<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended APRIL 30, 1998
--------------
[ ] Transition Report under Section 13 or 15(d) of the Exchange Act
For the transition period from_________________to_____________________________
Commission File Number 0-22964
-------
SEL-DRUM INTERNATIONAL, INC.
----------------------------
(Exact name of Small Business Issuer as Specified in Its Charter)
NEW YORK 84-1236134
-------- -----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
501 AMHERST STREET, BUFFALO, NEW YORK 14207-2913
------------------------------------------------
(Address of Principal Executive Offices)
905-335-2766
------------
(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
State the number of shares outstanding for each of the issuer's classes
of common equity, as of the latest practicable date:
COMMON STOCK, $.01 PAR VALUE
7,642,500 SHARES ISSUED AND OUTSTANDING AS OF JUNE 10, 1998
Transitional Small Business Disclosure Format (check one:)
Yes [ ] No [X]
<PAGE> 2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Unaudited Consolidated Balance Sheets as of April 30, 1998
and July 31, 1997
Unaudited Consolidated Statements of Income for the three
and nine months ended April 30, 1998 and April 30, 1997
Unaudited Consolidated Statements of Cash Flow for the
nine months ended April 30, 1998 and April 30, 1997
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
PART I: FINANCIAL INFORMATION
-----------------------------
ITEM 1: FINANCIAL STATEMENTS
----------------------------
UNAUDITED CONSOLIDATED BALANCE SHEETS
-------------------------------------
<TABLE>
<CAPTION>
ASSETS (U.S.$)
CURRENT ASSETS April 30, 1998 July 31, 1997*
- -------------- -------------- --------------
<S> <C> <C>
Cash and Cash Equivalents $ 64,932 $1,084,954
Accounts receivable, net 1,976,172 2,199,625
Inventories 3,590,711 3,143,472
Refundable Income Taxes 33,076 38,293
Deferred Income Tax Benefit 25,000 25,000
Other Current Assets 75,178 81,485
---------- ----------
TOTAL CURRENT ASSETS 5,765,069 6,572,829
PROPERTY
- --------
Equipment 1,336,886 1,357,641
Vehicles 38,757 24,835
Furniture and Fixtures 56,141 48,465
Leasehold improvements 404,722 414,114
---------- ----------
1,836,506 1,845,055
Less accumulated
Depreciation and Amortization 1,028,503 919,898
---------- ----------
808,003 925,157
OTHER ASSETS
- ------------
Organization costs, net 7,761 9,096
Purchased and developed technology, net 47,396 55,840
Deposits 11,204 17,496
Loans receivable from related parties 167,396 115,421
---------- ----------
233,757 197,853
---------- ----------
$6,806,829 $7,695,839
========== ==========
* Derived from the July 31, 1997 Form 10-KSB
</TABLE>
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SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
PART I: FINANCIAL INFORMATION
-----------------------------
ITEM 1: FINANCIAL STATEMENTS
----------------------------
UNAUDITED CONSOLIDATED BALANCE SHEETS (CONT'D)
----------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (U.S.$)
- ------------------------------------
CURRENT LIABILITIES April 30, 1998 July 31, 1997*
- ------------------- -------------- -------------
<S> <C> <C>
Current portion of long-term debt $ 57,212 $ 59,524
Notes payable to banks 609,185 1,393,185
Accounts payable 334,978 628,999
Income tax payable 18,279 -
Other current liabilities 420,416 258,427
---------- ----------
TOTAL CURRENT LIABILITIES 1,440,070 2,340,135
OTHER LIABILITIES
- -----------------
Long-term debt 47,618 109,072
Deferred income taxes 75,973 31,909
---------- ----------
123,591 140,981
SHAREHOLDERS' EQUITY
- --------------------
Common Stock 771,356 771,356
Preferred stock
Class C 1,154,952 1,280,048
Class D 3,344,853 3,520,132
--------- ---------
4,499,805 4,800,180
Additional paid in capital 11,915 11,915
Cumulative foreign currency translation
adjustment (231,833) (113,311)
---------- ----------
Retained Earnings 191,925 (255,417)
---------- ----------
5,243,168 5,214,723
---------- ----------
$6,806,829 $7,695,839
========== ==========
*Derived from the July 31, 1997 Form 10-KSB.
