<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 1996
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)
<TABLE>
<CAPTION>
DELAWARE 95-4426690
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
<S> <C>
400 BURRARD STREET
SUITE 1250
VANCOUVER, BRITISH COLUMBIA, CANADA V6C 3A6
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (604) 683-5312
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act 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:
<TABLE>
<CAPTION>
Class Outstanding at May 10, 1996
------------------- ---------------------------
<S> <C>
Common Stock, $0.01 2,718,600
par value
</TABLE>
Transitional Small Business Disclosure Format (check one): Yes No X
---- -----
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CVD FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, 1996 June 30, 1995
-------------- -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 14,480 $ 12,145
Finance receivables, net of
allowance for credit losses of $7,303
and $14,716, respectively 14,976 25,581
Other receivables 116 -
Deferred debt issuance costs, net
of accumulated amortization of $530
and $376, respectively 2,088 2,242
Investments 10,695 453
Other assets 43 69
----------- ------------
$ 42,398 $ 40,490
=========== ============
</TABLE>
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<S> <C> <C>
LIABILITIES
Bonds payable, net of bonds held in
treasury of $2,953 and $2,719,
respectively, in principal amount $ 42,047 $ 42,281
Interest payable 893 1,955
Accounts payable and accrued liabilities 760 404
----------- ------------
43,700 44,640
SHAREHOLDERS' DEFICIT
Preferred stock - -
Common stock 43 43
Additional paid-in capital 17,767 17,767
Accumulated deficit (16,056) (18,904)
----------- ------------
1,754 (1,094)
Less -- treasury stock (3,056) (3,056)
----------- ------------
(1,302) (4,150)
----------- ------------
$ 42,398 $ 40,490
</TABLE> =========== ============
FORM 10-QSB
QUARTERLY REPORT - PAGE 2
<PAGE> 3
CVD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Revenues
Interest and loan fee income $ 2,021 $ 4,348
Gain (loss) on securities 4,500 (153)
Other 2 -
----------- ------------
6,523 4,195
Costs and Expenses
Interest 2,945 3,706
Provision for credit losses (1,328) 8,429
General and administrative 2,170 801
----------- ------------
3,787 12,936
----------- ------------
Operating Income (loss) 2,736 (8,741)
Income tax expense (benefits) 1 (30)
----------- ------------
Income (loss) before extraordinary item 2,735 (8,711)
Extraordinary item, extinguishment of debt 113 527
Cumulative effect of a change in
accounting principle - 190
----------- ------------
Net income (loss) 2,848 (7,994)
Accumulated deficit, beginning of period (18,904) (2,059)
----------- ------------
Accumulated deficit, end of period $ (16,056) $ (10,053)
=========== ============
Earnings (loss) per share
Before extraordinary item $ 1.01 $ (3.54)
Extraordinary item 0.04 0.21
Cumulative effect of a change in
accounting principle - 0.08
----------- ------------
$ 1.05 $ (3.25)
=========== ============
Weighted average number of
shares outstanding 2,718,600 2,462,682
=========== ============
</TABLE>
FORM 10-QSB
QUARTERLY REPORT - PAGE 3
<PAGE> 4
CVD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Revenues
Interest and loan fee income $ 517 $ 1,394
Gain (loss) on securities 2,721 (82)
Other 2 -
----------- ------------
3,240 1,312
Costs and expenses
Interest 949 1,024
Provision for credit losses 200 2,701
General and administrative 528 298
----------- ------------
1,677 4,023
----------- ------------
Operating income (loss) 1,563 (2,711)
Income tax expenses (benefits) - (30)
----------- ------------
Income (loss) before extraordinary item 1,563 (2,681)
Extraordinary item, extinguishment of debt (5) -
----------- ------------
Net income (loss) 1,558 (2,681)
Accumulated deficit, beginning of period (17,614) (7,372)
----------- ------------
Accumulated deficit, end of period $ (16,056) $ (10,053)
=========== ============
Earnings (loss) per share
Before extraordinary item $ 0.57 $ (1.30)
Extraordinary item - -
----------- ------------
$ 0.57 $ (1.30)
=========== ============
Weighted average number of shares
outstanding 2,718,600 2,063,822
