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As filed with the Securities and Exchange Commission on August 27, 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. 1)
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 AUGUST 27, 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
845,000 SHARES OF COMMON STOCK
SEL-DRUM INTERNATIONAL, INC.
All of the 845,000 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 July 31, 1998, the
average bid and asked prices of the Common Stock on the OTC Bulletin Board was
$.6876 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 not receive any proceeds from the sale of the Shares
for the account of the Selling Shareholders. The Company has informed the
Selling Shareholders that the anti-manipulative rules under the Exchange Act of
1934, Regulation M may apply to their sales in the market and has furnished the
Selling Shareholders with a copy of these rules. The Company has also informed
the Selling Shareholders of the need for delivery of copies of this Prospectus
in connection with any sale of Shares registered hereunder.
The Company will pay 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 $.5000 $.0500 $.4500
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Total Maximum (3) $422,500 $42,250 $380,250
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Total Minimum (3)(4)(5) $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 $4,225 (or $4,850 if the Underwriter's over-allotment option described in Footnote (4) is
exercised in full), and (b) warrants to purchase up to 84,500 shares of Common Stock at a purchase price of $.70 (that
being 140% of the public offering price) (the "Underwriter's Warrant"). 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. The Company estimates such expenses to be approximately $22,500.
(3) The Selling Shareholders have granted the Underwriter an option, exercisable within 225 days of the Effective Date
of this Registration Statement (the "Effective Date"), to purchase up to an additional 125,000 shares of the Selling
Shareholders' Common Stock on the same terms and conditions as set forth above, solely to cover over-allotments, if
any. If the over-allotment option is exercised in full, the total "Price to Public," "Underwriting Discount and
Commissions," and "Proceeds to Selling Shareholders" will be $482,500, $48,250, and $434,250, respectively.
(4) 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.
See "PLAN OF DISTRIBUTION."
(5) 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............................................................................................ 44
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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 845,000 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 845,000 Shares of Common Stock (1)
Common stock outstanding prior to this
offering 7,642,500 Shares (2)
Common stock outstanding after this
offering 7,642,500 Shares (2)
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<FN>
(1) Does not include 125,000 shares of Common Stock subject to the Underwriter's over-allotment option
or 84,500 shares 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 7,642,500 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 for a reverse stock split to the
Company's Shareholders. 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 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
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 82.84%
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 has been 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.
- 14 -
<PAGE> 15
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 for 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 will 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 two 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 August 24, 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; (ii) warrants to purchase
120,000 shares of Common Stock upon receipt by the Company of a public relations
plan prepared by Pittsford Capital and suitable to the Company; (iii)
warrants to purchase 45,500 shares of Common Stock upon the closing of an
acquisition by the Company of another business entity; and (iv) $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; (ii) warrants to purchase
120,000 shares of Common Stock upon receipt by the Company of a public
relations plan prepared by Pittsford Capital and suitable to the Company; (iii)
warrants to purchase 45,500 shares of Common Stock upon the closing of an
acquisition by the Company of another business entity; and (iv) $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 August 24, 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 August 24, 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, Sales and Marketing. 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 increasing the number of shares
available for option grants under the 1995 Plan 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 August 24, 1998, the only class of voting securities issued and
outstanding was 7,642,500 shares of the Company's Common Stock, $.01 par value
(the "Common Stock").
The following table sets forth certain information as of August 24, 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) 23.16%
501 Amherst Street
Buffalo, New York 14207
Brian F. Turnbull 4,514,000 (3) 59.06%
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) 3.17%
501 Amherst Street
Buffalo, New York 14207
All Directors and 6,559,347 82.84%
Officers as a group (5 persons)
- ----------
<FN>
1. As reported by such persons as of August 24, 1998 with percentages based on 7,642,500
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. Includes a presently exercisable option to purchase 250,000 shares of Common Stock.
</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 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 August 24, 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) 23.16% 422,500 (3) 1,347,180 (3) 17.63%
Director
Brian F. Turnbull 4,514,000 59.06% 422,500 (3) 4,091,500 (3) 53.54%
Director
<FN>
(1) Based on 7,642,500 shares issued and outstanding as of August 24, 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.
(3) Assumes the Underwriter's over-allotment option is not exercised.
</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 (845,000 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.
The Selling Shareholders have also granted the Underwriter an option,
exercisable for a period of 225 days after the Effective Date of the
Registration Statement, to offer and sell up to 125,000 additional Shares of the
Selling Shareholders' Common Stock. The option may be exercised only to cover
over-allotment subscriptions in connection with the offer and sale of the
Shares.
- 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 (a total
of 84,500 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 "FNB Rochester Corp." 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 promptly transmitted to the escrow agent,
where they will be held for subscribers in a segregated escrow account until
acceptable subscriptions for at least $125,000 of Shares 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 $125,000 of Shares 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.
A Financial Consulting Agreement entered into between the Company and
Pittsford Capital Markets, Inc. (the Underwriter hereunder), provides for the
Company to grant (i) a warrant for 120,000 shares of Common Stock upon receipt
by the Company of a public relations plan prepared by Pittsford Capital Market,
Inc., suitable to the Company; and (ii) a warrant for 45,500 shares of the
Company's Common Stock upon the closing of an acquisition by the Company of
another business entity. The grant of such additional warrants and further stock
issuance are not related to the performance or success of Pittsford Capital
Markets, Inc., acting as Underwriter in connection with the Offering. The
Financial Consulting Agreement further provides that the Company will pay
Pittsford Capital Markets, Inc., a $1,000 monthly consulting fee, for a period
of twelve months 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 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 August 24,
1998, there were outstanding 7,642,500 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 August 24, 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.
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 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
(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 August 27, 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 August 27, 1998
- --------------------------------- Officer and Director (Prin-
Raymond C. Sparks cipal Executive Officer)
* Vice President - Finance August 27, 1998
- --------------------------------- (Principal Financial Officer
John C. Hall and Principal Accounting
Officer)
* Director, Selling August 27, 1998
- --------------------------------- Shareholder
Robert E. Asseltine
* Director August 27, 1998
- ---------------------------------
Robert M. Orr
* Director, Selling August 27, 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
(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 1
SEL-DRUM INTERNATIONAL, INC.
501 Amherst Street
Buffalo, New York 14207-2913
August ___, 1998
Pittsford Capital Markets, Inc.
17 Tobey Village Office Park
Pittsford, New York 14534
Dear Sirs:
Sel-Drum International, Inc., a New York corporation (Sel-Drum
International, Inc. and its Subsidiaries Sel-Drum Imaging, Inc. and each of
Sel-Drum Imaging, Inc.'s Subsidiaries, Sel-Drum Corporation and Sel-Drum Corp.
(U.S.A.) are referred to herein as the "Company" where the context requires),
hereby confirms its agreement with you (sometimes herein called the
"Underwriter") as follows:
1. INTRODUCTORY
The Company and certain Selling Shareholders propose to offer, through
the Underwriter acting as agent for the Company and certain Selling
Shareholders, up to an aggregate of 845,000 shares of common stock of Sel-Drum
International, Inc. (the "Common Stock"). If at least 250,000 shares of Common
Stock are not sold within 75 days after the date the Registration Statement (as
defined below) is declared effective by the Securities and Exchange Commission,
all subscription documents and funds together with any net interest thereon)
will be returned to subscribers and the offering will terminate. The Common
Stock will be sold pursuant to the provisions of an Escrow Agreement dated as of
September 1, 1998 (the "Escrow"), between the Company and FNB Rochester Corp.,
as Escrow Agent (the "Escrow Agent"). The Common Stock will be sold in
denominations of $1,000, with a minimum purchase of $1,000 (2,000 shares), and
is more fully described in the Prospectus referred to below. The Company hereby
appoints the Underwriter as its exclusive agent to sell the Common Stock,
subject to the terms and provisions of this Agreement, on a "best efforts" basis
with at least 250,000 shares of the Common Stock required to be sold within 75
days after the date the Registration Statement (as defined below) is declared
effective by the Securities and Exchange Commission (the "Termination Date"). If
at least 250,000 shares of the Common Stock are sold prior to the Termination
Date, any remaining shares may continue to be sold until 150 days after the
First Closing Date, as herein defined. In addition, the Company proposes to
grant to the Underwriters the Over-Allotment Option, referred to and defined in
Section 3(f), to purchase all or any part of an aggregate of 125,000
<PAGE> 2
additional shares, and to issue to you the Warrant, referred to and defined in
Section ____, to purchase certain further additional shares.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SELLING
SHAREHOLDERS
The Company and Selling Shareholders hereby represents and warrants
jointly and severally to, and agrees with, the Underwriter as follows:
(a) A Registration Statement on Form SB-2 (File No. 333-59897)
(the "Registration Statement") with respect to the Common Stock, including the
related Prospectus (the "Prospectus"), and any amendment thereto, copies of
which have heretofore been delivered by the Company to you, has been prepared by
the Company in conformity with the requirements of the Securities Act of 1933,
as amended (the "Act") and the published rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission") under
the Act, and has been filed with the Commission under the Act. The Company may
file on or prior to the Effective Date (as defined in Section 3(a)) additional
amendments to said Registration Statement, including the final Prospectus.
(b) The Registration Statement and the Prospectus (other than the
financial statements and other financial data and schedules which are or should
be contained therein) conform as to form in all material respects to the
requirements of the Act and the Rules and Regulations and do not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, and no event has
occurred which should have been set forth in the Registration Statement or the
Prospectus which has not been so set forth therein; provided, however, the
Company makes no representation or warranty as to statements or omissions made
in reliance upon and in conformity with written information furnished to the
Company by or on behalf of the Underwriter expressly for use in the Registration
Statement, the Prospectus, or any amendment or supplement thereto.
