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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended JULY 31, 1999
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 0-22964
SEL-DRUM INTERNATIONAL, INC.
----------------------------
(Name of Small Business Issuer in Its Charter)
NEW YORK 84-1236134
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
501 AMHERST STREET, BUFFALO, NEW YORK 14207-2913
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(Address of Principal Executive Offices) (Zip Code)
1-800-263-9356
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Issuer's Telephone Number, Including Area Code
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
----------------------------
Title of Each Class
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
The Issuer's revenues for the year ended July 31, 1999 were $ $14, 631,235.
As of October 27,1999 there were 7,417,500 outstanding shares of Common Stock,
$.01 par value. The aggregate market value of the voting stock of the registrant
held by non-affiliates on October 27, 1999 based on the average bid and asked
price on such date was $172,496.
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ITEM 1. DESCRIPTION OF BUSINESS.
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General
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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 Sel-Drum Corporation, a privately held Canadian corporation which
was founded in 1978. The Company amalgamated Micron Imaging Corporation (now the
Kelowna Facility) and Sel-Drum Corporation on November 1, 1996.
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 strategic alliance with
Densigraphix Kopi inc.("Densigraphix"), the Company strengthened its hold in the
toner segment of the market and positioned itself for a year of strong growth in
the US market. Please see below for more details on this transaction.
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 95% of the Kelowna Facility's refurbished products are 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
directly contact the copier machine dealers throughout North America. There are
approximately 7,000 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 $750 million in North America.
The Company's primary business is the distribution of high mortality
copier and printer replacement parts and toners. The Company also refurbishes
facsimile and laser printer and fax cartridges. During the course of last year,
the Company discontinued its drum manufacturing activities. This decision was
motivated by a change in technology and did not effect the Company's operations
as it had been ready to use the appropriate facilities for its cartridges
refurbishing activities. The technology and equipment affiliated with the drum
manufacturing operations have been written off and as of the year ended July 31,
1999, a loss of $394,006 was recorded against earnings. To be able to offer an
integrated service comprehending both a product component and a value added
technological component, the Company has been offering for the past months,
through its Burlington office, specialized technical connectivity (net-working)
software services. 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.
On October 29, 1997, the Company hired Raymond C. Sparks as its Chief
Executive Officer and President, replacing Brian Turnbull who had agreed to
remain with the Company as a full-time consultant.
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In December 1997, the Company reorganized its sales staff and began
implementing this reorganization during the month of January 1998. As expected,
as a result of this reorganization of sales staff, sales were flat during
Fiscal 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 former
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.
In late 1997, the Company initiated a strategic plan which was
designated to focus on the longer term growth prospects of the Company. This new
strategy called 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. In line
with its aim of bolstering the Company's core business, the Company signed a
cartridge sales contract in January 1999 with an important authorized dealer
thus taking advantage of the under-utilized Kelowna Facility refurbishing and
distribution capacity. The second tier of the contract, increasing the number of
cartridges processed in the Kelowna Facility, took effect in early September
1999. The profitability of the Kelowna Facility is presently dependent on this
contract which can be cancelled on three months notice. At present, the Company
has no indication that such a cancellation could be forthcoming.
In the course of the implementation of its strategic plan which included
seeking acquisition candidates, the Company contacted Densigraphix of Montreal,
Quebec, a company specialized in the toner and cartridge distribution business,
which already distributed some of Sel-Drum's products. In view of the
complementary nature of the businesses and the compatible management
philosophies, an agreement was reached between the principal shareholders and
related parties of the Company whereby, C. Cotran Holding inc., a private
company wholly-owned by Camille Cotran, purchased all of the shares held by
Sel-Drum's principal shareholders and related parties. Following this
transaction, C. Cotran Holding inc. holds 97% of the Common Stock of the
Company.
The third component of the strategic plan was to study the possibility
of seeking a listing on the Chicago Stock Exchange, the Nasdaq SmallCap Market
or a national or other regional exchange. Although not pursued during the past
year in view of its acquisition by C. Cotran Holding inc., this goal remains at
the forefront of the Company's development strategy.
A new computer system was introduced in 1999. Training is completed. The
Company is now in a good position to take advantage and develop a full
functionality of the system.
On July 30, 1999, Brian Turnbull and Robert Asseltine, the principal
shareholders of the Company, and other parties related to them, disposed of all
of their shares of Common Stock in the Company. On July 6, 1999, Messrs.
Turnbull and Asseltine delivered an executed original Term Sheet (the "Term
Sheet") among themselves, C. Cotran Holding inc. and Densigraphix ("the
Purchasers"). Pursuant to the Term Sheet, Messrs. Asseltine and Turnbull agreed
to sell to the Purchasers all of the Company's Common Stock beneficially held by
them at a price of $.40 US per share. Additionally, Messrs. Asseltine and
Turnbull agreed to deliver and sell to the Purchasers an additional 1,119,000
shares of Common Stock held by family members or related parties. The Term Sheet
further provided for the Purchaser's acquisition of all outstanding shares of
Preferred Stock held by Messrs. Asseltine and Turnbull (or their affiliates) in
the Company's Sel-Drum Imaging Corporation subsidiary at a price of $457.90 US
per share.
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The proposed transaction was contingent upon several items including but
not limited to: the repayment of indebtedness to the Company owed by related
parties (approximately $159,820 US is owed by two corporations controlled by
Mr. Turnbull); the resignation of current members of the Board of Directors and
the execution of a definitive agreement.
A Stock Purchase Agreement (the "Agreement") was executed on July 30,
1999 with respect to the shares of Common Stock between C. Cotran Holding inc.,
a company incorporated under the laws of Canada and Robert E. Asseltine, 547118
Ontario Limited represented by Brian F. Turnbull and the other selling
shareholders of the Company, and with respect to the Preferred Stock of Sel-Drum
Imaging Corporation, the parties to the Agreement are Densigraphix, a company
incorporated under the laws of Canada and Robert E. Asseltine, Geraldine
Asseltine and 547118 Ontario Limited.
The Agreement provided for the acquisition of 97% of the issued and
outstanding Common Stock of the Company by C. Cotran Holding inc. and all of the
outstanding Preferred Stock of Sel-Drum Imaging Corporation by Densigraphix.
Subject to post-closing adjustments, the aggregate purchase price for the Common
Stock and Preferred Stock was $5,702,472 US.
The National Bank of Canada (the "Bank") agreed to make available a
global financing in the amount of $6,000,000.00CDN for the acquisition of the
Company through C. Cotran Holding inc., Densigraphix and Sel-Drum Corporation.
To secure the payment of various loans made for the purpose of the acquisition,
the 0ffer of Financing by the Bank provides for certain undertakings by the
Company, C. Cotran Holding inc., Densigraphix, Sel-Drum Corporation and Sel-Drum
Corporation (U.S.A.), Inc. which include a moveable hypothec with delivery
(pledge) of all the shares of the Company owned or to be owned by each of the
respective borrowers.
Company 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 $750
million per year market in North America.
The Company's focus in the next year will be on the sale of toners in
the US, taking advantage of the synergies created by the strategic alliance with
Densigraphix. The Company will remain attentive to opportunities in the European
and Asia-Pacific regions and take advantage of communications established
through its Website. The Company's strategy for the next year is to consolidate
and reorganize certain operations to fully benefit from its strategic alliance
with Densigraphix. Significant progress was achieved as to the main objectives
of the Company:
- - Provide high quality products and superior customer service. The Company
has experienced a very low rate of customer returns as it monitors its
sales force and the quality of its products on a continuous basis. The
Company intends to continue its strategy of demanding high quality from
its vendors.
- - Improve refurbishing flexibility. The Company's refurbishing facility in
Kelowna, British Columbia (the "Kelowna Facility") obtained its ISO 9002
certification in June 1999. New contracts have permitted a more efficient
use of its capacity.
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- - Establish integrated data system. To date, the basic functions of an
integrated system have been successfully implemented as planned and
within the budget. The Company is now in a position to benefit from the
increased flexibility provided by this new system. The implementation of
additional functions is planned in the course of the year. No assurances
can be given that such functions will be implemented or if implemented
will be successful.
- - Customers have access to the Company's Website. Orders are channeled
through the sales representatives.
- - The Company has just completed a major transaction and will seek the full
benefits of its alliance with Densigraphix through consolidation of
certain operations or reorganization of certain functions. At this date,
the Company has not yet established definitive plans in that regard.
- - In order to position itself advantageously, management intends to
consolidate certain operations or reorganize certain functions prior to
refocusing its effort on obtaining listing on the Nasdaq SmallCap Market
system, a regional or national exchange. 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. To date, the Company does not meet the
necessary minimum bid price per share or public float criteria required
for getting its shares listed on an exchange. As part of an overall
strategy to be developed within its alliance with Densigraphix, the
Company may seek listing on a regional or national exchange. There can be
no assurance that any application will be approved or that a market for
the Common Stock will be obtained.
As a result of the Company's strategic alliance with Densigraphix, its
strategy to promote superior customer service, increase sales in the US and
outside of North America and pursue the development of its integrated data
system, 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
"Investment Considerations."
Copier, Facsimile, and Printer Parts Distribution
- -------------------------------------------------
Management believes Sel-Drum is one of the largest independent North
American distributors of high mortality copier parts, drums, toner and related
supplies, serving both the commercial, institutional and general copier
after-markets through authorized and independent dealers. 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 authorized and independent dealers and other
distributors. Sel-Drum purchases its generic toner almost exclusively from
Densigraphix. The terms and conditions under which such purchases are made have
been reviewed by the Board of Directors to ensure that these terms and
conditions are fair and at least as advantageous as those Sel-Drum could have
obtained if it has dealt at arms' length with a third party.
The Company distributes high mortality copier parts from customer
service centers located throughout North America, and to a limited extent in
Europe and the Asia-Pacific region. In the immediate future, the Company intends
to focus its efforts on developing its sales of toner in the US markets building
on the synergies deriving from its strategic alliance with Densigraphix.
Already, prior to the transaction, Densigraphix was a significant distributor of
toner to the reprographics industry. As well, the Company marketed some of the
Densigraphix toners outside of Quebec. Field sales representatives
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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 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. To date, sales outside of North America account for
less than 5% of total sales.
Management believes that this diversity 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. Refurbished cartridges
for the facsimile and printer market were introduced in August 1995. Many of
these products are marketed by the copier dealers already marketing the
Company's products. It is estimated that 75 million cartridges will be sold to
the North American market by all North American distributors in 1999, and
approximately 25 million of these will be re-charged units.
Through its Kelowna Facility, the Company markets refurbished cartridge
products to the industry's dealers, vendors and resellers in North America.
Sales and Marketing
- -------------------
The Company markets and inventories a line of 2,500 high mortality
replacements parts, toner, coin-ops for copier and vending machines,
keycounters, key pads and other related accessories and refurbished facsimile
and printer cartridges. 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.
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 service levels are maintained. Frequent
meetings are conducted with suppliers to provide new product introductions as
well as marketing and sales training.
Sel-Drum warrants its products to its customers. These product
warranties do not represent a material cost to the Company.
Seasonality of Business
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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 governments summer
recess because those institutional customers are significant users of copying
machines producing high volumes of copies and the recurring need for replacement
parts.
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Competition
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Sel-Drum's primary competitors for sales of copier parts and supplies
are other independent distributors and the OEMs. While Sel-Drum 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
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At July 31, 1999, Sel-Drum employed approximately 93 full time employees
located in the United States and Canada up from 68 as at 1998 year-end. The
additional employees were recruited mostly to service the increase in
contractual obligations at the Kelowna Facility. The Company has no employees
represented by unions. The Company believes that its relationship with its
employees is satisfactory.
Forward-Looking Information
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This document contains, and other materials filed or to be filed by the
Company with the Commission which are incorporated by reference herein, as well
as information included in oral statements or other written statements made or
to be made by the Company, contain or will contain or include, disclosures which
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1934, as amended (the "Act"), and Section 21E of the Exchange
Act. Such forward-looking statements address, among other things, strategic
initiatives (including plans for enhancing the Company's business through new
acquisitions, information technology systems, sales strategies, market growth
plans, margin enhancement initiatives, capital expenditures, and financing
sources). Such forward-looking information is based upon management's current
plans or expectations and is subject to a number of uncertainties and risks that
could significantly affect current plans, anticipated actions and the Company's
future financial condition and results. These uncertainties and risks include,
but are not limited to, those relating to successfully managing a program to
acquire and integrate new companies, including technical services risks and
uncertainties relating to conducting operations in a competitive environment;
delays, technological changes, management transitions and employment issues;
debt service requirements (including sensitivity to fluctuation in interest
rates and foreign currency); and general economic conditions. As a consequence,
current plans, anticipated actions and future financial condition and results
may differ from those expressed in any forward-looking statements made by or on
behalf of the Company.
Investment Considerations
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The following factors are important and relevant considerations in
evaluating the business of the Company and a potential investment in the
Company's securities.
Public Market for the Company's Common Stock. The Company's Common Stock
currently trades on the NASD's OTC Bulletin Board. The Company intends to apply
to list the Common Stock on the Nasdaq SmallCap Market or regional or national
exchange, if denied listing on such market. There can be no assurance that a
market for the Common Stock will develop or be sustained. As a result,
purchasers of the Company's securities may have difficulty in selling such
securities should they desire to do so.
Common Stock Eligible for Resale. Of the 7,417,500 shares of Common
Stock presently outstanding, over 7,165,680 shares are "restricted securities"
and under certain circumstances may be sold
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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
securities.
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.
Management Transition; Dependence Upon Key Personnel. The Company's
success will depend in large measure on the efforts of key senior management.
Mr. Camille Cotran became Chief Executive officer of the Company replacing the
Company's founder, Brian F. Turnbull who retired on July 30, 1999. Mr. Raymond
C. Sparks remains as President of the Company. Furthermore, the Company now
benefits from the knowledge and experience of Densigraphix's specialized
personnel. With the alliance with Densigraphix, the Company has therefore become
less dependent on a few individuals.
Management of Change. 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 growth effectively, that would have a material adverse effect on the
Company's financial condition, prospects and operating results.
Potential Unspecified Acquisitions. The Company is currently considering
acquiring other smaller 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 they
occur whether such acquisitions will provide the economies of scale the Company
desires from such candidates.
Competition. The high mortality copier 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. Prior 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 refurbishing 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.
Control by Management. C. Cotran Holding inc., whose sole shareholder is
Camille Cotran, holds approximately 97% of the Common Stock of the Company. As a
result, C. Cotran Holding inc. is in a position to control the 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
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restricting the sale of the Company, causing the Company to engage in
transactions with affiliated companies and controlling the Company's dividend
policy.
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 become unable or unwilling to continue to manufacture the
Company's distributed products that are 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.
ITEM 2. DESCRIPTION OF PROPERTY.
- ---------------------------------
As of July 31, 1999, the Company was utilizing approximately 45,300
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:
ADDRESS PRIMARY USE
501 Amherst Street (1) Registered Headquarters
Buffalo, N.Y. U.S.A. and U.S.A. Distribution
1370 Artisans Court (2) Executive and
Burlington, On. 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
(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 $78,000.
(3) The Kelowna Facility occupies two properties, one owned by a former director
Robert 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 $52,000. The other property is leased by the Company through April
2002 at an annual rent of $22,000.
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ITEM 3. LEGAL PROCEEDINGS.
- ---------------------------
As of July 31, 1999, there are no known material legal proceedings
against the Company or any of its officers and directors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -------------------------------------------------------------
No matters were submitted to a vote of the security holder during the
fourth fiscal quarter of 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------------------------------------------------------------------
The Common Stock of the Company began trading on the OTC Bulletin Board
June 20, 1995 under the symbol "SDUM". The OTC Bulletin Board is an NASD
sponsored and operated inter-dealer automated quotation system for equity
securities not included in the Nasdaq system. The OTC Bulletin Board has only
recently been introduced as an alternative to "pink sheet" trading of
over-the-counter securities. Consequently, the liquidity and stock price of the
Company's securities in the secondary market may be adversely affected. There is
no assurance that a regular trading market will develop for any of the Company's
securities or that, if developed, any such market will be sustained. The range
of high and low bid quotations for the Company's Common Stock for the last two
Fiscal Years were obtained from the NASD and are provided below. The volume of
trading in the Company's Common Stock has been limited and the bid prices
reported may not be indicative of the value of the Common Stock or the existence
of an active trading market.
