<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1996
-------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission file number 1-12212
CVD FINANCIAL CORPORATION
(Name of Small Business Issuer in Its Charter)
DELAWARE 95-4426690
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
400 Burrard Street, Suite # 1250
Vancouver, British Columbia, Canada V6C 3A6
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (604) 683-5312
Securities registered under Section 12(b) of the Exchange Act:
<TABLE>
<CAPTION>
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ------------------------
<S> <C>
Common Stock $0.01 Par Value N/A
15 Year Variable Rate Bonds N/A
</TABLE>
Securities registered under Section 12(g) of the Exchange Act: None
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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]
CVD Financial Corporation's revenues for the most recent fiscal year were
$7,067,000.
The aggregate market value of the voting stock of the Registrant held by non-
affiliates of the Registrant, based upon the average of the closing bid and
asked prices on September 18, 1996 was $1,533,994. Shares of Common Stock held
by each officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been included although such persons may be
deemed to be affiliates. In August 1995, the Company's shares of Common Stock
were accepted for quotation on the NASDAQ OTC Bulletin Board.
The number of shares outstanding of the Registrant's Common Stock, as of
September 18, 1996 was 2,718,600.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Document of the Registrant Form 10-KSB Reference Location
-------------------------- ------------------------------
<S> <C>
1996 Proxy Statement to be filed within 120 days Part III
of the end of the fiscal year ended June 30, 1996
</TABLE>
Transitional Small Business Disclosure Format: Yes No X
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<PAGE> 2
FORWARD-LOOKING STATEMENTS
Statements in this report, to the extent they are not based on historical
events, constitute forward-looking statements. Forward-looking statements
include, without limitation, statements regarding the outlook for future
operations, forecasts of future costs and expenditures, evaluation of market
conditions, the outcome of legal proceedings, the adequacy of reserves, or
other business plans. Investors are cautioned that forward-looking statements
are subject to an inherent risk that actual results may vary materially from
those described herein. Factors that may result in such variance, in addition
to those accompanying the forward-looking statements, include changes in
interest rates, prices, and other economic conditions; actions by competitors;
natural phenomena; actions by government authorities; uncertainties associated
with legal proceedings; technological development; future decisions by
management in response to changing conditions; and misjudgments in the course
of preparing forward-looking statements.
<PAGE> 3
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS.....................................4
ITEM 2. DESCRIPTION OF PROPERTY.....................................6
ITEM 3. LEGAL PROCEEDINGS...........................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................9
ITEM 7. FINANCIAL STATEMENTS.......................................19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................19
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT........................................19
ITEM 10. EXECUTIVE COMPENSATION.....................................19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT......................................19
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............19
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...........................20
SIGNATURES............................................................43
<PAGE> 4
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
The Company
- -----------
CVD Financial Corporation was incorporated in June 1993 pursuant to the laws
of the State of Delaware and commenced operations in August 1993.
In this document, unless the context otherwise requires, the "Company" refers
to CVD Financial Corporation and its subsidiaries.
General
- -------
The Company operates in the financial services segment in both the United
States and Canada, engaging in investment and merchant banking activities and
asset-based commercial lending. The Company's merchant banking activities
include seeking controlling interests in businesses or assets which the
Company believes are undervalued, and its asset-based commercial lending
primarily involves the administration and realization of an existing loan
portfolio comprised of loans to emerging companies.
The Company's operating strategy with respect to its commercial lending has
been to provide asset-based financing to emerging companies who wish to make a
public offering of securities within the near future and are seeking
additional financing prior to their offering with all or a portion of the
financing being repaid from the proceeds of the public offering. These
companies often have adequate collateral but do not meet the overall credit
standards typically required by commercial banks. As well, banks generally
reduced lending to small companies as a result of legislation passed by
Congress in 1991 which substantially increased the scope and cost of
bank/savings and loan regulation.
The Company has made both revolving credit and term loans which are generally
collateralized by accounts receivable, inventory, plant and equipment,
commercial real estate, and other tangible assets. The Company has generally
sought collateral coverage of 118% for accounts receivable; 200% for
inventory; and 154% of liquidation value for property and equipment,
commercial real estate, and other tangible assets. These represent advance
rates of 85%, 50% and 65%, respectively. The Company does not generally enter
into joint relationships with, actively participate in the operations of, or
establish any long-term equity interests in, its borrowers, although it may do
so in the future to work out certain non-performing loans.
At June 30, 1996, the Company's loan portfolio consisted of finance
receivables of $19.3 million which were subject to an allowance for credit
losses of $7.2 million, with no unfunded loan commitments. At such date, the
portfolio was comprised of loans to nine borrowers, with the largest principal
amount outstanding to any single borrower being $4.2 million and the
<PAGE> 5
average principal amount outstanding per borrower being $2.1 million. The
loans are due over periods of one to three years. The loan portfolio consists
of a diversity of borrowers (both in terms of industry and geographical
location) and types of collateral, with the largest industry concentrations at
June 30, 1996 being energy (two borrowers totaling 39.4%), environmental
clean-up (two borrowers totaling 30.4%), and venture capital (one borrower
totaling 12.4%). No other industry classification represents more than 10.0%
of finance receivables.
For the year ended June 30, 1996, approximately 63.9% of the Company's
revenues were from gains on investments and approximately 36.1% were from
interest income and loan commitment fees charged to its borrowers. The
majority of the investment gains arose as a result of the sale of shares which
were converted from a loan to a borrower or were acquired from the exercise of
warrants received from the borrower. At June 30, 1996, the Company held
warrants to acquire approximately 6.6 million shares of common stock of 17
current and former borrowers. However, all of the warrants relating to
publicly traded companies have exercise prices in excess of their respective
closing share prices as at June 30, 1996. Of the foregoing warrants,
approximately 4.0 million relate to nine borrowers who have filed for
bankruptcy protection or have effectively ceased to operate.
The Company has recently been de-emphasizing its asset-based commercial
lending as it focuses on administering and realizing its existing loan
portfolio and expanding its merchant banking activities. The Company intends
to seek controlling interests in businesses or operating companies as
opportunities arise. The Company has not acquired any such interest to date
and has not identified any opportunities as at the date hereof. The Company
anticipates that substantial capital may be required to further its merchant
banking activities, and anticipates that such capital will be provided from
cash on hand, through the sale or exchange of assets, or through debt or
equity financing. No assurance can be given that any necessary capital will
be available when required.
Although the Company has currently de-emphasized making new asset-based loans,
it continues to receive numerous unsolicited requests for funding from
potential borrowers. As well, the Company's contacts with members of the
investment community, commercial banks, lawyers, certified public accountants,
consultants and other financial service companies result in numerous
opportunities to identify potential borrowers. As a result, the Company's
board of directors maintains a Loan Committee to evaluate loan requests from
prospective borrowers and to recommend proposed loans to the full board of
directors. The Company's credit investigation normally involves analysis of
the prospective borrower's business, financial statements, cash flow,
collateral, and certain historical data. Audits of information and
operational data and independent appraisals may also be performed. As a
general policy, the Company does not consider loan applications from real
estate developers, leverage buyout companies, companies reorganizing under
Chapter 11 of the U.S. Bankruptcy Code, or developmental stage companies.
<PAGE> 6
Competition
- -----------
The Company competes against brokerage firms, investment bankers, merchant
banks and other investment managers for appropriate investments. Such
business is highly competitive and is subject to fluctuations based upon many
factors over which the Company has no control, such as the condition of public
markets, interest rates and the state of capital markets. Many of the
Company's competitors are national or international companies with far greater
resources, capital and access to information than the Company. As a result,
the Company may become involved in transactions with more risk than if it had
greater resources.
While the Company has nominally competed with commercial banks, leasing
companies and asset-based lenders with respect to its asset-based lending
activities, its primary competition has been venture capital firms who also
invest in emerging growth companies. The Company believes the terms it offers
its borrowers have in many cases been more favorable to the borrower than
those offered by venture capital firms. As well, the Company believes its
ability to process loans in a relatively short period of time with
substantially less paperwork than required for U.S. Small Business
Administration guaranteed loans has enabled it to compete effectively with
commercial banks in such market.
As at June 30, 1996, the Company employed two people.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's office is located in Vancouver, British Columbia, Canada, and is
leased.
ITEM 3. 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 District
of California. The lawsuit is a putative class action brought under the
federal securities laws. The lawsuit alleges that Conversion Industries Inc.
("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 of all claims without an
admission of liability, which was subsequently reopened. In May 1996, the
Company entered into a memorandum of understanding with respect to an amended
settlement of the claims without an admission of liability. Pursuant to such
memorandum, the Company will pay $650,000 of which up to
<PAGE> 7
$400,000 may be paid in stock that is subject to a price protection adjustment
as of the date of distribution. Alternatively, the Company may, at its
discretion, elect to pay the entire settlement amount in cash, in which case,
if the cash is paid within six months of entering into an amended settlement
agreement, the settlement amount will be reduced to $590,000, or $610,000 if
paid within the subsequent three month period. The settlement is subject to
Court approval. The Company has accrued $600,000 for this settlement.
In January 1996, the Company initiated proceedings against Beta Well Service
Inc. ("Beta") and its chairman, a guarantor, with respect to outstanding
principal and interest on a loan in the amount of approximately $3 million.
Beta responded by alleging damages from the Company's refusal to fund, and the
subsequent withdrawal of, the remaining $7.0 million unfunded loan commitment.
The Company also initiated proceedings against Beta and its chairman with
respect to a proxy dispute involving Beta's annual meeting in June 1996. In
September 1996, the Company and Beta reached a settlement with respect to all
outstanding matters between the parties. See Item 6. - "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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information. In August 1995, the Company's common stock was
approved for quotation on the NASDAQ OTC Bulletin Board under the listing
symbol "CVDF", and the Company's 15 Year Variable Rate Bonds (the "Bonds")
became listed in the National Quotation Bureau Yellow Sheets. Certain dealers
are currently making a market for the Bonds, but may discontinue such market
making activities at any time without notice.
The Company's common stock and Bonds were, until June 27, 1995, traded on the
American Stock Exchange ("AMEX"). Thereafter, primarily as a result of the
Company's continuing losses, the AMEX maintained a trading halt in the
Company's securities until the Company voluntarily delisted in October 1995.
<PAGE> 8
The following table sets forth the quarterly high and low closing prices per
share of the Company's common stock for the years ended June 30, 1995 and
1996, and the period ending September 18, 1996:
<TABLE>
<CAPTION>
Fiscal Quarter Ended High Low
-------------------- ---- ---
<S> <C> <C>
1994
----
September 30 $2.19 $1.13
December 31 $2.75 $0.88
1995
----
March 31 $2.19 $1.63
June 30 $2.44 $1.00
September 30 $1.67 $1.00
December 31 $1.52 $1.25
1996
----
March 31 $1.56 $1.38
June 30 $1.56 $1.31
Period Ending September 18 $1.44 $1.13
</TABLE>
Since August 1995, when the Company's common stock was approved for quotation
on the NASDAQ OTC Bulletin Board, through September 18, 1996, the shares have
traded with a high of $1.67 and a low of $1.00.
(b) Shareholders. As of September 18, 1996, there were approximately 39
holders of record of the Company's common stock.
(c) Dividends. The Company has not paid any dividends on its common stock
and the directors do not contemplate payment of such dividends. The indenture
governing the Company's Bonds (the "Bond Indenture") prohibits the payment of
dividends under certain circumstances, including a default in the payment of
principal or interest when due and if, after paying the dividend, the
Company's ratio of liabilities to tangible net worth shall be greater than
15:1.
<PAGE> 9
ITEM 6. 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 the Company for the year ended June 30, 1996 should be read
in conjunction with the consolidated financial statements and related notes
included elsewhere herein.
