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As filed with the Securities and Exchange Commission on September 25, 1998
REGISTRATION NO. 333-59897
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
(AMENDMENT NO. 2)
SEL-DRUM INTERNATIONAL, INC.
(Name of small business issuer in its charter)
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NEW YORK 3570 84-1236134
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code)
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501 AMHERST STREET
BUFFALO, NEW YORK 14207-2913
800-263-9356
(Address and telephone number of principal executive offices)
(Address of principal place of business or intended principal place of business)
RAYMOND C. SPARKS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SEL-DRUM INTERNATIONAL, INC.
501 AMHERST STREET
BUFFALO, NEW YORK 14207-2913
800-263-9356
(Name, address and telephone number
of agent for service)
Copies to:
James M. Jenkins, Esq.
Harter, Secrest & Emery LLP
700 Midtown Tower
Rochester, New York 14604-2070
(716) 232-6500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
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If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CROSS REFERENCE SHEET
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS OF THE FORM PURSUANT TO RULE 404(a)
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Form SB-2 Caption Prospectus Caption
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1. Front of Registration Statement and Prospectus Outside Front Cover Page
Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Inside Front Cover Page; AVAILABLE
Pages of Prospectus INFORMATION; TABLE OF CONTENTS;
REPORTS TO SECURITY HOLDERS
3. Summary Information and Risk PROSPECTUS SUMMARY - The Company,
Factors The Offering; RISK FACTORS; SELECTED
FINANCIAL DATA
4. Use of Proceeds Prospectus Outside Front Cover Page; USE
OF PROCEEDS
5. Determination of Offering Price Plan of Distribution
6. Dilution Not Applicable
7. Selling Security Holders Prospectus Outside Front Cover Page;
PROSPECTUS SUMMARY; SELLING
SHAREHOLDERS; PLAN OF DISTRIBUTION
8. Plan of Distribution Prospectus Outside Front Cover Page;
PROSPECTUS SUMMARY; SELLING SHAREHOLDERS;
PLAN OF DISTRIBUTION
9. Legal Proceedings LEGAL MATTERS
10. Directors, Executive Officers, MANAGEMENT
Promoters and Control Persons
11. Security Ownership of Certain SECURITY OWNERSHIP OF CERTAIN
Beneficial Owners and Management BENEFICIAL OWNERS AND MANAGEMENT
12. Description of Securities DESCRIPTION OF CAPITAL STOCK
13. Interest of Named Experts and Not Applicable
Counsel
14. Disclosure of Commission Position LIMITATION OF LIABILITY AND
on Indemnification for Securities Act INDEMNIFICATION MATTERS
Liabilities
15. Organization Within Last Five Years RELATED TRANSACTIONS
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16. Description of Business PROSPECTUS SUMMARY; THE
COMPANY
17. Management's Discussion and MANAGEMENT'S DISCUSSION AND
Analysis or Plan of Operation ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
18. Description of Property THE COMPANY - Properties
19. Certain Relationships and Related RELATED TRANSACTIONS
Transactions
20. Market for Common Equity and Prospectus Outside Front Cover; RISK
Related Stockholder Matters FACTORS; MARKET INFORMATION;
DIVIDEND POLICY; PLAN OF
DISTRIBUTION
21. Executive Compensation EXECUTIVE COMPENSATION;
RELATED TRANSACTIONS
22. Financial Statements FINANCIAL STATEMENTS
23. Changes In and Disagreements With Not Applicable
Accountants on Accounting and
Financial Disclosure
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SUBJECT TO COMPLETION, DATED SEPTEMBER 25, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
970,000 SHARES OF COMMON STOCK
SEL-DRUM INTERNATIONAL, INC.
All of the 970,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), of Sel-Drum International, Inc., a New York corporation
("Sel-Drum" or the "Company"), offered hereby (the "Shares") are being offered
for the account of certain shareholders of the Company (the "Selling
Shareholders"). The Company will receive none of the proceeds from the sale of
the Shares.
The Common Stock is quoted on the OTC Electronic Bulletin Board (the
"OTC Bulletin Board") under the symbol "SDUM." As of September 22, 1998, the
average bid and asked prices of the Common Stock on the OTC Bulletin Board was
$.625 per share (See "MARKET INFORMATION"). There can be no assurance that an
active and reliable public market will develop or, if developed, that such
market will be sustained.
The public offering price for the Common Stock will be $0.50 per share.
The offering price of the Common Stock has been determined by negotiation among
the Selling Shareholders, the Company and Pittsford Capital Markets, Inc. (the
"Underwriter"), and is not related to the Company's asset value or any other
established criteria of value. For the method of determining the public offering
price of the Common Stock, see "PLAN OF DISTRIBUTION."
The Company will pay half of all fees and expenses incident to the
registration of the Shares offered hereby, other than the following expenses
which will be borne by the Selling Shareholders: discounts and commissions
payable to brokers or dealers in respect of sales of the Shares, and stock
transfer taxes (See "PLAN OF DISTRIBUTION" and "SELLING SHAREHOLDERS").
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THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A
SUBSTANTIAL DEGREE OF RISK. SEE "RISK FACTORS" STARTING ON PAGE 11
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED BY
PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Underwriting Proceeds to
Discount and Selling
Price to Public Commissions(1) Shareholders(2)
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Per Share, Common Stock $.50 $.05 $.45
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Total Maximum $485,000 $48,500 $436,500
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Total Minimum (3)(4) $125,000 $12,500 $112,500
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(1) Does not reflect additional compensation to be received by the Underwriter in the form of: (a) a non-accountable
expense allowance of $4,850; (b) warrants to purchase up to 97,000 shares of Common Stock at a purchase price of $.70 (that
being 140% of the public offering price) (the "Underwriter's Warrant"); and (c) a Financial Consulting Agreement pursuant to
which the Underwriter will receive either $1,000 per month for 12 months if the maximum number of Shares offered hereby is
sold, or $500 per month for 12 months if only the minimum number of Shares offered hereby is sold. In addition, the Company
and the Selling Shareholders have agreed to indemnify the Underwriter against certain civil liabilities under the Securities
Act of 1933, as amended. See "PLAN OF DISTRIBUTION."
(2) The Company will not receive any proceeds from the market sales of the Shares owned by the Selling Shareholders. The
Company is reimbursing the Selling Shareholders for half of the expenses incident to the registration of the Shares
offered hereby, except selling commissions and stock transfer taxes. The Company estimates such expenses to be
approximately $22,500.
(3) If at least 250,000 Shares are not sold within 75 days of the Effective Date, all subscription documents and funds
(together with any interest earned thereon) will be promptly refunded to subscribers and the Offering will
terminate. If at least 250,000 Shares are sold prior to the 75 day period, the Company may close the Offering as to
these subscribers (the "First Closing") and continue the Offering of unsold Shares for up to 150 additional days. All
subscribers' checks will be deposited with First National Bank of Rochester, as escrow agent, by noon of the next business
day after receipt. See "PLAN OF DISTRIBUTION."
(4) The Underwriter will not accept offers to purchase fewer than 2,000 Shares.
</FN>
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The date of this Prospectus is ______________, 1998.
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NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, AND ANY INFORMATION OR REPRESENTATION NOT
CONTAINED OR INCORPORATED BY REFERENCE HEREIN MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS, OR THE UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
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AVAILABLE INFORMATION........................................................................................... 9
REPORTS TO SHAREHOLDERS......................................................................................... 9
PROSPECTUS SUMMARY.............................................................................................. 9
RISK FACTORS.................................................................................................... 11
MARKET INFORMATION.............................................................................................. 16
THE COMPANY..................................................................................................... 17
USE OF PROCEEDS................................................................................................. 19
DIVIDEND POLICY................................................................................................. 19
SELECTED FINANCIAL DATA......................................................................................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................................................................... 21
THE COMPANY..................................................................................................... 25
MANAGEMENT...................................................................................................... 31
EXECUTIVE COMPENSATION.......................................................................................... 33
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT............................................................................. 35
RELATED TRANSACTIONS............................................................................................ 36
SELLING SHAREHOLDERS............................................................................................ 37
PLAN OF DISTRIBUTION............................................................................................ 38
DESCRIPTION OF CAPITAL STOCK.................................................................................... 41
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS............................................................. 41
LEGAL MATTERS................................................................................................... 43
EXPERTS ........................................................................................................ 43
FINANCIAL STATEMENTS............................................................................................ F-1
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AVAILABLE INFORMATION
The Company has filed a registration statement on Form SB-2 (together
with any amendments thereto, the "Registration Statement") with the Securities
and Exchange Commission (the "Commission") under the Securities Act with respect
to the Shares. This Prospectus, which constitutes a part of the Registration
Statement, omits certain information contained in the Registration Statement and
reference is made to the Registration Statement and the Exhibits and Schedules
thereto for further information with respect to the Company and the Common
Stock. Statements contained in this Prospectus as to the contents of certain
documents filed with, or incorporated by reference in, the Registration
Statement are not necessarily complete, and in each instance reference is made
to such document, each such statement is qualified in all respects by such
reference.
The Company is subject to the information requirements of the Exchange
Act of 1934, as amended (the "Exchange Act") and in accordance therewith is
required to file reports, and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, and other information may be
inspected and copied at the Commission's Public Reference Section located in
Room 1024 at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and at 7 World Trade Center, Suite
1300, New York, New York 10048 at prescribed rates. The Commission also
maintains a web site at "http:\\www.sec.gov" where such material filed
electronically can be examined.
REPORTS TO SHAREHOLDERS
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, UPON THE WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A
COPY OF ANY AND ALL OF THE FOREGOING DOCUMENTS AND INFORMATION THAT HAVE BEEN
FILED WITH THE COMMISSION. REQUESTS SHOULD BE DIRECTED TO RAYMOND C. SPARKS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER, SEL-DRUM INTERNATIONAL, INC., 501 AMHERST
STREET, BUFFALO, NEW YORK 14207-2913; TELEPHONE 800-263-9356.
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL
REFERENCES TO AND INFORMATION CONCERNING "THE COMPANY" INCLUDES SEL-DRUM
INTERNATIONAL, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES. HISTORICAL INFORMATION,
EXCEPT FOR THE FINANCIAL STATEMENTS, PRESENTS THE OPERATIONS OF THE COMPANY AND
ITS SUBSIDIARIES ON A COMBINED BASIS, UNLESS OTHERWISE INDICATED.
THE COMPANY
Sel-Drum is a leading independent distributor of high mortality copier
and printer replacement parts and supplies. As one of the largest independent
high mortality copier parts distribution companies in North America, Sel-Drum
provides a link between parts
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manufacturers, sellers and buyers. Sel-Drum is also developing strong
relationships with suppliers who seek advanced inventory management and order
processing. The Company is headquartered at 501 Amherst Street, Buffalo, New
York 14207-2913; Telephone: 800-263-9356.
THE OFFERING
All of the 970,000 Shares of Common Stock, par value $.01 per share (the
"Common Stock"), of Sel-Drum International, Inc., a New York corporation
("Sel-Drum" or the "Company"), offered hereby (the "Shares") are being offered
for the account of certain shareholders of the Company (the "Selling
Shareholders"). The Company will receive none of the proceeds from the sale of
the Shares.
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Securities registered on behalf of
the Selling Shareholders 970,000 Shares of Common Stock (1)
Common stock outstanding prior to this
offering 7,542,500 Shares (2)
Common stock outstanding after this
offering 7,542,500 Shares (2)
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<FN>
(1) Does not include up to 97,000 shares of Common Stock issuable pursuant to the Underwriter's Warrant.
(2) Does not include 416,667 shares issuable pursuant to options which are exercisable within 60 days
from the date of this Prospectus.
</FN>
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RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH
BELOW, IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, IN EVALUATING AN INVESTMENT IN THE SHARES OFFERED
HEREBY.
PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK. The Company's Common Stock
currently trades on the National Association of Securities Dealers, Inc. OTC
Electronic Bulletin Board. The Company intends to apply to list the Common Stock
on the Chicago Stock Exchange after the closing of this Offering. See
"Applicability of Penny Stock Rules" under "RISK FACTORS" for listing
requirement information. The Company may also apply to list the Common Stock on
The Nasdaq SmallCap Market or a national or other regional stock exchange. There
can be no assurance that a market for the Common Stock will develop or be
sustained. As a result, purchasers of the Shares may have difficulty in selling
such Shares should they desire to do so. See "MARKET INFORMATION."
COMMON STOCK ELIGIBLE FOR RESALE. Of the 7,542,500 shares of Common
Stock presently outstanding, over 6,283,680 shares are "restricted securities"
and under certain circumstances may be sold in compliance with Rule 144 adopted
under the Securities Act. Future sales of such shares are likely to depress the
market price of the Company's Common Stock, which would have an adverse effect
on the value of the Company's Common Stock. See "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT."
REVERSE STOCK SPLIT. Following the close of this Offering, the Company's
Management intends to submit a proposal to the Company's shareholders to
approve and ratify an amendment to the Company's Restated Certificate of
Incorporation to effect a reverse stock split. As of the date of this
Prospectus, Management expects up to a 0.33-for-one stock split to be submitted
for approval by the Shareholders. All references to the Company's Common Stock
contained in this Prospectus do not give effect to the stock split.
DETERMINATION OF OFFERING PRICE. The public offering price for the
Common Stock is $0.50 per share. The offering price of the Common Stock has
been determined by negotiation among the Selling Shareholders, the Company and
the Underwriter, and is not related to the Company's asset value or any other
established criteria of value. For the method of determining the public offering
price of the Common Stock, see "PLAN OF DISTRIBUTION."
ABILITY TO RESPOND TO RAPID CHANGE. The Company's future success will
depend significantly on its ability to enhance its current products and develop
or acquire and market new products which keep pace with technological
developments and evolving industry standards as well as to respond to changes in
customer needs. The failure of the Company's management to adapt to changing
technological and business conditions, as well as the growth of its own
business, results of operations and prospects, would have a material adverse
effect on the Company's business. See "THE COMPANY."
RELIANCE ON MAJOR CUSTOMERS. The Company estimates that approximately
30% of its gross sales for the fiscal year ending July 31, 1998 will be
attributable to one customer's
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dealer network. The loss of this relationship would have a material adverse
effect on the financial condition of the Company. See "THE COMPANY - Sales and
Marketing."
MANAGEMENT TRANSITION; DEPENDENCE UPON KEY PERSONNEL. The Company's
success will depend in large measure on the efforts of key senior management.
The Company recently announced that it had hired Raymond C. Sparks as its new
Chief Executive Officer and President, replacing the Company's founder, Brian F.
Turnbull. Mr. Turnbull will remain as Chairman of the Board and will devote a
substantial amount of time working on the Company's export business and
transitioning his prior responsibilities to Mr. Sparks. The loss of the services
of Mr. Turnbull or Mr. Sparks or the loss of other key personnel could have a
material adverse effect on the Company. See "THE COMPANY; MANAGEMENT."
MANAGEMENT OF CHANGING OPERATIONS. The Company's future performance will
depend, in part, on its ability to manage changes in its operations and will
require the Company to hire additional management and technical personnel,
particularly in the marketing and customer support areas. In addition, the
Company's ability to manage changes in its operations will require it to
continue to improve its operational and financial control system and to attract,
train, motivate, manage and retain key employees. If the Company's management
were to become unable to manage these changes effectively, that would have a
material adverse effect on the Company's financial condition, prospects and
operating results. See "THE COMPANY."
POTENTIAL UNSPECIFIED ACQUISITIONS. The Company is currently considering
acquiring other businesses within its industry segment from whom economies of
scale can be achieved. In the event the Company determines to acquire such
businesses or assets, investors may not have an opportunity to review the
financial statements of such businesses or to vote on such acquisitions. To
date, the Company has not identified any acquisition candidates and no
assurances can be given that any such acquisitions will occur or if any occur
whether such acquisitions will provide the economies of scale the Company
desires from such candidates. See "THE COMPANY - History, Strategy."
COMPETITION. The high mortality copier and printer replacement parts
business is highly competitive. The Company believes that competition in the
industry is based principally upon experience, quality, prices and the ability
to meet customer delivery requirements. Competition in the industry affects the
Company's ability to increase prices on certain products and, in some cases,
subjects the Company to pressure from its customers to reduce prices. While
recently committing its efforts to improve its remanufacturing and assembly
processes to permit the Company to reduce costs through operating efficiencies,
thereby improving profitability, there can be no assurances that these efforts
will serve to improve productivity and profitability. Additionally, some of the
Company's competitors have greater financial resources than the Company and
there can be no assurance that the Company will be able to compete effectively
with these competitors. See "THE COMPANY - Competition."
CONTROL BY MANAGEMENT. Management currently holds approximately 83.90%
of the Common Stock of the Company. As a result, management is in a position to
control the
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management and policies of the Company, including, but not limited to, electing
or removing the Company's Board of Directors, changing the core business of the
Company, causing or restricting the sale of the Company, causing the Company to
engage in transactions with affiliated companies and controlling the Company's
dividend policy. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
RELIANCE ON QUALITY CONTROL OF UNAFFILIATED MANUFACTURERS. Although the
Company believes that it maintains good control with respect to product
specifications and quality, there can be no assurance that unaffiliated
manufacturers will remain able or willing to continue to manufacture the
Company's distributed products consistent with the Company's quality and
performance standards. In this regard, the Company has occasionally received,
and may in the future receive, shipments of product from unaffiliated
manufacturers of products that fail to conform to the Company's quality control
standards or are not timely delivered. Although shipments from unaffiliated
manufacturers of products that failed to conform to the Company's standards have
not materially affected the Company's operation, there cannot be any assurance
that such failure in the future would not materially adversely affect the
Company's results of operations or its reputation in the marketplace. See "THE
COMPANY - Strategy."
CURRENCY RISKS. Although the Company currently effects substantially all
of its transactions in United States dollars and approximately 70% of its sales
are made in the United States, in those situations in which transactions are in
foreign currencies, the Company is exposed to risks such as currency
instability, currency exchange losses and the ability to repatriate earnings
under existing exchange control laws. The Company does not currently engage in
hedging, and no assurance can be given that an effective currency hedging policy
could offset these currency risks.
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS. The
Company's officers and directors are residents of Canada and a significant
portion of the assets of the Company are or may be located outside of the United
States. As a result, service of process may be effected upon the Company through
its offices in New York, but it may be difficult for investors to effect service
of process within the United States upon non-resident officers and directors, or
to enforce against them judgments obtained in the United States courts
predicated upon the civil liability provision of the Securities Act or the state
securities laws. The Company believes that a judgment of a United States court
predicated solely upon civil liability under the Securities Act would probably
be enforceable in Canada if the United States court in which the judgment was
obtained had a basis for jurisdiction in the matter that was recognized by a
Canadian court for such purposes. However, there is substantial doubt whether an
action could be brought in Canada in the first instance on the basis of
liability predicated solely upon such laws. If investors have questions with
regard to these issues, they should seek the advice of their individual counsel.
The Company believes that, pursuant to the Currency Act (Canada), a judgment by
a court in any Province of Canada may only be awarded in Canadian currency.
Pursuant to the provision of the Courts of Justice Act (Ontario), however, a
court in the Province of Ontario shall give effect to the manner of conversion
to Canadian currency of an amount in a foreign currency, where such manner of
conversion is provided for in an obligation enforceable in Ontario.
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AUTHORIZATION OF PREFERRED STOCK. The Company's Restated Certificate of
Incorporation authorizes the issuance of "preferred" stock with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without shareholder approval, to designate and issue the "preferred" stock as
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
the Company's Common Stock. Also, the voting power and percentage of stock
ownership of the shareholders of the Company's outstanding Common Stock can be
substantially diluted by such preferred stock issuance. In addition, the
issuance of such preferred stock may have the effect of rendering more difficult
or discouraging an acquisition of the Company or changes in control of the
Company. See "DESCRIPTION OF CAPITAL STOCK - Preferred Stock."
APPLICABILITY OF "PENNY STOCK RULES" TO BROKER-DEALER SALES OF THE
COMPANY'S COMMON STOCK. At the present time, the Company's Common Stock is not
listed on The Nasdaq Stock Market or on any national or regional stock exchange.