(c) Neither the Commission nor the "blue sky" or state securities
authority of any jurisdiction has issued an order (a "Stop Order") suspending
the effectiveness of the Registration Statement, preventing or suspending the
use of the Prospectus, the Registration Statement or any amendment or supplement
thereto, refusing to permit the effectiveness of the Registration Statement or
suspending the registration of the Common Stock, nor have any of such
authorities instituted or threatened to institute any proceedings with respect
to a Stop Order.
(d) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of New York. The Company has
full power and authority to conduct its own business and own or lease its
properties as described in the Prospectus, and is duly qualified and in good
standing as a foreign corporation in each
- 2 -
<PAGE> 3
jurisdiction where the conduct of its business or its ownership or leasing of
property requires it to be qualified, except where the failure so to qualify
would not have a material adverse effect on the Company.
(e) The authorized capital stock of the Company is set forth in
the Prospectus under the caption "Capitalization". All of the outstanding shares
of Common Stock of the Company have been duly authorized and are validly issued,
fully paid and non-assessable.
(f) The financial statements of the Company together with related
schedules and notes as set forth in the Registration Statement and the
Prospectus fairly present the financial condition of the Company and the results
of its operations and the changes in its financial position as of the dates and
for the periods therein specified and such financial statements have been
prepared in conformity with generally accepted accounting principles
consistently applied throughout the periods involved.
(g) Except as reflected in or contemplated by the Registration
Statement or the Prospectus, since the date as of which information is given in
the Registration Statement or the Prospectus, there has not been any material
adverse change in the condition, financial or otherwise, of the Company. Since
the date as of which information is given in the Registration Statement or the
Prospectus, the Company has not entered into any transaction, other than
transactions in the ordinary course of business.
(h) There are no actions, suits or proceedings pending, or to the
knowledge of the Company threatened, against or with respect to the Company or
its business or assets, at law or in equity, or before or by any federal or
state commission, regulatory body or administrative agency or other governmental
body, domestic or foreign, in which an adverse decision might have a material
adverse effect on the business or assets of the Company or the business or
assets of the Subsidiary.
(i) The Company has good title to all properties and assets which
the Prospectus indicates are owned by them, free and clear of all liens,
security interests, pledges, charges, encumbrances and mortgages (except as may
be described in the Prospectus or such as in the aggregate will not have a
material adverse effect upon the business or assets of the Company).
(j) The Company is not in default in any material respect under,
and no event has occurred which, with the passage of time or the giving of the
notice, or both, would constitute a material default under, any contract,
agreement, instrument, lease or license to which the Company is a party or by
which any of them are bound, except as may be properly described in the
Prospectus or such as in the aggregate will not have a material adverse effect
on the business or assets of the Company. The Company is not in violation of its
certificates of incorporation or by-laws.
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<PAGE> 4
(k) The Company has all requisite power and authority to execute,
deliver and carry out the terms and provisions of this Agreement and to issue,
sell and deliver the Common Stock in accordance with and upon the terms and
conditions set forth in this Agreement. All necessary corporate proceedings of
the Company have been duly taken to authorize the execution, delivery and
performance by the Company of this Agreement and the issuance, sale and delivery
of the Common Stock. This Agreement has been duly authorized, executed and
delivered by the Company and Selling Shareholders, is the legal, valid and
binding obligation of the Company and Selling Shareholders, and is enforceable
as to the Company in accordance with its terms, except as rights to indemnity
and contribution hereunder may be limited by federal or state securities laws,
court decisions or public policy.
(l) No consent, authorization, approval, order, license,
certificate or permit of or from, or declaration or filing with, any federal,
state, local or other governmental authority or any court or other tribunal is
required for the execution, delivery or performance by the Company of this
Agreement or the Escrow Agreement, or the execution, authentication, issuance,
sale or delivery of the shares of Common Stock (except (i) registration under
the Act and (ii) registration or qualification under "blue sky" or state
securities laws).
(m) No consent of any party to any contract, agreement,
instrument, lease or license to which the Company is a party, or to which any of
the Company's or its properties or assets are subject, is required for the
execution, delivery or performance of this Agreement, or the Escrow, or the
execution, authentication, issuance, sale or delivery of the Common Stock; and
the execution, delivery and performance of this agreement and the execution,
authentication, issuance, sale and delivery of the Common Stock, will not
violate, result in a material breach of, conflict with or (with or without the
giving of notice of the passage of time or both) result in a default under any
such contract, agreement, instrument, lease or license, or violate the
certificate of incorporation or by-laws of the Company, or violate or conflict
with any law, rule, regulation, order, judgment or decree binding on the Company
or to which any of the Company's properties or assets are subject or result in
the creation or imposition of any lien, charge or encumbrance upon any assets of
the Company pursuant to the terms of any contract, agreement, instrument, lease
or license to which the Company is a party or to which any of their properties
or assets are subject.
(n) The Company knows of no outstanding claims for services in
the nature of a finder's fee or origination fee with respect to the sale of the
Common Stock hereunder resulting from its acts for which the Underwriter may be
responsible.
(o) The Company has filed all federal and state tax returns which
were required to be filed by them and have paid all taxes shown on such returns
and all assessments received by them, to the extent such taxes or returns have
become due (after giving effect to applicable grace periods or extensions, if
any).
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<PAGE> 5
3. EMPLOYMENT OF UNDERWRITER
(a) Subject to the terms and conditions herein set forth, the
effective date of this Agreement commences on the effective date under the Act
of the Registration Statement (the "Effective Date"), and the Company hereby
appoints the Underwriter as its exclusive agent as of the Effective Date, for
the purpose of offering the Common Stock as provided in this Agreement on a
"best efforts" basis with at least 250,000 shares of the Common Stock required
to sold within 75 days after the Effective Date if any Common Stock are sold.
The Underwriter agrees to use its best efforts to sell the Common stock as agent
for the Company and the Selling Shareholders. IT IS UNDERSTOOD AND AGREED THAT
THERE IS NO FIRM COMMITMENT ON THE PART OF THE UNDERWRITER TO PURCHASE ANY OF
THE COMMON STOCK.
(b) The Underwriter will offer the Common Stock hereunder at a
price of ($_____) per share. The Underwriter will be entitled to a commission of
ten percent (10%) of the purchase price on each share sold in the offering by
the Underwriter or any to is selected dealers. In addition, the Company will pay
the Underwriter a fee in an amount equal to one percent (1%) of the aggregate
gross amount of shares sold in the offering, such fee to be paid upon completion
of the offering. The Underwriter shall have the right to associate with other
dealers selected by the Underwriter who are members of the National Association
of Securities Dealers, Inc., pursuant to a written Selected Dealer Agreement,
and to offer a part of the Common Stock to such selected dealers for sale by
them at the offering price. In no event shall sales be made to accounts over
which the Underwriter or any dealer may exercise discretionary authority without
the written approval of the customer and the Underwriter prior to the execution
of any order, and the Selected Dealer Agreement will include provisions so as to
assure compliance with this restriction. The Selected Dealer Agreement will
provide that if a share is sold through any such selected dealer, the
Underwriter will allow to such selected dealer the entire commission paid by the
Company for such share. If a share is sold directly by the Underwriter, the
Underwriter will retain the entire commission paid by the Company for such
share. The Underwriter shall take such steps as it deems appropriate to assure
that purchasers of shares meet the suitability standards set forth in the
Prospectus or otherwise imposed by the Company and will maintain for a period of
at least four (4) years a record of the information obtained to indicate that
such standards have been met.
(c) The obligation of the Underwriter to offer the Common Stock
is subject to receipt by the Underwriter of a copy of written advice from the
Commission that the Registration Statement is effective. It is also subject to
the Common Stock being qualified for offering under applicable state securities
laws.
(d) (i) A special interest-bearing account (the "Escrow Account")
will be opened and maintained at FNB Rochester Corp (the "Bank") in Rochester,
New York, for the purpose of holding subscription funds in escrow until the
First Closing Date (as hereinafter defined). The title of the Escrow Account
will be "Sel-Drum International, Inc. Escrow Account". All subscription funds
shall be in the form of wire transfers of
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<PAGE> 6
immediately available funds, or check, and all checks should be made payable to
"FNB Rochester Corp., as Escrow Agent for Sel-Drum International, Inc." After
the First Closing Date all checks for subscriptions of Common Stock shall be
made payable to "Sel-Drum International, Inc.", the Company. The Company, the
Underwriter and the Bank will, prior to the beginning of the offering of the
Common Stock, enter into an Escrow Agreement with respect to the Escrow Account
in form satisfactory to the parties. The parties hereto agree to faithfully
perform their obligations under such Escrow Agreement. Except to the extent that
interest earned on the funds in the Escrow Account may be applied to pay escrow
expenses in the event the offering is terminated prior to the First Closing
Date, all costs, expenses and charges incurred in connection with the Escrow
account shall be paid by the Company.
(ii) Until the First Closing Date all funds received from
subscribers by any selected dealer shall be promptly transmitted to the Bank
(for deposit in the Escrow Account), but in any event such funds shall be so
transmitted by noon of the next business day following the day such funds are
received from the subscriber by the selected dealer. The Underwriter shall
promptly transmit to the Bank all funds received by it from subscribers for
deposit in the Escrow account in accordance with Rule 15c2-4 under the
Securities Exchange Act of 1934, as amended, but in any event such funds shall
be so transmitted for deposit by noon of the next business day following the day
such funds are received. After the First Closing Date all funds received from
subscribers by any selected dealer shall be promptly transmitted to the
Underwriter for distribution to the Company, but in any event such funds shall
be transmitted by noon of the next business day following the day such funds are
received by the selected dealer.
(iii) The first closing of the offering will take place at
the offices of counsel to the Company on a date (the "First Closing Date") which
is within ten (10) business days after the date on which acceptable
subscriptions have been received in cleared, collected funds for at least
$125,000 (250,000 shares of Common Stock).
(iv) On the First Closing Date the Underwriter will cause
the Bank to distribute the funds on deposit in the Escrow Account to the
Company, selected dealers and the Underwriter, as their interests may appear.