=========== ============
</TABLE>
FORM 10-QSB
QUARTERLY REPORT - PAGE 4
<PAGE> 5
CVD FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 2,848 $ (7,994)
Adjustments to reconcile net income to
net cash used by operating activities:
Extraordinary gain on extinguishment of debt (113) (527)
Cumulative effect of a change in accounting principle - (190)
Provision for credit losses (1,328) 8,429
Unrealized holding gains on securities (1,244) 153
Gain on sales of securities (3,257) -
Amortization of deferred debt issuance costs 154 155
----------- -----------
(2,940) 26
Changes in non-cash working capital:
Accounts receivable (116) -
Reimbursable costs (824) (410)
Interest receivable 126 (540)
Commitment fees (71) (76)
Other assets 25 44
Interest payable (1,062) (1,232)
Accounts payable and accrued liabilities 356 (176)
----------- -----------
(4,506) (2,364)
Purchase of trading securities (10,502) -
Proceeds from sales of trading securities 6,889 -
----------- -----------
(8,119) (2,364)
Investing activities:
Advances on loan receivables (228) (23,847)
Payments received on loan receivables 10,803 17,865
----------- -----------
10,575 (5,982)
Financing activities:
Purchase of treasury bonds (121) (1,020)
Purchase of treasury stock - (146)
Sale of treasury stock - 1,581
Exercise of stock options - 45
----------- -----------
(121) 460
----------- -----------
Net change in cash and cash equivalent 2,335 (7,886)
Cash and cash equivalent, beginning of period 12,145 20,461
------------ -----------
Cash and cash equivalent, end of period $ 14,480 $ 12,575
============ ===========
Cash paid during the period for:
Interest expenses $ 3,851 $ 4,783
Income taxes $ 1 $ 117
</TABLE>
FORM 10-QSB
QUARTERLY REPORT - PAGE 5
<PAGE> 6
CVD FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
In accordance with Item 310 of Regulation S-B promulgated by the Securities and
Exchange Commission, the consolidated financial statements and accompanying
notes thereto have been condensed and therefore do not contain all disclosures
required by generally accepted accounting principles. These consolidated
financial statements and accompanying notes thereto should be read in
conjunction with CVD Financial Corporation's (the "Company") audited financial
statements and notes thereto contained in the Company's Form 10-KSB Annual
Report for the fiscal year ended June 30, 1995. All dollar amounts are rounded
to the nearest thousands.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly its financial
position as of March 31, 1996, and the results of its operations and changes in
its financial position for the periods ended March 31, 1995 and 1996. 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 reclassifications 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 principles, which contemplate continuation of an
entity as a going concern. The Company incurred net losses of $16,845 and
$2,059 for the years ended June 30, 1995 and 1994, respectively. For the nine
months ended March 31, 1996, the Company generated net income of $2,848. As of
March 31, 1996, the Company had incurred cumulative losses since its inception
of $16,056 and had a net shareholders' deficit of $1,302 (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
therefore 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 March 31, 1996, the Company had a net shareholders' deficit of
$1,302 and failed to meet the minimum required tangible net worth of $2,913 by
$4,215. 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% of the
principal amount of the outstanding Bonds, is entitled at its option 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 May 10, 1996, the Company has not received a
notice of the event of default from the trustee.
FORM 10-QSB
QUARTERLY REPORT - PAGE 6
<PAGE> 7
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 until February 20, 1996, which was made within the 30 day cure period
provided for under the terms of the Bond indenture, and thus, did 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 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 continued to apply FASB Statement No. 5 "Accounting for
Contingencies" to provide an allowance on a pool of unimpaired loans.