Results of Operations for the Year Ended June 30, 1996 Compared to the Year
Ended June 30, 1995
- ---------------------------------------------------------------------------
Revenues for the year ended June 30, 1996 increased to $7.1 million from $5.4
million in the comparative period of 1995, primarily as the result of an
increase in gains on investments to $4.5 million in fiscal 1996, from $80,000
in fiscal 1995. The Company recognized $57,000 in unrealized holding losses
and a gain of $4.6 million on the sale of investments for the year ended June
30, 1996. The majority of the gain arose as a result of the sale of shares
which were converted from a loan to a borrower or were acquired from the
exercise of warrants received from a borrower. During the year ended June 30,
1995, the Company recognized $80,000 in unrecognized holding gains. Interest
and loan fee income decreased to $2.6 million for the year ended June 30, 1996
from $5.3 million for the comparative period of 1995, primarily due to a
reduction in the dollar amount of outstanding performing loans. The Company's
loans generally earn interest at the prime rate charged by a major U.S. bank
(the "Bank") plus 2% to 7%. The Bank's prime rate decreased to 8.25% from
9.00% during the year ended June 30, 1996, compared to an increase to 9.00%
from 7.25% during the comparative period of 1995. The weighted daily average
prime rate increased to 8.52% in fiscal 1996 from 8.36% in fiscal 1995.
Costs and expenses for the year ended June 30, 1996 decreased to $5.4 million
from $23.0 million in the comparative period of 1995, primarily as a result of
a recovery of prior years' provisions for credit losses of $1.4 million in
fiscal 1996, compared to a provision for credit losses of $16.7 million in
fiscal 1995. The provision for credit losses for the year ended June 30, 1995
primarily reflected a significant deterioration of the Company's loan
portfolio during the year.
Interest expense decreased to $3.9 million for the year ended June 30, 1996
from $4.7 million for the comparative period of 1995, primarily as a result of
a lower minimum interest rate accrued on the Bonds. For the year ended June
30, 1996, interest was accrued at the rate of 9.00% per annum for the six
months ended December 31, 1995 and 8.50% per annum for the six months ended
June 30, 1996. During the comparative period of 1995, interest expense was
accrued at the rate of 12.00% per annum through December 31, 1994 and 9.25%
per annum thereafter through June 30, 1995.
General and administrative expenses were $2.9 million for the year ended June
30, 1996, compared to $1.5 million for the year ended June 30, 1995, primarily
as the result of higher legal fees and a provision of $600,000 for settlement
costs relating to a class action involving, among others, the Company. See
"Item 3. Legal Proceedings".
<PAGE> 10
The Company reported operating income of $1.7 million in the current period
compared to an operating loss of $17.6 million for the comparative period of
1995, primarily as the result of the recovery of prior years' provisions for
credit losses and the increase in gains on investments.
No income tax provision was recognized for the year ended June 30, 1996,
except for the payment of a minimum tax of $1,000. The provision for income
taxes on the current period's income was eliminated by the charge-off with
respect to the finance receivables. The Company has deferred tax benefits
with respect to net operating loss carryforwards which have not been
recognized as there is no assurance that they will be realized. In the
comparative period of 1995, the Company recognized an income tax benefit of
$30,000.
The Company repurchased $0.2 million in principal amount of the Bonds during
the current period, recognizing $0.1 million of extraordinary gains on the
early extinguishment of debt. During the year ended June 30, 1995, the
Company repurchased $1.0 million in principal amount of the Bonds, which
resulted in the recognition of $0.5 million of income as a result thereof.
For the year ended June 30, 1996, the Company reported net income of $1.8
million, compared to a net loss of $16.8 million after recognizing the
cumulative effect of a change in accounting principle of $0.2 million in the
comparative period of 1995. The increase in net income in the current period
was primarily attributable to (i) a recovery of prior years' provisions for
credit losses of $1.4 million, and (ii) gains on investments totaling $4.5
million. Such higher income was partially offset by higher general and
administrative expenses incurred during the current period.
Liquidity and Capital Resources
- -------------------------------
The Company's cash and cash equivalents at June 30, 1996, were $14.5 million,
which represents an increase of $2.3 million from June 30, 1995.
Net cash used by operations for the year ended June 30, 1996 was $11.3
million, compared to net cash used by operations of $1.8 million for the
comparative period of 1995, primarily as the result of: (i) the purchase of
investment grade bonds; (ii) significantly higher legal fees paid during the
current period; and (iii) a decrease in interest income collected during the
current period, as compared to the comparative period of 1995, as a result of
the reduced amount of performing loans outstanding. The increase in cash used
by operations during the current period was partially offset by a reduction in
the amount of the interest payments 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.
Cash provided by investing activities was $7.8 million during the current
period as compared to cash used by investing activities of $7.0 million during
the comparative period of 1995. Lending activities during the year ended June
30, 1996 decreased significantly as compared to the fiscal
<PAGE> 11
year ended 1995, when the Company was still building its loan portfolio. In
June 1996, the Company purchased $6 million of cumulative voting preferred
stock in the capital of Logan International Corp.("Logan"), a real estate
company located in the Pacific Northwest of the U.S.A. Certain directors and
senior officers of the Company are also directors and senior officers of
Logan.
Cash provided by financing activities for the year ended June 30, 1996 was
$5.9 million, which consisted of proceeds of $6.0 million received from the
issuance of three million variable voting cumulative preferred shares in the
capital of the Company to Arbatax International Inc. ("Arbatax"), and the
repurchase of Bonds of $0.1 million. Arbatax indirectly owns approximately
34.6% of the Company's common shares. During the comparative period of 1995,
financing activities provided cash of $0.5 million. As of June 30, 1996, the
Company had repurchased 1,190,361 shares of its common stock and $3.0 million
in principal amount of the Bonds at a cost of $2.2 million and $2.0 million
(including $79,000 in prepaid interest), respectively, under a $4.5 million
discretionary repurchase program established in April 1994 (the "April
Repurchase Program"). During the last quarter of fiscal 1996, the board of
directors of the Company authorized the Company, at its discretion, to spend
up to an additional $10 million to repurchase Bonds. The Company has not
repurchased any shares of its common stock since June 30, 1995. For the year
ended June 30, 1995, the Company expended $1.0 million to repurchase Bonds and
$0.1 million to repurchase shares under the April Repurchase Program. In
addition, during such period, the Company issued 715,000 shares of treasury
stock to a purchaser and 25,000 of common stock upon the exercise of stock
options for total proceeds of $1.6 million.
The Company did not make its semi-annual interest payments on the Bonds due
July 25, 1996 and January 25, 1996 until August 22, 1996 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. As at the date hereof, no defaults
exist under the Bonds. The next regularly scheduled interest payment date is
January 25, 1997. The total principal outstanding on the Bonds at June 30,
1996 was $45.0 million, of which $3.0 million was repurchased and held by the
Company in treasury.
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. At June 30, 1996, the Company had shareholders' equity of $3.6 million
and was in compliance with the tangible net worth requirement of $3.0 million,
primarily as a result of the issuance of $6.0 million of variable voting
cumulative preferred stock. At June 30, 1995, the Company had a shareholders'
deficit of $4.2 million and failed to meet the minimum tangible net worth of
$3.0 million required at such date. The Company did not receive a notice of
the event of default from the trustee during the time in which the Company
failed to satisfy the ratio requirement.
<PAGE> 12
The Bond Indenture requires a 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 Conversion or its affiliates) of 35.0% or more of the combined voting
power of the then outstanding securities of the Company. Based upon filings
made with the Securities and Exchange Commission, the Company is aware that
Gibralt Holdings Ltd. ("Gibralt") and Arbatax own approximately 15.2% and
34.6%, respectively, of the Company's outstanding common stock. Arbatax also
owns all of the Company's outstanding variable voting cumulative preferred
stock which limit the votes attached thereto so that such votes do not put the
holder over the 35% threshold, except in certain situations. The Company has
made Gibralt and Arbatax aware of the Bond Indenture provision concerning a
change in control as described above.
For the years ended June 30, 1996 and 1995, the Company used $5.2 million and
$1.8 million, respectively, in operating activities, before any activities in
trading securities. As at June 30, 1996, the Company had $14.5 million in
cash and cash equivalents, and $13.3 million in trading securities, most of
which were highly liquid investment grade bonds. There was one new loan
approved and 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 June 30, 1996 aggregated $19.3 million in
finance receivables (principal plus interest and reimbursable costs less
unamortized commitment fees) due from nine borrowers, compared to an aggregate
of $40.3 million in finance receivables due from 17 borrowers at June 30,
1995.
Non-performing Loans at June 30, 1996
At June 30, 1996, loans to five borrowers, who had finance receivables
totaling $14.6 million, representing 75.4% of the outstanding portfolio, had
been classified as non-performing. 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).
<PAGE> 13
The following table compares the finance receivables of the non-performing
loans as at June 30, 1996 with the finance receivables of such loans as at
June 30, 1995:
<TABLE>
<CAPTION>
Outstanding Finance Receivables
-------------------------------
June 30, 1996 June 30, 1995
------------- -------------
(in thousands)
<S> <C> <C>
Non-performing Loans
- --------------------
Clean-Up Technology, Inc. and subsidiaries $ 2,946 $ 3,652
Conversion Industries Inc.(1) 2,405 2,331
Enviropur Waste Refining and Technology, Inc. 4,219 4,158
Heartland, Inc. 2,075 2,056
PDG Environmental, Inc. 2,927 3,140
--------- ---------
$ 14,572 $ 15,337
========= =========
</TABLE>
- ----------------------------------------
Notes:
(1) Subsequently settled in September 1996. See "Prior Connection with
Conversion Industries Inc."
As at June 30, 1996, four of these borrowers, who had non-performing finance
receivables totaling $8.8 million, representing 45.6% of the outstanding
portfolio, had filed voluntary petitions for bankruptcy protection. The
Company also had additional non-performing finance receivables totaling $2.8
million, 14.5% of the Company's portfolio, due 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.
In fiscal 1996, the Company designated the loan to PDG Environmental, Inc.
("PDGE") in the principal amount of $2.9 million as non-performing due to non-
payment of interest. In September 1996, the Company entered into an agreement
with PDGE which provides that PDGE will transfer to the Company, in partial
settlement of the loan, subject to certain conditions, PDGE's 60% interest in
PDG Remediation Inc. ("PDGR"). PDGR is an environmental remediation company
listed on the NASDAQ SmallCap Market.
Loans Previously Designated as Non-performing
In November 1995, the Company's loan in the amount of $3.0 million to Beta was
newly designated as non-performing after the Company declared events of
default for failure to comply with certain loan covenants 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 disputed the Company's actions
and various arbitration and litigation proceedings were initiated. The
Company also solicited proxies
<PAGE> 14
to elect an alternative board of directors of Beta. In September 1996, the
Company and Beta entered into a settlement agreement whereby: (i) all
litigation proceedings and arbitration proceedings between the parties were
settled; (ii) the Company's $3 million loan to Beta was reaffirmed as a term
loan with the maturity being extended to February 1999, the interest rate
accruing thereon being reduced by 5% effective November 1, 1995, and such loan
being collateralized; (iii) the share warrants granted to the Company to
purchase one million common shares of Beta at $10.125 per share were amended
to constitute warrants to purchase 200,000 shares of Beta at $2.00 per share;
(iv) Beta agreed to reimburse the Company, in cash or by the issuance of
common shares, for its third party expenses with respect to the dispute over
the loan agreement and 75% of its third party expenses arising out of the
proxy dispute; and (v) the Company's president was appointed as a director of
Beta. As a result of the settlement, the loan to Beta was brought into good
standing and has not been designated as non-performing as at June 30, 1996.
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 the time of the Company's first advance to Beta
in February 1994, 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).