The Underwriter will be entitled to cause the Bank to distribute to the
Underwriter from the Escrow Account an amount sufficient to pay all of the
commissions on the Common Stock sold to which the Underwriter and selected
dealers are entitled under the provisions of Section 3(c) hereof. Common Stock
may continue to be offered and sold for up to 150 days after the First Closing
Date. After the First Closing Date, the Underwriter will distribute the checks
for subscriptions of Common Stock directly to the Company within one business
day of receipt by the Underwriter. The Company shall, upon each subsequent
closing in which Common Stock are issued, remit to the Underwriter commissions
on the Common Stock sold to which the Underwriter and selected dealers are
entitled under the provisions of Section 3(c) hereof.
(v) In the event the offering pursuant to the Prospectus is
terminated prior to the First Closing Date for any reason whatsoever, the
Underwriter shall promptly cause
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<PAGE> 7
the Bank to refund to the subscribers of the Common Stock all funds which have
been received from them by the Underwriter. Interest earned on funds in the
Escrow Account shall be applied to pay escrow expenses, with the balance of
interest, if any, to be paid to subscribers in proportion to the amount of funds
paid by each subscriber on subscription and without regard to the date when such
subscription funds were paid by the subscriber.
(e) In the event the offering is terminated prior to the First
Closing Date, this Agreement shall terminate, and upon the payments and refunds
to subscribers being made as provided in Section 3(a)(v), neither party hereto
shall have any further liability to the other hereunder. In such event, the
Underwriter shall not be entitled to any fees or commissions hereunder and none
of the Warrants described in Section 3(d) will be delivered or deliverable.
(f) In addition, subject to the terms and conditions of this
Agreement, and on the basis of the representations, warranties and agreements
herein contained, the Selling Shareholders hereby grant to the Underwriters an
option (the "Over-Allotment Option") to purchase from the Selling Shareholders
all or any part of an aggregate of an additional 125,000 shares of Common Stock
at the Purchase Price (the "Option Shares"). In the event that the
Over-Allotment Option is exercised by the Underwriters in whole or in part, each
Selling Shareholder shall sell Option Shares in the same proportion as the
number of Firm Shares sold by it or him bore to the total number of Firm Shares.
(g) The Company shall pay all costs and expenses incident to the
performance of the obligations of the Company hereunder, including the fees and
expenses of the Company's counsel and accountants, registration fees, the costs
and expenses incident to the preparation, printing and shipping of the
Registration Statement, each preliminary prospectus, if any, the final
Prospectus and all amendments and supplements thereto and this Agreement and
related documents, filing fees required to be paid to the National Association
of Securities Dealers, Inc., the costs incurred in connection with the
qualification of the Common Stock under applicable state securities laws and the
fee of Underwriter's legal counsel. The Underwriter shall pay all other costs
incurred or to be incurred by it, or by its personnel, in connection with the
offering of the Common Stock. The Company may be reimbursed up to $22,500 by the
Selling Shareholders for other various expenses.
4. COVENANTS OF THE COMPANY.
(a) The Company will furnish to the Underwriter, without charge,
as soon as the Registration Statement or any amendment thereto becomes effective
or a supplement is filed, two signed copies of the Registration Statement and
each amendment thereto, including all financial statements and exhibits, and two
copies of any supplement thereto. The Company will also furnish to the
Underwriter such number of conformed copies of the Registration Statement and of
each amendment thereto, including all financial statements but excluding
exhibits, and of each supplement thereto, as the Underwriter may reasonably
request.
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<PAGE> 8
(b) The Company will furnish to the Underwriter as soon as
possible after the Effective Date and thereafter during the period required by
law for the Prospectus to be delivered in connection with sales of the Common
Stock, as many copies of the Prospectus (and of any amended or supplemented
Prospectus) as the Underwriter may reasonably request. If during such period any
event occurs as a result of which the Registration Statement or the Prospectus,
as then amended or supplemented, would include an untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
made, in the light of the circumstances in which they were made, not misleading,
or it shall be necessary to amend or supplement the Registration Statement or
the Prospectus to comply with the Act or the Rules and Regulations, the Company
will forthwith notify the Underwriter thereof and prepare and furnish to the
Underwriter and dealers selected by the Underwriter, in such quantity as the
Underwriter and such dealers may reasonably request, an amendment or supplement
which will correct such statement or omission or cause the Registration
Statement and the Prospectus to comply with the Act and the Rules and
Regulations. The Company will not at any time prior to the expiration of such
period, whether before or after the Effective Date, file any amendment to the
Registration Statement of which the Underwriter will not have been advised and
furnished with a copy, or which is not in compliance with the Act and the Rules
and Regulations.
(c) The Company will use its best efforts to cause the
Registration Statement to become effective and will promptly advise the
Underwriter and will confirm such advice in writing, of the following: (i) when
the Registration Statement or any post-effective amendment thereto shall have
become effective, and when any amendment of or supplement to the Prospectus is
filed with the Commission; (ii) when the Commission shall make a request or
suggestion for any amendment to the Registration Statement or the Prospectus or
for additional information and the nature and substance thereof; and (iii) the
issuance by the Commission of a stop order suspending the effectiveness of the
Registration Statement or the suspension of the qualification of the Common
Stock for sale in any jurisdiction, or of the initiation of any proceeding for
that purpose.
(d) The Company will take all action necessary to permit the
offering of the Common Stock as contemplated hereby under the "blue sky" or
securities laws of the states in which it determines that Common stock shall be
sold; provided, however, that the Company shall not be required to qualify as a
foreign corporation or to file a consent to service of process in any state in
any action other than one arising out of the offering or sale of the Common
Stock. The Company shall furnish the Underwriter with written notice as to the
states in which the Common Stock is to be offered, together with such reasonable
documentation as may be requested by the Underwriter to establish that the
Common Stock has been duly registered for offer and sale in those states or are
exempt from the registration requirements of such states, including, among other
things, "blue sky" memoranda or surveys prepared by the Company's counsel with
respect to those states in which the Company has determined that the Common
Stock is being offered. Notwithstanding the foregoing, nothing in this Agreement
shall be construed as obligating the Underwriter or any selected dealers engaged
in the offering of the Common Stock to offer Common Stock in any
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<PAGE> 9
states in which the Underwriter or selected dealer, as the case may be, is not
registered as a broker-dealer.
(e) The Company will make generally available (within the meaning
of Section 11(a) of the Act and the Rules and Regulations) to its security
holders, within 120 days of the first day of the fiscal year of the Company, an
earnings statement of the Company (which will be in reasonable detail and will
comply with the requirements of Section 11(a) of the Act, but need not be
audited) covering the prior fiscal year of the Company, commencing with the
fiscal year of the Company during which this Agreement is executed.
(f) For a period of five years after the termination of the
Offering, the Company will furnish the Underwriter without charge, within 90
days after the end of each fiscal year, a copy of its financial statements
certified by independent certified public accountants.
(g) The Company will apply the net proceeds received by it from
the offering in the manner set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will furnish to the Underwriter as early as
practicable prior to the First Closing Date, but no less than two full business
days prior thereto, a copy of the latest available unaudited interim financial
statements of the Company which have been read by the Company's independent
certified public accountants, as stated in their letters to be furnished
pursuant to Section 5(f).
(i) The Company will comply with all registration, filing and
reporting requirements of the Securities Exchange Act of 1934, which may from
time to time be applicable to the Company, and, for a period of three years
after the termination of the Offering, the Company will furnish the Underwriter,
without charge, with copies of all filings made with the Commission pursuant to
the Securities Exchange Act of 1934.
(j) The Company will comply with all provisions of all
undertakings contained in the Registration Statement.
(k) Offers and sales of Common Stock by the Company shall only be
made by persons who meet the safe harbor provisions of Rule 3a4-1 under the
Securities Exchange Act of 1934.
5. CONDITIONS OF UNDERWRITER'S OBLIGATIONS
The obligations of the Underwriter as provided herein shall be subject
to the continuing accuracy of the representations and warranties of the Company
herein contained as of the date hereof and through and including the date of
termination of the offering, to the performance by the Company of its
obligations hereunder theretofore to be performed, and the following additional
conditions:
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<PAGE> 10
(a) The Registration Statement shall have become effective at the
time of any sale of Common Stock hereunder, no Stop Order suspending the
effectiveness of the Registration Statement shall have been and no proceeding
for that purpose shall have been initiated or threatened by the Commission or be
pending.
(b) The Company shall not have sustained after the date hereof
any material loss or interference with its business from any calamity, whether
or not covered by insurance, which in your reasonable judgment makes it
impracticable or inadvisable to sell the Common Stock as contemplated hereby.
(c) All corporate proceedings and related matters in connection
with the organization of the Company and the Subsidiary, and the registration,
authorization, issuance, sale and delivery of the Common Stock, and in
connection with this Agreement, shall be reasonably satisfactory to you and you
shall have been furnished with such papers and information as you may reasonably
have requested in this connection.
(d) Between the date hereof and the First Closing Date, there
shall have been no litigation instituted or threatened against the Company or
the Subsidiary and there shall have been no proceeding instituted or threatened
against the Company or the Subsidiary before or by any federal or state
commission, regulatory body or administrative agency or other governmental body,
domestic or foreign, wherein an unfavorable ruling, decision or finding would
materially adversely affect the business, operations or financial condition or
income of the Company or the Subsidiary.
(e) At the time of the execution of this Agreement, and at the
First Closing Date, counsel for the Company shall provide to the Underwriter its
written opinion, in form and substance satisfactory to counsel for the
Underwriter, with respect to the following matters:
(i) The matters set forth in Paragraph 2(d).
(ii) The matters set forth in Paragraph 2(e).
(iii) The matters set forth in Paragraph 2(k).
(iv) To the best of counsel's knowledge, the matters set
forth in Paragraphs 2(l) and (m).
