<PAGE> 1
=============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1997
---------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number 001-12212
DRUMMOND FINANCIAL CORPORATION
(Name of small business issuer in its charter)
DELAWARE 95-4426690
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Burrard Street, Suite 1250
Vancouver, British Columbia, Canada V6C 3A6
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (604) 683-5312
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock $0.01 Par Value
15 Year Variable Rate Bonds
Check whether the issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the most recent fiscal year were $4.3
million.
The aggregate market value of the voting and non-voting common equity
of the Registrant held by non-affiliates of the Registrant as of September
22, 1997 was approximately $2.2 million.
The number of shares outstanding of the Registrant's Common Stock as of
September 22, 1997 was 2,718,600.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Proxy Statement to be filed within 120 days of the
fiscal year ended June 30, 1997 are incorporated by reference into Part III.
Certain exhibits in Part III are incorporated by reference from prior filings
made by the Registrant under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended.
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.
<PAGE> 3
TABLE OF CONTENTS
-----------------
PAGE
----
PART I
ITEM 1. DESCRIPTION OF BUSINESS......................................... 4
ITEM 2. DESCRIPTION OF PROPERTY......................................... 5
ITEM 3. LEGAL PROCEEDINGS............................................... 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS......................................................... 6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................. 6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................... 7
ITEM 7. FINANCIAL STATEMENTS............................................ 12
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................. 12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT............................................. 12
ITEM 10. EXECUTIVE COMPENSATION.......................................... 12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................. 12
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 13
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................ 13
SIGNATURES................................................................ 34
<PAGE> 4
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
The Corporation
- ---------------
Drummond Financial Corporation was incorporated in June 1993 pursuant to the
laws of the State of Delaware and commenced operations in August 1993. In
October 1996, the Corporation changed its name from "CVD Financial
Corporation" to "Drummond Financial Corporation".
In this document, unless the context otherwise requires, the "Corporation"
refers to Drummond Financial Corporation and its subsidiaries.
General
- -------
The Corporation operates in the financial services segment in both the United
States and Canada, engaging in investment and merchant banking activities and
asset-based commercial lending. The Corporation's merchant banking
activities include seeking controlling interests in businesses or assets
which the Corporation believes are undervalued, and its asset-based
commercial lending primarily involves the administration and realization of
an existing loan portfolio comprised of loans to emerging companies.
The Corporation's operating strategy with respect to its commercial lending
has been to provide asset-based financing to emerging companies who wish to
make a public offering of securities in the near future and are seeking
additional financing prior to the offering with all or a portion of the
financing to be repaid from the proceeds of the public offering. These
companies often have adequate collateral but do not meet the overall credit
standards typically required by commercial banks. The Corporation has made
both revolving credit and term loans which are generally collateralized by
accounts receivable, inventory, plant and equipment, commercial real estate,
and other tangible assets. The Corporation has generally sought collateral
coverage of 118% for accounts receivable; 200% for inventory; and 154% of
liquidation value for property and equipment, commercial real estate, and
other tangible assets. The Corporation does not generally enter into joint
relationships with, actively participate in the operations of, or establish
any long-term equity interests in, its borrowers, unless it is necessary to
work out certain non-performing loans.
At June 30, 1997, the Corporation's loan portfolio consisted of finance
receivables of $11.4 million which were subject to an allowance for credit
losses of $3.3 million, with no unfunded loan commitments. At such date, the
portfolio was comprised of loans to seven borrowers, with the largest
principal amount outstanding to any single borrower being $3.0 million and
the average principal amount outstanding per borrower being $1.6 million.
The loans are due over periods of one to three years. As at June 30, 1997,
the loan portfolio included one borrower in the energy industry (26.3% of the
portfolio) and two borrowers in the environmental clean-up industry (38.4% of
the portfolio). No other industry classification represented more than 20%
of finance receivables.
<PAGE> 5
For the year ended June 30, 1997, approximately 49% of the Corporation's
revenues were from interest income, approximately 21% were from loan fees and
other revenue, and approximately 22% were from gains on investments.
The Corporation has de-emphasized its asset-based commercial lending and is
focusing on administering and realizing its existing loan portfolio and
expanding its merchant banking activities. The Corporation intends to seek
controlling interests in businesses or operating companies as opportunities
arise. The Corporation has no such interest to date and has not identified
any opportunities as at the date hereof. The Corporation anticipates that
substantial capital may be required to further its merchant banking
activities, and anticipates that such capital will be provided from cash on
hand, through the sale or exchange of assets, or through debt or equity
financing. No assurance can be given that any necessary capital will be
available when required.
Although the Corporation has currently de-emphasized making new asset-based
loans, it continues to receive numerous unsolicited requests for funding from
potential borrowers. In addition, the Corporation may make loans in
conjunction with its merchant banking activities. The Corporation's credit
investigation normally involves analysis of the prospective borrower's
business, financial statements, cash flow, collateral, and certain historical
data. Audits of information and operational data and independent appraisals
may also be performed. As a general policy, the Corporation does not
consider loan applications from real estate developers, leverage buyout
companies, companies reorganizing under Chapter 11 of the U.S. Bankruptcy
Code, or developmental stage companies. During fiscal 1997, the Corporation
advanced one new loan in the amount of $1.0 million.
Competition
- -----------
The Corporation competes against investment bankers, merchant banks and other
investment managers for appropriate investments. This business is highly
competitive and is subject to fluctuations based upon many factors over which
the Corporation has no control, such as the condition of public markets,
interest rates and the state of capital markets. Many of the Corporation's
competitors are national or international companies with far greater
resources, capital and access to information than the Corporation. As a
result, the Corporation may become involved in transactions with more risk
than if it had greater resources.
While the Corporation has nominally competed with commercial banks, leasing
companies and asset-based lenders with respect to its asset-based lending
activities, its primary competitors have been venture capital firms which
also invest in emerging growth companies. The Corporation believes that the
terms it offers its borrowers have in many cases been more favorable to the
borrower than those offered by venture capital firms.
As at June 30, 1997, the Corporation had two employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Corporation's administrative office is located in Vancouver, British
Columbia, Canada, and is leased.
<PAGE> 6
ITEM 3. LEGAL PROCEEDINGS
The Corporation is involved in claims and matters of litigation arising in
the ordinary course of its business, including collection and related actions
concerning delinquent loans made by the Corporation. The Corporation does
not believe that the outcome of such litigation will have a material adverse
effect on its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information. In March 1997, the Corporation's common stock and
15 Year Variable Rate Bonds (the "Bonds") were listed and posted for trading
on the Vancouver Stock Exchange under the trading symbol "DFC.U" and
"DFC.DB.U", respectively. Since August 1995, the Corporation's common stock
has been quoted on the OTC Bulletin Board and the Bonds have been listed in
the National Quotation Bureau Yellow Sheets.
The following table sets forth the quarterly high and low closing prices per
share of the Corporation's common stock for the fiscal years ended June 30,
1996 and 1997, respectively, and the period ended September 22, 1997:
Fiscal Quarter Ended High Low
-------------------- ---- ---
1995
September 30...............................$1.67 $1.00
December 31................................$1.52 $1.25
1996
March 31...................................$1.56 $1.38
June 30....................................$1.56 $1.31
September 30...............................$1.44 $1.13
December 31................................$2.06 $1.25
1997
March 31...................................$1.69 $0.50
June 30....................................$1.25 $0.50
Period Ended September 22..................$1.38 $1.00
<PAGE> 7
(b) Shareholders. As of September 22, 1997, there were approximately 36
holders of record of the Corporation's common stock.
