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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 001-12212
DRUMMOND FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-4426690
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6 Rue Charles-Bonnet, 1206 Geneva, Switzerland
(Address of principal executive offices)
Registrant's telephone number, including area code: (41 22) 818 2999
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant was approximately $106,106 as of September
23, 1999, computed on the basis of the closing price on such date.
The number of shares outstanding of the Registrant's Common Stock as of
September 23, 1999 was 2,718,600.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Proxy Statement to be filed within 120 days of the
fiscal year ended June 30, 1999 are incorporated by reference into Part III.
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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
PAGE
PART I
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . 6
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 8
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . 13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.. . . . . . . . . . . . . 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . 13
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . 13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . 13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
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PART I
ITEM 1. BUSINESS
The Corporation
- ---------------
Drummond Financial Corporation was incorporated in June 1993 pursuant to the
laws of the State of Delaware and commenced operations in August 1993. In
October 1996, the Corporation changed its name from "CVD Financial
Corporation" to "Drummond Financial Corporation".
In this document, unless the context otherwise requires, the "Corporation"
refers to Drummond Financial Corporation and its subsidiaries.
General
- -------
The Corporation operates in the financial services business in both the
United States and Canada, engaging primarily in investment and merchant
banking activities. The Corporation's merchant banking activities include
seeking controlling interests in businesses or assets which the Corporation
believes are undervalued. The Corporation was previously engaged in asset-
based commercial lending, which primarily involved the administration and
realization of an existing loan portfolio comprised of loans to emerging
companies.
In 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. 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.
During fiscal 1999, the Corporation collected $1.1 million from a defaulting
borrower and fully settled its loan portfolio. At June 30, 1999, the
Corporation had no loan commitments.
The Corporation is focusing on expanding its merchant banking activities. The
Corporation is seeking controlling interests in businesses or operating
companies that generate or will potentially generate positive cash flows from
operations as opportunities arise. The Corporation has not identified any
such 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
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Corporation's competitors are national or international companies with far
greater resources, capital and access to information than the Corporation.
As a result, the Corporation may become involved in transactions with more
risk than if it had greater resources.
While the Corporation has nominally competed with commercial banks, leasing
companies and asset-based lenders with respect to its asset-based lending
activities, its primary competitors have been venture capital firms which
also invest in emerging growth companies.
As at June 30, 1999, the Corporation had one employee.
ITEM 2. PROPERTIES
The Corporation's corporate and administrative office is located in Geneva,
Switzerland and is leased.
ITEM 3. LEGAL PROCEEDINGS
In February 1999, Gibralt Holdings Ltd. ("Gibralt") commenced proceedings in
Delaware Chancery Court seeking access to certain records of the Corporation
for the purpose of investigating alleged mismanagement. In May 1999, the
Court granted Gibralt's application in part, allowing it access to some
records. In September 1999, Gibralt commenced a putative derivative action
in Delaware Chancery Court naming the Corporation, certain of its directors
and officers and others as defendants. The claim has been filed in the form
of a class action on behalf of shareholders, but has not received Court
certification as such. Gibralt alleges that the defendants have breached
certain fiduciary duties, engaged in self-dealing and failed in their
disclosure obligations. The remedies sought by Gibralt include, among other
things, recovery of funds, judgment for damages and certain other remedies
that may be sought in the hearing of the claim. The Corporation believes
Gibralt's claims to be entirely without merit and intends to vigorously
defend against the lawsuit.
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
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information. In March 1997, the Corporation's common stock was
listed and posted for trading on the Vancouver Stock Exchange under the
trading symbol "DFC.U". Since August 1995, the Corporation's common stock
has been quoted on the OTC Bulletin Board under the trading symbol "DFCU".
The following table sets forth the high and low sales prices per share of the
Corporation's common stock on the OTC Bulletin Board for the periods
indicated:
Fiscal Quarter Ended High Low
-------------------- ---- ---
1997
September 30. . . . . . . . . $ 1.38 $ 1.00
December 31 . . . . . . . . . 1.33 0.94
1998
March 31. . . . . . . . . . . 1.09 0.63
June 30 . . . . . . . . . . . 1.00 0.16
September 30. . . . . . . . . 0.25 0.07
December 31 . . . . . . . . . 0.40 0.07
1999
March 31. . . . . . . . . . . 0.31 0.19
June 30 . . . . . . . . . . . 0.31 0.16
Period Ended September 23 . . 0.19 0.16
(b) Shareholders. As of September 23, 1999, there were approximately 35
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.
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ITEM 6. SELECTED FINANCIAL DATA
The following table reflects selected consolidated financial data for the
Corporation for the last five fiscal years ended June 30, 1999. The
information in the table was extracted from the more detailed consolidated
financial statements and related notes included herein and should be read in
conjunction with such financial statements and related notes.
<TABLE>
Year Ended June 30,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues . . . . . . . . $ 2,297 $ 1,354 $ 4,253 $ 7,067 $ 5,419
Expenses . . . . . . . . 1,960 3,540 4,602 5,388 23,011
Income (loss) from
continuing operations. 336 (2,607) (639) 1,678 (17,562)
Net income (loss). . . . 336 (2,122) 2,338 1,791 (16,845)
COMMON SHARE DATA(1)
Income (loss) from
continuing operations
per common share . . . 0.01 (1.07) (0.35) 0.62 (6.95)
Net income (loss)
per common share . . . 0.01 (0.89) 0.74 0.66 (6.67)
Weighted average common
shares outstanding
(in thousands) . . . . 2,719 2,719 2,719 2,719 2,526
BALANCE SHEET DATA
Total assets . . . . . . 25,999 29,535 31,560 48,310 40,490
Long-term obligations. . 21,515 21,515 23,002 42,047 42,281
Total stockholders'
equity . . . . . . . . 3,271 3,235 5,657 3,641 (4,150)
_______________
(1) Basic and diluted common share data is the same.
</TABLE>
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ITEM 7. 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 three fiscal years ended June 30,
1999 should be read in conjunction with the consolidated financial statements
and related notes included elsewhere herein.
Results of Operations
- ---------------------
Year Ended June 30, 1999 Compared to the Year Ended June 30, 1998
- -----------------------------------------------------------------
Revenues for the year ended June 30, 1999 increased to $2.3 million from $1.4
million for the year ended June 30, 1998, primarily as a result of a net gain
on sales of investments. Revenues from interest and loan fees decreased to
$1.0 million for the year ended June 30, 1999 from $1.4 million for the year
ended June 30, 1998, primarily as a result of a reduction in the dollar
amount of outstanding performing loans. Revenues from dividends and other
activities were $0.3 million in the year ended June 30, 1999, compared to
$0.5 million in the year ended June 30, 1998.
Costs and expenses for the year ended June 30, 1999 decreased to $2.0 million
from $3.5 million for the year ended June 30, 1998, primarily as a result of
a recovery of credit losses of $1.1 million during the current period
relating to amounts outstanding under a non-performing loan. The Corporation
recovered credit losses of $0.4 million in the year ended June 30, 1998.
General and administrative expenses decreased to $1.1 million for the year
ended June 30, 1999 from $1.4 million for the year ended June 30, 1998,
primarily as a result of decreased professional fees and loan collection
costs.
Interest expense decreased to $2.0 million for the year ended June 30, 1999
from $2.5 million for the year ended June 30, 1998, primarily as a result of
a reduction in indebtedness. Interest on the Corporation's long-term debt was
accrued at the rate of approximately 8.63% per annum for the year ended June
30, 1999, compared to approximately 8.50% per annum for the year ended June
30, 1998.
No income tax provision was recognized for the years ended June 30, 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.
Net income for the year ended June 30, 1999 was $0.3 million, or $0.01 per
share, compared to a net loss of $2.1 million, or $0.89 per share, for the
year ended June 30, 1998. The Corporation's results of operations for the
year ended June 30, 1998 included a gain of $0.5 million, or $0.18 per share,
on the extinguishment of debt.
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Year Ended June 30, 1998 Compared to the Year Ended June 30, 1997
- -----------------------------------------------------------------
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.
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 Corporation's 15
Year Variable Rate Bonds (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.
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Liquidity and Capital Resources
- -------------------------------
The Corporation's cash and cash equivalents at June 30, 1999 were $4.3
million, an increase of $0.6 million from June 30, 1998.
Cash used by operating activities for the year ended June 30, 1999 was $1.4
million, compared to $7.9 million for the year ended June 30, 1998. Cash
used by operating activities before any activities in trading securities was
$5.4 million in the year ended June 30, 1999, compared to $3.6 million in the
year ended June 30, 1998. A decrease in accounts payable and accrued
liabilities used cash of $0.6 million in the year ended June 30, 1999,
compared to $1.3 million in the year ended June 30, 1998. An increase in
receivables used cash of $0.4 million in the year ended June 30, 1999,
compared to $1.6 million in the year ended June 30, 1998. A loan to an
affiliate used cash of $2.3 million in the year ended June 30, 1999.
Net sales of trading securities provided cash of $4.1 million in the year
ended June 30, 1999, compared to net purchases of trading securities using
cash of $4.3 million in the year ended June 30, 1998.
Investing activities for the year ended June 30, 1999 provided cash of $4.8
million, compared to $4.3 million for the year ended June 30, 1998. During
the year ended June 30, 1999, the Corporation collected $1.1 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. Collections on loan receivables provided cash of
$17.4 million in the year ended June 30, 1998. In the year ended June 30,
1999, a net decrease in notes receivable provided cash of $3.6 million,
compared to a net increase in same using cash of $3.4 million in the year
ended June 30, 1998.
Financing activities for the year ended June 30, 1999 used cash of $2.8
million, primarily as a result of the partial repayment of an outstanding
loan. For the year ended June 30, 1998, financing activities provided cash
of $5.7 million, primarily as a result of increased indebtedness.
