<PAGE> 1
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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 001-12212
DRUMMOND FINANCIAL CORPORATION
(Exact name of Registrant 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
(Registrant's telephone number)
Check whether the Registrant (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 Registrant's classes of
common equity, as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding at November 10, 1997
----- --------------------------------
<C> <S>
Common Stock, $0.01 2,718,600
par value
</TABLE>
Transitional Small Business Disclosure Format: Yes No X
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<PAGE> 2
FORWARD-LOOKING STATEMENTS
Statements in this report, to the extent that 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
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
2
<PAGE> 3
DRUMMOND FINANCIAL CORPORATION
Consolidated Balance Sheets
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
------------------ -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,724 $ 1,625
Finance receivables, net 5,388 8,142
Other receivables 8,495 10,948
Due from affiliates 702 541
Investments 18,361 8,035
Investment - at equity 751 917
Deferred debt issuance costs, net of accumulated
amortization 1,259 1,348
Other assets 32 4
--------------- -------------
$ 36,712 $ 31,560
=============== =============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES
Accounts payable and accrued liabilities $ 1,363 $ 1,788
Interest payable 534 964
Accrued dividends payable 224 149
Note payable 7,000 -
Bonds payable, net of principal amount
of bonds held in treasury 21,901 23,002
--------------- -------------
31,022 25,903
--------------- -------------
SHAREHOLDERS' EQUITY
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 (15,064) (15,097)
--------------- -------------
8,746 8,713
Less: 1,545,400 common shares held as treasury
stock (3,056) (3,056)
--------------- -------------
5,690 5,657
--------------- -------------
$ 36,712 $ 31,560
=============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
DRUMMOND FINANCIAL CORPORATION
Consolidated Statements of Operations
(Unaudited)
(dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Revenue
Interest and loan fee income $ 285 $ 441
Gain on securities 493 106
Dividend and other 89 -
----------- -----------
867 547
Costs and expenses
Interest 588 918
Recovery of credit losses (13) (115)
General and administrative 384 206
----------- -----------
959 1,009
----------- -----------
Operating loss (92) (462)
Equity in loss of an investee (166) -
----------- -----------
Loss before income tax expense
and extraordinary gain (258) (462)
Income tax expense 1 1
----------- -----------
Loss before extraordinary gain (259) (463)
Extraordinary gain on debt extinguishment 368 -
----------- -----------
Net income (loss) 109 (463)
Accumulated deficit, beginning of period (15,097) (17,113)
Dividends payable (76) -
----------- -----------
Accumulated deficit, end of period $ (15,064) $ (17,576)
=========== ===========
Earnings (loss) per share
Loss before extraordinary item $ (0.12) $ (0.20)
Extraordinary gain 0.13 -
----------- -----------
$ 0.01 $ (0.20)
=========== ===========
Weighted average number of shares
outstanding 2,718,600 2,718,600
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
DRUMMOND FINANCIAL CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 109 $ (463)
Adjustments to reconcile
net loss to net cash
used by operating activities:
Extraordinary gain on early
extinguishment of debt (368) -
Recovery of credit losses (13) (115)
Gain on investments, net (493) (106)
Equity in loss of an investee 166 -
Amortization of deferred debt
issuance costs 34 51
----------- -----------
(565) (633)
Changes in non-cash working capital
balances
Receivables (564) (368)
Interest receivable 9 204
Commitment fees 35 (101)
Other assets (28) -
Due from affiliates (165) -
Interest payable (388) (1,028)
Accounts payable and accrued
liabilities (421) (73)
----------- -----------
(2,087) (1,999)
Purchase of trading securities (9,721) (119)
Proceeds from sales of trading
securities 2,803 202
----------- -----------
Net cash used in operating
activities (9,005) (1,916)
----------- -----------
Investing activities:
Advances on loan receivables (3,000) (100)
Payments received on loan receivables 5,739 390
Decrease in note receivable 85 -
----------- -----------
Net cash provided by investing
activities 2,824 290
----------- -----------
Financing activities:
Purchase of treasury bonds (720) -
Increase in note payable 7,000 -
----------- -----------
Net cash provided by financing
activities 6,280 -
----------- -----------
Net change in cash and cash equivalents 99 (1,626)
Cash and cash equivalents,
beginning of period 1,625 14,478
----------- -----------
Cash and cash equivalents,
end of period $ 1,724 $ 12,852
=========== ===========
Cash paid during the period for:
Interest expense $ 931 $ 1,787
Income taxes $ 1 $ 1
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
DRUMMOND FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)
Note 1. Basis of Presentation
In accordance with Item 310 of Regulation S-B promulgated by the U.S.
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 "Corporation")
audited consolidated financial statements and notes thereto contained in the
Corporation's Form 10-KSB Annual Report for the fiscal year ended June 30,
1997. All dollar amounts are rounded to the nearest thousand.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
Corporation's financial position as of September 30, 1997, and the results of
its operations and changes in its financial position for the periods ended
September 30, 1996 and 1997, respectively. 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.
