By definition, the Company's
nonperforming loans are impaired. In addition, the Company has identified loans
to 2 borrowers which are believed to be impaired as of December 31, 1995. A
specific reserve is established for an impaired loan for the amount by which the
Company's recorded investment in the loan exceeds the net present value of the
loan determined in accordance with FASB Statement No. 114. The Company's
recorded investment includes the amount of finance receivables plus any
reimbursable costs incurred in connection with the loan. Reimbursable costs are
included in other assets.
The following table summarizes the Company's December 31, 1995 specific reserves
for credit losses prepared in accordance with FASB Statement No. 114.
<TABLE>
--------------------------------------- DECEMBER 31, 1995 -----------------------------------------
<CAPTION>
Total future Total related Specific
expected cash costs expec- Net Reserve
# of Recorded collections, net ted to be Present Under FAS
Loans investment of related costs(1) incurred(1)(2) Value No. 114
----- ---------- ---------------- -------- --------- --------------
<S> <C> <C> <C> <C> <C>
Collateral dependant(3):
Bankruptcy or
ceased to operate 2 $ 3,761,000 $ 2,380,000 $ 150,000 $ 2,251,000* $ 1,815,000
Continuing to operate 3 9,973,000 10,336,000 400,000 8,472,000* 1,583,000
Future cash flows:
Bankruptcy or
ceased to operate 3 6,628,000 6,423,000 505,000 3,899,000 2,741,000
Continuing to operate 0 0 0 0 0 0
-- ------------ ------------- ---------- ------------ ------------
SUBTOTAL 8 $20,362,000 $ 19,139,000 $1,055,000 $14,622,000 $ 6,139,000
========== ========= ==========
4 5,749,000 964,000(4)
-- ---------- -----------
GRAND TOTAL 12 $26,111,000 $ 7,103,000
== ========== ===========
----------------- JULY 1, 1995 -----------
Specific
Reserve
# of Recorded Under FAS
Loans Investment No. 114
----- ------- ----------------
<S> <C> <C> <C>
Collateral dependant(3):
Bankruptcy or
ceased to operate 4 $ 4,900,000 $ 1,857,000
Continuing to operate 3 9,946,000 2,873,000
Future cash flows:
Bankruptcy or
ceased to operate 4 8,789,000 4,977,000
Continuing to operate 1 5,253,000 3,663,000
-- --------- ---------
SUBTOTAL 12 $ 28,888,000 $ 13,370,000
5 11,371,000 1,346,000(4)
-- ---------- ------------
GRAND TOTAL 17 $40,259,000 $ 14,716,000
== ========== ============
*Represents fair value of collateral
</TABLE>
<TABLE>
CHANGES IN RESERVE
<CAPTION> Specific General Total
Reserve Reserve Reserve
<S> <C> <C> <C>
For six months ended December 31, 1995:
Balance as at July 1, 1995 $ 13,370,000 $1,346,000 $14,716,000
Increase (decrease) in provision (1,791,000) 263,000 (1,528,000)
Charge-offs (5,440,000) (645,000) (6,085,000)
---------------- ---------- -----------
Balance as at December 31, 1995 $ 6,139,000 $ 964,000 $ 7,103,000
================ ========== ===========
For three months ended December 31, 1995:
Balance as at October 1, 1995 $ 13,270,000 $1,346,000 $14,616,000
Increase (decrease) in provision (1,791,000) 263,000 (1,528,000)
Charge-offs (5,340,000) (645,000) (5,985,000)
---------------- ---------- -----------
Balance as at December 31, 1995 $ 6,139,000 $ 964,000 $ 7,103,000
================ ========== ===========
- ------------------
1. The estimate of expected cash flows represents the Company's best
estimate based on reasonable and supportable assumptions and projections. The
period over which future expected net cash collections will occur is 1 year for
loans that are collateral dependent and the borrower is bankrupt or has ceased
to operate, 3 years for loans that are collateral dependent and the borrower is
continuing to operate and 4.5 years for loans which may generate future cash
flows and the borrower is bankrupt or has ceased to operate.
2. These amounts represent future costs to be incurred in connection with
the sale of collateral and/or the collection of the loans, and have been
subtracted from the net future expected cash collections.
3. The fair market value of the collateral represents the amount that the
Company reasonably expects to receive in an arm's length sale between a willing
buyer and a willing seller. For marketable securities, the current quoted price
is used. For receivables, inventory and equipment, relevant market sources are
used when reliable information is provided. A normal price adjustment is
provided if a forced or liquidation sale is probable. No appraisals have been
used for the valuation of collateral.
4. The general reserve is determined in accordance with FASB Statement No.
5 on a pool of unimpaired loans.
</TABLE>
PART 2. FINANCIAL INFORMATION.
Item 1. Legal Proceedings
In January 1996, the Company reached a settlement, subject to court approval, of
all claims in the outstanding class action litigation without an admission of
liability. The class action was originally filed on behalf of the shareholders
of Conversion Industries, Inc., the Company's former parent company, in April
1995. Pursuant to the settlement, the Company will pay $250,000 and will deliver
warrants for the purchase of 2,750,000 common shares exercisable at $2.00 per
share for a period of 5 years.
Item 2-5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: May 28, 1996
CVD FINANCIAL CORPORATION
By: /s/ Michael J. Smith
Michael J. Smith, President,
Chief Executive Officer and
Chief Financial Officer