In January 1996, the Company reached an agreement with the management of
American Blood Institute ("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. This loan, which had
previously been designated as non-performing at June 30, 1995, has been
redesignated as performing.
The Company's loan to Statordyne Corporation in the principal amount of $1.0
million, which was designated as non-performing at June 30, 1995, was repaid
in February 1996.
During the year ended June 30, 1996, loans to four borrowers which were
previously designated as non-performing at June 30, 1995, with finance
receivables totaling $8.4 million, 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
June 30, 1995, and the total ultimate charge-off during the year ended June
30, 1996 in connection therewith was $5.6 million.
<PAGE> 15
Allowance for Credit Losses
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, interest and
reimbursable expenses 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 regards to the allowance for
credit losses during the years ended June 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------
1996 1995
----------------------------- -------
Specific General Total Total
Reserve Reserve Reserve Reserve
-------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Changes in Allowance
- --------------------
Balance, beginning of period $ 13,370 $ 1,346 $14,716 $ 1,833
Provision (recovery) for the period (1,228) (168) (1,396) 16,732
Charge-offs for the period (5,440) (678) (6,118) (3,849)
-------- ------- ------- -------
Balance, end of period $ 6,702 $ 500 $ 7,202 $14,716
======== ======= ======= =======
</TABLE>
On July 1, 1995, the Company adopted the Financial Accounting Standards Board
Statement ("FASB") No. 114, "Accounting by Creditors for Impairment of a Loan."
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.
<PAGE> 16
The following tables summarize the Company's specific reserves for credit
losses prepared in accordance with FASB No. 114 as at June 30, 1996 and July
1, 1995:
<TABLE>
<CAPTION>
JUNE 30, 1996
(dollars in thousands)
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 $ 2,405 $ 865 $ 125 $ 737 $ 1,668
Continuing to operate 2 7,146 6,024 300 4,494 2,652
Future cash flows:
Bankruptcy or
ceased to operate 2 5,021 5,213 375 2,639 2,382
-- -------- ------- ------ ------- -------
Subtotal 5 14,572 $12,102 $ 800 $ 7,870 $ 6,702
======= ====== =======
UNIMPAIRED LOANS 4 4,767 500(4)
-- -------- -------
Grand total 9 $ 19,339 $ 7,202
== ======== =======
</TABLE>
<TABLE>
<CAPTION>
JULY 1, 1995
(dollars in thousands)
Specific
reseveres
# 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 11,409 1,346(4)
-- -------- --------
Grand total 17 $ 40,297 $ 14,716
== ======== ========
</TABLE>
<PAGE> 17
- ----------------------------------------
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 1.5 years
for loans that are collateral dependant and the borrower is continuing to
operate and 4 years for loans which may generate future cash flows and the
borrower is bankrupt or has ceased to operate. In September 1996, the Company
settled its loan that was collateral dependant with the borrower who is
bankrupt.
(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.
Prior Connection with Conversion Industries Inc.
- ------------------------------------------------
In June 1993, the Company was formed as a wholly-owned subsidiary of
Conversion. Prior to the formation of the Company, Conversion performed
lending activities as a result of the inability of companies in which
Conversion had made equity investments to obtain debt financing from
traditional sources. As these lending activities were never part of
Conversion's intended business, Conversion formed the Company for the purpose
of providing collateralized asset-based loans to emerging growth companies,
which allowed Conversion to concentrate its activities on providing equity
capital to such companies. At the time of the Company's formation, it was
anticipated that approximately 30% to 50% of the Company's portfolio would be
in loans to companies in which Conversion had an equity interest.
Upon completion of the Company's initial public offering in August 1993,
Conversion's ownership interest in the Company was reduced to approximately
47%. As a result of subsequent open market purchases, Conversion increased
its ownership position in the Company to 52% by April 1994. During fiscal
1994, the Company repurchased 1,077,361 shares of its common stock from
Conversion at a cash cost of $2.0 million reducing Conversion's ownership
interest to approximately 34% as of June 30, 1994. The shares were
repurchased as part of the April Repurchase Program and, in connection with
the transaction, Conversion pledged another 922,639 of its remaining 1,070,039
shares of the Company's common stock as additional collateral for $8.1 million
(which was reduced to approximately $8.0 million in July 1994 when one of the
underlying loans was paid in full) in guarantees made by Conversion in favour
of the Company with regard to loans to various borrowers. The terms of the
repurchase from Conversion were approved by a special committee of independent
directors of the Company following receipt of
<PAGE> 18
an opinion issued by an independent investment banking firm, Wedbush Morgan
Securities, that the transaction was fair from a financial point of view to
the shareholders of the Company other than Conversion.
On October 23, 1994, the Company agreed to provide Conversion with up to $3.1
million in revolving credit to be used to replace approximately $2.2 million
in outstanding broker and bank loans of Conversion and for other corporate
purposes. The loan accrued interest at the Bank's prime rate plus 7%, was due
on November 1, 1997, and was secured by all of the assets of Conversion. As
part of the loan transaction: (i) the remaining $8.0 million in guarantees
made by Conversion were reduced by $2.2 million; (ii) the $5.8 million balance
of Conversion's guarantees were secured by all of the assets of Conversion;
(iii) the Company agreed not to take any action against Conversion to enforce
the guarantees until May 1, 1995; (iv) thereafter, provided Conversion was in
compliance with all provisions of the loan agreement, the Company agreed not
to take any action to enforce the guarantees until the earlier of May 1, 1996
or upon the obtaining of a final judgement against any defaulting borrower (in
which case, only the guarantee relating to that borrower may be immediately
enforced); (v) the Company acquired all of the 1,070,039 shares of its common
stock owned by Conversion, including the shares previously pledged to secure
the guarantees; and (vi) Conversion agreed not to acquire, either directly or
indirectly, any of the Company's common stock or debt securities (including
the Bonds) until November 1, 1997.
The loan transaction with Conversion was reviewed and recommended by a special
committee of the Company's independent directors which was constituted on
October 13, 1994 for the purpose of evaluating the Company's relationship to
Conversion. Since December 1994, the Company has had no officers and/or
directors who were also concurrently officers and/or directors of Conversion.
On May 8, 1995, Conversion defaulted under its loan agreement with the Company
by failing to make an interest payment to the Company of $177,000 due May 1,
1995, during the grace period provided under the loan agreement. The Company
demanded immediate repayment of the entire balance and performance with regard
to $4.9 million of the remaining loan guarantees. Conversion subsequently
filed a voluntary petition for bankruptcy protection under Chapter 11 on May
19, 1995. As of June 30, 1995 and 1996, Conversion owed the Company $2.3
million and $2.3 million, respectively, under the loan agreement in addition
to performance under its loan guarantees.
In September 1996, the Company and Conversion reached a settlement with
respect to all outstanding matters between the parties. Under the terms of
the settlement, all litigation and claims between the parties have been
dismissed and the Company is to receive an assignment of certain promissory
notes, stock purchase warrants and rights relating to a loan and 747,389
shares of Beta.
<PAGE> 19
The Company has also been named in an amended complaint filed on April 21,
1995 in connection with a class action originally filed on December 16, 1994
in the United States District Court, Los Angeles, California, against
Conversion, John P. McGrain, Donald B. Clark, Randall M. Gates, David Rapaport
and Coopers & Lybrand L.L.P. See "Item 3. Legal Proceedings".
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company required with respect to
this Item 8, and as listed in Item 13 of this report, are included in this
report commencing on page 23.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of the end of the Registrant's fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of the end of the Registrant's fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of the end of the Registrant's fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of the end of the Registrant's fiscal year.
<PAGE> 20
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) Index to Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Shareholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
(2) Exhibits
3.1 Certificate of Incorporation dated June 1, 1993.
Incorporated by reference from Form S-1 filed June 7, 1993.
3.2 Certificate of Designations dated July 19, 1996.
3.3 Bylaws. Incorporated by reference from Form S-1 filed
June 7, 1993.
3.4 Amendment to the Bylaws adopted as of July 20, 1993.
Incorporated by reference from Amendment No. 1 to
Form S-1 filed July 26, 1993.
4.1 Form of Indenture between CVD Financial Corporation
and Harris Trust Company of New York as Trustee.
Incorporated by reference from Form S-1 dated filed
June 7, 1993.
4.2 Form of Common Stock Share Certificate. Incorporated by
reference from Amendment No. 2 to Form S-1 filed August
16, 1993.
4.3 Form of Bond. Incorporated by reference from Amendment
No. 2 to Form S-1 dated filed August 16, 1993.
10.1 Employment Agreement with L.P. "Roy" McCann. Incorporated
by reference from Amendment No. 2 to Form S-1 filed August
16, 1993.
10.2 1993 Stock Option Plan. Incorporated by reference from
Form S-1 filed June 7, 1993.
10.3 Profit Sharing Plan. Incorporated by reference from
Amendment No. 1 to Form S-1 filed July 26, 1993.
10.4 Stock Repurchase Agreement between CVD Financial
Corporation and Conversion Industries Inc. dated
April 18, 1994. Incorporated by reference to Form
8-K dated April 28, 1994.
10.5 Stock Pledge Agreement between CVD Financial Corporation
and Conversion Industries Inc. dated April 18, 1994.
Incorporated by reference to Form 8-K dated April 28, 1994.
10.6* $1,865,367.89 Conversion Industries Inc. Guaranty dated
July 30, 1993 regarding loan to Bratcher Industries, Inc.
made by CVD Financial Corporation.
<PAGE> 21
10.7* $500,000 Conversion Industries Inc. Guaranty dated July 30,
1993 regarding $1,000,000 loan to Joseph Land Group, Inc.
made by CVD Financial Corporation.
10.8* $2,000,000 Conversion Industries Inc. Guaranty dated
August 5, 1993 regarding $2,000,000 loan to North American
Recycling Systems, Inc. made by CVD Financial Corporation.
10.9* $900,000 Conversion Industries Inc. Guaranty dated
September 27, 1993 regarding $2,500,000 loan to Metalclad
Corporation made by CVD Financial Corporation.
10.10* $1,000,000 Conversion Industries Inc. Guaranty dated
October 1, 1993 regarding $1,000,000 loan to American
Blood Institute, Inc. made by CVD Financial Corporation.
10.11* $1,500,000 Conversion Industries Inc. Guaranty dated
December 27, 1993 regarding $1,5000,000 loan to Joseph
Land Group, Inc. made by CVD Financial Corporation.
10.12* $75,000 Conversion Industries Inc. Guaranty dated
March 14, 1994 regarding $75,000 loan to Onsite
Energy Corporation made by CVD Financial Corporation.
10.13* $260,000 Conversion Industries Inc. Guaranty dated
April 5, 1994 regarding $860,000 loan to North American
Recycling Systems, Inc. made by CVD Financial Corporation.
10.14 Loan Agreement dated October 23, 1994, between CVD
Financial Corporation and Conversion Industries Inc.
Incorporated by reference to Form 8-K dated October 28,
1994.
10.15 First Amendment to the Conversion Loan Agreement
between CVD Financial Corporation and Conversion
Industries Inc. Incorporated by reference to June 30,
1995 Form 10-KSB.
10.16 Stock Purchase Agreement between CVD Financial Corporation
and Mercer International Inc. dated March 22, 1995.
Incorporated by reference to Form 8-K dated March 22, 1995.
10.17 Subscription Agreement between CVD Financial Corporation
and Logan International Corp. dated for reference June 20,
1996. Incorporated by reference to Form 8-K dated June 27,
1996.
10.18 Subscription Agreement between CVD Financial Corporation
and Arbatax International Inc. dated for reference June 20,
1996. Incorporated by reference to Form 8-K dated June 27,
1996.
21. List of subsidiaries of Registrant.
27. Article 5 - Financial Data Schedule for year ended June 30,
1996 - Form 10-KSB.