During the year ended June 30, 1999, MFC Bancorp Ltd. ("MFC") exchanged all
of the outstanding Bonds for a promissory note of the Corporation in a like
amount bearing interest at 8.75% per annum and maturing on July 31, 2008. In
August 1999, the Corporation entered into a debt restructuring agreement with
MFC, whereby interest on the aforesaid promissory note was reduced from 8.75%
to 5% per annum and the promissory note was secured by way of a general
security agreement and securities pledge agreement on 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.
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Finance Receivables
- -------------------
The Corporation fully settled its loan portfolio during fiscal 1999 and had
no loan commitments at June 30, 1999. The Corporation's loan portfolio
aggregated $2.1 million in finance receivables (principal plus interest and
reimbursable costs less unamortized commitment fees) due from a defaulting
borrower at June 30, 1998.
Non-Performing Loans at June 30, 1999
- -------------------------------------
During the year ended June 30, 1999, the Corporation collected $1.1 million
from the estate of Heartland, Inc. ("Heartland"), relating to a non-
performing loan in the amount of $2.1 million. Heartland 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 borrower's inability to meet its commitments
under the loan agreement (e.g., the borrower files for bankruptcy
protection).
Allowance for Credit Losses
- ---------------------------
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,
1999 and 1998, respectively.
Year 2000
- ---------
Many of the world's computer systems currently record years in a two-digit
format. These computer systems will be unable to properly interpret dates
beyond the year 1999, which could lead to business disruptions and is
commonly referred to as the "Year 2000" issue. Based on its current
information, management of the Corporation has determined that the Year 2000
issue will not pose significant operational problems for its computer systems
as it only utilizes commercially available software and personal computers,
which are Year 2000 compliant. The total cost to the Corporation of Year
2000 compliance activities has not been and is not currently anticipated to
be material to its financial position or results of operations in any given
year. In addition, management of the Corporation has initiated
communications with clients to ascertain their Year 2000 readiness and
develop contingency plans as required, and management intends to address this
issue with any prospective client. The determination by management and costs
relating to the Year 2000 issue are based on management's best estimates,
which were derived utilizing numerous assumptions of future events. However,
there can be no assurance that these estimates will be achieved and actual
results could vary materially from those anticipated.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Corporation is exposed to market risks from changes in interest rates and
equity prices which may affect its results of operations and financial
condition. The Corporation manages these risks through internal risk
management policies. The Corporation does not enter into derivative
contracts for its own account to hedge against these risks.
Interest Rate Risk
- ------------------
Fluctuations in interest rates may affect the fair value of financial
instruments sensitive to interest rates. An increase in interest rates may
decrease the fair value and a decrease in interest rates may increase the
fair value of such financial instruments. The Corporation's financial
instruments which may be sensitive to interest rate fluctuations are
investments, note receivable and debt obligations. The following table
provides information about the Corporation's exposure to interest rate
fluctuations for the carrying amount of financial instruments that may be
sensitive to such fluctuations as at June 30, 1999 and expected cash flows
from these instruments:
<TABLE>
Expected Future Cash Flow
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carrying Fair
Value Value 2000 2001 2002 2003 2004 Thereafter
-------- ----- ----- ----- ----- ----- ----- ----------
(in thousands)
Investments(1) $ 7,775 $ 7,775 $ 1,775 $ - $ - $ - $ - $ 6,000
Note
receivable 4,617 4,617 4,617 - - - - -
Debt obli-
gations(2) 21,515 21,515 - - - - - 21,515
__________
(1) Investments consist of debt securities and fixed yield securities.
(2) Debt obligations consist of a promissory note bearing interest at
8.75% per annum and maturing on July 31, 2008.
</TABLE>
Equity Price Risk
- -----------------
Changes in trading prices of equity securities may affect the fair value of
equity securities. An increase in trading prices will increase the fair
value and a decrease in trading prices will decrease the fair value of equity
securities. The Corporation's financial instruments which may be sensitive to
fluctuations in equity prices are investments. The following table provides
information about the Corporation's exposure to fluctuations in equity prices
for the carrying amount of financial instruments sensitive to such
fluctuations and expected cash flows from these instruments:
<TABLE>
Expected Future Cash Flow
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carrying Fair
Value Value 2000 2001 2002 2003 2004 Thereafter
-------- ----- ------ ------ ------ ------ ------ -----------
(in thousands)
Investments(1) $ 4,397 $ 4,397 $ 4,397 $ - $ - $ - $ - $ -
- ---------
(1) Investments consist of equity securities.
</TABLE>
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data required
pursuant to this Item 8, and as listed in Item 14 of this annual report, are
included in this annual report commencing on page 16.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 11. 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.
ITEM 12. 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 13. 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.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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) Financial Statement Schedules
None.
(3) Exhibits
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. Incorporated by reference to Form 10-KSB
dated September 28, 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. Incorporated by reference
to Form10-KSB dated September 28, 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 Debt Restructuring Agreement between MFC Bancorp Ltd. and
Drummond Financial Corporation dated August 30, 1999.
21 List of subsidiaries of the Registrant.
27 Article 5 - Financial Data Schedule for year ended June
30, 1999 - Form 10-K.
(b) Reports on Form 8-K
None.
15
<PAGE> 16
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, 1999 and 1998 and the related consolidated
statements of operations, cash flows and shareholders' equity for the years
ended June 30, 1999, 1998 and 1997. 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,
1999 and 1998 and the results of their operations and cash flows for the
years ended June 30, 1999, 1998 and 1997 in accordance with generally
accepted accounting principles in the United States of America.
"DAVIDSON & COMPANY"
Vancouver, Canada Chartered Accountants
September 23, 1999
16
<PAGE> 17
DRUMMOND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars stated in thousands)
AS AT JUNE 30
<TABLE>
=============================================================================
<S> <C> <C>
1999 1998
- -----------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 4,280 $ 3,699
Finance receivables, net (Note 4) - -
Other receivables (Note 5) 5,450 8,661
Due from affiliates 3,080 780
Investments (Note 6) 12,172 15,244
Investment - at equity (Note 7) - -
Deferred debt issuance costs, net of accumulated
amortization of $597 (1998 - $463) 1,017 1,151
-------- --------
$ 25,999 $ 29,535
==============================================================================
</TABLE>
17
<PAGE> 18
DRUMMOND FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars stated in thousands)
AS AT JUNE 30
<TABLE>
=============================================================================
<S> <C> <C>
1999 1998
- -----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 131 $ 761
Interest payable 933 1,349
Note payable - 2,526
Accrued dividends payable 149 149
Debt (Note 8) 21,515 21,515
------- -------
22,728 26,300
------- -------
Shareholders' equity (Note 9)
Capital stock
Preferred stock, $0.01 par value
5,000,000 shares authorized
3,000,000 shares issued and outstanding
at June 30, 1999 and 1998 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 and 4,264,000 shares
issued and outstanding
at June 30, 1999 and 1998, respectively 27 43
Additional paid-in capital 14,727 17,767
------- -------
14,754 17,810
------- -------
Deficit (17,483) (17,519)
------- -------
3,271 6,291
Less: Nil and 1,545,400 common shares held
as treasury stock
at June 30, 1999 and 1998, respectively. - (3,056)
------- -------
3,271 3,235
------- -------
$ 25,999 $ 29,535
=============================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 19
DRUMMOND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars stated in thousands; except per share amounts)
YEAR ENDED JUNE 30
<TABLE>
=============================================================================
<S> <C> <C> <C>
1999 1998 1997
- -----------------------------------------------------------------------------
REVENUE
Interest and loan fees $ 993 $ 1,405 $ 2,079
(Loss) gain on investments, net 1,004 (507) 938
Dividend income 300 300 322
Other - 156 914
------ ------ ------
2,297 1,354 4,253
------ ------ ------
COST AND EXPENSES
Interest 2,029 2,470 3,571
Recovery of credit losses (1,139) (360) (673)
General and administrative 1,070 1,430 1,704
------ ------- ------
1,960 3,540 4,602
------ ------- ------
Equity in loss of investee - (420) (289)
------ ------- ------
Income (loss) from operations 337 (2,606) (638)
Income tax expense (1) (1) (1)
------ ------- ------
Income (loss) before extraordinary gain 336 (2,607) (639)
Extraordinary gain on early extinguishment
of debt, net of $Nil provision for income
taxes for 1999, 1998 and 1997 - 485 2,977
------ ------- ------
Net income (loss) for the year $ 336 $ (2,122) $ 2,338
==============================================================================
Basic earnings (loss) per share
Income (loss) before extraordinary gain $0.01 $ (1.07) $ (0.35)
Extraordinary gain - 0.18 1.09
------ -------- -------
$0.01 $ (0.89) $ 0.74
==============================================================================
Weighted average number of shares
outstanding 2,718,600 2,718,600 2,718,600
==============================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE> 20
DRUMMOND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars stated in thousands)
YEAR ENDED JUNE 30
<TABLE>
============================================================================
<S> <C> <C> <C>
1999 1998 1997
- -----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for the year $ 336 $ (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 (1,004) 507 (938)
Recovery of credit losses (1,139) (360) (673)
Equity loss of investee - 420 289
Amortization of deferred debt
issuance costs 134 138 (78)
Changes in non-cash working
capital balances:
Interest receivable - 976 127
Commitment fees - (25) (106)
Other receivable (407) (1,605) (3,133)
Due from affiliate (2,300) (239) (541)
Interest payable (416) 438 (823)
Accounts payable and accrued
liabilities (630) (1,277) 953
Other - 3 -
Purchase of trading securities (4,405) (10,500) (3,037)
Proceeds from sales of trading
securities 8,480 6,197 16,082
------ ------ ------
Net cash provided by (used in)
operating activities (1,351) (7,934) 7,483
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances on loans - (9,700) (1,100)
Payments collected on loans 1,139 17,407 3,740
Decrease (increase) in notes receivable,
net 3,619 (3,407) (7,502)
------ ------- ------
Net cash provided by (used in)
investing activities 4,758 4,300 (4,862)
------ ------- ------
</TABLE>
20
<PAGE> 21
DRUMMOND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(Dollars stated in thousands)
YEAR ENDED JUNE 30
<TABLE>
==============================================================================
<S> <C> <C> <C>
1999 1998 1997
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable, net $ (2,526) $ 7,000 $ -
Purchase of treasury bond payable - (992) (15,301)
Dividends paid on preferred shares (300) (300) (173)
-------- ------ -------
Net cash provided by (used in)
financing activities (2,826) 5,708 (15,474)
------- ------ -------
Increase (decrease) in cash and cash
equivalents for the year 581 2,074 (12,853)
Cash and cash equivalents, beginning
of year 3,699 1,625 14,478
------ ----- ------
Cash and cash equivalents, end of year $ 4,280 $ 3,699 $ 1,625
=============================================================================
Cash paid during the year for:
Interest expense $ 2,311 $ 1,915 $ 3,521
Income taxes 1 1 1
=============================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE> 22
DRUMMOND FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars stated in thousands)
<TABLE>
====================================================================================================================
Preferred Stock Common Stock
-------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
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
Net income for
the year - - - - - - 336 - 336
Retirement of
treasury stock - - - (1,545,400) (16) (3,040) - 3,056 -
Dividends paid
and payable - - - - - - (300) - (300)
--------- ----- ------- ---------- ---- ------ -------- ------ -----
Balance at
June 30,
1999 3,000,000 $ 30 $ 5,970 2,718,600 $ 27 $14,727 $(17,483) $ - $ 3,271
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 23
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1999
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 affiliates, investments, accounts payable and
accrued liabilities, interest payable, note payable, accrued dividends
payable, and debt. 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.
