<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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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.)
6 Rue Charles-Bonnet, 1206 Geneva, Switzerland
(Address of principal executive offices)
(41 22) 818 2999
(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
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State the number of shares outstanding of each of the Registrant's classes of
common equity, as of the latest practicable date:
Class Outstanding at November 11, 1998
----- --------------------------------
Common Stock, $0.01 2,718,600
par value
Transitional Small Business Disclosure Format: Yes No X
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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, 1998
(Unaudited)
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DRUMMOND FINANCIAL CORPORATION
Consolidated Balance Sheets
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,655 $ 3,699
Finance receivables, net - -
Other receivables 8,762 8,661
Due from affiliate 1,980 780
Investments 12,056 15,244
Deferred debt issuance costs 1,117 1,151
------------- -------------
$ 26,570 $ 29,535
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued liabilities $ 801 $ 761
Interest payable 457 1,349
Accrued dividends payable 224 149
Note payable - 2,526
Bonds payable 21,515 21,515
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22,997 26,300
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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
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6,000 6,000
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Common stock, $0.01 par value
10,000,000 shares authorized
4,264,000 shares issued and outstanding 43 43
Additional paid-in capital 17,767 17,767
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17,810 17,810
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Deficit (17,181) (17,519)
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6,629 6,291
Less: 1,545,400 common shares held as
treasury stock (3,056) (3,056)
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3,573 3,235
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$ 26,570 $ 29,535
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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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, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Revenue
Interest and loan fee income $ 243 $ 285
Gain on securities 921 493
Dividend and other 76 89
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1,240 867
Costs and expenses
Interest 532 588
Recovery of credit losses - (13)
General and administrative 293 384
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825 959
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Operating income (loss) 415 (92)
Equity in loss of an investee - (166)
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Income (loss) before income tax expense
and extraordinary gain 415 (258)
Income tax expense 1 1
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Income (loss) before extraordinary gain 414 (259)
Extraordinary gain on debt extinguishment - 368
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Net income 414 109
Accumulated deficit, beginning of period (17,519) (15,097)
Dividends payable (76) (76)
------------- -------------
Accumulated deficit, end of period $ (17,181) $ (15,064)
============= =============
Earnings per share
Earnings (loss) before extraordinary item $ 0.12 $ (0.12)
Extraordinary gain - 0.13
------------- -------------
$ 0.12 $ 0.01
============= =============
Weighted average number of
shares outstanding 2,718,600 2,718,600
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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DRUMMOND FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Operating activities:
Net income $ 414 $ 109
Adjustments to reconcile
net income to net cash
used by operating activities
Extraordinary gain on early
extinguishment of debt - (368)
Recovery of credit losses - (13)
Gain on investments, net (921) (493)
Equity in loss of an investee - 166
Amortization of deferred debt
issuance costs 33 34
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(474) (565)
Changes in non-cash working capital
balances
Receivables (26) (564)
Interest receivable (76) 9
Commitment fees - 35
Other assets - (28)
Due from affiliates (1,200) (165)
Interest payable (892) (388)
Accounts payable and accrued
liabilities 41 (421)
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(2,627) (2,087)
Purchase of trading securities (113) (9,721)
Proceeds from sales of trading
securities 4,222 2,803
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Net cash provided by (used in)
operating activities 1,482 (9,005)
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Investing activities:
Advances on loan receivables - (3,000)
Payments received on loan receivables - 5,739
Decrease in note receivable - 85
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Net cash provided by investing
activities - 2,824
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Financing activities:
Purchase of treasury bonds - (720)
Increase in note payable - 7,000
Decrease in note payable (2,526) -
------------- -------------
Net cash used in (provided by)
financing activities (2,526) 6,280
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Net change in cash and cash equivalents (1,044) 99
Cash and cash equivalents,
beginning of period 3,699 1,625
------------- -------------
Cash and cash equivalents,
end of period $ 2,655 $ 1,724
============= =============
Cash paid during the period for:
Interest expense $ 1,424 $ 931
Income taxes $ 1 $ 1
</TABLE>
The accompanying notes are an integral part of these financial statements.
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DRUMMOND FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1998
(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,
1998. 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, 1998, and the results of
its operations and changes in its financial position for the periods ended
September 30, 1997 and 1998, 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.
Note 2. 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 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, 1998, the Corporation had identified impaired finance
receivables with a recorded investment totaling $2.1 million and had
established a specific allowance for credit losses totaling $2.1 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
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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, 1998 is as follows:
Three Months
------------
(in thousands)
Balance, beginning of period $ 2,100
Decrease in provision -
Charge-offs -
----------
Balance, end of period $ 2,100
==========
Consisted of:
Specific allowance under FASB Statement No. 114 $ 2,100
General allowance under FASB Statement No. 5 -
----------
$ 2,100
==========
The following table summarizes the calculation of net finance receivables as
at September 30, 1998:
(in thousands)
Finance receivables, gross $ 2,100
Less allowance for credit losses (2,100)
----------
Finance receivables, net $ -
==========
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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, 1998 should be read in conjunction with the
consolidated financial statements and related notes included elsewhere herein.
Results of Operations - Three Months Ended September 30, 1998
- -------------------------------------------------------------
Revenues for the three months ended September 30, 1998 increased to $1.2
million from $0.9 million in the comparative period of 1997. In the three
months ended September 30, 1998, the Corporation reported a net gain on
securities of $0.9 million, compared to $0.5 million in the comparative period
of 1997. Revenues from interest and loan fees decreased to $0.2 million for
the three months ended September 30, 1998 from $0.3 million in the three
months ended September 30, 1997, primarily as a result of a reduction in the
dollar amount of outstanding performing loans. Revenues from dividends and
other activities were $0.1 million in the three months ended September 30,
1998 and 1997, respectively.