(c) Dividends. The Corporation has not paid any dividends on its common
stock and the directors do not contemplate payment of such dividends. The
indenture governing the Corporation's Bonds (the "Bond Indenture") prohibits
the payment of dividends under certain circumstances, including a default in
the payment of principal or interest when due.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of the Corporation for the year ended June 30, 1997 should be
read in conjunction with the consolidated financial statements and related
notes included elsewhere herein (the "Financial Statements").
Results of Operations - Year Ended June 30, 1997
- ------------------------------------------------
Revenues for the year ended June 30, 1997 decreased to $4.3 million from $7.1
million in the comparative period of 1996. In the year ended June 30, 1997,
the Corporation recognized a $0.9 million net gain on investments, compared
to $4.5 million in the comparative period of 1996. Interest revenue decreased
to $2.1 million in fiscal 1997 from $2.2 million in the year ended June 30,
1996, primarily due to a reduction in the dollar amount of outstanding
performing loans, which was partially offset by increased interest revenue on
investments. The Corporation'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 increased to 8.50% from 8.25% during the year ended June 30, 1997,
compared to a decrease to 8.25% from 9.00% during the year ended June 30,
1996. Revenue from loan fees and other activities increased to $0.9 million
for the year ended June 30, 1997, including $0.6 million from a consent
dismissal of a court action for which the Corporation had made a provision,
from $0.3 million for the comparative period of 1996.
Costs and expenses for the year ended June 30, 1997 decreased to $4.6 million
from $5.4 million in the comparative period of 1996. General and
administrative expenses decreased to $1.7 million for the year ended June 30,
1997 from $2.9 million for the comparative period of 1996, primarily as a
result of reduced legal fees and loan collection costs in fiscal 1997 and the
provision of $0.6 million for settlement costs relating to a class action
involving, among others, the Corporation in the year ended June 30, 1996. In
the year ended June 30, 1997, the Corporation reported a recovery of credit
losses of $0.7 million, compared to $1.4 million for the comparative period
of 1996.
Interest expense decreased to $3.6 million for the year ended June 30, 1997
from $3.9 million for the comparative period of 1996, primarily as a result
of a lower interest rate accrued on the Bonds and a reduction in the
principal amount outstanding. For the year ended June 30, 1997, interest was
accrued at the rate of approximately 8.32% per annum, compared to
approximately 8.75% per annum for the year ended June 30, 1996.
<PAGE> 8
No income tax provision was recognized for the years ended June 30, 1997 and
1996, respectively, except for the payment of a minimum tax of $1,000. The
provision for income taxes for the year ended June 30, 1996 was eliminated by
the charge-off with respect to finance receivables for the period. The
Corporation 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 year ended June 30, 1997, the Corporation's net income was $2.3
million, or $0.74 per share, compared to $1.8 million, or $0.66 per share, in
the comparative period of 1996. In fiscal 1997, the Corporation had $3.0
million of extraordinary gains on the early extinguishment of debt, compared
to $0.1 million in the comparative period of 1996. The net income in the
current period was primarily attributable to an extraordinary gain on early
extinguishment of debt and lower general and administrative expenses, which
was partially offset by reduced net gains on investments.
Liquidity and Capital Resources
- -------------------------------
The Corporation's cash and cash equivalents at June 30, 1997 were $1.6
million, which represents a decrease of $12.9 million from June 30, 1996.
Cash provided by operations for the year ended June 30, 1997 was $7.5
million, compared to cash used by operations of $11.3 million for the
comparative period of 1996. The Corporation used cash of $5.6 million in
operating activities before any activities in trading securities in fiscal
1997, compared to $5.1 million in the comparative period of 1996. An
increase in other receivables used cash of $3.1 million in the year ended
June 30, 1997, compared to $1.3 million in the comparative period of 1996. In
the current fiscal year, interest payable decreased by $0.8 million, compared
to $0.2 million in the year ended June 30, 1996. An increase in accounts
payable and accrued liabilities provided cash of $1.0 million in the year
ended June 30, 1997, compared to $0.4 million in the year ended June 30,
1996. A loan to an affiliate used cash of $0.5 million during the year ended
June 30, 1997.
Net sales of trading securities provided cash of $13.0 million in the year
ended June 30, 1997, compared to net purchases of trading securities using
cash of $6.2 million in the year ended June 30, 1996.
Cash used by investing activities was $4.9 million during the year ended June
30, 1997, compared to cash provided by operations of $7.8 million during the
comparative period of 1996. During the year ended June 30, 1997, the
Corporation accepted an assignment of a note receivable in satisfaction of a
debt owing to the Corporation in the amount of $7.5 million. Collections on
loan receivables provided cash of $3.7 million in the year ended June 30,
1997, compared to $14.0 million in the same period of 1996, primarily as a
result of a smaller loan portfolio. The Corporation's net finance
receivables at June 30, 1997 were $8.1 million, compared to $12.1 million at
June 30, 1996. During the year ended June 30, 1997, one new loan in the
amount of $1.0 million was advanced and $0.1 million was advanced to an
existing borrower.
Financing activities for the year ended June 30, 1997 used cash of $15.5
million, compared to providing cash of $5.9 million in the year ended June
30, 1996. During the year ended June 30,
<PAGE> 9
1997, the Corporation used cash of $15.3 million to purchase $19.0 million in
aggregate principal amount of the Bonds. As at June 30, 1997, the
Corporation had $45.0 million in principal amount of the Bonds issued and
outstanding, of which approximately $22.0 million was repurchased and held by
the Corporation in treasury. The Corporation used $0.2 million to pay a cash
dividend to the holder of its preferred shares during fiscal 1997.
In October 1996, the terms of the indenture governing the Bonds were amended
to, among other things, delete the provisions that required the Corporation
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 Corporation. As a result of the deletion of
this 35.0% threshold, MFC Bancorp Ltd., who owns approximately 34.6% of the
Corporation's outstanding common stock and all of the Corporation's
outstanding variable voting cumulative preferred stock, controls 47.9% of the
total votes of the Corporation. At June 30, 1997, the Corporation was in
compliance with the ratios and other terms of the Bond Indenture.
The Corporation did not make its semi-annual interest payments on the Bonds
due July 25, 1997 and January 25, 1997 until August 20, 1997 and February 21,
1997, respectively, which were within the 30 day cure period provided for
under the terms of the Bond Indenture. As at the date hereof, no defaults
exist under the Bond Indenture. The next regularly scheduled interest
payment date is January 25, 1998. In May 1997, the trustee under the Bond
Indenture was changed to The Bank of Nova Scotia Trust Company of New York.
During the year ended June 30, 1997, the Corporation proceeded to collect
and/or settle and restructure the non-performing loans in its portfolio. The
Corporation anticipates that its cash and investments on hand, and its
expected loan interest and principal collections, will be sufficient to
service the Corporation's debt costs and cover the day-to-day general and
administrative expenses during the short-term.
Finance Receivables
- -------------------
The Corporation's loan portfolio at June 30, 1997 aggregated $11.4 million in
finance receivables (principal plus interest and reimbursable costs less
unamortized commitment fees) due from seven borrowers, compared to an
aggregate of $19.3 million in finance receivables due from nine borrowers at
June 30, 1996.
During the year ended June 30, 1997, loans to four borrowers which were
previously designated as non-performing at June 30, 1996, with finance
receivables totaling $18.0 million, were settled, sold or re-designated as
performing. The borrowers are: Conversion Industries Inc., Enviropur Waste
Refining and Technology, Inc., Beta Well Service Inc. ("Beta") and PDG
Environmental, Inc. ("PDGE"). In partial settlement of the Corporation's
loan to PDGE, 1,470,320 shares of PDGE's subsidiary, ICHOR Corporation
(formerly PDG Remediation, Inc.) ("ICHOR") were transferred to the
Corporation. ICHOR is in the environmental services business of recycling
petroleum waste products and disposing of oily waste waters, and is listed on
the NASDAQ SmallCap market. The loans to Beta and PDGE were repaid in full
subsequent to June 30, 1997.