Although dealer prices for the Company's Common Stock are listed on the OTC
Bulletin Board, trading has been sporadic and limited since such quotations
first appeared on June 20, 1995. See "MARKET INFORMATION." The Company intends
to apply to the Chicago Stock Exchange for listing of its Common Stock as soon
as practicable after the closing of this Offering. The current requirements for
listing on the Chicago Stock Exchange Tier II include net tangible assets of
$2,000,000; a demonstrated ability to produce adequate net earnings; a public
float of at least 250,000 shares; at lease 500 shareholders; at least 3 years
operating history; and two independent members on the Board of Directors. While
the Management of the Company believes that these criteria may be met, there can
be no assurances that a listing will be obtained or, if obtained, the listing
will continue.
The Company also intends to apply to have its Common Stock approved for
quotation on The Nasdaq SmallCap Market (the "Small Cap Market") at such time as
it meets the requirements for inclusion, which under current Nasdaq rules,
require a company to have, among other things, net tangible assets of $5,000,000
or meet certain other market capitalization or net income requirements, a
"public float" valued at least $1,000,000, and a minimum bid price of $4.00 per
share. At the present time, the Company is unable to state when, if ever, it
will meet the Nasdaq application standards. Moreover, even if the Company meets
the minimum requirements to apply for inclusion in the SmallCap Market, there
can be no assurance that approval will be received or, if received, that the
Company will meet the requirements for continued listing on the SmallCap Market.
Further, Nasdaq reserves the right to withdraw or terminate a listing on the
SmallCap Market at any time and for any reason in its discretion. If the Company
is unable to obtain or to maintain a listing on the SmallCap Market, quotations,
if any, for "bid" and "asked" prices of the Common Stock would be available only
in the "pink sheets" published by the National Quotation Bureau, Inc. or on the
OTC Bulletin Board where the Common Stock is currently quoted. This means
that an investor may find it more difficult to dispose of or to obtain accurate
quotations of prices for the Common Stock than would be the case if the Common
Stock were quoted on the SmallCap Market.
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Irrespective of whether or not the Common Stock is included on the
Chicago Stock Exchange or in the Nasdaq system, there is no assurance that the
public market for the Common Stock will become more active or liquid in the
future. In that regard, prospective purchasers should consider that this
Offering is being made without underwriting arrangements typically found in an
initial public offering of securities. Such arrangements generally provide for
the issuer of the securities to sell the securities to an underwriter which, in
turn, sells the securities to its customers and other members of the public at a
fixed offering price, with the result that the underwriter has a continuing
interest in the market for such securities following the offering.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a "penny stock." Commission regulations generally
define a penny stock to be an equity security that has a market price of less
than $5.00 per share and is not listed on The Nasdaq Stock Market or a major
stock exchange. These regulations subject all broker-dealer transactions
involving such securities to the special "Penny Stock Rules" set forth in Rule
15g-9 of the Securities Exchange Act of 1934, as amended (the "'34 Act"). It may
be necessary for the Selling Shareholders to utilize the services of
broker-dealers who are members of the NASD. The current market price of the
Company's Common Stock is substantially less than $5.00 per share and such stock
can, for at least the foreseeable future, be expected to continue to trade
in the over-the-counter market at a per share market price of less than $5.00
(see "MARKET INFORMATION"). Accordingly, any broker-dealer sales of the Shares
being registered hereunder, as well as any subsequent market transactions in the
Company's Common Stock, may be subject to the Penny Stock Rules. These Penny
Stock Rules affect the ability of broker-dealers to sell the Company's Common
Stock and also may affect the ability of purchasers in this Offering to sell
their Shares in the secondary market, if such market should ever develop. There
is an exemption from the Penny Stock Rules for companies whose most recently
audited financial statements reflect net tangible assets in excess of
$5,000,000. The Company believes it meets this exemption and will continue to do
so for the foreseeable future.
The Penny Stock Rules also impose special sales practice requirements on
broker-dealers who sell such securities to persons other than their established
customers or "Accredited Investors." Among other things, Penny Stock Rules
require that a broker-dealer make a special suitability determination respecting
the purchaser and receive the purchaser's written agreement to the transaction
prior to the sale. In addition, the Penny Stock Rules require that a
broker-dealer deliver, prior to any transaction, a disclosure schedule prepared
in accordance with the requirements of the Commission relating to the penny
stock market. Disclosure also has to be made about commissions payable to both
the broker-dealer and the registered representative and the current quotations
for the securities. Finally, monthly statements have to be sent to any holder of
such penny stocks disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stocks.
Accordingly, if the Penny Stock Rules were to become applicable to the Company's
Common Stock, it would be difficult to trade such stock because compliance with
such Penny Stock Rules can delay and/or preclude certain trading transactions.
This could have an adverse effect on the liquidity and/or price of the Company's
Common Stock.
- 15 -
<PAGE> 16
MARKET INFORMATION
The Company's Common Stock is traded on a limited basis in the
over-the-counter market and quoted on the OTC Electronic Bulletin Board
maintained by the National Association of Securities Dealers, Inc. (the "OTC
Bulletin Board"). The following table sets forth representative high and low bid
prices by calendar quarters as reported on the OTC Bulletin Board during the
last three fiscal years. The Company's Common Stock has not traded since July 1,
1998. Since the level of trading in the Company's Common Stock has been limited,
the bid prices reported may not be indicative of the value of the Common Stock
or the existence of an active market. The OTC Bulletin Board market quotations
reflect inter-dealer prices without retail markup, mark-down, or other fees or
commissions, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Bid Prices
Period Common Stock
Low High
Fiscal Year Ended July 31, 1996
<S> <C> <C> <C>
October 31, 1995 $1.50 $1.50
January 31, 1996 1.00 1.25
April 30, 1996 0.25 0.50
July 31, 1996 0.375 0.875
Fiscal Year Ended July 31, 1997
October 31, 1996 $0.625 $0.625
January 31, 1997 0.250 0.625
April 30, 1997 0.0625 0.0625
July 31, 1997 0.0625 0.125
Fiscal Year Ending July 31, 1998
October 31, 1997 $0.0625 $0.125
January 31, 1998 0.07 0.4375
April 30, 1998 0.375 0.53125
July 31, 1998 0.3125 0.87
</TABLE>
- 16 -
<PAGE> 17
SHAREHOLDERS
As of September 25, 1998, the number of holders of record of the Common
Stock, $.01 par value of the Company was 376.
THE COMPANY
Sel-Drum International, Inc., a New York Corporation ("Sel-Drum" or the
"Company") is the successor corporation to Dakota Equities, Ltd. (which was
incorporated in Colorado on June 16, 1993), a publicly-held "blank check" or
"blind pool" company, i.e., it had no operations of its own, its intent being to
acquire existing assets, properties, companies and/or operating a start-up
business. On November 26, 1993, the Company filed a Form 10-SB to register its
Common Stock pursuant to Section 12(g) of the Securities Exchange Act of 1934,
as amended. On February 1, 1995, the Company acquired all the outstanding common
shares of Sel-Drum Imaging Corporation, the parent corporation of a privately
held Canadian corporation and a privately held U.S. corporation, which was
founded in 1978. The Company also acquired, through its subsidiary Sel-Drum
Imaging Corporation, Micron Imaging Corp. Micron Imaging Corp. (which was
amalgamated with Sel-Drum Corporation in November 1996) houses the Company's
drum manufacturing and printer cartridge remanufacturing facility in Kelowna,
British Columbia (the "Kelowna Facility").
Through its Sel-Drum Imaging Corporation subsidiary, the Company has two
wholly-owned subsidiaries, Sel-Drum Corporation (U.S.A), Inc. and Sel-Drum
Corporation (which amalgamated Micron Imaging Corp. (now the "Kelowna Facility")
on November 1, 1996). Unless otherwise indicated, all references to "Sel-Drum"
or the "Company" include the Company, Sel-Drum Imaging Corporation, Sel-Drum
Corporation and Sel-Drum Corporation (U.S.A.), Inc. Sel-Drum Corporation
(U.S.A.), Inc. and Sel-Drum Corporation employ a number of sales agents and
telemarketers who contact directly the copier machine dealers throughout North
America. There are approximately 12,000 such dealers marketing various brands of
copier products. The Company estimates that the potential marketplace for high
mortality replacement parts, drums and toner, not controlled by the Original
Equipment Manufacturers ("OEM's") to be approximately $675 million in North
America.
Sel-Drum is a leading independent distributor of high mortality copier
and printer replacement parts and supplies. As one of the largest independent
high mortality copier parts distribution companies in North America, Sel-Drum
provides a link between parts manufacturers, sellers and buyers. Sel-Drum is
also developing strong relationships with suppliers who seek advanced inventory
management and order processing.
The Company's primary business is the distribution of high mortality
copier and printer replacement parts, toners, and photoreceptors ("Drums"),
including, to a limited extent, the manufacturing of Drums. On August 1, 1995,
the Company added remanufactured facsimile and printer cartridges to its product
offering. The Company markets in the United States and Canada through a direct
network of sales agents and telemarketers. Outside of North America, the Company
is represented by several distributors with their sales accounting for less than
5% of the total revenues.
- 17 -
<PAGE> 18
On March 7, 1997, the Company and certain principal shareholders
terminated discussions with JRCS Corp. regarding the sale of substantially all
of the outstanding capital stock of the Company.
In late 1997, the Company initiated a strategic plan which was designed
to focus on the longer term growth prospects of the Company. This new strategy
calls for concentrating efforts on the Company's core business and the existing
opportunities within the high mortality copier replacement part and printer
replacement part marketplace. The implementation of this strategy includes
programs aimed at bolstering the Company's core business. Specifically, the
Company is looking at its under-utilization of the Kelowna Facility with a view
toward having the Kelowna Facility provide increased distribution support.
Additional strategic items include seeking acquisition candidates and a
listing on the Chicago Stock Exchange, The Nasdaq SmallCap Market or a national
or other regional exchange, and establishing integrated data systems, all of
which may serve to increase the Company's budgeted 1998 expenses.
On October 29, 1997, the Company announced that it had hired Raymond C.
Sparks as its new Chief Executive Officer and President, replacing Brian F.
Turnbull who has agreed to remain with the Company as Chairman of the Board of
Directors.
In December 1997, the Company reorganized its sales staff and began
implementing this reorganization during the month of January 1998. As a result
of this reorganization of sales staff, the Company expects sales to be flat
during Fiscal 1998.
On January 6, 1998, the Shareholders approved the reincorporation of the
Company as a New York corporation. The reincorporation became effective on March
6, 1998.
On January 15, 1998, the Company began funding a repurchase of 172
shares of Class C and 241 shares of Class D Preferred Stock in the Company's
Sel-Drum Imaging Corporation subsidiary held by two of the Company's principal
shareholders. The total purchase price was approximately $300,000, of which
approximately $175,000 was delivered during the quarter ended January 31, 1998,
and the remainder during the quarter ended April 30, 1998. The Company does not
anticipate funding additional repurchases of Sel-Drum Imaging Corporation's
Preferred Stock at any time in the foreseeable future.
On August 1, 1998, the Company repurchased 100,000 shares of its Common
Stock from Brien Murtagh pursuant to a Share Repurchase and Non-competition
Agreement dated as of February 1, 1998, at $1.00 per share. The terms of this
Agreement are discussed more fully in "RELATED TRANSACTIONS."
The Company entered into a Financial Consulting Agreement with Pittsford
Capital Markets, Inc. ("Pittsford Capital"), dated as of August 1, 1998. The
Financial Consulting Agreement provides that Pittsford Capital will receive (i)
a monthly fee of $1,000 for a twelve month period if the maximum number of
Shares offered hereby is sold, or $500 per month for a twelve month period if
only the minimum number of Shares offered hereby (250,000 Shares) are sold; and
(ii) $85,000 per transaction for which the Company engages Pittsford Capital as
its financial consultant. The term of the
- 18 -
<PAGE> 19
agreement is one year unless it is terminated earlier by either party upon 30
days written notice. See "PLAN OF DISTRIBUTION."
USE OF PROCEEDS
The Company will receive no proceeds from the sales of any of the Shares
being registered hereunder.
DIVIDEND POLICY
The Company has never paid any dividends on its Common Stock and has no
present intention to do so in the foreseeable future. The Company intends to
follow a policy of retaining earnings to finance the growth of its business. Any
future determination to pay dividends will be at the discretion of the Board of
Directors of the Company and will be dependent on the Company's results of
operations, financial condition, contractual and legal restrictions and other
factors deemed relevant by the Board of Directors at that time.
- 19 -
<PAGE> 20
SELECTED FINANCIAL DATA
The Company's selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements, respective notes and selected
financial data included elsewhere in this Prospectus.
While the Company has significant Canadian operations, the Company has
provided the financial data in this Prospectus in United States dollars with its
audit conducted in accordance with generally accepted auditing standards in the
United States of America. All references to dollar amounts in this Prospectus,
unless otherwise indicated, are in United States dollars.
<TABLE>
<CAPTION>
Years Ended July 31,
---------------------------------------------
Nine Months Nine Months
Ended Ended
April 30, April 30,
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $10,874,126 $12,244,237 $16,619,967 $14,811,891 $14,170,171
Costs of Goods Sold 7,273,236 8,048,582 10,968,448 9,746,252 9,636,599
Selling, General and Administrative 2,704,819 2,904,558 3,954,952 3,651,045 3,392,956
Expenses
Income From Operations 845,291 1,246,540 1,621,478 1,366,634 1,098,996
Interest Expense (49,424) (101,253) (129,361) (175,193) (153,298)
Income Per Common Share .06 .09 .13 .10 .08
Common Shares Outstanding 7,642,500 7,642,500 7,642,500 7,632,500 7,622,000
BALANCE SHEET DATA
Cash $64,932 $817,934 $1,084,954 $1,181,396 $166,005
Working Capital 4,324,999 3,873,969 4,232,694 3,144,879 2,476,335
Total Assets 6,806,829 7,820,656 7,695,839 8,117,537 6,405,169
Total Liabilities 1,563,661 2,922,675 2,481,116 3,871,424 2,950,708
Stockholders' Equity 5,243,168 4,897,981 5,214,723 4,246,113 3,454,461
</TABLE>
- 20 -
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is Management's discussion and analysis of significant
factors which have affected the Company's financial position and operations
during the fiscal year ended July 31, 1997, and the interim nine-month period
ended April 30, 1998. This discussion contains both historical and
forward-looking statements. When used in this discussion, the words "expect(s)",
"feel(s)", "believe(s)", "will", "may", "anticipate(s)", "intend(s)" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those projected. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in "RISK FACTORS." Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. Readers are
also urged to carefully review and consider the various disclosures elsewhere in
this Prospectus which discuss factors which affect the Company's business,
including the discussion under the caption "RISK FACTORS."
Results of Operations
- ---------------------
The Company's results of operations are affected by numerous factors
such as general economic conditions, competition and inventory costs. The
largest component of the Company's cost of sales is inventory cost, which may
vary slightly from period to period based upon timing of purchases which
indirectly affect the Company's inventory costs.
Year Ended 1997 ("Fiscal 1997") Compared to Year Ended 1996 ("Fiscal 1996")
- ---------------------------------------------------------------------------
The Company's distribution centers in Burlington, Ontario (Canada) and
Buffalo, New York (USA), showed strong profit margins during the fiscal year
ended July 31, 1997 with each facility recording 32.2% and 36.6% gross margins
respectively. The Company's Kelowna Facility, however, recorded a loss in
absolute dollars of approximately $285,000 as a result of limited manufacturing
production of Drums. In an effort to address the losses incurred at the Kelowna
Facility during Fiscal 1997, at the beginning of Fiscal 1998, the Company began
efforts to utilize the Kelowna Facility's capacity for the remanufacturing of
cartridges. The Company believes that the Kelowna Facility will also serve to
alleviate its reliance upon third-party remanufacturers of cartridges.
Additionally, the Company began efforts to utilize expected additional capacity
at the Kelowna Facility for distribution of copier and facsimile component parts
in Western North America. The Company's Fiscal 1998 capital expenditures related
to the redeployment of assets at the Kelowna Facility are expected to total
approximately $65,000.
Net sales for the year ended July 31, 1997, were $16.6 million as
compared with $14.8 million for the year ended July 31, 1996, an increase of
12.2%. The increase in net sales was principally the result of steady
improvement in the copier and copier component markets and an intensified
marketing effort within the Company and its distribution channels.
Gross profit margin for the year ended July 31, 1997, was 34.0%, as
compared to 34.2% for Fiscal 1996. As disclosed above, gross profit margins
reflect an increase in profit
- 21 -
<PAGE> 22
margins in the Company's two distribution centers located in Burlington, Ontario
and Buffalo, New York, and a loss from the Company's manufacturing facility in
Kelowna, British Columbia.
Selling, general, and administrative expenses for the year ended July
31, 1997, increased 8.3% from the prior comparable period. This increase
resulted primarily from professional and other fees associated with the
terminated negotiations with JRCS described earlier herein and legal and
accounting costs associated with the Company's longer term strategy (initiated
in late Fiscal 1997) to obtain listing on The Nasdaq SmallCap Market.
As a result of the foregoing, net income improved by 25% from Fiscal
1996 to Fiscal 1997.
Year Ended 1996 ("Fiscal 1996") Compared to Year Ended 1995 ("Fiscal 1995")
- ---------------------------------------------------------------------------
Net sales for Fiscal 1996 were $14.8 million, an increase of 4.5% from
$14.1 million in Fiscal 1995. Gross profit for Fiscal 1996 of $5,065,639 (34.2%)
compared favorably to Fiscal 1995 of $4,533,572 (31.7%), an absolute dollar
increase of 11.7%. Gross profit margins continued to improve quarter over
quarter with a 2.5% improvement for Fiscal 1996 over Fiscal 1995.
Selling and general and administrative expenses increased by 7.6% (or
$258,089) from $3,392,956 in Fiscal 1995 to $3,651,045 in Fiscal 1996. The
increases in expenses were primarily from additional sales commissions and
telemarketers which were paid in the fourth quarter of Fiscal 1996.
The Company changed its policy for the handling of currency transactions
between Sel-Drum Corporation and Sel-Drum Corporation (U.S.A.), Inc. as stated
in the Form 10-KSB for Fiscal 1995. As a result, the Company enjoyed a $15,000
foreign exchange gain, and increased its interest income to $27,260. This income
off-set interest expense of $175,193 to a net interest expense of $147,933,
compared to a net interest expense of $150,612 for the prior fiscal year. Fiscal
1996 Income of $1.23 million (before taxes) represented an increase of 35% from
Fiscal 1995.
Taxes incurred in the Fiscal 1996 were $458,663, resulting in net income
of $770,187 and earnings per share of $0.10 in Fiscal 1996. Net income in Fiscal
1996 represents a 25% increase over net income of $613,900 and earnings per
share of $0.08 in Fiscal 1995.
Nine Months Ended April 30, 1998 Compared to Nine Months Ended April 30, 1997
- -----------------------------------------------------------------------------
In December 1997, the Company reorganized its sales staff and began
implementing this reorganization during the month of January 1998. As a result
of this reorganization of sales staff, the Company's sales have been flat during
the first nine months and Management expects this trend to continue through the
end of Fiscal 1998.
For the nine months ended April 30, 1998, net sales were $10,874,126, as
compared with $12,244,237 for the nine months ended April 30, 1997, a decrease
of 11.2%. The
- 22 -
<PAGE> 23
decrease in net sales for the nine months ended April 30, 1998 was principally
the result of a newly implemented reorganization of the Company's sales and
marketing distribution network.
For the nine month period ended April 30, 1998, the Company restated its
cost of goods sold to include additional costs associated, directly or
indirectly, with product costs. These newly incorporated costs include shipping
costs (material and labor); indirect purchasing costs; warehousing costs; and
other smaller miscellaneous costs. Any comparison of gross profit as a
percentage of net sales for the nine months ended April 30, 1998, as against
other periods is not meaningful.
For the nine months ended April 30, 1998, gross profit margin was 33.1%
as compared to 34.3% for the nine months ended April 30, 1997. Absolute gross
profit dollars decreased to $3,600,890 from $4,195,655 for the nine months ended
April 30, 1998,. The decrease in absolute gross profit dollars of $594,765 for
the nine month period resulted primarily from net sales decreases.
For the nine months ended April 30, 1998, selling, general and
administrative expenses in absolute dollars decreased by $199,739 or 6.9% from
$2,904,558 in the comparable nine month period ended April 30, 1997 to
$2,704,819 for the period ended April 30, 1998.
Liquidity and Capital Resources
- -------------------------------
The Company's principal capital requirements are to fund its working
capital needs and material inventory requirements and to fund the improvement of
facilities, machinery and equipment. Historically, the Company has used income
generated by operations as well as bank financing to fund these capital needs.
