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UNITED STATES
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, 1998
OR
[ ] TRANSITION REPORT UNDER 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
(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.)
6 Rue Charles-Bonnet, 1206 Geneva, Switzerland
(Address of principal executive offices)
Issuer's telephone number, including area code: (41 22) 818 2999
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
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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. [ ]
The issuer's revenues for the most recent fiscal year were $1.4 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,
1998 was approximately $100,000.
The number of shares outstanding of the Registrant's Common Stock as of
September 22, 1998 was 2,718,600.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Proxy Statement to be filed within 120 days of the
fiscal year ended June 30, 1998 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
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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.
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TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.........................................4
ITEM 2. DESCRIPTION OF PROPERTY.........................................5
ITEM 3. LEGAL PROCEEDINGS...............................................5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.........................................................5
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................5
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................6
ITEM 7. FINANCIAL STATEMENTS...........................................10
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................10
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT............................................10
ITEM 10. EXECUTIVE COMPENSATION.........................................10
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................10
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................10
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...............................10
SIGNATURES...............................................................29
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS
The Corporation
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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
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The Corporation operates in the financial services business 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.
During fiscal 1998, the Corporation proceeded to collect and/or settle its
existing loan portfolio. During the year, the Corporation collected and/or
settled loans to eight borrowers, including two loans which had been advanced
by the Corporation during the year in the aggregate principal amount of $9.7
million. As a result, at June 30, 1998, the Corporation's loan portfolio
consisted of a finance receivable of $2.1 million which was subject to an
allowance for credit losses of $2.1 million, and the Corporation had no
unfunded loan commitments.
The Corporation has de-emphasized its asset-based commercial lending and is
focusing on 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.
Competition
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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.
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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.
As at June 30, 1998, the Corporation had two employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Corporation's corporate and administrative office is located in Geneva,
Switzerland and is leased.
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
The Corporation held a special meeting of the registered holders of the
Corporation's 15 Year Variable Rate Bonds (the "Bonds") on March 26, 1998, at
which such holders approved an arrangement to exchange all of the outstanding
Bonds, other than Bonds held in treasury by the Corporation, for 8%
Convertible Subordinated Bonds of MFC Bancorp Ltd. ("MFC"). At the meeting,
the arrangement was approved as follows:
Principal Percentage of
Amount Voted Amount Voted
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FOR $13,056,800 86%
AGAINST $2,117,000 14%
Abstentions and Broker Non-Votes - -
PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information. In March 1997, the Corporation's common stock and
the Bonds were listed and posted for trading on the Vancouver Stock Exchange
under the trading symbols "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 sales prices per
share of the Corporation's common stock for the fiscal years ended June 30,
1997 and 1998, respectively, and the period ended September 22, 1998:
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Fiscal Quarter Ended High Low
-------------------- ---- ---
1996
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September 30....................$1.44 $1.13
December 31.....................$2.06 $1.25
1997
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March 31........................$1.69 $0.50
June 30.........................$1.25 $0.50
September 30....................$1.38 $1.00
December 31.....................$1.33 $0.94
1998
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March 31........................$1.09 $0.63
June 30.........................$1.00 $0.16
Period Ended September 22.......$0.25 $0.07
(b) Shareholders. As of September 22, 1998, there were approximately 38
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 the payment of such dividends.
The indenture governing the Bonds (the "Bond Indenture") prohibits the
payment of dividends under certain circumstances, including with respect to 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, 1998 should be
read in conjunction with the consolidated financial statements and related
notes included elsewhere herein.
Results of Operations - Year Ended June 30, 1998
- ------------------------------------------------
Revenues for the year ended June 30, 1998 decreased to $1.4 million from $4.3
million in the comparative period of 1997, primarily as a result of a
decrease in revenues from interest and loan fees and losses on investments.
Revenues from interest and loan fees decreased to $1.4 million for the year
ended June 30, 1998 from $2.1 million in the year ended June 30, 1997,
primarily as a result of a reduction in the dollar amount of outstanding
performing loans. 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% at June 30, 1998 and 1997, respectively. In the
year ended June 30, 1998, the Corporation reported a net loss on investments
of $0.5 million, compared to a net gain on investments of $0.9 million in the
comparative period of 1997. Revenues from other activities decreased to $0.2
million for the year ended June 30, 1998 from $0.9 million in the comparative
period of 1997. In the year ended June 30, 1997, revenues from other
activities included $0.6 million from a consent dismissal of a court action
for which the Corporation had made a provision.
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Costs and expenses for the year ended June 30, 1998 decreased to $3.5 million
from $4.6 million in the comparative period of 1997. General and
administrative expenses decreased to $1.4 million for the year ended June 30,
1998 from $1.7 million for the comparative period of 1997, primarily as a
result of lower professional fees and loan collection costs in fiscal 1998.