<TABLE>
<CAPTION>
COMMON STOCK PRICE
First Quarter Second Quarter Third Quarter Fourth Quarter
High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal $0.375 $0.375 $0.375 $0.375 $0.375 $0.375 $0.375 $0.315
1999
Fiscal $0.125 $0.0625 $0.50 $0.07 $0.53125 $0.375 $0.87 $0.3125
1998
</TABLE>
On October 15, 1999 there were approximately 359 holders of record of
the Company's common stock. The number of shares outstanding was 7,417,500.
The Company has not paid a dividend with respect to its Common Stock nor
does the Company anticipate paying dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
- --------------------------------------------------------------------
The Company markets and distributes a line of 2,500 high mortality
replacement parts, Drums, toner, facsimile and printer cartridges. The
replacement parts are principally manufactured in Japan and Germany, many
exclusively to the Company's specifications. Facsimile and printer cartridges
are manufactured for the Company for distribution to the copier dealer market in
North America by its Kelowna Facility.
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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.
During Fiscal 1999, the Company discontinued its drum operations at its
Kelowna Facility. Information relating to the discontinued operations for the
years ended July 31, 1999 and 1998 have been shown separately but 1997 and 1996
have not been restated.
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>
Years Ended
-----------
Statement of Operations Data 1999 1998 1997
- ---------------------------- ---- ---- ----
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
As a Percentage of Net Sales:
Cost of Goods Sold 72.1% 69.8% 70.3%
Gross Profit 27.9% 30.2% 29.7%
Selling, General and Administrative Expenses 22.6% 22.1% 19.5%
Provision for Bad Debt .9% .2% .5%
Income from Operations 4.4% 7.8% 9.7%
Other Income (Expense) (.4)% (.7)% (.7)%
Income from continuing operations before Taxes 4.0% 7.1% 9.0%
Net Income from continuing operations 2.4% 4.2% 5.8%
Discontinued operations (2.7)% (.5)% -
Net Income (.3)% 3.7% 5.8%
===== ==== ====
</TABLE>
YEAR ENDED 1999 COMPARED TO YEAR ENDED 1998
- -------------------------------------------
Net sales for the year ended July 31, 1999 were stable at $14.6 million
as compared with $14.1 million for the year ended July 31, 1998. The flatness in
sales is the result of the following factors:
- General Economic Conditions. To a certain extent the Company's business
is counter cyclical. Purchasers of copier, facsimile and printer high
mortality replacement parts tend to eschew such purchases in favor of
new machine purchases during favorable economic periods. Parts dealers
consequently do not require as high order volume and companies such as
Sel-Drum experience lower purchase volumes (and therefore lower
revenues) from dealers. The Company experienced this trend to a certain
degree during Fiscal 1999.
10
<PAGE> 12
- Movement toward Digital. The movement away from analogue technology
toward a digital technology within the copier, facsimile and printer
replacement part marketplace created new copier, facsimile and printer
products which did not have an immediate need for replacement parts.
- Competition. In the last twelve months the industry has witnessed a
consolidation process within the dealers network as well as the
introduction of more aggressive programs by the Office Equipment
Manufacturers. These two factors account for a more competitive market
which impacts on sales.
However, for the year to come, the Company anticipates that the
strategic alliance with Densigraphix will open up U.S. markets for sales of
toner products. As a result, the Company foresees a possible increase in sales
for Fiscal 2000, although no assurance can be given that this will occur.
The Company's distribution centers in Burlington, Ontario (Canada) and
Buffalo, New York (USA) showed gross profit margins during the fiscal year ended
July 31, 1999 on a combined basis of 29%. The margins at the Company's Kelowna
Facility, showed a gross profit in absolute dollars of approximately $200,000
compared to a negative margin of approximately $60,000 for Fiscal 1998 as a
result of the Company using the Kelowna Facility to remanufacture cartridges
instead of relying upon third party suppliers as was done historically.
Gross profit margin for the year ended July 31, 1999 was 27.9%, as
compared to 30.2% for Fiscal 1998. The decrease in gross margin is the result of
the negative impact of the exchange rate between the Canadian and the U.S.
dollars in the first two quarters as well as the increased competitiveness of
the market previously mentioned.
Selling, general, and administrative expenses for the year ended July
31, 1999 increased 6.4% from the prior comparable period. The increase resulted
from sales salaries due to some addition to the sales force, as well as
increased professional fees incurred in the acquisitions research process and in
work on special corporate projects.
As a result of the foregoing, net income from continuing operations was
$344,141 for Fiscal 1999, a decrease of $248,630 in absolute dollars from the
previous year. In addition during the year, the Company decided to discontinue
its drum recoating division in Kelowna because of the historic losses and
decrease in sales. As a result, a non-recurring loss net of taxes of $394,006
was recorded, bringing the results for Fiscal 1999 to a net loss of $49,865. The
abandonment of the business segment has been accounted for as discontinued
operations and, accordingly the results of operations have been excluded from
continuing operations for Fiscal 1999 and 1998.
YEAR 2000 COMPLIANCE ISSUES
- ---------------------------
An issue affecting the Company and others is the inability of many
computer systems and applications to process the year 2000 date change and the
leap year 2000. Many currently installed computer systems and software
applications are coded to accept only two digit entries in the date code field.
These date code fields will need to accept entries to distinguish 21st century
dates from 20th century dates. The inability to recognize or properly treat the
year 2000 may cause our systems and applications to process critical financial
and operational information incorrectly.
11
<PAGE> 13
The Company has invested approximately $177,000 to change its computer
system in order to be year 2000 compliant. An amount of $149,000 has been
capitalized and the Company expects to be within its budget of $200,000 by the
time the implementation is completed in connection with hardware and software
upgrades relative to the establishment of an integrated data system.
INTERNAL SYSTEMS
After evaluating the Company's internal computer systems, it was
decided to change the whole system in order to be year 2000 compliant.
The Company is now in the final phase of implementing it's new
computer system which is certified by the supplier to be year 2000
compliant.
OUTSIDE VENDORS AND CUSTOMERS
Disruptions with respect to the computer systems of vendors or
customers, which are outside the Company's control, could impair the
Company's ability to obtain products and services or conduct business
with our customers.
The Company has sent year 2000 issue questionnaires to its
significant suppliers. Although the responses received do not indicate
any significant year 2000 issues, there is no assurances that all
significant suppliers and customers will take the necessary steps to
ensure that their respective systems will be protected against the year
2000 issue or that even if such steps are taken, they will be
successful.
PRODUCTS
The products and services offered by the Company are year 2000
compliant and will accommodate the year 2000 date change.
SUMMARY
There is no assurance that any year 2000 issue - related
precautions with respect to internal information technology systems or
products will eliminate the numerous and varied risks associated with
the year 2000 date change.
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 showed an improvement for the year ended July 31, 1999 at $783,590
compared to $462,587 for the previous year. The non-recurring loss on
discontinued operations did not have an impact on the working capital. 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
12
<PAGE> 14
customers are generally on a letter of credit basis. Due to the Company's
expansion strategy, 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 amount of $2,463,460 (U.S.). These borrowings
generally assist the Company with funding of accounts receivable and inventory
purchases.
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. The Company has invested approximately $149,000 to change its
computer system in order to be year 2000 compliant.
During Fiscal 1999, the Company repurchased treasury stock for an amount
of $100,000. In addition, 245,000 common shares, held by a key employee under a
common stock repurchase and non-competition agreement, were sold to a major
shareholder, thereby relieving the Company of its stock repurchase and
non-competition obligations.
There was a change in the ownership of the Company as at July 30, 1999,
and as a result, the Company expects that its financing structure might be
reorganized in Fiscal 2000 according to the terms of financing included in the
offer of financing by the National Bank of Canada.
Risks
- -----
Sel-Drum faces the financial risks inherent to the nature of its
activities. The Company also faces risks stemming from other factors such as
fluctuations in exchange rates and economic market conditions in general.
YEAR ENDED 1998 RESTATED COMPARED TO YEAR ENDED 1997
- ----------------------------------------------------
Net sales for the year ended July 31, 1998 were $14.1 million as
compared with $16.6 million for the year ended July 31, 1997, a decrease of
15.4%. The decrease in net sales is principally the result of the following
factors:
- Lingering Effects of Two Potential Acquisitions of the Company During
Fiscal 1997 and early Fiscal 1998. Prior to refocusing its efforts on
its core business, the Company engaged in discussions with two
potential acquirors. Employee morale and retention suffered as a
result of this prior strategy and the Company lost several sales
personnel which adversely affected sales for the first half of Fiscal
1998. Management spent much of the first half of Fiscal 1998 focusing
on employee productivity and retention.
- General Economic Conditions. To a certain extent the Company's
business is counter cyclical. Purchasers of copier, facsimile and
printer high mortality replacement parts tend to eschew such
purchases in favor of new machine purchases during favorable economic
periods. Parts dealers consequently do not require as high order
volume and Company's such as Sel-Drum experience lower purchase
volumes (and therefore lower revenues) from dealers. The Company
experienced this trend to a certain degree, particularly during the
third and fourth quarters of Fiscal 1998.
- Management Transition. As previously disclosed, the Company spent
much of Fiscal 1998 reorganizing management, including restructuring
its sales and marketing staffs. This
13
<PAGE> 15
restructuring diverted some of management's attention and contributed
to a drop in sales.
- Movement toward Digital. The movement away from analogue technology
toward a digital technology within the copier, facsimile and printer
replacement part marketplace created new copier, facsimile and
printer products which did not have an immediate need for replacement
parts.
The Company's distribution centers in Burlington, Ontario (Canada) and
Buffalo, New York (USA) showed profit margins during the fiscal year ended July
31, 1998 on a combined basis of 30%. The Company's Kelowna Facility, however,
recorded a loss in absolute dollars of approximately $150,000 as a result of
limited remanufacturing production of Drums and the partial conversion of the
Kelowna Facility to cartridge remanufacturing.
Gross profit margin for the year ended July 31, 1998 was 30.2%, as
compared to 29.7% for Fiscal 1997. As disclosed above, gross profit margins
reflect an increase in profit 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, 1998 decreased 4.0% from the prior comparable period. The decrease resulted
from lower sales commission due to lower sales volumes and the restatement of
the costs of goods sold.
As a result of the foregoing, net income fell by 36.2% from Fiscal 1997
to Fiscal 1998.
ITEM 7. FINANCIAL STATEMENTS.
- ------------------------------
<PAGE> 16
SEL-DRUM INTERNATIONAL, INC.
AND SUBSIDIARIES
AUDITED CONSOLIDATED
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
JULY 31, 1999 AND 1998
F - 1
<PAGE> 17
CONTENTS
--------
<TABLE>
<CAPTION>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS PAGE
- ----------------------------------------- ----
<S> <C>
Independent Auditors' Report F -3
Consolidated Balance Sheet F -4
Consolidated Statements of Operations F -6
Consolidated Statements of Comprehensive Operations F -8
Consolidated Statements of Changes in Shareholders' Equity F -9
Consolidated Statements of Cash Flows F -11
Notes to Consolidated Financial Statements F -13
</TABLE>
F-2
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
----------------------------
Shareholders and Board of Directors
Sel-Drum International, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Sel-Drum
International, Inc. and Subsidiaries as of July 31, 1999, and the related
consolidated statements of operations, comprehensive operations, changes in
shareholders' equity and cash flows for each of the two years in the period
ended July 31, 1999. 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 consolidated 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, 1999, and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended July 31, 1999, in conformity with
generally accepted accounting principles.
