<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission file number 1-12212
DRUMMOND FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 95-4426690
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 1250, 400 Burrard Street, Vancouver, British Columbia, Canada V6C 3A6
(Address of principal executive offices)
(604) 683-5312
(Issuer's telephone number)
CVD FINANCIAL CORPORATION
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
-- --
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding at November 1, 1996
----- -------------------------------
<C> <S>
Common Stock, $0.01 2,718,600
par value
</TABLE>
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
==============================================================================
<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.
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
DRUMMOND FINANCIAL CORPORATION
(Formerly CVD Financial Corporation)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
FORM 10-QSB
QUARTERLY REPORT - PAGE 2
<PAGE> 3
DRUMMOND FINANCIAL CORPORATION
(Formerly CVD Financial Corporation)
Consolidated Balance Sheets
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
------------------ -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 12,852 $ 14,478
Finance receivables, net 11,462 12,137
Other receivables 276 371
Investments 20,167 19,283
Deferred debt issuance costs, net
of accumulated amortization of $617
and $567, respectively 1,986 2,037
Other assets 4 4
------------ ------------
$ 46,747 $ 48,310
============ ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES
Bonds payable, net of principal amount
of bonds held in treasury of $2,953
and $2,953, respectively $ 42,047 $ 42,047
Interest payable 759 1,787
Accounts payable and accrued liabilities 763 835
------------ ------------
43,569 44,669
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value,
5,000,000 shares authorized,
3,000,000 shares issued and outstanding $ 30 $ 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 23,737
Accumulated deficit (17,576) (17,113)
------------ ------------
6,234 6,697
Less: 1,545,400 common shares held as
treasury stock (3,056) (3,056)
------------ ------------
Total shareholders' equity 3,178 3,641
------------ ------------
$ 46,747 $ 48,310
============ ============
</TABLE>
FORM 10-QSB
QUARTERLY REPORT - PAGE 3
<PAGE> 4
DRUMMOND FINANCIAL CORPORATION
(Formerly CVD Financial Corporation)
Consolidated Statements of Operations and Deficit
(Unaudited)
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Revenues
Interest and loan fee income $ 441 $ 816
Gains on securities 106 -
------------ ------------
547 816
Costs and expenses
Interest 918 1,003
Recovery of credit losses (115) -
General and administrative 206 691
------------ ------------
1,009 1,694
------------ ------------
Operating loss (462) (878)
Income tax expense 1 -
------------ ------------
Net loss (463) (878)
Accumulated deficit, beginning of
period (17,113) (18,904)
------------ ------------
Accumulated deficit, end of period $ (17,576) $ (19,782)
============ ============
Loss per share $ (0.20) $ (0.32)
============ ============
Weighted average number of shares
outstanding 2,718,600 2,718,600
============ ============
</TABLE>
FORM 10-QSB
QUARTERLY REPORT - PAGE 4
<PAGE> 5
DRUMMOND FINANCIAL CORPORATION
(Formerly CVD Financial Corporation)
Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Operating activities:
Net loss $ (463) $ (878)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Recovery of credit losses (115) -
Gains on investments, net (106) -
Amortization of deferred debt
issuance costs 51 51
------------ ------------
(633) (827)
Changes in non-cash working capital:
Receivable (368) (190)
Interest receivable 204 93
Commitment fees (101) (53)
Other assets - (55)
Interest payable (1,028) (1,004)
Accounts payable and accrued
liabilities (73) 62
------------ ------------
(1,999) (1,974)
Purchase of trading securities (119) -
Proceeds from sales of trading
securities 202 -
------------ ------------
(1,916) (1,974)
Investing activities:
Advances on loan receivables (100) (133)
Payments received on loan receivables 390 1,699
------------ ------------
290 1,566
Financing activities - -
------------ ------------
- -
------------ ------------
Net change in cash and cash equivalent (1,626) (408)
Cash and cash equivalent, beginning of
period 14,478 12,145
------------ ------------
Cash and cash equivalent, end of period $ 12,852 $ 11,737
============ ============
Cash paid during the period for:
Interest expenses $ 1,787 $ 1,955
Income taxes $ 1 $ -
</TABLE>
FORM 10-QSB
QUARTERLY REPORT - PAGE 5
<PAGE> 6
DRUMMOND FINANCIAL CORPORATION
(Formerly CVD Financial Corporation)
Notes to Consolidated Financial Statements
September 30, 1996
(Unaudited)
Note 1 Basis of Presentation
---------------------
In accordance with Item 310 of Regulation S-B promulgated by the Securities
and Exchange Commission, the consolidated financial statements and
accompanying notes thereto have been condensed and therefore do not contain
all disclosures required by generally accepted accounting principles. These
consolidated financial statements and accompanying notes thereto should be
read in conjunction with Drummond Financial Corporation's (the "Company")
audited consolidated financial statements and notes thereto contained in the
Company's Form 10-KSB Annual Report for the fiscal year ended June 30, 1996.