<PAGE> 10
Non-performing Loans at June 30, 1997
- -------------------------------------
At June 30, 1997, the Corporation's loans to Clean-Up Technology, Inc.
("CUT") and Heartland, Inc. ("Heartland"), who had finance receivables
totaling $5.1 million, had been classified as non-performing and the
borrowers had either filed voluntary petitions for bankruptcy protection or
ceased to operate. See Note 4 of the Financial Statements for a comparison
of the non-performing loans as at June 30, 1997 with those as at June 30,
1996.
During fiscal 1997, the Corporation increased its allowance with respect to
its loan to Heartland to $2.1 million, the total amount outstanding. The
Corporation designates finance receivables as non-performing when interest
and/or principal payments are contractually delinquent for more than 90 days,
or earlier, if the Corporation 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 Corporation's interest margin, as the
Corporation does not realize income on these loans, but does incur holding
costs (primarily interest expense).
Allowance for Credit Losses
- ---------------------------
The Corporation maintains an allowance for credit losses in 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 Corporation'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 Corporation's best estimate
of the necessary level of the allowance for credit losses. See Note 4 of the
Financial Statements with regards to the allowance for credit losses during
the years ended June 30, 1997 and 1996, respectively.
On July 1, 1995, the Corporation adopted the Financial Accounting Standards
Board Statement ("FASB") No. 114, "Accounting by Creditors for Impairment of
a Loan". 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 Corporation has adopted a measurement method on a
loan-by-loan basis. By definition, the Corporation's non-performing loans
are impaired. A specific reserve is established for each impaired loan equal
to the amount by which the Corporation'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 Corporation's specific reserves for credit
losses prepared in accordance with FASB No. 114 as at June 30, 1997 and June
30, 1996:
<PAGE> 11
<TABLE>
<CAPTION>
JUNE 30, 1997
(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 $ 5,071 $ 2,927 $ 263 $1,848 $ 3,223
UNIMPAIRED LOANS 5 6,364 70(4)
-- -------- -------
Grand total 7 $ 11,435 $ 3,293
== ======== =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
(dollars in thousands)
Total future Total related Specific
expected cash costs Net reserve
# of Recorded collections, net expected to present under FASB
loans investment of related costs be incurred(2) value No. 114
----- ---------- ------------------- ----------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
IMPAIRED LOANS
Collateral dependant(3):
Bankruptcy or
ceased to operate 1 $ 2,405 $ 865 $ 125 $ 737 $ 1,668
Continuing to operate 2 7,146 6,024 300 4,494 2,652
Future cash flows:
Bankruptcy or
ceased to operate 2 5,021 5,213 375 2,639 2,382
-- -------- ------- ------ ------- -------
Subtotal 5 14,572 $12,102 $ 800 $ 7,870 6,702
======= ====== =======
UNIMPAIRED LOANS 4 4,767 500(4)
-- -------- -------
Grand total 9 $ 19,339 $ 7,202
== ======== =======
</TABLE>
________________________
Notes:
1. The estimate of expected cash flows represents the Corporation'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.
<PAGE> 12
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
Corporation 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.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Corporation to be provided
pursuant to this Item 7, and as listed in Item 13 of this report, are
included in this report commencing on page 15.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of the end of the Registrant's fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of the end of the Registrant's fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of the end of the Registrant's fiscal year.
<PAGE> 13
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of the end of the Registrant's fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) (1) Index to Financial Statements
-----------------------------
Independent Auditors' Report
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Cash Flows
Consolidated Statement of Shareholders' Equity
Notes to the Consolidated Financial Statements
(2) Exhibits
--------
3.1 Certificate of Incorporation dated June 1, 1993. Incorporated
by reference to Form S-1 filed June 7, 1993.
3.2 Certificate of Designations dated July 19, 1996. Incorporated
by reference to Form 10-KSB dated September 20, 1996.
3.3 Certificate of Amendment to the Certificate of Incorporation of
Drummond Financial Corporation dated October 14, 1996.
Incorporated by reference to Form 10-QSB dated November 11,
1996.
3.4 Bylaws. Incorporated by reference to Form S-1 filed June 7,
1993.
3.5 Amendment to the Bylaws adopted as of July 20, 1993.
Incorporated by reference to Amendment No. 1 to Form S-1 filed
July 26, 1993.
4.1 Form of Indenture between CVD Financial Corporation and Harris
Trust Company of New York, as Trustee. Incorporated by
reference to Form S-1 filed June 7, 1993.
4.2 Second Supplemental Indenture between Drummond Financial
Corporation and Harris Trust Company of New York, as Trustee,
dated for reference October 23, 1996. Incorporated by reference
to Form 10-QSB dated November 11, 1996.
4.3 Third Supplemental Indenture among Drummond Financial
Corporation, Harris Trust Company of New York and The Bank of
Nova Scotia Trust Company of New York dated for reference May
13, 1997.
10.1 1993 Stock Option Plan. Incorporated by reference to Form S-1
filed June 7, 1993.
10.2 Profit Sharing Plan. Incorporated by reference to Amendment No.
1 to Form S-1 filed July 26, 1993.
<PAGE> 14
10.3 Stock Purchase Agreement between CVD Financial Corporation and
Mercer International Inc. dated March 22, 1995. Incorporated by
reference to Form 8-K dated March 22, 1995.
10.4 Subscription Agreement between CVD Financial Corporation and
Logan International Corp. dated for reference June 20, 1996.
Incorporated by reference to Form 8-K dated June 27, 1996.
10.5 Subscription Agreement between CVD Financial Corporation and
Arbatax International Inc. dated for reference June 20, 1996.
Incorporated by reference to Form 8-K dated June 27, 1996.
21. List of subsidiaries of Registrant.
27. Article 5 - Financial Data Schedule for year ended June 30, 1997
- Form 10-KSB.
(b) Reports on Form 8-K
-------------------
A report on Form 8-K dated June 30, 1997 was filed reporting under:
Item 4. Changes in Registrant's Certifying Accountant.
Item 7. Financial Statements and Exhibits.
A report on Form 8-K/A dated July 7, 1997 was filed reporting under:
Item 4. Changes in Registrant's Certifying Accountant.
Item 7. Financial Statements and Exhibits.
<PAGE> 15
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Drummond Financial Corporation
(formerly CVD Financial Corporation)
We have audited the consolidated balance sheet of Drummond Financial
Corporation (formerly CVD Financial Corporation) as at June 30, 1997 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of Drummond Financial
Corporation (formerly CVD Financial Corporation) as at June 30, 1996 and for
the year then ended were audited by other auditors whose report dated
September 13, 1996 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we
plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at June 30,
1997 and the results of their operations and their cash flows for the year
then ended in accordance with generally accepted accounting principles in the
United States of America.
/s/ DAVIDSON & COMPANY
Vancouver, Canada Chartered Accountants
August 26, 1997
<PAGE> 16
=============================================================================
Report of Independent Accountants
- -----------------------------------------------------------------------------
To The Board of Directors and Shareholders
Drummond Financial Corporation
(formerly CVD Financial Corporation)
We have audited the Consolidated Balance Sheet of Drummond Financial
Corporation (formerly CVD Financial Corporation) (the "Company") as of June
30, 1996 and the related Consolidated Statements of Operations, Shareholders'
Equity and Cash Flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States and Canada. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company at June 30, 1996 and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles in the United States.