(v) To the best of counsel's knowledge, the matters set
forth in Paragraph 2(h).
(vi) That the Registration Statement has become effective
and to the best of counsel's knowledge, the matters set forth in Paragraph 2(c).
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<PAGE> 11
(vii) The matters set forth in Paragraph 2(b).
(viii) To the best of counsel's knowledge, there are no
contracts, agreements, or other understandings required to be described in the
Registration Statement or Prospectus or to be filed as exhibits to the
Registration Statement which are not so described or filed.
(f) At the First Closing Date, Mengel Metzger Barr & Co. LLP
shall have furnished a letter addressed to you and dated as of the date it is
required to be delivered in form and substance reasonably satisfactory to you,
to the effect that: (i) with respect to the Company they are, and during the
period covered by their reports included in the Registration Statement and the
Prospectus they were, independent public accountants within the meaning of the
Act and the Rules and Regulations, and the response to Item 509 of Regulation
S-K as reflected by the Registration Statement is correct insofar as it related
to them; (ii) in their opinion, the financial statements of the Company examined
by them at all dates and for all periods referred to in their opinion and
included in the Registration Statement and Prospectus, comply in all material
respects with the applicable accounting requirements of the Act and Rules and
Regulations; (iii) on the basis of certain indicated procedures (but not an
examination in accordance with generally accepted accounting principles),
including, but not limited to, a reading of the latest available interim
unaudited financial statements of the Company, whether or not appearing in the
Prospectus, inquiries of the officers of the Company or other persons
responsible for its financial and accounting matters and reading of the minute
book of the Company, nothing has come to their attention which would cause them
to believe that (A) there has been any change in the capital stock or other
securities of the Company or any payment or declaration of any dividend or other
distribution in respect thereof or exchange therefor from that shown on its
audited balance sheets or a change in the debt of the Company from that shown or
contemplated under "Capitalization" in the Registration Statement other than as
set forth in or contemplated by the Registration Statement, (B) there has been
any material adverse change in the financial condition of the Company except as
set forth in or contemplated by the Registration Statement, or (C) the unaudited
financial statements and schedules of the Company included in the Registration
Statement and Prospectus do not comply in form in all material respects with the
applicable accounting requirements of the Act and Rules and Regulations, or are
not fairly presented in conformity with generally accepted accounting principles
applied on a consistent basis; and (iv) they have compared specific numerical
data and financial information pertaining to the Company set forth in the
Registration Statement and Prospectus, which have been specified by the
Underwriter prior to the date of this Agreement, to the extent that such data
and information may be derived from the general accounting records of the
Company, and found them to be in agreement.
(g) The Company shall have furnished or caused to be furnished to
you a certificate by the President of the Company, dated as of the First Closing
Date and at the termination of the offering, to the effect that (i) the
representations and warranties of the Company herein are true and correct as of
each such date, and the Company has complied
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<PAGE> 12
with all the agreements and has satisfied all the conditions on its part to be
performed or satisfied at or prior to each such date; (ii) the Registration
Statement has become effective and no order suspending the effectiveness of the
Registration Statement has been issued and to the best knowledge of the signer,
no proceeding for that purpose has been initiated or threatened by the
Commission; and (iii) except as set forth in the Registration Statement and
Prospectus, since the respective dates as of which and the periods for which
information is given in the Registration Statement and Prospectus and prior to
the date of such certificate (A) there has not been any substantial adverse
change, financial or otherwise, in the affairs or condition of the Company or
the Subsidiary and (B) neither the Company nor the Subsidiary have incurred any
liabilities, direct or contingent, or entered into any transactions, otherwise
than in the ordinary course of business.
(h) The Company shall have executed the Warrant and Financial
Consulting Agreement with the Underwriter.
(i) The Company shall have executed the Stock Escrow Agreement
with FNB Rochester Corp.
6. INDEMNIFICATION
(a) Subject to the conditions set forth below, the Company agrees
to indemnify and hold harmless you and each person, if any, who controls you
within the meaning of Section 15 of the Act, against any and all loss,
liability, claim, damage and expense whatsoever (including, but not limited to,
any and all expense and counsel fees reasonably incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever), and any and all amounts paid in settlement of any claim or
litigation, arising out of, based upon or in connection with (i) any untrue or
alleged untrue statement of a material fact contained in (A) any preliminary
prospectus, the Registration Statement or the Prospectus (as from time to time
amended and supplemented) or (B) any application or other document (in this
Section 6(a) called "application") executed by or on behalf of the Company or
based upon written information furnished by or on behalf of the Company filed in
any jurisdiction in order to qualify the Common Stock under the "blue sky" or
securities laws thereof; (ii) the omission or alleged omission from any
preliminary prospectus, the Registration Statement, the Prospectus (as from time
to time amended and supplemented) or any application of a material fact required
to be stated therein or necessary to make the statements therein not misleading,
unless such statement or omission was made in reliance upon and in conformity
with written information furnished to the Company with respect to you by or on
behalf of you expressly for use in any preliminary prospectus, the Registration
Statement or Prospectus or any amendment or supplement thereof or in any
application, as the case may be; or (iii) any breach of any representation,
warranty, covenant, or agreement of the Company contained in this Agreement.
This indemnity shall not apply to amounts paid in settlement of any such
litigation if such settlement is effected without the consent of the Company.
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<PAGE> 13
If any action is brought against you or any of your officers,
directors, partners, employees, agents or counsel, or any controlling persons of
you (an "indemnified party") in respect of which indemnity may be sought against
the Company pursuant to the foregoing paragraph, such indemnified party or
parties shall promptly notify the Company in writing of the institution of such
action (but the failure so to notify shall not relieve the Company from any
liability it may have other than pursuant to his Section 6(a)) and the Company
shall promptly assume the defense of such action, including the employment of
counsel (reasonably satisfactory to such indemnified party or parties) and
payment of expenses. Such indemnified party or parties shall have the right to
employ its or their own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of such indemnified party or parties unless
the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action or the Company shall not
have promptly employed counsel reasonably satisfactory to such indemnified party
or parties to have charge of the defense of such action, in either of which
events such fees and expenses shall be borne by the Company and the Company
shall not have the right to direct the defense of such action on behalf of the
indemnified party or parties. Anything in this paragraph to the contrary
notwithstanding, the Company shall not be liable for any settlement of any such
claim or action effected without its written consent. The Company agrees
promptly to notify you of the commencement of any litigation or proceedings
against the Company or any of its officers or directors in connection with the
sale of the Common Stock, any preliminary prospectus, the Registration
Statement, the Prospectus, any amendment or supplement thereto or any
application. With respect to any untrue statement or alleged untrue statement
made in, or omission or alleged omission from, any preliminary prospectus or
Prospectus, to the extent it is based on the claim of a person who purchased
Common Stock directly from you, shall not insure to your benefit (or, to the
benefit of any of your officers, directors, partners, employees, agents or
counsel, or any person controlling you), if the Prospectus (or the Prospectus as
amended or supplemented if the Company shall have filed with the Commission any
amendment or supplement thereto) which shall have been furnished to you prior to
the time you sent written confirmation of such sale to such person does not
contain such statement, alleged statement, omission or alleged omission and a
copy of the Prospectus (or the Prospects as amended or supplemented if the
Company shall have filed with the Commission any amendment or supplement
thereto) shall not have been sent or given to such person and such person shall
not otherwise have received a copy thereof at or prior to the time of the
written confirmation of such sale to such person.
(b) You agree to indemnify and hold harmless the Company and each
of the officers and directors of the Company and each other person, if any, who
controls the Company within the meaning of Section 15 of the Act against any and
all such losses, liabilities, claims, damages and expenses as are indemnified by
the Company under Section 6(a) above, provided, however, that such
indemnification by you hereunder shall only be with respect to statements or
omissions, if any, made in any preliminary prospectus, the Registration
Statement, the Prospectus, any amendment or supplement thereof or any
application, in reliance upon, and in conformity with, written information
furnished by or on
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<PAGE> 14
behalf of you expressly for use in any preliminary prospectus, the Registration
Statement, the Prospectus, any amendment or supplement thereof or in any of said
applications. In case any action shall be brought against the Company or any
other person so indemnified based on any preliminary prospectus, the
Registration Statement, the Prospectus, any amendment or supplement thereof or
any such application and in respect of which indemnity may be sought against
you, you shall have the rights and duties given to the Company, and the Company
and each other person so indemnified shall have the rights and duties given to
you by the provisions of Section 6(a) above.
7. UNDERWRITER'S REPRESENTATIONS AND WARRANTIES
(a) The Underwriter represents and warrants to and agrees with
the Company that: (i) the Underwriter is a corporation duly organized, validly
existing and in good standing under the laws of the State of New York; (ii) it
is duly authorized to execute this Agreement and to perform its duties
hereunder, and the execution and delivery by it of this Agreement and the
consummation of the transactions herein contemplated will not result in any
violation of, be in conflict with or constitute a default under, any agreement
or instrument to which the Underwriter is a party or by which it is bound, or
any judgment, decree, order, or, to its knowledge, any statute, rule or
regulation applicable to it; (iii) the Underwriter is registered as a
broker/dealer with the Commission and is registered as a broker/dealer in all
states in which it conducts business and is a member in good standing of the
National Association of Securities Dealers, Inc.; and (iv) there is not now
pending or threatened against the Underwriter any action or proceeding of which
it has been advised, in any court of competent jurisdiction or before the
Commission or any state securities commission concerning its activities as a
broker/dealer, which would materially impair the Underwriter's ability to act as
such pursuant to this Agreement.
(b) The Underwriter will deliver a certificate dated as of the
First Closing Date and at the termination of the offering, and signed by the
president of the Underwriter stating that the representations of the Underwriter
set forth herein are true and correct in all material respects as of each such
date.