In October 1996, the Company changed its name from CVD Financial Corporation
to Drummond Financial Corporation. All dollar amounts are rounded to the
nearest thousands.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly its
financial position as of September 30, 1996, and the results of its operations
and changes in its financial position for the periods ended September 30, 1995
and 1996. All adjustments were of a normal recurring nature. Results for
interim periods are not necessarily indicative of those to be expected for the
full year.
Certain reclassifications have been made to the prior period's financial
statements to conform to the current period's presentation.
As at September 30, 1995, the Company had a negative shareholders' equity, and
failed to meet the minimum consolidated tangible net worth requirement under
its Bond indenture 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 June 30 and September 30, 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 June 30, 1996. The Company now focuses on
investment and merchant banking activities while de-emphasizing
FORM 10-QSB
QUARTERLY REPORT - PAGE 6
<PAGE> 7
asset-based commercial lending. However, there is no assurance that such
business strategies will improve future cash flow.
Note 2 Bonds Payable
-------------
Prior to October 1996, the Company was required under its Bond indenture to
maintain a ratio of consolidated liabilities to consolidated tangible net
worth of not more than 15:1. As of September 30, 1996, the Company had a net
shareholders' equity of $3.2 million, which met the minimum required tangible
net worth of $2.9 million. The Company was not in compliance with this
provision for the quarter ended September 30, 1995. During the period in
which the Company was unable to satisfy the tangible net worth ratio
requirement, the trustee under the Bond indenture, acting on behalf of all
holders of the Bonds or at the request of holders of at least 25% of the
principal amount of the outstanding Bonds, was entitled at its option to
exercise certain remedies, including the declaration of a default under the
Bond indenture and the making of a demand that the Bonds be immediately paid
in full if the net worth ratio is not cured within 90 days after receipt of
notice of the event of default. However, no event of default was declared.
In October 1996, the Bond indenture was amended to, among other things, delete
the requirement to meet the tangible net worth ratio.
The Company did not make its semi-annual Bond interest payment due on July 25,
1996 until August 22, 1996. The delinquent payment did not result in an event
of default, as the payment was made within the 30 day cure period provided for
under the terms of the Bond indenture.
Note 3 Adoption of Accounting Standard Regarding Impaired Loans
--------------------------------------------------------
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement No. 114, "Accounting by Creditors for Impairment of a Loan." The
statement is effective for fiscal years beginning after December 15, 1994, and
thus, is effective for the Company beginning on July 1, 1995. However, if the
Company had elected to adopt the statement for its fiscal year ended June 30,
1995, the computational provisions of this statement would not have had a
material impact on the Company's June 30, 1995 allowance for credit losses.
Under the provisions of the statement, when a loan is impaired as defined in
the statement, impairment is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, or as a
practical expedient, on a loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. The effective rate is
either the rate of return implicit in the loan for a loan with fixed interest
and principal repayment terms or the interest rate in effect when the loan
first becomes impaired for a loan with a variable interest rate. The Company
has adopted a measurement method on a loan-by-loan basis. Since the present
value of an impaired loan's expected future cash flows will change from one
reporting period to the next because of the passage of time and also may
change because of revised estimates in the amount or timing of those cash
flows, the Company has established a policy of recognizing
FORM 10-QSB
QUARTERLY REPORT - PAGE 7
<PAGE> 8
these present value changes as either an increase or decrease in its provision
for credit losses as applicable for each reporting period.
The Company continued to apply FASB Statement No. 5, "Accounting for
Contingencies" to provide an allowance on a pool of unimpaired loans.
