U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: March 31, 1998 Commission File No: 000-28638
INTERUNION FINANCIAL CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 87-0520294
- -------- ---------------------------------
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
249 Royal Palm Way, Suite 301 H, Palm Beach, Fl 33480
- ----------------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
(561) 820 - 0084 (561) 655 - 0146
- ---------------- ---------------------------------
(Issuer's telephone number) (Issuer's telecopier number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock $0.001 Par Value
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act during the past 12 months (or 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 [ ]
Check if there is no disclosure of delinquent filers in response to item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this form 10-KSB. [x]
State issuer's revenues for its most recent fiscal year: $ 3,115,407
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and ask prices of such stock, as of a specified date within the past 60
days. $ 5,053,306 As at June 11, 1998
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding for each of the issuer's classes of
common equity, as of the latest practicable date: $0.001 Par Value Common
Shares - 1,706,003 as of June 11,1998.
Transitional Small Business Disclosure Format (Check One) Yes [x] No [ ]
Page 1 of 25
INTERUNION FINANCIAL CORPORATION
FORM 10-KSB
TABLE OF CONTENTS
PART I........................................................................3
Item 1 DESCRIPTION OF BUSINESS.............................................3
Item 2 DESCRIPTION OF PROPERTY.............................................8
Item 3 LEGAL PROCEEDINGS...................................................8
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................9
PART II.......................................................................9
Item 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............9
Item 6 MANAGEMENT'S DISCUSSION AND ANALYSIS...............................11
Item 7 FINANCIAL STATEMENTS...............................................17
Item 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................17
PART III.....................................................................18
Item 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.........18
Item 10 EXECUTIVE COMPENSATION.............................................21
Item 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....22
Item 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................24
Item 13 EXHIBITS AND REPORTS ON FORM 8-K...................................24
Page 2 of 25
PART I
Item 1 DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT
On February 7, 1994, the shareholders of AU 'N AG, INC., a Utah corporation,
approved without dissent, a proposal to change the domicile of the Company
through the merger of the Company into AU 'N AG, INC., a Delaware corporation
to be formed.
On February 15, 1994 a Certificate of Incorporation of AU 'N AG, INC., a
Delaware corporation, was filed with the office of the Secretary of State,
Division of Corporations, State of Delaware.
On February 15, 1994, the date of incorporation of AU 'N AG, Inc. of Delaware,
the directors of that corporation approved a Pre-Organization Subscription and
Letter of Non-Distributive Intent executed by the President of AU 'N AG, Inc.,
the Delaware corporation, for $10.00 with the understanding that the shares
would be immediately canceled upon the effective date of the merger between
AU 'N AG, INC. of Delaware and AU 'N AG, INC. of Utah. These shares were
issued by the Company in reliance upon the exemption from the registration
requirements of the Securities Act of 1933, as amended, as provided by Section
4(2) of that Act and upon a similar exemption contained in applicable state
securities laws. The shares received by AU 'N AG, INC. were restricted
securities, subject to Rule 144 promulgated under the Securities Act of 1933,
as amended. See Exhibits at E-1 and E-4.
Further on February 15, 1994, a Plan and Agreement of Merger of AU 'NAG, INC.
(Utah) and AU 'N AG, INC. (Delaware) was executed. On the same day a
Certificate of Merger was executed by the above corporations. This Certificate
of Merger was filed in the office of the Secretary of Delaware on March
10,1994. Under the Certificate of Merger AU 'N AG, INC., the Delaware
Corporation, was the surviving corporation. See Exhibit E-5 and E-9.
Under the terms of the above-referenced merger each share of common stock of AU
'N AG, INC. (Utah) was converted into one share of AU 'N AG, INC.(Delaware).
At the time of its incorporation, AU 'N AG, Inc. (Delaware) had total
authorized capital stock in the amount of 50,000,000 shares at $.001 par value.
Each holder of AU 'N AG, INC. (Utah) upon surrender to AU 'N AG,
INC.(Delaware) of one or more certificates for such shares for cancellation
received one or more certificates for the number of shares of common stock of
AU 'N AG, INC. (Delaware) represented by the certificates of AU 'N AG,
INC.(Utah) so surrendered for cancellation by such holder.
As a result of the above-referenced merger, 23,297,800 shares of common stock
of AU 'N AG, INC. (Delaware) were issued to the shareholders of the corporation
formerly known as AU 'N AG, INC. (Utah). At the time of the merger, AU 'N AG,
INC. (Utah) had no assets and was an inactive corporation.
As provided in the Plan and Agreement of Merger, the sole purpose of the
above-referenced merger was to change the issuer's domicile from Utah to
Delaware and the exchange of securities from one corporation to another was, in
the opinion of management, outside of the provisions of Rule 145 as promulgated
by the Securities & Exchange Commission. It is also the position of management
that the exchange of stock was a transaction by an issuer not involving any
public offering and thus was within the protection of Section 4(2) of the
Securities Act of 1933, and exempted from registration requirements.
On April 11, 1994, a Certificate of Amendment of the Certificate of
Incorporation of AU 'N AG, INC. (Delaware) was executed, providing that the
name of the Company be changed to: INTERUNION FINANCIAL CORPORATION ("IUFC" or
"InterUnion" or the "Company"). This change of name was filed by the office of
the Secretary of State of Delaware on April 19, 1994.
Page 3 of 25
Subsequent to a filing of information submitted to the National Association of
Securities Dealers, Inc. (NASD) pursuant to Schedule H of the NASD By-Laws and
Rule 15c 2-11 under the Securities Act of 1934, on July 27,1994 IUFC was
cleared for listing on the OTC Bulletin Board. The Company currently trades
under the symbol: IUFC.
Subsequent to approval by the required shareholders at a meeting held October
14, 1994, the common stock was consolidated at a ratio of ten (10) to one (1).
Further, based upon shareholder approval at that meeting, a Certificate of
Amendment was filed with the Secretary of State.
On January 18, 1995 the Company acquired all of the outstanding capital stock
of BEARHILL LIMITED, a British Virgin Islands corporation, for the issuance of
22,262 shares of common stock of the Company.
On January 18, 1995 the Company acquired all of the outstanding capital stock
and preferred shares of GUARDIAN TIMING SERVICES, INC., a corporation organized
under the laws of Ontario, Canada, for the issuance of 5,566 shares of common
stock of the Company.
Upon application to the Florida Department of State, on February 2,1995, the
Company was qualified and authorized to transact business in the State of
Florida. The Company moved its principal office to 249 Royal Palm Way, Suite
301-H, Palm Beach, Florida 33480.
On March 20, 1995, the Company acquired all of the stock of I & B, INC., a
Delaware corporation, CREDIFINANCE CAPITAL INC., a corporation organized under
the laws of Ontario, Canada, CREDIFINANCE SECURITIES LIMITED ("Credifinance"),
a corporation organized under the laws of Ontario, Canada, and ninety-five
percent (95%) of the stock of ROSEDALE REALTY CORPORATION ("Rosedale"), a
corporation organized under the laws of Ontario, Canada, for the issuance of
75,000 shares of common stock. The Company further acquired the remaining
outstanding stock of Rosedale for the issuance of 1,230 shares of common stock.
It should be noted that in 1996 the Company disposed, by way of an assignment
in bankruptcy, of its shares in Rosedale. This assignment was a voluntary
petition filed by Credifinance Capital, Inc., the owner of Rosedale, on
September 29, 1995. The decision to file for bankruptcy was made after
negotiations for a merger of Rosedale with another firm were unsuccessful.
Rosedale had never been profitable subsequent to its acquisition and
Credifinance Capital, Inc. made the decision to cease financing Rosedaleis
operations. The bankruptcy was concluded and there are no outstanding lawsuits
against either Credifinance Capital, Inc. or the parent, InterUnion Financial
Corporation.
At a special meeting of the shareholders held on May 17, 1996, the Board of
Directors was authorized to consolidate all authorized shares in a ratio of
twenty (20) to one (1). At the time of this authorization, the total of all
issued and outstanding voting shares of stock was 13,851,156.
REEVE, MACKAY & ASSOCIATES LTD. ("Reeve, Mackay") was formed May 15, 1995 as a
corporation organized under the laws of Ontario, Canada. All capital stock of
this corporation was originally issued to InterUnion Financial Corporation. Due
to Reeve, Mackay's continued operating deficit and cash requirements, the
Company divested itself of its interest in Reeve, Mackay. The Company in
divesting itself of Reeve, Mackay in July 1997, was successful in recovering all
of its advances to and investment in Reeve, Mackay.
On January 19, 1997, the Company entered into an agreement where it would act
as an investment banker in the recapitalization of RECEPTAGEN Ltd.
("Receptagen") (see Exhibit 10(vii)). Receptagen is a corporation incorporated
under the laws of Canada. Receptagen is listed on the Toronto Stock Exchange
(RCG) and trades on the NASDAQ Over-the-Counter (RCEPF). Currently, it is not
the intention of the Company to consider its investment in Receptagen as an
integral part of its business outside of its bridge financing and special
situation activities.
Page 4 of 25
On July 1, 1997, the Company acquired a one third interest in LEON FRAZER,
BLACK & ASSOCIATES LIMITED. ("LFB"), a corporation organized under the laws of
Ontario, Canada. The Company acquired its interest for cash and notes payable.
On August 18, 1997, at the Company's Shareholders' meeting it was approved that
the Company's authorized capitalization be as follows:
2,500,000 shares of common voting stock at $.001 par value.
1,500,000 shares of Class A preferred stock at $.10 par value.
1,000 shares of Class B preferred stock at $0.10 par value.
1,000 shares of Class C preferred stock at $0.10 par value.
A Certificate of Amendment was filed with the Secretary of State, State of
Delaware, requesting the above modification.
Effective March 1, 1998, the Company acquired all of the outstanding common
stock in CLUSTER ASSET MANAGEMENT LIMITED ("CAM"), a corporation organized
under the laws of Ontario, Canada, for the issuance of 213,194 shares of Common
Stock of the Company and 106,597 shares purchase warrants. On May 26, 1998,
CAM changed its name to INTERUNION ASSET MANAGEMENT LIMITED ("IUAM").
Effective March 31, 1998, the Company acquired 45% of the outstanding common
shares of BLACK INVESTMENT MANAGEMENT LIMITED ("BIM"), a corporation organized
under the laws of Ontario, Canada, for the issuance of 216,640 shares of
common stock of the Company and cash.
(b) BUSINESS OF ISSUER
GENERAL
The Company was formed as a "business bank" which would acquire, when possible,
a majority interest in financial services companies.
The Company also provides bridge financing which is a part of its investment
banking activities. Such financings can be provided to companies outside the
financial service sector and can be extended for a period of up to three years,
depending on the complexity of the undertaking.
InterUnion is both a holding and an operating company engaging in activities
separate from the activities of its named subsidiaries: InterUnion derives
independent revenues from its own investment banking activities.
PRODUCTS AND/OR SERVICES OF ACTIVE SUBSIDIARIES
In addition to the operations of InterUnion Financial Corporation as the
parent, the Company owns operating subsidiary corporations. A description of
the business operations of these subsidiaries is as follows:
Investment Banking Investment Management
InterUnion Financial Corporation InterUnion Asset Management Limited
Marbury Trading Corporation Bearhill Limited
Credifinance Capital, Inc. Black Investment Management Limited
Credifinance Securities Limited Guardian Timing Services Inc.
Leon Frazer, Black & Associates Limited
The Glen Ardith-Frazer Corporation
Page 5 of 25
(1) UNDERWRITING AND RESEARCH
Credifinance Capital, Inc. is an investment corporation located in Toronto,
Canada. The business activities of this company are limited to short term
trading in securities and it owns Credifinance Securities Limited.
Credifinance Securities Limited ("Credifinance") started operations in
September 1991 as an institutional boutique active in trading for the accounts
of clients, in the fixed income and equity markets. Credifinance acts
exclusively as agent. Credifinance's specialize research is the basis of its
trading and corporate finance activities.
Between 1994 and 1998, Credifinance has been active in the financing of
Canadian companies. Credifinance is a member of the International Securities
Market Association, in addition, as a member of the Investment Dealers
Association, the Toronto Stock Exchange and the Montreal Exchange, Credifinance
is invited in most banking groups. Credifinance has acted as sole or
co-underwriter in 26 transactions representing C$255 million in financings. (C$
means Canadian currency. All other amounts are in US dollars.)
(2) INVESTMENT MANAGEMENT
The Company has interests in four independently operated investment management
firms all located in Toronto, Canada.
Guardian Timing Services, Inc. ("Guardian") is an independent investment and
fund management firm located in Toronto, Canada, with approximately C$80
million in assets under management. Guardian manages the Canadian Protected
Fund, the Protected American Fund and the First America Fund, in addition to
being the co-manager of the India Excel Fund. It uses a proprietary ITM market
timing model owned by Bearhill Limited, Inc., another subsidiary of the
Company.