</TABLE>
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SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
PART I: FINANCIAL INFORMATION
-----------------------------
ITEM 1: FINANCIAL STATEMENTS
----------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
<TABLE>
<CAPTION>
(U.S.$)
NINE MONTHS ENDED
--------------------------------------------
April 30
--------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales $10,874,126 $12,244,237
Cost of goods sold 7,273,236 8,048,582
----------- -----------
GROSS PROFIT 3,600,890 4,195,655
Selling, operating and general and administrative expenses 2,704,819 2,904,558
Provision for bad debts 50,780 44,557
----------- -----------
INCOME FROM OPERATIONS 845,291 1,246,540
Other income (expense):
Interest Income 16,658 13,480
Interest Expense (49,424) (101,253)
Foreign currency transaction gain (loss) (5,238) 21,185
Disposal Fixed Assets gain (loss) - 1,154
----------- -----------
(38,004) (65,434)
----------- -----------
INCOME BEFORE INCOME TAXES 807,287 1,181,106
Income Taxes:
Current 359,945 491,224
Deferred - -
----------- -----------
359,945 491,224
----------- -----------
NET INCOME $ 447,342 $ 689,882
=========== ===========
Number of common shares outstanding 7,642,500 7,642,500
Net income per common share $ .06 $ .09
============ ===========
</TABLE>
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SEL-DRUM INTERNATIONAL, INC.
----------------------------
PART I: FINANCIAL INFORMATION
-----------------------------
ITEM 1: FINANCIAL STATEMENTS
----------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
<TABLE>
<CAPTION>
(U.S.$)
QUARTER ENDED
--------------------------------------------
APRIL 30
--------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales $3,757,049 $4,308,203
Cost of goods sold 2,599,740 2,851,291
---------- ----------
GROSS PROFIT 1,157,309 1,456,912
Selling, operating and general and administrative expenses 803,309 1,019,153
Provision for bad debts 13,715 16,347
---------- ----------
INCOME FROM OPERATIONS 340,285 421,412
Other income (expense):
Interest Income 3,748 2,067
Interest Expense (14,300) (32,008)
Foreign currency transaction gain (loss) 8,372 3,089
Fixed Asset Disposal gain (loss) - -
---------- ----------
(2,180) (26,852)
---------- ----------
INCOME BEFORE INCOME TAXES 338,105 394,560
Income Taxes:
Current 153,180 167,297
Deferred - -
---------- ----------
153,180 167,297
---------- ----------
NET INCOME $ 184,925 $ 227,263
========== ==========
Number of common shares outstanding 7,642,500 7,642,500
Net income per common share $ .02 $ .03
========== ==========
</TABLE>
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<PAGE> 7
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
----------------------------------------------
<TABLE>
<CAPTION>
(U.S.$)
NINE MONTHS ENDED
------------------------------------
APRIL 30
------------------------------------
CASH FLOWS - OPERATING ACTIVITIES 1998 1997
- --------------------------------- ---- ----
<S> <C> <C>
Net Income $447,342 $689,882
Adjustments to reconcile net income to net cash provided from
(used for) operating activities:
Provision for bad debts 50,780 44,557
Depreciation and amortization 150,141 144,335
Deferred income taxes (credit) 44,064 _
Gain on Disposal of Property _ (1,154)
Changes in certain assets and liabilities affecting operations:
Accounts receivable 172,673 (592,525)
Inventories (447,239) 386,175
Other current assets 11,524 9,625
Deposits 6,292 73
Accounts payable (294,021) (125,713)
Income taxes payable 18,279 (40,727)
Other current liabilities 161,989 (164,912)
----------- ----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 321,824 349,616
CASH FLOWS - INVESTING ACTIVITIES
- ---------------------------------
Purchases of property (58,763) (59,350)
----------- ----------
NET CASH (USED FOR) INVESTING ACTIVITIES (58,763) (59,350)
CASH FLOWS - FINANCING ACTIVITIES
- ---------------------------------
Redemption of preferred shares (300,375) -
Loans receivable - related parties (51,975) 529
Short-term borrowings net (784,000) (473,989)
Proceeds from Disposal of Assets - 2,804
Repayments on long-term debt (63,766) (143,234)
----------- ----------
NET CASH (USED FOR) PROVIDED FROM FINANCING ACTIVITIES (1,200,116) (613,890)
Effect of exchange rate changes on cash (82,967) (39,838)
----------- ----------
NET (DECREASE) INCREASE IN CASH (1,020,022) (363,462)
Cash and Cash Equivalents at beginning of period 1,084,954 1,181,396
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 64,932 $ 817,934
========== ==========
</TABLE>
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<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
OVERVIEW
- --------
Sel-Drum International, Inc., a New York Corporation ("Sel-Drum" or the
"Company") is the successor corporation to Dakota Equities, Ltd., a
publicly-held "blind pool." 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 which was founded in 1978.
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.