While the Corporation reported net income in fiscal 1997 principally as a
result of an extraordinary gain on early extinguishment of debt, the
Corporation had an accumulated deficit of $15.1 million as at June 30, 1997.
The Corporation 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.
Note 2. Bonds Payable
The Corporation did not make its semi-annual Bond interest payment due on
July 25, 1997 until August 20, 1997. The delinquent payment did not result
in an event of default, as the payment was made within the 30 day cure period
provided for under the terms of the Bond indenture.
Note 3. Adoption of Accounting Standard Regarding Impaired Loans
Under the provisions of the 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
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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 Statement No. 114.
The Corporation continued to apply FASB Statement No. 5, "Accounting for
Contingencies", to provide an allowance on a pool of unimpaired loans.
As of September 30, 1997, the Corporation had identified impaired finance
receivables with a recorded investment totaling $5.1 million and had
established a specific allowance for credit losses totaling $3.2 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 three months ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Three Months
------------
(in thousands)
<S> <C>
Balance, beginning of period $ 3,293
Decrease in provision (13)
Charge-offs (1)
-------
Balance, end of period $ 3,279
=======
Consisted of:
Specific allowance under FASB Statement No. 114 $ 3,223
General allowance under FASB Statement No. 5 56
-------
$ 3,279
=======
</TABLE>
The following table summarizes the calculation of net finance receivables as
at September 30, 1997:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Finance receivables, gross $ 8,667
Less allowance for credit losses (3,279)
-------
Finance receivables, net $ 5,388
=======
</TABLE>
7
<PAGE> 8
The following table summarizes the Corporation's specific reserves for credit
losses prepared in accordance with FASB Statement No. 114 as at September 30,
1997:
<TABLE>
SEPTEMBER 30, 1997
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total future Specific
expected cash Total related Net reserve
# of Recorded collections, net costs expected to present under FASB
loans investment of related costs (1) be incurred (1)(2) value No. 114
----- ---------- -------------------- ------------------ ----- ----------
IMPAIRED LOANS
Future cash flows:
Bankruptcy or
ceased to operate 2 $ 5,071 $ 2,927 $ 263 $ 1,848 $ 3,223
UNIMPAIRED LOANS 3 3,596 56(3)
--- -------- --------
Grand total 5 $ 8,667 $ 3,279
=== ======== ========
</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.
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 general reserve is determined in accordance with FASB Statement No. 5
on a pool of unimpaired loans.
8
<PAGE> 9
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of Drummond Financial Corporation (the "Corporation") for the
three months ended September 30, 1997 should be read in conjunction with the
consolidated financial statements and related notes included elsewhere
herein.
Results of Operations - Three Months Ended September 30, 1997
- -------------------------------------------------------------
Revenues for the three months ended September 30, 1997 increased to $0.9
million from $0.5 million in the comparative period of 1996. In the three
months ended September 30, 1997, the Corporation recognized a $0.5 million
net gain on securities, compared to $0.1 million in the comparative period of
1996. Revenues from interest and loan fees decreased to $0.3 million in
three months ended September 30, 1997 from $0.4 million in the three months
ended September 30, 1996. 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 was 8.50% during the three months ended September 30, 1997,
compared to 8.25% during the three months ended September 30, 1996. Revenues
from dividends and other activities were $0.1 million for the three months
ended September 30, 1997, compared to nil for the three months ended
September 30, 1996.
Costs and expenses were $1.0 million for the quarters ended September 30,
1997 and 1996, respectively. General and administrative expenses increased
to $0.4 million for the three months ended September 30, 1997 from $0.2
million for the comparative period of 1996, primarily as a result of a
reversal of a provision for expenses in the quarter ended September 30, 1996.
In the three months ended September 30, 1997, the Corporation reported a
recovery of credit losses of $13,000, compared to $0.1 million for the
comparative period of 1996.
Interest expense decreased to $0.6 million for the three months ended
September 30, 1997 from $0.9 million for the comparative period of 1996,
primarily as a result of a reduction in the principal amount outstanding of
the Corporation's 15 Year Variable Rate Bonds (the "Bonds"). For the three
months ended September 30, 1997, interest was accrued at the rate of
approximately 8.50% per annum, compared to approximately 8.25% per annum for
the three months ended September 30, 1996.
No income tax provision was recognized for the three months ended September
30, 1997 and 1996, respectively, except for the payment of a minimum tax of
$1,000. 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 three months ended September 30, 1997, the Corporation's net income
was $0.1 million or $0.01 per share, compared to a net loss of $0.5 million
or $0.20 per share in the comparative period of 1996. The Corporation's
results of operations for the three months ended September 30, 1997 included
$0.4 million of extraordinary gains on the early extinguishment of debt. The
net income
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<PAGE> 10
in the current period was primarily attributable to the extraordinary gain on
early extinguishment of debt, the increase in net gains on securities and the
decrease in interest payable.
