10-K 1 a2091896z10-k.txt FORM 10-K ================================================================================ 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, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ COMMISSION FILE NUMBER 001-12212 DRUMMOND FINANCIAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) WASHINGTON 95-4426690 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) FLOOR 21, MILLENNIUM TOWER, HANDELSKAI 94-96, A-1200 VIENNA, AUSTRIA (ADDRESS OF OFFICE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (43) 1 24025 102 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 --- --- 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 $1,000,516 as of October 11, 2002, computed on the basis of the closing price on such date. The number of shares outstanding of the Registrant's Common Stock as of October 23, 2002 was 2,718,600. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2002 Proxy Statement to be filed within 120 days of the fiscal year ended June 30, 2002 are incorporated by reference into Part III. ================================================================================ 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. 2 TABLE OF CONTENTS

3 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 July 2001, the Corporation changed its domicile from the State of Delaware to the State of Washington. 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. In prior years, the Corporation was primarily engaged in asset-based commercial lending, which primarily involved the administration and realization of an existing loan portfolio comprised of loans to emerging companies, which portfolio was fully settled during fiscal 1999. 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 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, 2002, the Corporation had one employee. 4 ITEM 2. PROPERTIES The Corporation's administrative office is located in Vienna, Austria and is leased. ITEM 3. LEGAL PROCEEDINGS In September 1999, Gibralt Holdings Ltd. ("Gibralt") commenced a putative derivative action in Delaware Chancery Court (the "Court") naming Drummond Financial Corporation (the "Corporation"), certain of its directors and officers and others as defendants. The action was filed in the form of a class action on behalf of shareholders, but did not receive Court certification as such at the time. The action was subsequently amended to substitute certain individual plaintiffs (the "Individual Plaintiffs") in place of Gibralt and amend the action to withdraw certain claims dismissed by the Court and clarify other claims. The Corporation and other defendants believe the claims to be entirely without merit and have vigorously defended against the action. On July 25, 2002, the parties entered into a Stipulation and Agreement of Compromise, Settlement and Release in connection with the proposed settlement (the "Settlement") of the action. The Settlement is subject to final Court approval. If such approval is obtained, the Corporation will make an offer to purchase all of the outstanding shares of the Corporation's common stock not owned by the defendants and/or their associates and affiliates at a price of $1.25 per share. The Settlement will release any or all claims of the plaintiffs and derivative claims against the defendants, their affiliates, successors, heirs and assigns and any past or present officers and directors of the Corporation that were or could have been brought in the action, and to the maximum extent permitted under law, any claims that could have been brought under federal or state laws. The Settlement also releases any and all claims by the defendants against the Individual Plaintiffs that either could have been brought in the action or that in any way arise out of the action or the Individual Plaintiffs' conduct of the action. The action will be temporarily maintained as a class action, for the purposes of the Settlement only, and will not be an admission or concession on the part of any person of any liability or wrongdoing by them. The settlement also provides that plaintiff's counsel is to receive $125,000 for attorney's fees and expenses in connection with the action. For further information with respect to the Settlement, see the Corporation's Form 8-K filed July 26, 2002 with the U.S. Securities and Exchange Commission. The Corporation is subject to claims and matters of litigation arising in the ordinary course of its business. 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. 5 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 (now known as the TSX 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 "DFCUE". 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. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

(b) SHAREHOLDERS. As of October 22, 2002, there were approximately 40 holders of record of the Corporation's common stock. (c) DIVIDENDS. The Corporation has not paid any dividends on its common stock and does not contemplate the payment of such dividends. 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, 2002. The information in the table was extracted from the more detailed consolidated financial statements and related notes included in this annual report and should be read in conjunction with such financial statements and related notes.