- ----------------------------
*Incorporated by reference to June 30, 1994 Form 10-KSB.
<PAGE> 22
(b) Reports on Form 8-K
A report on Form 8-K dated June 27, 1996 was filed reporting under:
Item 2. Acquisition or Disposition of Assets.
Item 5. Other Events.
<PAGE> 23
- ------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- ------------------------------------------------------------------------------
To The Board of Directors and Shareholders
CVD Financial Corporation
We have audited the Consolidated Balance Sheets of CVD Financial Corporation
(the "Company") as of 30 June 1996 and 1995 and the related Consolidated
Statements of Operations, Shareholders' Equity (Deficit) and Cash Flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company at 30 June 1996 and 1995 and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles in the United States.
/s/ BDO Dunwoody
Vancouver, Canada
13 September 1996 CHARTERED ACCOUNTANTS
(Internationally BDO Binder)
<PAGE> 24
CVD FINANCIAL CORPORATION
Consolidated Balance Sheets
(Dollars Stated in Thousands)
<TABLE>
<CAPTION>
30 June 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $14,478 $12,145
FINANCE RECEIVABLES, net 12,137 25,581
OTHER RECEIVABLES 371 -
INVESTMENTS 19,283 453
DEFERRED DEBT ISSUANCE COSTS, net
of accumulated amortization of
$567 (1995 - $376) 2,037 2,242
OTHER ASSETS 4 69
--------- ---------
$48,310 $40,490
========= =========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
LIABILITIES
Bonds payable, net of principal amount of
bonds held in treasury of $2,953
(1995 - $2,719) $42,047 $42,281
Interest payable 1,787 1,955
Accounts payable and accrued liabilities 835 404
--------- ---------
44,669 44,640
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.01 par value,
5,000,000 shares authorized,
3,000,000 (1995 - Nil) shares
issued and outstanding 30 -
Common stock, $0.01 par value,
10,000,000 shares authorized,
4,264,000 shares issued and outstanding 43 43
Additional paid-in capital 23,737 17,767
Accumulated deficit (17,113) (18,904)
--------- ---------
6,697 (1,094)
Less: 1,545,400 common shares held as
treasury stock (3,056) (3,056)
--------- ---------
Total shareholders' equity (deficit) 3,641 (4,150)
--------- ---------
$48,310 $40,490
========= =========
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
<PAGE> 25
CVD FINANCIAL CORPORATION
Consolidated Statements of Operations
(Dollars Stated in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Years Ended 30 June 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
REVENUE
Interest $ 2,232 $ 5,165
Loan fees and other 319 174
Gains on investments, net 4,516 80
--------- ---------
7,067 5,419
--------- ---------
COSTS AND EXPENSES
Interest 3,893 4,740
Provision for (recovery of) credit losses (1,396) 16,732
General and administrative 2,891 1,539
--------- ---------
5,388 23,011
--------- ---------
INCOME (LOSS) FROM OPERATIONS 1,679 (17,592)
Income taxes (recovery) 1 (30)
--------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN
AND CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 1,678 (17,562)
EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT
OF DEBT, net of $0 provision for income
taxes for both 1996 and 1995 113 527
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE - 190
--------- ---------
NET INCOME (LOSS) FOR THE YEAR $ 1,791 $(16,845)
========= =========
EARNINGS (LOSS) PER SHARE
Earnings (loss) before extraordinary gain
and a change in accounting principle $ 0.62 $ (6.95)
Extraordinary gain 0.04 0.21
Change in accounting principle - 0.07
--------- ---------
$ 0.66 $ (6.67)
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 2,718,600 2,526,486
=========== ===========
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
<PAGE>
<PAGE> 26
CVD FINANCIAL CORPORATION
Consolidated Statements of Shareholders' Equity (Deficit)
(Dollars Stated in Thousands)
<TABLE>
<CAPTION>
For the Years Ended 30 June 1996 and 1995
- ------------------------------------------------------------------------------------------
Total
Additional Shareholders'
Preferred Stock Common Stock Paid-In Accumulated Treasury Equity
Shares Amount Shares Amount Capital Deficit Stock (Deficit)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, 30 June 1994 - $ - 4,239,000 $42 $15,309 $ (2,059) $(2,073) $11,219
Capital contribution - - - - 2,250 - (2,250) -
Exercise of Stock Options - - 25,000 1 44 - - 45
Purchases of Treasury Stock - - - - - - (146) (146)
Sale of Treasury Stock - - - - 164 - 1,413 1,577
Net loss for the year - - - - - (16,845) - (16,845)
--------- --- --------- --- ------- --------- -------- -------
BALANCE, 30 June 1995 - - 4,264,000 43 17,767 (18,904) (3,056) (4,150)
Issued for cash 3,000,000 30 - - 5,970 - - 6,000
Net income for the year - - - - - 1,791 - 1,791
--------- --- --------- --- ------- --------- -------- -------
BALANCE, 30 June 1996 3,000,000 $30 4,264,000 $43 $23,737 $(17,113) $(3,056) $ 3,641
========= === ========= === ======= ========= ======== =======
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
<PAGE> 27
CVD FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Dollars Stated in Thousands)
<TABLE>
<CAPTION>
For the Years Ended 30 June 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED (USED) BY:
OPERATING ACTIVITIES
Operations
Net income (loss) for the year $ 1,791 $(16,845)
Items not involving cash and equivalents
Extraordinary gain on early
extinguishment of debt (113) (527)
Cumulative effect of a change in
accounting principle - (190)
Gains on investments, net (4,516) (80)
Provision for (recovery of) credit losses (1,396) 16,732
Amortization of deferred debt issuance costs 205 206
Net change in working capital balances
Interest receivable 136 (556)
Commitment fees (249) (31)
Receivable (1,317) (371)
Interest payable (168) (250)
Accounts payable and accrued liabilities 430 104
Other 65 -
-------- --------
(5,132) (1,808)
Purchase of trading securities (15,235) -
Proceeds from sales of trading securities 9,050 -
-------- --------
(11,317) (1,808)
-------- --------
INVESTING ACTIVITIES
Advances on loans (229) (26,227)
Payments collected on loans 14,000 19,263
Purchase of available-for-sale security (6,000) -
-------- --------
7,771 (6,964)
-------- --------
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 6,000 -
Purchases of treasury bonds payable (121) (1,020)
Purchases of treasury stock - (146)
Proceeds from sale of treasury stock - 1,577
Proceeds from exercise of stock options - 45
-------- --------
5,879 456
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS FOR THE YEAR 2,333 (8,316)
CASH AND CASH EQUIVALENTS, beginning of year 12,145 20,461
-------- --------
CASH AND CASH EQUIVALENTS, end of year $14,478 $12,145
======== ========
CASH PAID DURING THE YEAR FOR:
Interest expense $ 3,853 $ 4,783
Income taxes $ 1 $ 117
======== ========
</TABLE>
The accompanying notes form an integral part of these consolidated financial
statements.
<PAGE> 28
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
1. FORMATION AND DESCRIPTION OF BUSINESS
CVD Financial Corporation (the "Company"), a Delaware corporation, was formed
in June 1993 as a wholly owned subsidiary of Conversion Industries Inc.
("Conversion"). In August 1993, the Company completed an initial public
offering of common stock concurrent with a debenture offering (see Note 11
with regard to Conversion's relationship with the Company). During 1996, the
Company incorporated three wholly-owned subsidiaries.
The Company presently operates in the financial services industry, which is
comprised of investment and merchant banking activities and asset-based
commercial lending. The merchant banking activities are expected to include
the acquisition of controlling interests in businesses or assets which the
Company believes are under-valued. The asset-based commercial lending
primarily involves the administration and realization of an existing loan
portfolio comprised of loans to emerging companies.
- ------------------------------------------------------------------------------
2. BASIS OF PRESENTATION
These consolidated financial statements have been prepared by management in
conformity with generally accepted accounting principles applicable in the
United States of America, and are stated in United States dollars.
As at 30 June 1995, the Company had a negative shareholders' equity, and
failed to meet the minimum consolidated tangible net worth requirement under a
bond indenture (see Note 6), which raised substantial doubt about its ability
to continue as a going concern. However, no adjustments were made to reflect
such uncertainties for the 1995 comparative figures, and the Company did not
receive a notice of the event of default from the trustee of the bonds during
the time in which the Company failed to satisfy the net worth requirement.
As at 30 June 1996, the Company had a positive shareholders' equity, and was
in compliance with all financial requirements under the bond indenture.
While the Company reported net income in 1996 principally as a result of
realizing gains on sales of investments, the Company had an accumulated
deficit of $17.1 million as at 30 June 1996. The Company now focuses on
investment and merchant banking activities while de-emphasizing asset-based
commercial lending. However, there is no assurance that such business
strategies will improve future cash flow.
<PAGE> 29
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES
In preparing these financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the year. Actual results in future periods could be different from those
estimates made in the current year. The following is a summary of the
significant accounting policies of the Company:
(a) Basis of Consolidation
These consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
(b) Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with an original
maturity of three months or less. These are recorded at cost which
approximates market. Additionally, the Company maintains cash balances at
foreign financial institutions in excess of insured limits.
(c) Finance Receivables and Allowance for Credit Losses
Finance receivables, also known as recorded investments in loans, include the
outstanding loan balance (net of any charge-offs), accrued interest,
reimburseable expenses and net of deferred loan fees.
The Company maintains an allowance for credit losses at an amount estimated to
cover potential losses on finance receivables which had experienced an event
of impairment or for which future collection of outstanding principal,
interest and reimbursable expenses 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 reflect the Company's best estimate of the necessary level of the
allowance for credit losses.
<PAGE> 30
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(c) Finance Receivables and Allowance for Credit Losses - Continued
Under the provisions of Financial Accounting Standards Board ("FASB")
Statement No. 114, "Accounting by Creditors for Impairment of a Loan", when a
loan is impaired as defined in the statement, a lender shall measure
impairment at 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 Statement No.
114.
The Company continued to apply FASB Statement No. 5 "Accounting for
Contingencies" to provide an allowance on a pool of unimpaired loans.
(d) Investments
Trading securities are carried at fair market value with unrealized holding
gains and losses included in earnings. The gains and losses are determined on
an average cost basis when the trading securities are sold.
Warrants to acquire common stock of the various borrowers held by the Company
for which a readily determinable fair market value is available and the
Company has an unrestricted right to sell the warrant and/or underlying
securities within one year are included in trading securities.
Unrealized holding gains and losses for available-for-sale securities are
excluded from earnings and reported as a net amount in a separate component of
shareholders' equity until realized.
(e) Deferred Debt Issuance Costs
Debt issuance costs consist of underwriters' fees and expenses and other costs
capitalized in connection with the Company's August 1993 debenture offering.
These costs are being amortized on a straight line basis which approximates
the interest method over the term of the related debt. The amortization is
included in interest expense.
<PAGE> 31
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
3. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
(f) Revenue Recognition
Revenue consists principally of interest income from finance receivables and
temporary investments of cash and cash equivalents, amortization of loan
commitment fees, net of related costs, received in connection with the making
of loans, as well as sales of trading securities. Interest income is
recognized when earned using the interest method. The Company, as a general
policy, suspends the recognition of income on loans which 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). The recognition of
income is generally resumed, and suspended income is recognized as interest
revenues, when the loan becomes contractually current or collection of
suspended amounts is assured. Loan commitment fees, net of related costs, are
deferred and recognized over the term of the loan using the interest method.
For delinquent loans, amortization of the corresponding net loan commitment
fees is suspended and subsequently resumed concurrently with the related
recognition of interest income.