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. 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. It should be noted that
approximately 50% of the Kelowna Facility's remanufactured product is sold
directly to the other operating divisions. 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 ("O.E.M's") to be approximately $675 million in North America.
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. The Company amalgamated Micron Imaging Corporation
(now the Kelowna Facility) and Sel-Drum Corporation on November 1, 1996.
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 future efforts to take advantage of the perceived
potential financial returns presented by existing opportunities within the high
mortality copier replacement part and printer 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
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<PAGE> 9
Kelowna Facility with a view toward having the Kelowna Facility provide limited
remanufacturing support and increased distribution support.
Additional strategic items include seeking acquisition candidates and a
listing on the Nasdaq stock market or regional exchanges 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
Turnbull who has agreed to remain with the Company as a full-time consultant.
In December, 1997, the Company reorganized its sales staff and began
implementing this reorganization during the month of January. As expected, as a
result of this reorganization of sales staff, sales were flat during the first
nine months.
On January 6, 1998, the Shareholders approved the reincorporation of the
Company into 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 $300,000, of which approximately
$175,000 was delivered during the quarter ended January 31, 1998, and
approximately $125,000 was delivered during the quarter ended April 30, 1998.
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.
The Company's sales were flat for the three months and nine months ended
April 30, 1998. The primary reason for reduction in sales is the Company's
recent reorganization of its internal sales and marketing network.
The following table sets forth for each of the periods presented,
certain income statement data for the Company expressed as a percentage of net
sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ ------------------
April 30, April 30, April 30, April 30
--------- --------- --------- --------
Statement of Operations Data 1998 1997 1998 1997
- ---------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
As a Percentage of Net Sales:
Cost of Goods Sold 69.2% 66.2% 66.9% 65.7%
----- ----- ----- -----
Gross Profit 30.8% 33.8% 33.1% 34.3%
</TABLE>
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<PAGE> 10
<TABLE>
<S> <C> <C> <C> <C>
Selling, General and Administrative Expenses 21.4% 23.6% 24.9% 23.7%
Provision for Bad Debt 0.3% 0.4% 0.4% 0.4%
----- ----- ----- -----
Income from Operations 9.1% 9.8% 7.8% 10.2%
Other Income (Expense) (.1%) (.6%) (.4%) (.5%)
----- ----- ----- -----
Income Before Taxes 9.0% 9.2% 7.4% 9.7%
----- ----- ----- -----
Net Income 4.9% 5.3% 4.1% 5.6%
===== ===== ===== =====
</TABLE>
Net sales for the three months ended April 30, 1998 were $3,757,049 as
compared with $4,308,203 for the three months ended April 30, 1997, a decrease
of 12.8%. 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 decrease in net sales for the three months and nine
months ended April 30, 1998 is principally the result of: (i) a newly
implemented program designed to enhance the Company's sales and marketing
distribution network; (ii) the Company's recent transition to a new management
team; and (iii) the recent implementation of the Company's strategic plan
described earlier herein. The Company expects this trend to continue at least
into the final fiscal quarter of 1998.
Beginning the three and nine months ended April 30, 1998, the Company
has 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 three and nine months ended
April 30, 1998, as against other periods is not meaningful.
Gross profit margin for the three months ending April 30, 1998 was
30.8%, as compared to 33.8% for the same period last year. 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. In absolute dollars, gross profit decreased
from $1,456,912 for the three months ended April 30, 1997 to $1,157,309 for the
three months ended April 30, 1998. For the nine months ended April 30, 1998,
absolute gross profit dollars decreased to $3,600,890 from $4,195,655. The
decrease in absolute gross profit dollars of $299,603 and $594,765 for the three
and nine month periods, respectively, resulted primarily from net sales
decreases.
Selling, general, and administrative expenses for the three months ended
April 30, 1998 decreased 21.2% from the prior comparable period. For the nine
months ended April 30, 1998, selling, general and administrative expenses in
absolute dollars decreased by $199,739 or 6.9%.
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
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<PAGE> 11
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.
Net cash used for investing activities represents purchases of property
in connection with the start up of a facsimile and printer cartridge production
operation at the Company's Kelowna, British Columbia facility.
The Company currently has a revolving demand loan arrangement with the
National Bank of Canada in the amount of $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 $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. Except for certain planned capital expenditures in connection with
computer system upgrades, for the foreseeable future, the Company does not
anticipate any significant cash outlays other than those consistent with past
practices.
YEAR 2000 ISSUE
- ---------------
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 $250,000 in order to get the systems ready for processing in the year
2000. Much of this outlay 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. The amount
expensed to date is immaterial.
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<PAGE> 12
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.