23
<PAGE> 24
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1999
3. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....)
Finance receivables and allowance for credit losses
- ---------------------------------------------------
Finance receivables, also known as recorded investments in loans, include the
outstanding loan balance (net of any charge-offs), accrued interest,
reimbursable expenses and are net of deferred loan fees.
The Company maintains an allowance for credit losses at an amount estimated
to cover potential losses on finance receivables which have experienced an
event of impairment or for which future collection of outstanding principal,
interest and reimbursable expenses has become doubtful. Amounts deemed to be
uncollectible are charged off against the allowance and subsequent
recoveries, if any, are credited to the allowance. The amount of the
allowance is based on the Company's evaluation of numerous factors, including
the adequacy of the collateral securing the loans, the operating environments
of the various borrowers and the historical experience of the various
borrowers' management, and reflect the Company's best estimate of the
necessary level of the allowance for credit losses.
Under the provisions of Financial Accounting Standards Board ("FASB")
Statement No. 114, "Accounting by Creditors for Impairment of a Loan", when
a loan is impaired as defined in the statement, a lender shall measure
impairment at the present value of expected future cash flows discounted at
the loan's effective interest rate, or as a practical expedient, based on a
loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. The Company has adopted a measurement method
on a loan-by-loan basis. By definition, the Company's non-performing loans
are impaired. A specific reserve is established for each impaired loan equal
to the amount by which the Company's recorded investment in the loan exceeds
the net present value of the loan determined in accordance with FASB
Statement No. 114.
The Company continues to apply FASB Statement No. 5 "Accounting for
Contingencies" to provide an allowance on a pool of unimpaired loans.
Investments
- -----------
The Company's available-for-sale and trading securities are stated at their
fair values. Any unrealized holding gains or losses of available-for-sale
securities are excluded from earnings and reported as a separate component of
shareholders' equity until realized. If a loss in value in available-for-
sale securities is considered to be other than temporary, it is recognized in
the determination of net income. Gains and losses on trading securities are
included in earnings. Cost is based on the specific identification method to
determine realized gains or losses.
Warrants to acquire common stock of the various borrowers held by the Company
for which a readily determinable fair market value is available and the
Company has an unrestricted right to sell the warrant and/or underlying
securities within one year are included in trading securities.
Investments in other companies where control is temporary or ownership is
less than 20% are carried using the cost method of accounting. The Company
accounts for its investments in companies where the ownership is 20% or more
under the equity method.
Deferred debt issuance costs
- ----------------------------
Deferred debt issuance costs consist of underwriters' fees and expenses and
other costs capitalized in connection with the Company's August 1993 debt
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.
24
<PAGE> 25
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1999
3. SIGNIFICANT ACCOUNTING POLICIES (cont'd.....)
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.
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 per share
- ------------------
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding in
the period. Diluted earnings per share takes into consideration common
shares outstanding (computed under basic earnings per share) and potentially
dilutive common shares.
Warrants and options were not included in the computation of diluted earnings
(loss) per share for the fiscal years 1999, 1998 and 1997 because their
exercise prices was greater than their market prices.
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 Statement No. 130 "Reporting Comprehensive
Income", which 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 other than transactions with
owners in their capacity as owners. The Company does not have any other
comprehensive income during the years ended June 30, 1999, 1998 and 1997.
Comparative figures
- -------------------
Certain comparative figures have been reclassified to conform with the
current year's presentation.
25
<PAGE> 26
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1999
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 (7.75 percent at June 30, 1999 and 8.50
percent at June 30, 1998, and 1997) plus two to seven percent. The Bank's
weighted daily average prime rate was 7.98 percent during the years ended
June 30, 1999 and 8.50 percent during the years ended June 30, 1998 and 1997,
respectively.
=============================================================================
<TABLE>
June 30, 1999 June 30, 1998
---------------------- ---------------------
<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
=================================================================================================
Net book
value $ - $ -
=================================================================================================
</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, 1999,
1998 and 1997 as follows:
<TABLE>
================================================================================================
1999
--------------------------------------
<S> <C> <C> <C> <C> <C>
Specific General Total 1998 1997
- ------------------------------------------------------------------------------------------------
Balance, beginning
of year $ 2,100 $ - $ 2,100 $ 3,293 $7,202
Recovery for the year (1,139) - (1,139) (360) (673)
Charge-offs for the
year, net (961) - (961) (833) (3,236)
------ ----- ------ ------ -----
Balance, end of year $ - $ - $ - $ 2,100 $3,293
==================================================================================================
</TABLE>
At June 30, 1999 and 1998, the Company does not have any unfunded loan
commitments.
5. OTHER RECEIVABLES
<TABLE>
=============================================================================
<S> <C> <C>
1999 1998
- -----------------------------------------------------------------------------
Notes receivable $ 4,617 $ 8,236
Accrued dividend receivable 149 149
Other receivables 684 276
------- -------
$ 5,450 $ 8,661
=============================================================================
</TABLE>
The carrying amount of receivables approximates their fair value which is
based on the discounted present value of their estimated future cash flows.
26
<PAGE> 27
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1999
6. INVESTMENTS
<TABLE>
=============================================================================
<S> <C> <C>
1999 1998
- -----------------------------------------------------------------------------
Trading securities:
Bonds and debentures $ 1,775 $ 1,720
Equity securities 4,397 7,524
------- -------
6,172 9,244
Available-for-sale security 6,000 6,000
-------- --------
$ 12,172 $ 15,244
=============================================================================
</TABLE>
For the year ended June 30, 1999, the Company recognized an unrealized
holding gain of $272,000 (1998 - $186,000 loss; 1997 - $435,000 loss) and a
realized gain of $732,000 (1998 - $321,000 loss; 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, 1999 and
1998 because there is no ready 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
As at June 30, 1998, the Company's investment was comprised of 1,070,320
shares of Ichor Corporation which represented 21.81% of the total outstanding
shares. The Company has accounted for its investment using the equity method
of accounting.
During 1999, the Company sold the investment to an affiliate for
consideration of 94% of the proceeds from the future sales by the affiliate
of all or part of the investment on or before December 31, 2003.
8. DEBT
Under an indenture dated August 26, 1993 (the "Master Indenture") the
Company was authorized to issue up to $500 million of unsecured, subordinated
variable rate bonds (the "Bonds"). The Bonds could have been 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
could not have issued any subsequent series of Bonds unless no event of
default under the Master Indenture had occurred or had 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 had 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 had since occurred.
27
<PAGE> 28
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1999
8. DEBT (cont'd...)
Interest on the Bonds was 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 was 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 was
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 were to mature on July 31, 2008 and were subject to mandatory
redemption by the Company in annual instalments commencing July 31, 2004
through July 31, 2008. The annual instalment amount was equal to 20 percent
of the outstanding principal on June 30, 2004. The Bonds were also subject
to mandatory redemption generally upon the sale or transfer of substantially
all of the assets of the Company.
For semi-annual periods ended December 31, 1996, June 30, 1997, December 31,
1997, June 30, 1998 and December 31, 1998, interest has been incurred at per
annum coupon rates of 8.25 percent, 8.38 percent, 8.50 percent, 8.50 percent
and 8.50 percent, respectively.
During the year ended June 30, 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).
As at June 30, 1998, the Bonds had a carrying amount of $21,515,000, and MFC
Bancorp Ltd. owned all of the Bonds as approved by a court order.
On January 25, 1999, MFC Bancorp Ltd. delivered all of the outstanding Bonds
to the Company in exchange for a promissory note. The promissory note bears
interest at 8.75% per annum payable semi-annually on January 25 and July 25
of each year and matures on July 31, 2008. The promissory note had a fair
value of $21,515,000 as of June 30, 1999 based on the present value of future
cash flows.
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.
MFC Bancorp Ltd. owns directly and indirectly 49.4% (1998 - 43.6%) of the
Company's Common Stock and 100%
(1998 - 100%) of the Company's Preferred Stock.
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.