Bearhill Limited ("Bearhill") is an investment management firm located in the
British Virgin Islands. Bearhill owns the proprietary rights to certain
computer software known as ITM Software, which is a computer software program
which is used to generate buy and sell signals with respect to any stock market
monitored. The forecasting technique used by the ITM market timing model
involves general market indicators, interest rates and monetary analysis,
market perception indicators, and various statistical data to detect trends.
The model is continually updated and has been credited with successfully
avoiding many of the overall market declines in the early part of the 1990s.
Black Investment Management Limited ("BIM") is an independent investment
counsel located in Toronto, Canada, that provides professional management of
financial assets for pension funds, corporations, foundations, mutual funds and
group investment plans. BIM was established in 1973 by Mr. Paul Black and Mr.
Robert W. Crosbie. Today BIM has approximately C$450 million in assets under
administration. IUFC has a 45% interest in BIM and is accounted for under the
equity method.
Leon Frazer, Black & Associates Limited ("LFB") was established in 1939 and is
the second oldest independent counseling and investment management firm in
Toronto, Canada. LFB manages assets for high net worth individuals of
approximately C$250 million. LFB also manages a mutual fund, Associate
Investor. IUFC has a 33.3% direct interest and an additional 14.3% indirect
interest through BIM which owns 31.7% directly. LFB is accounted for under the
equity method.
The Glen Ardith-Frazer Corporation ("GAF") is an independent investment counsel
located in Toronto, Canada that provides discretionary management to both
institutional and private clients. GAF has approximately C$150 million in
assets under administration.
Page 6 of 25
(3) MEDIUM AND LONG TERM INVESTING
Marbury Trading Corporation ("Marbury") is a Panama corporation with its head
office in Geneva, Switzerland. The business of Marbury is to take debt and
equity positions in companies InterUnion carries out merger & acquisition
activities for: these investments can be carried from a few weeks up to 3
years depending on the complexity of the transaction. Although Marbury's, and
therefore the Company's, interest in the reorganized companies can be
substantial, the intention is after the completion of the mandate, to reduce
its interest to that of minority investor.
COMPETITION
Competition is a part of every business. InterUnion faces competition directly
and through its subsidiaries from larger and better capitalized financial
service companies. These companies can be commercial/investment/merchant
banks, thrift institutions, venture capital firms, etc.. On the investment
management side, the performance of the assets under administration is another
factor which could adversely affect the results of the Company, because poor
performance may cause clients to move their assets to other managers.
GROWTH STRATEGY
Since inception, InterUnion's strategy has been to be a "business bank" i.e. to
be a company able to take advantage of opportunities in the financial services
sector. These opportunities include the involvement in non pure financial
service operations. InterUnion's business will remain the purchase and
selling of companies or part of companies which will use InterUnion's
investment banking services as well as its ability to issue its own securities
in order to complete M&A transactions and reorganizations. InterUnion's
strategy is also to reduce its shareholders risk by ensuring that its book
value is not dependent on any one sector of activity or any one operation.
InterUnion has been successful in managing its investors risk as today there
are enough experienced and credible individuals in the various operations who
at the same time are shareholders of InterUnion: that strategy should help
InterUnion to obtain the financing it needs for its growth. The investment
management activity should continue to expand as InterUnion gets closer to a
critical mass of assets under administration: the size of those assets and
their geographical location might require a corporate restructuring if
beneficial to all its shareholders.
GOVERNMENT REGULATION
The operating activities of InterUnion Financial Corporation are not subject to
governmental regulatory agencies, with the exception of:
Credifinance Securities Limited, a member of the Investment Dealers Association
of Canada, The Toronto Stock Exchange, The Montreal Exchange and the
International Securities Market Association. As such, it is subject to the
rules, regulations, and administrative rulings of these self regulatory
organizations.
Black Investment Management Limited, The Glen Ardith-Frazer Corporation,
Guardian Timing Services Inc. and Leon Frazer Black & Associates Limited are
regulated by the Ontario Securities Commission
InterUnion Financial Corporation is not subject to the Investment Company Act
of 1940 (the "Act"). Section 3(a)(3) of the Act defines an "investment
company" as "any issuer which owns or proposes to acquire investment securities
having a value exceeding 40% of the value of such issuer's total assets
(exclusive of Government securities and cash items)on an unconsolidated basis."
"Investment securities" are defined for purposes of this section as "all
securities except (A) Government securities, (B) securities issued by
employees' securities companies, and (C) securities issued by majority-owned
subsidiaries of the owner which are not investment companies."
Page 7 of 25
The Company is not an investment company because it does not invest more than
40% of its total assets (excluding government securities and cash items),on an
unconsolidated basis, in "investment securities" as defined in the Act. The
Company considers its primary business to be engaging in non-investment company
businesses through majority owned companies.
EMPLOYEES
The total number of employees of InterUnion and its subsidiaries is 35.
Item 2 DESCRIPTION OF PROPERTY
The Company does not own real estate.
The Company has leasehold interests in real estate as shown below, and all
premises are in good condition.
Gross Area Annual Rent
Lessee & Location of Premises (Sq. Ft.) Term Per Sq. Ft.
- ------------------------------- ---------- ---- -----------
InterUnion Financial Corporation 300 Mar. 98-Feb. 99 $15.32
Suite 301
249 Royal Palm Way
Palm Beach, Florida
Credifinance Securities Limited 3,310 Feb. 97-Jan. 02 C$22.00
Suite 3303
130 Adelaide Street W
Toronto, Ontario
Credifinance Securities Limited 927 Jul. 97-Jan. 02 C$15.00
Suite 3304
130 Adelaide Street W
Toronto, Ontario
Credifinance Securities Limited 1,000 Monthly C$12.00
Suite 900
1550 Metcalfe
Montreal, Quebec
The Glen-Ardith Frazer Corporation 4,850 Dec. 97-Nov. 02 C$11.00
13th Floor Dec. 02-Nov. 04 C$12.00
4 King St. W Dec. 04-Nov. 07 C$13.00
Toronto, Ontario
Item 3 LEGAL PROCEEDINGS
Not applicable
Page 8 of 25
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, there was
no matter brought to a vote of security holders, through the solicitation of
proxies or otherwise.
PART II
Item 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The issuer's common equity is traded on the NASD OTC Bulletin Board under the
symbol: IUFC.
The high and low sale prices for each quarter within the last two fiscal years
are as follows.
Period Open High Low Close
- ---------- ------ ------ ------ ------
FY97 Qtr 1 $13.75 $13.75 $5.00 $7.00
FY97 Qtr 2 7.00 15.00 4.75 5.00
FY97 Qtr 3 5.00 6.00 4.50 4.50
FY97 Qtr 4 4.50 6.00 4.50 5.00
FY98 Qtr 1 5.00 6.50 4.00 6.00
FY98 Qtr 2 6.00 6.75 4.50 4.50
FY98 Qtr 3 4.50 5.75 4.00 4.50
FY98 Qtr 4 4.50 5.50 3.50 3.50
(b) HOLDERS
The approximate number of holders of record of each class of common equity is
as follows:
Class of Stock Number of Holders
- ----------------- -----------------
Common Share 451
Class A Preferred 1
Class B Preferred none issued
Class C Preferred none issued
(c) DIVIDENDS
The company has never declared or paid dividends on its common stock or its
preferred stock. There are no restrictions, other than state law that may be
applicable, that limit the ability to payout all earnings as dividends. The
Board of Directors does not anticipate paying any dividends in the foreseeable
future; it intends to retain its distributable earnings, if any, for the
expansion and development of its business.
(d) RECENT SALES OF UNREGISTERED SECURITIES
(i) SALES PURSUANT TO REGULATION D
The following sales were made by the Company within the past three (3) years in
reliance upon an exemption from the registration requirements of the Securities
Act of 1933, as amended, as contained within Regulation D, Rule 504,
promulgated by the Securities and Exchange Commission:
Page 9 of 25
Number of Price per
Title of Class Shares Share Consideration Commission Date
- -------------- --------- --------- ------------- ---------- ----
Common 62,500 $2.00 $125,000 $Nil June 1995
Common 160,000 2.00 320,000 Nil March 1996
NOTES TO SALES PURSUANT TO REGULATION D
(1) All sales were made directly by the Company as issuer. No
commissions or underwriting discounts were paid in connection with the
sales.
(2) The class of persons to whom the Company sold the above-referenced
securities were individuals or entities whom the Company had reason to
believe were either accredited investors within the meaning of
Regulation Section 230.501 or were investors having such knowledge and
experience in financial and business matters that the purchaser could
properly evaluate the risks and merits of the investment.
(3) All sales as shown above were made to non-U.S. persons.
(4) The company specifically relied upon compliance with Rule 504 of
Regulation D (Regulation Section 230.504). The Company qualified for
Rule 504 because all offers and sales were made by the issuer, the
Company was not subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act, the Company was not an investment company,
and the Company was not a development stage company. Further, the
Company was in compliance with the conditions as set forth in Regulation
Section 230.504(b).
(B) SALES PURSUANT TO REGULATION S
The following sales were made by the Company within the past three (3)
years in reliance upon an exemption from the registration requirements of the
Securities Act of 1933, as amended, as contained within Regulation S
promulgated by the Securities and Exchange Commission:
Number of Price per
Title of Class Shares Share Consideration Commission Date
- -------------- --------- --------- ------------- ---------- ----
Common 100,000 2.00 200,000 Nil October 1995
Common 1,000 20.00 Services Nil March 1996
Common 151,500 1.00 151,500 Nil August 1996
Common 105,642 5.00 528,210 32,371 October 1996
Common 35,000 4.00 140,000 7,000 June 1998
NOTES TO SALES PURSUANT TO REGULATION S
(1) All sales were made directly by the Company as issuer.
(2) The class of persons to whom the Company sold the above-referenced
securities were individuals or entities whom the Company had reason to
believe were either accredited investors within the meaning of
Regulation Section 230.501 or were investors having such knowledge and
experience in financial and business matters that the purchaser could
properly evaluate the risks and merits of the investment.
(3) All sales as shown above were made to non-U.S. persons.
Page 10 of 25
(4) The company specifically relied upon compliance with Regulation S as
promulgated by the Securities and Exchanges Commission. The Company was
in compliance with Category 3 of Rule 903 of Regulation S which provides
an issuer safe harbor. Under this Category the Company complied with
the two general conditions of Rule 903(a) and (b) and to transactional
and offering restrictions by the execution of an investor Subscription
Agreement, and the placing of the appropriate restrictive legend on the
stock certificate(s).
(5) The 1,000 common shares issued for services in March 1996, was for
work done in connection with the development of a business plan and
market research for said business plan. These shares were given to a
non related party.
Item 6 MANAGEMENTiS DISCUSSION AND ANALYSIS
(a) OVERVIEW
InterUnion Financial Corporation, ("IUFC" or "InterUnion"), was incorporated on
February 7, 1994. InterUnion's strategy is to acquire, when possible, a
majority interest in financial services business. InterUnion and its
subsidiaries, (collectively the "Company"), also provides bridge financing as
part of its investment banking activities. The Company acquires companies or
interests in companies for cash but preferably for common shares of the Company
with additional incentives for vending shareholders via common share purchase
warrant and stock options for management. Since 1994, the Company has
acquired:
Corporation Acquired Nature of the Company Date Acquired
- -------------------- --------------------- -------------
Bearhill Limited Investment Management January 18, 1995
Guardian Timing Services, Inc. Investment Management January 18, 1995
Credifinance Capital Inc. Investment Company March 20, 1995
Credifinance Securities Limited Investment Bank March 20, 1995
Rosedale Realty Corporation Real Estate Sales March 20, 1995
Reeve, Mackay & Associates Ltd. Auction Sales May 15, 1995
Leon Frazer, Black & Associates
Limited Investment Management July 2, 1997
Cluster Asset Management Limited Investment Management March 1, 1998
The Glen Ardith-Corporation Investment Management March 1, 1998
Black Investment Management Limited Investment Management March 31 1998
Note: 1 All companies listed are active with the exception of Rosedale
Realty Corporation which was disposed of by the Company pursuant
to an assignment in bankruptcy in September 1995 and Reeve,
Mackay & Associates Limited which was sold in July 1997.
2 All are consolidated subsidiaries with the exception of
Leon Frazer, Black & Associates Limited and Black Investment
Management Limited, which are accounted for under the equity
method as InterUnion owns 33.3% and 45% respectively, directly.
And an additional 14.3% of Leon, Frazer, Black & Associates
Limited is owned indirectly by InterUnion.
Due to the business strategy of the Company, it is not expected to generate
revenues immediately, funding of operations is mainly effected through private
(non registered) sales of common shares under Regulation "D" as promulgated by
the United States Securities and Exchange Commission.