As of March 31, 1996, the Company had identified impaired finance receivables
with a recorded investment totaling $15,286 and had established a specific
allowance for credit losses totaling $6,581 in connection therewith. Finance
receivables, which are also referred to as recorded investment in loans,
include the outstanding loan balance (net of any charge-offs), any accrued
interest, deferred loan fees and reimbursable costs. The activity with regard
to the allowance for credit losses during the quarter and nine months ended
March 31, 1996 is as follows:
<TABLE>
<CAPTION>
Quarter Nine Months
------- -----------
(in thousands)
<S> <C> <C>
Balance, beginning of period $ 7,103 $ 14,716
Increase (decrease) in provision 200 (1,328)
Charge-offs - (6,085)
------------- -------------
Balance, end of period $ 7,303 $ 7,303
============= =============
Consisted of:
Specific allowance under FASB Statement No. 114 $ 6,581
General allowance under FASB Statement No. 5 722
-------------
$ 7,303
=============
</TABLE>
The following table summarizes the calculation of net finance receivables as at
March 31, 1996:
<TABLE>
<S> <C>
Finance receivables, gross $ 22,279
Less allowance for credit losses 7,303
-------------
Finance receivables, net $ 14,976
=============
</TABLE>
FORM 10-QSB
QUARTERLY REPORT - PAGE 7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of
operations of CVD Financial Corporation (the "Company") for the three and nine
months ended March 31, 1996 should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein.
RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 1996
For the nine months ended March 31, 1996, the Company reported net income of
$2.8 million or $1.05 per share, which included an extraordinary gain on the
early extinguishment of debt of $0.1 million or $0.04 per share . In the
comparative period of 1995, the Company reported a net loss of $8.0 million or
$3.25 per share, after recognizing an extraordinary gain on the early
extinguishment of debt of $0.5 million or $0.21 per share and a $0.2 million or
$0.08 per share gain on the cumulative effect of a change in accounting
principle. The net loss in the comparative period of 1995 included an increase
in the provision for credit losses of $8.4 million. The increase in net income
in the current period was primarily attributable to (i) a reduction in the
provision for credit losses of $1.3 million and (ii) investment gains totaling
$4.5 million. Such higher income was partially offset by higher general and
administrative expenses incurred during the current period.
Interest and loan fee income decreased to $2.0 million in the nine months ended
March 31, 1996 from $4.3 million in the comparative period of 1995, primarily
as a result of a reduction in the dollar amount of outstanding performing
loans. The Company's loans generally earn interest at a major bank's (the
"Bank") prime rate (8.25% and 9.0% at March 31, 1996 and 1995, respectively)
plus 5% to 7%. The Bank's prime rate decreased from 9.0% to 8.25% during the
nine months ended March 31, 1996, as compared to increasing from 7.25% to 9.0%
during the nine months ended March 31, 1995.
As a result of the Company's implementation on July 1, 1994 of the Financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("FASB No. 115"), the Company
recognized $0.1 million in unrealized holding losses and a gain of $0.2 million
from the cumulative effect of a change in accounting principle during the nine
months ended March 31, 1995, in connection with certain warrants the Company
holds to acquire shares of common stock of its various borrowers. During the
nine months ended March 31, 1996, the Company recognized $1.2 million in
unrealized holding gains and $2.2 million in gains on the sale of investments.
The majority of these gains arose as a result of the sale of shares which were
converted from a loan to a borrower. The Company does not expect the
unrealized holding gains to be reversed in the foreseeable future.
Interest expense decreased to $2.9 million in the nine months ended March 31,
1996 from $3.7 million in the comparative period of 1995, primarily as a
result of a lower minimum interest rate (8.5% per annum and 9.25% per annum for
the nine months ended March 31, 1996 and 1995, respectively) being used to
accrue interest on the Company's 15 Year Variable Rate Bonds (the "Bonds").
The provision for credit losses was reduced by $1.3 million for the nine months
ended March 31, 1996, as compared to a provision of $8.4 million for the
comparative period of 1995. The allowance for credit losses was $7.3 million
and $8.7 million as at March 31, 1996 and 1995, respectively.
FORM 10-QSB
QUARTERLY REPORT - PAGE 8
<PAGE> 9
General and administrative expenses increased to $2.2 million in the nine
months ended March 31, 1996 from $0.8 million in the same period of 1995,
primarily due to higher legal fees. General and administrative costs in the
current period included a provision of $250,000 for settlement costs related to
a class action involving, among others, the Company. See "Legal Proceedings".
The Company reported operating income of $2.7 million and an operating loss of
$8.7 million for the nine months ended March 31, 1996 and 1995, respectively.