28
<PAGE> 29
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1999
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:
<TABLE>
=============================================================================
<S> <C> <C>
Exercise
Price
Per Share
Number (Not in
of Shares Thousands)
- -----------------------------------------------------------------------------
Outstanding, June 30, 1996 75,000 $1.81 to $1.88
Expired (50,000) 1.81
-------
Outstanding, June 30, 1997 25,000 $1.88
Expired (25,000) $1.88
-------
Outstanding, June 30, 1998 and 1999 -
=============================================================================
</TABLE>
At June 30, 1999 and 1998 options to purchase 375,000 shares of the Company's
Common Stock are available for future grant. At June 30, 1997, options to
purchase 350,000 shares of the Company's Common Stock were 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 1999,
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.
11. INCOME TAXES
There was no provision for income taxes for the years ended June 30, 1999,
1998 and 1997 (other than the payment of state minimum income tax of $1,000
each in 1999, 1998 and 1997).
Differences between the United States federal statutory and the Company's
effective tax rates are as follows:
<TABLE>
=============================================================================
<S> <C> <C> <C>
1999 1998 1997
- -----------------------------------------------------------------------------
United States federal statutory rate
on income (loss) from operations $ 114 $ (721) $ 795
Timing differences on credit losses (714) (406) (1,329)
Other (243) 315 305
Valuation allowance 843 812 229
----- ----- ------
$ - $ - $ -
=============================================================================
</TABLE>
29
<PAGE> 30
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1999
11. INCOME TAXES (cont'd...)
The net deferred tax assets at June 30, 1999 and 1998 consist of the
following:
<TABLE>
=============================================================================
<S> <C> <C>
1999 1998
- -----------------------------------------------------------------------------
Provision for credit losses $ - $ 714
Net operating loss carryforwards 3,067 4,174
Other timing differences 469 879
Valuation allowance (3,536) (5,767)
------ ------
Deferred tax asset, net $ - $ -
=============================================================================
</TABLE>
At June 30, 1999, the Company has $9.0 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 2019 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. SEGMENTED INFORMATION
The Company conducted substantially all of its business of investment and
merchant banking activities and asset-based commercial lending in North
America as one business segment.
13. RELATED PARTY TRANSACTIONS
During the year ended June 30, 1999, the Company incurred $300,000 (1998 -
$300,000; 1997 - $300,000) in fees payable to MFC Bancorp Ltd.; and $300,000
(1998 - $300,000; 1997 - $306,000) to Logan International Corp., which has a
common director with the Company. These fees were paid for the accounting
and administration of the Company and reimbursement of office expenses. The
Company also paid $Nil (1998 - $22,000; 1997 - $22,000) in consulting fees
and expense reimbursements to a company which is owned and controlled by a
former officer of the Company. During fiscal year 1999, the Company paid
$300,000 (1998 - $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 (1998 - $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 (1998 - $780,000) due from Ichor
Corporation. The Company also has an amount of $2,300,000 (1998 - $Nil) due
from a company which has a common director with the Company and the Company
accrued $82,000 (1998 - $Nil; 1997 - $Nil) in interest income thereon; and
the amount due bears interest at the U.S. base rate plus 3% per annum,
matures on December 31, 2001 and is secured by assets of the company.
14. COMMITMENTS AND CONTINGENCIES
In February 1999, Gilbralt Holdings Ltd. ("Gilbralt") commenced proceedings
in Delaware Chancery Court seeking access to records of the Company for the
purpose of investigating alleged mismanagement. In May 1999, the Court
granted Gilbralt's application in part, allowing it access to some records.
In September 1999, Gilbralt commenced a putative derivative action in
Delaware Chancery Court naming the Company, certain of its directors and
officers and others as defendants. The claim has been filed in the form of a
class action on behalf of shareholders, but has not received Court
certification as such. Gilbralt alleges that the defendants have breached
certain fiduciary duties, engaged in self-dealing and failed in their
disclosure obligations. The remedies sought by Gilbralt include, among
other things, recovery of funds, judgement for damages and certain other
remedies that may be sought in the hearing of the claim. The Company believes
Gibralt's claims to be entirely without merit and intends to vigorously defend
against the lawsuit.
30
<PAGE> 31
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1999
14. COMMITMENTS AND CONTINGENCIES (cont'd...)
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.
15. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CONSOLIDATED
STATEMENT OF CASH FLOWS
Significant non-cash transactions in 1999 include:
a) The Company exchanged bonds payable with a carrying value of
$21,515,000 for a note payable of $21,515,000.
b) The Company cancelled 1,545,400 common shares held as treasury stock
valued at $3,056,000.
Significant non-cash transaction 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.
16. 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:
<TABLE>
=============================================================================
<S> <C> <C> <C>
June 30, June 30, June 30,
1999 1998 1997
- -----------------------------------------------------------------------------
Net income (loss) for the year in
accordance with U.S. GAAP $ 336 $ (2,122) $ 2,338
Reconciliation - - -
--------- --------- ---------
Net income (loss) for the year in
accordance with Canadian GAAP 336 (2,122) 2,338
Accumulated deficit, beginning of year (17,519) (15,097) (17,113)
Dividends paid and payable (300) (300) (322)
--------- --------- ---------
Accumulated deficit, end of year in
accordance with Canadian GAAP $ (17,483) $ (17,519) $ (15,097)
=============================================================================
Basic earnings (loss) per share in
accordance with Canadian GAAP $ 0.01 $ (0.89) $ 0.74
=============================================================================
Fully diluted earnings (loss)
per share in accordance with
Canadian GAAP $ 0.01 $ (0.89) $ 0.71
=============================================================================
</TABLE>
31
<PAGE> 32
DRUMMOND FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in tables stated in thousands)
JUNE 30, 1999
16. 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, 1999, 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.
17. SUBSEQUENT EVENT
Subsequent to June 30, 1999, the Company restructured its promissory note in
the amount of $21,515,000. The interest rate payable on the promissory note
was reduced from 8.75% per annum to 5.00% per annum effective August 30, 1999
and the promissory note was secured by way of a general security agreement
and securities pledge agreement on the assets of the Company.
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DRUMMOND FINANCIAL CORPORATION
Date: September 24, 1999 By: /s/ Michael J. Smith
------------------------------------
Michael J. Smith
President, Chief Executive Officer,
Chief Financial Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Michael J. Smith Date: September 24, 1999
- -----------------------------------
Michael J. Smith
President, Chief Executive Officer,
Chief Financial Officer and Director
/s/ Young-Soo Ko Date: September 24, 1999
- -----------------------------------
Young-Soo Ko
Director
/s/ Oq-Hyun Chin Date: September 24, 1999
- -----------------------------------
Oq-Hyun Chin
Director
33
<PAGE> 34
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. Incorporated by reference to Form 10-KSB dated September
28, 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. Incorporated by reference to Form 10-KSB dated
September 28, 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 Debt Restructuring Agreement between MFC Bancorp Ltd. and
Drummond Financial Corporation dated August 30, 1999.
21 List of subsidiaries of the Registrant.
27 Article 5 - Financial Data Schedule for year ended June 30,
1999 - Form 10-K.
<PAGE> 1
DEBT RESTRUCTURING AGREEMENT
THIS AGREEMENT is made this 30th day of August, 1999,
AMONG:
MFC BANCORP LTD., a company continued under the laws of the Yukon
Territory
("MFC")
AND:
DRUMMOND FINANCIAL CORPORATION, a company
incorporated under the laws of the State of Delaware
("Drummond")
WHEREAS Drummond is indebted to MFC and MFC has agreed to reduce the interest
rate applicable to that indebtedness in exchange for a general security
interest over the property, assets, effects and undertakings of Drummond, all
as hereinafter set forth;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the premises
and the mutual covenants and agreements hereinafter contained and the sum of
$1.00 paid by each party to the other (the receipt and sufficiency of which
are hereby acknowledged by each party) the parties hereto warrant, represent,
covenant and agree as follows:
1. INTERPRETATION
1.1 In this Agreement and the recitals hereto the following words have the
following meanings:
(a) "Agreement" means this agreement between MFC and Drummond;
(b) "Closing Date" means August 30, 1999 or such other date as the
parties hereto may agree; and
(c) "Indebtedness" means the indebtedness of US$21,515,000 bearing
interest at 8.75% owed by Drummond to MFC which is evidenced by
a promissory note due July 31, 2008.
1.2 The division of this Agreement into articles, sections and subsections
and the insertion of headings are for reference purposes only and
shall not effect the interpretation of the Agreement. Unless
otherwise indicated, the reference to a particular article, section,
subsection or Schedule refers to a specified article, section,
subsection or Schedule of this Agreement.
<PAGE> 2
1.3 This Agreement shall be construed in accordance with the laws of the
Province of British Columbia. All references to sums of money shall
be deemed to refer to the legal tender of Canada unless otherwise
stated.
2. RESTRUCTURING OF INDEBTEDNESS
2.1 Subject to and in accordance with the terms and conditions of this
Agreement, MFC and Drummond hereby covenant and agree with each other
to reduce the interest rate payable on the Indebtedness from 8.75% per
annum to 5.00% per annum and MFC and Drummond further covenant and
agree to secure the Indebtedness by way of a general security
agreement and securities pledge agreement.
3. REPRESENTATIONS AND WARRANTIES
3.1 MFC represents and warrants to Drummond that:
(a) it is a company duly continued and validly existing under the
laws of the Yukon Territory;
(b) it has all necessary corporate authority, power and capacity to
enter into this Agreement and to carry out its terms and
conditions to the full extent; and
(c) the acceptance of the general security interest in exchange
for the reduction of the interest rate applicable to the
Indebtedness has been validly authorized by all necessary
corporate acts.
3.2 Drummond represents and warrants to MFC that:
(a) it is a company duly incorporated and validly existing under
the laws of the State of Delaware;
(b) it has all necessary corporate authority, power and capacity to
enter into this Agreement and to carry out its terms and
conditions to the full extent; and
(c) the reduction of the interest rate applicable to the
Indebtedness as consideration for the granting of the general
security interest has been validly authorized by all necessary
corporate acts.