/s/ Mengel, Metzger, Barr & Co. LLP
Rochester, New York
September 24, 1999
F-3
<PAGE> 19
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
JULY 31, 1999
-------------
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS
- --------------
Cash and cash equivalents $ 202,965
Accounts receivable, net of allowance for doubtful
accounts of $100,000 1,877,050
Inventories 3,007,597
Refundable income taxes 49,027
Deferred income taxes 38,000
Other current assets 101,710
-----------
TOTAL CURRENT ASSETS 5,276,349
PROPERTY
- --------
Equipment 989,118
Vehicles 13,922
Furniture and fixtures 80,050
Leasehold improvements 412,109
-----------
1,495,199
Less accumulated depreciation and amortization 930,822
-----------
564,377
OTHER ASSETS
- ------------
Non-competition agreement, net of
accumulated amortization of $18,702 24,936
Sundry, principally deposits 11,885
-----------
36,821
-----------
$ 5,877,547
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 20
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C>
CURRENT LIABILITIES
- -------------------
Current portion of long-term debt $ 31,827
Accounts payable 404,162
Other current liabilities 321,878
-----------
TOTAL CURRENT LIABILITIES 757,867
SHAREHOLDERS' EQUITY
- --------------------
Common stock 76,425
Additional paid-in capital 706,846
Preferred stock 4,499,805
Retained earnings 211,222
Accumulated other comprehensive loss (274,618)
-----------
5,219,680
Less: Common stock in treasury, at cost 100,000
-----------
5,119,680
-----------
$ 5,877,547
===========
</TABLE>
F-5
<PAGE> 21
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Year ended July 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 14,631,235 $ 14,066,426
Cost of goods sold 10,555,266 9,824,694
------------ ------------
GROSS PROFIT 4,075,969 4,241,732
Selling, administrative and general
expenses 3,305,529 3,107,659
Bad debts 130,326 34,533
------------ ------------
INCOME FROM OPERATIONS 640,114 1,099,540
Other income (expense):
Interest income 1,325 17,303
Interest expense (53,706) (75,289)
Loss on disposal of property (2,241) --
Foreign currency transaction loss (9,465) (46,310)
------------ ------------
(64,087) (104,296)
------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 576,027 995,244
Income tax expense (benefit):
Current 235,886 393,469
Deferred (4,000) 9,004
------------ ------------
231,886 402,473
------------ ------------
NET INCOME FROM CONTINUING OPERATIONS 344,141 592,771
Discontinued operations:
Loss from operations of drum recoating division
(net of income tax benefit of $13,222 in 1999
and $50,845 in 1998) (19,833) (76,267)
Write-off of assets related to drum recoating division
(net of income tax benefit of $49,725) (374,173) --
------------ ------------
(394,006) (76,267)
------------ ------------
NET (LOSS) INCOME $ (49,865) $ 516,504
============ ============
</TABLE>
F-6
<PAGE> 22
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS, Cont'd
---------------------------------------------
<TABLE>
<CAPTION>
Year ended July 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net (loss) income per common share:
Basic and diluted:
Continuing operations $ 0.04 $ 0.08
Discontinued operations:
Loss from operations -- (0.01)
Write-off of assets (0.05) --
------------ ------------
NET (LOSS) INCOME PER COMMON SHARE $ (0.01) $ 0.07
============ ============
Weighted average:
Common shares 7,542,158 7,642,500
Dilutive stock options -- --
------------ ------------
COMMON SHARES AND DILUTIVE STOCK OPTIONS 7,542,158 7,642,500
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 23
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
---------------------------------------------------
Year ended July 31,
----------------------
1999 1998
--------- ---------
Net (loss) income $ (49,865) $ 516,504
Other comprehensive income (loss):
Foreign currency translation adjustment 25 (161,332)
--------- ---------
COMPREHENSIVE (LOSS) INCOME $ (49,840) $ 355,172
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE> 24
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
<TABLE>
<CAPTION>
(Accumulated
Additional deficit)
Common paid-in Preferred retained
stock capital stock earnings
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance at
August 1, 1997 $ 76,425 $ 706,846 $ 4,800,180 $ (255,417)
Net income for the year -- -- -- 516,504
Current year other comprehensive loss -- -- -- --
Repurchase of 172 shares of Class C
preferred stock and 241 shares of Class D
preferred stock -- -- (300,375) --
345,000 common shares subject to
"put rights", at $.50 per share -- -- -- --
--------------- --------------- --------------- ---------------
BALANCE AT
JULY 31, 1998 76,425 706,846 4,499,805 261,087
Net loss for the year -- -- -- (49,865)
Current year other comprehensive income -- -- -- --
Repurchase of 100,000 common shares
subject to "put rights" at $.50 per share -- -- -- --
Reversal of balance of common shares
previously subject to "put rights", resulting
from third party transaction, as described
in Note H -- -- -- --
Repurchase of 125,000 common shares
at $.40 per share -- -- -- --
--------------- --------------- --------------- ---------------
BALANCE AT
JULY 31, 1999 $ 76,425 $ 706,846 $ 4,499,805 $ 211,222
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE> 25
<TABLE>
<CAPTION>
Accumulated Common Common
other stock, stock Total
comprehensive subject to in treasury - shareholders'
loss "put rights" at cost equity
----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance at
August 1, 1997 $ (113,311) $ -- $ -- $ 5,214,723
Net income for the year -- -- -- 516,504
Current year other comprehensive loss (161,332) -- -- (161,332)
Repurchase of 172 shares of Class C
preferred stock and 241 shares of Class D
preferred stock -- -- -- (300,375)
345,000 common shares subject to
"put rights", at $.50 per share -- (172,500) -- (172,500)
--------------- --------------- --------------- ---------------
BALANCE AT
JULY 31, 1998 (274,643) (172,500) -- 5,097,020
Net loss for the year -- -- -- (49,865)
Current year other comprehensive income 25 -- -- 25
Repurchase of 100,000 common shares
subject to "put rights" at $.50 per share -- 50,000 (50,000) --
Reversal of balance of common shares
previously subject to "put rights", resulting
from third party transaction, as described
in Note H -- 122,500 -- 122,500
Repurchase of 125,000 common shares
at $.40 per share
-- -- (50,000) (50,000)
--------------- --------------- --------------- ---------------
BALANCE AT
JULY 31, 1999 $ (274,618) $ -- $ (100,000) $ 5,119,680
=============== =============== =============== ===============
</TABLE>
F-10
<PAGE> 26
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year ended July 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
- ---------------------------------
Net (loss) income $ (49,865) $ 516,504
Adjustments to reconcile net (loss) income to net cash provided
from operating activities:
Bad debts 130,326 34,533
Depreciation and amortization 167,867 208,189
Deferred income taxes (53,913) 9,004
Loss on disposal of property 2,241 --
Write-off of assets related to drum recoating division 423,898 --
Changes in certain assets and liabilities affecting operations:
Accounts receivable (180,484) 269,731
Inventories 364,073 (432,582)
Refundable income taxes 72,124 (85,457)
Other current assets 6,120 (31,736)
Deposits (74) 5,768
Accounts payable (285,034) 90,507
Other current liabilities 186,311 (121,874)
----------- -----------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 783,590 462,587
CASH FLOWS - INVESTING ACTIVITIES
- ---------------------------------
Purchases of property (205,026) (146,422)
Proceeds on disposal of property 2,312 --
----------- -----------
NET CASH (USED FOR)
INVESTING ACTIVITIES (202,714) (146,422)
CASH FLOWS - FINANCING ACTIVITIES
- ---------------------------------
(Decrease) increase in bank overdraft (315,284) 329,443
Decrease (increase) in loans receivable from related parties 160,084 (56,810)
Short-term repayments, net (310,043) (1,014,616)
Repayments on long-term debt (98,439) (65,254)
Repurchase of preferred stock -- (300,375)
Purchase of treasury stock (100,000) --
----------- -----------
NET CASH (USED FOR)
FINANCING ACTIVITIES (663,682) (1,107,612)
Effect of exchange rate changes on cash 21 (7,757)
----------- -----------
NET (DECREASE) IN
CASH AND CASH EQUIVALENTS (82,785) (799,204)
Cash and cash equivalents at beginning of year 285,750 1,084,954
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 202,965 $ 285,750
=========== ===========
</TABLE>
F-11
<PAGE> 27
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS, Cont'd
---------------------------------------------
<TABLE>
<CAPTION>
Year ended July 31,
----------------------------------
1999 1998
---------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
<S> <C> <C>
Interest $ 53,706 $ 68,928
========== =========
Income taxes $ 150,536 $ 425,486
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-12
<PAGE> 28
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
------------------------------------------
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
Description of business
-----------------------
In March 1998, Sel-Drum International, Inc. (the "Company") was
re-incorporated in New York State. The Company, which is a holding company,
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).
Sel-Drum Corporation (U.S.A.), Inc. operates from a warehouse located in
Buffalo, New York. Sel-Drum Corporation's facility for its wholesale
distribution operations, which includes warehouse space and administrative
offices, is located in Burlington, Ontario, Canada. Sel-Drum Corporation
also has a manufacturing facility and administrative offices in Kelowna,
British Columbia, Canada.
Sel-Drum Corporation (U.S.A), Inc. and the Burlington division of Sel-Drum
Corporation are engaged in the wholesale distribution of parts and supplies
used in the reprographic industry. The Kelowna division of Sel-Drum
Corporation is engaged in the re-manufacture of cartridges used in laser
printers and facsimile machines. The Kelowna division of Sel-Drum
Corporation discontinued the commercial production and distribution of
photocopier drums used in duplicating machinery as of January 1999. The
financial impact of the discontinued segment is detailed in Note L.
The Company grants credit to customers which are located throughout the
United States and Canada, and arranges for letters of credit and sight
drafts with international customers.
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, 1999, there was no excess cash
invested in these term deposit accounts.
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 approximately $40,000 ($60,000 Canadian). Uninsured
balances aggregated approximately $272,500 at July 31, 1999. The Company
has not experienced any losses in such accounts and believes that there is
no exposure to significant credit risk in this regard.
Inventories
-----------
Inventories are valued at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market.
F-13
<PAGE> 29
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
------------------------------------------
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
- ----------------------------------------------------------------------------
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:
Equipment 5 - 10 Years
Vehicles 5 Years
Furniture and fixtures 5 Years
Leasehold improvements 10 Years
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.
Non-competition agreement
-------------------------
The non-competition agreement is being amortized on a straight-line basis
over 42 months through July 31, 2001.
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 statements of operations
items are translated at weighted average exchange rates. The resulting
translation adjustments are made directly to accumulated other
comprehensive loss. 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 operations.
Change in ownership
-------------------
On July 30, 1999, 7,173,680 shares of the issued and outstanding common
stock of Sel-Drum International, Inc. were acquired by C. Cotran Holding,
Inc. (a Canadian holding company). Further, on July 30, 1999, 100% of the
issued and outstanding preferred shares of Sel-Drum Imaging Corporation
(Class C and Class D) were acquired by Densigraphix Kopi, Inc. (a
wholly-owned subsidiary of C. Cotran Holding, Inc.).
Revenue recognition
-------------------
Revenue is recognized by the Company when products are shipped to
unaffiliated customers, with appropriate provision for uncollectible
accounts.
Advertising costs
-----------------
The Company's policy is to expense advertising costs as incurred.
Advertising costs for the fiscal years ended July 31, 1999 and 1998
approximated $104,000 and $85,000, respectively.
F-14
<PAGE> 30
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
------------------------------------------
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 E.
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 value of financial instruments
-----------------------------------
Statement of Financial Accounting Standards Number 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 accompanying consolidated balance sheet for cash, accounts
receivable, accounts payable and other current liabilities approximate fair
value because of the short maturity period of those instruments.
Stock options
-------------
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Number 123 (SFAS 123) "Accounting for
Stock-Based Compensation". This statement established accounting and
reporting standards for stock-based employee compensation plans. As
permitted by the Statement, the Company continues to account for such
arrangements under Accounting Principles Board Opinion Number 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, no compensation expense is recognized for stock-option grants
because the exercise price of the stock options equals the market price of
the underlying stock on the date of grant.
Net (loss) income
-----------------
Basic net (loss) income per common share is determined by dividing net
(loss) income by the weighted average number of common shares outstanding.
As of July 31, 1999 and 1998 there are no dilutive potential common shares.
F-15
<PAGE> 31
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
------------------------------------------
NOTE B: INVENTORIES
- --------------------
The components of inventories at July 31, 1999 are as follows:
Raw materials $ 115,521
Finished goods 2,892,076
$3,007,597
NOTE C: NOTES PAYABLE TO BANK
- -------------------------------
Sel-Drum Corporation has several debt arrangements with a Canadian bank,
summarized as follows:
FACILITY A: $2,463,460 revolving demand loan ($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 6.25% at July 31,
1999). This arrangement may be drawn upon by Sel-Drum Corporation and
Sel-Drum Corporation (U.S.A.), Inc. Letters of credit (see Facility B
below), which reduce the amount of borrowings available under the terms
of the arrangement, were outstanding at July 31, 1999 in an amount of
$127,500.
FACILITY B: This arrangement provides the Company with letters of credit
to purchase inventories, up to an amount approximating $998,700
($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.
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.
FACILITY E: $233,030 ($350,000 Canadian dollars) facility to provide for
the purchase of up to $1,165,150 ($1,750,000 Canadian dollars) of forward
exchange contracts in various foreign currencies. Borrowings are subject
to the outstanding balance of Facility A cited above. At July 31, 1999,
the Company had outstanding forward exchange contracts aggregating
$750,000, which reduced the availability for borrowing under Facility A
by $150,000.
At July 31, 1999 the Company had $2,185,960 available for borrowing under
these arrangements.
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 Corp., each
in the amount of $2,330,300 ($3,500,000 Canadian dollars), and the limited
corporate guarantee of Sel-Drum Corporation (U.S.A.), Inc. in the amount of
$998,700 ($1,500,000 Canadian dollars). Further, the arrangements contain
various covenants which provide for, among other things, the maintenance of
certain ratios and dividend restrictions.
F-16
<PAGE> 32
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
------------------------------------------
NOTE D: DEBT
- -------------
Debt at July 31, 1999 is summarized as follows:
<TABLE>
<S> <C>
Interest free loan payable to Western Economic Diversification Fund,
due in monthly payments of approximately $4,550 through
February 2000. $ 31,827
Less: Current portion of long-term debt 31,827
--------
$ -
========
</TABLE>
NOTE E: INCOME TAXES
- ----------------------
The total tax provisions are different from the amount that would have been
recorded by applying the U.S. statutory federal income tax rate to income
before income taxes. The reconciliation of these differences is as follows:
<TABLE>
<CAPTION>
July 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Statutory U.S. tax rate 34.0 % 34.0 %
State income taxes, net of federal tax benefit 2.0 2.0
Other 4.3 4.4
EFFECTIVE TAX RATE 40.3 % 40.4 %
======== ========
</TABLE>
The tax effects of temporary differences that give rise to the current
deferred tax asset as of July 31, 1999 are presented below:
Assets/
(Liability)
------------
Allowance for doubtful accounts receivable $ 24,000
Capitalization of overhead costs under Section 263A 14,000
Depreciation - continuing operations (90,000)
Depreciation - discontinued operations 118,300
------------
66,300
Less valuation allowance 28,300
------------
$ 38,000
============
There was no valuation allowance at July 31, 1998.
F-17
<PAGE> 33
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
------------------------------------------
NOTE F: COMMON AND PREFERRED STOCK
The following is certain information regarding common and preferred stock
as of July 31, 1999:
<TABLE>
<CAPTION>
Sel-Drum International, Inc.
----------------------------
<S> <C>
Preferred Stock
---------------
Par value $0.01
Shares authorized 10,000,000
Shares issued and outstanding None
Common stock
------------
Par value $0.01
Shares authorized 100,000,000
Shares issued 7,642,500
Shares held in treasury 225,000
Sel-Drum Imaging Corporation
----------------------------
Preferred Stock
---------------
Class A (5% non-cumulative):
Par value None
Stated value $727.30
Shares authorized 2,000
Shares issued and outstanding None
Class B (5% non-cumulative):
Par value
Stated value None
Shares authorized $727.30
Shares issued and outstanding 5,000
None
Class C (5% non-cumulative):
Par value None
Stated value $727.30
Shares authorized 10,000
Shares issued and outstanding 1,588
Class D (5% non-cumulative):
Par value None
Stated value $727.30
Shares authorized 10,000
Shares issued and outstanding 4,599
</TABLE>
F-18
<PAGE> 34
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
------------------------------------------
NOTE G: COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Lease commitments
-----------------
Sel-Drum Corporation leases its facility in Burlington, Ontario, Canada at
a base monthly rental approximating $6,470 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 also leases two facilities in Kelowna, British
Columbia, Canada. The base monthly rental on one facility is approximately
$4,300 per month through the expiration of the lease in July 2001. The base
monthly rental on its other facility is approximately $1,530 per month
through the expiration of the lease in April 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 facility at a base monthly
rental approximating $3,200 through the expiration of the lease in October
2001. The base monthly rental includes property taxes.
Total rent expense for the Company's facilities was $208,969 and $209,821
for the years ended July 31, 1999 and 1998, respectively.
In addition, the Company has operating lease agreements for certain
vehicles and equipment, which expire in various years through 2002.
Total minimum future rental payments required under all non-cancelable
leases are approximately as follows:
Year ending July 31, Amount
-------------------- ----------------
2000 $ 202,500
2001 198,700
2002 66,300
---------
$ 467,500
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, Vice President - Sales and
Vice President - Finance of Sel-Drum International, Inc. These contracts
provide for minimum annual salaries plus bonuses.
F-19
<PAGE> 35
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
------------------------------------------
NOTE H: COMMON STOCK REPURCHASE AND NON-COMPETITION AGREEMENT
- --------------------------------------------------------------
On February 1, 1998, the Company entered into a common stock repurchase and
non-competition agreement with a key employee ("Seller") who owned 345,000
shares of the Company's common stock. The agreement provided that the
Company would be obligated to repurchase 100% of this common stock from the
Seller at various times through August 1, 2000 for $1.00 per share. The
agreement also allowed the Seller to sell the shares to a third-party if
the Seller so desired. In the event that a third-party were to purchase
such shares from the Seller, the Company's obligation to the Seller would
be reduced accordingly. On August 1, 1998, the Company acquired 100,000
shares of common stock from the seller for $100,000. Of this amount,
$50,000 was allocated to the fair market value of the stock and $50,000 was
allocated to a non-competition agreement (which included $43,638 for the
non-competition agreement itself, and $6,362 of accrued interest). On July
30, 1999, the seller sold his remaining 245,000 shares of common stock to a
then major shareholder of the Company for $1 per share, thereby relieving
the Company of its obligation to repurchase such shares from the Seller.
Accounting standards under rules and regulations issued by the Securities
and Exchange Commission require that common stock subject to "put rights"
(which are exercisable under certain circumstances pursuant to the
above-cited common stock repurchase agreement) be presented separately from
common stock which is not subject to "put rights" in order to distinguish
it from permanent capital. At February 1, 1998, management determined that
the Company's common stock had a fair market value of $.50 per share.
Accordingly, the Company had recorded a liability of $172,500 to the
above-cited Seller (345,000 shares x $.50 per share) in the Company's
consolidated balance sheet at July 31, 1998 and reduced shareholders'
equity by a similar amount. As a result of the acquisition of the Seller's
outstanding stock during fiscal 1999, there were no remaining common shares
subject to "put rights" at July 31, 1999.
As part of the original common stock repurchase agreement, the Company also
entered into a non-competition agreement with the Seller for a period which
the Company expected to last through August 1, 2002. As a result of the
entire purchase of the Seller's outstanding common stock (as cited above),
the non-competition agreement will expire on July 31, 2001. The Company
expected to pay a total of $172,500 to the Seller for this non-competition
agreement and, accordingly, recorded an asset and corresponding liability
of $147,050 on February 1, 1998 (the original date of the agreement) to
reflect the then present value of the expected payments to be made under
the agreement. However, the Company was only required to pay $43,638 for
the non-competition agreement (on August 1, 1998, as described above) and
has no additional liability to the Seller for such agreement. Accordingly,
the remaining asset and liability previously cited have been eliminated
during the year ended July 31, 1999.
