<PAGE> 1
==============================================================================
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 December 31, 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)
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 February 1, 1997
----- -------------------------------
<C> <S>
Common Stock, $0.01 2,718,600
par value
</TABLE>
Transitional Small Business Disclosure Format: 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 SIX MONTHS ENDED DECEMBER 31, 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>
December 31, 1996 June 30, 1996
----------------- -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 5,484 $ 14,478
Finance receivables, net 9,764 12,137
Other receivables 536 371
Investments 30,620 19,283
Deferred debt issuance costs, net
of accumulated amortization 2,209 2,037
Other assets 4 4
------------ -----------
$ 48,617 $ 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 $ 42,047 $ 42,047
Interest payable 1,734 1,787
Accounts payable and accrued liabilities 289 835
------------ -----------
44,070 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 (17,207) (17,113)
Unrealized holding gain on
available-for-sale securities 1,000 -
------------ -----------
7,603 6,697
Less: 1,545,400 common shares
held as treasury stock (3,056) (3,056)
------------ -----------
Total shareholders' equity 4,547 3,641
------------ -----------
$ 48,617 $ 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 Six For the Six
Months Ended Months Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Revenues
Interest and loan fee income $ 860 $ 1,504
(Loss) gains on securities (564) 1,779
Other 607 -
------------- -------------
903 3,283
Costs and expenses
Interest 1,860 1,996
Recovery of credit losses (1,704) (1,528)
General and administrative 840 1,642
------------- -------------
996 2,110
------------- -------------
Operating (loss) income (93) 1,173
Income tax expense 1 1
------------- -------------
(Loss) income before
extraordinary item (94) 1,172
Extraordinary item, extinguishment
of debt - 118
------------- -------------
Net (loss) income (94) 1,290
Accumulated deficit, beginning
of period (17,113) (18,904)
------------- -------------
Accumulated deficit, end of period $ (17,207) $ (17,614)
============= =============
(Loss) income per share:
(Loss) income before
extraordinary item $ (0.09) $ 0.43
Extraordinary item - 0.04
------------- -------------
$ (0.09) $ 0.47
============= =============
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 Operations and Deficit
(Unaudited)
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Revenues
Interest and loan fee income $ 419 $ 688
(Loss) gains on securities (670) 1,779
Other 607 -
------------ ------------
356 2,467
Costs and expenses
Interest 942 993
Recovery of credit losses (1,589) (1,528)
General and administrative 634 951
------------ ------------
(13) 416
------------ ------------
Operating income 369 2,051
Income tax expense - 1
------------ ------------
Income before extraordinary item 369 2,050
Extraordinary item, extinguishment
of debt - 118
------------ ------------
Net income 369 2,168
Accumulated deficit, beginning
of period (17,576) (19,782)
------------ ------------
Accumulated deficit, end of period $ (17,207) $ (17,614)
============ ============
Income per share:
Income before extraordinary item $ 0.11 $ 0.76
Extraordinary item - 0.04
------------ ------------
$ 0.11 $ 0.80
============ ============
Weighted average number of
shares outstanding 2,718,600 2,718,600
============ ============
</TABLE>
FORM 10-QSB
QUARTERLY REPORT - PAGE 5
<PAGE> 6
DRUMMOND FINANCIAL CORPORATION
(Formerly CVD Financial Corporation)
Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Operating activities:
Net (loss) income $ (94) $ 1,290
Adjustments to reconcile net loss
to net cash used by operating
activities:
Extraordinary gain on early
extinguishment of debt - (118)
Recovery of credit losses (1,704) (1,528)
Loss (gains) on investments, net 564 (1,779)
Amortization of deferred debt
issuance costs 6 102
------------- -------------
(1,228) (2,033)
Changes in non-cash working capital:
Receivable (206) -
Interest receivable 118 144
Commitment fees (109) 178
Other assets (172) (667)
Interest payable (53) (64)
Accounts payable and accrued liabilities (546) 472
------------- -------------
(2,196) (1,970)
Purchase of trading securities (21,831) (7,612)
Proceeds from sales of trading
securities 12,995 1,409
------------- -------------
(11,032) (8,173)
Investing activities:
Advances on loan receivables (1,100) (133)
Payments received on loan
receivables 3,138 8,849
------------- -------------
2,038 8,716
Financing activities:
Purchase of the treasury bonds - (126)
------------- -------------
- (126)
------------- -------------
Net change in cash and cash equivalent (8,994) 417
Cash and cash equivalent,
beginning of period 14,478 12,145
------------- -------------
Cash and cash equivalent,
end of period $ 5,484 $ 12,562
============= =============
Cash paid during the period for:
Interest expenses $ 1,913 $ 1,957
Income taxes $ 1 $ 1
</TABLE>
FORM 10-QSB
QUARTERLY REPORT - PAGE 6
<PAGE> 7
DRUMMOND FINANCIAL CORPORATION
(Formerly CVD Financial Corporation)
Notes to Consolidated Financial Statements
December 31, 1996
(Unaudited)
Note 1 Basis of Presentation
---------------------
In accordance with Item 310 of Regulation S-B promulgated by the Securities
and Exchange Commission, the consolidated financial statements and
accompanying notes thereto have been condensed and therefore do not contain
all disclosures required by generally accepted accounting principles. These
consolidated financial statements and accompanying notes thereto should be
read in conjunction with 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 December 31, 1996, and the results of its operations
and changes in its financial position for the periods ended December 31, 1995
and 1996. All adjustments were of a normal recurring nature. Results for
interim periods are not necessarily indicative of those to be expected for the
full year.
Certain reclassifications have been made to the prior period's financial
statements to conform to the current period's presentation.
As at December 31, 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 December 31, 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 fiscal 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 asset-based
commercial lending. However, there is no assurance that such business
strategies will improve future cash flow.
FORM 10-QSB
QUARTERLY REPORT - PAGE 7
<PAGE> 8
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. The Company was not in compliance with this
provision as at December 31, 1995 and March 31, 1996 but was in compliance
with the provision as at June 30, 1996. 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 January
25, 1997. The Company has advised the trustee that it will pay the interest
on February 21, 1997, which is within the 30 day cure period provided under
the terms of the Bond indenture, and thus, will not result in an event of
default.
Note 3 Adoption of Accounting Standard Regarding Impaired Loans
--------------------------------------------------------
In May 1993, the Financial Accounting Standards Board ("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 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.
FORM 10-QSB
QUARTERLY REPORT - PAGE 8
<PAGE> 9
As of December 31, 1996, the Company had identified impaired finance
receivables with a recorded investment totaling $5.0 million and had
established a specific allowance for credit losses totaling $2.2 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 six
months ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Six Months
----------
(in thousands)
<S> <C>
Balance, beginning of period $ 7,202
Decrease in provision (1,704)
Charge-offs, net of charge-back (3,224)
----------
Balance, end of period $ 2,274
==========
Consisted of:
Specific allowance under FASB Statement No. 114 $ 2,204
General allowance under FASB Statement No. 5 70
----------
$ 2,274
==========
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes the calculation of net finance receivables as
at December 31, 1996:
<S> <C>
Finance receivables, gross $ 12,038
Less allowance for credit losses (2,274)
----------
Finance receivables, net $ 9,764
==========
</TABLE>
Note 4 Related Party Transactions
--------------------------
In December 1996, the Company sold its loan to Enviropur Waste Refining and
Technology, Inc. to a subsidiary of the Company's parent company, Arbatax
International Inc., for $2.4 million in cash, which was approximately the
Company's carrying value of the loan. Certain officers and directors of the
Company are also officers and directors of the purchaser.
FORM 10-QSB
QUARTERLY REPORT - PAGE 9
<PAGE> 10
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 six months and quarter ended December 31,
1996 should be read in conjunction with the consolidated financial statements
and related notes included elsewhere herein.
