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 internationally, engaging primarily in 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.
During fiscal 1999, the Corporation collected $1.1 million from a defaulting borrower and fully settled its loan portfolio. As at and from June 30, 1999, the Corporation had no loan commitments or finance receivables.
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
The Corporation competes against investment banks, merchant banks and other investment managers for appropriate investments. This business is highly competitive and is subject to fluctuations based upon many factors over which the Corporation has no control, such as the condition of public markets, interest rates and the state of capital markets. Many of the Corporation's competitors are national or international companies with far greater resources, capital and access to information than the Corporation. As a result, the Corporation may become involved in transactions with more risk than if it had greater resources.
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, 2000, the Corporation had one employee.
ITEM 2.
ITEM 2. PROPERTIES
The Corporation's corporate and administrative office is located in Geneva, Switzerland and is leased.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
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 (now known as the Canadian Venture 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:
(b) Shareholders. As of September 25, 2000, there were approximately 36 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.
ITEM 6.
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, 2000. 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.
ITEM 7.
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, 2000 should be read in conjunction with the consolidated financial statements and related notes included elsewhere herein.
Results of Operations
Year Ended June 30, 2000 Compared to the Year Ended June 30, 1999
Revenues for the year ended June 30, 2000 increased to $2.7 million from $2.3 million for the year ended June 30, 1999, primarily as a result of a net gain on sales of investments. Revenues from interest and loan fees increased slightly to $1.1 million for the year ended June 30, 2000 from $1.0 million for the year ended June 30, 1999. Revenues from dividends and other activities were $0.3 million in the years ended June 30, 2000 and 1999.
Costs and expenses for the year ended June 30, 2000 increased to $2.5 million from $2.0 million for the year ended June 30, 1999, primarily as a result of lower costs in 1999 resulting from recovery of credit loss in the year. General and administrative expenses increased slightly to $1.2 million for the year ended June 30, 2000 from $1.1 million for the year ended June 30, 1999.
Interest expense decreased to $1.3 million for the year ended June 30, 2000 from $2.0 million for the year ended June 30, 1999, primarily as a result of a reduction in the interest rate on indebtedness. Interest on the Corporation's long-term debt was accrued at the rate of approximately 5.65% per annum for the year ended June 30, 2000, compared to approximately 8.63% per annum for the year ended June 30, 1999.
No income tax provision was recognized for the years ended June 30, 2000 and 1999, 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, 2000 was $0.1 million, or $0.07 loss per common share, compared to a net income of $0.3 million, or $0.01 per common share, for the year ended June 30, 1999.
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.
Liquidity and Capital Resources
The Corporation's cash and cash equivalents at June 30, 2000 were $6.2 million, an increase of $2.0 million from June 30, 1999.
Cash provided by operating activities for the year ended June 30, 2000 was $4.3 million, compared to $1.4 million used in the year ended June 30, 1999. Cash used by operating activities before activities in trading securities was $0.8 million in the year ended June 30, 2000, compared to $5.4 million in the year ended June 30, 1999. A decrease in accounts payable and accrued liabilities used cash of $81,000 in the year ended June 30, 2000, compared to $0.6 million in the year ended June 30, 1999. An increase in receivables used cash of $0.7 million in the year ended June 30, 2000, compared to $0.4 million in the year ended June 30, 1999. Repayment of a loan from an affiliate provided cash of $0.9 million in the year ended June 30, 2000. Net sales of trading securities provided cash of $5.0 million in the year ended June 30, 2000, compared to $4.1 million in the year ended June 30, 1999.
Investing activities for the year ended June 30, 2000 used cash of $2.1 million, compared to $4.8 million provided for the year ended June 30, 1999. Collections on loan receivables provided cash of $1.1 million in the year ended June 30, 1999. No new loans were made since June 30, 1999. In the year ended June 30, 2000, a net increase in notes receivable used cash of $2.1 million, compared to a net decrease in same providing cash of $3.6 million in the year ended June 30, 1999.
