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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
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.)
6 Rue Charles-Bonnet, 1206 Geneva, Switzerland
(Address of principal executive offices)
(41 22) 818 2999
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
----- -----
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date:
Class Outstanding at February 10, 2000
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Common Stock, $0.01 2,718,600
par value
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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 SIX MONTHS ENDED DECEMBER 31, 1999
(Unaudited)
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DRUMMOND FINANCIAL CORPORATION
Consolidated Balance Sheets
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
----------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 8,738 $ 4,280
Finance receivables, net - -
Other receivables 5,745 5,450
Due from affiliates 1,559 3,080
Investments 9,416 12,172
Deferred debt issuance costs, net 950 1,017
----------- -----------
$ 26,408 $ 25,999
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued liabilities $ 41 $ 131
Interest payable 669 933
Accrued dividends payable 300 149
Debt 21,515 21,515
----------- -----------
22,525 22,728
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
2,718,600 shares issued and outstanding 27 27
Additional paid-in capital 14,727 14,727
----------- -----------
14,754 14,754
----------- -----------
Deficit (16,871) (17,483)
----------- -----------
3,883 3,271
----------- -----------
$ 26,408 $ 25,999
=========== ===========
</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 Six For the Six
Months Ended Months Ended
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Revenue
Interest and loan fee income $ 657 $ 550
Gain on securities 1,317 385
Dividend and other 154 151
----------- -----------
2,128 1,086
Costs and expenses
Interest 744 1,023
Recovery of credit losses - (846)
General and administrative 620 552
----------- -----------
1,364 729
----------- -----------
Operating income 764 357
Income tax expense 1 1
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Net income 763 356
Accumulated deficit, beginning of period (17,483) (17,519)
Dividends payable (151) (151)
----------- -----------
Accumulated deficit, end of period $ (16,871) $ (17,314)
=========== ===========
Earnings per share $ 0.23 $ 0.08
=========== ===========
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 Operations
(Unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Revenue
Interest and loan fee income $ 228 $ 307
Gain (loss) on securities 1,692 (536)
Dividend and other 78 75
----------- -----------
1,998 (154)
Costs and expenses
Interest 302 491
Recovery of credit losses - (846)
General and administrative 419 259
----------- -----------
721 (96)
----------- -----------
Net income (loss) 1,277 (58)
Accumulated deficit, beginning of period (18,073) (17,181)
Dividends payable (75) (75)
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Accumulated deficit, end of period $ (16,871) $ (17,314)
=========== ===========
Earnings (loss) per share $ 0.44 $ (0.05)
=========== ===========
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 Six For the Six
Months Ended Months Ended
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Operating activities:
Net income $ 763 $ 356
Adjustments to reconcile net income
to net cash from operating
activities
Recovery of credit losses - (846)
Gain on investments, net (1,317) (385)
Amortization of deferred debt
issuance costs 67 67
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(487) (808)
Changes in non-cash working
capital balances
Receivables (197) (1,551)
Interest receivable (98) (254)
Due from affiliates 1,521 -
Interest payable (264) (435)
Accounts payable and accrued
liabilities (90) (12)
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385 (3,060)
Purchase of trading securities (1,300) (3,619)
Proceeds from sales of trading
securities 5,373 7,050
----------- -----------
Net cash provided by operating
activities 4,458 371
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Investing activities:
Payments received on loan receivables - 846
Decrease in note receivable, net - 744
----------- -----------
Net cash provided by investing
activities - 1,590
----------- -----------
Financing activities:
Decrease in note payable - (2,526)
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Net cash used in financing
activities - (2,526)
----------- -----------
Net change in cash and cash equivalents 4,458 (565)
Cash and cash equivalents, beginning
of period 4,280 3,699
----------- -----------
Cash and cash equivalents, end of period $ 8,738 $ 3,134
=========== ===========
Cash paid during the period for:
Interest expense $ 941 $ 1,458
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
December 31, 1999
(Unaudited)
Note 1. Basis of Presentation
- ------------------------------
The accompanying financial statements of Drummond Financial Corporation
(the "Corporation") are unaudited. However, in the opinion of management, they
include all adjustments necessary for a fair presentation of the financial
position, results of operations and cash flows of the Corporation for the
specified periods.