4. COMPLETION
4.1 On or before the Closing Date, MFC shall deliver, or cause to be
delivered to Drummond, the following:
(a) the promissory note due July 31, 2008 in the principal amount
of US$21,515,000 bearing interest at 8.75% per annum evidencing
the Indebtedness surrendered for cancellation; and
- 2 -
<PAGE> 3
(b) such other documents as may be required in order to carry out
the terms of this Agreement.
4.2 On or before the Closing Date, Drummond shall deliver, or cause to be
delivered to MFC, the following:
(a) a certified copy of a directors' resolution authorizing the
entering into, the execution and delivery of this Agreement by
Drummond and the consummation of the transactions contemplated
hereby;
(b) a promissory note substantially in the form attached hereto as
Schedule A due July 31, 2008 in the principal amount of
US$21,515,000 bearing interest at 5.00% per annum;
(c) a general security agreement substantially in the form attached
hereto as Schedule B;
(d) a securities pledge agreement substantially in the form
attached hereto as Schedule C; and
(e) such other documents as may be required in order to carry out
the terms of this Agreement.
5. GENERAL
5.1 Time is of the essence of this Agreement.
5.2 This Agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective successors and assigns.
5.3 The parties hereto agree to execute such further and other agreements
as may be necessary to give effect to the meaning and intent of this
Agreement.
5.4 This Agreement constitutes the entire agreement between the parties
with respect to the subject matter of this Agreement and supersedes
every previous agreement, communication, expectation, negotiation,
representation or understanding whether oral or written, express or
implied, statutory or otherwise among the parties with respect to the
subject matter of this Agreement except as specifically set out
herein.
5.5 No director, officer, employee or agent of any party has any authority
to make any representation, warranty or covenant not contained in this
Agreement and each party agrees that it has executed this Agreement
without reliance upon any such representation or promise.
- 3 -
<PAGE> 4
5.6 This Agreement may be executed in several parts and in the same form
and by facsimile and such parts so executed shall together constitute
one original document, and such parts, if more than one, shall be read
together and construed as if all the signing parties had executed one
copy of the said agreement.
IN WITNESS WHEREOF the parties hereto have hereunto executed this Agreement
as of the day and year first above written.
MFC BANCORP LTD.
Per: /s/Roy Zanatta
-----------------------------
Authorized Signatory
Per:
-----------------------------
Authorized Signatory
DRUMMOND FINANCIAL CORPORATION
Per: /s/ Michael J. Smith
------------------------------
Authorized Signatory
Per:
------------------------------
Authorized Signatory
- 4 -
<PAGE> 5
SCHEDULE A
PROMISSORY NOTE
---------------
AUGUST 30, 1999
PRINCIPAL AMOUNT: $21,515,000 (U.S.) DUE: JULY 31, 2008
FOR VALUE RECEIVED, the undersigned DRUMMOND FINANCIAL CORPORATION
("Drummond") hereby promises to pay to MFC BANCORP LTD. ("MFC"), of 6 Rue
Charles-Bonnet, 1206 Geneva, Switzerland, on July 31, 2008, at such address
or at such other place as MFC may from time to time designate by written
notice to Drummond, the principal amount of TWENTY-ONE MILLION FIVE HUNDRED
AND FIFTEEN THOUSAND DOLLARS (U.S.) ($21,515,000), together with interest
thereon at the rate of 5.00% per annum compounded semi-annually as well after
as before maturity and judgment and both before and after default, such
interest payable semi-annually on the 25th day of January and the 25th day of
July in each year until payment in full.
The payment of the principal and the interest thereon is secured by way of a
general security agreement and a securities pledge agreement issued and
delivered by Drummond to MFC and each dated August 30, 1999.
Presentment for payment, demand, protest and notice of dishonour and protest
hereof are hereby waived. This note shall be governed by and construed in
accordance with the laws of the Province of British Columbia.
DRUMMOND FINANCIAL CORPORATION
By: /s/ Michael J. Smith
-------------------------------------
Name: c/s
----------------------------------
Title:
---------------------------------
A-1
<PAGE> 6
SCHEDULE B
GENERAL SECURITY AGREEMENT
--------------------------
THIS GENERAL SECURITY AGREEMENT is dated for reference the 30th day of
August, 1999,
BETWEEN:
DRUMMOND FINANCIAL CORPORATION, a company
incorporated under the laws of the State of Delaware
("Drummond")
AND:
MFC BANCORP LTD., a company incorporated under the laws
of the Yukon Territory
("MFC")
WHEREAS Drummond has executed a promissory note dated the 30th day of August,
1999 in favour of MFC (the "Note") in the principal amount of US$21,515,000
due July 31, 2008 and MFC has requested that Drummond secure the payment of
the principal and interest by way of a general security agreement;
NOW THEREFORE for good and valuable consideration, receipt and adequacy of
which is acknowledged by the parties, the parties agree that:
1. DEFINITIONS
1.1 In this general security agreement:
(a) the terms "Goods", "Chattel paper", "Documents of Title",
"Equipment", "Accounts", "Consumer Goods", "Instruments",
"Intangibles", "Licenses", "Money", "Securities", "Proceeds",
"Inventory" and "Accessions" and other words and expressions
which have been defined in the Personal Property Security Act
(British Columbia) (the "PPSA") shall be interpreted in
accordance with their respective meanings given in the PPSA
unless otherwise defined herein or unless the context otherwise
requires and specifically;
B-1
<PAGE> 7
(b) "Indebtedness" means all liabilities of every kind and
description of Drummond to MFC, whether now or hereafter owed
or any future advance, whether direct, indirect, contingent,
and whether Drummond be bound alone or with others and whether
as principal or surety and including, but not limited to, the
principal amount of the Note and any interest accruing thereon;
(c) "PPSA" means the Personal Property Security Act (British
Columbia); and
(d) "Related Documents" means the Note and any other documentation
in connection with this general security agreement or the
Indebtedness or related to its operation or administration,
whether already existing or executed now or later.
2. GENERAL SECURITY INTEREST
2.1 For value received and as a general and continuing security for the
payment of the Indebtedness including any ultimate unpaid balance
thereof, owed to MFC and to secure the payment of the Indebtedness
under this general security agreement or any Related Documents,
Drummond hereby:
(a) grants to and in favour of MFC by way of mortgage, charge,
assignment and transfer, a general security interest in all
presently owned and hereafter acquired personal property of
Drummond of whatsoever nature and kind and wheresoever situate
and all Proceeds thereof and therefrom, renewals thereof,
Accessions thereto and substitutions therefor including,
without limiting the generality of the foregoing, all the
presently owned or held and hereafter acquired right, title,
and interest in and to all Goods (including all accessories,
attachments, additions, and Accessions thereto), Chattel Paper,
Documents of Title (whether negotiable or not), Instruments,
Intangibles, Licenses, Money (including, without limitation,
the principal), Securities, and all:
(i) Inventory of whatsoever nature and kind and wheresoever
situate;
(ii) Equipment (other than Inventory) of whatsoever nature
and kind and wheresoever situate, including, without
limitation, all machinery, tools, apparatus, plant,
furniture, fixtures, and vehicles of whatsoever nature
and kind;
(iii) book accounts and book debts and generally all Accounts,
debts, dues, claims, choses in action and demands of
every nature and kind howsoever arising or secured
including letters of credit, letters of guarantee and
advices of credit, which are now due, owing or accruing
or growing due to or owned by or which may hereafter
become due, owing or accruing or growing due to or owned
by Drummond (all of which are herein collectively called
the "Debts");
B-2
<PAGE> 8
(iv) deeds, documents, writings, paper, books of account and
other books relating to or being records of Debts,
Chattel paper or Documents of Title or by which such are
or may hereafter be secured, evidenced, acknowledges or
made payable;
(v) contractual rights including rents, revenues and
incomes, and insurance claims and policies, and all
goodwill, patents, trademarks, copyrights, and other
industrial property;
(vi) monies (including, without limitation, the principal)
other than trust monies lawfully belonging to others;
and
(vii) personal property described in any schedule now or
hereafter annexed hereto;
(all of which are herein collectively called the "Specifically
Charged Property").
(b) charge as and by way of a floating charge in favour of MFC all
the presently owned or held and hereafter acquired property,
assets, effects and undertakings of Drummond of whatsoever
nature and kind and wheresoever situate, other than such of the
property, assets, effects and undertakings of Drummond as are
validly and effectively subjected to the grant, mortgage,
pledge and charge, and the general security interest granted to
MFC pursuant to subsection 2.1(a) including, without limiting
the generality of the foregoing, all presently owned or held
and hereafter acquired:
(i) right, title and interest of Drummond in and to real and
immovable and leasehold property and rights whether in
fee or of a less estate and all interest in and rights
relating to lands and all easements, rights of way,
privilege, benefits, licenses, improvements and rights
whether connected therewith or appurtenant thereto or
separately owned or held and all structures, buildings,
plant, machinery, fixtures, apparatus and fixed assets;
and
(ii) businesses, goodwill and uncalled capital of Drummond;
and the Specifically Charged Property and the property charged
by this subsection 2.1(b) and all property and assets expressed
to be charged by any instruments supplemental hereto or in
implementation hereof are collectively referred to as the
"Collateral".
2.2 TO HAVE AND TO HOLD unto and in favour of MFC on the terms and
conditions herein set out, PROVIDED THAT Drummond shall not have the
power without the prior written consent of MFC to:
B-3
<PAGE> 9
(a) grant or allow any lien, charge or other encumbrance, whether
fixed or floating, to be registered against or exist on any
part of the Collateral, which ranks or could in any event rank
to be enforced in priority to or pari passu with the security
constituted by this general security agreement, save for:
(i) mortgages and charges and any other encumbrances, if
any, previously disclosed by Drummond;
(ii) mortgages and charges, and any other encumbrances to
MFC; and
(iii) encumbrances approved in writing by MFC prior to their
creation or assumption; and
(b) grant, sell, exchange, transfer, assign, lease or otherwise
dispose of any of its properties, assets, effects, and
undertakings.
