Cervus Financial Group Inc.
TSX : CFG

Cervus Financial Group Inc.

May 16, 2006 09:22 ET

Cervus Financial Group Inc. Announces Financial Results for the Second Quarter Ended March 31, 2006

TORONTO, ONTARIO--(CCNMatthews - May 16, 2006) - Cervus Financial Group Inc. ("Cervus"), (TSX:CFG), announced results of operations for the second quarter ended March 31, 2006 with revenues of $2.2 million and residential mortgage originations of $200.2 million. Total Administered Assets increased to $1,105.8 million.

March 31, 2006 Highlights

- Increased Total Administered Assets to $1.106 billion compared to $645 million as at September 30, 2005;

- Completed whole loan sales, totaling $457.6 million in the six months ended March 31, 2006 compared to $28.4 million in the same period last year. For the quarter ended March 31, 2006, loans sales totaled $180.1 million as compared to no sales in the quarter ended March 31, 2005.

- Gain on sale revenue was $3.29 million for the six months ended March 31, 2006 as compared to $0.46 million for the same period in the previous year. For the quarter ended March 31, 2006, the gain on sale was $1.56 million compared to one thousand for the quarter ended March 31, 2005.

- The Company has future mortgage commitments of $220.9 million compared to $141.7 million at December 31, 2005 and $218.1 million at September 30, 2005;

- Cervus ranked 13th out of 55 mortgage broker lenders in the monthly Filogix Canadian Mortgage Broker Market Report™ for the month of February 2006 as compared to 12th out of 47 for the month of December 2005 and 20th for December 2004; and

- Launched a Conventional Mortgage Product including fixed and adjustable rate pricing options under the Company's "Customer for Life" business model.

Going Concern and Subsequent Event

The accompanying financial statements have been prepared on a going concern basis which assumes that the Company will realize its assets and discharge its liabilities and commitments in the normal course of business. For the six months ended March 31, 2006, the Company incurred a loss of $7,526,865 (2005- $4,251,187) and has an accumulated deficit of $18,973,994. To date the Company has funded operations through private equity placements and long-term convertible debt financing. The ability to continue as a going concern is contingent on raising additional equity or debt and/or entering into a strategic partnership with a financial strong entity, or sale of the Company. There is no assurance that the Company will be successful in raising additional equity, debt or entering into a strategic partnership or sale of the Company. If Cervus is not successful in these efforts, the Company will have to cease operations.

On May 3, 2006, the Company announced it had entered into a non-exclusive and non-binding letter of intent ("Letter of Intent") with a major international financial institution ("Financial Institution"), which provided that the Financial Institution will acquire all of the issued and outstanding shares of Cervus Financial Corp., a wholly-owned subsidiary of Cervus, or alternatively all of the issued and outstanding common shares of Cervus ("Acquisition Transaction")

The obligation of the Financial Institution to enter into a definitive agreement in relation to the Acquisition Transaction is subject to approval by the Financial Institution's board and the satisfaction of the Financial Institution with its due diligence review. The completion of the Acquisition Transaction is subject to, among other things, the satisfaction of compliance with the terms and conditions of the definitive agreement, the receipt of all necessary contractual and third party consents, the receipt of all necessary regulatory and stock exchange consents and approvals.

Under the Letter of Intent, in the event that Cervus receives a bona fide offer for a value 10% greater than the Acquisition Transaction, Cervus may elect to remove support for the Acquisition Transaction in favour of the alternative transaction. Cervus has agreed to pay the Financial Institution an arrangement fee of approximately 3.2% of the value of the Acquisition Transaction in the event it does not close the Acquisition Transaction, other than where directly caused by the Financial Institution.