Page 11 of 25
The first acquisition in January 1995, allowed the Company to generate some
revenues. The following table shows revenues (in 000's) generated by
InterUnion itself as well by each of the subsidiaries and affiliates since
being acquired by InterUnion, except Rosedale Realty and Reeve Mackay &
Associates:
Corporation FY 1996 FY 1997 FY 1998
- ----------- ------- ------- -------
Bearhill Limited 30 14 18
Black Investment Management Limited 0
Cluster Asset Management Limited 0
Credifinance Capital Inc. 65 313 406
Credifinance Securities Limited 4,500 3,752 2,440
Guardian Timing Services, Inc. 355 365 371
Leon Frazer, Black & Associates Limited 771
The Glen Ardith-Corporation 102
InterUnion Financial Corporation 900 1,475 (212)
----- ----- -----
Total 5,850 5,892 3,878
===== ===== =====
Note The Glen-Ardith Frazer Corporation's ("GAF") revenues are
only consolidated as of March 1, 1998. The revenues from Leon
Frazer, Black & Associates ("LFB") and Black Investment
Management Limited ("BIM") are not consolidated. In addition,
their revenues are only as of the Company's investment in LFB on
July 2, 1997, GAF on March 1, 1998 and March 31, 1998 for BIM.
Credifinance Capital Inc. ("CFCI") primarily invests its own capital resources.
There is no reason to expect any consequential change in attained and
projected revenues.
Credifinance Securities Limited ("Credifinance") is an investment bank.
Revenues for fiscal 1998 were 35% lower than 1997. For the last two years,
investment banking activities have been, when possible diverted towards
InterUnion, while Credifinance redirected its business from an institutional
agency trading boutique to a corporate finance one. Efforts have been mainly
directed towards the support of InterUnion's activities: reorganization of
Receptagen as well as acquisition of asset management companies. Furthermore,
during all of 1998, investors feelings towards one of the areas of traditional
business for Credifinance, natural resources, has been negative.
Underwriting in junior gold companies has been non existent and another niche
sector, oil and gas in the former Soviet Union, which has been a successful
part of Credifinance business in 1997, has been reduced due to a downturn in
the emerging markets. Management is currently looking at various options which
will maintain the revenues from this subsidiary in the $2-3 million range.
Bearhill Limited ("BHL") is an investment management firm. However, the primary
asset of BHL remains its ownership of a computer software program, ITM
Software. BHL sold an option to the right of this software to the Bank of Nova
Scotia. In order to maintain the option the Bank of Nova Scotia is obligated
to pay an annual premium. The premium of C$50,000 due on April 23, 1998 has
not been made, however, the Company continues to manage approximately C$10
million in funds for the bank. If the option is not exercised, BHL will not be
adversely affected.
Black Investment Management Limited ("BIM") is an independent investment
counsel. BIM has assets under administration of approximately C$450 million.
The Company has a 45% direct interest in BIM and will be accounting for this
investment on the equity basis as of March 31, 1998. Therefore BIM did not
have any effect on the Company's performance in fiscal 1998.
Guardian Timing Services Inc. ("GTS") is an independent investment management
firm. Assets under management for GTS have risen from C$20 million at the
start of fiscal 1996 to C$80 million in fiscal 1997 and maintained that level
throughout fiscal 1998. This explains the low growth in revenues over the last
three fiscal years.
Page 12 of 25
Leon Frazer, Black & Associates Limited ("LFB") is the second oldest
independent counseling and investment management firm in Canada, as it was
established in 1939. LFB has assets under administration of approximately
C$250 million. The Company has a one third direct interest in LFB and has been
accounting for this investment on the equity basis since July 2, 1997. Since
then, LFB's revenues have been $771,000. BIM also has a one third direct
interest in LFB.
Cluster Asset Management Limited ("CAM") is a holding company who's only asset
is its investment in The Glen Ardith-Frazer Corporation ("GAF") and therefore
it is not expected to contribute revenues. The Company has a 91.55% direct
interest and an indirect interest as LFB owns the remaining 8.45%. For the
month of March 1998, GAF had revenues of $102.
The following is a summary of InterUnion's interest in the above mentioned
investment management firms.
Direct Indirect Total
------- -------- -------
BHL 100.00% 0.00% 100.00%
BIM 45.00% 0.00% 45.00%
GTS 100.00% 0.00% 100.00%
LFB 33.33% 14.30% 47.63%
CAM 91.55% 4.10% 95.65%
InterUnion Financial Corporation's revenues for fiscal 1998 were negative due to
the reversal of the unrealized gain on marketable securities that had been
previously recognized and not crystallized in fiscal 1998. Without this loss
InterUnion's revenues would have been $613,000 down from $1,475,000 a year
earlier. The decrease is due to InterUnion committing a majority of its
resources to Receptagen Ltd. ("RCG"). RCG has deposited with the Ontario
Securities Commission an information circular that describes the final stage of
the restructuring which shareholders of RCG will be voting on at their Annual
and Special General Meeting June 30. InterUnion derives its own revenues
primarily from bridge financing and special situations and some limited
investment in marketable securities.
There are no assurances that the Company will find acceptable companies for
bridge financing in the future and there is no method of forecasting this
probability except on a historical basis.
Cost of Revenues
The principal elements comprising costs of revenues are: commissions paid out
and salaries paid to research analysts and investment managers. In general,
non-administrative personnel within InterUnion are remunerated solely on
performance, as this permits the Company to keep overhead to a minimum and to
maintain a high correlation between its revenues and its personnel costs, as
InterUnion and its subsidiaries are extremely labor intensive. Therefore,
commissions paid out are the most important expense and generally rise and fall
along with revenues of the Company.
Across all of the Companyis subsidiaries, the contribution margin (contribution
margin is defined as revenues less variable expenses) was 48.4% in fiscal 1998
versus 43.0% in fiscal 1997 and 36.1% in 1996. The increase in margin is
primarily due to a shift in Credifinance's revenues from secondary market
agency to primary market revenue from corporate finance and underwriting
activities. The Company expects to maintain margins in this range due to the
stability of its commission payout structure.
Interest Income
The Company invests its cash in government issued treasury bills which give
rise to interest income. Additional interest income comes from the spread
between the interest that the Company receives over
Page 13 of 25
and above what is paid to its clients on their deposits by its broker dealer
clearing agent. This amount is not expected to be significant with respect to
revenues on a yearly or quarterly basis.
Discontinued Operations
In May 1995, Reeve, Mackay and Associates Ltd. was created to act as the
Company's auction subsidiary. Reeve, Mackay recorded operating losses of
$390,829 and $452,291 in 1997 and 1996 respectively, prior to recording a small
profit in the first quarter of 1998. The Company successfully sold its
interest in Reeve, Mackay as of July 2, 1997.
Interest Expense
The Company's only debt that causes a revenue or an expense arises from its
broker/dealer operation and from funds borrowed on a short term basis for its
trading activity. This amount is not expected to be significant with respect to
revenues on a yearly or quarterly basis.
Exposure to International Operations
Although all of the Company's revenues are generated from North America,
all of its principal subsidiaries are located in Canada. Therefore, a small
foreign exchange risk does exist due to the Canadian dollar. Due to the size of
the risk and that each company within the InterUnion Group operates
independently of each other, the Company does not purchase any derivative
products to offset this risk. In addition, the Company considers North America
as its domestic market.
Seasonal
InterUnion Financial Corporation and its subsidiaries do not operate in any
business which is affected by changes in season.
(b) RESULTS OF OPERATIONS
Fiscal 1997 marked a number of firsts for the Company.
o The first year as a reporting company, as our Form 10-SB cleared the SEC;
o The first year that the Company reports solely under US GAAP; and
o The first year that the Company reported a profit from continuing
operations.
Fiscal 1998 was no exception.
o The first year with only finance services companies with its group;
o The first year that investment management assets within the group
exceeded that of the broker dealer.
Financial highlights are as follows:
1998 1997 1996
--------- ---------- ---------
Revenues 3,115,407 5,737,848 5,857,157
Income (loss) from continuing operations (819,461) 160,676 (75,378)
Discontinued Operations 804,174 (390,829) (429,248)
Net Loss (15,287) (230,153) (504,626)
Assets 48,743,732 38,820,507 9,364,007
Shareholders' Equity 6,692,432 3,639,337 3,033,848
Working Capital (163,274) 1,750,889 928,268
Common Shares Outstanding 1,654,001 969,714 692,558
Book Value per Share 4.05 3.75 4.38
Page 14 of 25
Fiscal Year 1998 Compared to Fiscal Year 1997
(1) Overview
In fiscal 1998, revenues decreased by $2,622,411 (or 45.7%) over fiscal year
1997. For the year, costs of revenues as a percentage of sales decreased to
65.0% from 67.1% a year earlier. Fixed overhead and non cash expenses
increased by $311,322 or 22.0%. The reduction in revenues and the increase in
non variable expenses were too great to be over come by the reduction in cost
of sales and caused a loss from operations in the amount of $819,461 versus a
profit of $160,676 a year earlier. The Company reported a net loss of $15,287
versus $230,153 in fiscal 1997. The reduction in the loss is due to the
accounting gain of the sale of Reeve, Mackay & Associates Limited. Earnings
per share for fiscal 1998 was a loss of $0.01 versus a loss of $0.26 a year
earlier. The average number of common shares outstanding for the year ending
March 31, 1998 is 1,232,100 versus 907,097 a year earlier.
(2) Revenues
Revenues decreased by $2,622,411 (or 45.7%) over fiscal year 1997 (from
$5,712,183 to $3,115,407). The decrease came from the activities of Credifinance
Securities Limited and the reversal of an unrealized gain of the Company's
portfolio of warrants, received as additional compensation for corporate finance
mandates. The value of these warrants decreased by approximately $825,000.
Revenues for InterUnion itself also decreased by about $600,000, due to its
concentrating its resources on the restructuring of RCG. Revenues for
Credifinance decreased almost $1,300,000 or 34.5% (from $3,727,292 to
$2,439,951). The reason why Credifinance's revenues decreased was due to the
reduction in investors willingness to invest in small capitalized firms and in
the natural resource sector.
(3) Cost of Revenues
Costs of revenues (Selling, General and Administrative expenditures) for the
year decreased by $1,539,929 or 29.5% to $3,674,548 from $5,214,477. This
decrease is due to the fact that the Company's principal expense are commission
earned as a function of revenues.
(4) Income from Continuing Operations
Income from continuing operations net of the provision for income taxes,
decreased to a loss of $818,461, or $0.66 per share, from a profit of $160,676,
or $0.18 per share, a year earlier. As discussed previously, the decrease in
profitability has been attributed to the decrease in the value of the warrant
portfolio and reduction in revenues due to investors interest in small
capitalized firms. The average number of common shares outstanding for the
year ending March 31, 1998 is 1,232,100 versus 900,429 a year earlier. These
figures do no include an accounting gain of $804,174 in fiscal 1998 on the sale
of Reeve, Mackay, for which the Company recorded a loss in fiscal 1997 of
$390,829 as discontinued operations.
Fiscal Year 1997 Compared to Fiscal Year 1996
(1) Overview
In fiscal 1997, revenues decreased by $144,974 (or 2.5%) over fiscal year 1996.
For the year, costs of revenues as a percentage of sales decreased to 67.1%
from 71.8% a year earlier. Fixed overhead and non cash expenses also decreased
by 61,082 or 4.2%. These three factors contributed to the Company realizing
income from continuing operations of $160,676 versus a loss of $75,378 a year
earlier. The Company reported a net loss of $230,153 in 1997 versus a net loss
of $504,626 due to the losses the Company recorded in relation to Rosedale
Realty Corporation and Reeve, Mackay & Associates as
Page 15 of 25
discontinued operations. Excluding these discontinued operations, the
Company's earnings per share from continuing operations was $0.18 versus a loss
of $0.15 a year earlier.
(2) Revenues
Revenues decreased by $144,974 (or 2.5%) over fiscal year 1996 (from $5,857,196
to $5,712,183). The majority of the decrease came from the activities of
Credifinance Securities Limited, the Company's main operating subsidiary, as its
revenue decreased almost $800,000 or 17.8% (from $4,532,482 to $3,727,292). The
reason why Credifinance Securities' revenues decreased was due to the firm
restructuring its efforts from agency activities to corporate finance
activities. This decrease was offset by an increase in InterUnion's revenues of
almost $0.6 million or 62.1% (from $911,094 to $1,477,062).
(3) Cost of Revenues
Costs of revenues (Selling, General and Administrative expenditures) for the
year decreased by $515,520 or 9.0% to $5,214,477 from $5,729,997. This decrease
is due to the fact that the Company's revenues are generated more from
underwritings then from buy and sell orders, where it retains a greater
percentage, as variable costs decreased to 57.2% of revenues from 63.9% a year
earlier. In addition cost cutting of fixed overhead contributed a savings of
approximately $125,000. The Company was able to cut personnel due to the change
in target market.
(4) Income from Continuing Operations
Income from continuing operations net of the provision for income taxes,
increased to $160,676, or $0.18 per share, from a loss of $75,378, or $0.15 per
share, a year earlier. As discussed above the increase in profitability has
been attained by the combination of two things. The Company is deriving its
revenues from sources where the commissions to be paid out are less
(underwriting versus agency) and the cost savings discussed above. The average
number of common shares outstanding for the year ending March 31, 1997 is
900,429 versus 501,335 a year earlier. These figures do not include losses of
$390,829 and $429,248 in 1997 and 1996 respectively due to the discontinued
operations of Reeve, Mackay & Associates Ltd. and Rosedale Realty Corporation.