3. RIGHTS AND OBLIGATIONS OF DRUMMOND
3.1 Drummond warrants and covenants that it holds title or has rights in
the Collateral sufficient for a general security interest to attach to
the Collateral and that there are no existing encumbrances on this
Collateral, except as previously disclosed to MFC by Drummond.
3.2 Until default, or unless otherwise agreed with MFC, Drummond may deal
with the Collateral in the ordinary course of Drummond's business.
3.3 Drummond shall defend its own and MFC's rights in the Collateral
against the claims and demands of all persons.
3.4 Drummond will conduct its business and affairs in a proper and
efficient manner, in accordance with applicable law and keep records
in accordance with generally accepted accounting principles. Drummond
shall pay all charges, such as taxes, assessments, claims, liens and
encumbrances relating to the Collateral or Drummond's business and
affairs when the same become due. Drummond will deliver to MFC,
promptly, such information concerning the Collateral, Drummond and
Drummond's business and affairs, as MFC may reasonably request.
3.5 Drummond waives protest and notice of any instrument constituting
Collateral at any time held by MFC on which Drummond is in any way
liable, and subject to the notice requirements of the PPSA, notice of
any other action taken by MFC.
B-4
<PAGE> 10
4. DEFAULT
4.1 The Indebtedness hereby secured shall become immediately due and
payable, unless waived in writing by MFC, in any of the following
events:
(a) if Drummond should make default in the payment when due of the
Indebtedness, or any part thereof, hereby secured; or
(b) if Drummond should commit any breach of any term, condition,
proviso, agreement, obligation or covenant to MFC, or any
representation or warranty given by Drummond to MFC is untrue,
whether or not any such term, condition, proviso, agreement or
covenant, representation or warranty is contained in this
general security agreement; or
(c) if an order be made or an effective resolution be passed for
the winding up of Drummond or there is instituted by or against
Drummond of any type of insolvency proceeding or creditor
arrangement, any formal of informal proceeding for the
dissolution or liquidation of, settlement of claims against, or
winding up of affairs of Drummond; or
(d) if Drummond should make an assignment for the benefit of its
creditors or be declared bankrupt or makes a proposal or an
authorized assignment or otherwise takes advantage of
provisions for relief under the Bankruptcy Act (Canada), the
Company's Creditors Arrangement Act (Canada) or similar
legislation in any jurisdiction; or
(e) if Drummond ceases or threatens to cease to carry on business
or makes or agrees to make a bulk sale of assets or commits or
threatens to commit an act of bankruptcy; or
(f) a receiver, receiver and manager or receiver/manager of all or
any part of the Collateral, or of any other property, assets or
undertakings of Drummond is appointed; or
(g) any execution, sequestration, extent or other process of any
court becomes enforceable against Drummond or a distress or
analogous process is levied upon the Collateral or any part
thereof; or
(h) if, without the prior written consent of MFC, Drummond creates
or permits to exist any encumbrance against any of the
Collateral which ranks or could in any event rank in priority
to or pari passu with the security constituted by this general
security agreement; or
(i) Drummond enters into any reconstruction, reorganization,
amalgamation, merger or other similar arrangement with any
other person; or
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(j) any certificate, statement, representation, warranty or audit
report herewith, heretofore or hereafter furnished by or on
behalf of Drummond to MFC, whether in connection with this
general security agreement or otherwise, and whether furnished
as to an inducement to MFC to extend any credit to or to enter
into this or any other agreement with Drummond, or not:
(i) proves to have been false in any material respect at
the time as of which the facts therein set forth were
stated or certified; or
(ii) proves to have omitted any substantial, contingent or
unliquidated liability or claim against Drummond;
or, if upon the date of execution of this general security
agreement, there shall have been any material adverse change in
any of the facts disclosed by any such certificate, statement,
representation, warranty or audit report, which change shall
not have been disclosed to MFC at or prior to the time of such
execution.
4.2 All amounts payable to MFC shall be made without deduction,
compensation, set-off, or counterclaim. A written statement of an
officer of MFC as to the amount remaining unpaid to MFC at any time by
Drummond shall be conclusive evidence and shall in any event be prima
facie evidence against Drummond as to the amount remaining unpaid to
MFC at such time by Drummond.
5. RIGHTS AND OBLIGATIONS OF MFC
5.1 In addition to the rights granted herein, MFC may enforce any other
rights and remedies it may have at law or in equity and specifically
shall have all rights and remedies of a secured party under the PPSA.
All rights and remedies of MFC are cumulative and one or more of these
rights may be exercised independently or in combination from time to
time including marshalling.
5.2 MFC may direct account debtors of Drummond to make all payments owing
to Drummond on Collateral subject to the security interest directly to
MFC, by notifying such account debtors of MFC's interest, either
before or after default.
5.3 MFC shall have the right at any time to confirm the existence and
state of the Collateral in any manner MFC may consider appropriate and
Drummond agrees to furnish all assistance as MFC may reasonably
request in connection therewith. Drummond grants to MFC or its agents
access to all places where Collateral may be located and to all
premises occupied by Drummond for the purposes of inspection or
obtaining possession.
5.4 MFC may appoint by instrument or by application to a court of
competent jurisdiction a receiver or other person to act on its
behalf, before or after default, or in any insolvency or like pro-
ceeding (receiver includes a receiver-manager). The appointee has all the
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powers of MFC under this general security agreement. In addition, on
instructions from MFC, the receiver shall be entitled to carry on the
business of Drummond with all the powers Drummond would have to operate
its business, for such time as the receiver determines it advisable and
in the best interest of MFC. MFC is not liable for any act or omission
by any receiver appointed or selected by a court.
5.5 MFC may take possession or constructive possession of, collect, `
demand, sue on, enforce, recover and receive both Collateral and
proceeds and give binding receipts and discharges therefor. MFC in
possession may use Collateral as it sees fit, providing such use is
reasonable. Any income from or money that is Collateral shall be
applied to Drummond's account. Upon default, MFC may also sell, lease
or otherwise dispose of Collateral in any commercially reasonable
manner. MFC reserves the right to repair or restore Collateral prior
to sale and to add any costs incurred to the Indebtedness.
5.6 MFC may declare all or any part of the Indebtedness which is not by
its terms payable on demand to be immediately due and payable on the
occurrence of any default.
5.7 Drummond agrees to pay all charges, including solicitors', auditors',
receivers' or like persons' costs and remuneration or other expenses
reasonably incurred by MFC or other party appointed by MFC in
operating Drummond's accounts and in preparing or enforcing this
general security agreement. Such sums shall constitute a future
advance increasing the Indebtedness hereunder.
5.8 The failure of MFC to receive full payment or satisfaction of the
Indebtedness through its rights and remedies herein provided shall not
in any way release Drummond from the obligation to satisfy any
deficiency, including any costs of realization.
5.9 No variation, amendment (except for any schedules which may be added
hereto pursuant to the provisions of this general security agreement)
or waiver of any provision of this general security agreement shall be
effective unless made by written agreement executed by the parties to
this general security agreement.
5.10 No delay or omission by MFC in exercising any right or remedy
hereunder or with respect to any Indebtedness shall operate as a
waiver of that right or remedy and no single or partial exercise of
any right or remedy shall preclude any other exercise of cumulative
rights and remedies.
5.11 MFC may remedy any default or perform any duty of Drummond hereunder
or with respect to any Indebtedness in any reasonable manner without
waiving the default remedied and without waiving any other prior or
subsequent default by Drummond.
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6. GENERAL
6.1 This general security agreement shall enure to the benefit of and be
binding on the parties hereto and their respective heirs, executors,
administrators, successors and assigns.
6.2 This general security agreement and the related documents shall be
governed by the laws of the Province of British Columbia.
6.3 No action by MFC shall constitute a subordination of its general
security interest to any other interest in the Collateral unless such
subordination is effected by an agreement in writing, titled
"Subordination Agreement", signed by MFC.
6.4 This general security agreement shall remain in full force and effect
until the Collateral has been paid and written notice of discharge by
MFC is received by Drummond.
6.5 Drummond hereby acknowledges receipt of a copy of this general
security agreement.
IN WITNESS WHEREOF this general security agreement is executed and delivered
on August 30, 1999.
DRUMMOND FINANCIAL CORPORATION
By: /s/ Michael J. Smith
--------------------------------
Authorized Signatory
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SCHEDULE C
SECURITIES PLEDGE AGREEMENT
---------------------------
THIS AGREEMENT is dated for reference the 30th day of August, 1999, and is
made by DRUMMOND FINANCIAL CORPORATION of 1250 - 400 Burrard Street,
Vancouver, British Columbia, V6C 3A6 ("Drummond") in favour of MFC BANCORP
LTD. of 6 Rue Charles-Bonnet, 1206 Geneva, Switzerland ("MFC");
WHEREAS Drummond has executed a promissory note dated the 30th day of August,
1999 in favour of MFC (the "Note") in the principal amount of US $21,515,000
due July 31, 2008;
AND WHEREAS in order to secure the performance of its obligations under, in
connection with or relating to the Note, Drummond has agreed to pledge the
Securities (as hereinafter defined) to MFC;
NOW THEREFORE, this Agreement witnesses that in consideration of the
covenants and agreements herein contained, the parties hereto agree as
follows:
ARTICLE I
---------
ASSIGNMENT, PLEDGE AND HYPOTHECATION
1.1 COLLATERAL
Drummond hereby pledges to MFC all of the issued and outstanding
shares in the capital of CVD Financial Corporation (British Columbia)
and CVD Financial Corporation (Washington) and any and all accretions,
additions, accessions, substitutions and replacements thereto or
therefor (such shares, accretions, additions, accessions,
substitutions and replacements collectively hereinafter referred to as
the "Securities"), together with all money, income, proceeds and
benefits, of every nature and kind whatsoever, now or at any time
hereafter due, owing, payable or accruing on, under or in respect of
the Securities or otherwise attributable or accruing thereto,
including, without limitation, all distributions of earnings or
capital (including, without limitation, all dividends in cash and
dividends in kind, liquidating dividends, stock dividends, new
security or other properties or benefits to which Drummond is or may
hereafter become entitled to receive on account of the Securities and
all payments by way of reduction of capital) (the Securities together
with all such money, income, proceeds and benefits are collectively
hereinafter referred to as the "Collateral").