Net cash provided by operating activities primarily represents net
income plus changes in working capital positions. Net cash provided by operating
activities for the nine months ended April 30, 1998 was $321,824. The Company's
arrangements with its North American customers typically provide that payments
are due within 30 days following the date of the Company's shipment of goods,
while arrangements with overseas customers are generally on a letter of credit
basis. Due to the expected expansion of the Company's sales efforts, management
believes that the Company's working capital requirements will increase.
The Company currently has a revolving demand loan arrangement with the
National Bank of Canada in the approximate amount of $2,500,000 (U.S.)
($3,700,000 (CDN)). These borrowings generally assist the Company with funding
of accounts receivable and inventory purchases. As of April 30, 1998,
outstanding borrowings of approximately $609,185 (U.S.) existed under this
arrangement.
Cash flow from operations coupled with cash flow generated by bank
financing has provided the Company with the cash necessary to meet its cash
requirements. For the foreseeable future, the Company anticipates cash outlays
in connection with the utilization of the Kelowna Facility for remanufacturing
printer and facsimile cartridges to be $65,000. The Company may expend an
additional $175,000 in connection with hardware and software upgrades relative
to the establishment of an integrated data system and in connection with Year
2000 compliance described below. The Company's current credit facility requires
it to
- 23 -
<PAGE> 24
obtain the written consent of the National Bank of Canada prior to making
capital expenditures during any fiscal year in excess of $200,000. In connection
with the foregoing anticipated capital expenditures, the Company anticipates
seeking such consent.
Year 2000
- ---------
The Year 2000 issue stems from date coding practices in both software
and hardware. Specifically, hardware and software developers have often used
two-digit numbers rather than four-digit numbers to represent years. This was
done in a conscious effort to provide cost-effective and efficient business
solutions, given resource constraints and requirements in the past.
Consequently, when the year turns to 2000, the software may calculate the date
as 1900 because the century has not been defined.
Management has initiated an enterprise-wide program to prepare the
Company's computer systems and applications for the Year 2000. The Company
expects to incur internal staff costs as well as consulting and other expenses
related to infrastructure and facilities enhancements necessary to prepare the
systems for the Year 2000. The Company is expending significant resources to
assure that its computer systems are reprogrammed in time to effectively deal
with transactions in the Year 2000 and beyond. The Company expects to spend as
much as $175,000 in order to get the systems ready for processing in the year
2000. This expected capital expenditure also includes the establishment of
integrated data systems for order entry and inventory processing. Much of this
capital expenditure will be for new computer equipment and a new core data
processing system, which will be capitalized and amortized over five and three
years respectively. The core system being considered is a state-of-the-art
in-house, client/server based system. In addition to being Year 2000 ready, the
new processing system will result in immediate cost savings compared with the
existing system. The Company does not expect the amount required to be expensed
over the next three to five years to have a material effect on its financial
position or results of operations. Cost savings from the new system are expected
to completely offset the entire expenditure within three years; however, no
assurance can be given that these savings will be achieved. The amount expensed
to date is immaterial.
The Year 2000 problem creates risk for the Company from both unforeseen
problems in its own computer systems and from problems in the computer systems
of third parties with whom the Company transacts business. Failures of the
Company's and/or third parties' computer systems could have a material adverse
impact on the Company's ability to conduct business.
The Company expects its Year 2000 date conversion project to be
completed on a timely basis. However, there can be no assurance that the systems
of other companies on which the Company's systems rely also will be timely
converted or that any such failure to convert by another company would not have
an adverse effect on the Company's systems.
- 24 -
<PAGE> 25
THE COMPANY
HISTORY
Sel-Drum International, Inc., a New York Corporation ("Sel-Drum" or the
"Company") is the successor corporation to Dakota Equities, Ltd. (which was
incorporated in Colorado on June 16, 1993), a publicly-held "blank check" or
"blind pool" company, i.e., it had no operations of its own, its intent being to
acquire existing assets, properties, companies and/or operating a start-up
business. On November 26, 1993, the Company filed a Form 10-SB to register its
Common Stock pursuant to Section 12(g) of the Securities Exchange Act of 1934,
as amended. On February 1, 1995, the Company acquired all the outstanding common
shares of Sel-Drum Imaging Corporation, the parent corporation of a privately
held Canadian corporation and a privately held U.S. corporation, which was
founded in 1978. The Company also acquired, through its subsidiary Sel-Drum
Imaging Corporation, Micron Imaging Corp. (now the "Kelowna Facility").
Through its Sel-Drum Imaging Corporation subsidiary, the Company has two
wholly-owned subsidiaries, Sel-Drum Corporation (U.S.A), Inc. and Sel-Drum
Corporation (which amalgamated Micron Imaging Corp. on November 1, 1996). Unless
otherwise indicated, all references to "Sel-Drum" or the "Company" include the
Company, Sel-Drum Imaging Corporation, Sel-Drum Corporation and Sel-Drum
Corporation (U.S.A.), Inc. Sel-Drum Corporation (U.S.A.), Inc. and Sel-Drum
Corporation employ a number of sales agents and telemarketers who contact
directly the copier machine dealers throughout North America. There are
approximately 12,000 such dealers marketing various brands of copier products.
The Company estimates that the potential marketplace for high mortality
replacement parts, drums and toner, not controlled by the Original Equipment
Manufacturers ("OEM's") to be approximately $675 million in North America.
Sel-Drum is a leading independent distributor of high mortality copier
and printer replacement parts and supplies. As one of the largest independent
high mortality copier parts distribution companies in North America, Sel-Drum
provides a link between parts manufacturers, sellers and buyers. Sel-Drum is
also developing strong relationships with suppliers who seek advanced inventory
management and order processing.
The Company's primary business is the distribution of high mortality
copier and printer replacement parts, toners, and photoreceptors ("Drums"),
including, to a limited extent, the manufacturing of Drums. On August 1, 1995,
the Company added remanufactured facsimile and printer cartridges to its product
offering. The Company markets in the United States and Canada through a direct
network of sales agents and telemarketers. Outside of North America, the Company
is represented by several distributors with their sales accounting for less than
5% of the total revenues.
On March 7, 1997, the Company and certain principal shareholders
terminated discussions with JRCS Corp. regarding the sale of substantially all
of the outstanding capital stock of the Company.
In late 1997, the Company initiated a strategic plan which was designed
to focus on the longer term growth prospects of the Company. This new strategy
(described in detail below) calls for concentrating on the Company's core
business and the existing opportunities within the high mortality copier
replacement part and printer replacement part marketplace. The implementation of
this strategy includes programs aimed at bolstering the Company's core
- 25 -
<PAGE> 26
business. Specifically, the Company is looking at its under-utilization of the
Kelowna Facility with a view toward having the Kelowna Facility provide
increased distribution support.
Additional strategic items include seeking acquisition candidates and a
listing on the Chicago Stock Exchange, The Nasdaq SmallCap Market or a national
or other regional exchange, and establishing integrated data systems, all of
which may serve to increase the Company's budgeted 1998 expenses.
On October 29, 1997, the Company announced that it had hired Raymond C.
Sparks as its new Chief Executive Officer and President, replacing Brian F.
Turnbull who has agreed to remain with the Company as Chairman of the Board of
Directors.
In December 1997, the Company reorganized its sales staff and began
implementing this reorganization during the month of January 1998. As a result
of this reorganization of sales staff, the Company's sales have been flat during
the first nine months and Management expects this trend to continue through the
end of Fiscal 1998.
On January 6, 1998, the Shareholders approved the reincorporation of the
Company as a New York corporation. The reincorporation became effective on March
6, 1998.
On January 15, 1998, the Company began funding a repurchase of 172
shares of Class C and 241 shares of Class D Preferred Stock in the Company's
Sel-Drum Imaging Corporation subsidiary held by two of the Company's principal
shareholders. The total purchase price was approximately $300,000, of which
approximately $175,000 was delivered during the quarter ended January 31, 1998
and the remainder during the quarter ended April 30, 1998. The Company does not
anticipate funding additional repurchases of Sel-Drum Imaging Corporation's
Preferred Stock at any time in the foreseeable future.
On August 1, 1998, the Company repurchased 100,000 shares of its Common
Stock from Brien Murtagh pursuant to a Share Repurchase and Non-competition
Agreement dated as of February 1, 1998, at $1.00 per share. The terms of this
Agreement are discussed more fully in "RELATED TRANSACTIONS."
The Company entered into a Financial Consulting Agreement with Pittsford
Capital Markets, Inc. ("Pittsford Capital"), dated as of August 1, 1998. The
Financial Consulting Agreement provides that Pittsford Capital will receive (i)
a monthly fee of $1,000 for a twelve month period if the maximum number of
Shares offered hereby is sold, or $500 per month for a twelve month period if
only the minimum number of Shares offered hereby (250,000 Shares) are sold; and
(ii) $85,000 per transaction for which the Company engages Pittsford Capital as
its financial consultant. The term of the agreement is one year unless it is
terminated earlier by either party upon 30 days written notice. See "PLAN OF
DISTRIBUTION."
STRATEGY
Through flexibility in sourcing as well as customer service, the Company
continually strives to be a reliable, innovative and cost-effective provider of
high mortality copier and facsimile component products to the approximately $675
million per year market in North America. The Company believes there are also
significant opportunities in the European and Asia-Pacific regions. The
Company's strategy to accomplish these objectives includes the following:
- 26 -
<PAGE> 27
- PROVIDE HIGH QUALITY PRODUCTS AND SUPERIOR CUSTOMER
SERVICE. The Company maintains a detailed and extensive
quality assurance program. The Company also requires
that both its affiliated and unaffiliated suppliers
conform to Company customer quality and standards. The
Company intends to continue its strategy of demanding
high quality from its vendors.
- IMPROVE REMANUFACTURING FLEXIBILITY. Management believes
that the Company is the only copier parts distributor
with internal manufacturing and remanufacturing support.
Although to date the Company's manufacturing facility in
Kelowna, British Columbia (the "Kelowna Facility") has
been under-utilized, the Company intends to increase the
utilization of its Kelowna Facility to remanufacture
printer and facsimile cartridges. The Company also
intends to reemphasize the Kelowna Facility's
distribution capabilities to service its existing
customers in Western North America. To achieve this
strategy, the Company intends to make capital
expenditures in its Kelowna Facility of approximately
$65,000.
- ESTABLISH INTEGRATED DATA SYSTEM. An integrated data
system will permit the Company's employees to access
information on inventory availability, pricing and order
status, and to perform order entry on a real time basis
from anywhere in the world. The system will facilitate
immediate drop shipment from Burlington, Ontario or
Kelowna, British Columbia to customers throughout North
America and overnight fulfillment of European customer
orders. The anticipated system will provide direct
customer access to Sel-Drum's central inventory
management and retrieval system. In addition, the
Sel-Drum order entry system will be available on the
Internet and should enable customers to review parts
availability, place orders and check order status. To
date, the system has not been implemented and no
assurances can be given that such a system will be
implemented or, if implemented, whether such system will
be successful. The Company estimates the cost associated
with the establishment of such a system (which include
conformity with Year 2000 standards) will be
approximately $175,000.
- SEEK QUALIFIED ACQUISITION CANDIDATES. Although the
Company is not presently engaged in discussion, part of
its strategy is to acquire existing smaller companies
within its industry segment with whom the Company
believes economies of scale can be obtained. To this
end, the Company has entered into an agreement with
Pittsford Capital Markets, Inc., which provides that the
Company will pay certain fees to Pittsford Capital
Markets, Inc., for services in connection with a merger
or acquisition. No assurances can be given that the
Company will be able to identify suitable acquisition
candidates; or, if identified and successfully
completed, whether such acquisition candidates will
provide the economies of scale the Company is seeking.
- OBTAIN MARKET LISTING. The Company's management intends
to refocus its effort on obtaining listing on The Nasdaq
SmallCap Market system or a national or regional stock
exchange. To this end, the Company intends to apply to
the Chicago Stock Exchange for listing of its Common
Stock as soon as practicable after the closing of this
Offering. In order to obtain
- 27 -
<PAGE> 28
listing on the Chicago Stock Exchange, the Company may
be required to effect a 0.33-for-one stock split after
this Offering. See "RISK FACTORS-Reverse Stock Split."
The Company's management recognizes that it is
substantially more difficult for investors to dispose of
securities or to obtain accurate quotations as to
securities in the OTC Bulletin Board Service. There can
be no assurance that any application for listing on any
exchange will be approved or that a market for the
Common Stock will be obtained.
As a result of the Company's strategy to promote superior customer
service, increase sales outside of North America, establish an integrated data
system, seek qualified acquisition candidates, and obtain a listing for the
Company's Common Stock, the Company believes it is well positioned to increase
sales and profitability. The Company's strategy is subject to certain conditions
outside of its control and no assurances can be given that the Company will be
successful in implementing any or all of its corporate objectives. See "RISK
FACTORS."
COPIER, FACSIMILE, AND PRINTER PARTS DISTRIBUTION
Management believes Sel-Drum is one of the largest independent North
American distributors of high mortality copier replacement parts, drums, toner
and related supplies, serving both the commercial, institutional and general
copier after-markets. Product lines distributed by Sel-Drum include a variety of
other supplies. Sel-Drum purchases these new parts from suppliers for its own
account and resells such parts to its customers, which include commercial
customers, governmental agencies and other distributors.
The Company distributes high mortality copier and printer replacement
parts from its Burlington, Ontario and Buffalo, New York distribution centers to
North American customers, and to a limited extent in Europe and the Asia-Pacific
region. Field sales representatives located in regions throughout North America
call upon current and potential customers on a regular basis to solicit orders
and provide product and operational information. Each field service center is
staffed to receive and process telephone, facsimile and mail orders. A majority
of the parts distributed by the Company are located in its Buffalo, New York
warehouse complex, with the remaining parts distributed from the Company's
Burlington, Ontario and Kelowna, British Columbia facilities.
Management believes its diverse product line distinguishes Sel-Drum from
most other distributors which carry a narrower range of products. Over 2,500
unique part numbers are sold to approximately 4,500 customers.
Through Densigraphix Kopi Inc. ("Densigraphix") of Montreal, Quebec, the
Company markets its products in the province of Quebec. Densigraphix is a
significant distributor of toner to the reprographics industry. The Company also
markets some of the Densigraphix toners outside of Quebec, Canada. In August
1995, the Company introduced remanufactured cartridges for the facsimile and
printer market. Many of these products are marketed by the copier dealers who
also market the Company's other products. It is estimated that 75 million
cartridges will be sold to the North American market by all North American
distributors in 1998, and approximately 25 million of these will be
remanufactured units.
- 28 -
<PAGE> 29
The Company markets remanufactured cartridge products to the industry's
dealers, vendors and resellers in North America. It is anticipated that this
product line will represent 11% of the Company's revenues during Fiscal 1998.
SALES AND MARKETING
The Company markets and inventories a line of 2,500 high mortality
replacements parts, Drums, toner, and remanufactured facsimile and printer
cartridges. The Company recently added coin-ops for copier and vending machines,
keycounters, key pads and other related accessories. Sel-Drum emphasizes breadth
of product offering, competitive pricing, attention to customer service and
value-added functions through advanced systems and inventory management/
logistics applications. Sel-Drum's parts distribution operations serve the
different requirements of both the commercial copier and the general copier
after-market sectors.
Sel-Drum's commercial and institutional copier parts distribution sales
operations conduct direct sales and marketing efforts through a team of regional
sales managers and field sales representatives who meet regularly with
Sel-Drum's major customers. Their function is not only to sell and provide
technical support for existing products but also to work with Sel-Drum's
customers and with suppliers in order to identify new market opportunities.
The commercial and institutional parts distribution sales operation
conducts much of its parts purchasing activities through annual or longer term
purchase orders with a strong emphasis upon customer service. Management
believes that Sel-Drum's focus on service provides a competitive advantage in
serving its customers.
Sel-Drum's general copier parts distribution operations sell through
both employee and third-party sales representatives to meet customer
requirements. The general copier parts distribution staff works closely with the
regional sales staff and the inventory provisioning group to ensure that
inventory availability and customer product needs are maintained. Frequent
meetings are conducted with suppliers to provide new product introductions as
well as marketing and sales training.
The Company estimates that approximately 30% of its gross sales for the
fiscal year ending July 31, 1998, will be to the IKON dealer network. The loss
of this relationship with IKON or its affiliated dealers would have a material
adverse effect on the financial condition of the Company. To date, the Company
believes its relationship with IKON and the IKON dealer network is strong.
Sel-Drum warrants its products to its customers. This does not represent
a material cost to the Company.
SEASONALITY OF BUSINESS
Although there is no significant fluctuation in the flow of business,
revenues are generally lower during the Company's fourth fiscal quarter. The
Company believes this occurs due to school closings and government's summer
recess because those institutional end-users are significant users of copying
machines and printers producing high volumes of use and the recurring need for
replacement parts.
- 29 -
<PAGE> 30
COMPETITION
Sel-Drum's primary competitors for sales of copier parts and supplies
are other independent distributors and the OEMs, some of which have
significantly greater financial resources than Sel-Drum. While Sel-Drum has
historically competed in the parts distribution sector on the basis of price and
availability of parts, management believes that a primary basis for competition
today, and a key differentiating factor in the future, will be the ability to
offer value-added services to accommodate customers, such as broad-based
inventory management services and sophisticated systems capability.
EMPLOYEES
At September 25, 1998, Sel-Drum employed approximately 70 full time
employees located in the United States and Canada. The Company has no employees
represented by unions. The Company believes that its relationship with its
employees is satisfactory.
NEW CHIEF EXECUTIVE OFFICER
The Company recently announced that it had hired Raymond C. Sparks as
its new Chief Executive Officer and President. Mr. Sparks replaces Brian F.
Turnbull, the Company's founder, who will remain with the Company as Chairman of
the Board of Directors and will devote much of his efforts toward transitioning
his prior responsibilities as well as developing sales outside of North America.
From 1993 to August 1, 1997, Mr. Sparks was the President, Chairman of
the Board and Chief Executive Officer of Village Green Bookstores, Inc., a
publicly-held specialty retailer. On or about February 5, 1998, Village Green
filed for bankruptcy protection under Chapter XI of the United States Bankruptcy
Code. Mr. Sparks has eight years of public accounting experience in South Africa
with Ernst & Young and later, with Webb & Company. Since 1979, Mr. Sparks has
been engaged in the retail industry, primarily in supermarket and specialty
stores, in both operational and financial capacities. Mr. Sparks was Financial
Director for Burlington Industries in Cape Town until 1983. From 1983 to 1987,
Mr. Sparks was Divisional Financial Manager for Checkers Supermarkets Ltd. in
Cape Town. Mr. Sparks moved to the United States in 1987, and became Chief
Financial Officer of Checkers Restaurants, Brooklyn, New York. In 1989, he was
named Vice President of Finance at Tie Rack (U.S.) Inc. Mr. Sparks was the Chief
Operating and Chief Financial Officer of Burke & Burke (New York) in 1991. Mr.
Sparks was Vice President of Conston Corporation, an apparel retailer located in
Philadelphia before he joined Village Green in June 1993. Mr. Sparks holds the
professional qualification of Chartered Accountant (C.A.(S.A.)), and was awarded
a Bachelor of Commerce (with honors) degree in Financial Accounting by the
University of Cape Town, South Africa.
PROPERTIES
As of September 25, 1998, the Company was utilizing approximately 50,600
square feet of warehouse and manufacturing space and approximately 6,700 square
feet of office, administrative, training and sales space. The Company believes
that its properties are adequate for its needs. Information with respect to the
principal facilities used by Sel-Drum is set forth below:
- 30 -
<PAGE> 31
<TABLE>
<CAPTION>
ADDRESS PRIMARY USE
<S> <C>
501 Amherst Street (1) Registered Headquarters
Buffalo, N.Y. U.S.A. and U.S.A. Distribution
1370 Artisans Court (2) Executive and
Burlington, Ontario, Canada Administration Facilities
Canadian Distribution
1910 Dayton Street (3) Manufacturing Facility
Kelowna, B.C., Canada
1890 Dayton Street (3) Distribution Center
Kelowna, B.C., Canada
</TABLE>
(1) The Company established its U.S.A. distribution facilities in 1982, which it
has agreed to lease through October 2001 at an annual rental of $38,000.