In the year ended June 30, 1998, the Corporation reported a recovery of
credit losses of $0.4 million, compared to $0.7 million for the comparative
period of 1997.
Interest expense decreased to $2.5 million for the year ended June 30, 1998
from $3.6 million for the comparative period of 1997, primarily as a result
of a reduction in the principal amount outstanding of the Bonds. For the
year ended June 30, 1998, interest was accrued at the rate of approximately
8.50% per annum, compared to approximately 8.32% per annum for the year ended
June 30, 1997.
No income tax provision was recognized for the years ended June 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 year ended June 30, 1998, the Corporation reported a net loss of $2.1
million, or $0.89 per share, compared to net income of $2.3 million, or $0.74
per share, in the comparative period of 1997. The Corporation's results of
operations for the year ended June 30, 1998 included $0.5 million, or $0.18
per share, of extraordinary gains on the early extinguishment of debt,
compared to $3.0 million, or $1.09 per share, for fiscal 1997. The net loss
in the current period was primarily attributable to the decrease in revenues
from interest and loan fees, the net loss on investments and reduced revenues
from other activities, which were partially offset by reduced interest
expense and the extraordinary gain on debt extinguishment.
Liquidity and Capital Resources
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The Corporation's cash and cash equivalents at June 30, 1998 were $3.7
million, which represents an increase of $2.1 million from June 30, 1997.
Cash used by operations for the year ended June 30, 1998 was $7.9 million,
compared to cash provided by operations of $7.5 million for the comparative
period of 1997. The Corporation used cash of $3.6 million in operating
activities before any activities in trading securities in the year ended June
30, 1998, compared to $5.6 million in the comparative period of 1997. Net
purchases of trading securities used cash of $4.3 million in the year ended
June 30, 1998, compared to net sales of trading securities providing cash of
$13.0 million in the year ended June 30, 1997. An increase in other
receivables used cash of $1.6 million in fiscal 1998, compared to $3.1
million in fiscal 1997. A decrease in accounts payable and accrued
liabilities used cash of $1.3 million in the year ended June 30, 1998,
compared to an increase in accounts payable and accrued liabilities providing
cash of $1.0 million in the year ended June 30, 1997.
Cash provided by investing activities was $4.3 million during the year ended
June 30, 1998, compared to cash used by investing activities of $4.9 million
during the comparative period of 1997. Collections on loan receivables
provided cash of $17.4 million in the year ended June 30, 1998, compared to
$3.7 million in the comparative period of 1997, primarily as a result of the
collection and/or settlement of eight loans during the year ended June 30,
1998, including two loans which had been advanced by the Corporation during
the
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year in the aggregate principal amount of $9.7 million. A net increase in
notes receivable used cash of $3.4 million in the year ended June 30, 1998,
compared to $7.5 million in the year ended June 30, 1997.
Financing activities for the year ended June 30, 1998 provided cash of $5.7
million, compared to using cash of $15.5 million in the year ended June 30,
1997. During fiscal 1998, an increase in a note payable provided cash of $7.0
million. During the year ended June 30, 1998, the Corporation used cash of
$1.0 million to purchase $1.5 million in aggregate principal amount of the
Bonds. As at June 30, 1998, the Corporation had $45 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 used
$0.3 million to pay a cash dividend to the holder of its preferred shares in
fiscal 1998.
During the year ended June 30, 1998, the Corporation entered into an
Arrangement Agreement with MFC, the largest shareholder of the Corporation,
and Drummond Financial (B.C.) Ltd. ("Drummond B.C."), a wholly-owned
subsidiary of the Corporation, pursuant to which the parties effected an
arrangement (the "Arrangement"), in accordance with the terms of a Plan of
Arrangement, to exchange all of the outstanding Bonds, other than Bonds held
in treasury by the Corporation, for 8% Convertible Subordinated Bonds of MFC
(the "MFC Bonds").
The Arrangement was approved by more than 75% of the votes cast by the
registered holders of the Bonds at a meeting thereof and by the Supreme Court
of British Columbia, and was effected on March 31, 1998 (the "Effective
Date"). On the Effective Date, each Bond in the principal amount of $1,000
was deemed to be transferred to MFC in exchange for an aggregate principal
amount of $720 of MFC Bonds and each registered holder of the Bonds ceased to
be the holder thereof and such holder was removed from the register of
bondholders of the Corporation and Drummond B.C. Accordingly, MFC is now the
sole holder of all of the outstanding Bonds.
During the year ended June 30, 1998, 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 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
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The Corporation's loan portfolio at June 30, 1998 aggregated $2.1 million in
finance receivables (principal plus interest and reimbursable costs less
unamortized commitment fees) due from a borrower, compared to an aggregate of
$11.4 million in finance receivables due from seven borrowers at June 30,
1997. During the year ended June 30, 1998, the Corporation collected and/or
settled loans to eight borrowers, including two loans which had been advanced
by the Corporation during the year in the aggregate principal amount of $9.7
million.