Costs and expenses for the three months ended September 30, 1998 decreased to
$0.8 million from $1.0 million in the comparative period of 1997. General and
administrative expenses decreased to $0.3 million for the three months ended
September 30, 1998 from $0.4 million for the comparative period of 1997,
primarily as a result of a decrease in professional fees incurred in the
current period. In the three months ended September 30, 1997, the Corporation
reported a recovery of credit losses of $13,000.
Interest expense decreased to $0.5 million for the three months ended
September 30, 1998 from $0.6 million for the comparative period of 1997,
primarily as a result of a reduction in the principal amount outstanding of
the Corporation's 15 Year Variable Rate Bonds (the "Bonds"). Interest was
accrued at the rate of approximately 8.50% per annum for the three months
ended September 30, 1998 and 1997, respectively.
No income tax provision was recognized for the three months ended September
30, 1998 and 1997, 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, 1998, the Corporation reported net
income of $0.4 million, or $0.12 per share, compared to $0.1 million, or $0.01
per share, in the comparative period of 1997. The Corporation's results of
operations for the three months ended September 30, 1997 included $0.4 million
or $0.13 per share of extraordinary gains on the extinguishment of debt.
-8-
<PAGE> 9
Liquidity and Capital Resources
- -------------------------------
The Corporation's cash and cash equivalents at September 30, 1998 were $2.7
million, which represents a decrease of $1.0 million from June 30, 1998.
Cash provided by operations for the three months ended September 30, 1998 was
$1.5 million, compared to cash used by operations of $9.0 million for the
comparative period of 1997. The Corporation used cash of $2.6 million in
operating activities before any activities in trading securities in the three
months ended September 30, 1998, compared to $2.1 million in the comparative
period of 1997. An increase in accounts payable and accrued liabilities
provided cash of $41,000 in the three months ended September 30, 1998,
compared to a decrease in accounts payable and accrued liabilities using cash
of $0.4 million in the three months ended September 30, 1997. An increase in
receivables used cash of $26,000 in the three months ended September 30, 1998,
compared to $0.6 million in the three months ended September 30, 1997. A loan
to an affiliate used cash of $1.2 million for the three months ended September
30, 1998, compared to $0.2 million for the comparable period of 1997. In the
three months ended September 30, 1998, a decrease in interest payable used
cash of $0.9 million, compared to $0.4 million in the comparative period of
1997.
Net sales of trading securities provided cash of $4.1 million in the three
months ended September 30, 1998, compared to net purchases of trading
securities using cash of $6.9 million in the three months ended September 30,
1997.
There was no effect on cash flow as a result of investing activities in the
three months ended September 30, 1998. Investing activities provided cash of
$2.8 million in the three months ended September 30, 1997, as a result of net
payments received on loan receivables.
Financing activities for the three months ended September 30, 1998 used cash
of $2.5 million as a result of the repayment of a note. During the period
ended September 30, 1997, financing activities provided cash of $6.3 million.
As at September 30, 1998, the Corporation had $45.0 million in principal
amount of the Bonds issued, of which approximately $23.5 million was
repurchased and held by the Corporation in treasury.
The Corporation anticipates that its cash and investments on hand and interest
income 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, 1998 consisted of one non-
performing loan in the amount of $2.1 million due from a borrower which had
filed a petition for bankruptcy and had ceased to operate, compared to an
aggregate of $8.7 million in finance receivables due from five borrowers at
September 30, 1997.
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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 2 to the financial statements herein with respect to the
allowance for credit losses during the three months ended September 30, 1998.
Year 2000
- ---------
Many of the world's computer systems currently record years in a two-digit
format. These computer systems will be unable to properly interpret dates
beyond the year 1999, which could lead to business disruptions and is commonly
referred to as the "Year 2000" issue. Based on its current information,
management of the Corporation has determined that the Year 2000 issue will not
pose significant operational problems for its computer systems as it only
utilizes commercially available software and personal computers, which are
Year 2000 compliant. The total cost to the Corporation of Year 2000
compliance activities has not been and is not currently anticipated to be
material to its financial position or results of operations in any given year.
In addition, management of the Corporation has initiated communications with
clients to ascertain their Year 2000 readiness and develop contingency plans
as required, and management intends to address this issue with any prospective
client. The determination by management and costs relating to the Year 2000
issue are based on management's best estimates, which were derived utilizing
numerous assumptions of future events. However, there can be no assurance
that these estimates will be achieved and actual results could vary materially
from those anticipated.
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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, 1998 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 1999
Form 10-QSB.
(b) Reports on Form 8-K
None.
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SIGNATURES
In accordance with 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 12, 1998
DRUMMOND FINANCIAL CORPORATION
By: /s/ Michael J. Smith
---------------------------------------------
Michael J. Smith, President, Chief
Executive Officer and Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27 Article 5 - Financial Data Schedule for the 1st Quarter 1999
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-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,655
<SECURITIES> 12,056
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,570
<CURRENT-LIABILITIES> 0
<BONDS> 21,515
0
30
<COMMON> 43
<OTHER-SE> 3,500
<TOTAL-LIABILITY-AND-EQUITY> 26,570
<SALES> 0
<TOTAL-REVENUES> 1,240
<CGS> 0
<TOTAL-COSTS> 825
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 532
<INCOME-PRETAX> 415
<INCOME-TAX> 1
<INCOME-CONTINUING> 414
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 414
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