(2) Established in 1978 as the executive and administrative offices, together
with the distribution center for product within Canada. The Company has agreed
to lease the property through February 2002 at an annual rental of $85,000.
(3) The Kelowna Facility occupies two properties, one owned by a director,
Robert E. Asseltine, and the other by a third party. The property owned by Mr.
Asseltine is leased by the Company through July 2001 and has an annual rent of
approximately $56,000. The other property is leased by the Company through May
1999 at an annual rent of $32,500.
LEGAL PROCEEDINGS
The Company has been involved in routine litigation incidental to the
business and believes such litigation is not material.
MANAGEMENT
The directors, officers and key employees of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position with Company
---- --- ---------------------
<S> <C> <C>
Brian F. Turnbull 62 Chairman of the Board
Robert E. Asseltine 66 Director
Robert M. Orr 53 Director
Raymond C. Sparks 48 President and Chief
Executive Officer
Brien Murtagh 49 Vice President of Sales
John C. Hall 55 Vice President - Finance
</TABLE>
All of the Company's directors serve on the Board until the next annual
meeting of shareholders.
- 31 -
<PAGE> 32
BRIAN F. TURNBULL, Chairman of the Board of Directors. Mr. Turnbull, the
Company's founder, began his career in the reprographics industry with Nashua in
the U.K. and later in Canada. Prior to founding Sel-Drum Corporation in 1978,
Mr. Turnbull owned an independent copier dealership in Hamilton, Ontario,
Canada. Mr. Turnbull resigned as Chief Executive Officer and President of the
Company effective January 1, 1998, assuming the position of Chairman of the
Board and focusing his efforts in developing sales outside of North America.
ROBERT E. ASSELTINE, Director. Mr. Asseltine has served as a Director of
the Company since February 1995. He also served as Chairman of the Board from
February 1995 until January 1998. Mr. Asseltine was the founder and Chief
Executive Officer of Micron Imaging Corp., the photocopier drum manufacturer,
which was amalgamated with Sel-Drum Corporation in November 1996, now owned by
the Company. Prior to founding Micron Imaging Corp. in 1991, Mr. Asseltine
founded Copytron (formerly Western Canada's largest independent copier dealer)
and Photofax (a photoconductor facility), both of which were sold to Savin
Canada, Inc.
ROBERT M. ORR, Director. Mr. Orr was elected a Director of the Company
in January 1998. Mr. Orr is a former partner in the law firm of Ross & McBride,
the Company's Canadian Corporate Counsel. Mr. Orr's 25 years of practice
experience includes representation of small to medium sized corporations in
connection with corporate restructuring, financing and commercial real estate.
RAYMOND C. SPARKS, President and Chief Executive Officer. Mr. Sparks
became President and Chief Executive Officer of the Company in November 1997.
Further information about Mr. Sparks is set forth above under "THE COMPANY - New
Chief Executive Officer."
BRIEN MURTAGH, Vice President of Sales. Mr. Murtagh has been with
Sel-Drum for over 15 years and became Vice President of Sales for Sel-Drum
Corporation on February 1, 1995. Prior to assuming this position, he was Vice
President of Sel-Drum Corporation and Sel-Drum Corporation (U.S.A.), Inc.
Mr.Murtagh has been associated with the reprographics industry for many years,
starting his career with Nashua in Canada.
JOHN C. HALL, Vice President - Finance. Mr. Hall joined Sel-Drum
Corporation in 1985 as the Financial Manager. On February 1, 1995, he was
appointed as Director of Finance for the Company. Previously, he was employed
for five years by Butler Metals Co., an automotive related company, in the
position of Manager of Accounting. Prior to his employment with Butler, he was
employed by T.R.W. in Canada in the capacity of Chief Accountant. Mr. Hall
earned his C.M.A. in 1972.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's officers and directors and the holders of more than
ten percent (10%) of the Company's outstanding Common Stock to file reports of
ownership with the Securities and Exchange Commission and to furnish the Company
with copies of these reports. The Company believes that all such reports
required to be filed during or with respect to the fiscal year ended July 31,
1997, were made on a timely basis.
- 32 -
<PAGE> 33
EXECUTIVE COMPENSATION
The following table sets forth the compensation of the executive
officers of the Company:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------ --------------------------------------
Securities
Name and All other Underlying
Principal Position Year Salary ($) Bonus ($) Compensation Options/SARs(#)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Brian F.Turnbull,
Director, Chairman and 1997 $210,000 (1) $55,535 -0- -0-
Former Chief Executive
Officer 1996 $210,000 (1) $47,438 -0- -0-
Brien Murtagh
Vice President of Sales 1997 $ 91,250 (2) $61,977 -0- -0-
1996 $ 72,830 $47,437 -0- -0-
Raymond C. Sparks
Chief Executive Officer 1998 $125,000 (3) -0- -0- 250,000
- ----------
<FN>
(1) Perquisite and other benefits not included above are: (a) an annual automobile lease allowance of $12,000; (b) an
annual golf club membership of $1,500; and (c) payment of life insurance premiums of approximately $17,000 per year.
(2) Pursuant to the Company's recent reorganization of its sales staff, for Fiscal 1998, Mr. Murtagh's position as Vice
President of Sales is now considered a key employee position and not an executive position within the Company.
(3) Mr. Sparks became President and Chief Executive Officer on November 1, 1997. See "RELATED TRANSACTIONS - Raymond C.
Sparks Employment Agreement."
</FN>
</TABLE>
COMPENSATION OF DIRECTORS
Directors are reimbursed for their reasonable expenses incident to
travel and attendance at meetings. Directors do not receive any other
compensation for attendance at meetings.
STOCK OPTION PLAN
On November 24, 1995, the Company's shareholders approved the 1995
Employee and Non-Employee Director Stock Option Plan (the "1995 Plan"). As of
the date hereof, options to purchase 500,000 shares of the Company's Common
Stock have been granted under the 1995 Plan, of which 166,667 are exercisable
within 60 days of this Prospectus. As of the date hereof, no options to purchase
any shares have been exercised.
The Company's 1995 Plan provides for the grant of incentive stock
options, within the meaning of Section 442 of the Internal Revenue Code of 1986,
as amended (the "Code"), and nonstatutory stock options, to key employees,
directors and advisors of the Company to purchase up to an aggregate of 500,000
shares of the Company's Common Stock. The 1995 Plan is administered by a Stock
Option Committee comprised of at least two disinterested directors within the
meaning of Rule
- 33 -
<PAGE> 34
16b-3 promulgated under the Securities Exchange Act of 1934, as amended. The
Stock Option Committee is authorized to determine the recipients of options, the
type of options granted, the number of shares subject to each option, the term
of each option, exercise prices and other option features. The term of an option
may not exceed 5 years where the optionee would thereafter own stock possessing
more than 10% of the combined voting power of the Common Stock (a "10%
Stockholder"). The exercise price must at least equal the fair market value of
the Common Stock on the date of the grant of the option, except that if an
incentive stock option is granted to a 10% Stockholder, the exercise price shall
be no less than 110% of the fair market value of the Common Stock on the date of
the grant of the option. Options are not transferable except by will or
intestacy. Options that are not exercisable as of the date of death or
termination of employment terminate, and options that are exercisable as of the
date of death or termination of employment lapse within stated periods following
the death of the optionee or the termination of the optionee's employment with
the Company. The 1995 Plan contains customary anti-dilution provisions. Upon
change in control of the Company, the Board of Directors may, in its discretion,
accelerate the exercise dates of any options granted but not yet exercisable. If
a surviving corporation in a merger, consolidation, reverse merger, or capital
reorganization declines to continue or assume any options, or substitute similar
options, optionees have the right to exercise any options then exercisable
within 30 days of notice given by the Company. The 1995 Plan terminates on
November 23, 2005.
The Board of Directors approved an amendment to the 1995 Plan to
increase the number of shares available for option grants thereunder to
700,000 at its April 24, 1998 meeting. The proposal will be presented to
shareholders at the next annual meeting. All options granted for shares in
excess of the available number under the 1995 Plan will be deemed "conditional"
until such increase is approved by the shareholders.
RAYMOND C. SPARKS STOCK OPTION
Raymond C. Sparks was granted a non-qualified option to purchase 250,000
shares of the Company's Common Stock pursuant to an Employment Agreement between
the Company and Mr. Sparks. The option is presently exercisable at forty cents
($.40) per share. This option was not issued under the 1995 Plan.
The shares underlying options granted under the 1995 Plan and to Mr.
Sparks have been registered with the Securities and Exchange Commission on the
Company's Registration Statement on Form S-8 (Registration No. 333-57885).
- 34 -
<PAGE> 35
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
As of September 25, 1998, the only class of voting securities issued and
outstanding was 7,542,500 shares of the Company's Common Stock, $.01 par value
(the "Common Stock").
The following table sets forth certain information as of September 25,
1998 regarding the Common Stock held by (i) each person known to the Company to
be a record or beneficial owner of more than 5% of the Common Stock, (ii) each
director of the Company, (iii) each executive officer (See "EXECUTIVE
COMPENSATION"), and (iv) all directors and officers as a group.
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address of Beneficial Percent
Beneficial Owner Ownership (1) Class (1)
------------------------------------- ---------------------- ---------------
<S> <C> <C> <C>
Robert E. Asseltine 1,769,680 (2) 23.46%
501 Amherst Street
Buffalo, New York 14207
Brian F. Turnbull 4,514,000 (3) 59.85%
501 Amherst Street
Buffalo, New York 14207
Robert M. Orr 9,000 (4) 0.12%
501 Amherst Street
Buffalo, New York 14207
Raymond C. Sparks 250,000 (5) 3.20%
501 Amherst Street
Buffalo, New York 14207
All Directors and 6,559,347 83.90%
Officers as a group (5 persons)
- ----------
<FN>
1. As reported by such persons as of September 25, 1998 with percentages based on 7,542,500
shares issued and outstanding, except where the issuance of shares pursuant to presently
exercisable options would increase the number of shares owned by such person and the
number of shares outstanding.
2. Includes 237,000 shares owned of record by Mr. Asseltine's wife.
3. Shares owned of record by 547118 Ontario Limited, an Ontario corporation controlled by
Mr. Turnbull.
4. Mr. Orr was granted an option to purchase 40,000 shares on April 24, 1998 at an
exercise price of $.50 per share. The option is vested with respect to 20,000 shares, and
is presently exercisable by Mr. Orr with respect to 9,000 of such shares. Of the 40,000
shares underlying Mr. Orr's option, 31,000 shares are subject to a conditional grant,
which is conditioned upon shareholder approval of an amendment to the 1995 Plan increasing
the authorized number of shares available for grant under the 1995 Plan to 700,000. See
"EXECUTIVE COMPENSATION - Stock Option Plan."
5. A presently exercisable option to purchase 250,000 shares of Common Stock
at $.40 per share.
</FN>
</TABLE>
- 35 -
<PAGE> 36
RELATED TRANSACTIONS
EMPLOYMENT CONTRACTS
RAYMOND C. SPARKS EMPLOYMENT AGREEMENT. Effective November 1, 1997, the
Company entered into an Employment Agreement with Mr. Sparks (the "Employment
Agreement") to serve as the President and Chief Executive Officer of the
Company. The Agreement provides for a term of three years, subject to
termination as provided in the Agreement, and provides that as compensation
under the Agreement, Mr. Sparks will be paid $125,000 (U.S.) annual salary. The
Employment Agreement also provides for a $25,000 relocation allowance, fringe
benefits, including health insurance, on terms which may be agreed to from time
to time by the Company and Mr. Sparks. Pursuant to the terms of the Employment
Agreement, Mr. Sparks was granted a non-qualified option to purchase 250,000
shares of the Company's $.01 par value Common Stock, at an exercise price of
forty cents ($.40) per share.
SHAREHOLDER LOANS
The Company is owed $115,000 by 547117 Ontario Ltd. and 547118 Ontario
Ltd., both of which are controlled by Brian F. Turnbull, Chairman of the Board,
in the form of an interest-free loan from the Company's subsidiary, Sel-Drum
Corporation. The loan was used to provide leasehold and structural improvements
to the Company's Burlington, Ontario facility, which is leased by a company
controlled by Mr. Turnbull to the Company.
PREFERRED STOCK
The Company's Sel-Drum Imaging Corporation subsidiary has issued to each
of Messrs. Turnbull and Asseltine, Preferred Stock which is redeemable at the
Company's option at $727.30 per share. Mr. Asseltine currently owns 1,588 Class
C Preferred Shares and Mr. Turnbull currently owns 4,599 Class D Preferred
Shares. These shares were issued to Messrs. Turnbull and Asseltine in connection
with the Company's transaction with Dakota Equities, Ltd. in February 1995. On
January 15, 1998, the Company began funding a repurchase of 172 Shares of the
Class C Preferred Stock and 241 Shares of the Class D Preferred Stock held by
Messrs. Asseltine and Turnbull. The total purchase price was $300,000, of which
approximately $175,000 was delivered during the quarter ended January 31, 1998,
and the remainder during the quarter ended April 30, 1998. The Company does not
anticipate funding additional repurchases of Sel-Drum Imaging Corporation's
Preferred Stock at any time in the foreseeable future.
CONSULTING AGREEMENTS
During Fiscal 1997, the Company paid Mr. Asseltine $28,000 in connection
with his efforts to transition management and find a suitable replacement for
Mr. Turnbull, who has agreed to remain as Chairman of the Board of Directors of
the Company. On January 1, 1998, the Company and Mr. Turnbull terminated Mr.
Turnbull's employment contract. In his capacity as Chairman, Mr. Turnbull will
receive annual compensation of $126,000 as well as existing fringe benefits
including the lease of a car by the Company.
- 36 -
<PAGE> 37
SHARE REPURCHASE
The Company and Brien Murtagh entered into a Share Repurchase and Non-
competition Agreement dated as of February 1, 1998 (the "Repurchase Agreement").
The Repurchase Agreement provides for the Company's repurchase of a total of
345,000 shares of the Company's Common Stock owned by Mr. Murtagh under the
terms and conditions outlined therein. On August 1, 1998, in accordance with the
Repurchase Agreement, the Company repurchased 100,000 shares of Common Stock at
$1.00 per share. The Repurchase Agreement also provides that the Company may
(but is not obligated to) purchase the remaining 245,000 shares subject to the
Repurchase Agreement for $1.00 per share until 1:00 pm on August 1, 2000, or
for $2.00 per share from 1:00 pm August 1, 2000 until 1:00 pm August 1, 2001.
Further, if Mr. Murtagh sells any or all of the remaining 245,000 shares subject
to the Repurchase Agreement to a third party for less than (i) $1.00 per share
until August 1, 2000; or (ii) $2.00 per share between 1:01 pm August 1, 2000 and
August 1, 2001, the Company would be obligated to pay Mr. Murtagh the difference
between $1.00 per share, or $2.00 per share as the case may be, and the selling
price.
INSURANCE POLICIES
The Company pays the annual premiums to maintain a policy of life
insurance covering Brian F. Turnbull (the "Policy"). The named beneficiary under
the Policy is the Company, and the face amount of the policy is $2,000,000.00
(CDN). Mr. Turnbull and the Company have entered into an Insurance Policy
Agreement dated as of February 1, 1998, that provides that the Company will use
any proceeds it receives under the Policy to fund a repurchase of shares of the
Company owned by Mr. Turnbull or any corporation controlled by him. The
Insurance Policy Agreement does not require the Company to repurchase any of Mr.
Turnbull's shares in excess of the number that would be adequately funded by the
proceeds of the Policy.
LEASES
Mr. Asseltine, through Reaton Leasing Ltd., a corporation he controls,
leases to the Company a 12,000 square foot facility at 1890 Dayton Street for
one of the Company's facilities in Kelowna, British Columbia. Annual lease
payments are approximately $56,000 per year.
The Company leases its 21,600 square foot Burlington facility from a
company controlled by Mr. Turnbull pursuant to a lease terminating in February
2002. Annual lease payments are approximately $85,000.
SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
ownership of Common Stock, as of September 25, 1998, and as adjusted to reflect
the sale of all of the Shares offered hereby, by the Selling Shareholders.
Unless otherwise indicated, each of the Selling Shareholders has advised the
Company that he has sole voting and investment power with respect to all of the
Shares owned by him.
- 37 -
<PAGE> 38
<TABLE>
<CAPTION>
MAXIMUM
COMMON STOCK NUMBER OF COMMON STOCK
OWNED BEFORE SHARES BEING OWNED AFTER
THE OFFERING (1) OFFERED THE OFFERING (1)(3)
--------------------------------- ------------ ----------------------------
SELLING NO. OF PERCENT NO. OF PERCENT
SHAREHOLDER SHARES OF CLASS SHARES OF CLASS
- ------------------------ -------------------- ----------- ----------------------------
<S> <C> <C> <C> <C> <C>
Robert E. Asseltine 1,769,680 (2) 23.46% 485,000 (3) 1,284,680 (3) 17.03%
Director
Brian F. Turnbull 4,514,000 59.85% 485,000 (3) 4,029,000 (3) 53.42%
Director
<FN>
(1) Based on 7,542,500 shares issued and outstanding as of September 25, 1998. Does not include 416,667 shares
issuable pursuant to options which are exercisable within 60 days from the date of this Prospectus.
(2) Includes 237,000 shares owned of record by Mr. Asseltine's wife.
</FN>
</TABLE>
PLAN OF DISTRIBUTION
The Company has entered into an Underwriting Agreement with Pittsford
Capital Markets, Inc., a New York corporation (the "Underwriter"). Pursuant to
the Underwriting Agreement, the Underwriter will offer the Shares for sale on a
minimum (250,000 Shares), and maximum (970,000 Shares) "best efforts" basis.
Accordingly, the Underwriter will not have any obligation to purchase any Shares
from the Selling Shareholders in the event it is unable to effect a sale of part
or all of the Shares. Moreover, no Shares may be sold unless the Selling
Shareholders have received orders for at least 250,000 Shares. If, within 75
days after the Registration Statement is declared effective by the Securities
and Exchange Commission (the "Offering Termination Date"), at least 250,000
Shares have been sold and subscriptions accepted by the Selling Shareholders,
the Selling Shareholders may close the offer as to those Shares (the "First
Closing"). After the First Closing, the Underwriter may continue to offer the
balance of the Shares and subscriptions may be accepted by the Selling
Shareholders until 150 days after the First Closing.
The Underwriter may enter into one or more selected dealer agreements
with other broker/dealer firms which are members of the National Association of
Securities Dealers, Inc. (the "NASD"), pursuant to which such other
broker/dealers may offer part of the Shares for sale.
- 38 -
<PAGE> 39
The offering price of the Shares offered hereby was determined by
negotiation among the Selling Shareholders, the Company and the Underwriter.
Factors considered in determining such price include the history of and the
prospects for the industry in which the Company competes, the past and present
operations of the Company, the future prospects of the Company, the ability of
the Company's management, the earnings, net worth and financial condition of the
Company, the general condition of the securities markets at the time of the
Offering, the recent trading price of the Common Stock, the prices of similar
securities of comparable companies, and the anticipated effect of the planned
reverse stock split. The offering price does not relate to the Company's asset
value or any other criterion of value.
The Company and Selling Shareholders have agreed to indemnify the
Underwriter and such broker/dealers participating in the Offering against
certain civil liabilities, including certain liabilities under the Securities
Act of 1933, as amended.
The Selling Shareholders will pay to the Underwriter a commission equal
to 10% of the purchase price of the Shares which are sold by the Underwriter or
participating broker/dealers. In addition, the Selling Shareholders will pay the
Underwriter a non-accountable expense allowance equal to 1% of the aggregate
purchase price of Shares sold in the Offering, and will pay the fee of
Underwriter's counsel. The Underwriter may reallow to each participating
broker/dealer, if any, a commission equal to 10% of the price of each share sold
by such broker/dealer. Except as provided below, no additional discounts or
commissions are to be allowed or paid to other broker/dealers. Certain officers
of the Company and its subsidiaries, and the Selling Shareholders, may also
offer the Shares for sale and no commissions or compensation shall be paid to
such officers in connection with the Shares sold by such officers or Selling
Shareholders.
In addition to the commissions referred to above, the Company will issue
to the Underwriter one warrant for each 10 Shares sold in the Offering (up to
a total of 97,000 Shares) at an exercise price of $0.70 per share (that being
140% of the offering price per share to the public). The shares of Common Stock
issued pursuant to an exercised warrant will be on the same terms and
conditions as those issued pursuant to the Offering except that: (i) the $0.70
per share purchase price varies from the $0.50 per share offering price;
and (ii) neither the warrants nor the shares issued pursuant to an exercised
warrant will have any registration rights.