Financing activities for the year ended June 30, 2000 used cash of $0.3 million, as a result of the payment of dividends on preferred shares. For the year ended June 30, 1999, financing activities used cash of $2.8 million, primarily as a result of partial repayment of an outstanding loan.
During the year ended June 30, 2000, the Corporation entered into a debt restructuring agreement with MFC Bancorp Ltd. whereby interest on a 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.
Finance Receivables
The Corporation fully settled its loan portfolio during fiscal 1999 and since then it has had no loan commitments or finance receivables (principal plus interest and reimbursable costs less unamortized commitment fees).
Year 2000
The Corporation did not experience any difficulties associated with the changeover to the year 2000. While management of the Corporation believes that it took adequate steps to address the year 2000 issue, and are not aware of any difficulties experienced by the Corporation's clients associated with the changeover to the year 2000, there can be no assurance that difficulties associated with the year 2000 may not arise in the future.
ITEM 7A.
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, 2000 and 1999 and expected cash flows from these instruments:
Year ended June 30, 2000
Year ended June 30, 1999
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:
Year ended June 30, 2000
Year ended June 30, 1999
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
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.
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.
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.
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.
PART IV
ITEM 14.
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.
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. Incorporated by reference to Form 10-K dated September 24, 1999. 21 List of subsidiaries of the Registrant. 27 Article 5 - Financial Data Schedule for year ended June 30, 2000 - Form 10-K.
(b) Reports on Form 8-K
None.
DRUMMOND FINANCIAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Drummond Financial Corporation
We have audited the consolidated balance sheets of Drummond Financial Corporation as at June 30, 2000 and 1999 and the related consolidated statements of operations, cash flows and shareholders' equity for the years ended June 30, 2000, 1999 and 1998. 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 about 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 audits provide 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, 2000 and 1999 and the results of its operations and cash flows for the years ended June 30, 2000, 1999 and 1998 in accordance with generally accepted accounting principles in the United States of America.
Davidson & Company Vancouver, Canada Chartered Accountants
September 18, 2000
DRUMMOND FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars stated in thousands) AS AT JUNE 30
The accompanying notes are an integral part of these consolidated financial statements.
DRUMMOND FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars stated in thousands; except per share amounts) YEAR ENDED JUNE 30
The accompanying notes are an integral part of these consolidated financial statements.
DRUMMOND FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars stated in thousands) YEAR ENDED JUNE 30
The accompanying notes are an integral part of these consolidated financial statements.
DRUMMOND FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Dollars stated in thousands) YEAR ENDED JUNE 30
Supplemental disclosure with respect to non-cash investing and financing activities (Note 15)
The accompanying notes are an integral part of these consolidated financial statements.
22>
DRUMMOND FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Dollars stated in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2000
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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. Occasionally, 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 value, unless otherwise noted.
DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2000
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3. SIGNIFICANT ACCOUNTING POLICIES (continued.....)
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 underwriter's 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.
DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2000
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3. SIGNIFICANT ACCOUNTING POLICIES (continued.....)
Revenue recognition
Revenue consists principally of interest income from finance receivables, other 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 revenue, 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 because their exercise prices was greater than their market prices. There were no warrants nor options outstanding in the fiscal years 2000 and 1999.
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, 2000, 1999 and 1998.
Comparative figures
Certain comparative figures have been reclassified to conform with the current year's presentation.
DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2000
========================================================================== 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 plus two to seven percent. The Company did not have any finance receivables outstanding as at June 30, 2000 and 1999.
The Company has established allowances for credit losses at June 30, 1999 and 1998 as follows:
At June 30, 2000 and 1999, the Company does not have any unfunded loan commitments.
5. OTHER RECEIVABLES
The carrying amount of the receivables approximates their fair value which is based on the discounted present value of their estimated future cash flows.
6.	INVESTMENTS
DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2000
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6. INVESTMENTS (continued...)