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 1996
Revenues for the six months ended December 31, 1996 decreased to $903,000 from
$3.3 million in the comparative period of 1995. In the current period, the
Company recognized a $564,000 loss on securities, compared to a gain on
securities of $1.8 million in the comparative period of 1995. Interest and
loan fee income decreased to $860,000 for the six months ended December 31,
1996 from $1.5 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 remained at 8.25% during
the six months ended December 31, 1996, compared to a decrease to 8.50% from
9.00% during the comparative period of 1995. In the six months ended December
31, 1996, the Company had other revenue of $607,000, of which $600,000
resulted from a consent dismissal of a court action for which the Company had
made a provision. See "Legal Proceedings".
Costs and expenses for the six months ended December 31, 1996 decreased to
$1.0 million from $2.1 million in the comparative period of 1995, primarily as
a result of a decrease in general and administrative expenses. General and
administrative expenses decreased to $840,000 for the six months ended
December 31, 1996, compared to $1.6 million for the comparative period of
1995, primarily as the result of reduced legal fees and loan collection costs.
In the six months ended December 31, 1996, the Company reported a recovery of
credit losses of $1.7 million, compared to $1.5 million for the comparative
period of 1995.
Interest expense decreased to $1.9 million for the six months ended December
31, 1996 from $2.0 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 six months ended December 31,
1996, interest was accrued at the rate of 8.25% per annum, and 9.00% per annum
for the six months ended December 31, 1995.
No income tax provision was recognized for the six months ended December 31,
1996 and 1995, 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.
For the six months ended December 31, 1996, the Company reported a net loss of
$94,000, compared to net income of $1.3 million in the comparative period of
1995, which included $118,000 of extraordinary gains on the early
extinguishment of debt. The net loss in the current
FORM 10-QSB
QUARTERLY REPORT - PAGE 10
<PAGE> 11
period was primarily attributable to the loss on securities, which was
partially off-set by other income and the lower general and administrative
expenses. Results for the comparative period of 1995 included a gain on
securities of $1.8 million.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1996
Revenues for the three months ended December 31, 1996 decreased to $356,000
from $2.5 million in the comparative period of 1995. The Company recognized a
$670,000 loss on securities for the three months ended December 31, 1996,
compared to $1.8 million in gains on securities for the comparative period of
1995. Interest and loan fee income decreased to $419,000 for the quarter
ended December 31, 1996 from $688,000 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 the Bank plus 2% to 7%. The Bank's prime rate remained at 8.25% during the
three months ended December 31, 1996, compared to a decrease to 8.50% from
8.75% during the comparative period of 1995. In the quarter ended December
31, 1996, the Company had other revenues of $607,000, of which $600,000
resulted from the reversal of a provision for a court action which was
dismissed without any liability or cost to the Company. See "Legal
Proceedings".
Costs and expenses for the three months ended December 31, 1996 decreased to a
recovery of $13,000 from $416,000 in the comparative period of 1995, primarily
as a result of a decrease in general and administrative expenses and recovery
of credit losses. General and administrative expenses decreased to $634,000
for the quarter ended December 31, 1996, compared to $1.0 million for the
comparative period of 1995, primarily as the result of reduced legal fees and
loan collection costs. In the quarter ended December 31, 1996, the Company
reported a recovery of credit losses of $1.6 million, compared to $1.5 million
in the comparative period of 1995.
Interest expense decreased to $942,000 for the quarter ended December 31, 1996
from $1.0 million for the comparative period of 1995, primarily as a result of
a lower minimum interest rate accrued on the Bonds. For the three months
ended December 31, 1996, interest was accrued at the rate of 8.25% per annum,
and 9.00% per annum for the three months ended December 31, 1995.
For the three months ended December 31, 1996, the Company reported net income
of $369,000, compared to net income of $2.2 million in the comparative period
of 1995 which included $118,000 of extraordinary gains on the early
extinguishment of debt. Results for the comparative period of 1995 included a
gain on securities of $1.8 million compared to a loss on securities of
$607,000 in the current period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at December 31, 1996 were $5.5
million, which represents a decrease of $9.0 million from June 30, 1996.
FORM 10-QSB
QUARTERLY REPORT - PAGE 11
<PAGE> 12
Net cash used by operations for the six months ended December 1996 was $11.0
million, compared to net cash used by operations of $8.2 million for the
comparative period of 1995. The Company used $2.2 million in operating
activities, before any activities in trading securities, in the six months
ended December 1996, compared to using cash of $2.0 million in the comparative
period of 1995.