All adjustments made during the six months and three months ended December 31,
1999, respectively, were of a normal, recurring nature. The amounts presented
for the six months and three months ended December 31, 1999, respectively, are
not necessarily indicative of the results of operations for a full year.
Additional information is contained in the audited consolidated financial
statements and accompanying notes included in the Corporation's annual report
on Form 10-K for the fiscal year ended June 30, 1999, and should be read in
conjunction with such annual report.
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
Note 2. Earnings (Loss) Per Share
- ----------------------------------
Basic earnings (loss) per share is calculated by dividing the net income or
loss available to common shareholders by the weighted average number of common
shares outstanding during the six months and three months ended December 31,
1999 and 1998, respectively. The weighted average number of shares
outstanding was 2,718,600 for the six months and three months ended December
31, 1999 and 1998, respectively.
Diluted earnings per share takes into account common shares outstanding and
potentially dilutive common shares. Warrants have not been reflected as
exercised for purposes of computing the diluted earnings per share for the six
months ended December 31, 1998, respectively, because their exercise price was
greater than their market price.
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 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
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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.
The Corporation fully settled its loan portfolio during the fiscal year ended
June 30, 1999, and had no loan commitments at December 31, 1999. The
Corporation's loan portfolio aggregated $1.3 million in finance receivables
(principal plus interest and reimbursable costs less unamortized commitment
fees) due from a defaulting borrower at December 31, 1998.
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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
six months and three months ended December 31, 1999, respectively, should
be read in conjunction with the consolidated financial statements and related
notes included elsewhere herein.
Results of Operations - Six Months Ended December 31, 1999
- ----------------------------------------------------------
Revenues for the six months ended December 31, 1999 increased to $2.1 million
from $1.1 million for the comparative period of 1998, primarily as a result of
a net gain of $1.3 million recognized on securities during the current period.
In the six months ended December 31, 1998, the Corporation recognized a net
gain of $0.4 million on securities. Revenues from interest and loan fees
increased to $0.7 million for the six months ended December 31, 1999 from $0.6
million for the six months ended December 31, 1998. Revenues from dividends
and other activities were $0.2 million for the six months ended December 31,
1999 and 1998, respectively.
Costs and expenses for the six months ended December 31, 1999 increased to
$1.4 million from $0.7 million for the comparative period of 1998. The
Corporation had a recovery of credit losses of $0.8 million in the six months
ended December 31, 1998 relating to amounts outstanding under a non-performing
loan. General and administrative expenses were $0.6 million for the six
months ended December 31, 1999 and 1998, respectively.
Interest expense decreased to $0.7 million for the six months ended December
31, 1999 from $1.0 million for the six months ended December 31, 1998,
because of a lower interest rate on the Corporation's long-term debt
resulting from a restructuring of such debt.
No income tax provision was recognized for the six months ended December 31,
1999 and 1998, 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 six months ended December 31, 1999, the Company reported net income of
$0.8 million, or $0.23 per share, compared to net earnings of $0.4 million,
or $0.08 per share, for the six months ended December 31, 1998.
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Results of Operations - Three Months Ended December 31, 1999
- ------------------------------------------------------------
Revenues for the three months ended December 31, 1999 were $2.0 million,
compared to $(0.2) million for the comparative period of 1998. The
Corporation recognized a net gain on securities of $1.7 million in the three
months ended December 31, 1999, compared to a net loss on securities of $0.5
million in the three months ended December 31, 1998. Revenues from interest
and loan fees decreased to $0.2 million for the three months ended December
31, 1999 from $0.3 million for the three months ended December 31, 1998.
Revenues from dividends and other activities were $0.1 million for the three
months ended December 31, 1999 and 1998, respectively.