--------------- (1) Basic and diluted common share data is the same. (2) Including preferred stock of face value $6,000,000. 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 fiscal years ended June 30, 2002, 2001 and 2000 should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this annual report. RESULTS OF OPERATIONS YEAR ENDED JUNE 30, 2002 COMPARED TO THE YEAR ENDED JUNE 30, 2001 Revenues for the year ended June 30, 2002 increased to $2.0 million from $0.9 million for the year ended June 30, 2001, primarily as a result of a net gain on investments. Interest income decreased to $0.6 million for the year ended June 30, 2002 from $0.9 million for the year ended June 30, 2001. Revenues from dividends decreased to $0.3 million for the year ended June 30, 2002 from $0.4 million for the year ended June 30, 2001. Costs and expenses for the year ended June 30, 2002 decreased to $1.6 million from $2.1 million for the year ended June 30, 2001, primarily as a result of lower interest and general and administrative expenses. General and administrative expenses decreased to $0.6 million for the year ended June 30, 2002 from $0.9 million for the year ended June 30, 2001. Interest expense decreased to $1.0 million for the year ended June 30, 2002 from $1.2 million for the year ended June 30, 2001 as a result of a reduction in debt during the current period. No income tax provision was recognized for the years ended June 30, 2002 and 2001, respectively, except for the payment of a minimum tax of $1,000 in the year ended June 30, 2001. 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. In the year ended June 30, 2002, the Corporation recognized a gain, net of tax, of $2.4 million (or $0.87 per share) as a result of the settlement of a portion of its outstanding debt during the current period. The Corporation had net income of $2.8 million, or $0.91 per common share, for the year ended June 30, 2002, compared to a net loss of $1.3 million, or $0.58 per common share, for the year ended June 30, 2001. YEAR ENDED JUNE 30, 2001 COMPARED TO THE YEAR ENDED JUNE 30, 2000 Revenues for the year ended June 30, 2001 decreased to $0.9 million from $2.7 million for the year ended June 30, 2000, primarily as a result of a net loss on investments. Interest income decreased to $0.9 million for the year ended June 30, 2001 from $1.1 million for the year ended June 30, 2000. Revenues from dividends and other activities increased to $0.4 million for the year ended June 30, 2001 from $0.3 million for the year ended June 30, 2000. 8 Costs and expenses for the year ended June 30, 2001 decreased to $2.1 million from $2.5 million for the year ended June 30, 2000, primarily as a result of lower interest and general and administrative expenses. General and administrative expenses decreased to $0.9 million for the year ended June 30, 2001 from $1.2 million for the year ended June 30, 2000. Interest expense decreased to $1.2 million for the year ended June 30, 2001 from $1.3 million for the year ended June 30, 2000. No income tax provision was recognized for the years ended June 30, 2001 and 2000, 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 loss for the year ended June 30, 2001 was $1.3 million, or $0.58 per common share, compared to a net income of $0.1 million, or $0.07 loss per common share, for the year ended June 30, 2000. LIQUIDITY AND CAPITAL RESOURCES The Corporation's cash and cash equivalents at June 30, 2002 were $0.7 million, a decrease of $5.1 million from June 30, 2001. Cash provided by operating activities for the year ended June 30, 2002 was $1.7 million, compared to cash used by operating activities of $0.9 million for the year ended June 30, 2001. Cash used by operating activities before activities in trading securities was $30,000 in the year ended June 30, 2002, compared to $0.2 million in the year ended June 30, 2001. A decrease in accounts payable and accrued liabilities used cash of $0.2 million in the year ended June 30, 2002, compared to an increase in same providing cash of $0.2 million in the year ended June 30, 2001. A decrease in receivables provided cash of $0.7 million in the year ended June 30, 2002, compared to $0.9 million in the comparable period of 2001. Net sales of trading securities provided cash of $1.8 million in the year ended June 30, 2002, compared to net purchases of trading securities using cash of $0.6 million in the year ended June 30, 2001. Investing activities for the year ended June 30, 2002 provided cash of $0.4 million, compared to $0.6 million for the year ended June 30, 2001. In the year ended June 30, 2002, a net increase in notes receivable used cash of $0.7 million, compared to a net decrease in same providing cash of $6.5 million in the year ended June 30, 2001. Net sales of long-term investments provided cash of $1.1 million for the year ended June 30, 2002. Financing activities for the year ended June 30, 2002 used cash of $7.2 million, primarily as a result of the repayment of debt during the current period. The payment of dividends on preferred shares used cash of $0.3 million in each of the years ended June 30, 2002 and 2001. 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. 9 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, notes 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, 2002 and 2001 and expected cash flows from these instruments: AS AT JUNE 30, 2002

---------- (1) Investments consist of debt securities and fixed yield securities. (2) Debt obligations consist of a promissory note bearing interest at 5.00% per annum and maturing on July 31, 2008. (3) Including interest and dividends. Current investments are assumed to be sold in year 1 and long-term investment in perpetual preferred shares in year 6. 10 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: AS AT JUNE 30, 2002