(c) The Underwriter covenants that promptly after the First
Closing Date, and until such time as the earlier of: 250,000 shares of Common
Stock is sold or the offering is terminated pursuant to Section 8 hereof, it
will supply the Company with such information as the Company may reasonably
request to be supplied to the securities commissions of such states in which the
Common Stock has been qualified for sale.
8. EFFECTIVENESS AND TERMINATION
(a) This Agreement shall become effective at 9:00 a.m. on the
first full business day after the Effective Date unless prior to such time you
shall have received notice from the Company that it elects that this Agreement
shall not become effective.
- 14 -
<PAGE> 15
(b) This Agreement may be terminated by you by written notice to
the Company in the event that the Company shall have failed or been unable to
comply with any of the terms, conditions or provisions of this Agreement on the
part of the Company to be performed, complied with or fulfilled within the
respective times herein provided for, unless compliance therewith or performance
or satisfaction thereof shall have been expressly waived by you in writing.
(c) This Agreement may be terminated by you by written notice to
the Company if you believe in your reasonable judgment that a material adverse
change has occurred in the management of the Company, that a material adverse
change has occurred in the financial condition or obligations of the Company, or
if the Company shall have sustained a loss by strike, fire, flood, accident or
other calamity of such a character as, in your reasonable judgment, may
interfere materially with the conduct of the Company's business and operations
regardless of whether or not such loss shall have been insured.
(d) This Agreement may be terminated by you by written notice to
the Company at any time if, in your reasonable judgment, the payment for and
delivery of the Common stock is rendered impracticable or inadvisable because
(i) additional material governmental restrictions not in force and effect on the
date hereof shall have been imposed upon the registration and/or sale of
securities generally, or (ii) there shall be a material outbreak of hostilities
or a material escalation of existing hostilities between the United States and
any foreign power or a formal declaration of war by the United States shall have
occurred, or (iii) substantial and material changes in the condition of the
market (either generally or with reference to the sale of the Common Stock to be
offered hereby) beyond normal fluctuations are such that it would be
undesirable, impracticable or inadvisable in your reasonable judgment to proceed
with this Agreement or with the offering of the Common Stock.
(e) This Agreement may be terminated by either party by written
notice to the other at any time before it becomes effective as hereinabove
provided.
(f) In the event, at any time prior to the First Closing Date,
any action or proceeding shall be instituted or threatened against you in any
court of competent jurisdiction, before the Commission or any state securities
commission or in any court pursuant to any federal, state, local or municipal
statute, concerning your activities as a broker or dealer that would materially
impair your ability to act as Underwriter pursuant to this Agreement, or a
petition in bankruptcy or insolvency or for reorganization or for the
appointment of a receive or trustee of your assets is filed or if you make an
assignment for the benefit of creditors, the Company shall have the right on
three days' written notice to you to terminate this Agreement without any
liability to you of any kind.
(g) This Agreement shall terminate if at least $125,000 (250,000
shares) of the Common Stock is not sold within 75 days after the date the
Registration Statement is declared effective by the Commission.
- 15 -
<PAGE> 16
(h) Any termination of this Agreement pursuant to this Section 8
shall be without liability (including, but not limited to, loss of anticipated
profits or consequential damages) on the part of any party hereto, except that
the Company shall nevertheless be obligated to pay to the Underwriter its
accountable out-of-pocket expenses pursuant to Paragraph 3(f), unless the
Agreement is terminated pursuant to Section 8(f), and further provided that
Paragraph 9(b) shall survive the termination of this Agreement.
9. MISCELLANEOUS
(a) Whenever notice is required by the provisions of this
Agreement to be given to the parties hereto, such notice shall be given in
writing and shall be sent by certified or registered mail, return receipt
requested, postage prepaid, and shall be deemed delivered two days after
mailing, and shall be addressed to the party to whom such notice is directed at
the address set forth above or at such other address as a party has designed by
like notice.
(b) The respective indemnities, agreements, representations,
warranties and other statements of you and the Company hereunder, as set forth
in this Agreement or made pursuant to this Agreement, shall remain in full force
and effect, regardless of any investigation made by or on behalf of you, the
Company, or any officers, directors or controlling person of you or the Company,
and shall survive delivery of and payment for the Debentures.
(c) This Agreement shall be binding upon and inure solely to the
benefits of you and the Company and, to the extent provided in Section 6 hereof,
the officers and directors of the Company and any person who controls you, the
Company and their respective successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Common Stock shall be construed a successor or assign by reason
merely of such purchase.
(d) This Agreement shall be construed and governed by the laws of
the State of New York. This Agreement cannot be changed or terminated orally.
(e) This Agreement may be executed in any number of counterparts,
each of which may be deemed an original and all of which together will
constitute one and the same instrument.
- 16 -
<PAGE> 17
Please confirm that the foregoing sets forth the Agreement between you
and the Company by signing and returning to us the enclosed copy of this letter.
Very truly yours,
SEL-DRUM INTERNATIONAL, INC.
By:
------------------------
---------------------------
Selling Shareholder
---------------------------
Selling Shareholder
WE HEREBY CONFIRM AS OF THE DATE
HEREOF THAT THE ABOVE LETTER SETS FORTH
THE AGREEMENT BETWEEN THE COMPANY AND
UNDERSIGNED.
PITTSFORD CAPITAL MARKETS, INC.
By:
-------------------------------
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<PAGE> 1
Exhibit 5
[letterhead of Harter, Secrest & Emery LLP]
August 27, 1998
Sel-Drum International, Inc.
501 Amherst Drive
Buffalo, New York 14207-2913
Re: Sel-Drum International, Inc.
Registration Statement on Form SB-2
Ladies and Gentlemen:
You have requested our opinion in connection with your Registration
Statement on Form SB-2, as amended (Registration No. 333-59897), filed under the
Securities Act of 1933, as amended (the "Registration Statement"), with the
Securities and Exchange Commission in respect of the proposed sale by certain
selling shareholders of Sel-Drum International, Inc., a New York corporation
(the "Corporation") so identified in the Registration Statement (the "Selling
Shareholders") of 845,000 authorized and issued shares (or 970,000 authorized
and issued shares if the underwriters' option as to over-allotment is exercised
in full) of the Common Stock, par value $.01 per share, of the Corporation (the
"Common Stock"), subject to effectiveness of the Registration Statement.
We have examined the following corporate records and proceedings of the
Corporation in connection with the preparation of this opinion: its Certificate
of Incorporation, as amended and restated to date; its Bylaws, as in force and
effect on this date; its minute books, containing minutes and records of other
proceedings of its shareholders and its Board of Directors to the date hereof;
the Registration Statement and related Prospectus which constitutes a part
thereof; applicable provisions of the laws of the State of New York; and such
other documents and matters as we have deemed necessary in the circumstances.
In rendering this opinion, we have made such examination of laws as we
have deemed relevant for the purposes hereof. As to various questions of fact
material to this opinion, we have relied upon representations and/or
certificates of officers of the Corporation, certificates and documents issued
by public officials and authorities, and information received from searchers of
public records.
Based upon and in reliance on the foregoing, we are of the opinion that:
1. The Corporation has been duly incorporated and is validly existing
under the laws of the State of New York.
<PAGE> 2
Sel-Drum International, Inc.
August 27, 1998
Page 2
2. The shares of Common Stock to be sold by the Selling Shareholders
upon the effectiveness of the Registration Statement will, when sold and paid
for as described in the Registration Statement, be validly authorized and
legally issued and outstanding, fully paid and non-assessable.
We hereby consent to be named in the Registration Statement and to the
use of our name under the caption "Legal Matters" set forth in the related
Prospectus which constitutes a part of the Registration Statement, as attorneys
who will pass upon the legality of the shares of Common Stock offered thereby,
and we hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement.
Very truly yours,
/s/ Harter, Secrest & Emery LLP
<PAGE> 1
EXHIBIT 10 (g)
SHARE REPURCHASE AND NON-COMPETITION AGREEMENT
THIS AGREEMENT is made as of this 1st day of February, 1998, by and
among BRIEN MURTAGH ("Seller"), and SEL-DRUM IMAGING CORPORATION ("SDIC") and
SEL-DRUM INTERNATIONAL, INC. ("Sel-Drum"), a Colorado corporation with a
principal place of business at 501 Amherst Street, Buffalo, New York 14207-2913
(Sel-Drum and SDIC are sometimes collectively referred to as the "Corporation"
or the "Group").
W I T N E S E T H
WHEREAS, Seller wishes to have certain shares of Common Stock in
Sel-Drum repurchased upon the terms and conditions set forth in this Agreement;
and
WHEREAS, the parties desire to enter into such other agreements as are
necessary as the result of the repurchase of Seller's interests;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants hereinafter contained, the parties to this Agreement agree as follows:
1. REPURCHASE
(a) REPURCHASE OF SHARES. Upon the terms and conditions
hereinafter set forth, Seller will transfer and deliver to the Corporation
certificates representing 345,000 shares of Common Stock owned by Seller (the
"Shares"), all duly endorsed, or with stock powers duly executed and attached,
and the Corporation shall repurchase the Shares from Seller all pursuant to the
following Schedule:
(i) On August 1, 1998, Sel-Drum shall repurchase 100,000
shares of Common Stock held by Seller at $1.00 per share. If prior to August 1,
1998, a third-party purchases all or part of such shares from Seller at a price
of $1.00 per share or less, the Company shall be obligated only to make up the
difference between $100,000 ($1.00 x 100,000 shares) and the dollars paid to
Seller from such third-party purchaser.
(ii) Between August 1, 1998 and 1:00 p.m. Eastern Standard
Time August 1, 2000, the Company may purchase (but is not obligated to do
so) up to an additional 245,000 shares at $1.00 per share. If between August 1,
1998 and 1:00 p.m. Eastern Standard Time August 1, 2000 a third-party purchases
all or a part of the 245,000 shares remaining at a price of $1.00 per share or
less, the Company shall be obligated only to make up the difference between
$245,000 ($1.00 x 245,000 shares) and the dollars paid to Seller from such
third-party purchaser.