Cervus has also been in ongoing discussions with its bank to replace its credit facility as well as the termination of the transaction services and hedging facility provided by the bank. The bank has indicated to Cervus that it would require the credit facility to be replaced and the transaction services to be terminated by May 31, 2006, unless adequate alternate financial arrangements have been put in place. Under the Letter of Intent, the Financial Institution agreed that it will provide the bank with a letter of credit in the amount of Cdn$5 million in order to ensure that the bank continues to provide the current banking facilities to Cervus and its subsidiaries. The terms and conditions of these alternative financial arrangements are subject to the approval of the bank and the Financial Institution. The Financial Institution has not yet opened the letter of credit. Once opened, the letter of credit will be withdrawn if the Acquisition Transaction is not completed. If the credit facility and transaction services were terminated and not replaced with a different financial institution, the Company would need to seek creditor protection and the possibility that the Company would cease operations.

Although negotiations with the Financial Institution are ongoing, there can be no assurance that Cervus and the Financial Institution will enter into and close a definitive agreement in relation to the Acquisition Transaction. Cervus has also held and continues to hold meetings and discussions with other potential purchasers or strategic partners although there is no assurance that any other potential purchaser or strategic partner will make any offer. The Company is continuing discussions with equity and debt providers and other investors.

The Company has approximately $1.5 million of cash that is deposited with third parties that the Company cannot access in the near future, and an account receivable of approximately $800,000 that cannot be collected in the near future. Due to the Company's current nominal cash position as of the date hereof, and the current cash burn rate, the Company will have to cease operations and/or seek protection from its creditors unless additional cash is obtained. While management believes that an Acquisition Transaction or additional financing is possible, which will enable the Company to arrange adequate credit facilities and transaction services, the probability, nature and structure of a transaction is uncertain.

Accordingly, no adjustments to the carrying value of the assets and liabilities have been made to these accounts. However, should the Company be unable to continue as a going concern, assets and liabilities would require restatement on a liquidation basis, which would differ materially from the going concern basis.



Cervus Financial Group Inc.
Interim Unaudited Consolidated Balance Sheets
March 31, 2006

March 31, September 30,
2006 2005
--------------------------
ASSETS audited

CURRENT
Cash $ 1,002,417 $ 3,890,362
Restricted cash (Note 10) 1,500,000 1,500,000
Residential mortgages (Note 9) 5,917,513 4,448,436
Accounts receivable 995,136 1,866,587
Sales tax receivable - 30,524
Prepaid expenses 1,036,148 385,544
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10,451,214 12,121,453

OTHER ASSETS 786,166 444,363

DEFERRED FINANCING COSTS (Note 12) 320,977 -

SECURITIZATION - RETAINED INTEREST
(Note 8) 546,674 553,139

CAPITAL ASSETS (Note 6) 2,932,011 2,863,254

INTANGIBLE ASSETS (Note 7) 3,361,139 3,557,976

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$ 18,398,181 $ 19,540,185
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LIABILITIES

CURRENT
Accounts payable and accrued expenses $ 7,516,734 $ 8,655,126
Sales tax payable 105,353 39,606
Warehouse credit facility (Note 10) 200,000 -
Other liabilities 49,437 48,490
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7,871,524 8,743,222

TRAILER COMMISSIONS 2,414,554 1,401,161

FUTURE SERVICING LIABILITY 44,976 48,960

LEASE INDUCEMENT 156,240 177,540

LEASE OBLIGATIONS 3,019 7,376

CONVERTIBLE DEBENTURE (Note 12) 3,708,987 -

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14,199,300 10,378,259
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GOING CONCERN (Note 2)

SUBSEQUENT EVENT (Note 17)

SHAREHOLDERS' EQUITY

COMMON SHARES (Note 13) 19,574,420 19,574,420
EQUITY COMPONENT OF CONVERTIBLE
DEBENTURE (Note 13(f)) 1,696,882 -
CONTRIBUTED SURPLUS (Note 13 (e)) 1,901,573 1,034,635
DEFICIT (18,973,994) (11,447,129)
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4,198,881 9,161,926
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$ 18,398,181 $ 19,540,185
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Please see the SEDAR website at www.sedar.com for the accompanying
notes which are integral to these interim unaudited consolidated
financial statements and for Management's Discussion & Analysis.