As of September 30, 1996, the Company had identified impaired finance
receivables with a recorded investment totaling $12.3 million and had
established a specific allowance for credit losses totaling $4.9 million in
connection therewith. Finance receivables, which are also referred to as
recorded investment in loans, include the outstanding loan balance (net of any
charge-offs), any accrued interest, deferred loan fees and reimbursable costs.
The activity with regard to the allowance for credit losses during the three
months ended September 30, 1996 is as follows:
<TABLE>
<CAPTION>
Three Months
------------
(in thousands)
<S> <C>
Balance, beginning of period $ 7,202
Decrease in provision (115)
Charge-offs (1,695)
------------
Balance, end of period $ 5,392
============
Consisted of:
Specific allowance under FASB Statement No. 114 $ 4,891
General allowance under FASB Statement No. 5 501
------------
$ 5,392
============
</TABLE>
The following table summarizes the calculation of net finance receivables as
at September 30, 1996:
Finance receivables, gross $ 16,854
Less allowance for credit losses (5,392)
------------
Finance receivables, net $ 11,462
============
FORM 10-QSB
QUARTERLY REPORT - PAGE 8
<PAGE> 9
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of the Company for the three months ended September 30, 1996
should be read in conjunction with the consolidated financial statements and
related notes included elsewhere herein.
Results of Operations - Three Months Ended September 30, 1996
- -------------------------------------------------------------
Revenues for the three months ended September 30, 1996 decreased to $547,000
from $816,000 in the comparative period of 1995. Interest and loan fee income
decreased to $441,000 for the quarter ended September 30, 1996 from $816,000
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 remained at 8.25% during the three months ended
September 30, 1996, compared to a decrease to 8.75% from 9.00% during the
comparative period of 1995. The Company recognized $106,000 in gains on
securities for the three months ended September 30, 1996.
Costs and expenses for the three months ended September 30, 1996 decreased to
$1.0 million from $1.7 million in the comparative period of 1995, primarily as
a result of a decrease in general and administrative expenses. General and
administrative expenses were $206,000 for the three months ended September 30,
1996, compared to $691,000 for the three months ended September 30, 1995,
primarily as the result of reduced legal fees and loan collection costs.
Interest expense decreased to $0.9 million for the three months ended
September 30, 1996 from $1.0 million for the comparative period of 1995,
primarily as a result of a lower minimum interest rate accrued on the
Company's 15 Year Variable Rate Bonds (the "Bonds"). For the three months
ended September 30, 1996, interest was accrued at the rate of 8.25% per annum,
and 9.00% per annum for the three months ended September 30, 1995. In the
quarter ended September 30, 1996, the Company reported a recovery of credit
losses of $115,000.
No income tax provision was recognized for the three months ended September
30, 1996, except for the payment of a minimum tax of $1,000. The Company has
deferred tax benefits with respect to net operating loss carry forwards which
have not been recognized as there is no assurance that they will be realized.
In the comparative period of 1995, the Company recognized no income tax
provision.
For the three months ended September 30, 1996, the Company reported a net loss
of $463,000, compared to a net loss of $878,000 in the comparative period of
1995. The decrease in the net
FORM 10-QSB
QUARTERLY REPORT - PAGE 9
<PAGE> 10
loss in the current period was primarily attributable to the lower general and
administrative expenses incurred during the current period. The decrease in
the general and administrative expenses was partially offset by the decrease
in interest and loan fee income.
Liquidity and Capital Resources
- -------------------------------
The Company's cash and cash equivalents at September 30, 1996 were $12.9
million, which represents a decrease of $1.6 million from June 30, 1996.
Net cash used by operations for the three months ended September 30, 1996 was
$1.9 million, compared to net cash used by operations of $2.0 million for the
comparative period of 1995.
Cash provided by investing activities was $290,000 during the current period
as compared to $1.6 million during the comparative period of 1995, primarily
due to a decrease in collections on loan receivables resulting from a smaller
loan portfolio. The Company's finance receivables at September 30, 1996 were
$16.9 million, compared to $39.0 million at September 30, 1995.