Until the First Closing, subscription payments for the Shares should be
made payable to "First National Bank of Rochester" as escrow agent for Sel-Drum
International, Inc." After the First Closing, subscription payments for Shares
should be made payable to the Company. Payments received by the Underwriter or
participating broker/dealers will be transmitted to the escrow agent by noon of
the next business day after receipt, where they will be held for subscribers in
a segregated escrow account until acceptable subscriptions for at least
250,000 Shares ($125,000) have been received. At the First Closing, the funds
in the escrow account (including interest earned thereon, but after deducting
commissions due to the Underwriter) will be delivered to the Selling
Shareholders. If, on the Offering Termination Date, at least 250,000 Shares
($125,000) have not been sold and subscriptions accepted by the Selling
Shareholders, subscription documents and funds will be promptly refunded to
subscribers and the Offering will terminate. With respect to interest earned on
the escrow account, such interest will, in the event of such termination, be
distributed to subscribers in proportion to the amount paid by each subscriber
without regard to the date when such subscription funds were paid by the
subscriber. It shall be a condition to the refund of subscription funds that
the subscriber furnish an executed IRS
- 39 -
<PAGE> 40
Form W-9 so that any interest earned and distributed to such subscriber may be
properly reported. Once the escrow agent has received a minimum of $125,000 in
subscriptions for Shares which have been accepted by the Selling Shareholders,
the Selling Shareholders may close the Offering as to those subscribers, and the
Underwriter may continue to offer the balance of the Shares and subscriptions
may be accepted by the Selling Shareholders until 150 days after such minimum
has been sold.
The Company entered into a Financial Consulting Agreement with
Pittsford Capital Markets, Inc. ("Pittsford Capital") (the Underwriter
hereunder) dated as of August 1, 1998. The Financial Consulting Agreement
provides that the Company will pay Pittsford Capital a $1,000 monthly fee for a
period of twelve months if the maximum number of Shares offered hereby is sold,
or $500 per month for a twelve month period if only the minimum number of Shares
offered hereby (250,000 Shares) are sold; and $85,000 per transaction for which
the Company engages Pittsford Capital as its financial consultant. This
agreement is terminable by either party upon 30 days written notice.
In addition, any Shares covered by this Prospectus may be sold by the
Selling Shareholders pursuant to Rule 144 under the Securities Act rather than
pursuant to this Prospectus.
The Company will pay half of all fees and expenses incident to the
registration of the Shares offered hereby, other than the following expenses
which will be borne by the Selling Shareholders: discounts and commissions
payable to brokers or dealers in respect of sales of the Shares and stock
transfer taxes.
- 40 -
<PAGE> 41
DESCRIPTION OF CAPITAL STOCK
OUTSTANDING AND COMMITTED SHARES. The Company is authorized to issue
100,000,000 shares of Common Stock, par value $.01 per share. As of September
25, 1998, there were outstanding 7,542,500 shares of Common Stock. In addition,
an aggregate of 500,000 shares of Common Stock are subject to issuance from
time to time in the future under the Sel-Drum International, Inc. 1995 Employee
and Non-Director Employee Stock Option Plan, and 250,000 Shares are subject to
a presently exercisable option held by Raymond C. Sparks.
COMMON STOCK. The holders of Common Stock are entitled to one vote for
each share held of record on all matters to be voted on by the shareholders. The
holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
available for distribution to them after payment of liabilities. Holders of
Common Stock, as such, have no conversion, preemptive or other subscription
rights, and there are no redemption provisions applicable to the Common Stock.
All of the outstanding shares of Common Stock are fully paid and non-assessable.
PREFERRED STOCK. The Company is authorized to issue 10,000,000 shares of
Preferred Stock, par value $.01 per share, with such designations, rights and
preferences as may be determined from time to time by the Board of Directors
(see "RISK FACTORS"). As of September 25, 1998, no shares of Preferred Stock
have been issued.
TRANSFER AGENT. The transfer agent and registrar for the Common Stock is
U.S. Stock Transfer Corporation, Glendale, California.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Reference is made to Sections 721 through 725 of the New York Business
Corporation Law (the "NYBCL"), which provides for indemnification of directors
and officers of New York corporations under certain circumstances.
Section 722 of the NYBCL provides that a corporation may indemnify
directors and officers as well as other employees and individuals against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees, in connection with actions or proceedings, whether civil or
criminal (other than an action by or in the right of the corporation, a
"derivation action"), if they acted in good faith and in a manner they
reasonably believed to be in the best interests of the corporation; and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
their conduct was unlawful; and, in the case of service for any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise at the request of the corporation, reasonably believed to be in, or
not opposed to, the best interest of the corporation. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to amounts paid in settlement and reasonable expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
actions, and the statute does not apply in respect of a threatened action, or a
pending action that is settled or otherwise disposed of, unless prior court
approval of indemnification has been obtained. Section 721 of the NYBCL provides
that Article 7 of the NYBCL is not exclusive of other indemnification that may
be
- 41 -
<PAGE> 42
granted by a corporation's certificate of incorporation, disinterested director
vote, shareholder vote, agreement or otherwise.
The Company's Restated Certificate of Incorporation requires the Company
to indemnify its officers and directors to the fullest extent permitted under
the NYBCL. Furthermore, the Company's By-laws provides that the Company, to the
fullest extent permitted and in the manner required by the laws of the State of
New York, may indemnify any officer or director (and the heirs and legal
representatives of such person) made, or threatened to be made, a party in an
action or proceeding (including, without limitation, one by or in the right of
the Company to procure a judgment in its favor), whether civil or criminal,
including an action by or in the right of any other corporation of any type or
kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, which any director or officer of the Company
served in any capacity at the request of the Company, by reason of the fact that
such director or officer, or such director's or officer's testator or intestate,
was a director or officer of the Company or served such other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise in
any capacity.
Section 402(b) of the NYBCL provides that a corporation's certificate of
incorporation may include a provision that eliminates or limits the personal
liability of the corporation's directors to the corporation or its shareholders
for damages for any breach of a director's duty, provided that such provision
does not eliminate or limit (1) the liability of any director if a judgment or
other final adjudication adverse to the director establishes that the director's
acts of omissions were in bad faith or involved intentional misconduct or a
knowing violation of law or that the director personally gained a financial
profit or other advantage to which the director was not legally entitled or that
the director's acts violated Section 719 of the NYBCL, or (2) the liability of
any director for any act or omission prior to the adoption of a provision
authorized by Section 402(b) of the NYBCL.
The Company's Restated Certificate of Incorporation provides that a
member of the Company's Board of Directors shall not be personally liable to the
Company or its shareholders for damages for any breach of duty in his capacity
as such; provided, however, that the foregoing provision in the Restated
Certificate of Incorporation shall not be construed to eliminate (i) the
liability of any director if a judgment or other adjudication adverse to such
director establishes that such director's acts or omissions were in bad faith or
involved intentional misconduct or a knowing violation of law, or that such
director personally gained in fact a financial profit or other advantage to
which he or she was not legally entitled, or that such director's acts violated
Section 719 of the NYBCL (concerning liability of directors in certain cases),
or (ii) the liability of any director for any act or omission prior to the
adoption of the foregoing provisions. The Restated Certificate of Incorporation
further provides that if the NYBCL is amended after adoption of the foregoing
provisions contained in the Company's Restated Certificate of Incorporation to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of any director of the Company shall
be eliminated or limited to the fullest extent permitted by the NYBCL, as so
amended. The Company's Restated Certificate of Incorporation provides that any
repeal or modification of the foregoing provisions contained in the Company's
Restated Certificate of Incorporation by the shareholders of the Company shall
not adversely affect any right or protection of a director of the Company
existing at the time of such repeal or modification.
Article V of the Company's By-laws provides each person who was or is
made a party to or is threatened to be made a party to or is otherwise involved
in any action, suit or
- 42 -
<PAGE> 43
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or his testator or
intestate (i) is or was a director or officer of the Company or (ii) is or was a
director or officer of the Company who serves or served, in any capacity, any
other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise at the request of the Company (hereinafter an "indemnitee"),
shall be indemnified and held harmless by the Company against all expense,
liability and loss, including without limitation ERISA excise taxes or
penalties, judgments, fines, penalties, amounts paid in settlement (provided the
Board of Directors of the Company shall have given its prior consent to such
settlement, which consent shall not be unreasonably withheld by it) and
reasonable expenses, including attorneys' fees, suffered or incurred by such
indemnitee in connection therewith, and such indemnification shall continue as
to an indemnitee who has ceased to be a director or officer and shall inure to
the benefit of the indemnitee's heirs and fiduciaries; provided, however, that
no indemnification may be made to or on behalf of any director or officer if his
acts were committed in bad faith or were the result of active and deliberate
dishonesty and were material to the cause of action so adjudicated or otherwise
disposed of, or if he personally gained in fact a financial profit or other
advantage to which he was not legally entitled. Notwithstanding the foregoing,
the Company shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors and is consistent with the
Company's By-laws.
General Effect
- --------------
The general effect of the indemnification provisions of the NYBCL and
the Company's Restated Certificate of Incorporation and By-laws is to eliminate
the rights of the Company and its shareholders (through shareholders' derivative
suits on behalf of the Company) to recover monetary damages in the event of a
breach of fiduciary duty as a director (including breach of duty in the case of
negligent or grossly negligent behavior) except in the situations as described
above. The aforementioned provisions will not affect the availability of
injunctive relief against directors of the Company (although such relief may not
always be available as a practical matter), nor will it limit directors'
liability for violations of the federal securities laws.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing, the Company has been informed that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
LEGAL MATTERS
The legality of the Shares offered hereby will be passed upon for the
Company by Harter, Secrest & Emery LLP, Rochester, New York and for the
Underwriter by Patrick Lane, Esq. Harter Secrest & Emery, LLP represents the
Underwriter as its general corporate counsel and has obtained a conflict waiver
from each of the Company and the Underwriter.
EXPERTS
The consolidated financial statements as of July 31, 1997, and July 31,
1996, included in the Prospectus have been so included in reliance on the report
of Mengel, Metzger, Barr & Co. LLP, independent accountants, and are so included
in reliance upon the report given on their authority as experts in auditing and
accounting.
- 43 -
<PAGE> 44
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Sel-Drum International, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sel-Drum
International, Inc. and Subsidiaries as of July 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows the years then ended. 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sel-Drum
International, Inc. and Subsidiaries as of July 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
Rochester, New York
September 19, 1997
F-1
<PAGE> 45
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
APRIL 30, JULY 31, JULY 31,
1998 1997 1996
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS
- --------------
Cash and cash equivalents $ 64,932 $1,084,954 $1,181,396
Accounts receivable, net of allowance for doubtful
accounts of $115,339, $72,504 and $42,392,
respectively 1,976,172 2,199,625 1,769,211
Inventories 3,590,711 3,143,472 3,795,766
Refundable income taxes 33,076 38,293 --
Deferred income tax benefit 25,000 25,000 9,400
Other current assets 75,178 81,485 121,659
---------- ---------- ----------
TOTAL CURRENT ASSETS 5,765,069 6,572,829 6,877,432
PROPERTY
- --------
Equipment 1,336,886 1,357,641 1,351,522
Vehicles 38,757 24,835 34,288
Furniture and fixtures 56,141 48,465 38,134
Leasehold improvements 404,722 414,114 387,136
---------- ---------- ----------
1,836,506 1,845,055 1,811,080
Less accumulated depreciation and amortization 1,028,503 919,898 775,172
---------- ---------- ----------
808,003 925,157 1,035,908
OTHER ASSET
- -----------
Organization costs, net of accumulated amortization of
$5,687, $5,479 and $4,028, respectively 7,761 9,096 10,608
Purchased and developed technology, net of accumulated
amortization of $36,244, $31,184 and $22,577,
respectively 47,396 55,840 64,819
Deposits 11,204 17,496 14,475
Loans receivable from related parties 167,396 115,421 114,295
---------- ---------- ----------
233,757 197,853 204,197
---------- ---------- ----------
$6,806,829 $7,695,839 $8,117,537
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 46
<TABLE>
<CAPTION>
APRIL 30, JULY 31, JULY 31,
1998 1997 1996
----------- ---------- ----------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
-----------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES
- -------------------
Current portion of long-term debt $ 57,212 $ 59,524 $ 179,948
Notes payable to bank 609,185 1,393,185 2,074,144
Accounts payable 334,978 628,999 1,167,461
Income taxes payable 18,279 -- 91,771
Other current liabilities 420,416 258,427 219,229
---------- ---------- ----------
TOTAL CURRENT LIABILITIES 1,440,070 2,340,135 3,732,553
OTHER LIABILITIES
- -----------------
Deferred income taxes 75,973 31,909 9,406
Long-term debt 47,618 109,072 129,465
---------- ---------- ----------
123,591 140,981 138,871
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock:
Class C 1,154,952 1,280,048 1,280,048
Class D 3,344,853 3,520,132 3,520,132
---------- ---------- ----------
4,499,805 4,800,180 4,800,180
Common stock 76,425 76,425 76,325
Additional paid-in capital 706,846 706,846 696,946
Cumulative foreign currency translation adjustment (231,833) (113,311) (110,067)
Retained earnings (accumulated deficit) 191,925 (255,417) (1,217,271)
---------- ---------- ----------
5,243,168 5,214,723 4,246,113
---------- ---------- ----------
$6,806,829 $7,695,839 $8,117,537
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 47
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
APRIL 30, JULY 31,
-------------------------- --------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $10,874,126 $12,244,237 $16,619,967 $14,811,891
Cost of goods sold 7,273,236 8,048,582 10,968,448 9,746,252
----------- ----------- ----------- -----------
GROSS PROFIT 3,600,890 4,195,655 5,651,519 5,065,639
Selling, administrative and general
expenses 2,704,819 2,904,558 3,954,952 3,651,045
Provision for doubtful accounts 50,780 44,557 75,089 47,960
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 845,291 1,246,540 1,621,478 1,366,634
Other income (expense):
Interest income 16,658 13,480 22,851 27,260
Interest expense (49,424) (101,253) (129,361) (175,193)
Gain (loss) on disposal of
property -- 1,154 (24,551) (4,869)
Foreign currency transaction (loss)
gain (5,238) 21,185 9,495 15,018
----------- ----------- ----------- -----------
(38,004) (65,434) (121,566) (137,784)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 807,287 1,181,106 1,499,912 1,228,850
Income taxes (benefit):
Current 359,945 491,224 531,155 463,210
Deferred -- -- 6,903 (4,547)
----------- ----------- ----------- -----------
359,945 491,224 538,058 458,663
----------- ----------- ----------- -----------
NET INCOME $ 447,342 $ 689,882 $ 961,854 $ 770,187
=========== =========== =========== ===========
Weighted average:
Common shares 7,642,500 7,642,500 7,642,500 7,632,500
Dilutive stock options -- -- -- --
----------- ----------- ----------- -----------
Common shares and dilutive stock
options 7,642,500 7,642,500 7,642,500 7,632,500
=========== =========== =========== ===========
Earnings per common share:
Basic $ .06 $ .09 $ .13 $ .10
=========== =========== =========== ===========
Diluted $ .06 $ .09 $ .13 $ .10
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 48
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
-----------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN RETAINED
ADDITIONAL CURRENCY EARNINGS TOTAL
PREFERRED COMMON PAID-IN TRANSLATION (ACCUMULATED SHAREHOLDERS'
STOCK STOCK CAPITAL ADJUSTMENT DEFICIT) EQUITY
---------- -------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1995 $4,800,180 $76,220 $676,051 $(110,532) $(1,987,458) $3,454,461
Net income for the year -- -- -- -- 770,187 770,187
Adjustment for foreign
currency translation -- -- -- 465 -- 465
Issuance of 10,500 shares of
common stock -- 105 20,895 -- -- 21,000
---------- ------- -------- --------- ----------- ----------
BALANCE AT
JULY 31, 1996 4,800,180 76,325 696,946 (110,067) (1,217,271) 4,246,113
Net income for the year -- -- -- -- 961,854 961,854
Adjustment for foreign
currency translation -- -- -- (3,244) -- (3,244)
Issuance of 10,000 shares of
common stock in exchange
for services rendered -- 100 9,900 -- -- 10,000
---------- ------- -------- --------- ----------- ----------
BALANCE AT
JULY 31, 1997 4,800,180 76,425 706,846 (113,311) (255,417) 5,214,723
Net income for the nine
months ended April 30,
1998 (unaudited) -- -- -- -- 447,342 447,342
Redemption of 172 shares of
Class C preferred stock (125,096) -- -- -- -- (125,096)
Redemption of 241 shares of
Class D preferred stock (175,279) -- -- -- -- (175,279)
Adjustment for foreign
currency translation -- -- -- (118,522) -- (118,522)
---------- ------- -------- --------- ----------- ----------
BALANCE AT
APRIL 30, 1998
(UNAUDITED) $4,499,805 $76,425 $706,846 $(231,833) $ 191,925 $5,243,168
========== ======= ======== ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 49
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
APRIL 30, JULY 31,
-------------------------- ------------------------
1998 1997 1997 1996
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES
- ----------------------------------
Net income $ 447,342 $ 689,882 $ 961,854 $ 770,187
Adjustments to reconcile net income to net cash
provided from operating activities:
Provision for doubtful accounts 50,780 44,557 75,089 47,960
Depreciation and amortization 150,141 144,335 187,032 188,838
Deferred income tax (benefit) 44,064 -- 6,903 (4,547)
(Gain) loss on disposal of property -- (1,154) 24,551 4,869
Issuance of common stock in exchange for
services rendered -- -- 10,000 --
Changes in certain assets and liabilities
affecting operations:
Accounts receivable 172,673 (592,525) (505,503) (102,235)
Inventories (447,239) 386,175 652,294 (704,282)
Refundable income taxes 5,217 -- (38,293) --
Other current assets 6,307 9,625 40,174 (13,940)
Deposits 6,292 73 (3,021) 145
Accounts payable (294,021) (125,713) (538,462) 132,515
Income taxes payable 18,279 (40,727) (91,771) 32,319
Other current liabilities 161,989 (164,912) 39,198 104,795
----------- ---------- ---------- ----------
NET CASH PROVIDED FROM OPERATING
ACTIVITIES 321,824 349,616 820,045 456,624
CASH FLOWS -- INVESTING ACTIVITIES
- ----------------------------------
Purchases of property (58,763) (59,350) (90,341) (113,717)
Proceeds from disposal of property -- 2,804 -- --
----------- ---------- ---------- ----------
NET CASH (USED FOR) INVESTING
ACTIVITIES (58,763) (56,546) (90,341) (113,717)
CASH FLOWS -- FINANCING ACTIVITIES
- ----------------------------------
Redemption of preferred shares (300,375) -- -- --
Bank overdraft -- -- -- (17,058)
(Increase) decrease in loans receivable from
related parties (51,975) 529 (1,126) (3,063)
Short-term (repayments) borrowings, net (784,000) (473,989) (680,959) 731,913
Repayments on long-term debt (63,766) (143,234) (140,817) (59,272)
Proceeds from issuance of common stock -- -- -- 21,000
----------- ---------- ---------- ----------
NET CASH (USED FOR) PROVIDED FROM
FINANCING ACTIVITIES (1,200,116) (616,694) (822,902) 673,520
Effect of exchange rate changes on cash (82,967) (39,838) (3,244) (1,036)
----------- ---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (1,020,022) (363,462) (96,442) 1,015,391
Cash and cash equivalents at beginning of period 1,084,954 1,181,396 1,181,396 166,005
----------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 64,932 $ 817,934 $1,084,954 $1,181,396
=========== ========== ========== ==========
</TABLE>
F-6
<PAGE> 50
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
APRIL 30, JULY 31,
-------------------------- ------------------------
1998 1997 1997 1996
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
=========== ========== ========== ==========
Interest $ 49,424 $ 101,253 $ 129,361 $ 175,193
Income taxes $ 292,385 $ 550,392 $ 661,648 $ 426,046
=========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 51
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
(UNAUDITED WITH RESPECT TO DATA AS OF APRIL 30, 1998
AND FOR THE NINE MONTH PERIODS ENDED APRIL 30, 1998 AND 1997)
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------
DESCRIPTION OF BUSINESS
Sel-Drum International, Inc. (the "Company") is a holding company which
owns 100% of the common stock of Sel-Drum Imaging Corporation (a Canadian
holding company). Sel-Drum Imaging Corporation owns 100% of the common stock of
Sel-Drum Corporation (U.S.A.), Inc. (a United States operating company) and Sel-
Drum Corporation (a Canadian operating company).