Cash provided by investing activities was $2.0 million during the current
period as compared to $8.7 million during the comparative period of 1995,
primarily due to a decrease in collections on loan receivables resulting from
a smaller loan portfolio, and a loan advance during the current period of $1.1
million. The Company's finance receivables at December 31, 1996 were $9.8
million, compared to $19.0 million at December 31, 1995.
The Company did not make its semi-annual interest payment on the Bonds due
January 25, 1997. The Company has advised the trustee that it will pay the
interest on February 21, 1997, which is 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 July 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 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., 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.
As at December 31, 1996, the Company had $5.5 million in cash and cash
equivalents. There was one new loan advanced during the current period, and
the Company proceeded to collect and/or settle and restructure the non-
performing loans in its portfolio. 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.
FINANCE RECEIVABLES
The Company's loan portfolio at December 31, 1996 aggregated $12.0 million in
finance receivables (principal plus interest and reimbursable costs less
unamortized commitment fees) due from seven borrowers, compared to an
aggregate of $26.1 million in finance receivables due from 12 borrowers at
December 31, 1995. In December 1996, one new loan of $1.1 million was
advanced.
FORM 10-QSB
QUARTERLY REPORT - PAGE 12
<PAGE> 13
Non-performing Loans at December 31, 1996
- -----------------------------------------
At December 31, 1996, loans to two borrowers, who had finance receivables
totaling $5.0 million, representing approximately 41.9% 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 December 31, 1996 with the finance receivables of such loans as at
December 31, 1995:
<TABLE>
<CAPTION>
Outstanding Finance Receivables
-------------------------------------
December 31, 1996 December 31, 1995
----------------- -----------------
(in thousands)
<S> <C> <C>
Non-performing Loans
- --------------------
Clean-Up Technology, Inc. ("CUT")
and subsidiaries $ 2,971 $ 3,434
Heartland, Inc. ("Heartland") 2,075 2,009
------------ ------------
$ 5,046 $ 5,443
============ ============
</TABLE>
As at December 31, 1996, Heartland and one subsidiary of CUT, who had non-
performing finance receivables totaling $2.2 million, representing 19% of the
outstanding portfolio, had filed voluntary petitions for bankruptcy
protection. The Company also had additional non-performing finance
receivables totaling $2.8 million, being 23% of the Company's portfolio, due
from CUT. CUT had distinct operations from its subsidiary in an unrelated
business but, in February 1995, effectively ceased its operations.
Loans Previously Designated as Non-performing
- ---------------------------------------------
As at June 30, 1996, the Company had designated a loan to PDG Environmental,
Inc. ("PDGE") in the principal amount of $2.9 million as non-performing due to
non-payment of interest. In November 1996, PDGE transferred to the Company,
in partial settlement of the loan, 1,470,320 shares in PDGE's subsidiary,
ICHOR Corporation (formerly PDG Remediation Inc.) ("ICHOR"). The investment
in ICHOR is classified as available-for-sale securities and the unrealized
holding gain thereon is reported as a separate item of shareholders' equity
until such time as the gain is realized.
ICHOR is an environmental remediation company listed on the NASDAQ SmallCap
Market. The Company's loan to PDGE was subsequently designated as performing.
FORM 10-QSB
QUARTERLY REPORT - PAGE 13
<PAGE> 14
In December 1996, the Company sold its loan to Enviropur Waste Refining and
Technology, Inc. to a subsidiary of the Company's parent for $2.4 million in
cash, which was approximately the Company's carrying value for the loan.