Cervus Financial Group Inc.
Interim Unaudited Consolidated Statements of Operations and Deficit
March 31, 2006

For the For the For the For the
three three six six
months months months months
ended ended ended ended
March 31, March 31, March 31, March 31,
2006 2005 2006 2005
(restated (restated
see see
Note 5) Note 5)

INTEREST INCOME
(Note 5) $ 105,615 $ 370,030 $ 277,266 $ 485,023

INTEREST EXPENSE
(Note 5) (59,930) (289,718) (151,694) (396,242)
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NET INTEREST INCOME 45,685 80,312 125,572 88,781

GAIN ON SALE OF
LOANS (Note 5) 1,525,679 649 3,291,683 461,981
FEES AND OTHER INCOME 648,008 52,476 1,126,881 56,207
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2,219,372 133,437 4,544,136 606,969

BROKER COMMISSIONS
(Note 5) (2,113,804) (15,429) (4,945,002) (312,316)
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105,568 118,008 (400,866) 294,653
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OPERATING EXPENSES
Human resources 1,403,899 1,073,619 2,671,111 2,133,286
Business processing
(Note 5) 405,121 174,920 1,090,633 478,566
Selling, general
and administration 370,359 572,090 1,134,577 972,666
Governance and
public markets 633,147 399,342 1,179,286 664,022
Premises 99,007 61,597 202,746 107,530
Amortization 249,899 180,944 493,004 324,464
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3,161,432 2,462,512 6,771,357 4,680,534
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LOSS BEFORE INTEREST
ON CONVERTIBLE
DEBENTURE AND
INCOME TAXES 3,055,864 2,344,504 7,172,223 4,385,881

Interest on
convertible
debenture 302,359 - 354,642 -
Future income
tax benefit - (50,190) - (134,694)
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NET LOSS FOR THE
PERIOD $ 3,358,223 $ 2,294,314 $ 7,526,865 $ 4,251,187

DEFICIT - BEGINNING
OF PERIOD 15,615,771 4,429,823 11,447,129 2,472,950

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DEFICIT - END OF
PERIOD $ 18,973,994 $ 6,724,137 $ 18,973,994 $ 6,724,137
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NET LOSS PER
COMMON SHARE
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Basic and diluted
(Note 13(g)) $ (0.08) $ (0.05) $ (0.18) $ (0.11)
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Please see the SEDAR website at www.sedar.com for the accompanying
notes which are integral to these interim unaudited consolidated
financial statements and for Management's Discussion & Analysis.



Cervus Financial Group Inc.
Interim Unaudited Consolidated Statements of Cash Flows
March 31, 2006

For the For the For the For the
three three six six
months months months months
ended ended ended ended
March 31, March 31, March 31, March 31,
2006 2005 2006 2005
(restated (restated
see see
Note 5) Note 5)

NET INFLOW (OUTFLOW)
OF CASH RELATED TO
THE FOLLOWING
ACTIVITIES

OPERATING
Net loss for
the period $(3,358,223) $(2,294,314) $(7,526,865) $(4,251,187)
Items not
affecting cash
Amortization
of capital
assets 151,480 86,994 296,167 139,855
Amortization
of
intangibles 98,419 93,950 196,837 184,609
Future income
tax benefit - (50,190) - (134,694)
Stock option
expense 66,133 29,748 137,148 29,748
Amortization
of convertible
debenture
discount 131,102 - 153,342 -
Amortization
of deferred
financing costs 17,394 - 20,344 -
Lease
inducement (10,650) (4,083) (21,300) (4,083)
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(2,904,345) (2,137,895) (6,744,327) (4,035,752)