(iii) Between 1:01 p.m. Eastern Standard Time August 1,
2000 and August 1, 2001, any of the remaining 245,000 shares shall be purchased
by the Company at $2.00 per share. If prior to August 1, 2001 a third-party
purchases all or a part of the
<PAGE> 2
remaining shares, the Company shall be obligated only to make up the difference
between the $2.00 per share price multiplied by the remaining shares and the
price paid by the third party for the remaining shares multiplied by the
remaining shares.
2. SELLER'S REPRESENTATIONS AND WARRANTIES
(a) STOCK OWNERSHIP. As of the date of this Agreement, Seller is
the lawful owner of record and beneficially of all of the Shares, free and clear
of all pledges, liens, encumbrances, claims, security interests and other
charges of any nature whatsoever, including without limitation any agreements,
subscriptions, options, warrants, calls, commitments or rights of any character
granting to any person, corporation or other entity any interest in, or right to
acquire from Seller at any time, or upon the happening of any stated event, any
shares of the outstanding capital stock of the Corporation owned by Seller.
Seller has the full legal power, authority and capacity required by law to
transfer and deliver the Shares of the Corporation in accordance with this
Agreement free and clear of all pledges, liens, encumbrances, claims, security
interests and other charges of any nature whatsoever.
(b) VALIDITY OF CONTEMPLATED TRANSACTION. Neither the execution
and delivery of this Agreement by Seller nor his consummation of the
transactions contemplated hereby will contravene or violate, be in conflict with
or result in the breach (with or without the giving of notice or lapse of time,
or both), of any term, condition, or provision of any note agreement,
instrument, indenture, contract, lease, agreement or other document or
understanding (written or oral) to which Seller is a party or by which he or any
of his properties or assets, including the Shares, may be bound or affected.
3. NON-COMPETE OF SELLER.
(a) During the continuance of this Agreement and for a period of
two years thereafter, the Seller shall not be directly or indirectly, engaged,
concerned or interested in any capacity in any other trade, business or
occupation or shall Seller be directly or indirectly engaged, nor shall Seller
be engaged in any business, occupation or other trade which competes with the
Company directly or indirectly, except:
(i) as the owner of securities which are held for
investment only, which are listed on a recognized stock exchange, and which do
not exceed five percent (5%) in nominal value of the securities of that class
("Approved Ownership"); or
(ii) with the prior written consent of the Company. A
request for such written consent shall include the detail of any proposed
concern and/or interest.
(b) During the term of the employment of the Seller with the
Company and at all times thereafter, the Seller shall keep confidential and
shall not at any time use, for his own or another's advantage or disclose to any
person, firm or company any trade secrets, business methods or confidential
information concerning the business, financial status or affairs of the
Company or any company in the Group, including but not limited to,
<PAGE> 3
customer or supplier lists, trade processes or materials, price lists, pricing,
costings, new product or business plans ("Confidential Information") which may
have come to the Seller's knowledge during his employment hereunder provided,
however, this restriction shall not prevent:
(i) any disclosure or use authorized by the Board,
required by law, or made to enable the Seller to perform his duties hereunder,
or
(ii) the use of the personal skills of the Seller in any
business in which he may be lawfully engaged, subject to the terms of this
Paragraph 3, after termination of this Agreement; or
(iii) the use of Confidential Information that is in or
comes into the public domain in any way without breach of this Agreement by the
Seller.
(c) During the term of this Agreement and for the period ending
two (2) years after the actual date of termination of employment ("Covenant
Period"), the Seller shall not, whether alone or jointly with another, and
whether directly or indirectly, solicit or endeavor to entice away, knowingly
offer employment to, knowingly employ, or offer or conclude any contract for
services with, any person who is employed by the Company or any company in the
Group at the date of the termination of the Seller's employment and who has been
employed in skilled or managerial work at any time during the period of one (1)
year preceding the date of the termination of the Seller's employment by the
Company or any company in the Group.
4. CORPORATION'S REPRESENTATIONS AND WARRANTIES
(a) SEL-DRUM REPRESENTATIONS AND WARRANTIES. Sel-Drum represents
and warrants to Seller as follows:
(i) The corporation is a corporation duly incorporated,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated and has all necessary corporate power, and is duly
authorized to carry out the transactions contemplated by this Agreement.
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not violate or
conflict with any provisions of the Certificate of Incorporation or the By-laws
of either corporation or violate any order, judgment, award, decree or contract
or agreement of any kind or nature to which the Corporation is a party or is
subject.
(iii) The corporation has taken all action required by
law, its Certificate of Incorporation and its By-laws, or otherwise, to
authorize and approve the execution, delivery and performance of this Agreement.
- 3 -
<PAGE> 4
(iv) The corporation has sufficient surplus as of the date
hereof so that payment can be made without violating any Corporate Law of any
jurisdiction requiring that Sellers' interest be redeemed only out of surplus.
5. CLOSING
Unless otherwise agreed upon in writing by the parties hereto,
the Closing shall take place on August 1, 1998 and each subsequent date as may
be agreed to by the parties at the Canadian offices of Sel-Drum International,
Inc., 1370 Artisans Court, Burlington, Ontario L7L 5Y2 (the "Closing").
6. CONDITIONS TO CLOSING. Prior to any of the closings contemplated by
this Agreement, the following conditions shall be satisfied:
(a) the Company shall receive the written consent of any or all
third parties, including but not limited to, the written consent of the National
Bank of Canada or any other lender; and
(b) the transactions shall not be violative of any of the United
States securities laws or the corporate laws of the state in which Sel-Drum is
incorporated.
(c) the Company shall have a sufficient financial structure such
that any of the closings contemplated by the Agreement shall not materially
affect the Company's debt to earnings ratio, all as determined by the Company's
independent certified public accountants.
7. REGISTRATION OF SELLER'S SHARES IF SOLD TO THIRD PARTY. If Seller
finds a purchaser for Seller's shares, the Company shall use reasonable efforts
to register such transaction with the United States Securities and Exchange
Commission.
8. MISCELLANEOUS
(a) FURTHER ASSURANCES. Each party shall cooperate with the
others, take such further action, and execute and deliver such further
documents, as may be reasonably requested by the other parties in order to carry
out the terms and purposes of this Agreement.
(b) SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
several representations, warranties and covenants of the parties herein
contained, and the provisions hereof by which their terms are to be performed
after the date hereof, shall survive the execution and delivery of this
Agreement and shall be effective regardless of any investigation which may have
been or may be made at the time by or on behalf of the party to whom such
representations, warranties, covenants and agreements are made.
(c) AMENDMENT AND WAIVER. This Agreement may be amended only by a
writing executed by all of the parties hereto. No waiver of compliance with any
provision or condition hereof, and no consent provided for herein, shall be
effective unless evidenced by
- 4 -
<PAGE> 5
an instrument in writing duly executed by the parties sought to be charged
therewith. No failure on the part of any party to exercise, and no delay in
exercising, any of its rights hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise by any party of any rights preclude any
other or future exercise thereof or the exercise of any other right.
(d) ASSIGNMENT. No party shall assign or attempt to assign any of
its rights or obligations under this Agreement without the prior written consent
of each of the other parties hereto.
(e) BINDING EFFECT. Subject to the provisions of (d) above, this
Agreement shall be binding upon and shall inure to the benefit of the parties
and their respective successors and assigns. This Agreement creates no rights of
any nature in any party not a party hereto.
(f) GOVERNING LAW. This Agreement 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 and without
regard to principles of conflicts of laws.
(g) EFFECT OF AGREEMENT. This Agreement, and those other
agreements and documents to be executed at closing pursuant to the terms of this
Agreement, set forth the entire understanding of the parties, and supersedes any
and all prior agreements, arrangements and understandings, whether written or
oral, relating to the subject matter hereof.
(h) HEADINGS; COUNTERPARTS. The section headings of this
Agreement are for convenience of reference only and do not form a part hereof,
and do not in any way modify, interpret or construe the intention of the
parties. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
(i) NOTICES. All notices, requests, demands and other
communications which are required or may be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered personally
or sent by registered or certified mail, return receipt requested, postage
prepaid or to such other address as any party shall have specified by notice in
writing to the holder.
If to the Seller: Brien Murtagh
Sel-Drum International, Inc.
1370 Artisans Court
Burlington, Ontario L7L 5Y2
- 5 -
<PAGE> 6
If to Sel-Drum Sel-Drum International, Inc.
or SDIC: 1370 Artisans Court
Burlington, Ontario L7L 5Y2
Attention: Raymond C. Sparks, President
with copies to: Ross & McBride
Barrister & Solicitors
P.O. Box 907
Hamilton, Ontario L8N 3P6
Attention: Messrs. Peter R. Tice/Paul D. Paradis
Harter, Secrest & Emery LLP
700 Midtown Tower
Rochester, New York 14604-2070
Attn.: James M. Jenkins, Esq.
(j) EXPENSES. Each of the parties hereto shall pay its or his own
respective expenses, including but not limited to legal and accounting expenses,
associated with the transactions contemplated hereby.
9. TERMINATION. This Agreement shall terminate as follows: (i) by
written consent of all of the parties; (ii) upon a sale to a third party or a
repurchase by the Company of all of the shares held by Seller; (iii) by the
Company if the Seller's employment is terminated by Seller; or (iv) by the
Company if the Seller's employment is terminated by the Company "for cause"
pursuant to the Employment Contract. Any termination of this Agreement shall
release the parties of all obligations hereunder except Paragraph 3 which shall
survive by its terms.
- 6 -
<PAGE> 7
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date above first written.
/s/ Brien Murtagh
------------------------------------
Brien Murtagh, Seller
SEL-DRUM INTERNATIONAL, INC.