The Company did not make its semi-annual interest payment on the Bonds due
July 25, 1996 until August 22, 1996. The delinquent payment did not result in
an event of default as the payment was made within the 30 day cure period
provided for under the terms of the indenture governing the Company's Bonds
(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.
In October 1996, the Company's Bond Indenture was amended to, among other
things, delete the provisions that require the Company to maintain a ratio of
consolidated liabilities to consolidated tangible net worth of not more than
15:1, and redeem all of the Bonds if any person or group (other than
Conversion Industries Inc. ("Conversion") or its affiliates) acquires 35.0% or
more of the combined voting power of the then outstanding securities of the
Company. As a result of the deletion of the 35% threshold, Arbatax
International Inc. ("Arbatax"), who owns approximately 34.6% of the Company's
outstanding common stock and all of the Company's outstanding variable voting
cumulative preferred stock, controls 47.9% of the total votes of the Company.
The Company used $2.0 million in operating activities, before any activities
in trading securities, in both the three months ended September 30, 1996 and
1995. As at September 30, 1996, the Company had $12.9 million in cash and
cash equivalents, and $20.2 million in securities, the majority of which were
highly liquid investment grade bonds. There were no new loans approved 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 short-term.
FORM 10-QSB
QUARTERLY REPORT - PAGE 10
<PAGE> 11
Finance Receivables
- -------------------
The Company's loan portfolio at September 30, 1996 aggregated $16.9 million in
finance receivables (principal plus interest and reimbursable costs less
unamortized commitment fees) due from eight borrowers, compared to an
aggregate of $39.0 million in finance receivables due from 16 borrowers at
September 30, 1995.
Non-performing Loans at September 30, 1996
At September 30, 1996, loans to four borrowers, who had finance receivables
totaling $12.3 million, representing approximately 73% 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).
The following table compares the finance receivables of the non-performing
loans as at September 30, 1996 with the finance receivables of such loans as
at September 30, 1995:
<TABLE>
<CAPTION>
Outstanding Finance Receivables
---------------------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
(in thousands)
<S> <C> <C>
Non-performing Loans
- --------------------
Clean-Up Technology, Inc. and
subsidiaries $ 2,958 $ 3,434
Enviropur Waste Refining and
Technology, Inc. 4,237 4,158
Heartland, Inc. 2,075 2,009
PDG Environmental, Inc. 3,027 3,064
------------ ------------
$ 12,297 $ 12,665
============ ============
</TABLE>
As at September 30, 1996, three of these entities, who had non-performing
finance receivables totaling $6.5 million, representing 38% of the outstanding
portfolio, had filed voluntary petitions for bankruptcy protection. The
Company also had additional non-performing finance receivables totaling $2.8
million, 17% 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.
During the year ended June 30, 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
FORM 10-QSB
QUARTERLY REPORT - PAGE 11
<PAGE> 12
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 ICHOR
Corporation (formerly PDG Remediation Inc.) ("ICHOR"). ICHOR 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
Well Service Inc. ("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 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. 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 May 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 loan guarantees. Conversion subsequently filed a voluntary
petition for bankruptcy protection under Chapter 11 in May 1995. As of June
30, 1996, Conversion owed the Company $2.3 million 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, including Conversion's outstanding loan and loan
guarantees. 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
FORM 10-QSB
QUARTERLY REPORT - PAGE 12
<PAGE> 13
Beta. Since December 1994, the Company has had no officers and/or directors
who were also concurrently officers and/or directors of Conversion.
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 three months ended September 30, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------
1996 1995
---------------------------- -------
(in thousands)
Specific General Total Total
Changes in Allowance Reserve Reserve Reserve Reserve
- -------------------- -------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 6,702 $ 500 $ 7,202 $ 14,716
Provision (recovery) for the period (116) 1 (115) -
Charge-offs for the period (1,695) - (1,695) (100)
------- ------- ------- --------
Balance, end of period $ 4,891 $ 501 $ 5,392 $ 14,616
======= ======= ======= ========
</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.