Net changes in
non-cash working
capital balance
Prepaid
expenses
(Note 5) (380,045) (291,501) (650,604) (547,833)
Residential
mortgages
(Note 5) 14,472,185 (57,986,626) (1,469,077) (67,866,498)
Interest
receivable - (86,699) - (86,699)
Accounts
receivable 96,334 (262,941) 871,451 (262,941)
Other assets (246,104) 554 (341,803) 1,211
Accounts
payable and
accrued
expenses 662,004 671,194 (1,128,869) 1,108,870
Sales tax
payable 35,162 (184,559) 96,271 (167,804)
Proceeds from
credit
facility
borrowings (13,300,000) (3,450,000) 200,000 (2,450,000)
Deferred
revenue
(Note 5) - 698,856 - 717,018
Trailer
commissions
(Note 5) 453,199 (780) 1,013,393 77,354
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(1,111,610) (63,030,397) (8,153,565) (73,513,074)
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INVESTING
Lease inducement - 245,160 - 245,160
Cash collateral
- restricted
cash - 1,000,000 - 1,000,000
Acquisition of
capital assets (153,780) (1,111,593) (371,966) (1,660,194)
Acquisition of
intangible
assets - (8,232) - (22,092)
---------------------------------------------------------------------
(153,780) 125,335 (371,966) (437,126)
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FINANCING
Proceeds from
issuance of
common shares - - - 10,000,000
Proceeds from
exercise of
common share
warrants - - - 330,000
Common share
issue costs - (52,651) - (773,166)
Proceeds from
issuance of
convertible
debenture - - 6,240,000 -
Convertible
debenture
issue costs 25,996 - (599,004) -
Secured
borrowings
(Note 5) - 64,825,908 - 68,124,324
Repayment of
obligations
under capital
leases (1,862) (619) (3,410) (619)
---------------------------------------------------------------------
24,134 64,772,638 5,637,586 77,680,539
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NET INCREASE
(DECREASE) IN CASH
FOR THE PERIOD (1,241,256) 1,867,576 (2,887,945) 3,730,339

CASH, BEGINNING
OF PERIOD 2,243,673 4,158,969 3,890,362 2,296,206
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CASH, END OF
PERIOD $ 1,002,417 $ 6,026,545 $ 1,002,417 $ 6,026,545
---------------------------------------------------------------------
---------------------------------------------------------------------

CASH IS
REPRESENTED BY:
Cash in bank $ 1,002,417 $ 6,026,545 $ 1,002,417 $ 6,026,545
Cash held in
trust - - - -
---------------------------------------------------------------------
$ 1,002,417 $ 6,026,545 $ 1,002,417 $ 6,026,545
---------------------------------------------------------------------
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SUPPLEMENTARY
INFORMATION
---------------------------------------------------------------------
Interest paid
on convertible
debenture $ 153,863 $ - $ 180,956 $ -
---------------------------------------------------------------------
---------------------------------------------------------------------

Please see the SEDAR website at www.sedar.com for the accompanying
notes which are integral to these interim unaudited consolidated
financial statements and for Management's Discussion & Analysis.


About "Customer for Life"

The Cervus "Customer for Life" model enables the mortgage professional to retain the relationship with the borrower as a customer throughout the life of the mortgage. The compensation model also creates a continued revenue stream in the form of trailer fees, a one time origination fee and a renewal fee every time the customer renews with Cervus. This creates income security for the mortgage professional allowing a long-term relationship to be developed with the borrower. This long-term relationship subsequently gets passed along to the institutional investor of the mortgage security, creating a higher yield long-term investment cash flow stream. The Cervus "Customer for Life" model creates added value relationships for the borrowers, mortgage professionals, institutional investors and for Cervus.

About Cervus

Cervus Financial Group Inc. is a Canadian financial services company created as an industry initiative with leading mortgage broker companies and fixed income investment banks to become a high-yield residential mortgage producer and the largest mortgage broker lender of conventional insured and insurable mortgages in Canada.

Forward-looking (safe harbour) statement

Statements made in this news release that relate to future plans, events or performances are forward-looking statements. Any statement containing words such as "believes," plans," "expects" or "intends" and other statements which are not historical facts contained in this release are forward-looking, and these statements involve risks and uncertainties and are based on current expectations. Consequently, actual results could differ materially from the expectations expressed in these forward-looking statements.

Additional information about Cervus is available on SEDAR (www.sedar.com).

The TSX does not accept responsibility for the adequacy or accuracy of this release.

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