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1.2 INDEBTEDNESS SECURED
The Collateral will be held by MFC as general and continuing security
in favour of and as a fixed and specific assignment, pledge and
hypothecation unto MFC to secure performance of the obligations of
Drummond under the Note (the "Obligations").
1.3 ADDITIONAL SECURITY
If Drummond becomes entitled to receive or receives any certificate
(including, without limitation, any certificate representing a stock
dividend or a distribution in connection with any reclassification,
increase or reduction of capital), bond, note or other instrument, or
any option or right, whether as an addition to or in substitution or
exchange for, any of the Securities, Drummond will accept such
certificate, bond, note, instrument, option or right in trust for MFC
and will deliver such certificate, bond, note, instrument, option or
right forthwith to MFC in the exact form received by Drummond, with
Drummond's endorsement when necessary, to be held by MFC, subject to
the terms hereof, as general and continuing security and as a fixed
and specific assignment, pledge and hypothecation unto MFC to secure
payment of the Obligations.
1.4 AMOUNTS HELD IN TRUST
If any money, income, proceed or other benefit, of any nature or kind
whatsoever, is received by Drummond in respect of any of the
Collateral, Drummond will receive such money, income, proceed or other
benefit in trust for MFC, will segregate such money, income, proceed
or other benefit from its other property or funds and will forthwith
upon receipt thereof assign, transfer, set over and deliver the same
to MFC to be held by MFC hereunder as general and continuing security
to secure payment of the Obligations in accordance with the terms
hereof and MFC, as MFC in its uncontrolled discretion may determine,
may deal with such amounts or benefits in accordance with the
provisions hereof.
1.5 RESPONSIBILITY OF MFC
It is agreed that the responsibility of MFC in regard to the
Collateral will be limited to exercising the same degree of care which
it gives to its own valuable property.
1.6 VOTING RIGHTS PRIOR TO DEFAULT
So long as no Event of Default (as hereinafter defined) or event
which, with the giving of notice or lapse of time, or both, would
become an Event of Default has occurred and is continuing Drummond
will be entitled to vote or refrain from voting the Securities at any
meeting, whether special or general, at which the holder of the
Securities is entitled to vote and will be entitled to take part in or
consent to or refrain from taking part in or consenting to any
corporate or shareholders' action which the holder of the Securities
is entitled to take part in or consent to, provided that:
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(a) Drummond has given MFC at its address set forth above not less
than 15 days' written notice of the manner in which it intends
to exercise, or the reasons for refraining from exercising, any
such right to vote or to take part in or consent to any such
corporate or shareholders' action;
(b) the exercise of such right to vote or to take part in or
consent to any such corporate or shareholders' action would not
result in a contravention of any covenant or agreement of
Drummond to MFC hereunder or under any other agreement
evidencing or securing any of the Obligations and if so,
Drummond should not vote in such a manner; and
(c) Drummond has not received from MFC notice that, in the
judgment of MFC, the exercise of such right to vote or to take
part in or consent to any such corporate or shareholders'
action would have a material adverse effect on the value of
the Collateral or any part thereof.
1.7 VOTING RIGHTS AFTER DEFAULT
Upon the occurrence and during the continuance of any Event of Default
or event which, with the giving of notice or lapse of time, or both,
would become an Event of Default all rights of Drummond pursuant to
subsection 1.6 shall cease and MFC will be entitled (whether or not
the Securities are registered in the name of MFC or its nominee) to
vote or refrain from voting or direct Drummond or any other person as
MFC may appoint to vote or refrain from voting the Securities at any
meeting, whether special or general, at which the holder of the
Securities is entitled to vote and will be entitled to take part in or
consent to or refrain from taking part in or consenting to or direct
Drummond or any other person as MFC may appoint to take part in or
consent to or refrain from taking part in or consenting to any
corporate or shareholders' action which the holder of the Securities
is entitled to take part in or consent to and Drummond hereby
irrevocably constitutes and appoints MFC and any other person
appointed by MFC as its true and lawful attorney-in-fact and agent
for, in the name of and on behalf of Drummond, to act and vote and
otherwise exercise all powers exercisable with respect to the
Securities or to take part in or consent to any such corporate or
shareholders' action, and when so acting or refraining from acting,
neither MFC nor any person appointed by MFC will incur any liability
or responsibility of any kind whatsoever to Drummond.
1.8 ENTITLEMENT TO DIVIDENDS
MFC will be entitled to receive and retain any dividends or
distributions paid in respect of the Securities and any such dividends
or distributions shall be held as Collateral hereunder.
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ARTICLE II
----------
WARRANTIES AND COVENANTS OF DRUMMOND
2.1 WARRANTIES AND COVENANTS
Drummond hereby warrants, covenants and agrees with MFC that:
(a) the Securities have been duly authorized and validly issued and
are outstanding as fully paid and non-assessable and were
issued in compliance with all applicable corporate and
securities laws;
(b) Drummond authorizes MFC to file, in jurisdictions where this
authorization will be given effect, a financing statement or
other statement disclosing the security interest created
herein signed only by MFC covering the Collateral; and, at the
request of MFC, Drummond will join MFC in executing one or
more financing or other such statements, in form satisfactory
to MFC, and will pay the cost of filing the same or filing or
recording this Agreement in all public offices wherever filing
or recording is deemed by MFC to be necessary or desirable, it
being further stipulated in this regard that MFC may also at
any time or times sign any counterpart of this Agreement
signed by Drummond and file same as a financing statement if
MFC shall elect to do so;
(c) Drummond will not sell, assign, transfer or otherwise dispose
of the Collateral or any interest therein or agree to sell,
assign, transfer or otherwise dispose of the Collateral or any
interest therein without the prior written consent of MFC;
(d) Drummond will not create, incur or permit to exist any adverse
claim, mortgage, assignment, pledge, hypothecation, lien,
charge or other encumbrance or security interest whatsoever
with respect to any of the Collateral (other than pursuant to
this agreement) without the prior written consent of MFC; and
(e) Drummond will pay to MFC on demand all expenses and
expenditures, including, without limitation, legal fees and
disbursements, incurred or paid by MFC in connection with
confirming, perfecting and preserving of the assignment, pledge
and hypothecation constituted hereby, in connection with
protecting MFC against the claims or interests of any third
person against the Collateral and in connection with the
exercise by MFC of any right, power or remedy conferred by this
agreement or by law.
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ARTICLE III
-----------
GENERAL COVENANTS
3.1 CONTINUING SECURITY
This shall be a continuing agreement and the Collateral is in addition
to and not in substitution for any other security held now or
hereafter by MFC and shall not operate as a merger of any simple
contract debt or suspend the fulfillment of, or affect the rights,
remedies and powers of MFC in respect of the Obligations or the
Collateral and this Agreement and the assignment, pledge and
hypothecation constituted hereby shall continue in full force and
effect in accordance with the terms hereof until all of the
Obligations have been fully paid and satisfied by Drummond and
discharged by MFC. All claims, present and future, of Drummond
against any person liable upon or for payment of any of the Securities
are hereby assigned to MFC.
3.2 FUTURE SECURITIES
Any and all securities and other properties heretofore, now or
hereafter delivered by Drummond to MFC, or in MFC's possession, shall
also secure payment of the Obligations and shall be held and construed
to be a part of the Collateral hereunder to the same extent as fully
described herein.
3.3 APPOINTMENT AS ATTORNEY
Drummond hereby irrevocably constitutes and appoints MFC and any other
person appointed by MFC as its true and lawful attorney-in-fact and
agent for, in the name of and on behalf of Drummond, to execute and
deliver, and to receive delivery of, all such assignments, transfers,
deeds, assurances and instruments as may be necessary to transfer all
or any of the Collateral (including, without limitation, to fill in
all blanks in any transfers of stocks or any powers of attorney or
other documents delivered to MFC) and when so acting neither MFC nor
any person appointed by MFC will incur any liability or responsibility
of any kind whatsoever to Drummond.
3.4 RECORDS OF MFC
The records of MFC as to the occurrence of any Event of Default (as
hereinafter defined), as to the obligations secured hereby or as to
any demand having been made on Drummond will be prima facie evidence
of such default, obligation or demand.
3.5 NO OBLIGATION TO COLLECT
MFC will not be bound or obliged, at any time or under any
circumstances, to collect or see to the payment of any interest,
dividends or other income of, on or from any of the Collateral, or to
sell, transfer or otherwise realize upon any of the Collateral and MFC
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will not be responsible for any loss occasioned by any sale of any of
the Collateral or by the retention of or refusal to sell the same.
3.6 NO OBLIGATION TO RELEASE
If any payment on account of the Obligations is made MFC will not by
reason thereof be required to surrender any of the Collateral;
provided that MFC will, at the request of Drummond, surrender the
Collateral to Drummond upon the earlier of the date on which:
(a) all indebtedness and liability of Drummond under the Note has
been fully paid and satisfied and MFC has been released from
all of its obligations to make any further advances to
Drummond; and
(b) MFC has released Drummond from the Obligations.