FORM 10-QSB
QUARTERLY REPORT - PAGE 13
<PAGE> 14
The following tables summarize the Company's specific reserves for credit
losses prepared in accordance with FASB No. 114 as at September 30, 1996 and
September 30, 1995:
<TABLE>
<CAPTION>
SEPTEMBER 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):
Continuing to operate 2 $ 7,264 $ 6,024 $ 300 $ 4,569 $ 2,695
Future cash flows:
Bankruptcy or
ceased to operate 2 5,033 5,213 375 2,837 2,196
-- -------- -------- ------- ------- -------
Subtotal 4 12,297 $ 11,237 $ 675 $ 7,406 4,891
======== ======= =======
UNIMPAIRED LOANS 4 4,557 501(4)
-- -------- -------
Grand total 8 $ 16,854 $ 5,392
== ======== =======
</TABLE>
FORM 10-QSB
QUARTERLY REPORT - PAGE 14
<PAGE> 15
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
(dollars in thousands)
Total future Specific
expected cash Net reserve
# of Recorded collections, net present under FASB
loans investment of related costs(1) value No. 114
----- ---------- ---------------- ------- ----------
<S> <C> <C> <C> <C> <C>
IMPAIRED LOANS
Collateral dependant(3):
Bankruptcy or
ceased to operate 4 $ 5,024 $ 3,595 $ 3,167 $ 1,857
Continuing to operate 3 9,491 9,085 6,618 2,873
Future cash flows:
Bankruptcy or
ceased to operate 4 8,703 6,633 3,726 4,977
Continuing to operate 1 5,155 1,590 1,492 3,663
-- ------- -------- ------- -------
Subtotal 12 28,373 $ 20,903 $15,003 13,370
======== =======
UNIMPAIRED LOANS 4 10,592 1,246(4)
-- ------- -------
Grand total 16 $38,965 $14,616
== ======= =======
</TABLE>
- ------------------------------
Notes:
1. The estimate of expected cash flows represents the Company's best estimate
based on reasonable and supportable assumptions and projections. The period
over which future expected net cash collections will occur is 1.5 years for
loans that are collateral dependant and the borrower is continuing to operate
and 3.75 years for loans which may generate future cash flows and the borrower
is bankrupt or has ceased to operate.
2. These amounts represent future costs to be incurred in connection with the
sale of collateral and/or the collection of the loans, and have been
subtracted from the net future expected cash collections.
3. The fair market value of the collateral represents the amount that the
Company reasonably expects to receive in an arm's length sale between a
willing buyer and a willing seller. For marketable securities, the current
quoted price is used. For receivables, inventory and equipment, relevant
market sources are used when reliable information is provided. A normal price
adjustment is provided if a forced or liquidation sale is probable. No
appraisals have been used for the valuation of collateral.
4. The general reserve is determined in accordance with FASB No. 5 on a pool
of unimpaired loans.
FORM 10-QSB
QUARTERLY REPORT - PAGE 15
<PAGE> 16
PART II. FINANCIAL INFORMATION
---------------------
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's annual report on Form 10-KSB for the year
ended June 30, 1996 for information concerning certain legal proceedings.
ITEM 2. CHANGES IN SECURITIES
In October 1996, the Bond Indenture was amended to, among other things, delete
certain financial ratio requirements, amend the definition of "change of
control of the Company" to delete a 35% threshold, and delete the limitation
of a maximum of $1 million of unsecured indebtedness that can be incurred by
the Company. The amendments to the Bond Indenture have provided the Company
with greater flexibility in its business affairs.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on September 6, 1996. At
the meeting, Leonard Petersen was elected as a director to hold office for a
one-year term, expiring in 1996, Michael Smith and Lawrence E. Beard were
elected as directors to hold office for a two-year term, expiring in 1997, and
Rene Randall and Jimmy Lee were elected as directors to hold office for a
three-year term, expiring in 1998.
The following matters were submitted and voted upon at the meeting:
1. Election of the Board of Directors:
Abstentions and
Name Votes For Votes Withheld Broker Non-Votes
---- --------- -------------- ----------------
Lawrence E. Beard 2,167,224 - -
Jimmy S.H. Lee 2,167,224 - -
Leonard Petersen 2,167,224 - -
Rene Randall 2,167,224 - -
Michael J. Smith 2,167,224 - -
FORM 10-QSB
QUARTERLY REPORT - PAGE 16
<PAGE> 17
2. Approval of an amendment to the Company's Certificate of Incorporation to
change the name of the Company to "Drummond Financial Corporation".