For the year ended June 30, 2000, the Company recognized an unrealized holding loss of $40,000 (1999 - $272,000 gain; 1998 - $186,000 loss) and a realized loss of $846,000 (1999 - $732,000 gain; 1998 - $321,000 loss) 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, 2000 and 1999 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. During 2000, 779,435 shares of Ichor Corporation were sold for an accounting gain of $2,158,000.
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 issue 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.
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 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.
During the year ended June 30, 1998, $1,487,000 in aggregate principal amount of Bonds were repurchased, resulting in an extraordinary gain of $485,000. No repurchase had occurred in fiscal years 1999 and 2000.
In February 1998, MFC Bancorp Ltd. owned all of the Bonds, which had a face value of $21,515,000, as approved by a court order.
DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2000
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8. DEBT (cont'd...)
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 was to pay interest at 8.75% per annum payable semi-annually on January 25 and July 25 of each year and matures on July 31, 2008. In August 1999, The Company entered into a debt restructuring agreement with MFC Bancorp Ltd., pursuant to which the rate of interest is reduced to 5% per annum and the debt is secured by fixed liens upon the assets of the Company. The promissory note had a fair value of approximately $21,515,000 as of June 30, 2000 and 1999.
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% (1999 - 49.4%) of the Company's Common Stock and 100% (1999 - 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.
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:
DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2000
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10. STOCK OPTION PLAN (continued)
At June 30, 2000, 1999 and 1998 options to purchase 375,000 shares of the Company's Common Stock are available for future grant. There were no options granted in either 2000, 1999 or 1998.
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, 2000, 1999 and 1998 (other than the payment of state minimum income tax of $1,000 each in 2000, 1999 and 1998).
Differences between the United States federal statutory and the Company's effective tax rates are as follows:
The net deferred tax assets at June 30, 2000 and 1999 consist of the following:
At June 30, 2000, 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.
DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2000
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13. RELATED PARTY TRANSACTIONS
During the year ended June 30, 2000, the Company incurred $300,000 (1999 - - $300,000; 1998 - $300,000) in fees payable to MFC Bancorp Ltd. and $300,000 (1999 - $300,000; 1998 - $300,000) to Logan International Corp., both of which have 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 (1999 - $Nil; 1998 - $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 2000, the Company paid $300,000 (1999 - $300,000; 1998 - - $300,000) of dividends on its preferred shares held by a subsidiary of MFC Bancorp Ltd. The Company also collected $300,000 (1999 - $300,000; 1998 - $300,000) of dividends on its investments in preferred shares issued by another subsidiary of MFC Bancorp Ltd. The Company has an amount of $Nil (1999 - $780,000; 1998 - $780,000) due from Ichor Corporation. The Company also has an amount of $Nil (1999 - $2,300,000; 1998 - $Nil) due from a company which had a common director with the Company and the Company accrued $Nil (1999 - $82,000; 1998 - $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, Gibralt Holdings Ltd. ("Gibralt") commenced proceedings in Delaware Chancery Court seeking access to certain records of the Company 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 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. 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, 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.
15. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CONSOLIDATED STATEMENT OF CASH FLOWS
Significant non-cash transactions in 2000 include:
a) The Company received securities with fair value of $972,060 as settlement of an amount due from Ichor Corporation plus related accrued interest.
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.
DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2000
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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:
(a) Investments
U.S. GAAP require that trading securities be carried at fair market value with holding gains and losses included in the net income or loss. 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, 2000, 1999 and 1998.
(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.
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 25, 2000 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 25, 2000 - -------------------- Michael J. Smith President, Chief Executive Officer, Chief Financial Officer and Director
/s/ Young-Soo Ko Date: September 25, 2000 - -------------------- Young-Soo Ko Director
/s/ Oq-Hyun Chin Date: September 25, 2000 - -------------------- Oq-Hyun Chin Director
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. Incorporated by reference to Form 10-K dated September 24, 1999. 21 List of subsidiaries of the Registrant. 27 Article 5 - Financial Data Schedule for year ended June 30, 2000 - Form 10-K.