Non-performing Loans at June 30, 1998
- -------------------------------------
At June 30, 1998, the Corporation's loan to Heartland, Inc., which totaled
$2.1 million, had been classified as non-performing and the borrower had
filed a petition for bankruptcy and 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
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borrower's inability to meet its commitments under the loan agreement (e.g.,
the borrower files for bankruptcy protection).
Allowance for Credit Losses
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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 4 to the financial statements herein with
respect to the allowance for credit losses during the years ended June 30,
1998 and 1997, respectively.
Year 2000
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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.
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.
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 12.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Incorporated by reference from the 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 the Registrant's definitive proxy statement to
be filed within 120 days of the end of the Registrant's fiscal year.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Incorporated by reference from the Registrant's definitive proxy statement to
be filed within 120 days of the end of the Registrant's fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the 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
Consolidated Balance Sheet
Consolidated Statement of Operations
Consolidated Statement of Cash Flows
Consolidated Statement of Shareholders' Equity
Notes to the Consolidated Financial Statements
(2) Exhibits
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2.1 Arrangement Agreement among Drummond Financial (B.C.) Ltd., MFC
Bancorp Ltd. and Drummond Financial Corporation dated February 23,
1998. Incorporated by reference to Form T-3 of MFC Bancorp Ltd.
dated March 2, 1998.
2.2 Amendment Agreement among Drummond Financial (B.C.) Ltd., MFC
Bancorp Ltd. and Drummond Financial Corporation dated March 23,
1998.
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.
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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.
Incorporated by reference to Form 10-KSB dated September 24, 1997.
4.4 Fourth Supplemental Indenture among Drummond Financial
Corporation, The Bank of Nova Scotia Trust Company of New York and
Drummond Financial (B.C.) Ltd. dated for reference February 4,
1998.
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 the Registrant.
27. Article 5 - Financial Data Schedule for year ended June 30, 1998 -
Form 10-KSB.
(b) Reports on Form 8-K
-------------------
None.
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INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Drummond Financial Corporation
We have audited the consolidated balance sheet of Drummond Financial
Corporation as at June 30, 1998 and 1997 and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
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 audits.
We conducted our audits 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,
1998 and 1997 and the results of their operations and cash flows for the
years then ended in accordance with generally accepted accounting
principles in the United States of America.
/s/ Davidson & Company
Vancouver, Canada Chartered Accountants
September 28, 1998
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DRUMMOND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars stated in thousands)
AS AT JUNE 30
=============================================================================
1998 1997
- -----------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 3,699 $ 1,625
Finance receivables, net (Note 4) - 8,142
Other receivables (Note 5) 8,661 10,948
Due from affiliate 780 541
Investments (Note 6) 15,244 8,035
Investment - at equity (Note 7) - 917
Deferred debt issuance costs, net of
accumulated amortization of $463 (1997 - $770) 1,151 1,348
Other assets - 4
---------- ----------
$ 29,535 $ 31,560
=============================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
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DRUMMOND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars stated in thousands)
AS AT JUNE 30
=============================================================================
1998 1997
- -----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 761 $ 1,788
Interest payable 1,349 964
Note payable 2,526 -
Accrued dividends payable 149 149
Bonds payable (Note 8) 21,515 23,002
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26,300 25,903
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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 (17,519) (15,097)
---------- ----------
6,291 8,713
Less: 1,545,400 common shares held
as treasury stock (3,056) (3,056)
---------- ----------
3,235 5,657
---------- ----------
$ 29,535 $ 31,560
=============================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
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DRUMMOND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars stated in thousands; except per share amounts)
YEAR ENDED JUNE 30
=============================================================================
1998 1997
- -----------------------------------------------------------------------------
REVENUE
Interest and loan fees $ 1,405 $ 2,079
(Loss) gain on investments, net (507) 938
Dividend income 300 322
Other 156 914
---------- ----------
1,354 4,253
---------- ----------
COST AND EXPENSES
Interest 2,470 3,571
Recovery of credit losses (360) (673)
General and administrative 1,430 1,704
---------- ----------
3,540 4,602
---------- ----------
Equity loss of investee (420) (289)
---------- ----------
Loss from operations (2,606) (638)
Income tax expense (1) (1)
---------- ----------
Loss before extraordinary gain (2,607) (639)
Extraordinary gain on early extinguishment of debt,
net of $Nil provision for income taxes
for 1998 and 1997 485 2,977
---------- ----------
Net income (loss) for the year $ (2,122) $ 2,338
=============================================================================
Earnings (loss) per share
Loss before extraordinary gain $ (1.07) $ (0.35)
Extraordinary gain 0.18 1.09
---------- ----------
$ (0.89) $ 0.74
=============================================================================
Weighted average number of shares outstanding 2,718,600 2,718,600
=============================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
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DRUMMOND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars stated in thousands)
YEAR ENDED JUNE 30
=============================================================================
1998 1997
- -----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for the year $ (2,122) $ 2,338
Adjustments to reconcile income (loss)
to cash from operating activities:
Extraordinary gain on early
extinguishments of debt (485) (2,977)
Loss (gain) on investments, net 507 (938)
Recovery of credit losses (360) (673)
Equity in loss of investee 420 289
Amortization of deferred debt issuance costs 138 (78)
Changes in non-cash working capital balances:
Interest receivable 976 127
Commitment fees (25) (106)
Other receivable (1,605) (3,133)
Due from affiliate (239) (541)
Interest payable 438 (823)
Accounts payable and accrued liabilities (1,277) 953
Other 3 -
Purchase of trading securities (10,500) (3,037)
Proceeds from sales of trading securities 6,197 16,082
---------- ----------
Net cash provided by (used in)
operating activities (7,934) 7,483
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances on loans (9,700) (1,100)
Payments collected on loans 17,407 3,740
Increase in notes receivable, net (3,407) (7,502)
---------- ----------
Net cash provided by (used in)
investing activities 4,300 (4,862)
---------- ----------
- continued -
The accompanying notes are an integral part of these
consolidated financial statements.