Abstentions and
Votes For Votes Against Votes Withheld Broker Non-Votes
--------- ------------- -------------- ----------------
2,162,224 5,200 - -
3. Approval of an amendment to the Company's Certificate of Incorporation to
expand the permitted activities of the Company.
Abstentions and
Votes For Votes Against Votes Withheld Broker Non-Votes
--------- ------------- -------------- ----------------
1,436,681 5,000 - -
4. Approval of an amendment to the Company's Certificate of Incorporation to
provide for staggered terms for directors.
Abstentions and
Votes For Votes Against Votes Withheld Broker Non-Votes
--------- ------------- -------------- ----------------
1,397,970 41,711 - -
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
- -------------- -----------
3.1 Certificate of Amendment to the Certificate of Incorporation
of Drummond Financial Corporation dated October 14, 1996.
4.1 Second Supplemental Indenture between Drummond Financial
Corporation and Harris Trust Company of New York, as trustee,
dated for reference October 23, 1996.
27 Article 5 - Financial Data Schedule for 1st Quarter 1996
Form 10-QSB.
(b) Reports on Form 8-K
None.
FORM 10-QSB
QUARTERLY REPORT - PAGE 17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
DATED: November 11, 1996
CVD FINANCIAL CORPORATION
By: /s/Michael J. Smith
---------------------------
Michael J. Smith, President,
Chief Executive Officer and
Chief Financial Officer
FORM 10-QSB
QUARTERLY REPORT - PAGE 18
<PAGE> 19
EXHIBIT INDEX
-------------
Exhibit Number Description
- -------------- -----------
3.1 Certificate of Amendment to the Certificate of Incorporation
of Drummond Financial Corporation dated October 14, 1996.
4.1 Second Supplemental Indenture between Drummond Financial
Corporation and Harris Trust Company of New York, as trustee,
dated for reference October 23, 1996.
27 Article 5 - Financial Data Schedule for 1st Quarter 1996
Form 10-QSB.
FORM 10-QSB
QUARTERLY REPORT - PAGE 19
<PAGE> 1
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
CVD FINANCIAL CORPORATION
CVD Financial Corporation (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, hereby certifies as follows:
1. The Shareholders of the Corporation adopted the following resolutions at
the annual general meeting of shareholders of the Corporation on September 6,
1996:
AMENDMENT TO THE CERTIFICATE OF INCORPORATION - CHANGE OF NAME
- --------------------------------------------------------------
Article 1 of the Certificate of Incorporation [shall] be amended to read in
its entirety as follows:
"The name of the Corporation is Drummond Financial Corporation."
AMENDMENT TO THE CERTIFICATE OF INCORPORATION - EXPANSION OF CORPORATE POWERS
- -----------------------------------------------------------------------------
Article 3 of the Corporation's Certificate of Incorporation [shall] be amended
to read in its entirety as follows:
"The purpose of the Corporation is to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of
Delaware."
AMENDMENT TO THE CERTIFICATE OF INCORPORATION - CLASSIFYING THE BOARD OF
DIRECTORS
- ------------------------------------------------------------------------
A new Article 8 of the Corporation's Certificate of Incorporation [shall] be
added to read in its entirety as follows:
"The directors shall be divided into three classes, designated Class I, Class
II and Class III. Initially, Class I directors shall be elected for a one-
year term, Class II directors for a two-year term and Class III directors for
a three-year term. At any annual meeting of shareholders held during or after
1996, successors to the class of directors whose term expires at that annual
meeting shall be elected to serve until the third ensuing annual meeting of
shareholders. If the number of directors is changed in the manner provided by
the bylaws, any increase or decrease shall be apportioned among the classes so
the number of directors in each class is as nearly equal as possible, and any
additional director of any class elected or appointed to fill a vacancy
resulting from an increase in such class shall hold office for a term that
shall coincide with the remaining term of such class. A director
- 1 -
<PAGE> 2
shall hold office until the annual meeting for the year in which such
director's term expires and until such director's successor shall be elected
and qualified, subject, however, to prior death, resignation, retirement,
disqualification or removal from office."
2. The foregoing amendments were duly adopted in accordance with the
applicable provisions of Sections 242 of the General Corporation Law of the
State of Delaware.
DATED October 14, 1996.