By: /s/ Brian Turnbull
--------------------------------
Brian Turnbull, Chairman
By: /s/ Raymond C. Sparks
--------------------------------
Raymond C. Sparks, President
SEL-DRUM IMAGING CORPORATION
By: /s/ Raymond C. Sparks
--------------------------------
Raymond C. Sparks
President
- 7 -
<PAGE> 1
EXHIBIT 10 (h)
Pittsford Capital Markets, Inc.
17 Tobey Village Office Park
Pittsford, New York 14534
August ___, 1998
Sel-Drum International, Inc.
501 Amherst Street
Buffalo, New York 14207-2913
Ladies and Gentlemen:
You have agreed that Pittsford Capital Markets, Inc. ("Pittsford Capital
Markets" or "Consultant") may act as a non-exclusive finder or financial
consultant for you in various Transactions (as hereinafter defined), in which
Sel-Drum International, Inc. (the "Company") may be involved for a period of 12
months from the date of this Agreement unless earlier terminated pursuant to 30
days prior written notice from either party to the other (the "Period").
1. DEFINITIONS
For the purposes of this Agreement:
(a) A "Transaction" shall mean any transaction or series or
combination of transactions involving the Company, other than in the ordinary
course of trade or business, whereby, directly or indirectly, control of, or a
material interest in any businesses, assets or properties, is sold, purchased,
leased or otherwise transferred, including, without limitation, a sale, purchase
or exchange of capital stock or assets, a lease of assets with or without a
purchase option, a merger or consolidation, a tender or exchange offer, a
leveraged buy-out, a restructuring, a recapitalization, a repurchase of capital
stock, an extraordinary dividend or distribution (whether cash, property,
securities or a combination thereof), a liquidation, the formation of a joint
venture or partnership, a minority investment or any other similar transaction.
2. SERVICES TO BE RENDERED
(a) Consultant shall, to the extent reasonably required in the
conduct of the business of the Company, place at the disposal of the Company its
judgment and experience and, to such extent and at the prior written request of
the President of the Company, provide business development and corporate finance
services to the Company, including without limitation the following:
<PAGE> 2
(i) evaluation of the Company's managerial and financial
requirements;
(ii) assistance when requested by the Company in
recruiting, screening, evaluating and recommending key personnel,
directors, accountants, commercial and investment bankers, underwriters,
attorneys and other professional consultants;
(iii) assistance in the preparation of budgets and
business plans;
(iv) advice with regard to sales planning and sales
activities;
(v) advice with regard to stockholder relations and public
relations matters; and
(vi) evaluation of financial requirements and assistance
in financial arrangements.
(b) In addition to the foregoing, the Company shall appoint and
maintain, for a period of 12 months from the date hereof, an observer of the
Company's Board of Directors (the "Observer"), designated by Consultant and
acceptable to the Company, who shall be invited to attend all meetings of the
Board of Directors. The Company shall hold at least four meetings of its Board
of Directors per year. The Company shall provide the Observer with the same
expense reimbursement and cash allowance in connection with meetings of the
Board of Directors as it provides to non-employee directors of the Company.
(c) Consultant shall use its best efforts in the furnishing of
advice and recommendations, and for this purpose Consultant shall at all times
maintain or keep and make available qualified personnel or a network of
qualified outside professionals for the performance of its obligations under
this Agreement. To the extent reasonably practicable, Consultant shall so use
its own personnel rather than outside professionals.
(d) If during the Period, Pittsford Capital Markets provides
services in connection with a Transaction, then upon the consummation of that
Transaction, the Company will pay Pittsford Capital Markets as a fee the amount
provided for in Paragraph 3(c) hereof. As additional services in connection with
such transaction, Pittsford Capital Markets shall provide a fairness opinion (to
the extent practicable) to the Board of Directors that any such Transaction is
fair from a financial point to the Shareholders of the Company.
3. PITTSFORD CAPITAL MARKETS' FEE
(a) Unless earlier terminated pursuant to the first paragraph of
this letter, in consideration of Consultant's financial consulting services
hereunder as outlined in 1(a) and 1(c) above, the Company shall pay Consultant a
consulting fee of $12,000, payable in monthly installments of $1,000 beginning
on August 1, 1998. Consultant hereby accepts
- 2 -
<PAGE> 3
such compensation. In addition, Consultant shall be issued a warrant to purchase
165,500 shares of Common Stock which shall vest in the following denominations
and upon rendering the following services:
(i) 120,000 shares upon receipt by Sel-Drum of a public
relations plan suitable to Sel-Drum; and
(ii) 45,500 shares upon the closing of an acquisition.
The warrant shall be exercisable for a two-year period at $.70 per share.
(b) The amount to be paid by the Company to Pittsford Capital
Markets in any case described in Paragraph 2(a) hereof shall be $85,000 per
Transaction. Pittsford Capital Markets shall also receive $15,000 for each
fairness opinion it may be required to render to the Board of Directors.
(c) In addition to those fees payable to Pittsford Capital
Markets under the provisions of this Agreement, the Company shall reimburse
Pittsford Capital Markets for its out-of-pocket and incidental expenses incurred
in connection with the performance by Pittsford Capital Markets of its duties
under this Agreement. Such reimbursement shall occur promptly as requested and
shall include the fees and expenses of Pittsford Capital Markets' legal counsel
and those of any advisor retained by Pittsford Capital Markets.
4. INDEMNIFICATION
The Company hereby agrees to indemnify and hold harmless
Pittsford Capital Markets, their respective directors, officers, controlling
persons (within the meaning of Section 15 of the Securities Act of 1933 or
Section 20(a) of the Securities Exchange Act of 1934), if any, (collectively,
"Indemnified Persons" and individually, and "Indemnified Person") from and
against any and all claims, liabilities, losses, damages and expenses incurred
by any Indemnified Person (including reasonable fees and disbursements of
Pittsford Capital Markets and an Indemnified Person's counsel) which (A) are
related to or arise out of (i) actions taken or omitted to be taken (including
any untrue statements made or any statements omitted to be made) by the Company
or (ii) actions taken or omitted to be taken by an Indemnified Person with the
Company's consent or in conformity with the Company's instructions or the
Company's actions or omissions or (B) are otherwise related to or arise out of
the performance by Pittsford Capital Markets of duties pursuant to this
Agreement, and will reimburse Pittsford Capital Markets and any other
Indemnified Person for all reasonable costs and expenses, including fees of
Pittsford Capital Markets or an Indemnified Person's counsel, as they are
incurred, in connection with investigating, preparing for, or defending any
action, formal or informal claim, investigation, inquiry or other proceeding,
whether or not in connection with pending or threatened litigation, caused by or
arising out of or in connection with Pittsford Capital Markets acting pursuant
to this Agreement,
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<PAGE> 4
whether or not Pittsford Capital Markets or any Indemnified Person is named as a
party thereto and whether or not any liability results therefrom. The Company
will not, however, be responsible for any claims, liabilities, losses, damages,
or expenses pursuant to clause (B) of the preceding sentence which are finally
judicially determined to have resulted primarily from Pittsford Capital Markets'
bad faith or gross negligence. The Company also agrees that neither Pittsford
Capital Markets nor any other Indemnified Person shall have any liability to the
Company for or in connection with this Agreement except for any such liability
for claims, liabilities, losses, damages, or expenses incurred by the Company
which are finally judicially determined to have resulted primarily from
Pittsford Capital Markets' bad faith or gross negligence. The Company further
agrees that the Company will not, without the prior written consent of Pittsford
Capital Markets, settle or compromise or consent to the entry of any judgment in
any pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not Pittsford Capital
Markets or any Indemnified Person is an actual or potential party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of Pittsford Capital Markets and each other
Indemnified Person hereunder from all liability arising out of such claim,
action, suit or proceeding.
In order to provide for just and equitable contribution, if a
claim for indemnification is made pursuant to these provisions but it is found
in a final judgment by a court of competent jurisdiction (not subject to further
appeal) that such indemnification is not available for any reason (except, with
respect to indemnification sought solely pursuant to clause (B) of the first
paragraph hereof, for the reasons specified in the second sentence thereof),
even though the express provisions hereof provide for indemnification in such
case, then the Company, on one hand, and Pittsford Capital Markets, on the other
hand, shall contribute to such claim, liability, loss, damage or expense for
which such indemnification or reimbursement is held unavailable in such
proportion as is appropriate to reflect the relative benefits to the Company, on
one hand, and Pittsford Capital Markets, on the other hand, in connection with
the Transactions contemplated by this Agreement, subject to the limitation that
in any event Pittsford Capital Markets' aggregate contribution to all losses,
claims, damages, liabilities and expenses to which contribution is available
hereunder shall not exceed the amount of fees actually received by Pittsford
Capital Markets pursuant to this Agreement.
The foregoing right to indemnity and contribution shall be in
addition to any rights that Pittsford Capital Markets and/or any other
Indemnified Person may have at common law or otherwise and shall remain in full
force and effect following the completion or any termination of this Agreement.
It is understood that, in connection with this Agreement,
Pittsford Capital Markets may also be engaged to act for the Company in one or
more additional capacities, embodied in one or more separate written agreements.
This indemnification shall apply to this Agreement, any such additional
engagement(s) (whether written or oral) and any modification of this Agreement
or such additional engagement(s) and shall remain in full
- 4 -
<PAGE> 5
force and effect following the completion or termination of this Agreement or
such additional engagements.
5. CONFIDENTIALITY
Any advice, either oral or written, provided to the Company by
Pittsford Capital Markets hereunder shall not be publicly disclosed or made
available to third parties without the prior written consent of Pittsford
Capital Markets. In addition, Pittsford Capital Markets may not be otherwise
publicly referred to without its prior consent.