16
<PAGE> 17
DRUMMOND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars stated in thousands)
YEAR ENDED JUNE 30
=============================================================================
1998 1997
- -----------------------------------------------------------------------------
Continued....
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable $ 7,000 $ -
Purchase of treasury bond payable (992) (15,301)
Dividends paid (300) (173)
---------- ----------
Net cash provided by (used in)
financing activities 5,708 (15,474)
---------- ----------
Increase (decrease) in cash and cash
equivalents for the year 2,074 (12,853)
Cash and cash equivalents, beginning of year 1,625 14,478
---------- ----------
Cash and cash equivalents, end of year $ 3,699 $ 1,625
=============================================================================
Cash paid during the year for:
Interest expense $ 1,915 $ 3,521
Income taxes 1 1
=============================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
17
<PAGE> 18
DRUMMOND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars stated in thousands)
<TABLE>
<CAPTION>
===============================================================================================
Preferred Stock Common Stock
--------------------------- ---------------------------
Total
Additional Additional Accum- Share-
Number Paid-in Number Paid-in ulated Treasury holders'
of Shares Amount Capital of Shares Amount Capital Deficit Stock Equity
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Net loss for
the year - - - - - - (2,122) - (2,122)
Dividends
paid and
payable - - - - - - (300) - (300)
--------- ----- ------- --------- ----- -------- -------- ------- ------
Balance at
June 30,
1998 3,000,000 $ 30 $ 5,970 4,264,000 $ 43 $ 17,767 $(17,519) $(3,056) $3,235
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
18
<PAGE> 19
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1998
=============================================================================
1. NATURE OF OPERATIONS
Drummond 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.
The Company now focuses on investment and merchant banking activities
while de-emphasizing asset-based commercial lending.
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.
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. In addition,
the Company maintains cash balances at foreign financial institutions in
excess of insured limits.
Financial instruments
---------------------
The Company's financial instruments consist of cash and cash
equivalents, other receivables, due from affiliate, investments,
accounts payable and accrued liabilities, interest payable, note payable,
accrued dividends payable and bonds payable. Unless otherwise noted, it
is management's opinion that the Company is not exposed to significant
interest, currency or credit risks arising from these financial
instruments. The fair value of these financial instruments approximate
their carrying values, unless otherwise noted.
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-off's), accrued
interest, reimbursable expenses and are net of deferred loan fees.
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.
19
<PAGE> 20
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1998
=============================================================================
3. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....)
Finance receivables and allowance for credit losses (cont'd.....)
---------------------------------------------------
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.
Revenue recognition
-------------------
Revenue consists principally of interest income from finance
receivables, temporary investments of cash and cash equivalents, and
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.
20
<PAGE> 21
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1998
=============================================================================
3. SIGNIFICANT ACCOUNTING POLICIES (cont'd....)
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.
Comprehensive income
--------------------
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components (revenues, expenses,
gains and losses). The purpose of reporting comprehensive income is to
present a measure of all changes in shareholders' equity that result
from recognized transactions and other economic events of the year,
other than transactions with owners in their capacity as owners. SFAS
No. 130 is effective for financial statements issued for periods
beginning after December 15, 1997. Adoption of SFAS No. 130 may result
in additional disclosures in the Company's financial statements but will
not impact the Company's reported net income (loss) or net earnings
(loss) per share.
Segmented information
---------------------
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 131 specifies
revised guidelines for determining an entity's operating segments and
the type and level of financial information to be disclosed. SFAS No.
131 is effective for fiscal years beginning after December 15, 1997.