Prior to November 1, 1996, Micron Imaging Corp. was also a wholly-owned
subsidiary of Sel-Drum Imaging Corporation. On November 1, 1996, Micron Imaging
Corp. and Sel-Drum Corporation combined their operations into one entity, which
continued to do business as Sel-Drum Corporation.
Sel-Drum Corporation (U.S.A.), Inc. and Sel-Drum Corporation are engaged in
the wholesale distribution of parts and supplies used in the reprographic
industry. Micron Imaging (a division of Sel-Drum Corporation as of November 1,
1996) is engaged in the commercial production and distribution of arsenic
triselenide photoconductor aluminum drums used in duplicating machinery and the
remanufacture of cartridges used in laser printers and facsimile machines. The
Companies grant credit to customers who are located throughout the United States
and Canada, and arrange for letters of credit and sight drafts with
international customers.
Sel-Drum Corporation (U.S.A.), Inc. operates from a warehouse located in
Buffalo, New York. Sel-Drum Corporation's operating facility, which includes
warehouse space and administrative offices, is located in Burlington, Ontario,
Canada. Micron Imaging has its manufacturing facility and administrative offices
in Kelowna, British Columbia, Canada.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Sel-Drum International, Inc. and its wholly-owned subsidiaries (through Sel-Drum
Imaging Corporation), Sel-Drum Corporation (U.S.A.), Inc. and Sel-Drum
Corporation. All material intercompany balances and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company's policy is to invest cash in excess of operating requirements
in income producing investments. Cash equivalents are highly liquid investments
purchased with original maturities of three months or less. Cash equivalents
consist of investments in term deposit accounts at a Canadian financial
institution. At July 31, 1997 and 1996, the Company's investment in these term
deposit accounts aggregated approximately $439,000 and $675,000, respectively.
CONCENTRATION OF CREDIT RISK -- CASH
The Company maintains cash balances at financial institutions located in
New York and Canada. Accounts at the New York institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. Accounts at the Canadian
institutions are insured by the Canadian Deposit Insurance Corporation up to
$43,500 ($60,000 Canadian). Uninsured balances aggregated approximately
$1,313,000 and $1,111,000 at July 31, 1997 and 1996, respectively.
F-8
<PAGE> 52
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-------------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
(UNAUDITED WITH RESPECT TO DATA AS OF APRIL 30, 1998
AND FOR THE NINE MONTH PERIODS ENDED APRIL 30, 1998 AND 1997)
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
- -------------------------------------------------------------------
INVENTORIES
Inventories are valued at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market.
PROPERTY
Property is stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are computed using accelerated and straight-line
methods over the estimated useful lives of the related assets, which are as
follows:
<TABLE>
<S> <C>
Equipment 5 - 10 Years
Vehicles 5 Years
Furniture and fixtures 5 Years
Leasehold improvements 10 Years
</TABLE>
Major renewals and betterments are capitalized, while maintenance and
repairs are charged to operations as incurred. Upon sale or retirement, the
related cost and accumulated depreciation or amortization are removed from the
accounts and the related gain or loss is reflected in operations.
ORGANIZATION COSTS
Organization costs are being amortized on a straight-line basis over ten
years.
PURCHASED AND DEVELOPED TECHNOLOGY
Purchased and developed technology, consisting of technology acquired as
well as engineering and other costs associated with the development of Micron
Imaging's production process, is being amortized on a straight-line basis over
its estimated useful life of ten years.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
Sel-Drum International, Inc. and Sel-Drum Corporation (U.S.A.), Inc.
maintain their accounting records in U.S. dollars, while Sel-Drum Imaging
Corporation and Sel-Drum Corporation maintain their accounting records in
Canadian dollars. The accompanying consolidated financial statements are
presented in U.S. dollars. Accordingly, all balance sheet accounts of Sel-Drum
Imaging Corporation and Sel-Drum Corporation are translated into U.S. dollars at
period-end exchange rates, and statement of income items are translated at
weighted average exchange rates. The resulting translation adjustments are made
directly to a separate component of shareholders' equity. Gains or losses from
foreign currency transactions, such as those resulting from the settlement of
foreign receivables or payables, are included in the statements of income.
ADVERTISING COSTS
The Company's policy is to expense advertising costs as incurred.
Advertising costs for fiscal 1997 and 1996 were $110,212 and $97,782,
respectively ($59,906 and $75,150 for the nine months ended April 30, 1998 and
1997, respectively.)
F-9
<PAGE> 53
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-------------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
(UNAUDITED WITH RESPECT TO DATA AS OF APRIL 30, 1998
AND FOR THE NINE MONTH PERIODS ENDED APRIL 30, 1998 AND 1997)
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Cont'd
- -------------------------------------------------------------------
INCOME TAXES
Deferred income tax assets and liabilities arise from temporary differences
associated with differences between the financial statement and tax basis of
assets and liabilities, as determined by the enacted rates which are expected to
be in effect when these differences reverse. Deferred tax assets and liabilities
are classified as current or noncurrent, depending on the classification of the
assets and liabilities to which they relate. Deferred tax assets and liabilities
not related to an asset or liability are classified as current or noncurrent
depending on the periods in which the temporary differences are expected to
reverse. The principal types of temporary differences between assets and
liabilities for financial statement and tax return purposes are detailed in Note
F.
EARNINGS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS No. 128") in the second quarter of fiscal 1998. All
comparative earnings per share data provided for earlier periods have been
restated to conform to the provisions of this Statement.
Basic earnings per share excludes dilution and is computed by dividing net
income by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share, which reflects the potential dilution that
could occur if outstanding stock options were exercised and resulted in the
issuance of common stock that then shared in the earnings of the Company, is
computed by dividing net income by the weighted average number of common shares
and dilutive stock options. Other than stock options, the Company has no
securities that could be converted into common stock, nor does it have any
contracts that could result in the issuance of common stock.
ESTIMATES
The preparation of financial statements in conformity 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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires the Company to disclose estimated
fair values for its financial instruments. The carrying amounts reported in the
balance sheet for cash, accounts receivable, accounts payable and accrued
expenses approximate fair value because of the short maturity period of those
instruments. In addition, the Company does not believe it is practicable to
estimate the fair value of loans receivable from related parties and long-term
debt due to the terms of such agreements. Further, any difference between the
carrying value and fair value of those agreements would not be significant.
F-10
<PAGE> 54
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-------------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
(UNAUDITED WITH RESPECT TO DATA AS OF APRIL 30, 1998
AND FOR THE NINE MONTH PERIODS ENDED APRIL 30, 1998 AND 1997)
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Cont'd
- -------------------------------------------------------------------
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited financial statements include
all adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the Company's financial position at April 30, 1998 and results
of operations and cash flows for the nine-month periods ended April 30, 1998 and
1997. The financial statements as of April 30, 1998 and for the nine months
ended April 30, 1998 are not necessarily indicative of the results that may be
expected for the fiscal year ending July 31, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income," which
requires changes in comprehensive income be shown in a financial statement that
is displayed with the same prominence as other financial statements. Adoption of
SFAS 130 is required for fiscal 1999, however, the Company does not anticipate a
significant impact on its financial disclosure requirements due to the adoption
of SFAS 130.
NOTE B: INVENTORIES
- --------------------
The components of inventories are as follows:
<TABLE>
<CAPTION>
APRIL 30, JULY 31, JULY 31,
1998 1997 1996
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials $ 205,912 $ 236,240 $ 281,634
Work-in-process 32,172 17,763 88,080
Finished goods 3,352,627 2,889,469 3,426,052
---------- ---------- ----------
$3,590,711 $3,143,472 $3,795,766
========== ========== ==========
</TABLE>
NOTE C: LOANS RECEIVABLE FROM RELATED PARTIES
- ----------------------------------------------
Non-interest bearing loans receivable from related parties are summarized
as follows:
<TABLE>
<CAPTION>
APRIL 30, JULY 31, JULY 31,
1998 1997 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Due from 547117 Ontario Limited $ 25,730 $ 26,003 $ 25,342
Due from 547118 Ontario Limited 141,666 89,418 88,953
-------- -------- --------
$167,396 $115,421 $114,295
======== ======== ========
</TABLE>
The President of Sel-Drum Corporation is the majority shareholder (by
attribution) of the Canadian holding companies, 547117 Ontario Limited and
547118 Ontario Limited. There are currently no repayment terms for the
outstanding loans cited above.
F-11
<PAGE> 55
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-------------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
(UNAUDITED WITH RESPECT TO DATA AS OF APRIL 30, 1998
AND FOR THE NINE MONTH PERIODS ENDED APRIL 30, 1998 AND 1997)
NOTE D: NOTES PAYABLE TO BANK
- ------------------------------
Sel-Drum Corporation has several debt arrangements with a Canadian bank,
summarized as follows:
FACILITY A: Revolving demand loan approximating $2,500,000
($3,700,000 Canadian dollars) to assist with financing of the accounts
receivable and inventories of Sel-Drum Corporation and Sel-Drum Corporation
(U.S.A.), Inc. The arrangement provides for interest to be paid monthly at
the bank's prime rate plus .25% (an effective rate of 6.75% at April 30,
1998). This arrangement may be drawn upon by Sel-Drum Corporation and
Sel-Drum Corporation (U.S.A.), Inc. There were borrowings outstanding
against this arrangement of $591,760 at April 30, 1998 ($1,358,738 and
$1,677,716 at July 31, 1997 and 1996, respectively). Letters of credit (see
Facility B below), which reduce the amount of borrowings available under
the terms of the arrangement, were outstanding at April 30, 1998 in an
amount approximating $197,800.
FACILITY B: This arrangement provides the Company with letters of
credit to purchase inventories, up to an amount approximating $1,087,800
($1,500,000 Canadian dollars), subject to the outstanding balance of
Facility A cited above.
FACILITY C: $250,000 revolving demand loan to finance the payment of
U.S. trade accounts payable, subject to the outstanding balance of Facility
A cited above. No amounts were outstanding under this arrangement at April
30, 1998, July 31, 1997 or July 31, 1996.
FACILITY D: $50,000 facility to provide check clearing privileges for
U.S. dollar checks, subject to the outstanding balance of Facility A cited
above. No amounts were outstanding under this arrangement at April 30,
1998, July 31, 1997 or July 31, 1996.
FACILITY E: $245,000 ($350,000 Canadian dollars) facility to provide
for the purchase of up to $1,200,000 ($1,750,000 Canadian dollars) of
forward exchange contracts in Japanese yen. Borrowings are subject to the
outstanding balance of Facility A cited above. No amounts were outstanding
under this arrangement at April 30, 1998, July 31, 1997 or July 31, 1996.
FACILITY F: $45,000 ($65,000 Canadian dollars) arrangement to finance
leasehold improvements at the facility of Sel-Drum Corporation, which
provides for interest at the prime rate plus 1% (an effective rate of 7.5%
at April 30, 1998). Borrowings are subject to the outstanding balance of
Facility A cited above. There were borrowings outstanding against this
arrangement of $17,425 at April 30, 1998 ($34,447 and $56,443 at July 31,
1997 and 1996 respectively).
Total amounts outstanding on all of the above arrangements as of April 30,
1998 amounted to $609,185. At April 30, 1998 the Company had approximately
$1,693,000 available for borrowing under these arrangements.
F-12
<PAGE> 56
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-------------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
(UNAUDITED WITH RESPECT TO DATA AS OF APRIL 30, 1998
AND FOR THE NINE MONTH PERIODS ENDED APRIL 30, 1998 AND 1997)
NOTE D: NOTES PAYABLE TO BANK -- CONTINUED
- -------------------------------------------
The above arrangements are secured by substantially all assets of Sel-Drum
Corporation and Sel-Drum Corporation (U.S.A.), Inc., the limited corporate
guarantees of Sel-Drum International, Inc. and Sel-Drum Imaging Corporation,
each in the amount of approximately $2,500,000 ($3,500,000 Canadian dollars) and
the limited corporate guarantee of Sel-Drum Corporation (U.S.A.), Inc. in the
amount of $1,050,000 ($1,500,000 Canadian dollars). In addition, Facility F is
also secured by a collateral mortgage of $210,000 ($300,000 Canadian dollars) on
the operating facilities of Sel-Drum Corporation. Further, the arrangements
contain various covenants which provide for, among other things, the maintenance
of certain ratios and dividend restrictions.
NOTE E: LONG-TERM DEBT
- -----------------------
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
APRIL 30, JULY 31, JULY 31,
1998 1997 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Interest free note payable to a shareholder. The
note was paid in full in October 1996........... $ -- $ -- $ 29,132
Interest free note payable to a corporation. The
note was paid in full in October 1996........... -- -- 91,037
Interest free loan payable to Western Economic
Diversification Fund, due in monthly payments of
approximately $4,960 through November 1999...... 104,830 168,596 189,244
-------- -------- --------
104,830 168,596 309,413
Less: Current portion of long-term debt........... 57,212 59,524 179,948
-------- -------- --------
$ 47,618 $109,072 $129,465
======== ======== ========
</TABLE>
Maturities for long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JULY 31,
--------------------
<S> <C>
1998................................................... $ 59,524
1999................................................... 59,524
2000................................................... 49,548
--------
$168,596
========
</TABLE>
F-13
<PAGE> 57
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-------------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
(UNAUDITED WITH RESPECT TO DATA AS OF APRIL 30, 1998
AND FOR THE NINE MONTH PERIODS ENDED APRIL 30, 1998 AND 1997)
NOTE F: INCOME TAXES
- ---------------------
The total tax provision is different from the amount that would have been
recorded by applying the U.S. statutory federal income tax rate to income before
taxes. The reconciliation of these differences is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
-------------------------- --------------------------
APRIL 30, JULY 31,
-------------------------- --------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Statutory U.S. tax rate................. 34.0% 34.0% 34.0% 34.0%
State income taxes, net of federal tax
benefit............................... 2.0 2.0 2.0 2.0
Utilization of loss carryforwards....... -- -- (.2) (.2)
Utilization of scientific research and
experimental development expenditure
carryforwards......................... -- -- (.5) --
Difference between non--U.S. and U.S.
tax rates............................. 1.0 1.0 .7 1.3
Other................................... 7.5 4.5 (.1) .2
---- ---- ---- ----
EFFECTIVE TAX RATE............ 44.5% 41.5% 35.9% 37.3%
==== ==== ==== ====
</TABLE>
Deferred taxes resulting from temporary differences are as follows:
<TABLE>
<CAPTION>
ASSETS/(LIABILITIES)
--------------------
JULY 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Allowance for doubtful accounts receivable.................. $ 25,000 $ 9,400
Depreciation................................................ (79,047) (9,406)
Scientific research and experimental development expenditure
carryforwards............................................. 20,000 64,216
Investment tax credit carryforwards......................... 47,138 47,900
Tax effect of utilization of investment tax credit
carryforwards required to be included in taxable income... (20,000) --
Less valuation allowance.................................... -- (112,116)
-------- --------
$ (6,909) $ (6)
======== ========
Current..................................................... $ 25,000 $ 9,400
Long-term................................................... (31,909) (9,406)
-------- --------
$ (6,909) $ (6)
======== ========
</TABLE>
Temporary differences at April 30, 1998 are substantially the same as they
were at July 31, 1997.
F-14
<PAGE> 58
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-------------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
(UNAUDITED WITH RESPECT TO DATA AS OF APRIL 30, 1998
AND FOR THE NINE MONTH PERIODS ENDED APRIL 30, 1998 AND 1997)
NOTE F: INCOME TAXES, Cont'd
- ----------------------
At July 31, 1997, Sel-Drum Corporation had scientific research and
experimental development expenditure carryforwards approximating $50,000 which
may, subject to certain limitations, offset future taxable income. The
scientific research and experimental development expenditure carryforwards may
be carried forward indefinitely. In addition, Sel-Drum Corporation also had
investment tax credit carryforwards of $47,138 available, subject to certain
limitations, to reduce future income taxes payable. These credits expire at
various times through 2004.
F-15
<PAGE> 59
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-------------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
(UNAUDITED WITH RESPECT TO DATA AS OF APRIL 30, 1998
AND FOR THE NINE MONTH PERIODS ENDED APRIL 30, 1998 AND 1997)
NOTE G: COMMON AND PREFERRED STOCK
- -----------------------------------
The following is certain information regarding common and preferred stock:
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
------------ ---------------------------
1998 1997 1996
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
SEL-DRUM INTERNATIONAL, INC.
- ---------------------------
PREFERRED STOCK
---------------
Par value $0.01 $0.01 $0.01
Shares authorized 10,000,000 10,000,000 10,000,000
Shares issued and outstanding None None None
COMMON STOCK
------------
Par value $0.01 $0.01 $0.01
Shares authorized 100,000,000 100,000,000 10,000,000
Shares issued and outstanding 7,642,500 7,642,500 7,632,500
SEL-DRUM IMAGING CORPORATION
- ----------------------------
PREFERRED STOCK
---------------
Class A (5% non-cumulative):
Par value None None None
Stated value $ 727.30 $ 727.30 $ 727.30
Shares authorized 2,000 2,000 2,000
Shares issued and outstanding None None None
Class B (5% non-cumulative):
Par value None None None
Stated value $ 727.30 $ 727.30 $ 727.30
Shares authorized 5,000 5,000 5,000
Shares issued and outstanding None None None
Class C (5% non-cumulative):
Par value None None None
Stated value $ 727.30 $ 727.30 $ 727.30
Shares authorized 10,000 10,000 10,000
Shares issued and outstanding 1,588 1,760 1,760
Class D (5% non-cumulative):
Par value None None None
Stated value $ 727.30 $ 727.30 $ 727.30
Shares authorized 10,000 10,000 10,000
Shares issued and outstanding 4,599 4,840 4,840
</TABLE>
Effective March 6, 1998, the Company was reincorporated as a New York
Corporation. In connection with the reincorporation, Sel-Drum International,
Inc. established a par value of $0.01 per share for its preferred stock and
$0.01 per share for its common stock. Accordingly, the amounts in the
accompanying financial statements, for all periods presented, reflect the
revised capital structure of the Company, which resulted in a reduction in
common stock from its previously stated value and an increase in additional
paid-in capital of the same amount.
F-16
<PAGE> 60
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-------------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
(UNAUDITED WITH RESPECT TO DATA AS OF APRIL 30, 1998
AND FOR THE NINE MONTH PERIODS ENDED APRIL 30, 1998 AND 1997)
NOTE H: COMMITMENTS AND CONTINGENCIES
- --------------------------------------
Lease commitments
-----------------
Sel-Drum Corporation leases its operating facility from a related party at
a base monthly rental approximating $7,050 through February 2002. In addition to
the base rental, the Company is responsible for property taxes, insurance,
utilities and repairs and maintenance.
Sel-Drum Corporation (U.S.A.), Inc. leases its warehouse from an unrelated
party at a base monthly rental approximating $2,800 through March 1998, then
$3,200 through the expiration of the lease in October 2001. The base monthly
rental includes property taxes and utilities.
Micron Imaging leases one of its facilities for approximately $1,800 per
month under a lease agreement which expires in April 1999. Micron Imaging also
leases two additional facilities on a month-to-month basis, one from a related
party.
Total rent expense for the Company's operating facilities and warehouses
was $194,679 and $149,761 for the years ended July 31, 1997 and 1996,
respectively ($126,343 and $112,379 for the nine month periods ended April 30,
1998 and 1997, respectively).
Total minimum future rental payments under all noncancellable leases are
approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING JULY 31, AMOUNT
-------------------- --------
<S> <C>
1998 $146,669
1999 134,824
2000 126.845
2001 122,856
2002 51,864
--------
$583,058
========
</TABLE>
The amounts included in the minimum future rental payments above for the
Company's Canadian facilities have been converted to U.S. dollars using the
appropriate period-end exchange rates.
EMPLOYMENT CONTRACTS
- --------------------
Employment contracts exist with the President and Director of Finance of
Sel-Drum Corporation and the General Manager of Micron Imaging. These contracts
provide for minimum annual salaries plus bonuses.