(c) LIQUIDITY AND CAPITAL RESOURCES
In order to meet its growth plans and fund any operating cash requirements, the
Company's policy is to issue additional capital stock, when possible. To date
the Company has done this either through the issuance of Confidential Private
Placement Offerings under Regulation "D" or Regulation "S". The following are
details of these private placements during the previous three fiscal years:
Date # of Shares Amount Type
June 1995 62,500 $125,000 Regulation "D"
October 1995 100,000 200,000 Regulation "D" & "S"
March 1996 160,000 320,000 Regulation "D"
September 1996 277,142 759,710 Regulation "S"
June 1998 35,000 140,000 Regulation "S"
When unable, due to market conditions or unfavorable terms, the Company will
issue notes payable. Until the acquisition of three investment management
firms, with combined assets under administration of approximately C$1 billion,
and the Company's involvement in the restructuring of RCG, the Company did not
have any long term debt. The debt that was assumed in the restructuring of RCG
has been matched by receivables of similar terms, therefore, eliminating
certain risks. The Company is currently seeking to raise additional capital by
the issuance of common stock. Proceeds will be used to pay the debt that was
issued for the acquisition of these investment management firms.
Page 16 of 25
The Company also has a credit facility of up to C$2.35 million available with a
Canadian financial institution. As of March 31, 1998 this credit was unused.
The Company plans on reviewing its portfolio of investment management companies
in order to maximize shareholders' value.
Concluding Remarks
There are no other known trends, events or uncertainties that may have, or are
reasonably likely to have, a material impact on the Company's short-term or
long-term liquidity.
In addition, there is no significant income or losses that have risen from the
Company's continuing operations that has not been analyzed or discussed above.
Nor has there been any material change in any line item that is presented on
the financial statements which has also not been discussed above.
Year 2000: Management has compiled a list of both internally and externally
supplied information systems that utilize imbedded date codes which could
experience operational difficulties in the year 2000. The Company uses third
party applications or suppliers for all high level systems and reporting.
These systems will either be upgraded and tested to be in compliance for the
year 2000 or the Company will take necessary steps to replace the supplier.
Management is testing new systems for which it is responsible. It is the
Company's objective to be year 2000 compliance for all systems by the end of
fiscal 1999, however, no assurances can be given. The Company believes that it
has provisioned sufficient amounts to cover future expenditures.
Certain statements constitute "forward looking statements" within the meaning
of the Private Securities Litigations Reform Act of 1995. Such forward looking
statements involve risks, uncertainties and other factors which may cause the
actual results, performance and achievements of the Corporation to be
materially different from future results, performance or achievement expressed
or implied by such forward looking statements.
Item 7 FINANCIAL STATEMENTS
The audited consolidated financial statements for InterUnion Financial
Corporation, covering fiscal years ended March 31, 1998 and 1997 are submitted
in compliance with the requirements of Item 310 of Regulation S-B.
Item 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective February 24, 1998, InterUnion Financial Corporation ("InterUnion")
retained Ahearn Jasco + Company, P.A. ("AJC") of Pompano, FL as its new
certifying accountants. AJC, replaced Goldstein Golub Kessler & Company, P.C.
("GGK") of New York. GGK or its Nexia International affiliate Mintz &
Partner's ("MP") reported on InterUnion's fiscal 1996 and 1997 financial
statements. The 1996 and 1997 opinions contained no adverse opinions or
disclaimer of opinions, and was not qualified as to uncertainty, audit scope or
accounting principles. The decision to change accountants was recommended by
InterUnion's Audit Committee and approved by InterUnion's Board of Directors.
During the last two fiscal years and subsequent interim period to the date of
change, there were no disagreements between InterUnion and GGK or its Nexia
International affiliate MP on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to satisfaction of GGK or MP, would have
caused it to make a reference to the subject matter of the disagreements in
connection with its reports.
Page 17 of 25
None of the reportable events described in Item 304(a) (1) (ii) occurred with
respect to InterUnion within the last two fiscal years and the subsequent
interim period to the date of change. During the last two fiscal years and
the subsequent interim period to the date of change, InterUnion did not consult
AJC regarding any matter or events set forth in Item 304(a) (2) (i) and (ii) of
Regulation S-B.
PART III
Item 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
(a) IDENTIFY DIRECTORS AND EXECUTIVE OFFICERS
Name, Municipality of Residence Age Length of Service
- ------------------------------- --- -----------------
Robert W. Crosbie 68 Nominated to Chairman of the Board
Toronto, Ontario
Georges Benarroch 51 Appointed as President and
Paris, France Member of the Board (Outgoing Chairman)
March 21, 1994
Selwyn J. Kletz 52 Appointed as Vice-President and
Toronto, Ontario Member of the Board
Canada August 18, 1997
Samuel Balloul 52 Nominated as Member of the Board
Paris, France
Dr. Colin B. Bier 52 Appointed as Member of the Board
Ville St-Laurent, Quebec August 18, 1997
Canada
Karen Lynn Bolens 50 Appointed as Member of the Board
Geneva, Switzerland December 16, 1994
Ann Glover 47 Appointed as Member of the Board
Toronto, Ontario February 17, 1995
Canada
T. Jack Gary, III 56 Appointed as Secretary
West Palm Beach, Florida January 30, 1995
Claude E. Ayache 35 Appointed as Executive Vice-President and
Toronto, Ontario Chief Financial Officer
Canada March 2, 1998
ROBERT W. CROSBIE is nominated to the position of Chairman of the Board of the
Company. Mr. Crosbie has been Chairman of the Board of Black Investment
Management Limited since 1973.
Page 18 of 25
GEORGES BENARROCH is the President, Chief Executive Officer of the Company as
well as a Director and Chairman of the Audit Committee. He is also the Chief
Executive Officer, and Chairman of the Board of Credifinance Securities
Limited, President, Chief Executive Officer, and Chairman of the Board of
Credifinance Capital Inc. and Chairman of the Board of Guardian Timing
Services, Inc. The Glen-Ardith Frazer Corporation and InterUnion Asset
Management Limited -- all wholly-owned subsidiaries of the Company. In
addition, he is a member of the Board of Directors of, Black Investment
Management Limited, Leon Frazer, Black & Associates Limited and Receptagen
Limited. He is also the President of Equibank.
Since 1977, Mr. Benarroch has held the position of officer and partner/director
with various investment firms and private/public companies in the United
States, Canada and Europe. He has been a senior partner and/or seat holder of
a member firm of The Toronto Stock Exchange since 1982. His experience covers
Euro-financings, venture capital, mining and high tech financings, bridge
financings and mergers & acquisitions.
SELWYN J. KLETZ is Vice-President of the Company, as well as a Director. He is
also President and a member of the board of The Glen-Ardith Frazer Corporation
and InterUnion Asset Management Limited, in addition to being a Director of
Black Investment Management Limited, Guardian Timing Services, Inc. And Leon
Frazer, Black & Associates Limited. He has also held the position of officer
and partner/director with various investment firms and private/public companies
in Canada and South Africa. His experience in the investment industry covers
research, investment banking, merchant banking, corporate finance and
investment management. Mr. Kletz will be devoting 100% of his time to the
Company.
SAMUEL BALLOUL will serve as a Director of the Company. Mr. Balloul is in
house counsel for Le Refuge in France since 1975. Mr. Balloul's duties for
InterUnion will be limited to his participation at Board Meetings and as a
member of the Audit Committee.
DR. COLIN B. BIER serves as a Director of the Company and Receptagen Limited.
Since 1990 through and including the present, he has been Managing Director of
ABA BioResearch Inc., an independent bio-regulatory consulting firm providing
expertise for strategic management and development of biopharmaceuticals. Mr.
Bier's duties for InterUnion will be limited to his participation at Board
Meetings.
KAREN LYNN BOLENS serves as a Director of the Company. Since 1985 through and
including the present time, she has practiced as an associate attorney,
specializing in corporate, estate and family law for international clients.
Ms. Bolens' duties for InterUnion will be limited to her participation at Board
Meetings and as a member of the Audit Committee.
ANN GLOVER serves as a Director of the Company. She is a Director,
Secretary/Treasurer and Chief Financial Officer of Credifinance Securities
Limited a subsidiary of the Company. Ms. Glover has been an employee of
Credifinance Securities Limited since 1991, having held the position of a
Director, Secretary/ Treasurer, and Chief Compliance Officer. Ms. Glover will
devote approximately 10% of her time to InterUnion as she is also a director
and officer of Credifinance Securities Limited.
T. JACK GARY, III is the Secretary of the Company. He is Manager of the West
Palm Beach, Florida, office of Raymond James & Associates, a national brokerage
firm, having held that position since 1995 as well as a Director. From April
1988 to 1995, Mr. Gary was President and Chief Executive Officer of Crown
Capital Advisors, Inc., a company registered as an investment advisor with the
Securities and Exchange Commission and with the State of Florida under the
Florida Securities and Investor Protection Act. Mr. Gary will devote
approximately 10% of his time to his duties as Secretary at InterUnion.
CLAUDE E. AYACHE is the Executive Vice-President and Chief Financial Officer of
the Company and Manager of Corporate Finance and Investment Banking (non
resources) for Credifinance Securities Limited a subsidiary of the Company.
Mr. Ayache has been with the Company since 1995, having held various positions
in both administration, sales and corporate finance / investment banking. Mr.
Ayache will
Page 19 of 25
devote all of his time to the affairs of the Company. Prior to joining the
Company, Mr. Ayache was Controller for a manufacturer and Director of Finance
for an asset based lender for which he was instrumental in their restructuring.
(1) No director of InterUnion is currently a director of any other
reporting company, with the following exception: Georges Benarroch and
Dr. Colin B. Bier are directors of Receptagen Limited which is listed on
the Toronto Stock Exchange and trades on the NASD OTC Bulletin Board
under the symbol RCEPF.
(2) Under Section 1, ARTICLE III, of the By-Laws, the directors shall
serve until the next annual meeting of the stockholders, as prescribed
by the Board of Directors, at which time directors are elected by the
stockholders.
(3) In accordance with Item 405 no director, executive officer and
beneficial owner of more than ten percent (10%) of any class of equity
securities of the Company failed to file on a timely basis reports
required by section 16(a) of the Exchange Act during the most recent two
fiscal years to the best of the Company's knowledge.
(b) AUDIT COMMITTEE
The Audit Committee had three meetings. The first meeting was to approve the
change in auditors. The second meeting was to review the Company's accounting
policies with the auditors while the third meeting was to recommend to the
Board of Director that the March 31, 1998 Consolidated Financial Statements be
approved and presented to the shareholders.
(c) IDENTIFY SIGNIFICANT EMPLOYEES
The Company does not expect to receive a significant contribution from
employees that are not executive officers.
(d) FAMILY RELATIONSHIPS
Currently, there are no directors, executive officers or persons nominated or
persons chosen by the Company to become a director or executive officer of the
Company who are directly related to an individual who currently holds the
position of director or executive officer or is nominated to one of the said
positions.
(e) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
There are no material events that have occurred in the last five years that
would affect the evaluation of the ability or integrity of any director, person
nominated to become a director, executive officer, promoter or control person
of the Company.
(f) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
For the two fiscal years ended March 31, 1998, to the best of the Companyis
knowledge no director, executive officer and beneficial owner of more than ten
percent (10%) of any class of equity securities of the Company failed to file
on a timely basis reports required by section 16(a) of the Exchange Act.
Page 20 of 25
Item 10 EXECUTIVE COMPENSATION
(a) SUMMARY COMPENSATION TABLE
Name and Fiscal Base Other Long Term All other Total
Principal Position Year Salary Bonus Compensation Compensation Compensation
- ------------------ ------ ------ ----- ------------ ------------ ------------
Georges Benarroch 1998 None None None $ 30,000(1) $ 30,000
President & CEO 1997 None None None None None
Selwyn J. Kletz 1998 $75,245 $60,000(2) None $355,000(3) $488,314
Vice-President 1997 None None None $ 13,265(4) $ 13,265
(1) This amount represents life, disability and medical insurance and
certain expenses.
(2) This amount represents 60,000 short term stock options, that was
fully exercised.
(3) This amount represents $168,200 for life, disability and medical
insurance and $186,800 paid to a company controlled by Mr. Kletz for
services.
(4) This amount was paid to a company controlled by Mr. Kletz for
services.