6. INFORMATION
In the event Pittsford Capital Markets acts as finder or
financial advisor in a transaction, the Company will furnish Pittsford Capital
Markets with all information concerning the Transaction which Pittsford Capital
Markets reasonably deems appropriate and will provide Pittsford Capital Markets
with access to the Company's officers, directors, accountants, counsel and other
advisors. The Company represents and warrants to Pittsford Capital Markets that
all such information concerning the Company and its affiliates is and will be
true and accurate in all material respects and does not and will not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein not misleading in light of the
circumstance under which such statements are made. The Company acknowledges and
agrees that Pittsford Capital Markets will be using and relying upon such
information supplied by the Company and its officers, agents and others and any
other publicly available information concerning the Company and its affiliates
and any prospective acquiror of the Company, its businesses or assets without
any independent investigation or verification thereof or independent appraisal
by Pittsford Capital Markets of the Company and businesses or assets.
7. ADVERTISEMENTS
Pittsford Capital Markets shall have the right to place
advertisements in financial and other newspapers and journals at its own expense
describing its services to the Company hereunder in the event a transaction is
consummated.
8. BINDING OBLIGATION
The Company represents and warrants to Pittsford Capital Markets
that Pittsford Capital Markets' engagement hereunder has been duly authorized
and approved by the Board of Directors of the Company and that this letter
agreement has been duly executed and delivered by the Company and constitutes a
legal, valid and binding obligation of the Company.
- 5 -
<PAGE> 6
9. IN GENERAL
This Agreement 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. This Agreement sets forth the entire
agreement and understanding between the undersigned with respect to its subject
matter and supersedes all prior discussions, agreements and understandings of
every kind and nature between them with respect thereto. This Agreement shall
inure to the benefit of, and be enforceable against, each of the undersigned and
their respective successors and assigns.
Please sign this letter at the place indicated below, whereupon it will
constitute our mutually binding agreement with respect to the matters contained
herein.
Very truly yours,
PITTSFORD CAPITAL MARKETS, INC.
By:
-----------------------------
ACCEPTED AND AGREED TO:
SEL-DRUM INTERNATIONAL, INC.
By:
-------------------------------
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<PAGE> 1
EXHIBIT 10 (i)
SEL-DRUM INTERNATIONAL, INC.
Common Stock
(par value $.01 per share)
CUSTODY AGREEMENT
Sel-Drum International, Inc.
501 Amherst Street
Buffalo, New York 14207-2913
Attention: Raymond C. Sparks, President and Chief Executive Officer
Dear Mr. Sparks:
There are delivered to you herewith certificates (the "Certificates"),
in negotiable form (and, subject to your requirements, with signatures
guaranteed by a commercial bank or trust company having an office or
correspondent in the United States or by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.),
representing the number of issued and outstanding shares of Common Stock, par
value $.01 per share (the "Common Stock"), of Sel-Drum International, Inc., a
New York corporation (the "Company"), set forth below the name of the
undersigned selling stockholder (the "Seller") at the end of this letter. The
Certificates are to be held by you as Custodian for the account of the Seller
and are to be disposed of by you solely in accordance with this Custody
Agreement ("Custody Agreement").
Concurrently with the execution and delivery of this Custody Agreement,
the Seller has executed a power of attorney (the "Power of Attorney"), the form
of which has been furnished to you, authorizing you as the Attorney-in-Fact to
sell from the number of shares represented by the Certificates that number of
shares of the Common Stock indicated below the signature of the Seller at the
end of this letter (the "Shares") and for that purpose to enter into a
Underwriting Agreement (the "Underwriting Agreement") in substantially the form
of which has been furnished to you, among the Company, certain Selling
Stockholders of the Company including the Seller (the "Selling Stockholders"),
and Pittsford Capital Markets, Inc., the underwriter named therein (the
"Underwriter").
You are authorized and directed to hold the Certificates deposited in
your custody, and prior to any time of closing or delivery specified in the
Underwriting Agreement (each, a "Time of Delivery") of which you shall have been
given prior notice, and upon the instructions of the Attorney-in-Fact, you are
to instruct the transfer agent and registrar for the Common Stock set forth
below name of Seller at the end of this letter and to prepare and countersign a
certificate or certificates (the "Underwriter's Certificates") (which may be
aggregated with such certificates in respect of the other Selling Stockholder)
representing the Shares which are to be sold by the Seller at such Time of
Delivery registered in such names
<PAGE> 2
and denominations as the Underwriter shall have instructed you. At each Time of
Delivery under the Underwriting Agreement, you are, upon the instructions of the
Attorney-in-Fact, (i) to instruct the transfer agent and registrar for the
Common Stock (A) to cause the Shares that are to be sold at such Time of
Delivery pursuant to the Underwriting Agreement to be transferred upon the books
of the Company into such names and in such denominations as the Underwriter
shall have instructed you, and (B) to deliver the Underwriter's Certificates
(which shall not contain any restrictive legends) pursuant to the Underwriting
Agreement to the Underwriter against receipt by such transfer agent and
registrar from you of the Certificates (or a portion thereof) deposited with you
pursuant to this Custody Agreement, (ii) to purchase all transfer tax stamps (if
any) necessary in connection with the transfer of such Shares, (iii) to deliver
to such transfer agent and registrar the Certificates (or a portion thereof)
against receipt from the Underwriter of payment for such Shares as provided in
the Underwriting Agreement, (iv) to give receipt for such payment and to deposit
such payment to your account as Custodian, (v) to draw upon such account to pay
such fees and expenses (which may include your own) as you may be specifically
instructed in writing to pay by the Attorney-in-Fact, and (vi) after deducting
such fees and expenses, if any, from the amount received by you as payment for
the Shares sold at such Time of Delivery to distribute the balance in accordance
with the payment instructions set forth below the name of the Seller at the end
of this Custody Agreement or such other instructions as you shall have received
prior to such Time of Delivery from the Attorney-in-Fact. Promptly after the
later of (i) the date 30 calendar days after the date of the Underwriting
Agreement and (ii) the Time of Delivery under the Underwriting Agreement, you
shall return to the Seller new certificates (which you shall have obtained from
the transfer agent), representing the number of shares, of Common Stock
represented by the Certificates deposited with you on behalf of the Seller,
which are in excess of the total number of Shares sold by the Seller to the
Underwriter.
If the Underwriting Agreement shall not be executed and delivered on or
prior to September 12, 1998, then you are to return to the Seller or as the
Seller may otherwise direct, the Certificates representing shares then on
deposit and received by you on behalf of the Seller pursuant to this Custody
Agreement, together with the stock powers related thereto, and this Custody
Agreement shall forthwith terminate, unless the Seller shall have extended the
term of the Power of Attorney and, with your consent, this Custody Agreement by
written notice thereof delivered to you and to the Attorney-in-Fact.
Under the terms of the Power of Attorney, the authority conferred
thereby is granted and conferred subject to the interests of the Underwriter and
the other Selling Stockholder and, prior to September 12, 1998 is, to the extent
enforceable by law, irrevocable and not subject to termination by the Seller or
by operation of law, whether by the dissolution of the Seller or the occurrence
of any other event, and the obligations of the Seller under the Underwriting
Agreement similarly are not to be subject to termination. Accordingly, the
shares represented by Certificates deposited with you pursuant to this Custody
Agreement and your authority hereunder are subject to the interests of the
Underwriter and the other Selling Stockholder, and this Custody Agreement and
your authority hereunder shall be, to the extent enforceable by law, irrevocable
and not subject to termination by the Seller or by operation of law, whether by
the dissolution of the Seller or the occurrence of any other event. If the
Seller should be dissolved, or if any other such event should occur, before the
<PAGE> 3
delivery of the Shares to be sold by the Seller under the Underwriting
Agreement, the certificates representing the Shares shall be delivered by or on
behalf of the Seller in accordance with the terms of this Custody Agreement, and
actions taken by you hereunder or by the Attorney-in-Fact, or any of them acting
alone, pursuant to the Power of Attorney shall be as valid as if such
dissolution or other event had not occurred.
Until delivery of the Shares to be sold by the Seller to the Underwriter
has been made as herein and in the Underwriting Agreement provided, the Seller
shall, except as otherwise specifically provided herein, have all rights of
ownership of the Shares and all other shares, if any, represented by the
Certificates deposited with you on behalf of the Seller.
You shall be entitled to act and rely upon any statement, request,
notice or instruction respecting this Custody Agreement given to you by the
Attorney-in-Fact; provided, however, that any statement or notice to you with
respect to a Time of Delivery, or with respect to the non-effectiveness or
termination of the Underwriting Agreement, or advising that the Underwriting
Agreement has not been executed and delivered, shall have been confirmed in
writing by the Underwriter.
It is understood that you assume no responsibility or liability to any
person other than to deal with the Certificates deposited and the proceeds from
the sale of the Shares represented thereby, all in accordance with the
provisions of this Custody Agreement, and the Seller agrees to indemnify and
hold harmless with respect to anything done by you in good faith in accordance
with the foregoing instructions. It is understood that your fees and expenses
acting hereunder will be paid by the Company.
The Seller hereby makes, at and as of the date of this Custody
Agreement, and as of the date of the Underwriting Agreement, with and to you
each of the representations, warranties and agreements set forth in subsections
___, ____, and ___ of Section _______ of the Underwriting Agreement which has
been furnished to you, and such representations, warranties and agreements are
incorporated by reference herein in their entirety (the representations,
warranties and agreements in the first clause of such subsection (i) and in such
subsection (ii) being subject, however, to the exception that orders or other
authorizations may be required under the Securities Act of 1933, as amended, or
under state or Blue Sky laws in connection with the purchase and distribution by
the Underwriter of the Shares to be sold by the Seller).
<PAGE> 4
Please acknowledge your acceptance hereof as Custodian and receipt of
the Certificates deposited by executing and returning one of the enclosed copies
hereof to the undersigned.
Dated: _________________, 1998
Very truly yours,
------------------------------------
Shareholder
Signature guaranteed: Number of Shares of Common Stock
to be sold:
shares*
- ------------------------ -----------
- ------------------------
*Plus such additional shares which I may authorize you to sell on
my behalf in connection with the exercise by the Underwriter of
its over-allotment option.
<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 #1 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
August 27, 1998