Adoption of SFAS No. 131 will not have a material impact on the
Company's current geographic disclosures.
Comparative figures
-------------------
Certain comparative figures have been reclassified to conform with the
current year's presentation.
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, 1998
and 1997) plus two to seven percent. The Bank's weighted daily average
prime rate was 8.50 percent and 8.32 percent during the years ended June
30, 1998 and 1997, respectively.
21
<PAGE> 22
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1998
=============================================================================
4. FINANCE RECEIVABLES (cont'd....)
<TABLE>
<CAPTION>
========================================================================================
June 30, 1998 June 30, 1997
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Allowance Allowance
Number Recorded for Credit Number Recorded for Credit
of Loans Investments Losses of Loans Investments Losses
----------------------------------------------------------------------------------------
Impaired loans 1 $ 2,100 $ 2,100 2 $ 5,071 $ 3,223
Unimpaired loans - - - 5 6,364 70
-------- --------- --------- -------- --------- ---------
1 $ 2,100 $ 2,100 7 $ 11,435 $ 3,293
========================================================================================
Net book value $ - $ 8,142
========================================================================================
</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 flows.
The Company has established allowances for credit losses at June 30, 1998
and 1997 as follows:
<TABLE>
<CAPTION>
========================================================================================
1998
------------------------------------
Specific General Total 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of year $ 3,223 $ 70 $ 3,293 $ 7,202
Provision (recovery) for the year (290) (70) (360) (673)
Charge-offs for the year, net (833) - (833) (3,236)
---------- ------ -------- -------
Balance, end of year $ 2,100 $ - $ 2,100 $ 3,293
========================================================================================
</TABLE>
Contractual maturities of finance receivables are as follows:
Principal, currently due $ 2,000
Interest receivable, currently due 23
Reimbursable expenses, currently due 91
Deferred commitment fees, net of related costs (14)
--------
2,100
Less: allowance for credit losses (2,100)
--------
Finance receivables, net $ -
========
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, 1998 and 1997, the Company does not have any unfunded loan
commitments.
22
<PAGE> 23
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1998
=============================================================================
5. OTHER RECEIVABLES
========================================================================
1998 1997
------------------------------------------------------------------------
Notes receivable $ 8,236 $ 7,502
Accrued dividend receivable 149 149
Other receivables 276 3,297
--------- ---------
$ 8,661 $ 10,948
========================================================================
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
========================================================================
1998 1997
------------------------------------------------------------------------
Trading securities:
Bonds and debentures $ 1,720 $ -
Equity securities 7,524 2,035
--------- ---------
9,244 2,035
Available-for-sale security 6,000 6,000
--------- ---------
$ 15,244 $ 8,035
========================================================================
For the year ended June 30, 1998, the Company recognized an unrealized
holding loss of $186,000 (1997 - $435,000) and a realized loss of
$321,000 (1997 - $1,373,000 gain) on sales of trading securities.
Available-for-sale securities consist of preferred shares in an
affiliate. The preferred shares are stated at cost of $6,000,000 at
June 30, 1998 and 1997 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 1,070,320 (1997 - 1,470,320)
shares of Ichor Corporation which represents 21.81% (1997 - 29.95%) of
the total outstanding shares. The Company has accounted for its
investment using the equity method of accounting.
23
<PAGE> 24
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1998
=============================================================================
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, 1997, July 25, 1997, January 25, 1998 and July 25, 1998
until February 21, 1997, August 20, 1997, February 17, 1998 and
September 25, 1998, respectively. The delinquent payments did not
result in an event of default as the subsequent interest payments
discharged the Company's interest payment obligation under the terms of
the Master Indenture.
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.
During 1998, $1,487,000 (1997 - $19,045,000) in aggregate principal
amount of Bonds were repurchased resulting in an extraordinary gain of
$485,000 (1997 - $2,977,000). At June 30, 1998, the Company had
remaining issued and outstanding $45 million principal amount of bonds
of which approximately $23.5 million were repurchased and are held by
the Company in treasury.
The Bonds had a carrying amount of $21,515,000 (1997 - $23,002,000).
The Bonds had a fair value of $21,515,000 as of June 30, 1998 which is
based on the present value of future cash flows. As of June 30, 1998,
MFC Bancorp Ltd., which indirectly owns 43.6% of the Company's common
shares and 100% of the preferred shares, also owns all of the Bonds as
approved by a court order.
For semi-annual periods ended December 31, 1996, June 30, 1997, December
31, 1997 and June 30, 1998, interest has been incurred at per annum
coupon rates of 8.25 percent, 8.38 percent, 8.50 percent and 8.50
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.
24
<PAGE> 25
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1998
=============================================================================
9. SHAREHOLDERS' EQUITY (cont'd....)
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. These warrants expired unexercised
on August 16, 1998.