/s/ BDO DUNWOODY
Vancouver, Canada Chartered Accountants
September 13, 1996
<PAGE> 17
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
CONSOLIDATED BALANCE SHEETS
(Dollars stated in thousands)
AS AT JUNE 30
=============================================================================
1997 1996
- -----------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 1,625 $ 14,478
Finance receivables, net (Note 4) 8,142 12,137
Other receivables (Note 5) 10,948 371
Due from affiliates 541 -
Investments (Note 6) 8,035 19,283
Investment - at equity (Note 7) 917 -
Deferred debt issuance costs, net of accumulated
amortization of $770 (1996 - $567) 1,348 2,037
Other assets 4 4
---------- ----------
$ 31,560 $ 48,310
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 18
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
CONSOLIDATED BALANCE SHEETS
(Dollars stated in thousands)
AS AT JUNE 30
=============================================================================
1997 1996
- -----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 1,788 $ 835
Interest payable 964 1,787
Accrued dividends payable 149 -
Bonds payable (Note 8) 23,002 42,047
--------- ---------
25,903 44,669
--------- ---------
Shareholders' equity (Note 9)
Capital stock
Preferred stock, $0.01 par value
5,000,000 shares authorized
3,000,000 shares issued and outstanding 30 30
Additional paid-in capital 5,970 5,970
--------- ---------
6,000 6,000
--------- ---------
Common stock, $0.01 par value
10,000,000 shares authorized
4,264,000 shares issued and outstanding 43 43
Additional paid-in capital 17,767 17,767
--------- ---------
17,810 17,810
--------- ---------
Deficit (15,097) (17,113)
--------- ---------
8,713 6,697
Less: 1,545,400 common shares held as
treasury stock (3,056) (3,056)
--------- ---------
5,657 3,641
--------- ---------
$ 31,560 $ 48,310
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 19
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars stated in thousands; except per share amounts)
YEAR ENDED JUNE 30
=============================================================================
1997 1996
- -----------------------------------------------------------------------------
REVENUE
Interest $ 2,079 $ 2,232
Loan fees and other 914 319
Gain on investments, net 938 4,516
Dividend income 322 -
---------- ----------
4,253 7,067
---------- ----------
COSTS AND EXPENSES
Interest 3,571 3,893
Recovery of credit losses (673) (1,396)
General and administrative 1,704 2,891
---------- ----------
4,602 5,388
---------- ----------
Equity in loss of investee (289) -
---------- ----------
Income (loss) from operations (638) 1,679
Income tax expense 1 1
---------- ----------
Income (loss) before extraordinary gain (639) 1,678
Extraordinary gain on early extinguishment of debt,
net of $Nil provision for income taxes for
1997 and 1996 2,977 113
---------- ----------
Net income for the year $ 2,338 $ 1,791
=============================================================================
Earnings (loss) per share
Earnings (loss) before extraordinary gain $ (0.35) $ 0.62
Extraordinary gain 1.09 0.04
---------- ----------
$ 0.74 $ 0.66
=============================================================================
Weighted average number of shares outstanding 2,718,600 2,718,600
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 20
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars stated in thousands)
YEAR ENDED JUNE 30
=============================================================================
1997 1996
- -----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,338 $ 1,791
Adjustment to reconcile income to cash from
operating activities
Extraordinary gain on early extinguishments
of debt (2,977) (113)
Gain on investments, net (938) (4,516)
Recovery of credit losses (673) (1,396)
Equity in loss of investee 289 -
Amortization of deferred debt issuance costs (78) 205
--------- ---------
(2,039) (4,029)
Changes in non-cash working capital balances
Interest receivable 127 136
Commitment fees (106) (249)
Other receivables (3,133) (1,317)
Due from affiliates (541) -
Interest payable (823) (168)
Accounts payable and accrued liabilities 953 430
Other - 65
--------- ---------
(5,562) (5,132)
Purchase of trading securities (3,037) (15,235)
Proceeds from sales of trading securities 16,082 9,050
--------- ---------
Net cash provided by (used in) operating
activities 7,483 (11,317)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances on loans (1,100) (229)
Payments collected on loans 3,740 14,000
Purchase of available-for-sale security - (6,000)
Increase in note receivable (7,502) -
--------- ---------
Net cash provided by (used in) investing activities (4,862) 7,771
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 21
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(Dollars stated in thousands)
YEAR ENDED JUNE 30
=============================================================================
1997 1996
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock $ - $ 6,000
Purchase of treasury bond payable (15,301) (121)
Dividends paid (173) -
--------- ---------
Net cash provided by (used in) financing activities (15,474) 5,879
--------- ---------
Increase (decrease) in cash and cash equivalents for
the year (12,853) 2,333
Cash and cash equivalents, beginning of year 14,478 12,145
--------- ---------
Cash and cash equivalents, end of year $ 1,625 $ 14,478
=============================================================================
Cash paid during the year for:
Interest expense $ 3,521 $ 3,853
Income taxes 1 1
=============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 22
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars stated in thousands)
<TABLE>
<CAPTION>
=========================================================================================================
Preferred Stock Common Stock
--------------------------- -------------------------- Total
Additional Additional Shareholders'
Number Paid-in Number Paid-in Accumulated Treasury Equity
of Shares Amount Capital of Shares Amount Capital Deficit Stock (Deficit)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
June 30, 1995 - $ - $ - 4,264,000 $ 43 $ 17,767 $ (18,904) $ (3,056) $ (4,150)
Issued for cash 3,000,000 30 5,970 - - - - - 6,000
Net income
for the year - - - - - - 1,791 - 1,791
--------- ------ ------- --------- ------ -------- ----------- -------- --------
Balance at
June 30, 1996 3,000,000 30 5,970 4,264,000 43 17,767 (17,113) (3,056) 3,641
Net income for
the year - - - - - - 2,338 - 2,338
Dividends paid
and payable - - - - - - (322) - (322)
--------- ------ ------- --------- ------ -------- ----------- -------- --------
Balance at
June 30, 1997 3,000,000 $ 30 $ 5,970 4,264,000 $ 43 $ 17,767 $ (15,097) $ (3,056) $ 5,657
========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 23
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1997
=============================================================================
1. NATURE OF OPERATIONS
Drummond Financial Corporation (formerly CVD Financial Corporation)
(the "Company"), a Delaware corporation, was formed in June 1993. In
August 1993, the Company completed an initial public offering of common
stock concurrent with a debenture offering.
The Company presently operates in the financial services industry,
which is comprised of investment and merchant banking activities and
asset-based commercial lending. The merchant banking activities are
expected to include the acquisition of controlling interests in
businesses or assets which the Company believes are under-valued. The
asset-based commercial lending primarily involves the administration
and realization of an existing loan portfolio comprised of loans to
emerging companies.
2. BASIS OF PRESENTATION
These consolidated financial statements have been prepared by
management in conformity with generally accepted accounting principles
applicable in the United States of America, and are stated in United
States dollars.
While the Company reported net income in 1997 and 1996 principally as a
result of realizing gains on sales of investments and extinguishment of
debt, the Company had an accumulated deficit of $15.1 million as at
June 30, 1997. The Company now focuses on investment and merchant
banking activities while de-emphasizing asset-based commercial lending.
3. SIGNIFICANT ACCOUNTING POLICIES
In preparing these financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the balance sheet and revenues and
expenses for the year. Actual results in future periods could be
different from these estimates made in the current year. The following
is a summary of the significant accounting policies of the Company:
Basis of consolidation
- ----------------------
These consolidated financial statements included the accounts of the
Company and its subsidiaries. Significant inter-company accounts and
transactions have been eliminated.
Cash and cash equivalents
- -------------------------
Cash equivalents consist of highly liquid investments with an original
maturity of three months or less. These are recorded at cost which
approximates fair value based on the reported market value.
Additionally, the Company maintains cash balances at foreign financial
institutions in excess of insured limits.
Finance receivables and allowance for credit losses
- ---------------------------------------------------
Finance receivables, also known as recorded investments in loans,
include the outstanding loan balance (net of any charge-offs), accrued
interest, reimbursable expenses and are net of deferred loan fees.