F-20
<PAGE> 36
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
------------------------------------------
NOTE I: STOCK OPTION PLANS
- ---------------------------
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 originally provided 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. On December 1, 1998, the Company's shareholders
approved an amendment to the Plan to increase the number of shares
available for option grants under the Plan to 700,000 shares. 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. Stock option grants generally have a
contractual life of ten years and vest over a period of two years from the
grant date.
On November 3, 1997, the Company granted a non-incentive stock option to
the President of the Company to purchase 250,000 shares of the Company's
common stock. The exercise price for the shares subject to this option was
equal to the fair market value of the common stock on the date of the
grant. This option has a contractual life of five years and vested 100% at
the grant date.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Weighted-
Shares average
subject exercise
to options price
---------------- ----------------
<S> <C> <C>
Outstanding at July 31, 1998 741,000 $ 0.47
Granted 40,000 $ 0.50
Forfeited (81,500) $ 0.50
--------
Outstanding at July 31, 1999 699,500 $ 0.46
========
Exercisable at July 31, 1999 563,000 $ 0.46
========
Exercisable at July 31, 1998 413,666 $ 0.44
========
</TABLE>
F-21
<PAGE> 37
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
------------------------------------------
NOTE I: STOCK OPTION PLANS, Cont'd
The following table summarizes information about stock options outstanding
at July 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
-------------------------------------------------------- ------------------------------------
Weighted-
Weighted- average Weighted-
average remaining average
Exercise Shares exercise contractual Shares exercise
price subject to price life in subject to price
per share options per share years options per share
----------------- ----------------- ----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$ .40 250,000 $ .40 3.3 250,000 $ .40
$ .50 449,500 $ .50 8.8 313,000 $ .50
-------- --------
699,500 $ .46 6.8 563,000 $ .46
======== ========
</TABLE>
Pro forma information regarding net (loss) income and basic and diluted net
(loss) income per share is required by SFAS No. 123, and has been
determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement. This disclosure may not be
representative of the effects on reported pro forma net (loss) income and
basic and diluted net (loss) income per share for future years, because of
the various vesting schedules of the stock options and the fact that
additional awards may be made in the future. The Company's pro forma net
(loss) income and basic and diluted net (loss) income per share are as
follows:
<TABLE>
<CAPTION>
Year ended July 31,
----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Pro forma net (loss) income $ (62,555) $ 490,780
========== =========
Pro forma basic net (loss) income per share $ (0.01) $ 0.06
========== =========
Pro forma diluted net (loss) income per share $ (0.01) $ 0.06
========== =========
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of a stock
option is amortized to expense over the option's vesting period. The fair
value of these stock options was estimated at the date of grant using facts
and circumstances available to the Company for its common stock, which is
thinly traded.
NOTE J: MAJOR CUSTOMER
For the year ended July 31, 1999, approximately 24% of net sales were made
to one customer. At July 31, 1999 total amounts due from this customer of
approximately $609,000 are included in accounts receivable, as reflected in
the accompanying consolidated balance sheet.
F-22
<PAGE> 38
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
------------------------------------------
NOTE K: SEGMENT FINANCIAL INFORMATION
- --------------------------------------
On July 31, 1998, the Company adopted SFAS Number 131, "Disclosure About
Segments of an Enterprise and Related Information". This statement
establishes standards for reporting information about operating segments
and related disclosures about products and services and geographic areas.
The Company's two business segments, as further described in Note A, are
wholesale distribution and manufacturing. The reportable segments are each
managed separately because they offer and provide different products and
services.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies (see Note A).
The Company evaluates segment performance and allocates resources based on
profit and loss from operations before income taxes. Identifiable assets
are those directly used in the operations of each segment.
The wholesale distribution segment's activities are carried on in the
United States and Canada. The manufacturing segment operates exclusively at
the Company's British Columbia, Canada location.
For the year ended July 31, 1998, gross profit attributable to the
Company's operations in Canada is net of gross loss of $62,385 incurred by
the Company's manufacturing operation in British Columbia, Canada.
The following tables present sales and other financial information by
geographic region and business segment for the years ended July 31, 1999
and July 31, 1998:
<TABLE>
<CAPTION>
United States Canada Eliminations Consolidated
----------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
July 31, 1999:
--------------
Sales to unaffiliated customers $ 8,550,672 $6,080,563 $ - $14,631,235
Intercompany sales 1,980,590 3,088,095 (5,068,685) -
Gross profit 2,737,534 1,444,349 (105,914) 4,075,969
Operating earnings 385,105 255,009 - 640,114
Identifiable assets 3,043,658 2,808,953 - 5,852,611
Capital expenditures 5,778 199,248 - 205,026
Depreciation and amortization 51,605 83,876 - 135,481
July 31, 1998:
--------------
Sales to unaffiliated customers $ 9,622,758 $4,443,668 $ - $14,066,426
Intercompany sales 1,185,694 3,209,806 (4,395,500) -
Gross profit 3,188,299 1,053,433 - 4,241,732
Operating earnings 1,113,583 (14,043) - 1,099,540
Identifiable assets 3,312,930 3,102,971 - 6,415,901
Capital expenditures 14,749 131,673 - 146,422
Depreciation and amortization 67,109 39,925 - 107,034
</TABLE>
F-23
<PAGE> 39
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
------------------------------------------
NOTE K: SEGMENT FINANCIAL INFORMATION, Cont'd
- ---------------------------------------
<TABLE>
<CAPTION>
Year ended July 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales:
- ----------
Wholesale distribution $ 13,132,839 $ 13,737,970
Manufacturing 1,498,396 328,456
------------ ------------
$ 14,631,235 $ 14,066,426
============ ============
Gross profit (loss):
- --------------------
Wholesale distribution $ 3,848,302 $ 4,304,117
Manufacturing 227,667 (62,385)
------------ ------------
$ 4,075,969 $ 4,241,732
============ ============
Operating earnings (loss):
- --------------------------
Wholesale distribution $ 588,981 $ 1,237,632
Manufacturing 51,133 (138,092)
------------ ------------
$ 640,114 $ 1,099,540
============ ============
Tangible assets:
- ----------------
Wholesale distribution $ 5,332,161 $ 5,310,649
Manufacturing 520,450 1,105,252
------------ ------------
Total identifiable assets 5,852,611 6,415,901
Discontinued operations -- 456,284
Non-competition agreement, net 24,936 130,711
------------ ------------
$ 5,877,547 $ 7,002,896
============ ============
Capital expenditures:
- ---------------------
Wholesale distribution $ 173,343 $ 95,423
Manufacturing 31,683 50,999
------------ ------------
$ 205,026 $ 146,422
============ ============
Depreciation and amortization:
- ------------------------------
Wholesale distribution $ 75,447 $ 93,121
Manufacturing 60,034 13,913
------------ ------------
135,481 107,034
Discontinued operations 32,386 101,155
------------ ------------
$ 167,867 $ 208,189
============ ============
</TABLE>
F-24
<PAGE> 40
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
------------------------------------------
NOTE L: DISCONTINUED OPERATIONS
During fiscal 1999, the Company discontinued its commercial production and
distribution of photocopier drums used in duplicating machinery. The
abandonment of this business segment has been accounted for as a
discontinued operation and, accordingly, the results of operations have
been excluded from continuing operations for this business segment in the
accompanying consolidated statements of operations for all periods
presented. Information relating to the discontinued operations of the
business segment for the years ended July 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net sales $ 48,266 $ 265,146
Cost of goods sold 75,635 331,137
---------- ----------
GROSS LOSS (27,369) (65,991)
Selling, administrative and general expenses 5,686 61,121
---------- ----------
Loss before income taxes (33,055) (127,112)
Income tax benefit 13,222 50,845
---------- ----------
NET LOSS $ (19,833) $ (76,267)
========== ==========
</TABLE>
The above-cited business segment ceased accepting new business during
January 1999 and, accordingly, the assets used in the commercial production
and distribution of photocopier drums were written down to their estimated
net realizable value as of January 31, 1999. The charge to discontinued
operations had no effect on the cash flow of the Company and increased net
loss per common share for fiscal 1999 by $.05. The write-off of
identifiable assets used in the production of the photocopier drums is as
follows:
Inventories $ 85,902
Equipment, net of accumulated depreciation of $255,109 292,744
Purchased and developed technology, net of accumulated
amortization of $40,443 39,117
Organization costs, net of accumulated amortization of $6,346 6,135
--------
423,898
Less income tax benefit 49,725
--------
$374,173
========
F-25
<PAGE> 41
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1999 AND 1998
------------------------------------------
NOTE M: IMPACT OF YEAR 2000 (UNAUDITED)
Like other companies, Sel-Drum International, Inc. and Subsidiaries could
be adversely affected if the computer systems of the Companies or their
suppliers or customers do not properly process and calculate date-related
information and data from the period surrounding and including January 1,
2000. This is commonly known as the "Year 2000" issue. Additionally, this
issue could impact non-computer systems and devices such as equipment and
security systems. The Companies have implemented a plan to modify their
business technologies to be ready for the Year 2000 and are in the process
of converting critical data processing systems. The project is expected to
be substantially completed by October 1999. However, at this time, because
of the complexities involved in the issue, management cannot provide
absolute assurance that the Year 2000 issue will not have an impact on the
consolidated company operations.
F-26
<PAGE> 42
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
None
PART III
The information required by Item 9 (Directors, Executive Officers,
Promoters and Control Person; Compliance with Section 16(a) of the Exchange
Act), Item 10 (Executive Compensation). Item 11 (Security Ownership of Certain
Beneficial Owners and Management), and Item 12 (Certain Relationships and
Related Transactions) are incorporated herein by reference to the Company's
Proxy Statement to be issued in connection with the Annual Meeting of
Shareholders to be held on January, 17, 2000, which proxy statement will be
filed within 120 days after the Company's July 31, 1999 fiscal year end.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
- --------------------------------------------------
(a) See Index to Exhibits
(b) Reports on Form 8-K
Report on Form 8-K dated July 6, 1999 reporting on Item 5. Other was
filed during the quarter ended July 31, 1999, and a related Report on Form 8-K
dated July 30, 1999 reporting on Item 1. Changes in Control of Registrant was
filed on August 12, 1999. Financial statements were not filed with either
report.
15
<PAGE> 43
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SEL-DRUM INTERNATIONAL, INC.
Dated: October 29, 1999 By: /s/ Camille Cotran
----------------------------------------
Camille Cotran, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature and Title Date
------------------- ----
/s/ Camille Cotran October 29, 1999
- -----------------------------------
Camille Cotran, Director
/s/ John Brohman October 29, 1999
- -----------------------------------
John Brohman, Director
Louise Vaillancourt-Chatillon October 29, 1999
- -----------------------------------
Louise Vaillancourt-Chatillon,
Director and Secretary
John C. Hall October 29, 1999
- -----------------------------------
John C. Hall
Vice President - Finance
(Principal Accounting Officer)
16
<PAGE> 44
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION
Not applicable.
(3) (a) ARTICLES OF INCORPORATION
Articles of Incorporation are incorporated herein by
reference to Exhibit 3.1 to the Registrant's Form 10-KSB
filed for the fiscal year ended July 31, 1996.
(b) BY-LAWS
By-laws are incorporated herein by reference to Exhibit 3.2
to the Registrant's Form 10-KSB filed for the fiscal year
ended July 31, 1996.
(4) INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS, INCLUDING INDENTURES
(a) The documents listed under Item (3) of this Index are
incorporated herein by reference.
(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 C.
Sparks is incorporated herein by reference to Exhibit
10(a) to the Company's Form 10-QSB for the quarter
ended January 31, 1998.
(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) 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).
(d) Stock Sale and Purchase Agreement among the Selling
Shareholders of Sel-Drum International, Inc. and
Densigraphix Kopi inc. and C. Cotran Holding inc.
dated July 30, 1999 is incorporated herein by
reference to Exhibit 2.1 to the Company's Report on
Form 8-K dated July 30, 1999.
<PAGE> 45
*(e) Offering Letter by the National Bank of Canada to
Sel-Drum International, Inc. is included herein as
Exhibit 10 (e).
(11) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Computation can be clearly determined from the Financial Statements and
Notes thereto included herein.
(13) ANNUAL OR QUARTERLY REPORTS, FORM 10-Q AND FORM 10-QSB
Not applicable.
(16) LETTER ON CHANGE IN CERTIFYING ACCOUNTANT
Not applicable.
(18) LETTER ON CHANGE IN ACCOUNTING PRINCIPLES
Not applicable.
*(21) SUBSIDIARIES OF THE REGISTRANT
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE
Not applicable.
*(23) CONSENT OF EXPERTS AND COUNSEL
Consent of Mengel, Metzger, Barr & Co. LLP is included herein as
Exhibit 23.1
(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
<PAGE> 1
Exhibit 10(e)
[NATIONAL BANK OF CANADA LETTERHEAD]
July 19th, 1999
Mr. Camille Cotran, President
C. COTRAN HOLDING INC.
220 Industrial Boulevard
Boucherville (Quebec)
J4B 2X4
Re: Global Financing in the Amount of $6,000,000.00 CDN
for the Acquisition of Sel-Drum International Inc.
Dear Sir:
We are pleased to inform you that National Bank of Canada (the "Bank") agrees to
make available a global financing in the amount of $6,000,000.00 CDN for the
proposed acquisition of 97% of the outstanding shares of Sel-Drum International
Inc.
This global financing is made available through the following companies:
(a) C. COTRAN HOLDING INC.:
$2,750,000.00 CDN by way of a Term Loan of $750,000.00, a Mezzanine
Financing of $2,000,000.00 and a Bridge Loan of $1,500,000.00. The terms and
conditions of these loans are set forth in the Offer made to C. COTRAN
HOLDING INC. and attached to this letter as Schedule A.
(b) DENSIGRAPHIX KOPI INC.:
$3,250,000.00 CDN by way of an Operating Line of Credit of $3,000,000.00 and
a Term Loan of $250,000.00. The terms and conditions of these loans are set
forth in the Offer made to DENSIGRAPHIX KOPI INC. and attached to this
letter as Schedule B.
(c) SEL-DRUM CORPORATION:
$4,700,000.00 CDN by way of an Operating Line of Credit of $4,200,00.00 and
a Term Loan of $500,000.00. The terms and conditions of these loans are set
forth in the Offer made to SEL-DRUM CORPORATION and attached to this letter
as Schedule C. (The financing of SEL-DRUM CORPORATION will be available
after the acquisition of the shares.)
<PAGE> 2
These three offers should be accepted together and it will not be possible to
separate them.
If you should accept this letter and the offers hereto attached, please indicate
your acceptance thereof by signing and initialing each page of the attached
offers and returning same to the attention of Mr. Michel Gendron, Vice-President
or Suzanne Werbiski, Account Manager, before 5:00 PM, on July 24th, 1999,
failing which the Bank, at its discretion, reserves the right to cancel and/or
modify the Offers, without notice.
Once this Offer has been accepted, we will ask our legal advisors to draw up the
applicable security documents in accordance with standards acceptable to the
Bank.
We hope that our financial support will continue to contribute to your group's
development.
NATIONAL BANK OF CANADA
Per: /s/ Michel Gendron Per:
---------------------------------- -----------------------------------
Michel Gendron Suzanne Werbiski
Vice-President Account Manager
ACCEPTANCE
The undersigned hereby declares and confirms having taken cognizance of this
letter and the attached Offers and accepts all their terms, conditions and
obligations.
Executed at Boucherville, Province of Quebec, this 23rd day of July, 1999.