No income tax provision was recognized in the nine months ended March 31, 1996,
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
forwards from prior periods. The deferred tax benefits on these net operating
loss carried forwards were not recognized in prior periods as there was no
assurance that they would be realized. In the comparative period of 1995, the
Company recognized an income tax benefit of $30,000.
During the nine months ended March 31, 1995, the Company repurchased $1.6
million in principal amount of the Bonds. As a result of these repurchases,
the Company recognized $0.5 million of extraordinary gains on the early
extinguishment of debt in the nine months ended March 31, 1995. The Company
repurchased $0.2 million in principal amount of the Bonds during the current
period, recognizing $0.1 million as income as a result thereof.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1996
For the three months ended March 31, 1996, the Company reported net income of
$1.6 million or $0.57 per share. During the comparable quarter of 1995, the
Company reported a net loss of $2.7 million or $1.30 per share. The increased
net income in the current quarter was primarily attributable to investment
gains totaling $2.7 million. Such higher income was offset in part by higher
general and administrative expenses incurred during the current quarter.
Interest and loan fee income decreased to $0.5 million in the three months
ended March 31, 1996 from $1.4 million in the comparative quarter of 1995,
primarily as the result of a reduction in the dollar amount of outstanding
performing loans. The Company's loans generally earn interest at a major
bank's (the "Bank") prime rate (8.25% and 9.0% at March 31, 1996 and 1995,
respectively) plus 5% to 7%. The Bank's prime rate decreased from 8.5% to
8.25% during the quarter ended March 31, 1996, as compared to increasing from
8.5% to 9.0% during the quarter ended March 31, 1995.
During the current quarter, the Company recognized a $2.7 million gain on
securities, of which $2.2 million resulted from the sale of investments, as
compared to a loss of $82,000 in the comparative quarter of 1995.
Interest expense decreased to $0.9 million in the current quarter from $1.0
million in the comparative quarter of 1995, primarily as a result of a lower
minimum interest rate (8.5% per annum and 9.25% per annum for the quarters
ended March 31, 1996 and 1995, respectively) being used to accrue interest on
the Bonds.
General and administrative expenses increased to $0.5 million in the three
months ended March 31, 1996 from $0.3 million in the comparative quarter of
1995, primarily due to higher legal fees.
FORM 10-QSB
QUARTERLY REPORT - PAGE 9
<PAGE> 10
The Company reported operating income of $1.6 million and an operating loss of
$2.7 million for the three months ended March 31, 1996 and 1995, respectively.
No income tax provision was recognized in the current quarter, due to the net
operating loss carried forwards from prior periods. The deferred tax benefits
on these net operating loss carried forwards were not recognized in prior
periods, as there was no assurance that they would be realized. In the
comparative quarter of 1995, the Company recognized an income tax benefit of
$30,000.
During the three months ended March 31, 1996 and 1995, the Company did not
repurchase any Bonds.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at March 31, 1996 were $14.5 million,
which represent an increase of $2.3 million from June 30, 1995.
Net cash used by operations for the nine months ended March 31, 1996 was $8.1
million, as compared to net cash used by operations of $2.4 million for the
comparative period ended March 31, 1995. The $5.7 million increase in cash
used by operations between the corresponding periods resulted primarily from:
(i) the purchase of investment grade bonds; (ii) significantly higher legal
fees paid during the current period in connection with the larger amount of
non-performing loans outstanding during the period; and (iii) as a result of
the larger amount of non-performing loans, a decrease in interest income
collected during the current period, as compared to the comparative period of
1995. The increase in cash used by operations during the current period was
partially offset by a reduction in the amount of the interest payment made on
the Bonds during the period as compared to the comparative period of 1995, due
to both a lower interest rate being paid and a reduced amount of principal
outstanding on the Bonds during the current period. The Company used cash to
acquire investment grade bonds as they provide better yields than bank deposits
and are highly liquid investments as a result of an active secondary market.
The Company continues to invest in investment grade bonds for the aforesaid
reasons.
Cash provided by investing activities was $10.6 million during the current
period, as compared to cash used by investing activities of $6.0 million during
the comparative period of 1995. Lending activity during the current period of
1996 decreased significantly as compared to the comparative period of 1995 when
the Company was still building its initial loan portfolio. In addition, the
significantly larger amount of non-performing loans in the Company's
portfolio also contributed to the reduced activity.