<PAGE> 24
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1997
=============================================================================
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
Finance receivables and allowance for credit losses (continued)
- ---------------------------------------------------------------
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 future collection of
outstanding principal, interest and reimbursable expenses has become
doubtful. Amounts deemed to be uncollectible are charged off against
the allowance and subsequent recoveries, if any, are credited to the
allowance. The amount of the allowance is based on the Company's
evaluation of numerous factors, including the adequacy of the
collateral securing the loans, the operating environments of the
various borrowers and the historical experience of the various
borrowers' management, and reflect the Company's best estimate of the
necessary level of the allowance for credit losses.
Under the provisions of Financial Accounting Standards Board ("FASB")
Statement No. 114, "Accounting by Creditors for Impairment of a Loan",
when a loan is impaired as defined in the statement, a lender shall
measure impairment at the present value of expected future cash flows
discounted at the loan's effective interest rate, or, as a practical
expedient, based on a loan's observable market price or the fair value
of the collateral if the loan is collateral dependent. The Company has
adopted a measurement method on a loan-by-loan basis. By definition,
the Company's non-performing loans are impaired. A specific reserve is
established for each impaired loan equal to the amount by which the
Company's recorded investment in the loan exceeds the net present value
of the loan determined in accordance with FASB Statement No. 114.
The Company continues to apply FASB Statement No. 5, "Accounting for
Contingencies", to provide an allowance on a pool of unimpaired loans.
Investments
- -----------
The Company's available-for-sale and trading securities are stated at
their fair values. Any unrealized holding gains or losses of
available-for-sale securities are excluded from earnings and reported
as a separate component of shareholders' equity until realized. If a
loss in value in available-for-sale securities is considered to be
other than temporary, it is recognized in the determination of net
income. Gains and losses on trading securities are included in
earnings. Cost is based on the specific identification method to
determine realized gains or losses.
Warrants to acquire common stock of the various borrowers held by the
Company for which a readily determinable fair market value is available
and the Company has an unrestricted right to sell the warrant and/or
underlying securities within one year, are included in trading
securities.
Investments in other companies where control is temporary or ownership
is less than 20% are carried using the cost method of accounting. The
Company accounts for its investments in companies where the ownership
is 20% or more under the equity method.
Deferred debt issuance costs
- ----------------------------
Debt issuance costs consist of underwriters' fees and expenses and
other costs capitalized in connection with the Company's August 1993
debenture offering. These costs are being amortized on a straight line
basis which approximates the interest method over the term of the
related debt. The amortization is included in interest expense.
<PAGE> 25
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1997
=============================================================================
3. SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
- -------------------
Revenue consists principally of interest income from finance
receivables and temporary investments of cash and cash equivalents,
amortization of loan commitment fees, net of related costs, received in
connection with the making of loans, as well as sales of trading
securities. Interest income is recognized when earned using the
interest method. The Company, as a general policy, suspends the
recognition of income on loans which are more than 90 days
contractually delinquent or earlier if the Company has material
evidence of the borrower's inability to meet its commitments under the
loan agreement (e.g. the borrower files for bankruptcy protection).
The recognition of income is generally resumed, and suspended income is
recognized as interest revenues, when the loan becomes contractually
current or collection of suspended amounts is assured. Loan commitment
fees, net of related costs, are deferred and recognized over the term
of the loan using the interest method. For delinquent loans,
amortization of the corresponding net loan commitment fees is suspended
and subsequently resumed concurrently with the related recognition of
interest income.
Income taxes
- ------------
Certain revenue and expense items, primarily related to the allowance
for credit losses, are accounted for in different time periods for
financial reporting purposes as compared to income tax reporting
purposes. Deferred taxes are recognized using the liability method,
and tax rates are applied to cumulative temporary differences based on
when and how they are expected to be included for income tax reporting
purposes. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount which management believes is
more likely than not to be realized.
Earnings (loss) per share
- -------------------------
Earnings (loss) per share is computed using the weighted average number
of shares outstanding during the year, after considering outstanding
stock options and warrants.
Stock-based compensation
- ------------------------
FASB Statement No. 123, "Accounting for Stock-Based Compensation",
encourages, but does not require, companies to record compensation cost
for stock-based employee compensation plans at fair value. The Company
has chosen to account for stock-based compensation using Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee is
required to pay for the stock.
Comparative figures
- -------------------
Certain comparative figures have been reclassified to conform with the
current year's presentation.
<PAGE> 26
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1997
=============================================================================
4. FINANCE RECEIVABLES
The Company engages in the asset-based commercial lending business.
Generally, loans are due over periods of one to five years and are
collateralized by security agreements on various types of equipment,
commercial real estate, borrowers' eligible accounts receivable and
inventory and other tangible assets. The loans generally earn interest
at a major bank's (the "Bank") prime rate (8.5 percent at June 30, 1997
and 8.25 percent at June 30, 1996) plus two to seven percent. The
Bank's weighted daily average prime rate was 8.32 percent and 8.52
percent during the years ended June 30, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
================================================================================
June 30, 1997 June 30, 1996
------------------------------- ------------------------------
Allowance Allowance
Number Recorded for Credit Number Recorded for Credit
of Loans Investments Losses of Loans Investments Losses
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Impaired loans 2 $ 5,071 $ 3,223 5 $ 14,572 $ 6,702
Unimpaired loans 5 6,364 70 4 4,767 500
------- ---------- --------- ------- ----------- ---------
7 $ 11,435 $ 3,293 9 $ 19,339 $ 7,202
================================================================================
Net book value $ 8,142 $ 12,137
================================================================================
</TABLE>
The net book value of the finance receivables approximate their fair
market value which is based on the discounted present value of the
estimated future cash flow.
The Company has established allowances for credit losses at June 30,
1997 and 1996 as follows:
<TABLE>
<CAPTION>
================================================================================
1997
-------------------------------
Specific General Total 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of year $ 6,702 $ 500 $ 7,202 $ 14,716
Provision (recovery) for the year 40 (713) (673) (1,396)
Charge-offs for the year (3,519) 283 (3,236) (6,118)
--------- -------- -------- --------
Balance, end of year $ 3,223 $ 70 $ 3,293 $ 7,202
================================================================================
</TABLE>
Contractual maturities of finance receivables are as follows:
Years ending June 30,
1998 $ 7,664
1999 3,329
2000 82
--------
11,075
Interest receivable, currently due 178
Reimbursable expenses, currently due 220
Deferred commitment fees, net of related costs (38)
--------
11,435
Less: allowance for credit losses (3,293)
--------
Finance receivables, net $ 8,142
========
<PAGE> 27
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1997
=============================================================================
4. FINANCE RECEIVABLES (continued)
The Company does not have sufficient operating history to determine
whether the loan portfolio will generally be repaid or renewed before
contractual maturity dates. The above tabulation, therefore, is not to
be regarded as a forecast of future cash collections.
At June 30, 1997 and 1996, the Company does not have any unfunded loan
commitments.
5. OTHER RECEIVABLES
=========================================================================
1997 1996
- -------------------------------------------------------------------------
Note receivable $ 7,502 $ -
Accrued dividend receivable 149 -
Other receivable 3,297 371
-------- --------
$ 10,948 $ 371
=========================================================================
The note receivable is unsecured, accrues interest at the rate of 8%
per annum and is due January 1, 1998.
The carrying amount of receivables approximates their fair value which
is based on the discounted present value of their estimated future cash
flows.