(b) Option/SAR Grants in Last Fiscal Year
% of Total
Number of Options/SARs
Securities Granted to
Underlying Options/ Employees in Exercise Expiration
Name SARs Granted (#) Fiscal Year Price Date
- ---- ------------------ ------------ -------- ----------
Georges Benarroch 0 0.0% $0.00
Selwyn J. Kletz 60,000 44.4% $3.00 June 1997
(c) AGGREGATED OPTION/SAR EXERCISE IN LATEST FISCAL YEAR AND FISCAL YEAR
END OPTION/VAR VALUES
Number of Securities Value of
Underlying Unexercised In-the-Money Option
Shares Acquired Value Option at Fiscal Year end at Fiscal Year end
Name on Exercise(#) Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ----- --------------- -------- -------------------------- -------------------------
Georges Benarroch 0 $ 0.00 0 0 $0.00 $0.00
Selwyn J. Kletz 60,000 $240,000 0 0 $0.00 $0.00
(B) ALL COMPENSATION COVERED
As of the date of this registration statement, the Company has no formal
options, warrants, SARs, long-term incentive plans, pension or profit-sharing
plans, or other compensation plans, in effect regarding any employees of the
Company.
The Company feels that it does not have to include executive compensation for
an executive officer of any subsidiary because under Rule 3b-7 under the
Exchange Act (17 CFR 240.3b-7) no executive officer(s) of any subsidiary
perform(s) policy making functions for the registrant.
Page 21 of 25
As of the date of this registration statement, the Company has no agreement or
understanding, express or implied, with any officer or director, or any other
person regarding employment with the Company or compensation for services.
Section 14 of ARTICLE III of the By-Laws of InterUnion provides that directors
do not receive any stated salary for their services as directors. However, by
board resolution, a fixed fee and expenses of attendance may be allowed for
each meeting. These limitations do not affect compensation for a person
serving as an officer or otherwise for the Company and receiving compensation
therefor. The Company's Board of Directors has approved payment of $1,750 for
the services of each of its independent directors for the fiscal year ending
March 31,1997.
Item 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following persons (including any group as defined in Regulation S-B,
Section 228.403) are known to InterUnion Financial Corporation, as the issuer,
to be the beneficial owner of more than five percent (5%) of any class of the
said issuer's voting securities.
Title of Name and Address of Amount and Nature of Percentage
Class Beneficial Owner Beneficial Owner of Class
- --------- --------------------- -------------------- ---------
Common RIF Capital Inc. (1) 536,899 31.5%
Price Waterhouse Centre
PO Box 634C
St. Michael, Barbados, WI
Common Selwyn J. Kletz 100,000 5.9%
499 Riverside Drive
Toronto, Ontario
Canada M6S 4B6
Total 636,899 37.4%
Preferred A RIF Capital Inc. (1) 1,500,000 100.0%
Price Waterhouse Centre
PO Box 634C
St. Michael, Barbados, WI
(1) RIF Capital Inc. is a wholly-owned subsidiary of Equibank Inc.
which is wholly-owned by Central Investment Trust. As of January
1998, Safeguardian Limited replaced Georges Benarroch as the sole
protector of Central Investment Trust and neither is a beneficiary of
the Trust nor its subsidiaries.
Page 22 of 25
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following information lists, as to each class, equity securities
beneficially owned by all directors and nominees, and of the directors and
nominees of the issuer, as a group.
Title of Name and Address of Amount and Nature of Percentage
Class Beneficial Owner Beneficial Owner of Class
- -------- ------------------- -------------------- ----------
Common Safeguardian Limited 536,899 31.5%
PO Box 316 Trustee
Jardine House (voting power of
1 Hesley Street Central Investment
St. Helier, Jersey, UK JE4 8UD Trust
Common Robert W. Crosbie 25,404 1.5%
110 Yonge Street, #1701
Toronto, Ontario
Canada M5C 1T4
Common Selwyn J. Kletz 100,000 5.9%
499 Riverside Drive
Toronto, Ontario
Canada M6S 4B6
Preferred A Safeguardian Limited 1,500,000 100.0%
PO Box 316 Trustee
Jardine House (voting power of
1 Hesley Street Central Investment
St. Helier, Jersey, UK JE4 8UD Trust
Common Directors and Executive Officers 667,803 39.1%
as a group (4 people)
Preferred A Directors and Executive Officers 1,500,000 100.0%
as a group (1 person)
NOTE TO (A) AND (B): As to the beneficial owner(s) of the securities
listed above in (a) and (b), no such owner has any right to acquire
within sixty (60) days or otherwise, the right to acquire shares
from options, warrants, rights, conversion privileges or similar
obligations. With the exception of
(c) CHANGES IN CONTROL
Currently, there is no such arrangement which may result in a change in control
of the Company.
Page 23 of 25
Item 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) CERTAIN RELATED TRANSACTIONS
The Company paid $186,765 to Witpan Inc. for services render in the acquisition
of Leon, Frazer, Black & Associates Limited, Cluster Asset Management Limited,
The Glen-Ardith Frazer Corporation and Black Investment Limited. In addition,
the Company received $135,850 from Witpan, for investment research services.
Witpan is controlled by Mr. Selwyn J. Kletz.
For services rendered in the restructuring of RCG, the Company paid Rif Capital
Inc. $300,000.
In fiscal 1997, the Company acquired an option on all of the issued and
outstanding shares of News Research Corporation (see Exhibit 10(vi)) at a cost
of $80,000. The vendors of the option were Rif Capital Inc. and Central
Investment Trust. The Company allowed the option to expire in December 1997
and therefore expensed this cost of the option.
Item 13 EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Page
Table Number Exhibit Name Number
(2)(i) Unanimous Consent in Lieu of The First Meeting of the Board +
of Directors of AU 'N AG, INC. (A Delaware Corporation)
(2)(ii) Pre-Organization Subscription and Letter of Non-Distributive Intent +
(2)(iii) Plan and Agreement of Merger +
(2)(iv) Certificate of Merger, dated February 15, 1994 +
(3)(i) Certificate of Incorporation of AU 'N AG, INC. Dated February 15, 1994 +
(3)(ii) Certificate of Amendment of Certificate of Incorporation of AU 'N +
AG, INC. Dated April 11, 1994
(3)(iii) Certificate of Amendment of Certificate of Incorporation of AU 'N +
AG, INC. Dated April 11, 1994
(3)(iv) Bylaws of InterUnion Financial Corporation +
(4) Instruments Defining the Rights of Security Holders Including Indentures +
(10)(i) ITM Software Development Agreement +
(10)(ii) Letter of Understanding (iITM Option Agreementi) dated +
November 30,1995
(10)(iii) Investment Management Agreement +
(10)(iv) Agreements (Havensight/InterUnion) +
(10)(v) Amendment to the Letter of Understanding +
(iITM Option Agreementi), dated April 16, 1997
Page 24 of 25
(10)(vi) Letter of Understanding (New Researches Corporation) +
(10)(vii) Letter Agreement (Receptagen, Ltd.) +
(16) Letter on change in certifying accountant ++
(21) Subsidiaries of InterUnion E - 1
(27) Financial Data Schedule E - 2
+ Incorporated by reference to the Company's Registration Statement on Form
10-KSB filed on June 20, 1997.
++ Incorporated by reference to the Company's Registration Statement on Form
8-K filed on March 3 1998.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERUNION FINANCIAL CORPORATION
(Registrant)
Date: June 26, 1998 By: /s/ Georges Benarroch
------------------------ -----------------------------------
Georges Benarroch
President, Chief Executive Officer
Chairman, Board of Directors
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in their capacities on the
dates indicated.
Signature Title Date
- -------------- ------ -------
/s/ Georges Benarroch President, Chief Executive June 26, 1998
- -------------------------------------------- Officer, Chairman, Board of ---------------------
Georges Benarroch Directors
/s/ Claude E. Ayache Executive Vice - President June 26, 1998
- -------------------------------------------- and Chief Financial Officer ---------------------
Claude E. Ayache
/s/ Karen Lynn Bolens Director June 26, 1998
- -------------------------------------------- ---------------------
Karen Lynn Bolens
Page 25 of 25
INTERUNION FINANCIAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 and 1997
INTERUNION FINANCIAL CORPORATION
MARCH 31, 1998 and 1997
CONTENTS
Page
Independent Auditoris Reports:
March 31, 1998 - Ahearn, Jasco + Company, P.A. F - 2
March 31, 1997 - Goldstein Golub Kessler & Company, P.C. F - 3
Consolidated Financial Statements:
Consolidated Balance Sheets F - 4
Consolidated Statements of Operations F - 6
Consolidated Statements of Shareholders' Equity F - 7
Consolidated Statements of Cash Flows F - 8
Notes to Consolidated Financial Statements F - 9 To F - 22
F - 1
INDEPENDENT AUDITORS' REPORT
To The Directors and Shareholders,
InterUnion Financial Corporation
We have audited the accompanying consolidated balance sheet of InterUnion
Financial Corporation and its subsidiaries as of March 31, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of InterUnion Financial
Corporation and its subsidiaries as of March 31, 1998, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
We also audited the adjustments described in Note 2 that were applied to restate
basic and diluted earnings per share in the March 31, 1997 consolidated
financial statements in accordance with Statement of Financial Accounting
Standards No. 128, Earnings per Share. In our opinion, such adjustments are
appropriate and have been properly applied.
Ahearn, Jasco + Company, P.A.
Pompano Beach, Florida
May 29, 1998
F - 2
INDEPENDENT AUDITOR'S REPORT
To The Directors and Shareholders,
InterUnion Financial Corporation
We have audited the accompanying consolidated balance sheet of InterUnion
Financial Corporation as of March 31, 1997 and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended (prior to the effects on such financial statements of the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share, and the resultant restatement of the Company's earnings per share for the
year ended March 31, 1997 as discussed in Note 2). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of InterUnion Financial
Corporation as of March 31, 1997 and the results of its consolidated operations
and its cash flows for the year then ended (prior to the effects on such
financial statements of the adoption of SFAS No. 128, and the resultant
restatement of the Company's earnings per share for the year ended March 31,
1997 as discussed in Note 2) in conformity with generally accepted accounting
principles.
Goldstein Golub Kessler & Company, P.C.