During the nine months ended March 31, 1996, net cash used by financing
activities was $0.1 million, which consisted of the repurchase of Bonds.
During the comparative period of 1995, financing activities provided cash of
$0.5 million. In the nine months ended March 31, 1995, the Company expended
$1.0 million to repurchase Bonds and $0.1 million to repurchase shares. In
addition, during such period, the Company issued 715,000 shares of treasury
stock to a purchaser and 25,000 shares of common stock upon the exercise of
stock options for total proceeds of $1.6 million. The purchases of the
Company's common stock and Bonds were made pursuant to a $4.5 million
discretionary repurchase program established in April 1994 (the "April
Repurchase Program"). As of March 31, 1996, the Company had repurchased
1,190,361 shares of its common stock and $3.0 million in principal amount of
the Bonds at cost of $2.2 million and $1.9 million (including $79,000 of
prepaid interest), respectively, under the April Repurchase Program. As of
May 10, 1996, the Company has $0.3 million available under the April
Repurchase Program for additional
FORM 10-QSB
QUARTERLY REPORT - PAGE 10
<PAGE> 11
discretionary purchases of its common stock and Bonds. In the current quarter,
the board of directors of the Company authorized the Company to purchase, at
its election and from time to time, up to an additional $10 million of Bonds.
The Company did not make its semi-annual Bond interest payments due on July 25,
1995 and January 25, 1996 until August 22, 1995 and February 20, 1996,
respectively. The delinquent payments did not result in an event of default as
the payments were made within the 30 day cure period provided for under the
terms of the Bond indenture.
The Company is required under the 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 March 31, 1996, the Company had a shareholders' deficit of
$1.3 million and failed to meet the minimum required tangible net worth of $2.9
million by $4.2 million. 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%
of the principal amount of the outstanding Bonds, is entitled at its option 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 May 10, 1996, the Company has not received a
notice of the event of default from the trustee .
The Bond indenture also requires mandatory redemption of the Bonds in certain
instances, including 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 which originally formed the Company in 1993, or its
affiliates) 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 a change in control of the
Company as defined in the Bond indenture occurs, 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 March 31, 1996, the Company announced that it intended to effect an
exchange offer (the "Offer") with holders of the Bonds. The Company offered to
exchange each $1,000 in principal amount of the 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 Offer was
terminated because the Company was unable to issue sufficient common shares to
complete the Offer, as the Company had not held a shareholders' meeting to
approve the necessary increase in authorized capital. In addition, the delay
resulting from the requirement to hold a shareholders' meeting had caused the
January 25, 1996 interest payment to be paid prior to the completion of the
proposed Offer. These and other considerations changed the economics of the
proposed transaction for the Company and its bondholders.
FORM 10-QSB
QUARTERLY REPORT - PAGE 11
<PAGE> 12
The Company intends to seek other methods to raise additional capital, although
there can be no assurance that such capital will be available on 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.
The Company has developed a business plan which emphasizes financial services
and merchant banking activities, including the acquisition of 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.
At March 31, 1996, the Company had no outstanding unfunded loan commitments.
During the nine months ended March 31, 1996 and 1995, the Company used $4.5
million and $2.4 million, respectively, in operating activities, before any
activities in trading securities. As at March 31, 1996, the Company had $14.5
million in cash and cash equivalent, and $10.7 million in marketable
securities, most of which are highly liquid investment grade bonds. There was
one new loan approved but no new loans committed during the current period, and
the Company proceeded to collect and/or settle and restructure the
non-performing loans in its portfolio. Therefore, subject to the contingencies
described in the foregoing paragraphs, the Company anticipates that its cash
and investments on hand, and its expected loan interest and principal
collections, will be sufficient to service the Company's debt costs and cover
the day-to-day general and administrative expenses during the ensuing 12
months.