(g) Income Taxes
Certain revenue and expense items, primarily related to the allowance for
credit losses, are accounted for in different time periods for financial
reporting purposes as compared to income tax reporting purposes. Deferred
taxes are recognized using the liability method, and tax rates are applied to
cumulative temporary differences based on when and how they are expected to be
included for income tax reporting purposes. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount which
management believes is more likely than not to be realized.
(h) Earnings (Loss) Per Share
Earnings (loss) per share is computed using the weighted average number of
shares outstanding during the year, after considering options.
<PAGE> 32
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
4. INVESTMENTS 1996 1995
<S> <C> <C>
Trading securities:
Bonds and debentures $10,204 $ -
Equity securities 296 183
Investment funds 2,783 -
Warrants - 270
------- -------
13,283 453
Available-for-sale security (see Note 11) 6,000 -
------- -------
$19,283 $ 453
======= =======
</TABLE>
The Company generally obtains warrants to purchase the common stock of the
various borrowers as an enhancement of its loan yield. The exercise price per
share of the warrants is generally equal to the fair market value of the
underlying common stock on the date the loan commitment is made.
Effective 1 July 1994, the Company implemented FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". This
Statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments
in debt securities. An unrealized gain of $190,000 on trading securities was
recognized as the effect of this change in accounting principle in the 1995
Consolidated Statement of Operations.
For the year ended 30 June 1996, the Company recognized an unrealized holding
gain (loss) of ($57,000) (1995 - $80,000); and realized gains of $4,573,000
(1995 - Nil) on sales of trading securities.
- ------------------------------------------------------------------------------
5. FINANCE RECEIVABLES
The Company engages in the asset-based commercial lending business. Generally,
loans are due over periods of one to five years and are collateralized by
security agreements on various types of equipment, commercial real estate,
borrowers eligible accounts receivable and inventory and other tangible
assets. The loans generally earn interest at a major bank's (the "Bank")
prime rate (8.25 percent at 30 June 1996 and 9 percent at 30 June 1995) plus
two to seven percent. The Bank's weighted daily average prime rate was 8.52
percent and 8.36 percent during the years ended 30 June 1996 and 1995,
respectively.
<PAGE> 33
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
5. FINANCE RECEIVABLES - CONTINUED
Finance receivables consist of the following:
<TABLE>
<CAPTION>
30 June 1996 30 June 1995
---------------------------- -----------------------------
Allowance Allowance
# of Recorded for Credit # of Recorded for Credit
Loans Investments Losses Loans Investments Losses
----- ----------- ---------- ----- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Impaired loans 5 $14,572 $6,702 12 $28,888 $13,370
Unimpaired loans 4 4,767 500 5 11,409 1,346
-- ------- ------ -- ------- -------
9 $19,339 $7,202 17 $40,297 $14,716
== ======= ====== == ======= =======
Net book value $12,137 $25,581
======= =======
</TABLE>
The Company has established allowances for credit losses at 30 June 1996 and
1995 as follows:
<TABLE>
<CAPTION>
--------------1996--------------
Specific General Total 1995
-------- ------- ----- ----
<S> <C> <C> <C> <C>
Balance, beginning of year $13,370 $1,346 $14,716 $ 1,833
Provision (recovery) for
the year (1,228) (168) (1,396) 16,732
Charge-offs for the year (5,440) (678) (6,118) (3,849)
-------- ------- -------- --------
Balance, end of year $ 6,702 $ 500 $ 7,202 $14,716
======== ======= ======== ========
</TABLE>
In the fourth quarter of fiscal year 1995, the allowance was substantially
increased with respect to loss development on certain loans in default.
<PAGE> 34
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
5. FINANCE RECEIVABLES - CONTINUED
<TABLE>
<CAPTION>
Contractual maturities of finance receivables are as follows:
<S> <C>
1997 $12,753
1998 2,127
1999 3,000
-------
17,880
Interest receivable, currently due 817
Reimbursable expenses, currently due 792
Deferred commitment fees, net of related costs (150)
-------
19,339
Less: Allowance for credit losses 7,202
-------
Finance receivables, net $12,137
=======
</TABLE>
The Company does not have sufficient operating history to determine whether
the loan portfolio will generally be repaid or renewed before contractual
maturity dates. The above tabulation, therefore, is not to be regarded as a
forecast of future cash collections.
At 30 June 1996, the Company does not have any unfunded loan commitments (1995
- - $7.7 million).
- ------------------------------------------------------------------------------
6. BONDS PAYABLE
Under an indenture dated 26 August 1993 (the "Master Indenture") the Company
is authorized to issue up to $500 million of unsecured, subordinated variable
rate bonds (the "Bonds"). The Bonds may be issued in series, each
substantially identical in form pari passu in right and having substantially
identical terms except for the date of issuance. The Company may not issue
any subsequent series of Bonds unless no event of default under the Master
Indenture has occurred or has been continuing with respect to any Bond
previously issued within the 12 month period immediately preceding the date
of issuance of such subsequent series, and not less that 75 percent of the net
proceeds received from the issuance of the immediately preceding series of
Bonds have been utilized or formally committed. The net proceeds from the
Bonds may only be used to make or purchase loans constituting part of the
Company's loan portfolio.
<PAGE> 35
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
6. BONDS PAYABLE - CONTINUED
In August 1993, the Company made an initial issuance of Bonds at par in the
aggregate principal amount of $50 million in a public offering concurrent with
the Company's initial public offering of Common Stock. The sale of the Bonds
generated net proceeds of $46.9 million after related debt issuance costs. No
other issuances of Bonds have since occurred.
Interest on the Bonds is paid semi-annually on 25 January and 25 July to
holders of record on the preceding 31 December and 30 June, respectively. The
interest paid for each semi-annual period is the greater of: (i) the Bank's
prime rate as of the first day of the semi-annual period, (ii) the Bank's
weighted daily average prime rate during the semi-annual period, (iii) a rate
specified by the Company prior to the commencement of the semi-annual period,
and, (iv) 80 percent of the "portfolio yield." Portfolio yield is defined as:
(i) the aggregate of interest received from the Company's loan portfolio and
gains less losses, if any, realized from the disposition of equity securities
or warrants to acquire equity securities received in connection with the
making or purchasing of loans; less (ii) the provision for credit losses.
The Company did not make its semi-annual interest payments due on 25 July 1996
and 25 January 1996 until 22 August 1996 and 20 February 1996, respectively.
The delinquent payments 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
Master Indenture.
The Company is required under the Master Indenture to maintain a ratio of
consolidated liabilities to consolidated tangible net worth of not more than
15:1. Tangible net worth is defined in the indenture as the book value of all
assets of the Company as determined in accordance with generally accepted
accounting principles ("GAAP") consistently applied, minus the book value of
all liabilities of the Company determined in accordance with GAAP. At 30 June
1995, the Company had no tangible net worth as defined in the indenture and
failed to meet the minimum tangible net worth requirement of $2,976,000
necessary at such date under the 15:1 ratio requirements by $7,126,000. As a
result of the Company's failure to satisfy the net worth requirement, the
trustee under the Master Indenture, acting on behalf of all of the holders of
the Bonds or at the request of holders of at least 25 percent in principal
amount of outstanding Bonds, is entitled to exercise certain remedies,
including the declaration of a default under the Master Indenture and the
making of a demand that the Bonds be immediately paid in full if the net worth
ratio deficiency is not cured within 90 days after receipt of notice form the
trustee of the default. No event of default was declared.
At 30 June 1996, such minimum tangible net worth requirement was $2,978,000,
and was met by the Company which had a net equity of $3,641,000.
Under terms of the Master Indenture, the net proceeds of the Bonds may be only
used to make or purchase loans constituting part of the Company's loan
portfolio. At 30 June 1996, there were no restricted amounts of cash and
equivalents (1995 - $5,632,000).
<PAGE> 36
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
6. BONDS PAYABLE - CONTINUED
The Bonds mature on 31 July 2008 and are subject to mandatory redemption by
the Company in annual instalments commencing 31 July 2004 through 31 July
2008. The annual instalment amount is equal to 20 percent of the outstanding
principal on 30 June 2004. The Bonds are also subject to mandatory redemption
generally upon the sale or transfer of substantially all of the assets of the
Company or upon any percentage change of control of at least 35 percent of the
combined voting power of the outstanding stock of the Company.
In September 1993, the Board of Directors authorized the repurchase of up to
$5.0 million principal amount of Bonds. The entire $5.0 million of Bonds were
repurchased and cancelled, resulting in an extraordinary gain before income
taxes of approximately $0.7 million.
In April 1994, the Company's Board of Directors authorized a discretionary buy
back program ( the "Repurchase Program") of the Company's Common Stock and
Bonds up to a total cost of $4.5 million. During 1996, $234,000 (1995 - $1.6
million) in aggregate principal amount of Bonds were repurchased resulting in
an extraordinary gain of $113,000 (1995 - $527,000). At 30 June 1996, the
Company had remaining issued and outstanding $45 million principal amount of
Bonds of which approximately $2,953,000 (1995 - $2,719,000) were repurchased
and are held by the Company in treasury.
During the last quarter of fiscal 1996, the board of directors of the Company
authorized the Company, at its discretion, to spend up to an additional $10
million to repurchase Bonds. The Company did not repurchase any Bonds under
this program.
For the semi-annual periods ended 31 December 1994, 30 June 1995, 31 December
1995 and 30 June 1996, interest has been incurred at per annum coupon rates of
12 percent, 9.25 percent, 9.0 percent and 8.5 percent, respectively.
The Bonds had a carrying amount of $42,047,000 and a fair value of $29,433,000
as at 30 June 1996. The fair value is based on the quoted market price.
- ------------------------------------------------------------------------------
7. SHAREHOLDERS' EQUITY
During the year ended 30 June 1995, the Company repurchased 78,400 shares
under the Repurchase Program at a cash cost of $146,000. Subsequent to 30
June 1995, the Company has not repurchased any additional shares.
In June 1996, the Company issued 3,000,000 shares of its Preferred Stock,
Series 1 for $6,000,000 cash. The Preferred Stock, Series 1 pays a cumulative
dividend at 5% per annum on paid-up amount; accrued interest at 8% per annum
on accrued and unpaid dividends; is redeemable by the Company at any time at
the paid-up amount plus 10% premium; and has variable voting rights which
limit the votes thereon so that any holder thereof has less than 35% of total
votes attached to all the outstanding voting shares of the Company, subject to
certain adjustments.
<PAGE> 37
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
The Company has reserved 400,000 shares of Common Stock for future issuance
pursuant to a stock option plan (see Note 8).
In connection with its initial public offering, the Company issued warrants to
its underwriters representing the right to purchase 200,000 shares of the
Company's Common Stock at $4.50 per share. The number of shares and exercise
price are subject to adjustment for certain changes in the Company's capital
structure. The warrants may be exercised until expiry on 16 August 1998.
- ------------------------------------------------------------------------------
8. STOCK OPTION PLAN
In June 1993, the Board of Directors approved the adoption of the Stock Option
Plan. Under the plan, substantially all employees, consultants and non-
employee directors are eligible to receive options to purchase up to an
aggregate of 400,000 shares of the Company's Common Stock at exercise prices
which cannot be less than the fair market value of the shares on the date the
options are granted. The term of each option can be no more than 10 years.
Non-employee directors of the Company are automatically granted options to
purchase 25,000 shares of Common Stock on the date they become a director and
additional options to purchase 3,500 shares of Common Stock are granted upon
the completion of each full year of service and the Annual Meeting of
Shareholders thereafter. Information with respect to options granted under
the plan is as follows:
<TABLE>
<CAPTION>
Exercise
Price Per
Share
Number of (Not in
Shares Thousands)
--------- ----------
<S> <C> <C>
Outstanding, 30 June 1994 205,000 $3.75
Granted 75,000 $1.81 - $1.94
Exercised (25,000) $1.81
Expired (105,000) $1.81 - $3.75
--------- -------------
Outstanding, 30 June 1995 150,000 $1.81 - $3.75
Expired (75,000) $1.81 - $3.75
--------- -------------
Outstanding, 30 June 1996 75,000 $1.81 - $1.88
========= =============
</TABLE>
On 22 July 1994, the Compensation Committee of the Board of Directors reset
the exercise price to $1.8125 per share (the closing market price on 21 July
1994) with regard to outstanding options to acquire 105,000 shares. These
options represented all outstanding options at 21 July 1994 other than those
held by the Company's non-employee directors.