New York, New York
May 14, 1997
F - 3
INTERUNION FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 1997
________________________________________________________________________________
A S S E T S
CURRENT ASSETS
Cash and cash equivalents $2,873,731 $349,738
Due from brokers and dealers 2,012 166,062
Due from clients 715,871 5,967,989
Marketable securities 35,169,986 29,457,965
Accounts receivable 882,491 226,663
Refundable income taxes 7,789 22,197
Notes receivable, current portion 616,579 ---
Prepaid expenses and other current assets 56,733 151,483
----------- -----------
Total current assets 40,325,192 36,342,097
----------- -----------
OTHER NON-CURRENT ASSETS
Property & equipment, net 1,425,192 1,609,905
Notes receivable, non-current portion 952,106 ---
Other long-term assets 84,710 256,945
Investment in unconsolidated affiliates 3,488,322 ---
Goodwill, net 2,468,210 394,332
Net assets related to discontinued
operations --- 217,228
----------- -----------
Total non-current assets 8,418,540 2,478,410
----------- -----------
Total Assets $48,743,732 $38,820,507
=========== ===========
________________________________________________________________________________
See Notes to Consolidated Financial Statements F - 4
INTERUNION FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 1997
________________________________________________________________________________
L I A B I L I T I E S
CURRENT LIABILITIES
Due to brokers and dealers $34,663,322 $33,012,864
Due to clients 3,057,747 1,320,874
Accounts payable and accrued liabilities 1,063,956 257,470
Notes payable, current portion 1,703,441 ---
----------- -----------
Total current liabilities 40,488,466 34,591,208
LIABILITIES RELATED TO DISCONTINUED OPERATIONS --- 504,962
OTHER LIABILITIES 77,033 ---
NOTES PAYABLE, long-term portion 1,485,801 ---
DEFERRED INCOME TAXES --- 85,000
----------- -----------
Total liabilities 42,051,300 35,181,170
----------- -----------
COMMITMENTS AND CONTINGENCIES
S H A R E H O L D E R S' E Q U I T Y
CAPITAL STOCK AND ADDITIONAL PAID-IN CAPITAL
Class A Preferred Stock, $0.10 par value
Authorized - 1,500,000 shares
Issued and outstanding - 1,500,000 150,000 150,000
Class B Preferred Stock, $0.10 par value
Authorized - 1,000 shares
Issued and outstanding - None --- ---
Class C Preferred Stock, $0.10 par value
Authorized - 1,000 shares
Issued and outstanding - None --- ---
Common Stock, $0.001 par value
Authorized - 2,500,000 shares
Issued and outstanding - 1,654,001 in 1998,
969,714 in 1997 1,654 970
Additional Paid-In Capital 8,119,397 5,055,845
ACCUMULATED DEFICIT (1,573,568) (1,558,281)
CUMULATIVE TRANSLATION ADJUSTMENT (5,051) (9,197)
----------- -----------
Total shareholders' equity 6,692,432 3,639,337
----------- -----------
Total Liabilities and Shareholders' Equity $48,743,732 $38,820,507
=========== ===========
________________________________________________________________________________
See Notes to Consolidated Financial Statements F - 5
INTERUNION FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998 1997
________________________________________________________________________________
REVENUES
Investment Banking $2,642,958 $5,346,503
Investment Management 370,871 365,680
Interest income 101,578 25,665
---------- ----------
3,115,407 5,737,848
---------- ----------
EXPENSES
Selling, General and Administrative 3,674,548 5,214,477
Depreciation and Amortization 240,886 240,912
Foreign exchange loss 17,361 31,067
Interest expense 76,627 2,631
---------- ----------
4,009,422 5,489,087
---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND EQUITY IN NET
EARNINGS (LOSSES) OF UNCONSOLIDATED
AFFILIATES (894,015) 248,761
EQUITY IN NET EARNINGS (LOSSES) OF
UNCONSOLIDATED AFFILIATES (8,310) ---
BENEFIT (PROVISION) FOR INCOME TAXES 82,864 (88,085)
---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (819,461) 160,676
GAIN (LOSS) FROM DISCONTINUED OPERATIONS 691 (390,829)
GAIN ON DISPOSITION OF SUBSIDIARY 803,483 ---
---------- ----------
NET LOSS $ (15,287) $ (230,153)
========== ==========
EARNINGS (LOSS) PER COMMON SHARE - Basic
Continuing operations $ (0.66) $ 0.18
========== ==========
Discontinued operations $ 0.65 $ (0.43)
========== ==========
Net loss $ (0.01) $ (0.25)
========== ==========
Weighted average common
shares outstanding 1,232,100 899,859
========== ==========
EARNINGS (LOSS) PER COMMON SHARE - Diluted
Continuing operations $ (0.66) $ 0.16
========== ==========
Discontinuing operations $ 0.48 $ (0.43)
========== ==========
Net loss $ (0.01) $ (0.25)
========== ==========
Weighted average common
shares outstanding 1,671,568 985,951
========== ==========
________________________________________________________________________________
See Notes to Consolidated Financial Statements F - 6
INTERUNION FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
________________________________________________________________________________
Number Additional Share
of Paid-in Capital
Shares Amount Capital Totals
Preferred Shares
Balances,
March 31, 1997 & 1998 1,500,000 $ 150,000 $ --- $ 150,000
--------- ---------- ----------- ----------
Common Shares
Balance, March 31, 1996 692,558 693 4,211,283 4,211,976
Adjustment, reverse split 14 --- --- ---
Issued during the year
net of issue costs 277,142 277 727,062 727,339
Compensation related to
stock options --- --- 117,500 117,500
--------- ---------- ----------- ----------
Balance, March 31, 1997 969,714 970 5,055,845 5,056,815
Issued during the year
Exercise of warrants 15,000 15 89,985 90,000
Exercise of options 60,000 60 179,940 180,000
Investments 659,287 659 3,002,327 3,002,986
Cancellation (50,000) (50) (268,700) (268,750)
Compensation related to
stock options --- --- 60,000 60,000
--------- ---------- ----------- ----------
Balance, March 31, 1998 1,654,001 1,654 8,119,397 8,121,051
=========
Total Share Capital $151,654 $8,119,397 $8,271,051
========== =========== ==========
Cumulative
Foreign
Currency
Translation
Deficit and Foreign currency translation adjustment Adjustment Deficit
----------- -----------
Balance, Mach 31, 1996 $ --- $(1,328,128)
Foreign currency translation
adjustment (9,197) ---
Net loss for fiscal --- (230,153)
----------- -----------
Balance, March 31, 1997 (9,197) (1,558,281)
Foreign currency translation adjustment 4,146 ---
Net loss for fiscal 1998 --- (15,287)
----------- -----------
Balance, March 31, 1998 $ (5,051) $(1,573,568)
=========== ===========
________________________________________________________________________________
See Notes to Consolidated Financial Statements F - 7
INTERUNION FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998 1997
_____________________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(15,287) $(230,153)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Depreciation and amortization 240,886 240,912
Gain on disposal of discountinued operations (804,174) ---
Non cash compensation - stock options 60,000 117,500
Deferred income taxes (85,000) 85,000
Unrealized loss (gain) in marketable securities 159,831 (529,854)
----------- ------------
(443,744) (316,595)
Changes in operating assets and liabilities net of effects from
the purchase of Cluster Asset Management Limited
Increase in due to/from brokers and dealers, net 1,814,508 31,515,327
Decrease (increase) in due to/from client, net 6,988,991 (5,588,459)
Increase in marketable securities (5,871,852) (26,352,526)
Increase in accounts receivable and other assets (452,610) (184,970)
Increase (decrease) in accounts payable and accrued liabilities 633,103 (56,560)
Increase (decrease) in assets and liabilites related to
discontinued operations (287,734) 129,296
----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,380,662 (854,487)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds on issuance of capital stock 270,000 727,339
Proceeds (repayment) of notes payable 1,508,712 (119,462)
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,778,712 607,877
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment, net (2,032) (10,866)
Purchase of long-term investments, net (485,336) (66,945)
Investment in notes receivable (1,299,935) ---
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (1,787,303) (77,811)
----------- ------------
NET INCREASE (DECREASE) IN CASH 2,372,071 (324,421)
CASH AND CASH EQUIVALENTS - Beginning of Year 349,738 674,159
CASH ACQUIRED ON ACQUISITION OF SUBSIDIARY 151,922 ---
----------- ------------
CASH AND CASH EQUIVALENTS - End of Year $2,873,731 $349,738
=========== ============
For supplemental disclosure information for the Consolidated Statement of Cash
flows, see note 15.
________________________________________________________________________________
See Notes to Consolidated Financial Statements F - 8
INTERUNION FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
________________________________________________________________________________
1. ORGANIZATION AND BASIS OF PRESENTION
Description of Business: InterUnion Financial Corporation ("IUFC") and its
subsidiaries (collectively the "Company") are engaged in financial services
with activities in investment banking, securities brokerage, and money
management.
Principles of Consolidation: The consolidated financial statements
include the accounts of IUFC and all wholly owned and majority owned
subsidiaries from their respective dates of acquisition, after the elimination
of all significant intercompany transactions and balances. The consolidated
subsidiaries of IUFC are Bearhill Limited, Cluster Asset Management Limited,
Credifinance Capital Inc., Credifinance Securities Limited, Guardian Timing
Services Limited, I & B Inc., Marbury Trading Corporation, and The Glen-Ardith
Frazer Corporation. Investments in affiliates, representing 20% to 50% of the
ownership, are accounted for under the equity method. Under the equity method,
the Company records its proportionate share of income (loss) of the affiliate
(net of the amortization of the excess of the purchase price over the net
assets acquired) to results of operations, with this amount either added to
(deducted from) the cost of the investment. Dividends received from affiliates
who are accounted for on the equity basis are deducted from the carrying value
of the investment. Equity method affiliates are Black Investment Management
Limited and Leon Frazer, Black & Associates Limited. Investments in affiliates
representing less than 20% ownership are accounted for under the cost method;
this affiliate is Receptagen Ltd.
Use of Estimates: The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates and
assumptions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents: Cash and cash equivalents include demand
deposits with banks, money market accounts, and other short term investments
with original maturities of 90 days of less. Balances of cash and cash
equivalents in financial institutions may at times exceed the government
insured limits.
Marketable Securities: The Company classifies its marketable securities
into one of three categories: trading, held to maturity, or available for sale.
Trading securities, which are bought and held primarly for the purpose of
selling them in the near term, are recorded at fair value with gains and losses
included in earnings. Held-to-maturity securities, which are securities that
the Company has the ability and the intent to hold until maturity, are recorded
at amortized cost and adjusted for amortization or accretion of premiums or
discounts. All other investments in marketable securities not classified as
either trading or held-to-maturity are classified as available-for-sale and are
reported at fair value. Unrealized gains and losses on securities classified
as available for sale are reported as a separate component of shareholders'
equity until realized. Market values of marketable securities are based on the
last day of the fiscal year. A decline in market value of any
available-for-sale or held-to-maturity security below cost that is deemed other
than temporary is charged to earning, resulting in the establishment of a new
cost basis for the security.
Security Transactions: Security transactions are recorded in accordance
with industry practice in the accounts on trade date. Commission income and
related expenses for transactions executed but not yet settled are accrued as
of the financial statement date.
In accordance with Canadian industry practice, the balances due from and
to brokers, dealers and clients may include the trading balances of clients at
the end of the reporting period and may not be an indication of the
investment activity of the Company. These balances are due to the Company's
ownership of Credifinance Securities Limited, a Canadian broker/dealer. These
balances may fluctuate significantly.
________________________________________________________________________________
/Continued... F - 9
INTERUNION FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
________________________________________________________________________________
Property and Equipment: Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using straight line and
accelerated methods over the estimated useful lives of the asset.
Other Long-Term Assets: Stock exchange seats are recorded at cost and are
included in other long-term assets. Declines in market value are only recorded
when there is an indication of permanent decline in value.
Goodwill: Following purchase accounting for businesses acquired, goodwill
represents the excess of the purchase price over the fair value of the net
assets acquired, and is being amortized over a period of 20 years on a straight
line basis. Accumulated amortization as of March 31, 1998 and 1997 was $74,240
and $43,816, respectively.
Long-lived Assets: As prescribed by the Statement of Financial Accounting
(SFAS) No. 121, "Accounting for the Impairement of Long-lived Assets and for
Long-lived Assets to be Disposed of," the Company assesses the recoverability
of its long-lived assets (including goodwill) by determining whether the asset
balance can be recovered over the remaining depreciation or amortization period
through projected undiscounted future cash flows. As of March 31, 1998, no
impairment of any asset was recognized.
Fair Value of Financial Assets: The carrying value of cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities, notes
receivable and notes payable approximates the fair value. In addition, unless
described elsewhere, the carrying value of all financial assets approximate
fair value based on terms and interest rates currently available to the
Company.
Income Taxes: The Company provides for federal and state income taxes
currently payable, as well as for those deferred because of timing differences
between reporting income and expenses for financial statement purposes versus
tax purposes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect of a change in tax rates is recognized as income or expense in the
period that includes the enactment date.
The Company and its eligible subsidiaries file consolidated U.S. federal
tax income returns. Non-U.S. subsidiaries, which are consolidated for
financial reporting, are not eligible to be included in consolidated U.S.
federal income tax returns, and therefore separate provisions for income taxes
have been determined for these entities. Except for return of capital and
selected didvidends, the Company intends to reinvest the unremitted earnings of
its non-U.S. subsidiaries and postpone their remittance indefinitely.
Accordingly, no provision for U.S. income taxes for non-U.S. subsidiaries was
required for any year presented.
Translation of Foreign Currencies: In accordance with SFAS No.52,
iForeign Currency Translationi, the financial statements of certain
subsidiaries of the Company are measured using local currency as the functional
currency. Assets and liabilities have been translated at current exchange
rates and related revenue and expenses have been translated at average monthly
exchange rates. Gains and losses resulting from the translation of
subsidiaries financial statements are included as a separate component of
shareholders' equity. Any gains or losses resulting from foreign currency
transactions are included in results of operations.
________________________________________________________________________________
/Continued... F - 10
INTERUNION FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
________________________________________________________________________________
Earnings per Share: Net Income (loss) per share is reported in accordance
with SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires dual
presentation of basic earnings per share ("EPS") and diluted EPS on the face of
all statements of earnings issued for periods ending after December 15, 1997,
for all entities with complex capital structures. In accordance with SFAS No.
128, the EPS computation for March 31, 1997 has been restated. Basic EPS is
computed by dividing income (loss) available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur from common shares issuable
through the exercise or conversion of stock options, restricted stock awards,
warrants and convertible securities. In certain circumstances, the conversion
of these options, warrants and convertible securities are excluded from diluted
EPS if the effect of such inclusion is anti-dilutive. The numerators of EPS
computations are as reported in the statement of operations; the denominators
include the effects of the Common Share equivalents of outstanding warrants and
stock options which total 439,468 for 1998 and 86,092 for 1997.
Stock Based Compensation: The Company accounts for employee stock options
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees". Under APB No. 25, the Company
applies the intrinsic value method of accounting. SFAS No. 123, "Accounting for
Stock-Based Compensation", prescribes the recognition of compensation expense
based on fair value of options determined on the grant date. However, SFAS No.
123 allows companies currently applying APB No. 25 to continue applying the
intrinsic value method under APB No. 25. For companies that continue in
applying the intrinsic value method, SFAS No. 123 mandates certain pro forma
disclosures as if the fair value method had been utilized. (See Note 6)
Pending Accounting Pronouncements: In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 and SFAS No. 131 are effective for fiscal years
beginning after December 15, 1997 and the Company does not believe that adoption
of these standards will have a material impact on the Company's results of
operations.
Other: Certain amounts on the 1997 financial statements have been
reclassified to conform with the 1998 presentation. All amounts in these
financial statements are in United States dollars unless indicated with a "C"
to represent Canadian dollar presentation.