FINANCE RECEIVABLES
The Company's loan portfolio at March 31, 1996 aggregated $22.3 million in
finance receivables (principal plus interest and reimbursable costs less
unamortized commitment fees) due from 11 borrowers. The portfolio is comprised
of loans with principal amounts due from individual borrowers ranging from
$0.4 million to $4.2 million, and the average principal outstanding per
borrower is approximately $2.0 million. The largest industry concentrations,
as a percentage of finance receivables outstanding at March 31, 1996, are
energy (two borrowers totaling 32.7%), environmental clean-up (two borrowers
totaling 29.1%), electronics (one borrower totaling 9.5%) and venture capital
(two borrowers totaling 12.6%). No other industry classification represents
more than 10.0% of finance receivables.
The Company designates finance receivables as non-performing when interest
and/or principal payments are contractually delinquent for more than 90 days,
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). Non-performing loans have a significant
negative effect on the Company's interest margin, as the Company does not
realize income on these loans, but does incur holding costs (primarily
interest expense). At March 31, 1996, loans to five borrowers, who had
finance receivables totaling $15.3 million, representing 68.6% of the
outstanding portfolio, had been classified as non-performing. Four of these
borrowers, who had non-performing finance receivables totaling $5.2 million,
representing 23.5% of the outstanding portfolio, had filed voluntary
petitions for bankruptcy protection. The Company also had additional
non-performing finance receivables totaling $2.8 million, 12.3% of the
Company's portfolio, due
FORM 10-QSB
QUARTERLY REPORT - PAGE 12
<PAGE> 13
from the parent of one of the entities which had filed for bankruptcy
protection. The parent company had distinct operations from its subsidiary
in an unrelated business but, in February 1995, effectively ceased its
operations.
During the nine months ended March 31, 1996, one loan in the amount of $3.0
million to Beta Well Service Inc. ("Beta") was newly designated as
non-performing, one loan to American Blood Institute, Inc. ("ABI") in the
amount of $1.3 million, which was previously designated as non-performing, was
brought into compliance, such that the Company redesignated it as performing,
and one loan to Statordyne Corporation in the amount of $1.0 million was repaid
in full on February 5, 1996.
In November 1995, the Company declared events of default for failure to comply
with certain loan covenants with respect to its loan to 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 has not repaid the principal and interest owing to the Company. Beta
is a publicly traded company headquartered in Calgary, Alberta, Canada and is
primarily engaged in oil well service, oil production, and oil field equipment
manufacturing. At March 31, 1996, finance receivables owed by Beta totaled $3.1
million. At the time of the Company's first advance to Beta in February 1994,
Conversion Industries Inc. ("Conversion"), the Company's former parent, had a 9%
ownership interest in Beta and had in excess of a 47% ownership interest in the
Company (as of October 1994, Conversion 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, therefore, 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 informed the guarantor that the
Company may sell the pledged shares at any time after December 4, 1995 (as of
May 10, 1996, none of the pledged shares have been sold by the Company). The
Company has initiated proceedings against Beta and the guarantor with respect to
the outstanding principal and interest. Beta has responded to the Company's
actions by alleging damages from the Company's refusal to fund, and the
subsequent withdrawal of, the remaining $7.0 million unfunded loan commitment.
As provided by the terms of the loan agreement, the Company and Beta are
preparing to enter into a formal arbitration process.
In January 1996, the Company reached an agreement with the management of ABI
and its creditors' committee, whereby the Company received $0.6 million in cash
and a note for $1.2 million in connection with ABI's reorganization. The note
is payable in equal quarterly instalments over 3.5 years and is secured with
essentially the same collateral that the Company held for its previous loans to
ABI. Interest on the new note is payable monthly in arrears at 14.0%. ABI's
reorganization plan was confirmed by the bankruptcy court on January 24, 1996
and the Company received its $0.6 million cash payment on February 6, 1996.
During the nine months ended March 31, 1996, loans to four borrowers which were
previously designated as non-performing at both June 30, 1995 and September 30,
1995, with finance receivables totaling $8.4 million and $8.2 million,
respectively, 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 totaling $5.6 million in connection with these loans as of both June
30, 1995 and September 30, 1995, and the total ultimate charge-off during the
nine months ended March 31, 1996 in connection therewith was $5.6 million. No
similar transactions occurred during the quarter ended March 31, 1996.