6. INVESTMENTS
=========================================================================
1997 1996
- -------------------------------------------------------------------------
Trading securities:
Bonds and debentures $ - $ 10,204
Equity securities 2,035 296
Investment funds - 2,783
-------- --------
2,035 13,283
Available-for-sale security (Note 12) 6,000 6,000
-------- --------
$ 8,035 $ 19,283
=========================================================================
<PAGE> 28
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1997
=============================================================================
6. INVESTMENTS (continued)
For the year ended June 30, 1997, the Company recognized an unrealized
holding loss of $435,000 (1996 - $57,000) and a realized gain of
$1,373,000 (1996 - $4,573,000) on sales of trading securities.
Available-for-sale investments consist of preferred shares in an
affiliate. The preferred shares are stated at cost of $6,000,000 at
June 30, 1997 and 1996 because there is no market for the shares. The
carrying amount approximates their fair value which is based on their
retractibility feature and dividend rate compared to market rate.
7. INVESTMENT - AT EQUITY
The Company's investment is comprised of 1,470,320 shares of Ichor
Corporation which represents 29.95% of the total outstanding shares.
The Company has accounted for its investment using the equity method of
accounting.
8. BONDS PAYABLE
Under an indenture dated August 26, 1993 (the "Master Indenture") the
Company is authorized to issue up to $500 million of unsecured,
subordinated variable rate bonds (the "Bonds"). The Bonds may be
issued in series, each substantially identical in form pari passu in
right and having substantially identical terms except for the date of
issuance. The Company may not issue any subsequent series of Bonds
unless no event of default under the Master Indenture has occurred or
has been continuing with respect to any Bond previously issued within
the 12 month period immediately preceding the date of issuance of such
subsequent series, and not less than 75 percent of the net proceeds
received from the issuance of the immediately preceding series of Bonds
have been utilized or formally committed.
In August 1993, the Company made an initial issuance of Bonds at par in
the aggregate principal amount of $50 million in a public offering
concurrent with the Company's initial public offering of Common Stock.
The sale of the Bonds generated net proceeds of $46.9 million after
related debt issuance costs. No other issuances of Bonds have since
occurred.
Interest on the Bonds is payable semi-annually on January 25 and July
25 to holders of record on the preceding December 31, and June 30,
respectively. The interest paid for each semi-annual period is the
greater of: (i) the Bank's prime rate as of the first day of the semi-
annual period, (ii) the Bank's weighted daily average prime rate during
the semi-annual period, (iii) a rate specified by the Company prior to
the commencement of the semi-annual period, and, (iv) 80 percent of the
"portfolio yield". Portfolio yield is defined as: (i) the aggregate of
interest received from the Company's loan portfolio and gains less
losses, if any, realized from the disposition of equity securities or
warrants to acquire equity securities received in connection with the
making or purchasing of loans; less (ii) the provision for credit
losses.
The Company did not make its semi-annual interest payments due on
January 25, 1996, July 25, 1996, January 25, 1997, and July 25, 1997
until February 20, 1996, August 22, 1996, February 21, 1997, and August
20, 1997, respectively. The delinquent payments did not result in an
event of default as the payment was made within the 30 day cure period
provided for under the terms of the Master Indenture.
As part of an amendment to the Master Indenture made during 1996, the
requirement to maintain a ratio of consolidated liabilities to
consolidated tangible net worth of not more than 15:1 and the
restriction on the use of proceeds from the issuance of the bonds was
deleted.
<PAGE> 29
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1997
=============================================================================
8. BONDS PAYABLE (continued)
The Bonds mature on July 31, 2008 and are subject to mandatory
redemption by the Company in annual instalments commencing July 31,
2004 through July 31, 2008. The annual instalment amount is equal to
20 percent of the outstanding principal on June 30, 2004. The Bonds
are also subject to mandatory redemption generally upon the sale or
transfer of substantially all of the assets of the Company.
In September 1993, the Board of Directors authorized the repurchase of
up to $5.0 million principal amount of bonds. The entire $5.0 million
of bonds were repurchased and cancelled, resulting in an extraordinary
gain before income taxes of approximately $0.7 million.
In April, 1994, the Company's Board of Directors authorized a
discretionary buy back program (the "Repurchase Program") of the
Company's Common Stock and Bonds up to a total cost of $4.5 million.
During the last quarter of fiscal 1996, the Board of Directors
authorized the Company at its discretion, to spend up to an additional
$10 million to repurchase Bonds. During the last quarter of fiscal
1997, the Board of Directors authorized the Company to spend a further
$10 million to repurchase Bonds. During 1997, $19,045,000 (1996 -
$234,000) in aggregate principal amount of Bonds were repurchased
resulting in an extraordinary gain of $2,977,000 (1996 - $113,000). At
June 30, 1997, the Company had remaining issued and outstanding $45
million principal amount of bonds of which approximately $22 million
were repurchased and are held by the Company in treasury.
The Bonds had a carrying amount of $23,002,000 (1996 - $42,047,000) and
a fair value of $15,181,000 (1996 - $29,433,000) as at June 30, 1997.
The fair value is based on the quoted market price.
For semi-annual periods ended December 31, 1995, June 30, 1996,
December 31, 1996 and June 30, 1997, interest has been incurred at per
annum coupon rates of 9.0 percent, 8.5 percent, 8.25 percent and 8.38
percent, respectively.
9. SHAREHOLDERS' EQUITY
In June, 1996, the Company issued 3,000,000 shares of its Preferred
Stock, Series 1 for $6,000,000 cash. The Preferred Stock, Series 1
pays a cumulative dividend at 5% per annum on paid-up amount; accrued
interest at 8% per annum on accrued and unpaid dividends; is redeemable
by the Company at any time at the paid-up amount plus 10% premium; and
has variable voting rights which limit the votes thereon so that any
holder thereof has less than 48% of total votes attached to all the
outstanding voting shares of the Company, subject to certain
adjustments.
In connection with its initial public offering, the Company issued
warrants to its underwriters representing the right to purchase 200,000
shares of the Company's Common Stock at $4.50 per share. The number of
shares and exercise price are subject to adjustment for certain changes
in the Company's capital structure. The warrants may be exercised
until expiry on August 16, 1998.
<PAGE> 30
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1997
=============================================================================
10. STOCK OPTION PLAN
In June 1993, the Board of Directors approved the adoption of the Stock
Option Plan. Under the plan, substantially all employees, consultants
and non-employee directors are eligible to receive options to purchase
up to an aggregate of 400,000 shares of the Company's Common Stock at
exercise prices which cannot be less than the fair market value of the
shares on the date the options are granted. The term of each option
can be no more than 10 years. Non-employee directors of the Company
are automatically granted options to purchase 25,000 shares of Common
Stock on the date they become a director and additional options to
purchase 3,500 shares of Common Stock are granted upon the completion
of each full year of service and at the Annual Meeting of Shareholders
thereafter. Information with respect to options granted under the plan
is as follows:
=========================================================================
Exercise
Price
Per Share
Number (Not in
of Shares Thousands)
- -------------------------------------------------------------------------
Outstanding, June 30, 1995 150,000 $1.81 - $3.75
Expired (75,000) $1.81 - $3.75
--------- -------------
Outstanding, June 30, 1996 75,000 $1.81 - $1.88
Expired (50,000) $1.81
--------- -------------
Outstanding, June 30, 1997 25,000 $1.88
=========================================================================
At June 30, 1997, options to purchase 350,000 shares (1996 - 300,000)
of the Company's Common Stock are available for future grant and
outstanding options with regard to 25,000 (1996 - 75,000) shares are
exercisable.
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its stock option plan. There was no option granted in
either 1997 or 1996.
The disclosure requirements of FASB Statement No. 123 are effective for
the Company's financial statements starting from the fiscal year ended
June 30, 1997. No pro forma disclosures are presented because there
was no option granted after the fiscal year ended June 30, 1995.
<PAGE> 31
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1997
=============================================================================
11. INCOME TAXES
There was no provision for income taxes for the years ended June 30,
1997 and 1996 (other than the payment of state minimum income tax of
$1,000 each in 1997 and 1996) due to tax losses incurred in prior
years.