C. COTRAN HOLDING INC.
Per: /s/ Camille Cotran
----------------------------------
Camille Cotran
President
<PAGE> 3
SCHEDULE A
July 19th, 1999
C. COTRAN HOLDING INC.
220 Industriel Boulevard
Boucherville (Quebec)
J4B 2X4
TO THE ATTENTION OF MR CAMILLE COTRAN, PRESIDENT
RE: OFFER OF FINANCING
Dear Sir:
As indicated in the Transmission Letter to which this offer is attached,
National Bank of Canada (the "Bank") agrees to make available to C. COTRAN
HOLDING INC. (the "Borrower") the following credits in Canadian Dollars,
subject to the terms and conditions set forth herein:
1. CREDIT A - TERM LOAN
1.1 AMOUNT
The Bank, subject to the terms and conditions hereof, agrees to make
available to the Borrower a term loan in the amount of $750,000.00 in
Canadian Dollars.
1.2 TERM
This loan is granted for a term of five (5) years effective as of the
date of its disbursement.
1.3 INTEREST RATE
At the option of the Borrower, this loan shall bear interest at the
Bank's canadian prime rate plus 1.50% per year (Floating Rate) or at
the Rate Offered by the Bank plus 2.75% per year (fixed rate) with
interest at the same rate on all amounts in arrears. Interests shall be
payable monthly on the 26th day of each month.
<PAGE> 4
OFFER OF FINANCING Page 2
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1.4 DISBURSEMENT
The Borrower shall use the present term loan by way of a single
disbursement to be made prior to October 31st, 1999. Thereafter, the
Bank reserves the right to discontinue making advances under the said
financing.
1.5 REPAYMENT TERMS AND CONDITIONS
This loan shall be repaid on the basis of an amortization period of ten
(10) years in sixty (60) equal and consecutive monthly instalments of
$6,250.00 in principal, payable on the first day of each of each month,
the first of such instalments to become due and payable on the first
month following the date of the disbursement. The balance of principal,
interests, fees, accessories and all other sums that may be due to the
Bank under the present loan shall be repaid on the date of the last
instalment without further notice.
1.6 PREPAYMENTS
The Borrower may, at any time, prepay in whole or in part, the floating
rate term loan upon payment of a penalty equal to three (3) months of
interest on the principal amount prepaid. Partial prepayments will be
applied in reverse order of scheduled repayment.
The Borrower, if the fixed rate is chosen, may not prepay all or part
of the term loan provided for herein.
2. CREDIT B - MEZZANINE FINANCING
2.1 AMOUNT
The Bank, subject to the terms and conditions hereof, agrees to make
available to the Borrower a mezzanine financing in the amount of
$2,000,000.00 in Canadian Dollars.
2.2 TERM
This loan is granted for a term of three (3) years effective as of the
date of its disbursement.
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C. COTRAN HOLDING INC.
<PAGE> 5
OFFER OF FINANCING Page 3
================================================================================
2.3 INTEREST RATE
At the option of the Borrower to be exercised before the disbursement,
this loan shall bear interest at the Bank's Canadian Prime Rate plus
3.00% per year (floating rate) or at the rate offered by the Bank plus
4.25% per year (fixed rate) with interest at the same rate on all
amounts in arrears. Interests shall be payable monthly on the 26th day
of each month.
In addition to the rate referred to above, and at the same time, the
Borrower shall pay to the Bank thirty-six (36) consecutive and equal
monthly bonus interest payments of $8,000.00.
2.4 DISBURSEMENT
The Borrower shall use the present term loan by way of a single
disbursement to be made prior to October 31st, 1999. Thereafter, the
Bank reserves the right to discontinue making advances under the said
financing.
2.5 REPAYMENT TERMS AND CONDITIONS
This loan shall be repaid on the basis of an amortization period of
five (5) years in thirty-six (36) equal and consecutive monthly
instalments of $33,500.00 in principal, payable on the first day of
each month, the first of such instalments to become due and payable the
first month following the date of the disbursement. The balance of
principal, interests, fees, accessories and all other sums that may be
due to the Bank under the present loan shall be repaid on the date of
the last instalment without further notice.
2.6 PREPAYMENTS
The Borrower may, at any time, prepay in whole or in part, the floating
rate term loan upon payment of a penalty equal to three (3) months of
interest on the principal amount prepaid.
In addition to the penalty, should this loan be prepaid in full, the
Borrower will pay the Bank the net present value (NPV) of all future
bonus interest payments to be calculated at the rate of 8%.
The Borrower, if the fixed rate is chosen, may not prepay all or part
of the term loan provided for herein.
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C. COTRAN HOLDING INC.
<PAGE> 6
OFFER OF FINANCING Page 4
================================================================================
3. CREDIT C - BRIDGE LOAN
3.1 AMOUNT
The Bank, subject to the terms and conditions hereof, agrees to make
available to the Borrower a Bridge loan in the amount of $1,500,000.00
in Canadian Dollars.
3.2 TERM
This loan is granted for a maximum term of sixty (60) days effective as
of the date of its disbursement.
3.3 INTEREST RATE
This loan shall bear interest at the Bank's canadian prime rate plus
1.50% per year (Floating Rate) on all amounts in arrears. Interest
shall be payable monthly on the 26th day of each month.
3.4 DISBURSEMENT
The Borrower shall use the present term loan by way of a single
disbursement to be made prior to October 31st, 1999. Thereafter, the
Bank reserves the right to discontinue making advances under the said
financing.
3.5 REPAYMENT TERMS AND CONDITIONS
This loan, the unpaid interest, fees and accessories shall be repaid in
full no later than sixty (60) days following its disbursement with the
net proceed of the financing of Sel-Drum Corporation.
4. SECURITY
To secure the repayment of Credit A, Credit B and Credit C, the payment of
interest, fees and all of the amounts payable thereunder and the performance
of its obligations towards the Bank, the Borrower undertakes to provide to
the Bank the following security, in accordance with the forms in use at the
Bank:
4.1 a first universal hypothec in the amount of $4,250,000.00 on all the
assets, movable and immovable, present and future, with a specific
charge on the properties of the Borrower located at 220 Industriel
Boulevard, Boucherville, province of Quebec, J4B 2X4 (the "Property"),
the rents
================================================================================
C. COTRAN HOLDING INC.
<PAGE> 7
OFFER OF FINANCING Page 5
================================================================================
deriving from the Property and insurance policies securing such rents
(collectively the "Hypothecated property"), including also, without
limitation, an additional hypothec in the amount of $850,000.00 and all
other standard protection clauses in favour of the Bank.
4.2 movable hypothec with delivery (pledge) of all of the shares of
Sel-Drum International Inc. and Densigraphix Kopi Inc. owned or to be
owned by the Borrower under this financing to be released upon
repayment of Credit B.
4.3 a rider designating the Bank as loss payee of the proceeds of all-risk
insurance on the Hypothecated property as security, up to the full
replacement value thereof.
4.4 an unconditional letter of guarantee by Densigraphix Kopi Inc. in the
amount of $4,250,000.00 to be secured by a second ranking universal
hypothec in the amount of $4,250,000.00 on all the assets of
Densigraphix Kopi Inc., movable and immovable, present and future,
including also, without limitation, an additional hypothec in the
amount of $850,000.00 and all other standard protection clauses in
favour of the Bank (subject only to the Bank's first ranking charge
totalling $3,250,000.00 and more fully detailed in the offer addressed
to Densigraphix Kopi Inc. and attached with these presents at the
transmission letter as Schedule B).
4.5 an unconditional letter of guarantee by Sel-Drum Corporation in the
amount of $4,250,000.00 to be secured by a second ranking security
interest in the amount of $4,250,000.00 on all the assets of Sel-Drum
Corporation, movable and immovable, present and future, including also,
without limitation, all other standard protection clauses in favour of
the Bank (subject only the Bank's first ranking charge totalling
$5,250,000.00 and more fully detailed in the offer addressed to
Sel-Drum Corporation and attached with these presents at the
transmission letter as Schedule C) (to be obtained after the
acquisition of the shares);
4.6 an unconditional undertaking by Densigraphix Kopi Inc. and Sel-Drum
International Inc., Sel-Drum Imaging Corporation., Sel-Drum Corporation
and Sel-Drum Corporation (USA) Inc. to advance to the Borrower, on a
monthly basis, sufficient amounts to ensure the proper servicing of the
Borrower long-term debts and interest.
4.7 two life insurance policies or one totaling two million dollars
assigned to National Bank.
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C. COTRAN HOLDING INC.
<PAGE> 8
OFFER OF FINANCING Page 6
================================================================================
5. REPRESENTATIONS AND WARRANTIES
The Borrower, for itself and for the guarantors, represents and warrants to
the Bank that:
5.1 They are duly constituted, registered and organized companies and are
in good standing under the laws governing them, and they have the
powers, permits and licences required to carry on their business and to
own, operate and administer their property.
5.2 There has been no material adverse change in their financial position
since the date of their most recent internal financial statements which
have been provided to the Bank. These statements represent fairly, at
the date they were drawn up, their financial position. The Borrower
does not foresee incurring any significant liabilities which have not
already been disclosed to the Bank.
5.3 They are not a party to any litigation or legal proceedings which could
have a material effect on their financial position or on their ability
to carry on their business.
5.4 They are not in default under the agreements to which they are a party
nor under the legislation and regulations applicable to the conduct of
their business including, without limitation, any environmental
requirements.
5.5 All taxes, assessments, deductions at source, income tax or annuities
for which the payment thereof is guaranteed by prior claim and/or legal
hypothec have been paid by the Borrower without subrogation or
consolidation.
5.6 They have the power to borrow money and give security without any
restriction.
6. CONDITIONS PRECEDENT TO ANY DISBURSEMENT
At the time of the disbursement of the credit facilities, the Borrower shall,
as applicable, provide, execute or perform the following to the satisfaction
of the Bank and its legal advisers:
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C. COTRAN HOLDING INC.
<PAGE> 9
OFFER OF FINANCING Page 7
================================================================================
6.1 REPRESENTATIONS AND WARRANTIES
The representations and warranties contained in the Section entitled
"REPRESENTATIONS AND WARRANTIES" hereof shall continue to be true and
exact and shall survive the execution of this or any subsequent
agreements. No event of default shall have occurred and no other event
shall exist that is likely to materially adversely affect the financial
position of the Borrower or of the guarantors
6.2 DOCUMENTS REQUIRED
The following documents shall be furnished to the Bank in form and
substance satisfactory to it for the Borrower and the Guarantors:
6.2.1 a duly certified copy of the corporate documents and
certificates of good standing and conformity in accordance with
the applicable laws;
6.2.2 a duly certified copy of the borrowing by-laws and the
resolutions of the Board of Directors relating to the authority
to execute these presents and to perform their obligations
hereunder and in virtue of the security documents;
6.2.3 a certificate setting forth the functions and signatures of the
individuals authorized to represent them;
6.2.4 a written opinion, in form and substance acceptable to the Bank
and its legal advisers, from the legal advisers of the Borrower
and of the Guarantors regarding the status and the capacity to
perform the obligations described in this Offer and in virtue of
the security documents;
6.2.5 a copy of the offer to purchase the shares of Sel-Drum
International Inc., which is to be satisfactory to the Bank;
6.2.6 a professional appraisal to be performed by a certified
appraiser acceptable to the Bank outlining the market value of
the immovable property 220 Industriel Boulevard, Boucherville,
province of Quebec, J4B 2X4;
6.2.7 completion to the Bank's satisfaction of questionnaire with
respect to environmental and Year 2000 matters;
================================================================================
C. COTRAN HOLDING INC.
<PAGE> 10
OFFER OF FINANCING Page 8
================================================================================
6.2.8 the instruments or contracts creating the security contemplated
in Section 4 duly executed and duly registered or filed in all
places in Quebec or elsewhere where such registration or filing
is necessary and duly signified or served when such
signification or service is required under the terms thereof;
6.2.9 evidence satisfactory to the Bank that all real estate,
including municipal and school taxes affecting the Property have
been paid in full, without subrogation;
6.2.10 a certified copy of a certificate of location showing the
Property in its present state;
6.2.11 evidence, in form and substance acceptable to the Bank and its
legal advisers, that the property given as security is duly
insured against loss or damage caused by fire and any other
risk;
6.2.12 a written opinion from the Bank's legal advisers regarding the
registration and rank of the security documents provided for in
this Offer;
6.2.13 payment in full of the set-up fees charged by the Bank;
6.2.14 acceptance by Densigraphix Kopi Inc. and Sel-Drum Corporation of
their respective offers; and
6.2.15 any other document that the Bank may reasonably request.
7. OBLIGATIONS OF THE BORROWER
7.1 POSITIVE COVENANTS
Until payment in full of any amount due under the terms of this Offer,
the Borrower shall:
7.1.1 carry on its business in a diligent and continuous manner;
7.1.2 use the proceeds of the financing for the purposes provided for
herein;
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C. COTRAN HOLDING INC.
<PAGE> 11
OFFER OF FINANCING Page 9
================================================================================
7.1.3 at all times, give the Bank's representatives the right to
inspect its establishments and provide access thereto, and
further permit the Bank's representatives to examine its books
of account and other records, and take extracts therefrom and/or
copies thereof;
7.1.4 obtain and maintain in effect the permits and licenses required
to carry on its business;
7.1.5 notify the Bank, without delay, of any event of default or any
event which, following notice or the expiry of a delay, could
constitute an event of default;
7.1.6 punctually pay all taxes, assessments, deductions at source,
income tax or annuities for which the payment thereof is
guaranteed by prior claim and/or legal hypothec, without
subrogation or consolidation;
7.1.7 provide the Bank with monthly prepared financial statements
within forty-five (45) days of the end of each month for
Densigraphix Kopi Inc., Sel-Drum Corporation and Sel-Drum
Corporation (USA) Inc.;
7.1.8 provide the Bank with quaterly consolidated financial statements
within forty-five (45) days of the end of each quarter for C.
Cotran Holdings Inc. and Sel-Drum International Inc.;
7.1.9 provide the Bank with audited financial statements within ninety
(90) days of the end of the fiscal year for C. Cotran Holdings
Inc. (consolidated and non-consolidated), and within one
hundered and twenty (120) days of the end of the fiscal year for
Sel-Drum International Inc. (consolidated) Sel-Drum Imaging
Corporation, Sel-Drum Corporation and Sel-Drum Corporation (USA)
Inc.;
7.1.10 conduct all or the greater part of its business with the Bank;
7.2 NEGATIVE COVENANTS
The Borrower undertakes not to carry out the following transactions or
operations without obtaining the prior written consent from the Bank:
7.2.1 substantially change the nature of its operations or business;
7.2.2 change the voting control of the Borrower, which is directly or
indirectly held by Camille Cotran;
7.2.3 merge with another company, dissolve or wind up the company.
================================================================================
C. COTRAN HOLDING INC.
<PAGE> 12
OFFER OF FINANCING Page 10
================================================================================
7.2.4 create or permit the existence of security on the Hypothecated
property, except for permitted encumbrances;
7.2.5 make an investment or provide financial assistance to its
partners, officers, directors, affiliated entities or any third
party by way of a loan, a guarantee or otherwise, except in the
course of the project submitted to the Bank.
7.3 ENVIRONMENTAL OBLIGATIONS
7.3.1 The Borrower shall comply with the requirements of all
legislative and regulatory environmental provisions (the
"Environmental Requirements") and shall at all times maintain
the authorizations, permits and certificates required under
these provisions.
7.3.2 The Borrower shall immediately notify the Bank of any notice,
order, decree or fine that it may receive or be ordered to pay
relating to Environmental Requirements in connection with its
business or property and in the event of any release or
discovery of any contaminant upon, under or over its property or
any contiguous real property.
7.3.3 At the request and upon the conditions set forth by the Bank,
the Borrower shall, at its own cost, provide the Bank with all
the informations that the Bank may require regarding the
environmental situation of the Borrower. In the event that any
Environmental Requirements are not being respected, the Borrower
shall effect the necessary work to ensure that its business and
property meet the Environmental Requirements within a delay
acceptable to the Bank.