<PAGE> 38
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
8. STOCK OPTION PLAN - CONTINUED
At 30 June 1996, options to purchase 300,000 shares (1995 - 225,000) of the
Company's Common Stock are available for future grant and outstanding options
with regard to 75,000 (1995: 100,835) shares are exercisable.
- ------------------------------------------------------------------------------
9. PROFIT SHARING AND EMPLOYEE BENEFIT PLANS
As an incentive to key employees who contribute to the success of the Company,
the Board of Directors has adopted a profit sharing plan ("Plan") to enable
key employees and directors to participate in the Company's success as
reflected by its earnings. The Plan shall be funded for any fiscal year with
10 percent of the pre-tax earnings for such year. However, no profit sharing
amount shall be payable until such time as the portfolio yield (see Note 6)
exceeds 15 percent. The Plan is administered by the Compensation Committee of
the Board of Directors and selection to participate in and compensation
awarded under the Plan is determined by the recommendation of the Company's
Chairman. If the amount available for awards of any year exceeds the actual
awards made for such year, the excess is not available for future award. An
award to a participating individual cannot exceed 300 percent of such
individual's base salary in such fiscal year. Through 30 June 1996, the Plan
has not been funded and correspondingly no awards have been made.
- ------------------------------------------------------------------------------
10. INCOME TAXES
There was no provision for income taxes for the years ended 30 June 1996 and
1995 (other than the payment of state minimum income tax of $1,000 in 1996 and
the recovery of the prior year's state income tax provision of $30,000 in
1995) due to taxable losses incurred during the year.
Differences between the U.S. Federal Statutory and the Company's effective
rates for 1996 are as follows:
<TABLE>
<S> <C>
U.S. federal statutory rate on income from operations $ 571
Timing differences on credit losses (2,520)
Valuation allowance 1,848
Other 101
-------
$ -
=======
</TABLE>
<PAGE> 39
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
10. INCOME TAXES - CONTINUED
The net deferred tax assets at 30 June 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Provision for credit losses $2,483 $5,003
Net operating loss carryforwards 3,245 1,397
Valuation allowance (5,728) (6,470)
Other - 70
------- -------
Deferred tax asset, net $ - $ -
======= =======
</TABLE>
At 30 June 1996, the Company has $9.6 million (1995 - $4.1 million) in net
operating loss carryforwards for U.S. federal and California income tax
purposes. The carryforwards expire in the fiscal years ending in 2009 to 2011
for U.S. federal income tax purposes and 1999 to 2001 for California income
tax purposes. The ultimate utilization of the net operating loss
carryforwards may be restricted due to changes or subsequent changes in the
ownership of the Company.
- ------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
During the year ended 30 June 1996, the Company incurred $456,000 (1995 -
$79,000) in fees payable to three affiliates. These affiliates are related to
the Company because they have certain common director(s) (one of the
affiliates, which is a former subsidiary of one of the other two affiliates,
also owns a 34.6% indirect interest in the Company). The fees were to pay for
the accounting and administration of the Company, as well as reimbursement of
certain office expenses. The Company also paid $125,000 in consulting fees
and expense reimbursement to a company which is owned and controlled by an
officer of the Company.
During the year, the Company issued 3,000,000 shares of its Preferred Stock,
Series 1 for $6,000,000 cash to the above-mentioned affiliate which owns a
34.6% indirect interest in the Company. Also during the year, the Company
acquired $6,000,000 worth of preferred stock in a subsidiary of the afore-
mentioned affiliate. This investment is classified as an available-for-sale
security.
<PAGE> 40
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS - CONTINUED
The Company was related to Conversion until October 1994 when Conversion
disposed of all its ownership interest in the Company. During the two years
ended 30 June 1995, the Company made loans totaling $34.1 million to
Conversion and 15 borrowers in which Conversion has or had an ownership
interest. At 30 June 1996, the outstanding balances on these finance
receivables total $7.2 million (1995 - $21.9 million) to Conversion and such
affiliated borrowers. During 1995, the Company earned $4.5 million in interest
and fees on the loans, received $0.04 million in commitment fees and had on
hand warrants to acquire 5.7 million shares of common stock of these various
borrowers (of which warrants to acquire 1.9 million shares were related to six
borrowers who have filed for bankruptcy protection or effectively ceased to
operate). In addition, the Company wrote-off against its allowance for credit
losses $3.1 million of finance receivables relating to these borrowers during
the year ended 30 June 1995. Conversion had guaranteed the repayment to the
Company of $8.1 million with regard to six borrowers (which was reduced to
approximately $8.0 million in July 1994 when one of the underlying loans was
repaid in full). In October 1994, as part of a series of transactions with
Conversion (see below) the then outstanding guarantees of $8.0 million were
reduced to $5.8 million. Conversion collateralized its guarantees to the
Company with substantially all of its assets.
On 23 October 1994, the Company agreed to provide Conversion with up to $3.1
million in revolving credit to replace approximately $2.2 million in
outstanding broker and bank loans of Conversion and for other corporate
purposes. The loan was to bear interest at a major bank's prime rate plus 7
percent, due on 1 November 1997 and was secured by all of the assets of
Conversion. In connection with the loan transaction, Conversion's then
outstanding guarantees in the amount of $8.0 million were reduced to $5.8
million, Conversion contributed its remaining 1,070,039 shares of the
Company's Common Stock to the Company, and the management services agreement
(see below) with Conversion was terminated. As of 23 October 1994, Conversion
had no remaining ownership interest in the Company. On 19 May 1995,
Conversion filed for bankruptcy protection. As of 30 June 1996, Conversion
owed the Company an aggregate of $2.4 million (1995 - $2.3 million).
Subsequent to June 30, 1996, a settlement agreement was reached by Conversion
and the Company.
On 30 June 1993, the Company entered into a management services agreement with
Conversion which was terminated in October 1994. Under the terms of the
agreement, Conversion provided the Company with assistance in various areas
including legal, personnel, accounting and finance. The agreement provided
for a minimum monthly fee of $2,000, which fee was credited against the actual
costs incurred by Conversion in providing the services. For the period from 1
July 1994 through 23 October 1994, the Company exceeded the minimum monthly
fee and incurred costs of $12,000 relating to services provided under this
agreement.
<PAGE> 41
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENCIES
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 District
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 (some of whom were formerly officers
and/or directors of the Company), Coopers & Lybrand L.L.P. (Conversion's and
the Company's former external 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. The Company believes that the allegations
contained in the complaint are without merit, but is trying to reach an
out-of-court settlement without any admission of liability. A memorandum
of understanding was signed in May 1996 and $600,000 has been accrued by
the Company there under, which is included in the general and administrative
expenses.
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 concerning 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 conditions.
The Company entered into an agreement with a key employee commencing on 1 July
1993. The agreement is for a five year term with automatic one year renewal
periods in the absence of written notice to terminate from either party. The
agreement provides for an annual salary of $130,000 and participation in the
Company's Stock Option Plan (see Note 8) and Profit Sharing Plan (see Note 9).
The agreement further provides that if employment is terminated by the Company
without cause, the Company will pay a lump sum to the employee equal to all
compensation payable during the remaining term of the employment agreement had
the employee not been terminated, but in no event less than six months'
compensation. Beginning 1 April 1996, either party may terminate the
agreement with a reduced lump sum payment due to the employee.
<PAGE> 42
CVD FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Tables Stated in Thousands)
30 June 1996 and 1995
- ------------------------------------------------------------------------------
13. SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Significant non-cash transactions in 1996 include:
(a) The Company received payment of $131,000 in loan fees in the form of
shares of the respective borrower's common stock.
(b) The Company collected $73,000 on a loan by receiving shares of a
borrower's common stock.
(c) The Company converted a loan of $1,925,000 into shares of a borrower's
common stock. Subsequently, the shares so received were sold for a gain.
Significant non-cash transactions in 1995 include:
(a) As discussed in Note 11, in October 1994 the Company received 1,070,039
shares of its Common Stock from Conversion which shares were recorded as a
capital contribution and retained in the Company's treasury at their estimated
fair market value of $2,250,000 at the date of the transaction.
(b) The Company received payment of $164,000 in loan fees in the form of
shares of the respective borrower's common stock.
All the shares obtained from the borrowers were publicly traded securities and
the shares were valued at their fair market value at the date of acquisition.
<PAGE> 43
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CVD FINANCIAL CORPORATION
Date: September 20, 1996 By: /s/ Michael J. Smith
-------------------------
Michael J. Smith
President, Chief Executive Officer,
Chief Financial Officer and Director
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ Michael J. Smith
- ---------------------------------
Michael J. Smith
President, Chief Executive Officer,
Chief Financial Officer and Director Date: September 20, 1996
/s/ Jimmy S.H. Lee
- ---------------------------------
Jimmy S.H. Lee
Chairman of the Board
and Director Date: September 20, 1996
/s/ Leonard Petersen
- ---------------------------------
Leonard Petersen
Director Date: September 20, 1996
/s/ Lawrence E. Beard
- ---------------------------------
Lawrence E. Beard
Director Date: September 20, 1996
/s/ Rene Randall
- ---------------------------------
Rene Randall
Director Date: September 20, 1996
<PAGE> 44
EXHIBIT INDEX
3.1 Certificate of Incorporation dated June 1, 1993.
Incorporated by reference from Form S-1 filed June 7, 1993.
3.2 Certificate of Designations dated July 19, 1996.
3.3 Bylaws. Incorporated by reference from Form S-1 filed
June 7, 1993.
3.4 Amendment to the Bylaws adopted as of July 20, 1993.
Incorporated by reference from Amendment No. 1 to
Form S-1 filed July 26, 1993.
4.1 Form of Indenture between CVD Financial Corporation
and Harris Trust Company of New York as Trustee.
Incorporated by reference from Form S-1 dated filed
June 7, 1993.
4.2 Form of Common Stock Share Certificate. Incorporated by
reference from Amendment No. 2 to Form S-1 filed August
16, 1993.
4.3 Form of Bond. Incorporated by reference from Amendment
No. 2 to Form S-1 dated filed August 16, 1993.
10.1 Employment Agreement with L.P. "Roy" McCann. Incorporated
by reference from Amendment No. 2 to Form S-1 filed August
16, 1993.
10.2 1993 Stock Option Plan. Incorporated by reference from
Form S-1 filed June 7, 1993.
10.3 Profit Sharing Plan. Incorporated by reference from
Amendment No. 1 to Form S-1 filed July 26, 1993.
10.4 Stock Repurchase Agreement between CVD Financial
Corporation and Conversion Industries Inc. dated April 18,
1994. Incorporated by reference to Form 8-K dated
April 28, 1994.
10.5 Stock Pledge Agreement between CVD Financial Corporation
and Conversion Industries Inc. dated April 18, 1994.
Incorporated by reference to Form 8-K dated April 28, 1994.
10.6* $1,865,367.89 Conversion Industries Inc. Guaranty dated
July 30, 1993 regarding loan to Bratcher Industries, Inc.
made by CVD Financial Corporation.
10.7* $500,000 Conversion Industries Inc. Guaranty dated July 30,
1993 regarding $1,000,000 loan to Joseph Land Group, Inc.
made by CVD Financial Corporation.