---------- (1) Investments consist of equity securities. AS AT JUNE 30, 2001

---------- (1) Investments consist of equity securities. 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 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 11 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. ITEM 14. CONTROLS AND PROCEDURES Not applicable. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Index to Financial Statements Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Cash Flows Consolidated Statement of Shareholders' Equity Notes to the Consolidated Financial Statements 12 (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. 2.3 Plan and Agreement of Merger between Drummond Financial Corporation and Drummond Merger Corporation dated June 18, 2001. Incorporated by reference to Information Statement on Form DEF14C of Drummond Financial Corporation filed July 11, 2001. 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 Articles of Incorporation dated June 13, 2001. Incorporated by reference to Form 10-K dated May 14, 2002. 3.5 Bylaws. Incorporated by reference to Form S-1 filed June 7, 1993. 3.6 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. 3.7 Bylaws dated June 18, 2001. Incorporated by reference to Form 10-Q dated May 14, 2002. 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. 10.4 Stipulation and Agreement of Compromise, Settlement and Release dated July 25, 2002. 21 List of subsidiaries of the Registrant. 99 Certification of Periodic Report. (b) Reports on Form 8-K Form 8-K filed July 26, 2002. Item 5 - Other Events 13 DRUMMOND FINANCIAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 14 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, 2002 and 2001 and the related consolidated statements of operations, cash flows and shareholders' equity for the years ended June 30, 2002, 2001 and 2000. 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, 2002 and 2001 and the results of its operations and cash flows for the years ended June 30, 2002, 2001 and 2000 in conformity with generally accepted accounting principles in the United States of America. /s/ Davidson & Company Vancouver, Canada Chartered Accountants October 11, 2002 15 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. 16 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. 17 DRUMMOND FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars stated in thousands) YEAR ENDED JUNE 30

- CONTINUED - The accompanying notes are an integral part of these consolidated financial statements. 18 DRUMMOND FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars stated in thousands) YEAR ENDED JUNE 30

SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS (Note 15) The accompanying notes are an integral part of these consolidated financial statements. 19 DRUMMOND FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Dollars stated in thousands)

The accompanying notes are an integral part of these consolidated financial statements. 20 DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2002 =============================================================================== 1. NATURE OF OPERATIONS Drummond Financial Corporation (the "Company"), a Washington 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 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 USE OF ESTIMATES 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. 21 DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2002 =============================================================================== 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. 22 DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2002 =============================================================================== 3. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) 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 (LOSS) PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share". Under SFAS 128, basic and diluted earnings per share are to be presented. 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. FOREIGN CURRENCY The monetary assets and liabilities of the Company that are denominated in foreign currencies are translated at the rate of exchange at the balance sheet date and non-monetary items are translated at historical rates. Revenues and expenses are translated at the average exchange rate for the year. Exchange gains and losses arising on translation are included in the statement of operations. 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. 23 DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2002 =============================================================================== 3. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) 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 has other comprehensive income of $127,000, $391,000 loss and $Nil during the years ended June 30, 2002, 2001 and 2000, respectively, representing the unrealized holding gain or loss on available-for-sale securities. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all future business combinations and specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives, and reviewed for impairment in accordance with SFAS No. 121. The Company has adopted the provisions of SFAS 141 and SFAS 142 as of July 1, 2001. In July 2001, the FASB issued Statements of Financial Accounting Standards No. 143 ("SFAS 143") "Accounting for Asset Retirement Obligations" that records the fair value of the liability for closure and removal costs associated with the legal obligations upon retirement or removal of any tangible long-lived assets. The initial recognition of the liability will be capitalized as part of the asset cost and depreciated over its estimated useful life. SFAS 143 is required to be adopted effective January 1, 2003. In August 2001, the FASB issued Statements of Financial Accounting Standards No. 144 ("SFAS 144") "Accounting for the Impairment or Disposal of Long-Lived Assets" that supersedes Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 is required to be adopted for fiscal years beginning after December 15, 2001. In April 2002, FASB issued Statements of Financial Accounting No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect and eliminates an inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Generally SFAS 145 is effective for transactions occurring after May 15, 2002. In June 2002, the FASB issued Statements of Financial Accounting Standards No. 146 ("SFAS 146") "Accounting for Costs Associated with Exit or Disposal Activities" that nullifies Emerging Issues Task Force Issue No. 94-3 ("EITF Issue 94-3") "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)". SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereby EITF Issue 94-3 had recognized the liability at the commitment date to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002 with earlier application encouraged. 24 DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2002 =============================================================================== 3. SIGNIFICANT ACCOUNTING POLICIES (cont'd...) RECENT ACCOUNTING PRONOUNCEMENTS (cont'd...) The adoption of these new pronouncements is not expected to have a material effect on the Company's financial position or results of operations. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform with the current year's presentation. 4. 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. 5. INVESTMENTS