CVD FINANCIAL CORPORATION
By: /s/Michael J. Smith
------------------------
Michael J. Smith
President
Attest: /s/ Roy Zanatta
------------------------
Roy Zanatta
Secretary
I certify that I know or have satisfactory evidence that Michael J. Smith is
the person who appeared before me, and said person acknowledge that said
person signed this instrument, on oath stated that said person was authorized
to execute the instrument, and acknowledged it as the act of CVD Financial
Corporation, a Delaware corporation, to be the free and voluntary act of such
corporation for the uses and purposes mentioned in this instrument.
Dated this 14th day of October, 1996.
/s/Janilee A. Jeffery
OFFICIAL SEAL ---------------------------------
JANILEE A. JEFFERY (Signature of Public Officer)
Notary Public - State of Washington
My Commission Expires 6-29-99 Janilee A. Jeffery
---------------------------------
(Legibly Print or Stamp Name of
Public Officer)
My appointment expires 6-29-99
-2-
<PAGE> 1
SECOND SUPPLEMENTAL INDENTURE dated for reference October 23, 1996 (the
"Supplemental Indenture") to CVD Financial 1993 Master Indenture, dated as of
August 26, 1993 as amended by a First Supplemental Indenture dated August 26,
1993 (collectively the "Indenture"), made between Drummond Financial
Corporation, formerly called CVD Financial Corporation, a Delaware Corporation
(herein called the "Company") and Harris Trust Company of New York, a trust
company organized pursuant to the laws of the State of Illinois, as trustee
(herein called the "Trustee").
RECITALS OF THE COMPANY
A. The Company and the Trustee entered into the Indenture to provide for the
issuance of unsecured subordinated variable rate bonds (herein called the
"Securities") to be issued in one or more series as provided in the Indenture;
B. Section 902 of the Indenture provides that with the consent of Holders of
not less than a majority amount of the Outstanding Securities, that the
Company and Trustee may enter into an indenture or indentures supplemental for
the purposes of adding or changing in any manner or eliminating any of the
provisions of the Indenture or of modifying in any manner certain rights of
Holders;
C. The Company has agreed to the modification of or change in or omission
from the provisions contained in the Indenture hereinafter provided for;
D. The Company has requested the Trustee to concur in and execute this
Supplemental Indenture;
E. The Indenture provides that any request, demand, authorization, direction,
notice, consent, waiver or other action provided by the Indenture to be given
or taken by Holders may be embodied in and evidenced by one or more
instruments of a substantially similar tenor signed by such Holders in person
or by agent duly appointed in writing;
F. The terms and provisions of this Supplemental Indenture have been
consented to and approved in writing by Holders of a majority of the
Outstanding Securities;
G. The Company under the laws relating thereto is duly authorized to enter
into the Supplemental Indenture and all things necessary have been done and
performed to make the Supplemental Indenture a valid and binding instrument in
accordance with its terms and under the terms of the Indenture; and
H. The foregoing recitals are made as representations and warranties by the
Company and not by the Trustee.
<PAGE> 2
2
NOW THEREFORE THIS INDENTURE WITNESSES THAT the parties agree as follows:
1. DECLARATION AND INTERPRETIVE PROVISIONS
This Supplemental Indenture is declared to be supplemental to the Indenture
and is to form part of and shall have the same effect as though incorporated
into the Indenture. In this Supplemental Indenture, unless there is something
in the subject or context inconsistent therewith, the expressions herein used
shall have the same meaning as corresponding expressions used in the Indenture
and all provisions of the Indenture, except only so far as may be inconsistent
with the express provisions of this Supplemental Indenture, shall apply to and
have effect in connection with this Supplemental Indenture.
2. EFFECTIVE DATE
For the purposes of convenience, this Supplemental Indenture will be effective
from and after October 29, 1996, irrespective of the actual dates of execution
hereof.
3. ENUREMENT
This Supplemental Indenture will enure to the benefit of and be binding upon
the parties hereto and their respective successors and assigns.
4. AMENDMENT
4.1 Section 101
-----------
(a) Section 101 of the Indenture is hereby amended to delete in their
entirety: (i) subparagraph (2) of the definition of "Change in Control of the
Company" on page 3 of the Indenture; (ii) the definitions of "Consolidated
Assets", "Consolidated Liabilities" and "Consolidated Tangible Net Worth" on
page 4 of the Indenture; and (iii) the definitions of "Loan Loss Reserve" and
"Loan-to-Value Ratio" on page 6 of the Indenture.