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<PAGE> 13
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See Index to Exhibits.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter for which
this report is filed.
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<PAGE> 14
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SEL-DRUM INTERNATIONAL, INC.
Date June 11, 1998 /s/ Raymond C. Sparks
------------------- ---------------------------------------
Raymond C. Sparks, President and CEO
Date June 11, 1998 /s/ John C. Hall
------------------- ---------------------------------------
John C. Hall, Vice President - Finance
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<PAGE> 15
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION
Not applicable.
(3) (a) ARTICLES OF INCORPORATION
Restated Certificate of Incorporation is incorporated by
reference to Exhibit 3(a) to the Registrant's Form 10-QSB
filed for the quarterly period ended January 31, 1998.
(b) BY-LAWS
Amended and Restated By-laws are incorporated by reference
to Exhibit 3(b) to the Registrant's Form 10-QSB filed for
the quarterly period ended January 31, 1998.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
(a) The documents listed under Item (3) of this Index are
incorporated herein by reference.
(10) MATERIAL CONTRACTS
(a) Insurance Policy Agreement dated February 1, 1998, between
Sel-Drum International, Inc., and Brian F. Turnbull.
(11) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Computation can be clearly determined the Financial Statements included
herein under Item 1.
(15) LETTER ON UNAUDITED INTERIM FINANCIAL INFORMATION
Not applicable.
(18) LETTER ON CHANGE IN ACCOUNTING PRINCIPLES
Not applicable.
(19) REPORTS FURNISHED TO SECURITY HOLDERS
Not applicable.
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<PAGE> 16
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE
Not applicable.
(23) CONSENT OF EXPERTS AND COUNSEL
Not applicable.
(24) POWER OF ATTORNEY
Not applicable.
*(27) FINANCIAL DATA SCHEDULE
The Financial Data Schedule is included herein as Exhibit 27.
(99) ADDITIONAL EXHIBITS
Not applicable.
- ------------------------------
* Exhibit filed with this Report
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<PAGE> 1
EXHIBIT 10(a)
INSURANCE POLICY AGREEMENT
THIS AGREEMENT made this 1st day of February, 1998
B E T W E E N:
SEL-DRUM INTERNATIONAL, INC.
(Hereinafter called "Sel-Drum")
OF THE FIRST PART;
- - and -
BRIAN F. TURNBULL
(Hereinafter called "Turnbull")
OF THE SECOND PART.
WHEREAS over a period of years The Manufacturers Life Insurance Company
("Manulife") has issued and maintained a policy of life insurance on the life of
Turnbull, being policy number 7592717-8 in the face amount of $2,000,000.00 in
Canadian Dollars (the "Policy");
AND WHEREAS Sel-Drum has been paying the annual premiums due to
Manulife to maintain the Policy;
AND WHEREAS the designated beneficiary or beneficiaries of the Policy
have been 547118 Ontario Limited and/or 547117 Ontario Limited, two corporations
solely owned and controlled by Turnbull;
AND WHEREAS the parties hereto wish to enter into this Agreement to
establish the steps to be taken in the event that the Policy proceeds are paid
out by Manulife;
NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration for being
named by Turnbull as the beneficiary within the Policy, and the sum of Two
Dollars ($2.00), the receipt and sufficiency of such consideration being
acknowledged by Sel-Drum, Sel-Drum does hereby covenant and agree as follows:
1. Upon receipt of any proceeds of insurance paid by Manulife or any
successor or assign pursuant to the provisions of the Policy, or any
subsequent policy in lieu thereof that names Sel-Drum as the beneficiary
therein, such proceeds shall be disbursed by Sel-Drum as follows:
<PAGE> 2
(a) The total sum of all premiums paid by Sel-Drum throughout the
years that the Policy is in place shall be deducted from the
proceeds received and shall be retained by Sel-Drum as its own
funds as reimbursement for such premiums paid; and
(b) The Remaining Proceeds of the Policy, after the deduction in
paragraph (a) above, shall be paid by Sel-Drum for the benefit
of Turnbull, in the following order:
(i) To the extent that Turnbull or any personal
corporation controlled by him, such as 547117
Ontario Limited or 547118 Ontario Limited, holds
any preference or special shares in the capital
stock of Sel-Drum or any subsidiary thereof
("Turnbull Special Shares"), such portion of the
Remaining Proceeds as shall be required to redeem
the Turnbull Special Shares shall be paid to the
holder thereof as a redemption payment; and
(ii) In the event that any Remaining Proceeds are still
held by Sel-Drum after all of the Turnbull Special
Shares are fully redeemed, then such balance of
the Remaining Proceeds shall be paid by Sel-Drum
to purchase common shares of the capital stock of
Sel-Drum or any subsidiary thereof held by
Turnbull or any personal corporation controlled by
him, to the extent that such balance of the
Remaining Proceeds permits. The price to be paid
for such common shares shall be as established by
the auditors of Sel-Drum, acting reasonably, and
calculated as at the date of death of Turnbull.