Costs and expenses for the three months ended December 31, 1999 were $0.7
million, compared to $(0.1) million for the comparative period of 1998. The
Corporation had a recovery of credit losses of $0.8 million in the three
months ended December 31, 1998 relating to amounts outstanding under a non-
performing loan. General and administrative expenses were $0.4 million for
the three months ended December 31, 1999, compared to $0.3 million for the
three months ended December 31, 1998.
Interest expense decreased to $0.3 million for the three months ended December
31, 1999 from $0.5 million for the three months ended December 31, 1998,
because of a lower interest rate on the Corporation's long-term debt resulting
from a restructuring of such debt.
For the three months ended December 31, 1999, the Company reported net income
of $1.3 million, or $0.44 per share, compared to a net loss of $58,000, or
$0.05 per share, for the three months ended December 31, 1998.
Liquidity and Capital Resources
- -------------------------------
The Corporation's cash and cash equivalents at December 31, 1999 were $8.7
million, an increase of $4.5 million from June 30, 1999.
Cash provided by operating activities in the six months ended December 31,
1999 was $4.5 million, compared to $0.4 million in the six months ended
December 31, 1998. Net sales of trading securities provided cash of $4.1
million in the six months ended December 31, 1999, compared to $3.4 million
in the six months ended December 31, 1998. Repayments on a loan to an
affiliate provided cash of $1.5 million in the current period. An increase
in receivables used cash of $0.2 million in the six months ended December 31,
1999, compared to $1.6 million in the six months ended December 31, 1998.
Investing activities had no effect on cash flows in the six months ended
December 31, 1999, compared to providing cash of $1.6 million in the six
months ended December 31, 1998. In the six months ended December 31, 1998,
the Corporation collected $0.8 million from the estate of a defaulting
borrower relating to a non-performing loan in the amount of $2.1 million.
The borrower had filed a petition for bankruptcy and had ceased to operate.
The Corporation also collected $0.7 million from the partial repayment of an
outstanding note in the six months ended December 31, 1998.
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Financing activities had no effect on cash flows in the six months ended
December 31, 1999. In the six months ended December 31, 1998, financing
activities used cash of $2.5 million as a result of a reduction in
indebtedness.
In August 1999, the Corporation entered into a debt restructuring agreement
with the holder of its long-term debt, MFC Bancorp Ltd., pursuant to which
the rate of interest on such debt was reduced to 5% per annum from 8.75% and
the debt was secured by fixed liens upon the assets of the Corporation.
The Corporation anticipates that its cash, 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 fully settled its loan portfolio during the fiscal year ended
June 30, 1999, and had no loan commitments at December 31, 1999. The
Corporation's loan portfolio aggregated $1.3 million in finance receivables
(principal plus interest and reimbursable costs less unamortized commitment
fees) due from a defaulting borrower at December 31, 1998.
Year 2000
- ---------
The Corporation has not experienced any difficulties associated with the
changeover to the year 2000. While management of the Corporation believes
that it took adequate steps to address the year 2000 issue, and the
Corporation is not aware of any difficulties experienced by its clients
associated with the changeover to the year 2000, there can be no assurance
that difficulties associated with the year 2000 may not arise in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Reference is made to the Corporation's annual report on Form 10-K for the
year ended June 30, 1999 for information concerning market risk.
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PART II. OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Corporation's annual report on Form 10-K for the
year ended June 30, 1999 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 2nd Quarter
2000 Form 10-Q.
(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: February 11, 2000
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 2nd Quarter
2000 Form 10-Q.
<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-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,738
<SECURITIES> 9,416
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,408
<CURRENT-LIABILITIES> 0
<BONDS> 21,515
0
30
<COMMON> 27
<OTHER-SE> 3,826
<TOTAL-LIABILITY-AND-EQUITY> 26,408
<SALES> 0
<TOTAL-REVENUES> 2,128
<CGS> 0
<TOTAL-COSTS> 1,364
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 744
<INCOME-PRETAX> 764
<INCOME-TAX> 1
<INCOME-CONTINUING> 763
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 763
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.23
</TABLE>