25 DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2002 =============================================================================== 5. INVESTMENTS (cont'd...) For the year ended June 30, 2002, the Company recognized an unrealized holding gain (loss) of $267,000 (2001 - ($75,000); 2000 - ($40,000)) and a realized gain (loss) of $159,000 (2001 - ($340,000); 2000 - $846,000) on trading securities. For the year ended June 30, 2002 the Company recorded an unrealized gain (loss) of $127,000 (2001 - ($391,000); 2000 - $Nil) on the available-for-sale securities which is recorded as other comprehensive loss under the shareholders' equity section. Other investments consist of preferred shares in a company under common control and in an unrelated company. The preferred shares in the Company under common control are stated at cost of $6,000,000 at June 30, 2002 and 2001 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. 6. INVESTMENT - AT EQUITY As at June 30, 1998, the Company's investment was comprised of 1,070,320 common shares of Mymetics Corporation (formerly 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 Mymetics Corporation were sold for an accounting gain of $2,158,000. During 2002, the remaining shares were sold for an accounting gain of $684,000. 7. 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. In February 1998, MFC Bancorp Ltd. ("MFC") owned all of the Bonds, which had a face value of $21,515,000, as approved by a court order. 26 DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2002 =============================================================================== 7. DEBT (cont'd...) On January 25, 1999, MFC 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, pursuant to which the rate of interest was reduced to 5% per annum and the debt was secured by fixed liens upon the assets of the Company. Interest paid or accrued on the promissory note and/or Bonds was $868,000 during the year 2002 (2001 - $1,076,000; 2000 - $1,207,000), and accrued interest payable was $349,000 as at June 30, 2002 (2001 - $537,000). During the year 2002, the Company settled approximately $9,179,000 debt with MFC, resulting in a gain, net of tax, of approximately $2,274,000. Also, the Company settled approximately $387,000 Bonds with a dissenting holder, resulting in a gain, net of tax, of approximately $87,000. The gains that arose from these debt settlements have been classified as extraordinary item on the consolidated income statement. The promissory note had a fair value of approximately $11,949,000 and $21,515,000 as of June 30, 2002 and 2001, respectively, which is based on the present value taking into consideration the security and interest rate. 8. 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 owns directly and indirectly 50.1% (2001 - 49.4%) of the Company's Common Stock and 100% (2001 - 100%) of the Company's Preferred Stock. Income (loss) before extraordinary item has been reduced by preferred dividends of $300,000 for each of the years presented in the calculation of basic and diluted earnings (loss) per share before extraordinary item. 9. 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 400,000 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. At June 30, 2002, 2001 and 2000 options to purchase 375,000 shares of the Company's Common Stock are available for future grant. There were no options granted in either 2002, 2001 or 2000. There were no stock options outstanding as at June 30, 2002 and 2001. 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. 27 DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2002 =============================================================================== 10. INCOME TAXES There was no provision for income taxes for the years ended June 30, 2002, 2001 and 2000 (other than the payment of state minimum income tax of $1,000 each in 2001 and 2000). 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, 2002 and 2001 consist of the following:

At June 30, 2002, the Company had $12,000,000 in net operating loss carryforwards for United States federal income tax purposes. The carryforwards expire in the fiscal years ending in 2009 to 2022. 11. 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. 12. RELATED PARTY TRANSACTIONS During the year ended June 30, 2002, the Company: a) Paid or accrued $300,000 (2001 - $300,000; 2000 - $300,000) in administrative fees to MFC., and $Nil (2001 - $Nil; 2000 - $300,000) to Logan International Corp. whose former director is a director and officer of the Company. These fees were paid for the accounting and administration of the Company and reimbursement of office expenses. 28 DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2002 =============================================================================== 12. RELATED PARTY TRANSACTIONS (cont'd...) b) Paid $300,000 (2001 - $300,000; 2000 - $300,000) of dividends on its preferred shares held by a subsidiary of MFC and accrued $149,000 (2001 - $149,000; 2000 - $149,000) for dividends to the subsidiary of MFC. c) Received $300,000 (2001 - $300,000; 2000 - $300,000) of dividends on its investments in preferred shares issued by another subsidiary of MFC and accrued $149,000 (2001 - $149,000; 2000 - $149,000) for dividends from the subsidiary of MFC. d) Received $Nil (2001 - $972,000; 2000 - $Nil) on redemption of preferred shares and $Nil (2001 - $52,000; 2000 - $Nil) for dividends from Mymetics Corporation. e) Sold trading securities of $3,216,000 (2001 and 2000 - $Nil) to MFC. f) Owed MFC and its subsidiary $328,000 (2001 - $Nil). g) Advanced to a director of the Company of $141,000 (2001 - $Nil) for travel and related expenses. h) Advanced to a company with a director in common $128,000 (2001 - $Nil). 13. FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, receivables, investments, accounts payable and accrued liabilities, interest 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. a) Credit risk: The Company is exposed to credit risk only with respect to uncertainties as the timing and amount of collectibility of accounts receivable. The Company mitigates credit risk through standard credit and reference checks. b) Currency risk: The Company is exposed to financial risk arising from fluctuation in foreign exchange rates and the degree of volatility of these rates. The Company does not use derivative instruments to reduce its exposure to foreign currency risk. 29 DRUMMOND FINANCIAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Dollars in tables stated in thousands) JUNE 30, 2002 =============================================================================== 14. COMMITMENTS AND CONTINGENCIES In September 1999, Gibralt Holdings Ltd. ("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 action was subsequently amended to substitute certain individual plaintiffs (the "Individual Plaintiffs") in place of Gibralt and amend the action to withdraw certain claims dismissed by the Court and clarify other claims. The Corporation and other defendants believe the claims to be entirely without merit and have vigorously defended against the action. In order to avoid, among other things, the inherent cost, time consuming nature and uncertainty of litigation, on July 25, 2002, the parties entered into a Stipulation and Agreement of Compromise, Settlement and Release (the "Settlement Agreement") in connection with the proposed settlement (the "Settlement") of the action. The Settlement Agreement provides, among other things, that the Corporation will make an offer to purchase all of the outstanding shares of the corporation's common stock not owned by the defendants and/or their associates and affiliates at a price of $1.25 per share and will provide $125,000 to the plaintiff's counsel. The settlement is subject to court approval which has not yet been obtained. 15. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CONSOLIDATED STATEMENT OF CASH FLOWS Significant non-cash transactions in 2002 and 2001: Nil The significant non-cash transaction in 2000 was the Company receiving securities with fair value of $972,000 as settlement of an amount due from Mymetics Corporation plus related accrued interest. 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: INVESTMENTS U.S. GAAP requires 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, 2002, 2001 and 2000. U.S. GAAP requires that the available for-sale securities be carried at fair market value with holding gains and losses included in the determination of comprehensive income and reported as a separate component of shareholders' equity. Canadian GAAP would require that such securities be carried at cost and written down only when a decline in value of the investment is other than temporary. Under Canadian GAAP, shareholders' equity and investment would both increase by $264,000 as at June 30, 2002 (2001 - $391,000). 30 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: October 24, 2002 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: October 24, 2002 ------------------------------------ Michael J. Smith President, Chief Executive Officer, Chief Financial Officer and Director /s/ Young-Soo Ko Date: October 24, 2002 ------------------------------------ Young-Soo Ko Director /s/ Oq-Hyun Chin Date: October 24, 2002 ------------------------------------ Oq-Hyun Chin Director 31 CERTIFICATION OF PERIODIC REPORT I, Michael J. Smith, certify that: 1. I have reviewed this annual report on Form 10-K of Drummond Financial Corporation (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report. Date: October 24, 2002 /s/ Michael J. Smith --------------------------- Michael J. Smith Chief Executive Officer and Chief Financial Officer 32 EXHIBIT INDEX

DRUMMOND FINANCIAL CORP 10-K