10.8* $2,000,000 Conversion Industries Inc. Guaranty dated
August 5, 1993 regarding $2,000,000 loan to North American
Recycling Systems, Inc. made by CVD Financial Corporation.
10.9* $900,000 Conversion Industries Inc. Guaranty dated
September 27, 1993 regarding $2,500,000 loan to Metalclad
Corporation made by CVD Financial Corporation.
<PAGE> 45
10.10* $1,000,000 Conversion Industries Inc. Guaranty dated
October 1, 1993 regarding $1,000,000 loan to American
Blood Institute, Inc. made by CVD Financial Corporation.
10.11* $1,500,000 Conversion Industries Inc. Guaranty dated
December 27, 1993 regarding $1,5000,000 loan to Joseph
Land Group, Inc. made by CVD Financial Corporation.
10.12* $75,000 Conversion Industries Inc. Guaranty dated
March 14, 1994 regarding $75,000 loan to Onsite
Energy Corporation made by CVD Financial Corporation.
10.13* $260,000 Conversion Industries Inc. Guaranty dated
April 5, 1994 regarding $860,000 loan to North American
Recycling Systems, Inc. made by CVD Financial Corporation.
10.14 Loan Agreement dated October 23, 1994, between CVD
Financial Corporation and Conversion Industries Inc.
Incorporated by reference to Form 8-K dated October 28,
1994.
10.15 First Amendment to the Conversion Loan Agreement
between CVD Financial Corporation and Conversion
Industries Inc. Incorporated by reference to June 30,
1995 Form 10-KSB.
10.16 Stock Purchase Agreement between CVD Financial Corporation
and Mercer International Inc. dated March 22, 1995.
Incorporated by reference to Form 8-K dated March 22, 1995.
10.17 Subscription Agreement between CVD Financial Corporation
and Logan International Corp. dated for reference June 20,
1996. Incorporated by reference to Form 8-K dated June 27,
1996.
10.18 Subscription Agreement between CVD Financial Corporation
and Arbatax International Inc. dated for reference June 27,
1996. Incorporated by reference to Form 8-K dated June 27,
1996.
21. List of subsidiaries of Registrant.
27. Article 5 - Financial Data Schedule for year ended June 30,
1996 - Form 10-KSB.
- ----------------------------
*Incorporated by reference to June 30, 1994 Form 10-KSB.
<PAGE> 1 EXHIBIT 3.2
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 A.M. 07/19/1996
960211599 - 2338600
CERTIFICATE OF DESIGNATIONS
CVD FINANCIAL CORPORATION
CVD Financial Corporation, a Delaware corporation (the "Corporation"), desires
to designate the rights and preferences of a series of preferred stock (the
"Series 1 Preferred Stock") in accordance with the Corporation's Certificate
of Incorporation and Section 151 of the Delaware General Corporation Law.
Jimmy S.H. Lee, Chairman of the Corporation, hereby certifies the following:
1. This Certificate is the act and deed of Jimmy S.H. Lee, Director and
Chairman of the Corporation. The facts stated in this Certificate are true.
2. The resolutions attached as Exhibit A were duly adopted by the board of
directors effective June 27, 1996.
3. The number of shares of Series 1 Preferred Stock to which the resolutions
at Exhibit A apply is 3,000,000 shares.
DATED July 17, 1996.
/s/ Jimmy S.H. Lee
------------------------
Jimmy S.H. Lee
Director and Chairman
Attest: /s/ Roy Zanatta
------------------------
Roy Zanatta
Secretary
DATED July 17,1996.
/s/ John A. Skuter
------------------------
(Signature of Notary)
John A. Skuter
Barrister & Solicitor
1900, 700 West Georgia Street
Vancouver, BC V7Y 1G5
Telephone: (604) 662-8808
----------------------------------
(Legibly Print or Stamp Name of Notary)
Notary public in and for British Columbia,
Canada , residing at Vancouver, British
Columbia
My commission expires at the pleasure of her
majesty the Queen in the Right of the Province
of British Columbia
<PAGE> 2
This is Exhibit "A" referred to in
the declaration of Jimmy S.H. Lee,
sworn before me this 17th day of
July, 1996
/s/ John A. Skuter
----------------------------------
A Notary Public for British Columbia
EXHIBIT A
----------
DIRECTORS' RESOLUTIONS
BE IT RESOLVED THAT:
1. A first series of Preferred Stock be and is hereby designated as
"Preferred Stock, Series 1" (the "Series 1 Preferred Stock").
2. The number of Series 1 Preferred Stock in the capital of the Corporation
be and is hereby fixed at 3,000,000.
3. The Series 1 Preferred Stock shall have attached thereto the special
rights and restrictions, as a series, in substantially the form set out in
Schedule "A" hereto, with such changes, additions and alterations thereto as
the President or Secretary may deem necessary or desirable, and that the
constating documents of the Corporation be amended as necessary to incorporate
same.
<PAGE> 3
SCHEDULE "A"
SECTION 1
ISSUE PRICE
-----------
1.1 The issue price for the Preferred Stock, Series 1 shall be determined by
resolution of the board of directors of the Corporation.
SECTION 2
DIVIDENS
---------
2.1 Payment of Dividends
--------------------
The holders of the Preferred Stock, Series 1 shall be entitled to receive, and
the Corporation shall pay thereon, as and when declared by the board of
directors out of monies properly applicable to the payment of dividends, fixed
cumulative preferential cash dividends at the rate of 5% per share per annum
(the "Dividend Payment") on the amount paid-up thereon payable in arrears on
December 31 of each year (the "Dividend Payment Date"). Dividends on the
Preferred Stock, Series 1 shall accrue from and including the date of
issuance. Cheques of the Corporation or its dividend paying agent payable at
par at a chartered bank or trust company shall be issued in respect of such
dividends to the holders of the Preferred Stock, Series 1 entitled thereto.
The mailing of such cheques shall satisfy and discharge all liability for the
dividends represented thereby, unless the cheques are not paid on due
presentation. If on any Dividend Payment Date, the dividends payable on such
date are not paid in full on all of the Preferred Stock, Series 1 then issued
and outstanding, the dividends or the unpaid part thereof shall be paid on a
subsequent date or dates as determined by the board of directors. The holders
of the Preferred Stock, Series 1 shall not be entitled to any dividends other
than or in excess of the cash dividends provided for herein. A dividend which
is represented by a cheque which has not been presented for payment within six
years after it was issued shall be forfeited to the Corporation.
2.2 Dividend for Other than a Full Year
-----------------------------------
The amount per share of the dividend accrued for any period which is less than
a full year with respect to any Preferred Stock, Series 1:
(a) which is issued, redeemed or purchased; or
(b) where the assets of the Corporation are distributed to the holders of
Preferred Stock, Series 1 on the liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, or on any other distribution of
assets of the Corporation among its shareholders for the purpose of winding up
its affairs,
<PAGE> 4
shall be equal to the amount (rounded to the nearest 1/100th of 1 cent)
calculated by multiplying the Dividend Payment by a fraction of which the
numerator is the number of days during the year that the share has been
outstanding (including the date of issuance or the first day of the year as
well as the Dividend Payment Date or date of redemption, purchase, or
distribution of assets, as applicable) and the denominator is 365.
2.3 Interest Payment
----------------
The holders of the Preferred Stock, Series 1 shall be entitled to receive, as
provided herein, an amount equivalent to interest at the rate of 8% per annum
on the amount of all Dividend Payments not paid on their respective Dividend
Payment Dates and which remain outstanding from time to time, which shall be
compounded annually on each Dividend Payment Date (the "Interest Amount").
SECTION 3
REDEMPTION AND PURCHASE
-----------------------
3.1 General
-------
Subject to Section 6, the Preferred Stock, Series 1 may be redeemed or
purchased by the Corporation as provided in this Section, but not otherwise.
3.2 Redemption Rights
-----------------
(a) Subject to Section 6, the Corporation may at its option redeem at any
time all or from time to time any number of the outstanding Preferred Stock,
Series 1 on payment of the Redemption Price as provided in Section 3.3.
(b) If less than all of the outstanding Preferred Stock, Series 1 are to be
redeemed, the shares to be redeemed shall be selected by lot, in single shares
or in units of 10 shares or less, or pro rata (disregarding fractions) as the
board of directors or a committee thereof in its sole discretion shall by
resolution determine.
3.3 Redemption Price
----------------
The price at which any Preferred Stock, Series 1 is redeemable (the
"Redemption Price") shall be the aggregate of all accrued and unpaid dividends
up to and including the date fixed for redemption, the amount paid-up thereon,
any Interest Amount applicable thereto and a redemption premium of 10% of the
amount paid-up thereon.
<PAGE> 5
3.4 Redemption Procedure
--------------------
(a) Notice of redemption (the "Redemption Notice") of the Preferred Stock,
Series 1 shall be given by the Corporation not less than 30 days prior to the
date fixed for redemption to each holder of any Preferred Stock, Series 1 to
be redeemed. Accidental failure or omission to give the Redemption Notice to
one or more of such holders shall not affect the validity of such redemption.
The Redemption Notice shall set out the Redemption Price, the date fixed for
redemption, the place of redemption and, in the case of partial redemption,
the number of the holder's shares to be redeemed.
(b) On and after the date fixed for redemption, the Corporation shall pay or
cause to be paid the Redemption Price to or to the order of the holders of the
Preferred Stock, Series 1 redeemed on presentation and surrender, at the place
of redemption, of the respective certificates representing such shares, and
the holders of the Preferred Stock, Series 1 called for redemption shall cease
to be entitled to dividends or to exercise any of the rights of holders in
respect thereof, unless payment of the Redemption Price shall not be made in
accordance with the foregoing provisions, in which case the rights and
privileges of the holders shall remain unimpaired.
(c) The Corporation shall have the right at any time after mailing the
Redemption Notice to deposit the Redemption Price of the shares thereby called
for redemption, or such part thereof as at the time of deposit has not been
claimed by the shareholders entitled thereto, in a special account with a
chartered bank or trust company for the holders of such shares, and upon the
deposit being made or upon the date fixed for redemption, whichever is the
earlier, the Preferred Stock, Series 1 in respect of which the deposit shall
have been made shall be deemed to be redeemed and the rights of each holder
thereof shall be limited to receiving, without interest, his proportionate
part of the Redemption Price so deposited upon presentation and surrender of
the certificates representing his shares so redeemed.
(d) If less than all the Preferred Stock, Series 1 represented by any
certificate are redeemed, a new certificate for the balance shall be issued
without cost to the holder.
3.5 Purchase
--------
Subject to Section 6, the Corporation may purchase at any time all or from
time to time any number of the outstanding Preferred Stock, Series 1 in the
open market (including purchases through or from an investment dealer or firm
holding membership on a stock exchange) or pursuant to tenders received by the
Corporation upon an invitation for tenders addressed to all holders of the
Preferred Stock, Series 1, at a price per share not exceeding the Redemption
Price
<PAGE> 6
plus costs of purchase. If, upon any invitation for tenders, the Corporation
receives tenders for Preferred Stock, Series 1 at the same price in an
aggregate number greater than the number for which the Corporation is prepared
to accept tenders, the shares to be purchased shall be selected from the
shares offered at prices as nearly as may be pro rata (to the nearest 10
shares) according to the number of Preferred Stock, Series 1 offered in each
tender, in the manner as the board of directors or a committee thereof in its
sole discretion shall by resolution determine.