Differences between the United States federal statutory and the
Company's effective tax rates are as follows:
=========================================================================
1997 1996
- -------------------------------------------------------------------------
United States federal statutory rate on
income from operations $ 795 $ 571
Timing differences on credit losses (1,329) (2,520)
Other timing differences 305 101
Valuation allowance 229 1,848
-------- --------
$ - $ -
=========================================================================
The net deferred tax assets at June 30, 1997 and 1996 consist of the
following:
=========================================================================
1997 1996
- -------------------------------------------------------------------------
Provision for credit losses $ 1,120 $ 2,483
Net operating loss carryforwards 3,264 3,245
Other timing differences 571 -
Valuation allowance (4,955) (5,728)
-------- --------
Deferred tax asset, net $ - $ -
=========================================================================
At June 30, 1997, the Company has $9.6 million in net operating loss
carryforwards for United States federal income tax purposes and $3.1
million for California income tax purposes. The carryforwards expire
in the fiscal years ending in 2009 to 2012 for United States federal
income tax purposes and 1999 to 2001 for California income tax
purposes. Of the total net operating loss carryforwards, utilization
of approximately $3.0 million is restricted due to various changes in
the ownership of the Company.
<PAGE> 32
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1997
=============================================================================
12. RELATED PARTY TRANSACTIONS
During the year ended June 30, 1997, the Company incurred $300,000
(1996 - $456,000) in fees payable to certain affiliates. These
affiliates are related to the Company because they have certain common
director(s) (one of the affiliates also owns a 34.6% indirect interest
of common shares and 100% indirect interest of preferred shares of the
Company representing a total of 47.9% of all the outstanding voting
shares). The fees were to pay for the accounting and administration of
the Company, as well as reimbursement of certain office expenses. The
Company also paid $22,000 (1996 - $125,000) in consulting fees and
expense reimbursement to a company which is owned and controlled by an
officer of the Company. The Company has an amount of $541,000 (1996 -
$Nil) owing to them from a company in which the Company owns 29.95%
interest.
During fiscal 1996, the Company issued 3,000,000 shares of its
Preferred Stock, Series 1 for $6,000,000 cash to an affiliate which
also owns a 34.6% indirect interest in the Company. Also during fiscal
1996, the Company acquired $6,000,000 worth of preferred stock in a
subsidiary of the same affiliate. This investment is classified as an
available-for-sale security.
13. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and matters of litigation
arising in the ordinary course of its business including collection and
related actions concerning delinquent loans made by the Company. The
Company does not believe that the outcome of such litigation will have
a material adverse effect on its business or financial conditions.
14. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO
CONSOLIDATED STATEMENT OF CASH FLOWS
Significant non-cash transaction in 1997 include:
a) The Company received a loan re-payment of $1,205,662 in the form of
shares of a company related to the respective borrower.
Significant non-cash transactions in 1996 include:
a) The Company received payment of $131,000 in loan fees in the form of
shares of the respective borrower's common stock.
b) The Company collected $73,000 on a loan by receiving shares of a
borrower's common stock.
c) The Company converted a loan of $1,925,000 into shares of a borrower's
common stock. Subsequently, the shares received were sold for a gain.
<PAGE> 33
DRUMMOND FINANCIAL CORPORATION
(formerly CVD Financial Corporation)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1997
=============================================================================
15. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Company's consolidated financial statements have been prepared in
accordance with United States Generally Accepted Accounting Principles
("U.S. GAAP") which conform in all material respects with Canadian
Generally Accepted Accounting Principles ("Canadian GAAP") except as
set forth below:
=========================================================================
June 30, June 30,
1997 1996
- -------------------------------------------------------------------------
Net income for the year in accordance
with U.S. GAAP $ 2,338 $ 1,791
Unrealized gains of prior years on trading
securities sold during the year - 270
--------- ---------
Net income for the year in accordance
with Canadian GAAP 2,338 2,061
Accumulated deficit, beginning of year (17,113) (19,174)
Dividends paid and payable (322) -
--------- ---------
Accumulated deficit, end of year
in accordance with Canadian GAAP $ (15,097) $ (17,113)
=========================================================================
Basic earnings per share
in accordance with Canadian GAAP $ 0.74 $ 0.76
=========================================================================
Fully diluted earnings per share
in accordance with Canadian GAAP $ 0.71 $ 0.76
=========================================================================
(a) Investments
-----------
U.S. GAAP require that trading securities be carried at fair market value
with holdings gains and losses included in annual earnings. Warrants to
acquire common stock for which a readily determinable fair market value is
available and the Company has an unrestricted right to sell the warrant
and/or underlying securities within one year are included in trading
securities. Canadian GAAP would require that such securities be carried at
the lower of cost or market with gains recorded only as realized.
(b) Extinguishment of Debt
----------------------
U.S. GAAP require gains and losses on the extinguishment of debt to be
classified as an extraordinary item. Under Canadian GAAP, the gain or loss
would be included in income (loss) from operations.
<PAGE> 34
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DRUMMOND FINANCIAL CORPORATION
Date: September 24, 1997 By: /s/ Michael J. Smith
------------------------------------
Michael J. Smith
President, Chief Executive Officer,
Chief Financial Officer and Director
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ Michael J. Smith Date: September 24, 1997
- --------------------
Michael J. Smith
President, Chief Executive Officer,
Chief Financial Officer and Director
/s/ Leonard Petersen Date: September 24, 1997
- --------------------
Leonard Petersen
Director
/s/ Rene Randall Date: September 24, 1997
- --------------------
Rene Randall
Director
/s/ Frederick Yu Wong Date: September 24, 1997
- ---------------------
Frederick Yu Wong
Director
<PAGE> 35
EXHIBIT INDEX
3.1 Certificate of Incorporation dated June 1, 1993. Incorporated by
reference to Form S-1 filed June 7, 1993.
3.2 Certificate of Designations dated July 19, 1996. Incorporated by
reference to Form 10-KSB dated September 20, 1996.
3.3 Certificate of Amendment to the Certificate of Incorporation of Drummond
Financial Corporation dated October 14, 1996. Incorporated by reference
to Form 10-QSB dated November 11, 1996.
3.4 Bylaws. Incorporated by reference to Form S-1 filed June 7, 1993.
3.5 Amendment to the Bylaws adopted as of July 20, 1993. Incorporated by
reference to Amendment No. 1 to Form S-1 filed July 26, 1993.
4.1 Form of Indenture between CVD Financial Corporation and Harris Trust
Company of New York, as Trustee. Incorporated by reference to Form S-1
filed June 7, 1993.
4.2 Second Supplemental Indenture between Drummond Financial Corporation and
Harris Trust Company of New York, as Trustee, dated for reference
October 23, 1996. Incorporated by reference to Form 10-QSB dated
November 11, 1996.
4.3 Third Supplemental Indenture among Drummond Financial Corporation,
Harris Trust Company of New York and The Bank of Nova Scotia Trust
Company of New York dated for reference May 13, 1997.
10.1 1993 Stock Option Plan. Incorporated by reference to Form S-1 filed
June 7, 1993.
10.2 Profit Sharing Plan. Incorporated by reference to Amendment No. 1 to
Form S-1 filed July 26, 1993.
10.3 Stock Purchase Agreement between CVD Financial Corporation and Mercer
International Inc. dated March 22, 1995. Incorporated by reference to
Form 8-K dated March 22, 1995.
10.4 Subscription Agreement between CVD Financial Corporation and Logan
International Corp. dated for reference June 20, 1996. Incorporated by
reference to Form 8-K dated June 27, 1996.
10.5 Subscription Agreement between CVD Financial Corporation and Arbatax
International Inc. dated for reference June 20, 1996. Incorporated by
reference to Form 8-K dated June 27, 1996.