CONTINGENCIES
- -------------
At April 30, 1998, July 31, 1997 and 1996, Sel-Drum Corporation was
contingently liable for approximately $197,800, $155,310 and $330,000,
respectively, related to letters of credit (see Note D).
F-17
<PAGE> 61
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-------------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
(UNAUDITED WITH RESPECT TO DATA AS OF APRIL 30, 1998
AND FOR THE NINE MONTH PERIODS ENDED APRIL 30, 1998 AND 1997)
NOTE I: STOCK OPTION PLAN
- --------------------------
On November 24, 1995, the Company's shareholders approved the Sel-Drum
International, Inc. 1995 Employee and Non-Employee Director Stock Option Plan
(the "Plan"). The Plan is designed to attract and retain key employees,
directors or advisors of the Company and to encourage them to contribute to the
Company's success by providing the opportunity for stock ownership. The Plan
provides for the grant of incentive stock options and nonstatutory stock options
to key employees, directors and advisors of the Company to purchase up to an
aggregate of 500,000 shares of the Company's common stock. The Plan is
administered by a Stock Option Committee, which is authorized to determine the
recipients of options, the type of options granted, the number of shares subject
to each option, the term of each option, exercise prices and other option
features. The term of an option may not exceed 5 years where the optionee would
thereafter own stock possessing more than 10% of the combined voting power of
the common stock (a 10% Shareholder). The exercise price must at least equal the
fair market value of the common stock on the date of the grant of the option,
except that if an incentive stock option is granted to a 10% Shareholder, the
exercise price shall be no less than 110% of the fair market value of the common
stock on the date of the grant of the option. On April 24, 1998, nonstatutory
options were granted to allow for the purchase of up to 500,000 shares of the
Company's common stock at an exercise price of $.50 per share; however, as of
June 24, 1998, none of the options have been exercised.
NOTE J: IMPACT OF YEAR 2000 (UNAUDITED)
- ----------------------------------------
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any of the
Company's computer programs or operating equipment that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than Year 2000.
This could result in a computer system failure or miscalculations causing
disruptions of operations.
Management is in the process of assessing which systems will need to be
modified or replaced so that they will function properly with respect to dates
in the Year 2000 and thereafter. The Company plans to initiate formal
communications with its significant vendors to determine the extent to which the
Company's programs or operating equipment are vulnerable to those third parties'
failure to remediate their own Year 2000 issues. The total Year 2000 project
cost has not been determined.
F-18
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Sections 721 through 725 of the New York Business
Corporation Law (the "NYBCL"), which provides for indemnification of directors
and officers of New York corporations under certain circumstances.
Section 722 of the NYBCL provides that a corporation may indemnify
directors and officers as well as other employees and individuals against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees, in connection with actions or proceedings, whether civil or
criminal (other than an action by or in the right of the corporation, a
"derivation action"), if they acted in good faith and in a manner they
reasonably believed to be in the best interests of the corporation; and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
their conduct was unlawful; and, in the case of service for any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise at the request of the corporation, reasonably believed to be in, or
not opposed to, the best interest of the corporation. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to amounts paid in settlement and reasonable expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
actions, and the statute does not apply in respect of a threatened action, or a
pending action that is settled or otherwise disposed of, unless prior court
approval of indemnification has been obtained. Section 721 of the NYBCL provides
that Article 7 of the NYBCL is not exclusive of other indemnification that may
be granted by a corporation's certificate of incorporation, disinterested
director vote, shareholder vote, agreement or otherwise.
The Company's Restated Certificate of Incorporation requires the Company
to indemnify its officers and directors to the fullest extent permitted under
the NYBCL. Furthermore, the Company's By-laws provides that the Company, to the
fullest extent permitted and in the manner required by the laws of the State of
New York, may indemnify any officer or director (and the heirs and legal
representatives of such person) made, or threatened to be made, a party in an
action or proceeding (including, without limitation, one by or in the right of
the Company to procure a judgment in its favor), whether civil or criminal,
including an action by or in the right of any other corporation of any type or
kind, domestic or foreign, or any partnership, joint venture, trust, employee
benefit plan or other enterprise, which any director or officer of the Company
served in any capacity at the request of the Company, by reason of the fact that
such director or officer, or such director's or officer's testator or intestate,
was a director or officer of the Company or served such other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise in
any capacity.
Section 402(b) of the NYBCL provides that a corporation's certificate of
incorporation may include a provision that eliminates or limits the personal
liability of the corporation's directors to the corporation or its shareholders
for damages for any breach of a director's duty, provided that such provision
does not eliminate or limit (1) the liability of any director if a judgment or
other final adjudication adverse to the director establishes that the director's
acts of omissions were in bad faith or involved intentional misconduct or a
knowing violation of law or that the director personally gained a financial
profit or other advantage to which
- 1 -
<PAGE> 63
the director was not legally entitled or that the director's acts violated
Section 719 of the NYBCL, or (2) the liability of any director for any act or
omission prior to the adoption of a provision authorized by Section 402(b) of
the NYBCL.
The Company's Restated Certificate of Incorporation provides that a
member of the Company's Board of Directors shall not be personally liable to the
Company or its shareholders for damages for any breach of duty in his capacity
as such; provided, however, that the foregoing provision in the Restated
Certificate of Incorporation shall not be construed to eliminate (i) the
liability of any director if a judgment or other adjudication adverse to such
director establishes that such director's acts or omissions were in bad faith or
involved intentional misconduct or a knowing violation of law, or that such
director personally gained in fact a financial profit or other advantage to
which he or she was not legally entitled, or that such director's acts violated
Section 719 of the NYBCL (concerning liability of directors in certain cases),
or (ii) the liability of any director for any act or omission prior to the
adoption of the foregoing provisions. The Restated Certificate of Incorporation
further provides that if the NYBCL is amended after adoption of the foregoing
provisions contained in the Company's Restated Certificate of Incorporation to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of any director of the Company shall
be eliminated or limited to the fullest extent permitted by the NYBCL, as so
amended. The Company's Restated Certificate of Incorporation provides that any
repeal or modification of the foregoing provisions contained in the Company's
Restated Certificate of Incorporation by the shareholders of the Company shall
not adversely affect any right or protection of a director of the Company
existing at the time of such repeal or modification.
Article V of the Company's By-laws provides each person who was or is
made a party to or is threatened to be made a party to or is otherwise involved
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or his
testator or intestate (i) is or was a director or officer of the Company or (ii)
is or was a director or officer of the Company who serves or served, in any
capacity, any other corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise at the request of the Company (hereinafter an
"indemnitee"), shall be indemnified and held harmless by the Company against all
expense, liability and loss, including without limitation ERISA excise taxes or
penalties, judgments, fines, penalties, amounts paid in settlement (provided the
Board of Directors of the Company shall have given its prior consent to such
settlement, which consent shall not be unreasonably withheld by it) and
reasonable expenses, including attorneys' fees, suffered or incurred by such
indemnitee in connection therewith, and such indemnification shall continue as
to an indemnitee who has ceased to be a director or officer and shall inure to
the benefit of the indemnitee's heirs and fiduciaries; provided, however, that
no indemnification may be made to or on behalf of any director or officer if his
acts were committed in bad faith or were the result of active and deliberate
dishonesty and were material to the cause of action so adjudicated or otherwise
disposed of, or if he personally gained in fact a financial profit or other
advantage to which he was not legally entitled. Notwithstanding the foregoing,
the Company shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors and is consistent with the
Company's By-laws.
- 2 -
<PAGE> 64
General Effect
- --------------
The general effect of the indemnification provisions of the NYBCL and
the Company's Restated Certificate of Incorporation and By-laws is to eliminate
the rights of the Company and its shareholders (through shareholders' derivative
suits on behalf of the Company) to recover monetary damages in the event of a
breach of fiduciary duty as a director (including breach of duty in the case of
negligent or grossly negligent behavior) except in the situations as described
above. The aforementioned provisions will not affect the availability of
injunctive relief against directors of the Company (although such relief may not
always be available as a practical matter), nor will it limit directors'
liability for violations of the federal securities laws.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing, the Company has been informed that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred by
the Company and the selling shareholders in connection with the offering of
the Shares registered hereby. All amounts, except the Securities and Exchange
Commission registration fee, are estimated.
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission Registration Fee $ 143
NASD Fee .......................................... $ 560
Accounting Fees and Expenses ...................... $ 7,600
Legal Fees and Expenses ........................... $30,000
Blue Sky Fees and Expenses ........................ $ 5,000
Miscellaneous Expenses ............................ $ 2,000
Total ............................................. $45,303
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1995, the Company has sold the following shares of
Common Stock which were not registered under the Securities Act of 1933, as
amended (the "Securities Act"):
<TABLE>
<CAPTION>
Number of Aggregate
Date of Sale Name of Investor Shares Consideration
- ------------ ---------------- ------ -------------
<S> <C> <C> <C>
3/14/96 Sharron King 1,000 $ 2,000
3/14/96 F. Keith Bird 8,000 16,000
3/14/96 Kenneth C. Musgrave 1,000 2,000
3/14/96 James Hrousalas 500 1,000
11/19/96 Kensington Enterprises Ltd. 10,000 10,000*
</TABLE>
* The shares issued to Kensington Enterprises Ltd. were issued in
connection with services rendered to the Company and were valued at $1.00 per
share at the time of issuance.
- 3 -
<PAGE> 65
Each of the issuances of securities described above was made by private
offerings in reliance of the exemption from the registration requirements of the
Securities Act provided by Regulation S of the Securities Act.
ITEM 27. EXHIBITS.
(1) UNDERWRITING AGREEMENT
Form of Underwriting Agreement between Sel-Drum
International, Inc., and Pittsford Capital Markets, Inc.
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT,
LIQUIDATION OR SUCCESSION
Not applicable.
(3) (a) ARTICLES OF INCORPORATION
Restated Certificate of Incorporation is
incorporated herein by reference to Exhibit 3(a) to
the Company's Form 10-QSB for the quarter ended
January 31, 1998.
(b) BY-LAWS
By-laws are incorporated herein by reference to
Exhibit 3(b) to the Company's Form 10-QSB for the
quarter ended January 31, 1998.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
The documents listed under Item (3) of this Index
are incorporated herein by reference.
(5) OPINION OF HARTER, SECREST & EMERY LLP
(8) OPINION REGARDING TAX MATTERS
Not applicable.
(9) VOTING TRUST AGREEMENT
Not applicable.
(10) MATERIAL CONTRACTS
(a) Employment Contract dated as of November 1, 1997,
between Sel-Drum International, Inc., and Raymond
Sparks is incorporated herein by reference to
Exhibit 10(a) to the Company's Form 10-QSB for the
quarter ended January 31, 1998.
- 4 -
<PAGE> 66
(b) Non-Incentive Stock Option Grant granted as of
November 3, 1997, by Sel-Drum International, Inc.,
to Raymond C. Sparks is incorporated herein by
reference to Exhibit 10(b) to the Company's Form
10-QSB for the quarter ended January 31, 1998.
(c) Form of Redemption Agreement by and between 547118
Ontario Limited, Sel-Drum Imaging Corporation and
Sel-Drum International, Inc., is incorporated
herein by reference to Exhibit 10(c) to the
Company's Form 10-QSB for the quarter ended January
31, 1998.
(d) Form of Redemption Agreement by and between Robert
Asseltine, Geraldine Asseltine, Sel-Drum Imaging
Corporation and Sel-Drum International, Inc., is
incorporated herein by reference to Exhibit 10(d)
to the Company's Form 10-QSB for the quarter ended
January 31, 1998.
(e) Insurance Policy Agreement dated February 1, 1998,
between Sel-Drum International, Inc., and Brian
F. Turnbull is incorporated herein by reference to
Exhibit 10(a) to the Company's Form 10-QSB for the
quarter ended April 30, 1998.
(f) Sel-Drum International, Inc. 1995 Employee and
Non-Employee Director Stock Option Plan is
incorporated herein by reference to Exhibit 99.1
to the Company's Registration Statement on Form
S-8 (Registration No. 333-57885).
(g) Share Repurchase and Non-Competition Agreement
dated as of February 1, 1998, by and among Brien
Murtagh, Sel-Drum Imaging Corporation and Sel-Drum
International, Inc.
(h) Form of Financial Consulting Agreement between
Sel-Drum International, Inc. and Pittsford Capital
Markets, Inc.
(i) Form of Custody Agreement
* (j) Form of Warrants
* (k) Form of Escrow Agreement between Sel-Drum
International, Inc. and First National Bank of
Rochester
(11) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Computation can be clearly determined by reference to the
Financial Statements included herein.
(13) ANNUAL OR QUARTERLY REPORTS
Not applicable.
(16) LETTER ON CHANGE IN CERTIFYING ACCOUNTANT
Not applicable.
- 5 -
<PAGE> 67
(21) SUBSIDIARIES OF THE COMPANY
* (23) CONSENT OF EXPERTS AND COUNSEL
*(a) Consent of Mengel, Metzger, Barr & Co. LLP
(b) Consent of Harter, Secrest & Emery LLP (contained
in Exhibit 5)
(24) POWER OF ATTORNEY
(25) STATEMENT OF ELIGIBILITY OF TRUSTEE
Not applicable.
(26) INVITATIONS FOR COMPETITIVE BIDS
Not applicable.
(27) FINANCIAL DATA SCHEDULE
(99) ADDITIONAL EXHIBITS
Not applicable.
- ---------------------
* Exhibit filed with this Amendment
- 6 -
<PAGE> 68
ITEM 28. UNDERTAKINGS.
The undersigned Company hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(a) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(b) to reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
Registration Statement; and
(c) to include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective
amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
4. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Directors, Officers and
controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a Director, Officer or
controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by a Director, Officer or
Controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the
Act and shall be governed by the final adjudication of such issue.
- 7 -
<PAGE> 69
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Buffalo,
State of New York, on September 25, 1998.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Raymond C. Sparks as his true and lawful attorney-in-fact and agent with full
power of substitution and re-substitution, for him and his name, place and
stead, in any and all capacities, to sign any or all amendments (including
post-effective amendments) to this Registration Statement and a new Registration
Statement filed pursuant to Rule 462(b) of the Securities Act of 1933, as
amended and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute, may lawfully do or cause to be done by virtue hereof.
SEL-DRUM INTERNATIONAL, INC.
By: /s/ Raymond C. Sparks
-------------------------------------
Raymond C. Sparks
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Raymond C. Sparks President, Chief Executive September 25, 1998
- --------------------------------- Officer and Director (Prin-
Raymond C. Sparks cipal Executive Officer)
* Vice President - Finance September 25, 1998
- --------------------------------- (Principal Financial Officer
John C. Hall and Principal Accounting
Officer)
* Director, Selling September 25, 1998
- --------------------------------- Shareholder
Robert E. Asseltine
* Director September 25, 1998
- ---------------------------------
Robert M. Orr
* Director, Selling September 25, 1998
- --------------------------------- Shareholder
Brian F. Turnbull
*By: /s/ Raymond C. Sparks
--------------------------------------------
Attorney-in-Fact
</TABLE>
- 8 -
<PAGE> 70
EXHIBIT INDEX
(1) UNDERWRITING AGREEMENT
Form of Underwriting Agreement between Sel-Drum
International, Inc., and Pittsford Capital Markets, Inc.
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION
OR SUCCESSION
Not applicable.
(3) (a) ARTICLES OF INCORPORATION
Restated Certificate of Incorporation is incorporated
herein by reference to Exhibit 3(a) to the Company's Form
10-QSB for the quarter ended January 31, 1998.
(b) BY-LAWS
By-laws are incorporated herein by reference to Exhibit
3(b) to the Company's Form 10-QSB for the quarter ended
January 31, 1998.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
The documents listed under Item (3) of this Index are
incorporated herein by reference.
(5) OPINION OF HARTER, SECREST & EMERY LLP
(8) OPINION REGARDING TAX MATTERS
Not applicable.
(9) VOTING TRUST AGREEMENT
Not applicable.
(10) MATERIAL CONTRACTS
(a) Employment Contract dated as of November 1, 1997,
between Sel-Drum International, Inc., and Raymond
Sparks is incorporated herein by reference to
Exhibit 10(a) to the Company's Form 10-QSB for the
quarter ended January 31, 1998.
- 9 -
<PAGE> 71
(b) Non-Incentive Stock Option Grant granted as of
November 3, 1997, by Sel-Drum International, Inc.,
to Raymond C. Sparks is incorporated herein by
reference to Exhibit 10(b) to the Company's Form
10-QSB for the quarter ended January 31, 1998.
(c) Form of Redemption Agreement by and between 547118
Ontario Limited, Sel-Drum Imaging Corporation and
Sel-Drum International, Inc., is incorporated
herein by reference to Exhibit 10(c) to the
Company's Form 10-QSB for the quarter ended January
31, 1998.
(d) Form of Redemption Agreement by and between Robert
Asseltine, Geraldine Asseltine, Sel-Drum Imaging
Corporation and Sel-Drum International, Inc., is
incorporated herein by reference to Exhibit 10(d)
to the Company's Form 10-QSB for the quarter ended
January 31, 1998.
(e) Insurance Policy Agreement dated February 1, 1998,
between Sel-Drum International, Inc., and Brian
F. Turnbull is incorporated herein by reference to
Exhibit 10(a) to the Company's Form 10-QSB for the
quarter ended April 30, 1998.
(f) Sel-Drum International, Inc. 1995 Employee and
Non-Employee Director Stock Option Plan is
incorporated herein by reference to Exhibit 99.1
to the Company's Registration Statement on Form
S-8 (Registration No. 333-57885).
(g) Share Repurchase and Non-Competition Agreement
dated as of February 1, 1998, by and among Brien
Murtagh, Sel-Drum Imaging Corporation and Sel-Drum
International, Inc.
(h) Form of Financial Consulting Agreement between
Sel-Drum International, Inc. and Pittsford Capital
Markets, Inc.
(i) Form of Custody Agreement
* (j) Form of Warrants
* (k) Form of Escrow Agreement between Sel-Drum
International, Inc. and First National Bank
of Rochester
(11) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Computation can be clearly determined by reference to the
Financial Statements included herein.
(13) ANNUAL OR QUARTERLY REPORTS
Not applicable.
(16) LETTER ON CHANGE IN CERTIFYING ACCOUNTANT
Not applicable.
- 10 -
<PAGE> 72
(21) SUBSIDIARIES OF THE COMPANY
* (23) CONSENT OF EXPERTS AND COUNSEL
*(a) Consent of Mengel, Metzger, Barr & Co. LLP
(b) Consent of Harter, Secrest & Emery LLP (contained
in Exhibit 5)
(24) POWER OF ATTORNEY
(25) STATEMENT OF ELIGIBILITY OF TRUSTEE
Not applicable.
(26) INVITATIONS FOR COMPETITIVE BIDS
Not applicable.
(27) FINANCIAL DATA SCHEDULE
(99) ADDITIONAL EXHIBITS
Not applicable.
- -----------------------------
* Exhibit filed with this Amendment
- 11 -
<PAGE> 1
EXHIBIT 10 (j)
WARRANT TO PURCHASE _______
SHARES OF COMMON STOCK
WARRANTS
Dated: ___________, 1998
THIS CERTIFIES THAT PITTSFORD CAPITAL MARKETS, INC. (herein sometimes
called the "Holder") is entitled to purchase from SEL-DRUM INTERNATIONAL, INC.,
a Delaware corporation (the "Company"), at $.70 per share (that being 140% of
the public offering price per share) and during the period hereinafter
specified, up to _________ shares of the Common Stock, $.01 par value, of the
Company (the "Common Stock"). The aggregate amount of this Warrant (this
"Warrant") shall equal 10% of the total number of shares of Common Stock sold in
this offering. By way of example, if 250,000 shares of Common Stock are sold in
this offering, the Company shall issue the Underwriter for $5.00 an
Underwriter's Warrant to purchase 25,000 shares of Common Stock at an exercise
price of $.70 per share.This Warrant is issued pursuant to an Underwriting
Agreement between the Company and Pittsford Capital Markets, Inc. (the
"Underwriter"), in connection with a "best efforts" offering (the "Offering"),
of up to 845,000 shares of the Common Stock of the Company, in consideration of
$5.00 received by the Company for this Warrant. Except as otherwise expressly
provided herein, the shares of Common Stock issued upon exercise of this Warrant
shall bear the same terms and conditions described under the caption
"Description Of The Securities" in the Company's Registration Statement on Form
SB-2 dated August ___, 1998 (the "Registration Statement"), except that: (i)
neither this Warrant nor the shares of Common Stock underlying this Warrant
shall be registered under the Securities Act of 1933, as amended (the "Act");
and (ii) the Holder shall have no registration rights under the the Act, for
this Warrant or the Common Stock underlying this Warrant. Each certificate
evidencing the Common Stock issuable pursuant to this Warrant shall bear the
appropriate restrictive legend set forth below, except that any such certificate
shall not bear such restrictive legend if: (i) it is transferred pursuant to an
effective registration statement under the Act or in compliance with Rule 144 or
Rule 144A promulgated under the Act, or (ii) the Company is provided with an
opinion of counsel reasonably satisfactory to the Company to the effect that
such legend is not required in order to establish compliance with the provisions
of the Act:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGIS-
<PAGE> 2
TERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SECURITIES MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE WARRANT COVERING
REGISTRATION RIGHTS PERTAINING TO THESE SECURITIES AND RESTRICTING
THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY
THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE
COMPANY AT THE OFFICE OF THE COMPANY AT BUFFALO, NEW YORK."