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 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 can be
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, 1996 75,000 $1.81 - $1.88
Expired (50,000) $1.81
-----------
Outstanding, June 30, 1997 25,000 $1.88
Expired (25,000) $1.88
-----------
Outstanding, June 30, 1998 -
========================================================================
At June 30, 1998 and 1997 options to purchase 375,000 and 350,000
shares, respectively, of the Company's common stock are available for
future grant.
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its stock option plan. There were no options granted in
either 1998 or 1997.
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
have been no options granted after the fiscal year ended June 30, 1995.
25
<PAGE> 26
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1998
=============================================================================
11. INCOME TAXES
There was no provision for income taxes for the years ended June 30,
1998 and 1997 (other than the payment of state minimum income tax of
$1,000 each in 1998 and 1997).
Differences between the United States federal statutory and the
Company's effective tax rates are as follows:
========================================================================
1998 1997
------------------------------------------------------------------------
United States federal statutory rate
on income (loss) from operations $ (721) $ 795
Timing differences on credit losses (406) (1,329)
Other timing differences 315 305
Valuation allowance 812 229
------- -------
$ - $ -
========================================================================
The net deferred tax assets at June 30, 1998 and 1997 consist of the
following:
========================================================================
1998 1997
------------------------------------------------------------------------
Provision for credit losses $ 714 $ 1,120
Net operating loss carryforwards 4,174 3,264
Other timing differences 879 571
Valuation allowance (5,767) (4,955)
------- -------
Deferred tax asset, net $ - $ -
=======================================================================
At June 30, 1998, the Company has $12.3 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 2013 for United States federal income
tax purposes and 1999 to 2001 for California income tax purposes.
Utilization of net operating loss carryforwards for United States
federal income tax purposes may be limited by the Internal Revenue Code
because of changes in the ownership of the Company.
12. RELATED PARTY TRANSACTIONS
During the year ended June 30, 1998, the Company incurred $300,000 (1997
- $300,000) in fees payable to MFC Bancorp Ltd., and $300,000 (1997 -
$306,000) to Logan International Corp. which has a common director.
These fees were paid for the accounting, administration of the Company
and reimbursement of office expenses. The Company also paid $22,000
(1997 - $22,000) in consulting fees and expense reimbursements to a
company which is owned and controlled by an officer of the Company.
During fiscal 1998, the Company paid $300,000 (1997 - $173,000) of
dividends on its preferred shares held by a subsidiary of MFC Bancorp
Ltd. The Company also collected $300,000 (1997 - $173,000) of dividends
on its investments in preferred shares issued by another subsidiary of
MFC Bancorp Ltd. The Company has an amount of $780,000 (1997 -
$541,000) due from Ichor Corporation.
26
<PAGE> 27
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1998
=============================================================================
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 transactions in 1998 include:
a) The Company received securities with fair value of $2,915,000 as a
partial settlement of a note receivable.
b) The Company's note receivable in the amount of $4,474,000 was partially
offset against its note payable.
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 Ichor Corporation which was then related to the respective
borrower.
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,
1998 1997
------------------------------------------------------------------------
Net income (loss) for the year
in accordance with U.S. GAAP $ (2,122) $ 2,338
Reconciliation - -
--------- ---------
Net income (loss) for the year
in accordance with Canadian GAAP (2,122) 2,338
Accumulated deficit, beginning of year (15,097) (17,113)
Dividends paid and payable (300) (322)
--------- ---------
Accumulated deficit, end of year
in accordance with Canadian GAAP $ (17,519) $ (15,097)
========================================================================
Basic earnings (loss) per share
in accordance with Canadian GAAP $ (0.89) $ 0.74
========================================================================
Fully diluted earnings (loss) per share
in accordance with Canadian GAAP $ (0.89) $ 0.71
========================================================================
27
<PAGE> 28
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1998
=============================================================================
15. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (cont'd....)
(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. There were no
differences between U.S. and Canadian GAAP in the determination of
net income (loss) for the years ended June 30, 1998 and 1997.
(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.
28
<PAGE> 29
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 28, 1998 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 28, 1998
- -------------------------------
Michael J. Smith
President, Chief Executive Officer,
Chief Financial Officer and Director
/s/ Roy Zanatta Date: September 28, 1998
- -------------------------------
Roy Zanatta
Director
/s/ Oq-Hyun Chin Date: September 28, 1998
- -------------------------------
Oq-Hyun Chin
Director
29
<PAGE> 30
EXHIBIT INDEX
Exhibit No. Document
----------- --------
2.1 Arrangement Agreement among Drummond Financial (B.C.) Ltd., MFC
Bancorp Ltd. and Drummond Financial Corporation dated February 23,
1998. Incorporated by reference to Form T-3 of MFC Bancorp Ltd.
dated March 2, 1998.
2.2 Amendment Agreement among Drummond Financial (B.C.) Ltd., MFC
Bancorp Ltd. and Drummond Financial Corporation dated March 23,
1998.