________________________________________________________________________________
/Continued... F - 11
INTERUNION FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
________________________________________________________________________________
3. MARKETABLE SECURITIES
As of March 31, 1998 Original Carrying Market
Cost Value Value
----------- ----------- -----------
Trading securities $35,335,725 $35,169,986 $35,169,986
Available for Sale --- --- ---
Held to maturity --- --- ---
----------- ----------- -----------
Total $35,335,725 $35,169,986 $35,169,986
=========== =========== ===========
As of March 31, 1997 Original Carrying Market
Cost Value Value
----------- ----------- -----------
Trading securities $29,006,131 $29,457,965 $29,457,965
Available for Sale --- --- ---
Held to maturity --- --- ---
----------- ----------- -----------
Total $29,006,131 $29,457,965 $29,457,965
=========== =========== ===========
For the year ending March 31, 1998 1997
----------- -----------
Proceeds from securities classified as available for sale --- 2,500,000
Gross realized gains (losses) from securities
classified as available for sale --- 335
Gross realized gains (losses) due to change
in classification to trading from available for sale --- ---
Change in net unrealized gains (losses)
on available for sale securities --- ---
Change in net unrealized gains (losses) on trading
securities included in revenues (159,831) 529,854
4. PROPERTY AND EQUIPMENT
March 31
----------------------
1998 1997
---------- ----------
Computer hardware and software $126,595 $104,046
ITM Computer software 1,924,443 1,924,443
Furniture, fixtures and equipment 70,650 69,786
Leasehold improvements 1,735 1,735
---------- ----------
Total cost 2,123,423 2,100,010
Less: accumulated depreciation 692,231 490,105
---------- ----------
$1,425,192 $1,609,905
========== ==========
Depreciation expense amounted to $210,462 and $219,444, respectively, for
the years ended March 31, 1998 and 1997.
________________________________________________________________________________
/Continued... F - 12
INTERUNION FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
________________________________________________________________________________
5. NOTES RECEIVABLE
1998 1997
--------- ---------
Note receivable from Receptagen Ltd. with no minimum
periodic payment, due September 15, 1998
plus interest at the rate of 11%, loan is secured by a
pledge on all of the intellectual property $616,579 $ ---
Note receivable from Receptagen Ltd. with no minimum
periodic payment, no maturity and no rate of interest
($292,229 + C$494,431); see notes payable for
corresponding obligation 641,255 ---
Note receivable from the purchaser of the Company's
auction subsidiary with no minimum periodic payment,
due June 30,2002 plus interest at the rate of 5.5%; purchaser
may prepay any amount with no penalty 310,851 ---
--------- --------
Total 1,568,685 ---
Less: current portion 616,579 ---
--------- --------
Non-current portion $952,106 $ ---
========= ========
The fair value of the non-interest bearing notes receivable from
Receptagen Ltd., as well as the corresponding obligation described in note 6,
cannot be determined because of the unique nature of these instruments.
6. NOTES PAYABLE
1998 1997
---------- ----------
Note payable, non-interest bearing, to the former shareholders of
The Glen-Ardith Frazer Corporation with no minimum periodic
payment, $662,412 and $476,857 due June 2, 1998 and
August 29, 2000 respectively; discounted for recording
using a rate of 8% $1,139,269 $ ---
Note payable with no minimum periodic payment,
due September 15, 1998 plus interest at the rate of 11%,
265,750 common shares issued as collateral 616,579 ---
Note payable to the co developer of Receptagen Ltd.'s research
with no minimum periodic payment, no maturity and no rate of
interest ($292,229 + C$494,431); see note receivable for
corresponding asset 641,255 ---
Note payable, non-interest bearing, to the former shareholders of
Leon Frazer, Black & Associates Limited with no minimum periodic
payment, $414,964 and $377,205 due July 2, 1998 and 1999
respectively; discounted for recording using a rate of 8% 792,169 ---
---------- ----------
Total 3,189,242 ---
Less: current portion 1,703,441 ---
---------- ----------
Long-term portion $1,485,801 $ ---
========== ==========
A portion of the note due to the former shareholders of Leon Frazer, Black
& Associates Limited ("LFB") was assumed when IUFC invested in Black Investment
Management Limited ("BIM"). (See Note 7)
The Company has a credit facility of up to C$2.35 million available with a
Canadian financial institution. As of March 31, 1998 this credit facility was
unused.
________________________________________________________________________________
/Continued... F - 13
INTERUNION FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
________________________________________________________________________________
7. ACQUISITIONS AND EQUITY INVESTMENTS
Leon Frazer, Black & Associates Ltd.: On July 2, 1997, IUFC acquired a
one third interest in all of the issued and outstanding shares of Leon Frazer,
Black & Associates Ltd. ("LFB") for cash of C$650,000, notes payable of
C$550,000 and acquisition costs of $170,000.
This investment will be accounted for using the equity method. The
difference between the carrying value of this investment and the underlying
equity in net assets is $1 million, and this amount will be amortized to equity
in earnings of unconsolidated affiliates over 20 years. During fiscal 1998,
$37,800 was amortized.
Cluster Asset Management Limited: Effective March 1, 1998, IUFC acquired
a 91.55% direct interest in all of the issued and outstanding shares of Cluster
Asset Management Limited ("CAM") for 213,194 IUFC common shares and 106,597
share purchase warants of valued at $852,776, assumption of debt valued at
$1,197,924 and acquisition costs of $59,768. Each share purchase warrant
entitles the holder to acquire an additional share of IUFC common stock at
$5.00 within two years. The acquisition has been accounted for using the
purchase method and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair values at the
date of acquisition. The excess of the purchase price over the fair value of
the net assets acquired was $2.07 million and has been recorded as goodwill,
which will be amortized over 20 years. During fiscal 1998, $8,516 was
amortizated.
The net purchased price was allocated as follows:
Working capital $19,945
Property and equipment 21,085
Goodwill 2,069,438
----------
Purchase price $2,110,468
==========
CAM's sole asset is a Canadian money management firm, The Glen
Ardith-Frazer Corporation ("GAF"), which was acquired by CAM in September 1997.
IUFC, in addition to its 91.55% direct interest, has an additional indirect
ownership of 4.08% of CAM throught its interest in LFB, as LFB owns directly
the 8.45% not owned by IUFC.
Subsequent to year end, CAM changed its name to InterUnion Asset
Management Limited ("IUAM").
Black Investment Management Limited.: Effective March 31, 1998, IUFC
acquired a 45% direct interest in all of the issued and outstanding shares of
Black Investment Management Limited ("BIM") for cash of $202,480, 216,640
shares of IUFC common stock valued at $788,570, assumption of notes payable of
$430,806 and acquisition costs of $67,151.
This investment will be accounted for using the equity method. The
difference between the carrying value of this investment and the underlying
equity in net assets is $1.3 million, and this amount will be amortized to
equity in earnings of unconsolidated affiliates over 20 years. During fiscal
1998, no amount was amortized.
A stand still agreement exists between the shareholders of BIM, whereby
IUFC agrees not to acquire additional shares in BIM until April 18, 1999.
________________________________________________________________________________
/Continued... F - 14
INTERUNION FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
BIM holds a 31.7% direct ownership interest in LFB, which it acquired in
July 1997. As a result, IUFC acquired (1) an additional indirect interest in
LFB of approximately 14.3% through its investment in BIM, and (2) an additional
1.3% indirect ownership of IUAM through BIM's ownership in LFB. In summary, as
a result of the above transactions, IUFC has the following ownership in these
entities:
Direct Indirect Total
BIM 45.0% 0.0% 45.0%
LFB 33.3% 14.3% 47.6%
IUAM 91.55% 4.1% 95.65%
The following table summarizes, on an unaudited proforma basis, the
combined results of the Company had the acquisition of consolidated affiliates
had taken place at the beginning of fiscal 1998. Appropriate proforma
adjustments have been made to reflect the accounting used in recording these
acquisitions. This pro-forma information does not purport to be indicative of
the results of operations that would have been resulted had the acquisitions
been in effect for the entire periods presented, and is not intended to be a
projection of future results or trends.
Proforma earnings data, 12 months to March 31, 1998
Revenue $4,057,806
Loss from continuing operations (821,212)
Net loss (17,083)
Loss per share (0.01)
The following table reflects, on an audited and unaudited pro-forma basis,
certain summarized financial information with regards to IUFC's equity method
affiliates.
LFB BIM
12 Months Ended 12 Months Ended
Dec 31/97 Mar 31/98 Dec 31/97 Mar 31/98
Audited Unaudited Audited Unaudited
--------- ----------- --------- -----------
Assets $250,747 $ 357,134 $816,759 $730,269
Liabilities 206,824 300,513 883,257 291,938
Revenues 909,170 811,051 918,856 929,233
Net Income 58,292 41,206 14,903 45,022
8. CAPITAL STOCK
On May 17,1996, the shareholders' of the Company approved a twenty (20) to
one (1) reverse stock split. All references to number of shares and exercise
prices have been adjusted accordingly. In addition, at the 1997 annual and
special shareholders meeting, shareholders' approved a reduction to the
authorized number of shares that may be issued for each class.
________________________________________________________________________________
/Continued... F - 15
INTERUNION FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
Currently, the number of shares authorized to be issued under each class
of stock is:
1,500,000 Class A Preferred Shares, ($0.10 par value), entitled to 100
votes for every one share issued, annual dividends, if declared
by the directors, at a rate of $0.01 per share, non-cumulative
1,000 Class B Preferred Shares, ($0.10 par value), non-voting, annual
dividends, if declared by the directors, at a rate to be
determined by the directors at the first issuance of these
shares, non-cumulative
1,000 Class C Preferred Shares, ($0.10 par value), non-voting, annual
dividends, if declared by the directors, at a rate to be
determined by the directors at the first issuance of these
shares, non-cumulative. These shares are convertible into
common stock at terms determined by the directors when these
shares are issued.
2,500,000 Common shares ($0.001 par value), each share has one vote
During fiscal 1997, the Company issued 277,142 shares of common stock for
gross proceeds of $759,142. Of these shares, 105,642 had common share purchase
warrants attached to them. Each warrant entitles the holder to purchase 1
additional common share at $6.00 within one year. A value of $78,175 was
assigned to the warrants.
During fiscal 1998, the Company issued 659,287 shares of common stock and
106,597 common stock purchase warrants for investments in affiliates (see note
7 & 13). The Company issued 60,000 and 15,000 shares of common stock upon the
exercise of stock options and warrants. In addition, the Company cancelled
50,000 shares that it received in reduction of the note receivable from the
purchaser of Reeve, Mackay & Associates Ltd.
Subsequent to year end the Company issued 35,000 shares of common stock
and 17,500 common share purchase warrants for net proceeds of $133,000, and
17,002 shares of common stock as per its agreement with Receptagen Ltd, for
which it will receive additional units from Receptagen Ltd.
9. STOCK OPTIONS AND WARRANTS
The Company currently issues stock options at the direction of the Board
of Directors. To date, non-qualified stock options have been granted to select
key employees under terms and conditions determined by the Board of Directors
at the time the options are issued.
Presented below is a summary of stock option plan activity:
Wt. Avg. Wt. Avg.
Exercise Options Exercise
Number Price Exercisable Price
------- -------- ----------- --------
Balance, April 1,1996 -- -- -- --
Granted 190,000 4.00 190,000 4.00
------- -------- ----------- --------
Balance, April 1,1997 190,000 4.00 190,000 4.00
Cancelled 145,000 4.00 145,000 4.00
Granted 135,000 3.56 135,000 3.56
Exercised 60,000 3.00 190,000 3.00
------- -------- ----------- --------
Balance, March 31,1998 120,000 $4.00 120,000 $4.00
======= ======== =========== ========
________________________________________________________________________________
/Continued... F - 16
INTERUNION FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
________________________________________________________________________________
Options and warrants outstanding and exercisable at March 31, 1998, as
well as those issued subsequent to March 31, 1998 are as follows:
Outstanding Exercisable
------------------------------------- ------------------
Wt. Avg. Wt. Avg. Wt. Avg.
Remaining Remaining Exercise
Price Number Life Exercise Price Number Price
----- ------- --------- -------------- ------ --------
$4.00 70,000 <1 4.00 70,000 4.00
4.00 106,597 <2 $4.00 106,597 $4.00
5.00 17,500 <2 5.00 17,500 5.00
4.00 50,000 <2 4.00 75,000 4.00
5.00 213,482 <2 5.00 213,482 5.00
Exercise Expire
Number Price Date
------- --------- ---------
70,000 $4.00 February 1999
213,482 5.00 April 1999
106,597 4.00 February 2000
17,500 5.00 March 2000
50,000 4.00 January 2001
SFAS No.123 requires entities that account for awards for stock-based
compensation to employees in accordance with APB No.25 to present pro forma
disclosures of net income and earnings per share as if compensation cost was
measured at the date of grant based on fair value of the award. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
1998 1997
------- -------
Expected life of the option 2 years 2 years
Risk free interest rate 5.5 % 5.2 %
Expected volatility 20.0 % 50.0%
Expected dividend yield 0.0 % 0.0 %
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
Had the compensation cost for the Company's stock option plan been
recognized based upon the fair value on the grant date under the methodology
prescribed by SFAS No. 123, the Company's income from continuing operations and
earnings per share for the year ended March 31, 1998 and 1997 would have been
impacted as indicated in the following table. The proforma results below
reflect only the impact of the options granted. EPS is presented following SFAS
No. 128.