7.3.4 The Borrower undertakes to indemnify the Bank for any damage
which the Bank may suffer or any responsibility which it may
incur as a result of the non-compliance with Environmental
Requirements.
7.3.5 The provisions of and undertakings and indemnification set out
in this Section shall survive the satisfaction and release of
the security for, and payment and satisfaction of the
indebtedness and liability of the Borrower to the Bank pursuant
to the terms hereof.
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C. COTRAN HOLDING INC.
<PAGE> 13
OFFER OF FINANCING Page 11
================================================================================
8. DEFAULT
8.1 EVENTS OF DEFAULT
The occurrence of one or more of the following events, shall constitute
a default under this Offer:
8.1.1 if the Borrower fails to make a payment, on demand or when due,
of principal under the terms hereof; or
8.1.2 if the Borrower fails to make a payment, when due, of interest,
fees or any other amount which may become due hereunder or under
any of the security documents provided for herein; or
8.1.3 if the Borrower fails to perform or otherwise breaches any
obligation hereunder or pursuant to any of the security
documents provided for herein; or
8.1.4 if the Borrower becomes subject to any of the provisions of the
Bankruptcy and Insolvency Act (Canada) or of any other
bankruptcy, insolvency, proposal or winding up legislation; or
8.1.5 if proceedings are instituted for the Borrower's dissolution,
winding-up or suspension of its operations; including for any
readjustment of the indebtedness of the Borrower; or
8.1.6 if the property of the Borrower or a substantial part thereof
becomes subject to a hypothecary recourse or be subject to a
taking of possession by a creditor or be seized or if a
sequestrator is appointed; or
8.1.7 if the Borrower is in default under any other contracts,
agreements or writings with the Bank or any other financial
institution; or
8.1.8 if any representation or warranty made by the Borrower herein or
in any document or certificate furnished to the Bank in
connection herewith proves to be materially incorrect or
erroneous in an important manner or
8.1.9 if, in the opinion of the Bank,
- there is a deterioration in the Borrower's financial position;
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C. COTRAN HOLDING INC.
<PAGE> 14
OFFER OF FINANCING Page 12
================================================================================
- the Borrower contravenes the provisions, whether of a
legislative, regulatory, administrative or other nature, of
the federal, provincial, municipal or other authorities as
regards environmental pollution, toxic substances or other
causes endangering the environment or public health and safety
or other laws, to which the Borrower's activities and property
are subject.
8.1.10 any default occurs with respect to the terms and conditions of
the Offer of financing made to Densigraphix Kopi Inc. and/or
Sel-Drum Corporation concurrently to this Offer shall also
constitute default under this Offer.
8.2 RIGHTS AND RECOURSE OF THE BANK
Without limiting the Bank's rights hereunder or under the security and
subject to its other rights and recourse in the even of default:
8.2.1 the Bank may declare liquid and exigible all monetary
obligations of the Borrower still outstanding at that time and
claim for the Borrower, with no other notice of default,
immediate payment of the principal, interest, fees and any other
amount, including the fees incurred by the Bank for the
collection and protection of the debt and the execution of any
other obligation of the Borrower;
8.2.2 the Borrower shall lose all its rights and privileges hereunder
including, without limitation, the right to receive additional
advances;
8.2.3 the Bank may charge the Borrower reasonable analysis,
administration and follow-up charges and may also incur and pay
any reasonable amount for services rendered (including the fees
for legal counsel, accountants or any other professional whose
services may be required or deemed necessary) with respect to
the realization, sale, transfer, delivery or payment to be made
in the exercise of any security held by the Bank and may
withhold such charges and fee amounts from the proceeds of the
realization of security;
8.2.4 any amount collected or received by the Bank, including the
balance of any proceeds of the realization on security, may be
withheld by the Bank and may, at the Bank's discretion, be
charged to any portion of the Borrower's indebtedness to the
Bank;
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C. COTRAN HOLDING INC.
<PAGE> 15
OFFER OF FINANCING Page 13
================================================================================
8.2.5 any amount incurred and paid by the Bank to realize, retain or
preserve any security given by the Borrower to the Bank
hereunder or by law, shall bear interest at the Canadian Prime
Rate of the Bank plus 3% per annum until payment of said amount.
8.3 WAIVER, OMISSION AND CUMULATIVE RECOURSE
The Bank may grant delays, accept or waive security, accept
arrangements, grant releases and discharges and transact with the
Borrower as it shall deem acceptable without in any way limiting the
responsibility of the Borrower or infringing on the rights of the Bank
under the security provided for hereunder.
The omission on the part of the Bank to notify the borrower of any
event of default hereunder or to avail itself of any of its rights
hereunder shall not be construed as a waiver by the Bank to take
recourse in the event of such default or to exercise its right.
Acceptance by the Bank following any default by the Borrower of any sum
owing to it or its exercising of any right or recourse shall not
preclude the Bank from exercising any other right or recourse, which it
may have, whether pursuant to any agreement or otherwise provided by
law, said rights and recourses of the Bank being cumulative and not
alternative, and in addition to and not in substitution for, any other
right or recourse of the Bank.
9. MISCELLANEOUS PROVISIONS
9.1 DEFINITIONS
For the purposes hereof, the following words and phrases shall have the
following meaning:
9.1.1 "CANADIAN DOLLARS" "CAN DOLLARS" "CDN$": means lawful money of
Canada.
9.1.2 "CANADIAN PRIME RATE": means the annual variable rate of
interest announced from time to time by the Bank and used to
determine the interest rates on Canadian Dollars commercial
loans granted by the Bank in Canada.
================================================================================
C. COTRAN HOLDING INC.
<PAGE> 16
OFFER OF FINANCING Page 14
================================================================================
9.1.3 "DEBT" OR "TOTAL INDEBTEDNESS" OR "CREDIT FACILITY" OR
"ADVANCES": means the aggregate amount of principal, interest
and accessories due by the Borrower hereunder.
9.1.4 "FLOATING RATE": means the interest rate applicable to floating
rate advances made hereunder in Canadian Dollars.
9.1.5 "NET PRESENT VALUE": means the present value of all future
bonus interest payments as determined given a specific discount
rate. the NPV will be calculated using the following formula:
Px [to the nth power]
-----------------------------------------------
(1+(i divided by 12 months)) [to the nth power]
Where: P = Amount of monthly bonus payments
($8,000 in this case);
n = The number of remaining monthly bonus interest
payments at the time of full prepayment of the
mezzanine financing;
i = The annual rate for the purposes of discounting
(8% in this case).
9.1.6 "PERMITTED ENCUMBRANCES": refers collectively to charges
created by the security document granted from time to time in
virtue of these presents and any other charge which constitutes
a "Permitted Encumbrance", as may be defined in the said
documents.
9.1.7 "RATE OFFERED": means the annual interest rate determined from
time to time by the Bank, for the term chosen by the Borrower,
as being the fixed interest rate applicable to its commercial
fixed rate term loans granted in Canada for the same term.
9.2 ACCOUNTING TERMS
Unless another definition is provided hereunder, each accounting term
used in this Offer shall have the meaning ascribed to it in accordance
with accounting principles generally accepted by the Canadian Institute
of Chartered Accountants.
================================================================================
C. COTRAN HOLDING INC.
<PAGE> 17
OFFER OF FINANCING Page 15
================================================================================
9.3 CURRENCY AND PLACE OF PAYMENT
All amounts due by the Borrower under this offer shall be paid by the
Borrower to the Bank, at the branch of the Bank where the Borrower
operates its bank account, in Canadian Dollars.
9.4 CALCULATION OF INTEREST AND ARREARS
9.4.1 Unless otherwise provided for herein, interest on any amount due
hereunder shall be calculated daily and not in advance on the
basis of a 365-day year.
9.4.2 For the purposes of the Interest Act (Canada) in the case of a
leap year, the annual interest rate corresponding to the
interest calculated on the basis of a 365-day year is equal to
the interest rate thus calculated multiplied by 366 and divided
by 365.
9.4.3 Any amount of principal, interest, commission, discount or of
any other nature remaining unpaid at maturity, shall bear
interest at the rate provided for herein, being understood that
the said interest rate on arrears shall not exceed the maximum
rate provided by law.
9.4.4 Interest on arrears shall be compounded daily and payable on
demand.
9.5 RECORDS
The Bank shall keep records and computerized data evidencing the
transactions performed under this financing. Such records or
computerized data shall be presumed to reflect these transactions and
shall constituted evidenced of the debt due to the Bank.
9.6 ACCOUNT DEBITS
The Borrower irrevocably authorizes the Bank to debit periodically or
from time to time any bank account it may maintain with the Bank in
order to pay all or part of the amounts it may owe to the Bank
hereunder.
9.7 NON-BUSINESS DAYS
Should any payment of capital or interest hereunder become due on a day
which is not a Business Day, the due date thereof shall be extended to
the immediate following Business Day.
================================================================================
C. COTRAN HOLDING INC.
<PAGE> 18
OFFER OF FINANCING Page 16
================================================================================
9.8 INVALIDITY OF ANY PROVISIONS HEREUNDER
Any decision of a court to the effect that any of the provisions
hereunder are null and void or non-executory shall in no way affect,
invalidate or render unenforceable the other provisions hereunder.
9.9 MODIFICATIONS
Any modifications hereto or waiver of a right thereunder is without
effect if it is not expressly made and evidenced in a written document
executed between the parties hereto.
9.10 OTHERS DOCUMENTS
The Borrower shall do all things and sign all documents which may be
deemed necessary or appropriate by the Bank for the purposes of giving
full effect to the terms, conditions, undertakings and security
provided herein.
9.11 FINAL AGREEMENT AND INTERPRETATION
Upon acceptance and execution by the Borrower, this Offer shall
constitute the final agreement between the parties hereto with, the
exception of any further written modification agreed by the parties and
replaces and supersedes any prior agreements verbal or written between
the parties related to the financing described herein.
Notwithstanding the foregoing, this Offer does not create novation and
does not constitute any derogation to the rights, privileges and
remedies of the Bank under the terms of any agreements, promissory
notes and/or any instruments or contracts regarding the facilities or
the security contemplated herein and executed by the Borrower prior to
the date of this Offer. The Borrower represents and warrants that the
rights, privileges and remedies of the Bank under these agreements,
promissory notes and security documents have not been modified and
cover the Borrower's obligations contemplated herein, the whole without
novation.
10. REVIEW
Notwithstanding any provisions to the contrary, the terms and conditions
provided for herein are subject to be reviewed by the Bank on April 30,
2000, based upon the Borrower's financial statements which it shall furnish
the Bank, in accordance with the provisions herein.
================================================================================
C. COTRAN HOLDING INC.
<PAGE> 19
OFFER OF FINANCING Page 17
================================================================================
11. FEES
11.1 Non-refundable set-up fees of $37,500.00 shall be payable by the
Borrower upon acceptance of this Offer.
11.2 The legal fees and expenses relating to this Offer and to the
preparation of the security documents required herein and the
registration, if required, shall be payable by the Borrower in
addition to the fees stipulated hereinabove.
12. ACCESS TO INFORMATION
The Borrower hereby authorizes any personal information agent, financial
institution, creditor, tax authority, employer or any other person,
including any public body, holding information concerning the Borrower or
its property including any financial information or with respect to any
undertaking or surety given by the Borrower in favour of third parties, to
supply such information to the Bank for the purposes of verifying
information provided to the Bank or that will be provided by the Borrower
and to ensure its solvency at all times.
13. NOTICES
Any notice or demand to or upon the respective parties hereto shall be in
writing and shall be validly communicated by the delivery thereof to its
addressee, by a delivery, certified mail, postage prepaid, or by
transmitting the same by fax, to the addressee hereinafter mentioned, or at
such other address as any of the parties hereto may hereafter notify the
other in writing:
NATIONAL BANK OF CANADA
Central Montreal Regional Centre
Bank Tower and North
600, de La Gauchetiere Street West
Ground Floor
Montreal (Quebec)
H3B 4L2
Fax: (514) 394-4144
TO THE ATTENTION OF: Suzanne Werbiski
Account Manager
================================================================================
C. COTRAN HOLDING INC.
<PAGE> 20
OFFER OF FINANCING Page 18
================================================================================
C. COTRAN HOLDING INC.
220 Industriel Boulevard
Boucherville (Quebec)
J4B 2X4
Fax: (450) 641-4332
TO THE ATTENTION OF: Mr Camille Cotran
President
Any such notice or demand sent as aforesaid shall be deemed to have been
received by the party to whom it is addressed upon delivery, if delivered,
and on the actual receipt thereof, if sent by certified mail, and when
transmitted, if sent by fax; provided, however, that in the event normal
mail service or fax service shall be interrupted by strike, "force majeure"
or other cause, then the party sending the notice or demand shall use anyone
of the said services which has not been so interrupted or, failing the
availability of any such service, any other mode of communication which
shall ensure prompt receipt of such notice or demand by the other party.
14. GOVERNING LAW
This Offer shall be construed and interpreted in accordance with the laws of
the Province of Quebec.
15. LANGUAGE (QUEBEC)
The parties declare that they have requested and do hereby confirm their
request that the present Offer and the ancillary documents related thereto
be in English; les parties declarent qu'elles ont exige et par la presente
confirment leur demande que la presente offre ainsi que les documents
connexes soient rediges en anglais.
16. PREPARATION OF LEGAL DOCUMENTATION
Once this Offer has been accepted, we will ask our legal advisers to draw up
the applicable security documents in accordance with standards acceptable to
the Bank.
================================================================================
C. COTRAN HOLDING INC.
<PAGE> 21
OFFER OF FINANCING Page 19
================================================================================
We hope that our financial support will continue to contribute to your company's
development.
Yours truly,
NATIONAL BANK OF CANADA
Per: /s/ Michel Gendron Per:
------------------------------------ ----------------------------------
Michel Gendron Suzanne Werbiski
Vice-president Account Manager
ACCEPTANCE
WE ACCEPT THE TERMS AND CONDITIONS OF YOUR OFFER OF FINANCING.
We, undersigned, hereby authorize the National Bank of Canada to gather any
information relating to our financial situation and/or credit history from any
credit agency and/or financial institution and/or employer and/or person with
whom we have or may have a business relationship with. We also authorize the
National Bank of Canada to release this information to such persons.
The National Bank of Canada may use the information it has obtained to make
decisions regarding any credit facility or any other services made available to
us or to be made available to us.
THIS 23rd day of July 1999.
C. COTRAN HOLDING INC.
Per: /s/ Camille Cotran
------------------------------------
Camille COTRAN
================================================================================
C. COTRAN HOLDING INC.
<PAGE> 22
OFFER OF FINANCING Page 20
================================================================================
GUARANTORS
DENSIGRAPHIX KOPI INC. THIS 23rd day of July 1999.
Per: /s/ Camille Cotran
------------------------------------
and, subject to the conclusion of the contemplated transaction
SEL-DRUM COPRORATION THIS 23rd day of July 1999.
Per: /s/ Camille Cotran
------------------------------------
SEL-DRUM
INTERNATIONAL INC. THIS 23rd day of July 1999.
Per: /s/ Camille Cotran
------------------------------------
SEL-DRUM IMAGING
CORPORATION THIS 23rd day of July 1999.
Per: /s/ Camille Cotran
------------------------------------
================================================================================
C. COTRAN HOLDING INC.
<PAGE> 23
SCHEDULE B
July 19th, 1999
DENSIGRAPHIX KOPI INC.
220 Industriel Boulevard
Boucherville (Quebec)
J4B 2X4
Attention of Mr Camille Cotran, president
- -----------------------------------------
RE: Offer of financing
- -----------------------
Dear Sir:
As indicated in the Transmission Letter to which this offer is attached,
National Bank of Canada (the "Bank") agrees to make available to DENSIGRAPHIX
KOPI INC. (the "Borrower") an Operating Line of Credit in the maximum amount of
$3,000,000.00 in Canadian Dollars and a Term Loan in the amount of $250,000.00
Canadian Dollars, subject to the terms and conditions set forth herein:
1. CREDIT A - OPERATING LINE OF CREDIT
-----------------------------------
1.1 AMOUNT AND PURPOSE
------------------
$3,000,000.00 in Canadian Dollars on a revolving credit to be used to
finance the day-to-day operating purposes and to assist the financing
for the acquisition of the preferred shares of Sel-Drum International
Inc.