ARTICLE IV
----------
EVENTS OF DEFAULT
4.1 EVENTS OF DEFAULT
Drummond shall be in default under this Agreement upon the occurrence
of any of the following events or conditions (each an "Event of
Default"):
(a) default in the payment or performance of any liability or
obligation of Drummond or of any maker, endorser or guarantor
of any liability or obligation of Drummond to MFC, including,
without limitation, default in connection with the Obligations
when due;
(b) default in the performance of any covenant or agreement of
Drummond to MFC, whether under this Agreement or any other
agreement evidencing or securing any of the Obligations or
otherwise;
(c) any representation or warranty by Drummond herein or in any
other agreement or instrument of which MFC has the benefit, or
any certificate of Drummond or any shareholder, director or
officer of Drummond delivered in connection herewith or
pursuant hereto, being or becoming untrue or incorrect in whole
or in part and the same not being remedied within 10 days after
written notice thereof is given to Drummond;
(d) the levy of any attachment, execution, or other process against
Drummond or any of the Collateral;
(e) the dissolution, termination of existence, insolvency or
business failure of Drummond or any endorser, guarantor or
surety of any of the Obligations, or the
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commission of an act of bankruptcy by, or by the appointment of
receiver or other legal representative for any part of the
property of, assignment for the benefit of creditors by, or the
commencement of any proceedings under any bankruptcy or
insolvency law by or against, Drummond or any endorser,
guarantor or surety for any of the Obligations;
(f) the occurrence of any event which under the terms of any
evidence of indebtedness, indenture, loan agreement, security
agreement or similar instrument permits the acceleration of
maturity of any indebtedness of Drummond to MFC;
(g) the receipt by MFC of notification that another person has or
expects to acquire a security interest in the Collateral or any
part thereof; or
(h) a change in the beneficial ownership or control of Drummond or
the entering into of any agreement pursuant to which a right,
agreement or option, present or future, contingent or absolute,
or any right capable of becoming a right, agreement or option:
(i) to require Drummond to issue any further or other
shares or securities in its capital or to convert any
securities of Drummond into voting shares in its
capital; or
(ii) to purchase or otherwise acquire any shares in the
capital of Drummond from Drummond or the Borrower.
ARTICLE V
---------
POWERS AND REMEDIES
5.1 SALE
Upon the occurrence of an Event of Default and at any time thereafter,
at the option of MFC, the Obligations shall become immediately due and
payable without presentment or demand or any notice to Drummond or any
other person obligated thereon and MFC shall have and may exercise
with reference to the Collateral and the Obligations any and all of
the rights and remedies of MFC under this Agreement and such other
rights and remedies as are provided by law or by equity or by statute,
including, without limitation, the right and power to sell on any
recognized exchange dealing in such securities or by public or private
sale or sales, or otherwise dispose of or utilize, the Collateral and
any part or parts thereof as fully and effectually as if MFC were the
absolute owner thereof, and to apply the proceeds thereof toward
payment of any costs and expenses (including, without limitation,
legal fees and disbursements) thereby incurred by MFC and toward
payment of the Obligations, in such order, manner and priority as MFC
in its uncontrolled discretion may see fit. To the extent permitted
by law, Drummond expressly waives any notice of sale or other
disposition of the Collateral and any other rights or remedies of
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Drummond or formalities prescribed by law or by equity or by statute
relative to the sale or other disposition of the Collateral or
exercise of any other right or remedy of MFC; and to the extent any
such notice is required and cannot be waived, Drummond agrees that if
such notice is mailed, postage prepaid, to Drummond at the address
shown above at least five days before the time of the sale or
disposition, such notice shall be deemed reasonable and shall fully
satisfy any requirement for giving of said notice. Drummond expressly
acknowledges and agrees that at any sale or realization of the
Securities under this section, MFC may purchase the Securities or any
part thereof, free from any right of redemption on the part of
Drummond or anyone claiming through Drummond, which right is, to the
extent permitted by law, hereby waived and released.
5.2 TRANSFER OF SECURITIES
MFC is hereby granted the right, at its option, either before or after
the occurrence of an Event of Default, to transfer at any time to
itself or its nominee the Securities or any part thereof and to have
the Securities or any part thereof registered in its name or in the
name of its nominee.
5.3 RIGHT TO EXERCISE OPTION
Upon the occurrence and during the continuance of any Event of Default
or event which, with the giving of notice or lapse of time, or both,
would become an Event of Default, MFC will have the right but will not
be bound nor required to exercise any option or right which the holder
of any of the Collateral may at any time have, and any and all costs,
charges, expenses, fees, outlays and premiums incurred by MFC in
connection with the exercise of any such option or right will be added
to and form part of the Obligations and be secured hereby.
5.4 COMPROMISE AND RELEASE
MFC will not be obliged to exhaust its recourse against Drummond or
any other person or against any other security or securities which it
may hold before realizing on or otherwise dealing with the Collateral,
and MFC may grant time, renewals, extensions, indulgences, releases
and discharges to, may take securities from and give the same and any
and all securities up to, may abstain from taking securities from, or
from perfecting securities of, may accept compositions from, and may
otherwise deal with, Drummond and all other persons as MFC may see
fit, without prejudice to the right of MFC to hold, deal with, sell,
transfer and otherwise realize on the Securities in accordance with
the terms of this Agreement.
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5.5 COOPERATION WITH LENDER
Drummond hereby agrees to cooperate fully with MFC in order to permit
MFC to sell, transfer or otherwise realize on the Collateral in
accordance with the terms hereof. Specifically, Drummond agrees to
fully comply with the securities laws of the Province of British
Columbia and any other province having jurisdiction, and the rules,
bylaws and regulations of any stock exchange on which the Securities
may be traded, and to take such action as may be necessary to permit
MFC to sell, transfer or otherwise realize on the Securities in
compliance with such laws.
5.6 APPLICATION OF COLLATERAL
MFC may, at its option, hold any and all proceeds, payments, monies,
income or benefits attributable or accruing to the Collateral which is
received by MFC as security for the Obligations, or, apply any or all
of such proceeds, payments, monies, income or benefits to the
Obligations, whether or not then due, in such order manner or priority
as MFC may, in its uncontrolled discretion, determine.
ARTICLE VI
----------
MISCELLANEOUS
6.1 FURTHER ASSURANCES
At the request of MFC Drummond will, at its own expense, execute all
such transfers, stock powers, proxies and other documents as may be
required by MFC, with all such powers of sale and other necessary
powers as may be expedient for vesting in MFC or such person or person
as MFC may appoint, the Securities and to otherwise carry into effect
the intent and purposes of this Agreement.
6.2 NO REVOCATION
The appointment and power of attorney contained in sections 1.7 and
3.3, respectively, will be deemed to be coupled with an interest and
will not be revoked by the bankruptcy, insolvency, winding-up,
liquidation or dissolution of Drummond and Drummond hereby ratifies
and confirms and agrees to ratify and confirm all that MFC or any
person appointed by MFC, as attorney-in-fact and agent for, in the
name of and on behalf of Drummond, may lawfully do or cause to be done
by virtue of sections 1.7 and 3.3, respectively.
6.3 WAIVER
No delay or omission on the part of MFC in exercising any rights
hereunder shall operate as a waiver of any such right or any other
right. A waiver on any one or more occasions shall not be construed
as a bar to or waiver of any right or remedy on any future occasion.
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6.4 SEIZURE OF COLLATERAL
Upon the occurrence of an Event of Default MFC shall have the absolute
and unconditional right, without prior notice or any prior hearing of
any kind whatsoever, to seize and take possession of the Collateral,
and Drummond does hereby expressly waive any right to any prior notice
or any prior hearing prior to seizure and taking possession of the
Collateral by MFC.
6.5 SUCCESSORS AND ASSIGNS
This Agreement shall be binding on Drummond, and its successors and
assigns, and shall enure to the benefit of MFC, and its successors and
assigns.
6.6 RIGHTS CUMULATIVE
The rights and remedies of MFC hereunder are cumulative and the
exercise of any one or more of the remedies provided herein shall not
be construed as a waiver of any of the other remedies of MFC.
6.7 SEVERABILITY
If any provision of this Agreement shall be found or determined to be
invalid, illegal or unenforceable it shall be severable from this
Agreement and the remainder of this Agreement shall be read and
construed as if such invalid, illegal or unenforceable provision or
part had been deleted herefrom.
6.8 APPLICABLE LAW
This Agreement and the rights and obligations of the parties hereunder
shall be governed and construed according to the laws of the Province
of British Columbia.
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6.9 OWNERSHIP CERTIFICATES
In connection with the Securities MFC is hereby authorized to sign on
behalf of and as agent for Drummond such income tax ownership
certificates as may be required.
EXECUTED as of the 30th day of August, 1999.
SIGNED, SEALED and DELIVERED by )
DRUMMOND FINANCIAL )
CORPORATION in the presence of: ) By:
)
- -------------------------------- ) /s/ Michael J. Smith
Witness ) ------------------------------
- -------------------------------- ) Authorized Signatory
Address )
- -------------------------------- )
) ------------------------------
- -------------------------------- ) Authorized Signatory
Occupation
C-11
SUBSIDIARIES OF DRUMMOND FINANCIAL CORPORATION
Shareholding
Jurisdiction at June 30, 1999
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>
ARTICLE 5 Financial Data Schedule for the Year Ended June 30, 1999 Form 10-K405
This Schedule contains summary financial information extracted from the
consolidated financial statements and notes included in this Form 10-K405 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> JUN-30-1999
<CASH> 4,280
<SECURITIES> 12,172
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,999
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
30
<COMMON> 27
<OTHER-SE> 3,214
<TOTAL-LIABILITY-AND-EQUITY> 25,999
<SALES> 0
<TOTAL-REVENUES> 2,297
<CGS> 0
<TOTAL-COSTS> 1,960
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (1,139)
<INTEREST-EXPENSE> 2,029
<INCOME-PRETAX> 337
<INCOME-TAX> 1
<INCOME-CONTINUING> 336
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 336
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