21. List of subsidiaries of Registrant.
27. Article 5 - Financial Data Schedule for year ended June 30, 1997 - Form
10-KSB.
<PAGE> 1
THIRD SUPPLEMENTAL INDENTURE among Drummond Financial Corporation,
formerly called CVD Financial Corporation, a corporation incorporated
pursuant to the laws of the State of Delaware (the "Corporation"),
Harris Trust Company of New York ("Harris Trust"), a trust company
organized pursuant to the laws of the State of New York, and The Bank
of Nova Scotia Trust Company of New York ("The Bank of Nova Scotia"), a
trust company organized pursuant to the laws of the State of New York,
dated for reference May 13, 1997 (the "Supplemental Indenture") to the
CVD Financial 1993 Master Indenture made between the Corporation and
Harris Trust, dated August 26, 1993, as amended by a First Supplemental
Indenture dated November 30, 1993 and a Second Supplemental Indenture
dated October 23, 1996 (collectively, the "Indenture").
WHEREAS:
A. The Corporation and Harris Trust entered into the Indenture to
provide for the issuance of the Corporation's unsecured subordinated
variable rate bonds (the "Securities") to be issued in one or more
series as provided in the Indenture;
B. Harris Trust has provided notice in writing to the Corporation of
its intention to resign as Trustee under the Indenture;
C. The Corporation has approved the appointment of The Bank of Nova
Scotia to act as Trustee under the Indenture in place of Harris Trust
by a resolution of the board of directors of the Corporation dated May
13, 1997;
D. Section 610 of the Indenture provides that the resignation of a
Trustee under the Indenture shall not be effective until an appointed
successor Trustee executes, acknowledges and delivers to the
Corporation and the retiring Trustee an instrument accepting its
appointment as Trustee under the Indenture; and
E. Section 901 of the Indenture provides that the Corporation,
without the consent of any of the holders of the Securities, may enter
into one or more indentures supplemental to the Indenture in order to
evidence and provide for the acceptance of appointment under the
Indenture by a successor Trustee with respect to the Securities;
NOW THEREFORE THIS INDENTURE WITNESSES THAT the parties agree as
follows:
SECTION 1
Representations, Warranties and Covenants of the Corporation
------------------------------------------------------------
1.1 The Corporation represents, warrants and covenants to The Bank of
Nova Scotia that:
(a) it is validly organized and existing;
(b) the Securities were validly and lawfully issued;
<PAGE> 2
(c) it has performed or fulfilled each covenant, agreement and
condition on its part to be performed or fulfilled under the
Indenture;
(d) it has no knowledge of the existence of an Event of Default or
any event which, upon notice or lapse of time or both, would
become an Event of Default under the Indenture;
(e) it has not entered into any amendment or supplement to the
Indenture other than the First and Second Supplemental Indentures
referred to in the first paragraph of this Supplemental Indenture;
and
(f) it will continue to perform the obligations undertaken by it
under the Indenture.
SECTION 2
Resignation and Replacement of Trustee
--------------------------------------
2.1 Pursuant to Section 610 of the Indenture, Harris Trust hereby
resigns as Trustee under the Indenture and is hereby discharged from
the trusts of the Indenture, such resignation to become effective on
the Effective Date (as defined herein).
2.2 The Corporation hereby appoints The Bank of Nova Scotia as
successor Trustee under the Indenture in the place and stead of Harris
Trust and with like effect as if originally named as Trustee under the
Indenture, such appointment to become effective on the Effective Date,
and The Bank of Nova Scotia hereby accepts such appointment.
2.3 Harris Trust hereby assigns, transfers and delivers to The Bank
of Nova Scotia, as successor Trustee, upon the trusts expressed in the
Indenture, all rights, powers, benefits, privileges and duties of
Harris Trust under the Indenture, and The Bank of Nova Scotia hereby
accepts such assignment, transfer and delivery, which is to become
effective on the Effective Date.
2.4 The parties hereto agree to sign, execute and deliver all such
documents and instruments and do such other acts as may be necessary or
advisable to give effect to the assignment, transfer and delivery by
Harris Trust to The Bank of Nova Scotia of all rights, powers,
benefits, privileges and duties under the Indenture referred to in
Section 2.3 hereof.
2.5 Harris Trust hereby represents, warrants and covenants to The
Bank of Nova Scotia that:
(a) it will make available to The Bank of Nova Scotia originals of
documents relating to the trust created by the Indenture and
information in the possession of its corporate trust department
relating to the administration and status thereof and will forward
to The Bank of Nova Scotia such documents or information as it and
The Bank of Nova Scotia shall agree;
<PAGE> 3
(b) it has not entered into any amendment or supplement to the
Indenture, other than the First and Second Supplemental Indentures
referred to in the first paragraph of this Supplemental Indenture;
(c) based on information known to the Responsible Officers of
Harris Trust, as Trustee, no Event of Default or event which, upon
notice or lapse of time or both, would become an Event of Default
under the Indenture exists; and
(d) the aggregate outstanding principal amount of the Securities
as of the date hereof is $45 million.
SECTION 3
Declaration and Interpretive Provisions
---------------------------------------
3.1 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 in the Indenture. The Indenture is a part of this
Supplemental Indenture and is, by this reference, included herein with
the same effect as though at length set forth herein. 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 the 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.
SECTION 4
Acceptance of Trust
-------------------
4.1 The Bank of Nova Scotia represents that it has the qualifications
for a new Trustee required by the Indenture and the Trust Indenture Act
of 1939, as amended, and as successor Trustee hereby accepts the trusts
declared and provided in the Indenture and agrees to perform the same
upon the terms and conditions herein and in the Indenture.
SECTION 5
Effective Date
--------------
5.1 This Supplemental Indenture will be effective from and after May
15, 1997 (the "Effective Date"), irrespective of the actual dates of
the execution hereof.
<PAGE> 4
SECTION 6
Enurement
---------
6.1 This Supplemental Indenture will enure to the benefit of and be
binding upon the parties hereto and their respective successors and
assigns.
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 CVD Financial Corporation)
By: /s/ Rene Randall
---------------------------------
Name: Rene Randall
---------------------------------
Title: Director
---------------------------------
HARRIS TRUST COMPANY OF NEW YORK
By: /s/ Amy Roberts
---------------------------------
Name: Amy Roberts
---------------------------------
Title: Assistant Vice President
---------------------------------
THE BANK OF NOVA SCOTIA TRUST COMPANY OF NEW YORK
By: /s/ George E. Timmes
---------------------------------
Name: George E. Timmes
---------------------------------
Title: Secretary
---------------------------------
<PAGE> 1
SUBSIDIARIES OF DRUMMOND FINANCIAL CORPORATION
Shareholding
Jurisdiction at June 30, 1997
Name of Subsidiary of Incorporation (Direct)
- ------------------ ---------------- ----------------
CVD Financial Corporation Washington 100%
CVD Financial Corporation British Columbia 100%
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES INCLUDED IN THIS FORM 10-KSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,625
<SECURITIES> 8,035
<RECEIVABLES> 11,435
<ALLOWANCES> 3,293
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,560
<CURRENT-LIABILITIES> 0
<BONDS> 23,002
0
30
<COMMON> 43
<OTHER-SE> 5,584
<TOTAL-LIABILITY-AND-EQUITY> 31,560
<SALES> 0
<TOTAL-REVENUES> 4,253
<CGS> 0
<TOTAL-COSTS> 4,602
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (673)
<INTEREST-EXPENSE> 3,571
<INCOME-PRETAX> (638)
<INCOME-TAX> 1
<INCOME-CONTINUING> (639)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,977
<CHANGES> 0
<NET-INCOME> 2,338
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.74
</TABLE>