FORM 10-QSB
QUARTERLY REPORT - PAGE 13
<PAGE> 14
The remaining non-performing loans as at March 31, 1996 and June 30, 1995 are
as follows:
<TABLE>
<CAPTION>
Outstanding Finance Receivables
--------------------------------
March 31, 1996 June 30, 1995
-------------- -------------
(in thousands)
<S> <C> <C>
American Blood Institute, Inc. $ n/a $ 1,346
Clean-Up Technology, Inc. and subsidiaries 3,538 3,634
Conversion Industries Inc. 2,349 2,150
Enviropur Waste Refining and Technology, Inc. 4,210 4,158
Heartland, Inc. 2,110 2,009
Beta Well Service Inc. 3,079 n/a
Statordyne Corporation - 1,037
----------- -----------
$ 15,286 $ 14,334
=========== ===========
</TABLE>
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 collection of outstanding principal and interest has
become doubtful. Amounts deemed to be uncollectible are charged off against the
allowance and subsequent recoveries, if any, are credited to the allowance. The
amount of the allowance is based on the Company's evaluation of numerous
factors, including the adequacy of the collateral securing 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 nine months
ended March 31, 1996 is as follows:
<TABLE>
<CAPTION>
Quarter Nine Months
------- -----------
(in thousands)
<S> <C> <C>
Balance, beginning of period $ 7,103 $ 14,716
Increased (decrease) in provision 200 (1,328)
Charge-offs - (6,085)
----------- -----------
Balance, end of period $ 7,303 $ 7,303
=========== ===========
</TABLE>
On July 1, 1995, the Company adopted the Financial Accounting Standards Board
Statement No. 114, "Accounting by Creditors for Impairment of a Loan" ("FASB
No. 114"). If the Company had elected to adopt FASB No. 114 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 FASB No. 114, when a loan is impaired as defined in the
statement, a lender shall measure impairment based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or
as a practical expedient, based 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 non-performing loans are impaired. A specific reserve is established
for each impaired loan equal to 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 No. 114.
FORM 10-QSB
QUARTERLY REPORT - PAGE 14
<PAGE> 15
The following tables summarize the Company's specific reserves for credit
losses prepared in accordance with FASB No. 114 as at March 31, 1996 and July
1, 1995.
MARCH 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Total future Total related Specific
expected cash costs Net reserve
# of Recorded collections, net expected to present under FASB
loans investment of related costs(1) be incurred(1)(2) value No. 114
----- ---------- ------------------- ----------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
IMPAIRED LOANS
Collateral dependant(3):
Bankruptcy or ceased to operate 1 $ 2,349 $ 708 $ 125 $ 632 $ 1,717
Continuing to operate 2 7,289 6,482 400 5,170 2,119
Future cash flows:
Bankruptcy or ceased to operate 2 5,648 5,145 405 2,903 2,745
Continuing to operate - - - - - -
-- -------- -------- -------- -------- --------
Subtotal 5 15,286 $ 12,335 $ 930 $ 8,705 $ 6,581
======== ======== ========
UNIMPAIRED LOANS 6 6,993 722(4)
-- -------- --------
Grand total 11 $ 22,279 $ 7,303
== ======== ========
</TABLE>
JULY 1, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Specific
reserves
# of Recorded under FASB
loans investment No. 114
----- ---------- ----------
<S> <C> <C> <C>
IMPAIRED LOANS
Collateral dependant(3):
Bankruptcy or ceased to operate 4 $ 4,900 $ 1,857
Continuing to operate 3 9,946 2,873
Future cash flows:
Bankruptcy or ceased to operate 4 8,789 4,977
Continuing to operate 1 5,253 3,663
-- -------- --------
Subtotal 12 $ 28,888 $ 13,370
UNIMPAIRED LOANS 5 11,371 1,346(4)
-- -------- --------
Grand total 17 $ 40,259 $ 14,716
== ======== ========
</TABLE>
FORM 10-QSB
QUARTERLY REPORT - PAGE 15
<PAGE> 16
<TABLE>
<CAPTION>
Specific General Total
Reserve Reserve Reserve
-------- ------- -------
<S> <C> <C> <C>
CHANGES IN RESERVE
For nine months ended March 31, 1996:
Balance as at July 1, 1995 $ 13,370 $ 1,346 $ 14,716
Increase (decrease) in provision (1,349) 21 (1,328)
Charge-offs (5,440) (645) (6,085)
--------- --------- ---------
Balance as at March 31, 1996 $ 6,581 $ 722 $ 7,303
========= ========= =========
For three months ended March 31, 1996:
Balance as at January 1, 1996 $ 6,139 $ 964 $ 7,103
Increase (decrease) in provision 442 (242) 200
Charge-offs - - -
--------- --------- ---------
Balance as at March 31, 1996 $ 6,581 $ 722 $ 7,303
========= ========= =========
</TABLE>
- - --------------
Notes:
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 .75 of a year
for loans that are collateral dependant and the borrower is bankrupt or has
ceased to operate, 3 years for loans that are collateral dependant and the
borrower is continuing to operate and 4.25 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 expect 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.