(b) Section 101 of the Indenture is hereby amended to delete from the
definition of "Senior Indebtedness" on page 9 of the Indenture, commencing in
the 16th line thereof, the following:
(C) the Loan-to-Value Ratio of the Company is not less than 1:1; and (D) the
ratio of Consolidated Liabilities to Consolidated Tangible Net Worth of the
Company is not greater than 15:1, both immediately before and immediately
following the incurrence of such Indebtedness.
4.2 Section 1008
------------
Section 1008 of the Indenture is hereby amended to delete the same in its
entirety.
<PAGE> 3
3
4.3 Section 1009
------------
Section 1009 of the Indenture is amended in its entirety to read as follows:
"The Company shall not declare or pay any dividends or distribution either
in cash, stock or any other property on its capital stock now or hereafter
outstanding or on any warrant, option or other right to acquire capital stock
now or hereafter outstanding, or redeem, retire, purchase or otherwise acquire
any shares of any class of its capital stock now or hereafter outstanding, or
any warrant, option or other right to acquire capital stock now or hereafter
outstanding, including without limitation any put, call or other right to
payment under any warrant, option or the right to acquire capital stock now or
hereafter outstanding, unless at the time of such action an Event of Default
shall not have occurred and be continuing, and the Company shall deliver to
the Trustee an Officer's Certificate stating that, to the best of the
knowledge to the signers thereof, no Event of Default shall have occurred and
be continuing."
4.4 Sections 1010, 1012 and 1014
----------------------------
Sections 1010, 1012 and 1014 of the Indenture are hereby amended to delete the
same in their entirety.
4.5 Section 1011
------------
Section 1011 of the Indenture is hereby amended in its entirety to read as
follows:
Section 1011. Incurrence of Indebtedness.
---------------------------
The Company shall not create, incur, assume or permit to exist any
indebtedness other than indebtedness outstanding as of the date of this
Indenture; PROVIDED, HOWEVER, that this Section shall not prohibit the
incurrence of (1) Senior Indebtedness; (2) unsecured indebtedness and other
liabilities incurred in the ordinary course of business, but not incurred
through the borrowing of money or the obtaining of credit; (3) indebtedness
for taxes, assessments, governmental charges or levies to the extent that
payment thereof shall not at the time be required to be made or to the extent
that such taxes, assessments, governmental charges or levies may be the
subject of good faith contest or bona fide dispute; or (4) indebtedness which
is expressly subordinated to the Securities.
4.6 Consequential Amendments
------------------------
The Indenture is hereby amended to delete all references to any definitions
which have been deleted in their entirety as provided in Section 4.1(a) of
this Supplemental Indenture.
<PAGE> 4
4
5. COUNTERPARTS
This instrument may be executed in any number of counterparts, each of which
so executed shall be deemed to be an original, but all such counterparts all
together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture
to be duly executed effective as of the date set out herein.
DRUMMOND FINANCIAL CORPORATION
(formerly called CVD Financial Corporation)
By: /s/ Roy Zanatta
--------------------------------------
Name: Roy Zanatta
------------------------------------
Its: Secretary
-------------------------------------
HARRIS TRUST COMPANY OF NEW YORK
By: /s/ Amy Roberts
--------------------------------------
Name: Amy Roberts
------------------------------------
Its: Assistant Vice-President
------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES INCLUDED IN THIS FORM 10-QSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 12,852
<SECURITIES> 20,167
<RECEIVABLES> 17,130
<ALLOWANCES> 5,392
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,747
<CURRENT-LIABILITIES> 0
<BONDS> 42,047
0
30
<COMMON> 43
<OTHER-SE> 3,105
<TOTAL-LIABILITY-AND-EQUITY> 46,747
<SALES> 0
<TOTAL-REVENUES> 547
<CGS> 0
<TOTAL-COSTS> 1,009
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (115)
<INTEREST-EXPENSE> 918
<INCOME-PRETAX> (462)
<INCOME-TAX> 1
<INCOME-CONTINUING> (463)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (463)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