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 six months ended December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1996 1995
---------------------------- --------
(in thousands)
Specific General Total Total
Changes in Allowance Reserve Reserve Reserve Reserve
- -------------------- -------- ------- ------- -------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED
Balance, beginning of period $ 6,702 $ 500 $ 7,202 $ 14,716
Provision (recovery) for the period (991) (713) (1,704) (1,528)
Charge-offs for the period,
net of charge-back (3,507) 283 (3,224) (6,085)
-------- ------- ------- --------
Balance, end of period $ 2,204 $ 70 $ 2,274 $ 7,103
======== ======= ======= ========
QUARTER ENDED
Balance, beginning of period $ 4,891 $ 501 $ 5,392 $ 14,616
Provision (recovery) for the period (875) (714) (1,589) (1,528)
Charge-offs for the period,
net of charge-back (1,812) 283 (1,529) (5,985)
-------- ------- ------- --------
Balance, end of period $ 2,204 $ 70 $ 2,274 $ 7,103
======== ======= ======= ========
</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
FORM 10-QSB
QUARTERLY REPORT - PAGE 14
<PAGE> 15
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.
The following tables summarize the Company's specific reserves for credit
losses prepared in accordance with FASB No. 114 as at December 31, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 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
Future cash flows:
Bankruptcy or
ceased to operate 2 $ 5,046 $ 5,213 $ 475 $ 2,842 $ 2,204
UNIMPAIRED LOANS 5 6,992 70(4)
- --------- --------
Grand total 7 $ 12,038 $ 2,274
= ========= ========
</TABLE>
FORM 10-QSB
QUARTERLY REPORT - PAGE 15
<PAGE> 16
<TABLE>
<CAPTION>
DECEMBER 31, 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 2 $ 3,761 $ 2,380 $ 2,251 $ 1,815
Continuing to operate 3 9,973 10,336 8,472 1,583
Future cash flows:
Bankruptcy or
ceased to operate 3 6,628 6,423 3,899 2,741
-- ---------- ----------- ------- --------
Subtotal 8 20,362 $ 19,139 $14,622 6,139
UNIMPAIRED LOANS 4 5,749 =========== ======= 964(4)
-- ---------- --------
Grand total 12 $ 26,111 $ 7,103
== ========== ========
</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 3.5
years for loans which may generate future cash flows and the borrower is
bankrupt or has ceased to operate.
2. These amounts represent future costs to be incurred in connection with the
sale of collateral and/or the collection of the loans, and have been
subtracted from the net future expected cash collections.
3. The fair market value of the collateral represents the amount that the
Company reasonably expects to receive in an arm's length sale between a
willing buyer and a willing seller. For marketable securities, the current
quoted price is used. For receivables, inventory and equipment, relevant
market sources are used when reliable information is provided. A normal
price adjustment is provided if a forced or liquidation sale is probable.
No appraisals have been used for the valuation of collateral.
4. The general reserve is determined in accordance with FASB No. 5 on a pool
of unimpaired loans.
FORM 10-QSB
QUARTERLY REPORT - PAGE 16
<PAGE> 17
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
In April 1995, the Company was added as a defendant in Hudson v. Conversion
Industries Inc. et al., United States District Court for the Central District
of California. The law suit was a putative class action brought under the
federal securities laws. During the current period, the parties to the law
suit agreed to dismiss the same without any liability or cost to any party
including the Company. 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.
ITEMS 2 to 5.
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
- -------------- -----------
27 Article 5 - Financial Data Schedule for 2nd 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: February 12, 1997
DRUMMOND 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
- -------------- -----------
27 Article 5 - Financial Data Schedule for 2nd Quarter 1996
Form 10-QSB.
FORM 10-QSB
QUARTERLY REPORT - PAGE 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
consolidated financial statements and notes included in this Form 10-QSB and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,484
<SECURITIES> 30,620
<RECEIVABLES> 12,574
<ALLOWANCES> 2,274
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,617
<CURRENT-LIABILITIES> 0
<BONDS> 42,047
0
30
<COMMON> 43
<OTHER-SE> 4,474
<TOTAL-LIABILITY-AND-EQUITY> 48,617
<SALES> 0
<TOTAL-REVENUES> 903
<CGS> 0
<TOTAL-COSTS> 996
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (1,704)
<INTEREST-EXPENSE> 1,860
<INCOME-PRETAX> (93)
<INCOME-TAX> 1
<INCOME-CONTINUING> (94)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (94)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