1.2 SUB-LIMIT
---------
COMMERCIAL LETTERS OF CREDIT
----------------------------
The Borrower shall be entitled to use its credit for the issuance of
Letters of Credit at sight.
Any request for the issuance of a Letter of credit, which request may
be made at any time by the Borrower, shall be subject to the following
conditions:
<PAGE> 24
Offer of financing Page 2
================================================================================
1.2.1 Written Notice
--------------
A prior written notice of two (2) business days must be given to
the Bank.
1.2.2 Limited Amount
--------------
The total amount of Letters of credit must never exceed 1 500
000,00$ in Canadian dollars or its equivalent in any other
currency acceptable to the Bank.
1.2.3 Maturity Dates
--------------
Letters of credit shall be payable at sight and shall constitute
a utilization of the credit to the extent of their nominal face
value and shall automatically, when paid, become Floating Rate
Advances and shall then bear interest at the interest rate
hereinafter mentioned in paragraph 4.
1.2.4 Commissions
-----------
The Borrower shall pay to the Bank at the date of issuance of any
letter of credit a commission based on the usual scheduled fees
of the Bank.
1.2.5 Conditions
----------
Each letter of credit to be issued shall be covered at 100% of
its value by orders in hand.
1.3 TERM
----
This operating credit may be reviewed from time to time by the Bank and is
repayable on demand.
1.4 MODES OF FINANCING
------------------
Subject to the terms and conditions provided herein, the Borrower may, within
the amount available to it under the present credit, avail itself of Floating
Rate advances in CDN$.
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Densigraphix Kopi Inc.
<PAGE> 25
Offer of financing Page 3
================================================================================
1.5 INTEREST RATE
-------------
Floating Rate advances shall bear interest, until payment in full, at the
Canadian Prime Rate of the Bank plus 0.50% with interest at the same rate on any
amount in arrears. Interest shall be payable monthly on the 26th day of each
month.
1.6 ADVANCES AND REPAYMENT
----------------------
The Borrower may draw upon the amount made available to it by virtue of these
presents, at any time during the term of the credit, by satisfying the terms and
conditions specified herein and subject to the execution of any document that
may reasonably be requested by the Bank in order to give full effect to the
provisions contained herein.
Disbursement and repayment of the operating credit shall be made in multiples of
$25,000.00.
The principal amount of the Floating Rate advances shall be payable on demand.
The Borrower may repay all or part of its Floating Rate advances at any time
during the credit, without penalty.
1.7 FINANCING CONDITIONS
--------------------
The aggregate total amount of advances made by virtue of this credit facility
shall not in any time exceed the value of:
1.7.1 75% of the Borrower's net accounts receivable (excluding contra
or intercompany accounts, accounts of doubtful quality and those
aged 90 days or more); and
1.7.2 50% of the Borrower's inventory (raw material and finished
products) up to a maximum amount of $1,500,000.00.
The value of the Borrower's net accounts receivable and inventory shall be
established, from time to time, by the Bank, taking into account claims ranking
prior to the security of the Bank. The Borrower shall furnish to the Bank, on
the 20th day of each month, a detailed list of its accounts receivable according
to age, an inventory declaration on the
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Densigraphix Kopi Inc.
<PAGE> 26
Offer of financing Page 4
================================================================================
standard form of the Bank, and a detailed list of its accounts payable for the
month ending on the last day of the preceding month.
2. CREDIT B - TERM LOAN
--------------------
2.1 AMOUNT
------
The Bank, subject to the terms and conditions hereof, agrees to make
available to the Borrower a term loan in the amount of $250,000.00 in
Canadian Dollars.
2.2 TERM
----
This loan is granted for a term of five (5) years effective as of the
date of its disbursement.
2.3 INTEREST RATE
-------------
At the option of the Borrower, this loan shall bear interest at the
Bank's Canadian Prime Rate plus 1.50% per year (Floating Rate) or at
the Rate Offered by the Bank plus 2.75% per year (fixed rate) with
interest at the same rate on all amounts in arrears. Interest shall be
payable monthly on the 26th day of each month.
2.4 DISBURSEMENT
------------
The Borrower shall use the present term loan by way of a single
disbursement to be made prior to October 31st, 1999. Thereafter, the
Bank reserves the right to discontinue making advances under the said
financing.
2.5 REPAYMENT TERMS AND CONDITIONS
------------------------------
This loan shall be repaid on the basis of an amortization period of
five (5) years in fifty-nine (59) equal and consecutive monthly
instalments of $4,166.67 and a last instalment of $4,166.47 in
principal, payable on the first day of each month, the first of such
instalments to become due and payable the first month following the
date of the disbursement. The balance of principal, interest, fees,
accessories and all other sums that may be due to
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Densigraphix Kopi Inc.
<PAGE> 27
Offer of financing Page 5
================================================================================
the Bank under the present loan shall be repaid on the date of the
last instalment without further notice.
2.6 PREPAYMENTS
-----------
The Borrower may, at any time, prepay in whole or in part, the
floating rate term loan upon payment of a penalty equal to three (3)
months of interests on the principal amount prepaid. Partial
prepayments will be applied in reverse order of scheduled repayment.
The Borrower, if the fixed rate is chosen, may not prepay all or part
of the term loan provided for herein.
3. SECURITY
--------
To secure the repayment of Credit A and Credit B, the payment of interest,
fees and all of the amounts payable thereunder and the performance of its
obligations towards the Bank, the Borrower undertakes to provide to the
Bank the following security, in accordance with the forms in use at the
Bank:
3.1 a first ranking movable hypothec in the amount of $3,000,000.00 on all
the accounts receivable and inventory, present and future, including
also, without limitation, an additional hypothec in the amount of
$600,000.00 and all other standard protection clauses in favour of the
Bank.
3.2 a security in virtue of Section 427 of the Bank Act;
3.3 a movable hypothec with delivery (pledge) of all of the shares of
Sel-Drum Imaging Corporation, owned or to be owned by the Borrower
under this financing.
3.4 a first universal hypothec in the amount of $3,250,000.00 on all the
assets, movable and immovable, present and future (collectively the
"Hypothecated property"), including also, without limitation, an
additional hypothec in the amount of $650,000.00 and all other
standard protection clauses in favour of the Bank (subject only to the
Permitted Encumbrances being the hypothec in favour of the Bank
referred to in paragraph 3.1 hereinabove).
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Densigraphix Kopi Inc.
<PAGE> 28
Offer of financing Page 6
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3.5 an unconditional letter of guarantee in the amount of $3,250,000.00 by
C. Cotran Holdings Inc.
3.6 a rider designating the Bank as loss payee of the proceeds of all-risk
insurance on the Hypothecated property as security, up to the full
replacement value thereof.
4. REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower, for itself and for the guarantor, represents and warrants to
the Bank that:
4.1 They are duly constituted, registered and organized companies and are
in good standing under the laws governing them, and they have the
powers, permits and licences required to carry on their business and
to own, operate and administer their property.
4.2 There has been no material adverse change in their financial position
since the date of their most recent internal financial statements
which have been provided to the Bank. These statements represent
fairly, at the date they were drawn up, their financial position. The
Borrower does not foresee incurring any significant liabilities which
have not already been disclosed to the Bank.
4.3 They are not a party to any litigation or legal proceedings which
could have a material effect on their financial position or on their
ability to carry on their business.
4.4 They are not in default under the agreements to which they are a party
nor under the legislation and regulations applicable to the conduct of
their business including, without limitation, any environmental
requirements.
4.5 All taxes, assessments, deductions at source, income tax or annuities
for which the payment thereof is guaranteed by prior claim and/or
legal hypothec have been paid by the Borrower without subrogation or
consolidation.
4.6 They have the power to borrow money and give security without any
restriction.
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Denisgraphix Kopi Inc.
<PAGE> 29
Offer of financing Page 7
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5. CONDITIONS PRECEDENT TO ANY DISBURSEMENT
----------------------------------------
At the time of the disbursement of the credit facilities, the Borrower
shall, as applicable, provide, execute or perform the following to the
satisfaction of the Bank and its legal advisers:
5.1 Representations and warranties
------------------------------
The representations and warranties contained in the Section entitled
"REPRESENTATIONS AND WARRANTIES" hereof shall continue to be true and
exact and shall survive the execution of this or any subsequent
agreements. No event of default shall have occurred and no other event
shall exist that is likely to materially adversely affect the
financial position of the Borrower or of the guarantors
5.2 Documents required
------------------
The following documents shall be furnished to the Bank in form and
substance satisfactory to it for the Borrower and the Guarantor:
5.2.1 a duly certified copy of the corporate documents and
certificates of good standing and conformity in accordance
with the applicable laws;
5.2.2 a duly certified copy of the borrowing by-laws and the
resolutions of the Board of Directors relating to the
authority to execute these presents and to perform their
obligations hereunder and in virtue of the security
documents;
5.2.3 a certificate setting forth the functions and signatures of
the individuals authorized to represent them;
5.2.4 a written opinion, in form and substance acceptable to the
Bank and its legal advisers, from the legal advisers of the
Borrower and of the Guarantor regarding the status and the
capacity to perform the obligations described in this Offer
and in virtue of the security documents;
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Densigraphix Kopi Inc.
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Offer of financing Page 8
================================================================================
5.2.5 a copy of the offer to purchase for the shares of Sel-Drum
International Inc., which is to be satisfactory to the Bank;
5.2.6 a chartered accountant certificate stating that shareholders
have invested at least $2,500,000.00 Canadian Dollars in the
Borrower without right to be repaid before the Bank except
as required interest payments of up to 12% and until the
Bank has been repaid of Credit B (Mezzanine Financing)
and C (Bridge Loan) made available to C. Cotran Holding
Inc. by virtue of an offer of financing dated July 19,
1999, together with a copy of the Investment Agreement;
5.2.7 completion to the Bank's satisfaction of questionnaire with
respect to environmental and Year 2000 matters;
5.2.8 the instruments or contracts creating the security
contemplated in Section 3 duly executed and duly registered
or filed in all places in Quebec or elsewhere where such
registration or filing is necessary and duly signified or
served when such signification or service is required under
the terms thereof;
5.2.9 evidence satisfactory to the Bank that all real estate,
including municipal and school taxes affecting the
Hypothecated property have been paid in full, without
subrogation;
5.2.10 evidence, in form and substance acceptable to the Bank and
its legal advisers, that the property given as security is
duly insured against loss or damage caused by fire and any
other risk;
5.2.11 a written opinion from the Bank's legal advisers regarding
the registration and rank of the security documents provided
for in this Offer;
5.2.12 payment in full of the set-up fees charged by the Bank;
5.2.13 acceptance by C. Cotran Holdings Inc. and Sel-Drum
Corporation of their respective offers; and
5.2.14 any other document that the Bank may reasonably request.
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Offer of financing Page 9
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6. OBLIGATIONS OF THE BORROWER
---------------------------
6.1 Positive covenants
------------------
Until payment in full of any amount due under the terms of this Offer,
the Borrower shall:
6.1.1 carry on its business in a diligent and continuous manner;
6.1.2 use the proceeds of the financing for the purposes provided
for herein;
6.1.3 at all times, give the Bank's representatives the right to
inspect its establishments and provide access thereto, and
further permit the Bank's representatives to examine its
books of account and other records, and take extracts
therefrom and/or copies thereof;
6.1.4 obtain and maintain in effect the permits and licenses
required to carry on its business;
6.1.5 notify the Bank, without delay, of any event of default or
any event which, following notice or the expiry of a delay,
could constitute an event of default;
6.1.6 punctually pay all taxes, assessments, deductions at source,
income tax or annuities for which the payment thereof is
guaranteed by prior claim and/or legal hypothec, without
subrogation or consolidation;
6.1.7 provide the Bank with monthly prepared financial statements
within forty-five (45) days of the end of each month for
Densigraphix Kopi Inc., Sel-Drum Corporation and Sel-Crum
Corporation (USA) Inc.;
6.1.8 provide the Bank with quaterly consolidated financial
statements within forty-five (45) days of the end of each
quarter for C. Cotran Holdings Inc. and Sel-Drum
International Inc.;
6.1.9 provide the Bank with audited financial statements within
ninety (90) days of the end of the fiscal year for C. Cotran
Holdings Inc. (consolidated and non-consolidated), and
within one hundred and twenty (120) days of the end of the
fiscal year for Sel-Drum International Inc.
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Densigraphix Kopi Inc.
<PAGE> 32
Offer of financing Page 10
================================================================================
(consolidated) Sel-Drum Imaging Corporation, Sel-Drum
Corporation and Sel-Drum Corporation (USA) Inc.;
6.1.10 conduct all or the greater part of its business with the
Bank;
6.2 Negative covenants
------------------
The Borrower undertakes not to carry out the following transactions or
operations without obtaining the prior written consent from the Bank:
6.2.1 substantially change the nature of its operations or
business;
6.2.2 change the voting control of the Borrower, C. Cotran
Holdings Inc. and Sel-Drum International Inc., which is
directly or indirectly held or to be held by Camille Cotran;
6.2.3 merge with another company, dissolve or wind up the company.
6.2.4 create or permit the existence of security on the
Hypothecated property, except for permitted encumbrances;
6.2.5 make an investment or provide financial assistance to its
partners, officers, directors, affiliated entities or any
third party by way of a loan, a guarantee or otherwise,
except in the course of the project submitted to the Bank.
6.3 Environmental obligations
-------------------------
6.3.1 The Borrower shall comply with the requirements of all
legislative and regulatory environmental provisions (the
"Environmental Requirements") and shall at all times
maintain the authorizations, permits and certificates
required under these provisions.
6.3.2 The Borrower shall immediately notify the Bank of any
notice, order, decree or fine that it may receive or be
ordered to pay relating to Environmental Requirements in
connection with its business or property and in the event of
any release or discovery of any contaminant upon, under or
over its property or any contiguous real property.
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Densigraphix Kopi Inc.
<PAGE> 33
Offer of financing Page 11
================================================================================
6.3.3 At the request and upon the conditions set forth by the
Bank, the Borrower shall, at its own cost, provide the Bank
with all the informations that the Bank may require
regarding the environmental situation of the Borrower. In
the event that any Environmental Requirements are not being
respected, the Borrower shall effect the necessary work to
ensure that its business and property meet the Environmental
Requirements within a delay acceptable to the Bank.
6.3.4 The Borrower undertakes to indemnify the Bank for any damage
which the Bank may suffer or any responsibility which it may
incur as a result of the non-compliance with Environmental
Requirements.
6.3.5 The provisions of and undertakings and indemnification set
out in this Section shall survive the satisfaction and
release of the security for, and payment and satisfaction of
the indebtedness and liability of the Borrower to the Bank
pursuant to the terms hereof.
7. DEFAULT
-------
7.1 Events of Default
------------------
The occurrence of one or more of the following events, shall
constitute a default under this Offer:
7.1.1 if the Borrower fails to make a payment, on demand or when
due, of principal under the terms hereof; or
7.1.2 if the Borrower fails to make a payment, when due, of
interest, fees or any other amount which may become due
hereunder or under any of the security documents provided
for herein; or
7.1.3 if the Borrower fails to perform or otherwise breaches any
obligation hereunder or pursuant to any of the security
documents provided for herein; or
7.1.4 if the Borrower becomes subject to any of the provisions of
the Bankruptcy and Insolvency Act (Canada) or of any other
bankruptcy, insolvency, proposal or winding up legislation;
or
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<PAGE> 34
Offer of financing Page 12
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7.1.5 if proceedings are instituted for the Borrower's
dissolution, winding-up or suspension of its operations;
including for any readjustment of the indebtedness of the
Borrower; or
7.1.6 if the property of the Borrower or a substantial part
thereof becomes subject to a hypothecary recourse or be
subject to a taking of possession by a creditor or be seized
or if a sequestrator is appointed; or
7.1.7 if the Borrower is in default under any other contracts,
agreements or writings with the Bank or any other financial
institution; or
7.1.8 if any representation or warranty made by the Borrower
herein or in any document or certificate furnished to the
Bank in connection herewith proves to be materially
incorrect or erroneous in an important manner or
7.1.9 if, in the opinion of the Bank,
- there is a deterioration in the Borrower's financial
position;
- the Borrower contravenes the provisions, whether of a
legislative, regulatory, administrative or other
nature, of the federal, provincial, municipal or other
authorities as regards environmental pollution, toxic
substances or other causes endangering the environment
or public health and safety or other laws, to which the
Borrower's activities and property are subject.