Sel-Drum shall not be compelled to purchase any
fractional shares, but may retain any nominal
balance of the Remaining Proceeds, as its own
funds, after purchasing the maximum number of
whole common shares that can be fully paid for.
(c) Sel-Drum is only obligated to redeem Turnbull Special Shares
or to purchase common shares pursuant to this Agreement to the
extent that funds are available as Remaining Proceeds, and
this Agreement shall not be construed as to require Sel-Drum
to purchase any or all of the Turnbull Special Shares or any
common shares in the event that Remaining Proceeds are not
available to Sel-Drum to complete such transactions.
2. (a) By executing this Agreement, Turnbull represents and
warrants that, as of the date of execution of this Agreement,
none of the Turnbull Special Shares or any common shares of
Sel-Drum held or controlled by him have been pledged,
hypothecated or otherwise charged or encumbered to any third
party, nor does any third party hold any option or other right
to acquire such shares.
(b) In the event that, subsequent to the execution of this
Agreement, Turnbull pledges, hypothecates, otherwise charges
or encumbers any of the shares that are the subject of this
Agreement, or in the event that Turnbull grants any third
party any option or other right to acquire such shares,
Turnbull shall give notice of
<PAGE> 3
such event to Sel-Drum and Sel-Drum is hereby authorized,
after such notice and the subsequent receipt of Policy
proceeds, to pay directly to such third party part or all of
the Remaining Proceeds to be applied to any indebtedness that
the said shares may be subject to, but only on the express
condition that Turnbull Special Shares shall be delivered to
Sel-Drum by the security holder thereof, duly endorsed in
blank for redemption purposes, and that similarly, any common
shares being acquired pursuant to this Agreement are also duly
endorsed in blank for transfer purposes and are delivered to
Sel-Drum at the time of payment.
3. Sel-Drum's obligations and covenants herein shall only be in effect as
at such time as Manulife accepts the change in beneficiary designation,
naming Sel-Drum as the beneficiary of the Policy proceeds, and shall
only continue in force for such time as such beneficiary designation
continues.
4. At all times this Agreement shall be subject to the policies and
provisions of the United States securities laws or the corporate laws of
the state in which Sel-Drum is incorporated or maintained. Further, this
Agreement shall be governed by and be construed in accordance with the
laws of the Province of Ontario and such Canadian federal statutes as
are applicable therein.
5. Each party shall co-operate with the other, take such further action and
execute and deliver such further documents as may be reasonably
requested by the other party to carry out the terms and purposes of this
Agreement.
6. This Agreement may be amended only by a writing executed by both parties
hereto.
7. No party shall assign or attempt to assign any of its or his rights or
obligations under this Agreement without the prior written consent of
the other party hereto.
8. This Agreement shall enure to the benefit of and be binding upon the
successors, assigns and legal representations of both parties hereto.
-3-
<PAGE> 4
IN WITNESS WHEREOF the parties have duly executed this Agreement on the
date first written above.
SEL-DRUM INTERNATIONAL, INC.
Per:/s/ Raymond C. Sparks
----------------------------------------
Raymond C. Sparks - President
/s/ Brian Turnbull
----------------------------------------
Brian Turnbull
-4-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's April 30, 1998 Form 10-QSB and is qualified in its entirety by
reference to such financial statement.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> APR-30-1998
<CASH> 64,932
<SECURITIES> 0
<RECEIVABLES> 2,091,511
<ALLOWANCES> 115,339
<INVENTORY> 3,590,711
<CURRENT-ASSETS> 5,765,069
<PP&E> 1,836,506
<DEPRECIATION> 1,028,503
<TOTAL-ASSETS> 6,806,829
<CURRENT-LIABILITIES> 1,440,070
<BONDS> 0
0
4,499,805
<COMMON> 771,356
<OTHER-SE> (27,993)
<TOTAL-LIABILITY-AND-EQUITY> 6,806,829
<SALES> 10,874,126
<TOTAL-REVENUES> 10,874,126
<CGS> 7,273,236
<TOTAL-COSTS> 7,273,236
<OTHER-EXPENSES> 2,704,819
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (49,424)
<INCOME-PRETAX> 807,287
<INCOME-TAX> 359,945
<INCOME-CONTINUING> 447,342
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 447,342
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