3.6 Indenture
---------
In the event that an "Event of Default", as such term is defined in a master
indenture made between the Corporation and Harris Trust Corporation of New
York, as trustee, dated as of August 23, 1993, as amended from time to time
(the "Indenture"), occurs and is not remedied by the Corporation within any
applicable curative periods and either the "Trustee" or "Holders" (as such
terms are defined in the Indenture) provide written notice to the Corporation
declaring the principal amount of "Outstanding" "Securities" (as such terms are
defined in the Indenture) plus accrued interest to be due and payable as
provided for and pursuant to Section 502 of the Indenture, a holder of any
Preferred Stock, Series 1 may require the Corporation to redeem, at any time
and from time to time, the number of Preferred Stock, Series 1 as may be
presented for redemption by the holder as provided herein. The Corporation
need not redeem the Preferred Stock, Series 1 pro rata, among all holders of
Preferred Stock, Series 1. The price per share (the "Retraction Price") at
which the Corporation is required to redeem Preferred Stock, Series 1 pursuant
to the exercise of the right of retraction herein shall be the aggregate of
all accrued and unpaid dividends up to and including the dated fixed for
redemption, the amount paid-up thereon, any Interest Amount applicable thereto
and a retraction premium of 10% of the amount paid-up thereon. The holder of
Preferred Stock, Series 1 desiring to exercise his retraction right shall
tender his Preferred Stock, Series 1 to be redeemed by depositing with the
Secretary of the Corporation a certificate or certificates representing such
Preferred Stock, Series 1 together with a notice of retraction (the
"Retraction Notice") requesting redemption of a specified number of Preferred
Stock, Series 1 and stating the place at which the Retraction Price is to be
paid. Such deposit shall be irrevocable unless the Corporation shall fail to
make payment of the Retraction Price for the Preferred Stock, Series 1 to be
redeemed within 30 days of receipt of the Retraction Notice. The payment of
the Retraction Price shall be made by cheque payable at par at a United States
or Canadian chartered bank or trust company and at the place stated in the
Retraction Notice. The Preferred Stock, Series 1 shall then be and be deemed
to be redeemed unless such cheque fails to clear in the ordinary course. The
Corporation shall use its best efforts to pay the Retraction Price for the
Preferred Stock, Series 1 to be redeemed within 30 days of receipt of the
Retraction Notice, or so soon thereafter as liquid funds become available, to
a holder of Preferred Stock, Series 1 who has tendered his shares as provided
herein and shall cancel his certificates which were tendered subject to the
terms hereof and issue new certificates in respect of the unredeemed shares,
if any. Upon payment of the Retraction Price as provided herein, the
Preferred Stock, Series 1 shall cease to be entitled to dividends and the
holder shall not be entitled to exercise any of the rights of the shareholder
in respect thereof.
<PAGE> 7
3.7 Redeemed or Purchased Preferred Stock, Series 1
-----------------------------------------------
Preferred Stock, Series 1 redeemed or purchased by the Corporation shall
remain as authorized but unissued Preferred Stock, Series 1 and shall be
available for issuance as such, unless payment for same is not made by the
Corporation in the ordinary course.
SECTION 4
VOTING RIGHTS
-------------
4.1 General
-------
The holders of the Preferred Stock, Series 1 shall be entitled to receive
notice of and to attend at all meetings of shareholders of the Corporation,
other than separate meetings of the holders of another class or series of
shares. Subject to Sections 4.2 and 4.3 hereof, a holder of any Preferred
Stock, Series 1 shall be entitled to vote at such meetings on the basis of a
vote per share that is equal to the lesser of:
(a) one; and
(b) such fractional vote per share that results in the holder and any other
entity that may together with the holder be considered a "person" or "group"
(respectively, a "Person" or a "Group") as such terms are used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1933, as amended (the
"Exchange Act") becoming the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act), directly or indirectly, of 34.6% (the
"Threshold Amount") of the total votes attached to all outstanding voting
shares of the Corporation outstanding from time to time,
provided that in no event, except as provided in Section 4.3 hereof, shall any
votes attach to the Preferred Stock, Series 1 which would trigger a mandatory
redemption of all of the variable rate bonds (the "Bonds") issued pursuant to
the Indenture. For greater certainty, if at any time and only during such
time a Person or Group is or becomes the beneficial owner, directly or
indirectly, of the Threshold Amount of the total votes attaching to all
outstanding voting shares of the Corporation, excluding any Preferred Stock,
Series 1, then if such Person or Group is or becomes the beneficial owner,
directly or indirectly, of any Preferred Stock, Series 1, the same shall have
no votes per share, except: (i) as provided in sections 4.2 or 4.3 hereof; or
(ii) in the event the Person or Group subsequently is or becomes the
beneficial owner, directly or indirectly, of less than the Threshold Amount of
the total votes attaching to all Voting Shares of the Corporation.
<PAGE> 8
4.2 Amendments to Master Indenture
------------------------------
If the Indenture is amended so that a Person or Group can become the
beneficial owner of a percentage of the total votes attached to all
outstanding voting shares of the Corporation in excess of the Threshold Amount
without triggering a mandatory redemption of the Bonds, the Threshold Amount
shall be amended in Section 4.1(b) to be equal to the lesser of: (i) the
amended percentage which triggers the mandatory redemption of the Bonds
pursuant to the Indenture minus 0.1%; and (ii) 47.9%.
4.3 Fully Voting
------------
If any Person or Group becomes the beneficial owner, directly or indirectly,
of a percentage of the total votes attached to all outstanding voting shares
of the Corporation from time to time in excess of the Threshold Amount, as
amended from time to time, (excluding any Preferred Stock Series 1), then a
holder of any Preferred Stock, Series 1 shall be entitled to one vote per
share.
4.4 Determination
-------------
In the event of any dispute or uncertainty, the votes per share of Preferred
Stock Series 1 shall be determined from time to time as required and as
provided herein exclusively by the board of directors of the Corporation,
whose decision and calculation shall be final and binding upon all parties and
for all purposes.
SECTION 5
LIQUIDATION, DISSOLUTION OR WIND-UP
-----------------------------------
5.1 Priority of Distributions
-------------------------
In the event of the liquidation, dissolution or winding-up of the Corporation
or other distribution of the assets of the Corporation among its shareholders
for the purpose of winding up its affairs, whether voluntary or involuntary,
the holders of the Preferred Stock, Series 1 shall be entitled, before any
amounts shall be paid to or any property or assets of the Corporation are
distributed among the holders of the Common Stock, or any other share of the
Corporation ranking junior to the Preferred Stock, Series 1, to receive an
amount equal to the amount paid-up thereon, together with all accrued and
unpaid dividends thereon, any Interest Amount applicable thereto and a premium
of 10% of the amount paid-up thereon. After payment to the holders of the
Preferred Stock, Series 1 of the amounts so payable to them, they shall not be
entitled to share in any further distribution of the assets of the
Corporation.
<PAGE> 9
5.2 Ratable Distribution
--------------------
If any accrued and unpaid dividends, amounts payable on the return of capital,
any Interest Amount or any premium in respect of the Preferred Stock, Series 1
are not paid in full, all series of Preferred Stock shall participate ratably
in respect of accrued and unpaid dividends, the return of capital, any
Interest Amount and the premium.
SECTION 6
RESTRICTIONS ON DIVIDENDS AND
ISSUE OR RETIREMENT OF SHARES
-----------------------------
6.1 The Corporation shall not at any time without, but may at any time with,
the approval of the holders of the Preferred Stock, Series 1 given in
accordance with Section 9, authorize or issue any shares, other than
additional series of Preferred Stock, ranking prior to or on a parity with the
Preferred Stock, Series 1 as to the payment of dividends or the distribution
of the property or assets of the Corporation. Furthermore, so long as any of
the Preferred Stock, Series 1 are outstanding, the Corporation shall not:
(a) declare, pay or set apart for payment any dividends (other than stock
dividends in shares of the Corporation ranking junior to the Preferred Stock,
Series 1) on any shares of the Corporation ranking junior to the Preferred
Stock, Series 1;
(b) call for redemption, redeem, purchase or otherwise retire for value any
shares ranking junior to the Preferred Stock, Series 1 (except out of the net
cash proceeds of a substantially concurrent issue of shares of the Corporation
ranking junior to the Preferred Stock, Series 1);
(c) call for redemption, redeem, purchase or otherwise retire for value less
than all of the Preferred Stock, Series 1;
(d) except out of the net cash proceeds of a substantially concurrent issue
of shares of the Corporation ranking junior to the Preferred Stock, Series 1,
call for redemption, redeem, purchase or otherwise retire for value (i) any
Preferred Stock, other than the Preferred Stock, Series 1 or (ii) any shares
of a class or series ranking on a parity with the Preferred Stock, Series 1 in
respect of the payment of dividends and the distribution of assets in the
event of a liquidation, dissolution or winding-up of the Corporation, whether
voluntary or involuntary, or in the event of any other distribution of assets
of the Corporation among its shareholders for the purpose of winding up its
affairs; or
(e) create or issue any additional Preferred Stock,
<PAGE> 10
unless, in each such case, any Interest Amount and all accrued and unpaid
dividends on the outstanding Preferred Stock, Series 1 and on all other shares
ranking prior to or on a parity with the Preferred Stock, Series 1, up to and
including all dividends payable on the last preceding Dividend Payment Date,
have been declared and paid or set apart for payment.
SECTION 7
NOTICES AND INTERPRETATION
--------------------------
7.1 Notices
-------
(a) Any notice, cheque, invitation for tenders or other communication from
the Corporation provided for herein shall be sufficiently given if delivered
or if sent by ordinary first class mail, postage prepaid, to the holders of
the Preferred Stock, Series 1 at their respective addresses appearing on the
books of the Corporation or, in the event of the address of any of such
holders not so appearing, then at the last address of such holder known to the
Corporation. Accidental failure to give any notice, invitation for tenders or
other communication to one or more holders of the Preferred Stock, Series 1
shall not affect the validity of the notices, invitations for tenders or other
communications properly given or any action taken pursuant to such notice,
invitation for tender or other communication, but upon a failure being
discovered, the notice, invitation for tenders or other communication, as the
case may be, shall be sent forthwith to the holder or holders.
(b) If any notice, cheque, invitation for tenders or other communication from
the Corporation given to a holder of Preferred Stock, Series 1 pursuant to
Section 7.1(a) is returned on three consecutive occasions because he cannot be
found, the Corporation shall not be required to give or mail any further
notices, cheques, invitations for tenders or other communications to such
shareholder until he informs the Corporation in writing of his new address.
7.2 Interpretation
--------------
(a) In the event that any day on which any dividend on the Preferred Stock,
Series 1 is payable or on or by which any other action is required to be taken
hereunder is not a business day, then such dividend shall be payable or such
other action shall be required to be taken on or before the next succeeding
day that is a business day. "Business day" means a day other than a Saturday,
a Sunday or any other day that is a statutory or civic holiday in the place
where the Corporation has its head office.
(b) All references herein to a holder of Preferred Stock, Series 1 shall be
interpreted as referring to a registered holder of the Preferred Stock, Series
1.
<PAGE> 11
SECTION 8
MODIFICATION
------------
8.1 The provisions set out herein attaching to the Preferred Stock, Series 1
may be deleted, varied, modified, amended or amplified with the prior approval
of the holders of Preferred Stock, Series 1 given in accordance with Section
9.
SECTION 9
APPROVAL OF PREFERRED STOCK, SERIES 1
-------------------------------------
9.1 Any approval required or permitted to be given by the holders of the
Preferred Stock, Series 1 with respect to any and all matters referred to
herein shall be deemed to have been sufficiently given by the holders of the
Preferred Stock, Series 1 if given in accordance with the Corporation's
governing statute and constating documents.
EXHIBIT 21
CVD FINANCIAL CORPORATION
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Shareholding
Jurisdiction at end of year
Name of Subsidiary of Incorporation (Direct)
- ------------------ ---------------- --------------
<S> <C> <C>
CVD Financial Corporation Washington 100%
CVD Financial Corporation British Columbia, Canada 100%
501164 B.C. Ltd. British Columbia, Canada 100%
</TABLE>
<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-KSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
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0
30
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</TABLE>