Liquidity and Capital Resources
- -------------------------------
The Corporation's cash and cash equivalents at September 30, 1997 were $1.7
million, which represents an increase of $0.1 million from June 30, 1997.
Cash used by operations for the quarter ended September 30, 1997 was $9.0
million, compared to $1.9 million for the comparative period of 1996. The
Corporation used cash of $2.1 million in operating activities before any
activities in trading securities in the three months ended September 30,
1997, compared to $2.0 million in the comparative period of 1996. An
increase in receivables used cash of $0.6 million in the three months ended
September 30, 1997, compared to $0.4 million in the comparative period of
1996. A decrease in accounts payable and accrued liabilities used cash of
$0.4 million in the three months ended September 30, 1997, compared to $0.1
million in the three months ended September 30, 1996. In the three months
ended September 30, 1997, interest payable decreased by $0.4 million,
compared to $1.0 million in the three months ended September 30, 1996.
Net purchases of trading securities used cash of $6.9 million in the three
months ended September 30, 1997, compared to net sales of trading securities
providing cash of $0.1 million in the three months ended September 30, 1996.
Cash provided by investing activities was $2.8 million during the three
months ended September 30, 1997, compared to $0.3 million during the
comparative period of 1996. Collections on loan receivables provided cash of
$5.7 million in the three months ended September 30, 1997, compared to $0.4
million in the same period of 1996, primarily as a result of the repayment in
full of three loans during the current quarter of 1997. During the three
months ended September 30, 1997, one new loan in the amount of $3.0 million
with a term of one year was advanced. The Corporation's net finance
receivables at September 30, 1997 were $5.4 million, compared to $11.5
million at September 30, 1996.
Financing activities for the three months ended September 30, 1997 provided
cash of $6.3 million. An increase in indebtedness provided cash of $7.0
million during the current period of 1997. During the three months ended
September 30, 1997, the Corporation used cash of $0.7 million to purchase
$1.1 million in aggregate principal amount of the Bonds. As at September 30,
1997, the Corporation had $45.0 million in principal amount of the Bonds
issued and outstanding, of which approximately $23.1 million was repurchased
and held by the Corporation in treasury.
The Corporation did not make its semi-annual interest payment on the Bonds
due July 25, 1997 until August 20, 1997, which was within the 30 day cure
period provided for under the terms of the indenture governing the
Corporation's Bonds (the "Bond Indenture"). The next regularly scheduled
interest payment date is January 25, 1998. As of the date hereof, the
Corporation is in compliance with the terms of the Bond Indenture.
During the three months ended September 30, 1997, the Corporation proceeded
to collect and/or settle and restructure the non-performing loans in its
portfolio. The Corporation anticipates that its
10
<PAGE> 11
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 of the Corporation
during the short-term.
Finance Receivables
- -------------------
The Corporation's loan portfolio at September 30, 1997 aggregated $8.7
million in finance receivables (principal plus interest and reimbursable
costs less unamortized commitment fees) due from five borrowers, compared to
an aggregate of $16.9 million in finance receivables due from eight borrowers
at September 30, 1996. During the quarter ended September 30, 1997, the
Corporation's loans to three borrowers, with finance receivables totaling
$5.7 million, were repaid in full.
At September 30, 1997, the Corporation's loans to Clean-Up Technology, Inc.
and Heartland, Inc., 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 had ceased to operate. 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).
The Corporation maintains an allowance for credit losses against which
amounts deemed uncollectible are charged off and subsequent recoveries, if
any, are credited. See Note 3 to the unaudited consolidated financial
statements included elsewhere herein regarding the allowance for credit
losses for the three months ended September 30, 1997.
11
<PAGE> 12
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Corporation's annual report on Form 10-KSB for the
year ended June 30, 1997 for information concerning certain legal
proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
- ------ -----------
27 Article 5 - Financial Data Schedule for the 1st Quarter 1998
Form 10-QSB.
(b) Reports on Form 8-K
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.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: November 13, 1997
DRUMMOND FINANCIAL CORPORATION
By: /s/ Michael J. Smith
-------------------------------------
Michael J. Smith, President, Chief
Executive Officer and Chief Financial
Officer
13
<PAGE> 14
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 Article 5 - Financial Data Schedule for the 1st Quarter 1998
Form 10-QSB.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
consolidated financial statements and notes included in this Form 10-QSB and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,724
<SECURITIES> 18,361
<RECEIVABLES> 5,388
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 36,712
<CURRENT-LIABILITIES> 0
<BONDS> 21,901
0
30
<COMMON> 43
<OTHER-SE> 5,617
<TOTAL-LIABILITY-AND-EQUITY> 36,712
<SALES> 0
<TOTAL-REVENUES> 867
<CGS> 0
<TOTAL-COSTS> 959
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (13)
<INTEREST-EXPENSE> 588
<INCOME-PRETAX> (258)
<INCOME-TAX> 1
<INCOME-CONTINUING> (259)
<DISCONTINUED> 0
<EXTRAORDINARY> 368
<CHANGES> 0
<NET-INCOME> 109
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