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. Incorporated
by reference to Form 10-KSB dated September 24, 1997.
4.4 Fourth Supplemental Indenture among Drummond Financial Corporation,
The Bank of Nova Scotia Trust Company of New York and Drummond
Financial (B.C.) Ltd. dated for reference February 4, 1998.
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.
<PAGE> 31
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 the Registrant.
27. Article 5 - Financial Data Schedule for year ended June 30, 1998 -
Form 10-KSB.
<PAGE> 1
THIS AMENDMENT AGREEMENT dated the 23rd day of March, 1998,
AMONG:
DRUMMOND FINANCIAL (B.C.) LTD., a company
------------------------------
incorporated pursuant to the laws of
the Province of British Columbia
(the "Company")
OF THE FIRST PART
AND:
MFC BANCORP LTD., a company continued pursuant
----------------
to the laws of the Yukon Territory
("MFC")
OF THE SECOND PART
AND:
DRUMMOND FINANCIAL CORPORATION, a company organized
------------------------------
pursuant to the laws of the State of Delaware
("Drummond")
OF THE THIRD PART
WHEREAS the Company, MFC and Drummond entered into an arrangement agreement
dated the 23rd day of February, 1998 (the "Arrangement Agreement") and wish
to amend the Arrangement Agreement as provided herein;
NOW THEREFORE THIS AGREEMENT WITNESSETH THAT in consideration of the premises
and the respective covenants and agreements herein contained, and for other
good and valuable consideration, the parties hereto covenant and agree as
follows:
1. The Arrangement Agreement be and is hereby amended and modified as
follows:
(a) Section 3.2(a)(i) be amended by adding the words "as amended" at the
end thereof;
(b) The first paragraph appearing under the heading "Conversion" on page
B-2 of Schedule "B" to the Arrangement Agreement be amended by
inserting "the lesser of" immediately before "115% . . ." in the
second line thereof and inserting "and U.S. $13.22 per common share"
immediately before "(the Conversion Price) . . ." in the fourth line
thereof.
2. The Company, MFC and Drummond hereby confirm and ratify the
Arrangement Agreement as amended and modified hereby and agree that
these presents and the Arrangement Agreement shall be read together
and shall be construed as one agreement.
<PAGE> 2
3. This Agreement shall be effective to amend the Plan of Arrangement
(as defined in the Arrangement Agreement) upon receipt of Court
approval as required under section 5.1 of the Plan of Arrangement.
4. This Agreement may be executed in several parts in the same form and
such parts as so executed shall together constitute one original
document, and such parts, if more than one, shall be read together
and construed as if all of the signing parties had executed one copy
of the said Agreement.
IN WITNESS WHEREOF the parties hereto have executed this Agreement, as of the
day, month and year first above written.
DRUMMOND FINANCIAL (B.C.) LTD.
By: /s/ Rene Randall
--------------------------
Authorized Signatory
MFC BANCORP LTD.
By: /s/ Michael J. Smith
--------------------------
Authorized Signatory
DRUMMOND FINANCIAL CORPORATION
By: /s/ Michael J. Smith
--------------------------
Authorized Signatory
2
<PAGE> 1
FOURTH 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"), The Bank of Nova Scotia
Trust Company of New York (the "Trustee"), a trust company organized pursuant
to the laws of the State of New York, and Drummond Financial (B.C.) Ltd., a
company incorporated pursuant to the laws of the Province of British
Columbia, Canada (the "Subsidiary") dated for reference February 4, 1998 (the
"Fourth Supplemental Indenture") to the CVD Financial 1993 Master Indenture
made between the Corporation and Harris Trust Company of New York, dated
August 26, 1993, as amended by a First Supplemental Indenture dated November
30, 1993, a Second Supplemental Indenture dated October 23, 1996, and a Third
Supplemental Indenture dated May 15, 1997 (collectively, the "Indenture").
WHEREAS:
A. The Corporation 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. The Corporation wishes to transfer (the "Transfer") certain of its
properties and assets to the Subsidiary, a wholly-owned subsidiary of the
Corporation, such Transfer not constituting a transfer of the Corporation's
properties and assets substantially as an entirety as set out in section 801
of the Indenture;
C. In order to protect the interests of the Holders of the Securities,
the Corporation has agreed to cause the Subsidiary to become a primary
obligor under the Indenture, jointly and severally with the Corporation; and
D. Section 901 of the Indenture provides that the Corporation and the
Trustee, without the consent of any of the holders of the Securities, may
enter into one or more indentures supplemental to the Indenture to add to,
change or eliminate any of the provisions of the Indenture, provided that any
such addition, change or elimination shall not adversely affect the interests
of the Holder of any Outstanding Security in any material respect;
NOW THEREFORE THIS INDENTURE WITNESSES THAT the parties agree as follows:
SECTION 1
DECLARATION AND INTERPRETIVE PROVISIONS
1.1 This Fourth 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 Fourth
Supplemental Indenture and is, by this reference, included herein with the
same effect as though at length set forth herein. In this Fourth
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 Fourth Supplemental Indenture, shall apply to
and have effect in connection with this Fourth Supplemental Indenture.