1998 1997
---------------------- --------------------
Reported Proforma Reported Proforma
---------- ---------- --------- ---------
Income (loss) from continuing operations $(819,461) $(852,806) $160,676 $(50,888)
Net loss (15,287) (48,632) (230,153) (441,718)
Basic EPS from continuing operations (0.66) (0.69) 0.18 (0.06)
Basic EPS (0.01) (0.04) (0.25) (0.49)
Diluted EPS from continuing operations (0.66) (0.69) 0.16 (0.06)
Diluted EPS (0.01) (0.04) (0.25) (0.49)
________________________________________________________________________________
/Continued... F - 17
INTERUNION FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
________________________________________________________________________________
10. SALES COMMITMENT
The Company entered into an option agreement in fiscal 1996 with a major
international financial institution whereby software ("ITM Software") owned by
its subsidiary, Bearhill Limited ("Bearhill") may be purchased by the option
holder for approximately C$15,000,000 (at March 31,1998 - approximately
$10,600,000). The Companyis interest in this software is included in property
and equipment.
During the life of the non-transferable option, Bearhill will receive an
option fee from the option holder annually in order to maintain the option. The
decision to exercise this option is at the full and unlimited discretion of the
option holder. The future annual option fee are payable in Canadian dollars,
at the beginning of the corresponding periods as follows:
For the year beginning April 23,1998 C$ 50,000
For the year beginning April 23,1999 C$ 50,000
As of May 29, 1998, the option premium due for the period begining April
23, 1998 had not been paid. It is managements belief that this is not
significant, as the Company continues to manage approximately C$10 million
funds on behalf of the holder of the option.
11. DISCONTINUED OPERATIONS
During fiscal 1997, the Company adopted a formal plan to dispose of its
auction subsidiary, Reeve, Mackay & Associates Ltd. As a result, the Company
reclassified the operating losses and the net assets of the subsidiary as
separate items on the financial statements. No loss on disposition was accrued
at March 31,1997.
In July 1997, the Company sold the auction subsidiary. The operating loss
that was incurred by Reeve, Mackay until the date of sale is recorded as
operating losses from discontinued operations. The gain from discontinued
operations is equal to the excess of the liability over the assets carried by
the Company, resulted from the investment in and advances to Reeve, Mackay.
12. INCOME TAXES
IUFC files a consolidated US Federal income tax return for its US
operations and its US subsidiaries. Separate returns are filed, as locally
required, for each of its foreign subsidiaries. The provision for income taxes
consists of:
Year Ended March 31, 1998 1997
-------------------- --------- -------
Domestic
Current $ -- $ --
Deferred (85,000) 85,000
Foreign
Current 2,136 3,085
Deferred -- --
--------- -------
Total provision for income taxes $ (82,864) $88,085
========= =======
________________________________________________________________________________
/Continued... F - 18
INTERUNION FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
________________________________________________________________________________
The total provision for income taxes differs from that amount which would
be computed by applying the United States federal income tax rate to income
(loss) before provision for income taxes. The reason for these differences are
as follows:
Year Ended March 31, 1998 1997
-------------------- ---------- ---- -------- ---
Amount % Amount %
---------- ---- -------- ---
Statutory income tax rate (recovery) $(300,000) (34) $ 84,500 34
Foreign taxes payable 2,136 0 3,085 1
Effect of non taxable gain on
disposition of subsidiary 275,000 31 --- 0
Non-deductible items 17,500 2 10,500 4
Other, including valuation
allowance adjustment (78,450) (9) (10,000) (4)
---------- ---- -------- ---
Net taxes (recovery) and effective rate $ (82,864) (10) $ 88,085 35
---------- ---- -------- ---
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax basis of assets and liabilities and net operating loss
carryforwards. Temporary differences and carryforwards which give rise to
deferred tax assets and liabilities are as follows:
March 31, 1998 March 31, 1997
--------------------- ----------------------
Component Tax Effect Component Tax Effect
--------- ---------- ---------- ----------
Net operating losses - foreign $ 363,000 $ 145,000 $ 150,000 $ 60,000
Less valuation allowance (363,000) (145,000) (150,000) (60,000)
--------- ---------- ---------- ----------
Net deferred asset $ --- $ --- $ --- $ ---
--------- ---------- ---------- ----------
Net operating losses - domestic $ 310,000 $ 45,000 $ 90,000 $ 15,000
Unrealized gains - domestic (6,000) (900) (550,000) (100,000)
Less valuation allowance (304,000) (44,100) --- ---
--------- ---------- ---------- ----------
Net deferred asset $ --- $ --- $(460,000) $ (85,000)
--------- ---------- ---------- ----------
At March 31, 1998, the Company had cumulative net operating loss
carryforwards of approximately $310,000 and $363,000 in the United States and
Canada, respectively. These amounts will expire in various years through 2013.
In addition, the Company has capital loss carryforward of approximately
$1,250,000 for tax purposes. The related deferred tax asset has been
completely offset by a valuation allowance. This amount will expire in various
years begining in 2001. The Company has no significant deferred tax
liabilities
13. INVESTMENT BANKING ACTIVITIES
During fiscal 1997, IUFC entered into an agreement to act as investment
banker for the recapitalization of Receptagen Ltd. IUFC made available to
Receptagen a credit facility of C$400,000 (approximately $290,000). This
credit facility was exchanged for a convertible debenture of Receptagen which
has been converted into units of Receptagen at a rate of C$0.105 per unit.
Each unit is itself exchangeable, after the private placement outlined below,
into one common share and one share purchase warrant at C$0.14 for two years.
The credit facility was fully subscribed by investors other than the Company.
________________________________________________________________________________
/Continued... F - 19
INTERUNION FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
________________________________________________________________________________
On April 7, 1997, all creditors of Receptagen agreed to exchange debt of
approximately C$9 million for shares of common stock of IUFC issued under
Regulation "S" of the Securities Act of 1933, at a rate of C$0.20 per C$1.00 of
debt. IUFC expects to issue approximately 250,000 shares valued at $4.00 per
share for this transaction in addition to 220,000 share purchase warrant at
$4.00. In exchange, IUFC will receive C$0.20 per C$1.00 of debt of Receptagen
acquired from creditors in the form of a convertible debenture. This debenture
is convertible into unit "A" of Receptagen at a rate of C$0.07 per unit. Each
unit 'A' is exchangeable into one common share and one share purchase warrant
at C$0.14 within two years.
The third phase of the recapitalization of Receptagen involves a private
placement of C$2.5 million in Special Warrants, which closed in May 1997. The
offering price of these Special Warrants was C$0.116 and they are exchangeable
into one common share and one share purchase warrant at C$0.14 within two
years.
Receptagen is currently listed on the Toronto Stock Exchange ("RCG") and
trades on the NASD Over-the-Counter Bulletin Board ("RCEPF").
During the year, the Company made available a credit facility of up to
$875,000 to Receptagen. This credit facility is fully secured by Recepatgen's
intellectual property. Upon non-interested shareholders approval this loan may
be convertible in to common shares of Receptagen, with the conversion price
being C$0.035.
IUFC's ownership interest in Receptagen was 19.4% and 0%, respectively at
March 31, 1998 and 1997. The Company also holds 15,916,875 common share
purchase warrants at C$0.14 per warrant to acquire additional stock in
Receptagen and has a receivable in the amount of $350,000 for investment
services. The Company accounts for its investment in Receptagen following the
cost method. Because IUFC holds a security interest in Receptagen's
intellectual property, management believes that this investment, including the
related notes receivable, are recorded at the lower of cost or fair value.
Receptagen intends to hold, on June 30, 1998, an Annual and Special
Meeting of Shareholders where it is seeking approval to merge its operations
with GRN -International Inc., a multi-service contract research organization
providing research and development services to pharmaceutical, biotechnology
and medical device companies. Should this transaction be completed, the
Company's interest in Receptagen will be reduced to approximately 7.5%. In
addition, non-interested shareholders of Receptagen will vote to have all
warrants, issued in the restructuring, repriced at C$0.035 and extend the
expiration date to July 30, 2000, subject to certain conditions.
13. RELATED PARTY TRANSACTIONS
Directors, officers or employees of the Company may also be officers of
and serve on the board of directors of companies in which IUFC or its
subsidiaries have invested. This is considered to be in the normal course of
IUFC's business.
During the period ending March 31, 1998, the Company paid an entity owned
by one of its directors approximately $186,765 for services, and received
approximately $135,000 from the same company for advisory services.
During the period ending March 31, 1998, the Company paid an entity
related by common ownership approximately $300,000 for advisory fees.
________________________________________________________________________________
/Continued... F - 20
INTERUNION FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
________________________________________________________________________________
The Company paid an entity related by common ownership approximately
$35,000 and $40,000, during fiscal 1998 and 1997 respectively, which has been
included as rent expense. In turn, this related company has paid an unrelated
entity $40,000 as rent for these same premises.
On September 26,1996, the Company paid $80,000 to a related company in
order to acquire an option to purchase all of the outstanding shares of New
Research Corporation. The option expired on December 15,1997 and the Company
expensed the cost of the option.
14. COMMITMENTS AND CONTINGENCIES
The Company leases office space under a number of operating leases
expiring at various dates through to November 2007. The Company also has a
number of commitments with regards to information suppliers that expire at
various dates through to January 2000. The total minimum annual rentals,
exclusive of additional operating costs, under the leases for the company's
premises and information systems in each of the next five fiscal years are
approximately:
1999 $150,000
2000 130,000
2001 100,000
2002 90,000
2003 40,000
Payments under the above mentioned leases that have been charged to
operations for the periods ending March 31, 1998 and 1997 amount to $352,666
and $414,539, respectively.
From time to time the Company is exposed to claims and legal actions in
the normal course of business, some of which are initiated by the Company. At
March 31, 1998, management believes that any such outstanding issues will be
resolved without significantly impairing the financial condition of the
Company.
15. SUPPLEMENTAL CASH FLOW DISCLOSURE
The following is additional information regarding the Consolidated
Statement of Cash Flows:
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $76,627 $ 2,631
Cash paid during the period for income taxes 11,231 15,160
Supplemental disclosure of non-cash financing and investing:
Stock issued for long-term investments 3,002,986 ---
Common stock canceled 268,750 ---
Notes payable assumed in acquisitions 430,896 ---
________________________________________________________________________________
/Continued... F - 21
INTERUNION FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
________________________________________________________________________________
16. GEOGRAPHICAL AREA SEGMENTATION
The following tables summaries the revenues, operating profits (losses)
from continuing operations and identifiable assets by geographical area.
Adjustments
United &
Canada States Other Elimination Consolidated
----------- --------- ----------- ----------- ------------
For the year ended and as of March 31, 1998
Revenue from unaffiliated customers $ 3,343,052 $ (262,065) $ 34,420 $ -- $ 3,115,407
Revenue from intersegments 312,745 50,000 -- (362,745) --
----------- ----------- ----------- --------- -----------
Total revenue 3,655,797 212,065 34,420 -- 3,115,407
=========== =========== =========== ========= ===========
Depreciation & Amortization 47,450 992 192,444 -- 240,886
=========== =========== =========== ========= ===========
Operating profit 198,085 (693,742) (242,309) -- (743,966)
=========== =========== =========== =========
General corporate expenses 175,000
Interest expenses, net (24,951)
-----------
Income from continuing Operations
before provision for income taxes (894,015)
===========
Identifiable assets 9,102,875 1,679,781 37,961,076 -- 48,743,732
=========== =========== =========== ========= ===========
For the year ended and as of March 31, 1997
Revenue from unaffiliated customers $ 4,220,784 $ 1,477,062 $ 14,337 $ -- $ 5,712,183
Revenue from intersegments 292,567 -- -- (292,567) --
----------- ----------- ----------- ---------- -----------
Total revenue 4,513,351 1,477,062 14,337 -- 5,712,183
=========== =========== =========== ========== ===========
Depreciation & Amortization 25,986 574 214,352 -- 240,912
=========== =========== =========== ========== ===========
Operating profit 104,931 550,424 (229,628) -- 425,727
=========== =========== =========== ==========
General corporate expenses 200,000
Interest expenses, net (23,034)
-----------
Income from continuing
Operations before provision
for income taxes 248,761
===========
Identifiable assets 11,253,145 25,990,456 1,576,906 -- 38,820,507
=========== =========== =========== ========== ===========
For both fiscal years ended March 31, 1998 and March 31, 1997 the Company
did not have any customers that represented revenues in excess of 10%, nor did
the Company have activities outside of the financial services industry.
________________________________________________________________________________
F - 22