Unless the context otherwise requires, all references herein to a "Section"
shall mean the appropriate Section of this Warrant.
1. EXERCISE PRICE AND PERIOD. The rights represented by this Warrant
shall be exercised at the price and during the periods set forth below:
(a) During the period from [EFFECTIVE DATE] to [EFFECTIVE
DATE+1 YEAR-1 DAY] (the "First Anniversary Date") inclusive, the Holder shall
have no right to purchase any Common Stock hereunder, except that in the event
of any merger or consolidation of the Company into another entity, or any sale
of substantially all of the assets of the Company as an entirety, prior to the
First Anniversary Date, the Holder shall have the right to exercise this Warrant
at such time and into such kinds and amounts of shares of stock and other
securities and property (including cash) as would be receivable by a holder of
the number of shares of Common Stock into which this Warrant might have been
exercisable immediately prior thereto.
(b) Between [EFFECTIVE DATE+1 YEAR] and [EFFECTIVE DATE+3
YEARS-1 DAY] (the "Expiration Date") inclusive, the Holder shall have the right
to purchase hereunder: (i) shares of Common Stock at a price of $0.70 per share
(that being 140 percent of the public offering price of the shares of Common
Stock) (the "Share Exercise Price").
(c) After the Expiration Date, the Holder shall have no right
to purchase any shares of Common Stock hereunder.
2. EXERCISE. The rights represented by this Warrant may be exercised,
in whole or in part (with respect to shares of Common Stock, by the Holder at
any time within the period specified in Section 1 by: (a) surrender of this
Warrant for cancellation (with the purchase form at the end hereof properly
executed) at the principal executive office of the Company (or at such other
office or agency of the Company as it may designate by notice in writing to the
Holder at the address of the Holder appearing on the books of the Company); (b)
payment to the Company of the Exercise Price for the number of shares of Common
Stock specified in the such purchase form, together with the amount of
applicable stock transfer taxes, if any; and (c) delivery to the Company of a
duly executed agreement signed by the person(s) designated in the purchase form
to the effect that such person(s) agree(s) to
- 2 -
<PAGE> 3
be bound by all of the terms and conditions of this Warrant, including without
limitation the provisions of Sections 6 and 7. This Warrant shall be deemed to
have been exercised, in whole or in part to the extent specified, immediately
prior to the close of business on the date on which all of the provisions of
this Section 2 are satisfied, and the person(s) designated in the purchase form
shall become the holder(s) of record of the shares of Common Stock issuable upon
such exercise at that time and date. The certificates representing the shares of
Common Stock so purchased shall be delivered to the Holder within a reasonable
time, not exceeding fifteen business days, after this Warrant shall have been so
exercised.
3. TRANSFER OF WARRANT.
(a) During the period from [EFFECTIVE DATE] to the First
Anniversary Date inclusive, this Warrant shall not be transferred, sold,
assigned or hypothecated, except that during such period this Warrant may be
transferred (i) to successors in interest of the Holder, or (ii) in whole or in
part to any one or more shareholders, directors or officers of the Holder, in
each case subject to compliance with applicable Federal and state securities
laws and Interpretations of the Board of Governors of the National Association
of Securities Dealers, Inc.
(b) Between [EFFECTIVE DATE+1 YEAR] and the Expiration Date
inclusive, this Warrant shall be freely transferable, in whole or in part,
subject to the other terms and conditions hereof and to compliance with
applicable Federal and state securities laws; provided, however, that this
Warrant shall be immediately exercised upon any such transfer to any person or
entity that is not a shareholder, director or officer of the Holder and that if
this Warrant is not so exercised upon a transfer to any person or entity which
is not a shareholder, director or officer of the Holder, that this Warrant shall
immediately lapse.
(c) Any transfer of this Warrant permitted by this Section 3
shall be effected by: (i) surrender of this Warrant for cancellation (with the
assignment form at the end hereof properly executed) at the office or agency of
the Company referred to in Section 2; (ii) delivery of a certificate (signed, if
the Holder is a corporation or partnership, by an authorized officer or partner
thereof), stating that each transferee designated in the assignment form is a
permitted transferee under this Section 3; and (iii) delivery of an opinion of
counsel stating that the proposed transfer may be made without registration or
qualification under applicable Federal or state securities laws. This Warrant
shall be deemed to have been transferred, in whole or in part to the extent
specified, immediately prior to the close of business on the date the provisions
of this Section 3(c) are satisfied, and the transferee(s) designated in the
assignment form shall become the holder(s) of record at that time and date. The
Company shall issue, in the name(s) of the designated transferee(s) (including
the Holder if this Warrant has been transferred in part) a new Warrant or
Warrants of like tenor and representing, in the aggregate, rights to purchase
the same number of shares of Common Stock as are then purchasable under this
Warrant. Such new Warrant or Warrants shall be delivered to the record holder(s)
thereof within a reasonable time, not exceeding ten business days, after the
rights represented by this Warrant shall have been so transferred. As used
- 3 -
<PAGE> 4
herein (unless the context otherwise requires), the term "Holder" shall include
each such transferee, and the term "Warrant" shall include each such transferred
Warrant.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees that all
shares of Common Stock which may be issued upon exercise of this Warrant shall,
upon issuance in accordance with the terms hereof, be duly and validly issued,
fully paid and non-assessable, with no personal liability attaching to the
Holder thereof. The Company further covenants and agrees that within a
reasonable amount of time subsequent to the period within which this Warrant may
be exercised, the Company shall have authorized and reserved a sufficient number
of shares of Common Stock for issuance upon exercise of this Warrant.
5. SHAREHOLDERS' RIGHTS. This Warrant shall not entitle the Holder to
any voting rights or other rights as a shareholder of the Company.
6. GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such State, without reference to such
State's laws regarding the conflict of laws.
7. AMENDMENT OR WAIVER. Any provision of this Warrant may be amended,
waived or modified upon the written consent of the Company and any 50% Holder;
provided, however, that such amendment, waiver or modification applies by its
terms to each Holder; and provided further, that a Holder may waive any of its
rights or the Company's obligations to such Holder without obtaining the consent
of any other Holder.
IN WITNESS WHEREOF, SEL-DRUM INTERNATIONAL, INC. has caused this
Warrant to be signed by its duly authorized officer and to be dated as of the
date set forth on the first page hereof.
SEL-DRUM INTERNATIONAL, INC.
By:
--------------------------------
Name: Raymond C. Sparks
Title: Chief Executive Officer
- 4 -
<PAGE> 5
PURCHASE FORM
(TO BE SIGNED ONLY UPON EXERCISE OF WARRANT)
The undersigned, the Holder of the foregoing Warrant, hereby
irrevocably elects to exercise the purchase rights represented by such Warrant
for, and to purchase thereunder, ________ shares of Common Stock, $.01 par
value, of SEL-DRUM INTERNATIONAL, INC. (the "Company") and (i) herewith makes
payment of an aggregate of $____________ therefor to the extent of ________
shares of Common Stock of the Company. The undersigned requests that the
certificates for the shares of such Common Stock be issued in the name(s) of,
and delivered to, the person(s) whose name(s) and address(es) are set forth
below:
Dated: _____________________
---------------------------------
Name:
---------------------------------
Address:
Signatures guaranteed by:
- -----------------------------
Taxpayer Identification Number:
- -----------------------------
- 5 -
<PAGE> 6
TRANSFER FORM
(TO BE SIGNED ONLY UPON TRANSFER OF WARRANT)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and
transfers unto ___________________________________________ the right to purchase
shares of the Common Stock, $.01 par value per share, of SEL-DRUM INTERNATIONAL,
INC. (the "Company") represented by the foregoing Warrant to the extent of ____
shares of Common Stock and appoints ________________________ attorney to
transfer such rights on the books of the Company, with full power of
substitution in the premises.
Dated: _____________________
---------------------------------
Name:
---------------------------------
Address:
Signatures guaranteed by:
- -----------------------------
Taxpayer Identification Number:
- -----------------------------
- 6 -
<PAGE> 1
EXHIBIT 10 (k)
ESCROW AGREEMENT
THIS ESCROW AGREEMENT ("Agreement") is entered into as of __________
____, 1998, by and among SEL-DRUM INTERNATIONAL, INC. (the "Company"), having
its principal office at 501 Amherst Street, Buffalo, New York 14207, the FIRST
NATIONAL BANK OF ROCHESTER, as escrow agent (the "Bank" or "Escrow Agent"),
having its principal office at 35 State Street, Rochester, New York 14614, and
PITTSFORD CAPITAL MARKETS, INC. (the "Underwriter") having its principal office
at 17 Tobey Village Office Park, Pittsford, New York 14534.
WITNESSETH:
WHEREAS, the Company proposes to offer for sale through the Underwriter
pursuant to a "best efforts minimum/maximum" public offering (the "Offering"),
which has commenced, up to 845,000 shares of the common stock, par value $.01
per share (the "Common Stock") of the Company; and
WHEREAS, the term of this Agreement shall commence as of the date hereof
and continue until terminated as provided herein. In any event, this Agreement
shall terminate on December 31, 1998 (hereinafter referred to as the
"Termination Date"); and
WHEREAS, if subscriptions for at least 250,000 shares of Common Stock
(the "Minimum") offered by the Company have not been tendered by the Termination
Date, all subscription funds theretofore received will thereupon be returned to
the subscribers thereof with interest, less escrow costs.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein, the parties agree as follows:
1. The Company hereby designates and appoints the Bank as escrow agent
(the "Escrow Agent") to serve in accordance with the terms and conditions of
this Agreement, and the Escrow Agent hereby agrees to serve in said capacity
upon the terms and conditions hereof. The Bank agrees to establish an
appropriate segregated interest bearing account (the "Escrow Account") entitled:
"FIRST NATIONAL BANK OF ROCHESTER, ESCROW AGENT FOR SEL-DRUM INTERNATIONAL,
INC." and to receive for deposit therein all of the subscription payments. The
Escrow Agent shall invest the escrowed funds only in investments permissible
under Rule 15c2-4 as promulgated under the Securities Act of 1934, as amended.
2. The Underwriter and other broker/dealers participating in the
offering shall deliver to the Escrow Agent all subscription cash and checks from
subscriptions for Common Stock by noon of the next day following receipt
together with the name and address of each subscriber, the subscription amount
and the number of shares of Common Stock subscribed for. The
<PAGE> 2
Escrow Agent shall accept such proceeds subject to terms hereof. Subscription
checks shall be payable to "FIRST NATIONAL BANK OF ROCHESTER, ESCROW AGENT FOR
SEL-DRUM INTERNATIONAL, INC." The Escrow Agent is authorized to deposit such
proceeds in the Escrow Account, which shall be an interest bearing bank account.
The Escrow Agent will, upon final collection of the proceeds of such items,
credit the proceeds to the Escrow Account to be held by it under the terms of
this Escrow Agreement. Any item returned unpaid to the Escrow Agent on its first
presentation for payment shall be presented again for payment and if not then
paid, shall be returned to the Company.
3. In the event the Offering is extended beyond the Termination Date by
supplement, this Agreement shall continue in effect through such extended
period. The Company and the Underwriter shall jointly provide written notice to
the Bank of any such extension.
4. The Escrow Agent shall distribute the proceeds as follows:
(a) If the Company rejects any subscription for which the Escrow
Agent has already collected funds, upon written notice from
the Company, the Escrow Agent shall promptly remit to the
subscriber a refund of the full amount of the subscriber's
original payment with interest but less escrow costs.
(b) The Company and Underwriter may determine by joint written
notice to the Escrow Agent to effect a closing only after
the receipt of subscriptions acceptable to the Company for
the Minimum number of shares of Common Stock offered
pursuant to the Offering have been subscribed for (the
"Closing"); provided, that all subscription checks shall
have cleared normal banking channels and all such
subscriptions shall have been accepted in writing by the
Company. The Common Stock must be paid for by cash. Upon
being notified by the Company of the Initial Closing, the
Escrow Agent shall distribute the escrowed funds with
respect to the subscriptions accepted pursuant to the
Initial Closing, together with interest earned thereon, to
the Company or as directed in writing by the Company.
(c) As specified by the Company, in the event the Offering of
the Common Stock is withdrawn or terminated, or in the event
the Escrow Agent has not received proceeds with respect to
the Minimum number of shares of Common Stock offered
pursuant to the Offering before the Termination Date, the
entire proceeds previously deposited with the Escrow Agent
hereunder shall be refunded to the subscribers. In no event
shall any refund be less than the amount of the subscriber's
original payment sent to the mailing address provided by the
Company. Interest will also be paid to the subscribers.
(d) This Agreement shall terminate on the earlier of: (i) the
Termination Date; (ii) upon a Closing; or (iii) as otherwise
provided herein.
<PAGE> 3
5. The acceptance by the Escrow Agent of its duties under this Agreement
is subject to the following terms and conditions, which will govern and control
with respect to the Escrow Agent's rights, duties, liabilities and immunities:
(a) The duties and obligations of the Escrow Agent will be
determined solely by the provisions of this Agreement, and
the Escrow Agent shall not be bound by the terms of any
other agreement nor shall the Escrow Agent be liable to any
persons except for the performance of such duties and
obligations as are specifically set forth in this Agreement.
(b) The Underwriter and/or the Company shall: (i) not make any
claim, or bring an action, suit or proceeding, against the
Escrow Agent by reason of any alleged loss, liability, claim
or charge arising out of, or in connection with, the Escrow
Agent's acceptance or performance (including acts and
omissions), in good faith, of its duties and obligations
under this Agreement, and (ii) reimburse and indemnify the
Escrow Agent for, and hold it harmless against any loss,
liability, cost or expense (including, without limitation,
reasonable attorney's fees and disbursements), other than
such caused by willful misconduct or gross negligence on the
part of the Escrow Agent, and arising out of, or in
connection with, the Escrow Agent's acceptance or
performance of its duties hereunder, as well as the costs
and expenses of instituting, prosecuting or defending any
claim, action, suit or proceeding arising out of, or
relating to, this Agreement, including, without limitation,
an action for a declaratory judgment in such regard
instituted by the Escrow Agent.
(c) The Escrow Agent will be fully protected in acting and
relying upon any written advice, certificate, notice,
direction, instruction, request, order, judgment, decree or
other document given to it which the Escrow Agent in good
faith believed to be genuine and to have been signed or
presented by the proper party or parties, and may assume
that any person purporting to give such advice, certificate,
notice, direction, instruction, request or other document
has been duly authorized to do so. The Escrow Agent assumes
no responsibility for the accuracy of the recitals in any
such document.
(d) The Escrow Agent shall not be liable for any action taken by
it in good faith and believed by it to be authorized or
within the rights or powers conferred upon it by this
Agreement. The Escrow Agent may seek the advice of legal
counsel in the event of any dispute or question as to the
construction of any of the provisions of this Agreement or
its duties hereunder, and may rely on an opinion of such
counsel. In rendering such opinion, such counsel may rely on
statements of fact furnished to them by persons reasonably
believed by such counsel to be credible, and such counsel
will have no liability for the accuracy of the facts so
relied upon, nor will such counsel have any liability for
matters of their own judgment forming a part of the process
of providing such opinion.
<PAGE> 4
(e) The Escrow Agent, and any successor escrow agent, as the
case may be, may resign as escrow agent and be discharged
from all further duties and obligations hereunder at any
time upon giving 30 days notice to the Company. Thereupon,
the Company shall designate a successor escrow agent
hereunder within such 30 day period to whom the Escrow Agent
shall deliver the funds held by the Escrow Agent. Further,
either the Company or the Underwriter may, at any time,
terminate Escrow Agent as escrow agent under this Agreement
by giving 30 days written notice to Escrow Agent and, in
such event, must designate a successor escrow agent to whom
Escrow Agent will deliver the funds held by the Escrow
Agent.
6. If any disagreement should arise between the subscribers and the
Company, between the subscribers and the Underwriter or between the Company and
the Underwriter with respect to the funds held by the Escrow Agent or this
Escrow Agreement, or if the Escrow Agent in good faith is in doubt as to what
action should be taken hereunder, the Escrow Agent shall have the absolute right
at its election upon written notice to the Company and Underwriter to do either
or both of the following: (i) withhold or stop all further performances under
this Escrow Agreement and all instructions received in connection herewith until
the Escrow Agent is satisfied that such disagreement has been resolved, or (ii)
file a suit in interpleader and obtain an order from a court of appropriate
jurisdiction requiring all persons involved to litigate in such court their
respective claims arising out of or in connection with the fund held by the
Escrow Agent.
7. All communications, notices, requests, instructions, consents or
demands given under this Escrow Agreement shall be in writing and will be deemed
to have been duly given when delivered to, or mailed by prepaid registered or
certified mail addressed to, the party for whom intended, as follows, or to such
other address as may be furnished by such party in the matter provided herein:
If to the Placement Agent:
Pittsford Capital Markets, Inc.
17 Tobey Village Office Park
Pittsford, New York 14534
ATTN: President
If to the Escrow Agent:
First National Bank of Rochester
35 State Street
Rochester, New York 14614
ATTN: Jeffrey Barker, Vice President
Business and Professional Banking
With a copy to:
<PAGE> 5
First National Bank of Rochester
35 State Street
Rochester, New York 14614
ATTN: Timothy P. Johnson, Esq. (Vice President and Counsel)
If to the Company:
Sel-Drum International, Inc.
501 Amherst Street
Buffalo, New York 14207
ATTN: Chief Executive Officer
In all cases, with a copy to:
Daniel R. Kinel, Esq.
Harter, Secrest & Emery, LLP
700 Midtown Tower
Rochester, New York 14604
8. This Agreement will in all respects be governed by and construed
under the laws of the State of New York, without giving effect to provisions
thereof concerning the conflict of laws.
9. This Agreement sets forth the entire understanding of the parties
hereto with respect to its subject matter, merges and supersedes all prior and
contemporaneous understandings and may not be waived or modified, in whole or in
part, except by a writing signed by each of the parties hereto. Escrow Agent
shall not be bound by any other agreement between the parties hereto even if it
has knowledge thereof. No waiver of any provision of this Agreement in any
instance may be deemed to be a waiver of the same or any other provisions in any
other instance.
10. This Agreement will be binding upon, enforceable against, and inure
to the benefit of, the parties hereto and their respective successors and
assigns, and nothing herein is intended to confer any right, remedy or benefit
upon any other person.
11. If any provision of this Agreement is held to be invalid or
unenforceable by a court of competent jurisdiction, this Agreement will be
interpreted and enforceable as if such provision were not contained herein, the
provisions of this Agreement being severable in any such instance.
<PAGE> 6
IN WITNESS WHEREOF, each of the parties hereto has executed this Escrow
Agreement as of the date first set forth above.
SEL-DRUM INTERNATIONAL, INC. PITTSFORD CAPITAL MARKETS, INC.
By: By:
---------------------------- --------------------------------
Name: Name:
Title: Title:
FIRST NATIONAL BANK OF ROCHESTER
By:
----------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 23 (a)
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Sel-Drum International, Inc.
We consent to the use in this Registration Statement of Sel-Drum International,
Inc. on Amendment #2 to Form SB-2 of our report dated September 19, 1997 for
the years ended July 31, 1997 and 1996.
We also consent to the reference to us under the heading "Experts" in the
Registration Statement cited above.
/s/ Mengel, Metzger, Barr & Co. LLP
Rochester, New York
September 25, 1998