FORM 10-QSB
QUARTERLY REPORT - PAGE 16
<PAGE> 17
PART II. FINANCIAL INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1995, the Company was added as a defendant in Hudson v. Conversion
Industries, Inc., et al, United States District Court for the Central Distract
of California. The lawsuit is a putative class action brought under the
federal securities laws. The lawsuit alleges that Conversion, certain officers
and directors of Conversion (including Donald B. Clark, Randall M. Gates, John
P. McGrain and David A. Rapaport, all of whom were formerly officers and/or
directors of the Company), Coopers & Lybrand L.L.P. (Conversion's and the
Company's former outside auditors) and the Company engaged in acts intended to
artificially inflate the price of Conversion's stock. Among other things, the
Company is alleged to have participated in this scheme by making loans to
companies affiliated with Conversion, by acquiescing in Conversion's failure to
consolidate the Company's results into Conversion's financial statements, and
by failing to disclose the Company's purported intent to defraud Conversion's
shareholders. The lawsuit further alleges that the Company controlled
Conversion. In January, 1996, the Company reached a settlement, subject to
court approval, of all claims without an admission of liability. This
settlement was subsequently reopened and the Company is currently renegotiating
its terms with respect to the non-cash payments.
In January 1996, the Company initiated proceedings against Beta and its
chairman, a guarantor, with respect to outstanding principal and interest on a
loan in the amount of approximately $3 million. Beta has responded by alleging
damages from the Company's refusal to fund, and the subsequent withdrawal of,
the remaining $7.0 million unfunded loan commitment. See "FINANCE
RECEIVABLES."
The Company is involved in various other claims and matters of litigation
arising in the ordinary course of its business, including collection and
related actions convening delinquent loans made by the Company. The Company
does not believe that the outcome of such litigation will have a material
adverse effect on its business or financial condition.
ITEMS 2-5. Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- - ------ -----------
27 Article 5 - Financial Data Schedule for 3rd Quarter 1995 - Form 10-QSB
(b) Reports on Form 8-K.
None.
FORM 10-QSB
QUARTERLY REPORT - PAGE 17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
DATED: May 10, 1996
CVD FINANCIAL CORPORATION
By: /s/ Michael J. Smith
--------------------------------------------
Michael J. Smith, President, Chief Executive
Officer and Chief Financial Officer
FORM 10-QSB
QUARTERLY REPORT - PAGE 18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- - ---------------- -----------
<S> <C>
27 Article 5 - Financial Data Schedule for 3rd Quarter 1995 - Form 10-QSB
</TABLE>
FORM 10-QSB
QUARTERLY REPORT - PAGE 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES INCLUDED IN THIS FORM 10-QSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 14,480
<SECURITIES> 10,695
<RECEIVABLES> 22,395
<ALLOWANCES> 7,303
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 42,398
<CURRENT-LIABILITIES> 0
<BONDS> 42,047
<COMMON> 43
0
0
<OTHER-SE> (1,345)
<TOTAL-LIABILITY-AND-EQUITY> 42,398
<SALES> 0
<TOTAL-REVENUES> 6,523
<CGS> 0
<TOTAL-COSTS> 3,787
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (1,328)
<INTEREST-EXPENSE> 2,945
<INCOME-PRETAX> 2,736
<INCOME-TAX> 1
<INCOME-CONTINUING> 2,735
<DISCONTINUED> 0
<EXTRAORDINARY> 113
<CHANGES> 0
<NET-INCOME> 2,848
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
</TABLE>