<PAGE> 2
-2-
SECTION 2
EFFECTIVE DATE
2.1 This Fourth Supplemental Indenture will be effective from and after
February 4, 1998 (the "Effective Date"), irrespective of the actual dates of
the execution hereof.
SECTION 3
ENUREMENT
3.1 This Fourth Supplemental Indenture will enure to the benefit of and
be binding upon the parties hereto and their respective successors and
assigns.
SECTION 4
REPRESENTATIONS AND WARRANTIES
4.1 As of the Effective Date, the Subsidiary represents and warrants
that it has no indebtedness or any other mortgage, pledge, lien, security
interest or other encumbrance outstanding, other than unsecured indebtedness
owing to the Corporation.
SECTION 5
AMENDMENT
5.1 The Indenture and the Securities are hereby amended so that the
references to the "Company" in the Indenture and the Securities refer to
either both the Corporation and the Subsidiary or either the Corporation or
the Subsidiary, as appropriate in the context, such that the Subsidiary is
added as a primary obligor under the Indenture and the interests of the
Holder of any Security shall not be adversely affected in any material
respect by the Transfer.
5.2 For greater certainty, the Subsidiary covenants and agrees for the
benefit of the Securities that it will duly and punctually pay the principal
of and interest on the Securities in accordance with the terms of the
Securities and the Indenture, and that it will severally and jointly with the
Corporation perform or observe every covenant of the Indenture to be
performed or observed by the Corporation. The parties hereto agree that the
Subsidiary may exercise every right and power of the Corporation under the
Indenture with the same effect as if the Subsidiary had been named as the
Corporation therein.
SECTION 6
COUNTERPARTS
6.1 This instrument may be executed in any number of counterparts, each
of which so executed shall be deemed to be an original, but all such
counterparts constitute but one and the same instrument.
<PAGE> 3
-3-
SECTION 7
MISCELLANEOUS
7.1 The Indenture and the Securities as amended or modified by this
Fourth Supplemental Indenture, in all respects, are ratified and confirmed
and the Indenture as so amended shall be read, taken and construed as one and
the same instrument. This Fourth Supplemental Indenture shall become
effective upon execution and delivery hereof by all parties hereto.
7.2 The Trustee accepts the modification of the Indenture effected by
this Fourth Supplemental Indenture, but only upon the terms and conditions
set forth in the Indenture. Without limiting the generality of the
foregoing, the Trustee assumes no responsibility for the accuracy of the
recitals contained herein, which recitals shall be taken as the statements of
the Corporation.
7.3 This Fourth Supplemental Indenture shall be governed by and
construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Supplemental
Indenture to be duly executed effective as of the date set out herein.
DRUMMOND FINANCIAL CORPORATION
(FORMERLY CVD FINANCIAL CORPORATION)
By: /s/ Michael J. Smith
-------------------------
Name: Michael J. Smith
-------------------------
Title: President
-------------------------
THE BANK OF NOVA SCOTIA TRUST COMPANY OF NEW YORK, AS TRUSTEE
By: /s/ George E. Timmes
-------------------------
Name: George E. Timmes
-------------------------
Title: Vice President
-------------------------
DRUMMOND FINANCIAL (B.C.) LTD.
By: /s/ Michael J. Smith
-------------------------
Name: Michael J. Smith
-------------------------
Title: Secretary and Chief Financial Officer
-------------------------
<PAGE> 1
SUBSIDIARIES OF DRUMMOND FINANCIAL CORPORATION
Shareholding
Jurisdiction at June 30, 1998
Name of Subsidiary of Incorporation (Direct)
- ------------------ ---------------- ----------------
CVD Financial Corporation Washington 100%
CVD Financial Corporation British Columbia 100%
Drummond Financial (B.C.) Ltd. 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> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 3,699
<SECURITIES> 15,244
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,535
<CURRENT-LIABILITIES> 0
<BONDS> 21,515
0
30
<COMMON> 43
<OTHER-SE> 3,162
<TOTAL-LIABILITY-AND-EQUITY> 29,535
<SALES> 0
<TOTAL-REVENUES> 1,354
<CGS> 0
<TOTAL-COSTS> 3,540
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (360)
<INTEREST-EXPENSE> 2,470
<INCOME-PRETAX> (2,606)
<INCOME-TAX> 1
<INCOME-CONTINUING> (2,607)
<DISCONTINUED> 0
<EXTRAORDINARY> 485
<CHANGES> 0
<NET-INCOME> (2,122)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> (0.89)
</TABLE>