7.1.10 any default occurs with respect to the terms and conditions
of the Offer of financing made to Densigraphix Kopi Inc.
and/or Sel-Drum Corporation concurrently to this Offer shall
also constitute default under this Offer.
7.2 Rights and recourse of the Bank
-------------------------------
Without limiting the Bank's rights hereunder or under the security and
subject to its other rights and recourse in the even of default:
7.2.1 the Bank may declare liquid and exigible all monetary
obligations of the Borrower still outstanding at that time
and claim for the
================================================================================
Densigraphix Kopi Inc.
<PAGE> 35
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================================================================================
Borrower, with no other notice of default, immediate payment
of the principal, interest, fees and any other amount,
including the fees incurred by the Bank for the collection
and protection of the debt and the execution of any other
obligation of the Borrower;
7.2.2 the Borrower shall lose all its rights and privileges
hereunder including, without limitation, the right to
receive additional advances;
7.2.3 the Bank may charge the Borrower reasonable analysis,
administration and follow-up charges and may also incur and
pay any reasonable amount for services rendered (including
the fees for legal counsel, accountants or any other
professional whose services may be required or deemed
necessary) with respect to the realization, sale, transfer,
delivery or payment to be made in the exercise of any
security held by the Bank and may withhold such charges and
fee amounts from the proceeds of the realization of
security;
7.2.4 any amount collected or received by the Bank, including the
balance of any proceeds of the realization on security, may
be withheld by the Bank and may, at the Bank's discretion,
be charged to any portion of the Borrower's indebtedness to
the Bank;
7.2.5 any amount incurred and paid by the Bank to realize, retain
or preserve any security given by the Borrower to the Bank
hereunder or by law, shall bear interest at the Canadian
Prime Rage of the Bank plus 3% per annum until payment of
said amount.
7.3 Waiver, Omission and Cumulative Recourse
----------------------------------------
The Bank may grant delays, accept or waive security, accept
arrangements, grant releases and discharges and transact with the
Borrower as it shall deem acceptable without in any way limiting the
responsibility of the Borrower or infringing on the rights of the Bank
under the security provided for hereunder.
The omission on the part of the Bank to notify the borrower of any
event of default hereunder or to avail itself of any of its rights
hereunder shall not be construed as a waiver by the Bank to take
recourse in the event of such default or to exercise its right.
================================================================================
Densigraphix Kopi Inc.
<PAGE> 36
Offer of financing Page 14
================================================================================
Acceptance by the Bank following any default by the Borrower of
any sum owing to it or its exercising of any right or recourse
shall not preclude the Bank from exercising any other right or
recourse, which it may have, whether pursuant to any agreement
or otherwise provided by law, said rights and recourses of the
Bank being cumulative and not alternative, and in addition to
and not in substitution for, any other right or recourse of the
Bank.
8. MISCELLANEOUS PROVISIONS
------------------------
8.1 Definitions
-----------
For the purposes hereof, the following words and phrases shall have
the following meaning:
8.1.1 "CANADIAN DOLLARS" "CAN DOLLARS" "CDN$": means lawful money
of Canada.
8.1.2 "CANADIAN PRIME RATE": means the annual variable rate of
interest announced from time to time by the Bank and used to
determine the interest rates on Canadian Dollars commercial
loans granted by the Bank in Canada.
8.1.3 "DEBT" OR "TOTAL INDEBTEDNESS" OR "CREDIT FACILITY" OR
"ADVANCES": means the aggregate amount of principal,
interest and accessories due by the Borrower hereunder.
8.1.4 "FLOATING RATE": means the interest rate applicable to
floating rate advances made hereunder in Canadian Dollars.
8.1.5 "PERMITTED ENCUMBRANCES": refers collectively to charges
created by the security document granted from time to time
in virtue of these presents and any other charge which
constitutes a "Permitted Encumbrance", as may be defined in
the said documents.
8.1.6 "RATE OFFERED": means the annual interest rate determined
from time to time by the Bank, for the term chosen by the
Borrower, as
================================================================================
Densigraphix Kopi Inc.
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Offer of financing Page 15
================================================================================
being the fixed interest rate applicable to its commercial
fixed rate term loans granted in Canada for the same term.
8.2 Accounting terms
----------------
Unless another definition is provided hereunder, each accounting term
used in this Offer shall have the meaning ascribed to it in accordance
with accounting principles generally accepted by the Canadian
Institute of Chartered Accountants.
8.3 Currency and place of payment
-----------------------------
All amounts due by the Borrower under this offer shall be paid by the
Borrower to the Bank, at the branch of the Bank where the Borrower
operates its bank account, in Canadian Dollars.
8.4 Calculation of interest and arrears
-----------------------------------
8.4.1 Unless otherwise provided for herein, interest on any amount
due hereunder shall be calculated daily and not in advance
on the basis of a 365-day year.
8.4.2 For the purposes of the Interest Act (Canada) in the case of
a leap year, the annual interest rate corresponding to the
interest calculated on the basis of a 365-day year is equal
to the interest rate thus calculated multiplied by 366 and
divided by 365.
8.4.3 Any amount of principal, interest, commission, discount or
of any other nature remaining unpaid at maturity, shall bear
interest at the rate provided for herein, being understood
that the said interest rate on arrears shall not exceed the
maximum rate provided by law.
8.4.4 Interest on arrears shall be compounded daily and payable on
demand.
8.5 Records
-------
The Bank shall keep records and computerized data evidencing the
transactions performed under this financing. Such records or
computerized
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Densigraphix Kopi Inc.
<PAGE> 38
Offer of financing Page 16
================================================================================
data shall be presumed to reflect these transactions and shall
constituted evidenced of the debt due to the Bank.
8.6 Account debits
--------------
The Borrower irrevocably authorizes the Bank to debit periodically or
from time to time any bank account it may maintain with the Bank in
order to pay all or part of the amounts it may owe to the Bank
hereunder.
8.7 Non-Business Days
-----------------
Should any payment of capital or interest hereunder become due on a
day which is not a Business Day, the due date thereof shall be
extended to the immediate following Business Day.
8.8 Invalidity of any provisions hereunder
--------------------------------------
Any decision of a court to the effect that any of the provisions
hereunder are null and void or non-executory shall in no way affect,
invalidate or render unenforceable the other provisions hereunder.
8.9 Modifications
-------------
Any modifications hereto or waiver of a right thereunder is without
effect if it is not expressly made and evidenced in a written document
executed between the parties hereto.
8.10 Others documents
----------------
The Borrower shall do all things and sign all documents which may be
deemed necessary or appropriate by the Bank for the purposes of giving
full effect to the terms, conditions, undertakings and security
provided herein.
8.11 Final agreement and interpretation
----------------------------------
Upon acceptance and execution by the Borrower, this Offer shall
constitute the final agreement between the parties hereto with, the
exception of any further written modification agreed by the parties
and replaces and supersedes any prior agreements verbal or written
between the parties related to the financing described herein.
================================================================================
Densigraphix Kopi Inc.
<PAGE> 39
Offer of financing Page 17
================================================================================
Notwithstanding the foregoing, this Offer does not create novation and
does not constitute any derogation to the rights, privileges and
remedies of the Bank under the terms of any agreements, promissory
notes and/or any instruments or contracts regarding the facilities or
the security contemplated herein and executed by the Borrower prior to
the date of this Offer. The Borrower represents and warrants that the
rights, privileges and remedies of the Bank under these agreements,
promissory notes and security documents have not been modified and
cover the Borrower's obligations contemplated herein, the whole
without novation.
9. REVIEW
-------
Notwithstanding any provisions to the contrary, the terms and conditions
provided for herein are subject to be reviewed by the Bank on April 30,
2000, based upon the Borrower's financial statements which it shall furnish
the Bank, in accordance with the provisions herein.
Upon review, renewal fees of 0.25% of the amount of the operating line of
credit shall be payable by the Borrower to the Bank.
10. FEES
----
10.1 Non-refundable set-up fees of $17,500.00 shall be payable by the
Borrower upon acceptance of this Offer.
10.2 The legal fees and expenses relating to this Offer and to the
preparation of the security documents required herein and the
registration, if required, shall be payable by the Borrower in
addition to the fees stipulated hereinabove.
11. ACCESS TO INFORMATION
---------------------
The Borrower hereby authorizes any personal information agent, financial
institution, creditor, tax authority, employer or any other person,
including any public body, holding information concerning the Borrower or
its property including any financial information or with respect to any
undertaking or surety given by the Borrower in favour of third parties, to
supply such information to the Bank for the
================================================================================
Densigraphix Kopi Inc.
<PAGE> 40
Offer of financing Page 18
================================================================================
purposes of verifying information provided to the Bank or that will be
provided by the Borrower and to ensure its solvency at all times.
12. NOTICES
-------
Any notice or demand to or upon the respective parties hereto shall be in
writing and shall be validly communicated by the delivery thereof to its
addressee, by a delivery, certified mail, postage prepaid, or by
transmitting the same by fax, to the addressee hereinafter mentioned, or at
such other address as any of the parties hereto may hereafter notify the
other in writing:
NATIONAL BANK OF CANADA
Central Montreal Regional Centre
Bank Tower and North
600, de La Gauchetiere Street West
Ground Floor
Montreal (Quebec)
H3B 4L2
Fax: (514) 394-4144
To the attention of: Suzanne Werbiski
------------------- Account Manager
DENSIGRAPHIX KOPI INC.
220 Industriel Boulevard
Boucherville (Quebec)
J4B 2X4
Fax: (450) 641-4332
To the attention of: Camille Cotran
------------------- President
Any such notice or demand sent as aforesaid shall be deemed to have been
received by the party to whom it is addressed upon delivery, if delivered,
and on the actual receipt thereof, if sent by certified mail, and when
transmitted, if sent by fax;
================================================================================
Densigraphix Kopi Inc.
<PAGE> 41
Offer of financing Page 19
================================================================================
provided, however, that in the event normal mail service or fax service
shall be interrupted by strike, "force majeure" or other cause, then the
party sending the notice or demand shall use anyone of the said services
which has not been so interrupted or, failing the availability of any such
service, any other mode of communication which shall ensure prompt receipt
of such notice or demand by the other party.
13. GOVERNING LAW
-------------
This Offer shall be construed and interpreted in accordance with the laws
of the Province of Quebec.
14. LANGUAGE (QUEBEC)
-----------------
The parties declare that they have requested and do hereby confirm their
request that the present Offer and the ancillary documents related thereto
be in English; les parties declarent qu'elles ont exige et par la presente
confirment leur demande que la presente offre ainsi que les documents
connexes soient rediges en anglais.
15. PREPARATION OF LEGAL DOCUMENTATION
----------------------------------
Once this Offer has been accepted, we will ask our legal advisers to draw
up the applicable security documents in accordance with standards
acceptable to the Bank.
We hope that our financial support will continue to contribute to your company's
development.
Yours truly,
NATIONAL BANK OF CANADA
Per: /s/ Michel Gendron Per:
---------------------------------- ----------------------------
Michel Gendron Suzanne Werbiski
Vice-President Account Manager
================================================================================
Densigraphix Kopi Inc.
<PAGE> 42
Offer of financing Page 20
================================================================================
ACCEPTANCE
WE ACCEPT THE TERMS AND CONDITIONS OF YOUR OFFER OF FINANCING.
We, undersigned, hereby authorize the National Bank of Canada to gather any
information relating to our financial situation and/or credit history from any
credit agency and/or financial institution and/or employer and/or person with
whom we have or may have a business relationship with. We also authorize the
National Bank of Canada to release this information to such persons.
The National Bank of Canada may use the information it has obtained to make
decisions regarding any credit facility or any other services made available to
us or to be made available to us.
THIS 23rd day of July, 1999.
DENSIGRAPHIX KOPI INC.
Per: /s/ Camille Cotran
---------------------------------
Camille Cotran
GUARANTOR
C. COTRAN HOLDING INC.
Per: /s/ Camille Cotran
----------------------------------
Camille Cotran
================================================================================
Densigraphix Kopi Inc.
<PAGE> 43
SCHEDULE C
July 19th, 1999
SEL-DRUM CORPORATION
c/o: C. COTRAN HOLDING INC.
220 Industriel Boulevard
Boucherville (Quebec)
J4B 2X4
Attention of Mr Camille Cotran, president
- -----------------------------------------
RE: Offer of Financing
- ---------------------------
Dear Sir:
As indicated in the Transmission Letter to which this offer is attached,
National Bank of Canada (the "Bank") agrees to make available to SEL-DRUM
CORPORATION (the "Borrower") an Operating Line of Credit in the maximum amount
of $4,200,000.00 in Canadian Dollars and a Term Loan in the amount of
$500,000.00 Canadian Dollars, subject to the terms and conditions set forth
herein:
1. CREDIT A - OPERATING LINE OF CREDIT
-----------------------------------
1.1 AMOUNT AND PURPOSE
------------------
$4,200,000.00 in Canadian Dollars on a revolving credit to be
used to finance the day-to-day operating purposes and to
assist the reimbursement of Credit C made available to C.
COTRAN HOLDING INC. in virtue of the Offer of financing
attached to the Transmission Letter as Schedule A.
1.2 SUB-LIMIT
---------
COMMERCIAL LETTERS OF CREDIT
----------------------------
The Borrower shall be entitled to use its credit for the
issuance of Letters of Credit at sight.
<PAGE> 44
Offer of financing Page 2
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Any request for the issuance of a Letter of credit, which request may
be made at any time by the Borrower, shall be subject to the following
conditions:
1.2.1 Written Notice
--------------
A prior written notice of two (2) business days must be given
to the Bank.
1.2.2 Limited Amount
--------------
The total amount of Letters of credit must never exceed
$1,500,000.00 in Canadian dollars or its equivalent in any
other currency acceptable to the Bank.
1.2.3 Maturity Dates
--------------
Letters of credit shall be payable at sight and shall
constitute a utilization of the credit to the extent of their
nominal face value and shall automatically, when paid, become
Floating Rate Advances and shall then bear interest at the
interest rate hereinafter mentioned in paragraph 4.
1.2.4 Commissions
-----------
The Borrower shall pay to the Bank at the date of issuance of
any letter of credit a commission based on the usual scheduled
fees of the Bank.
1.2.5 Conditions
----------
Each letter of credit to be issued shall be covered at 100% of
its value by orders in hand.
1.3 TERM
----
This operating credit may be reviewed from time to time by the Bank and is
repayable on demand.
===============================================================================
Sel-Drum Corporation
<PAGE> 45
Offer of financing Page 3
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1.4 MODES OF FINANCING
------------------
Subject to the terms and conditions provided herein, the Borrower may,
within the amount available to it under the present credit, avail
itself of Floating Rate advances in CDN$.
1.5 INTEREST RATE
-------------
Floating Rate advances shall bear interest, until payment in full, at
the Canadian Prime Rate of the Bank plus 0.50% with interest at the
same rate on any amount in arrears. Interest and fees shall be payable
monthly on the 26th day of each month.
1.6 ADVANCES AND REPAYMENT
----------------------
The Borrower may draw upon the amount made available to it by virtue of
these presents, at any time during the term of the credit, by
satisfying the terms and conditions specified herein and subject to the
execution of any document that may reasonably be requested by the Bank
in order to give full effect to the provisions contained herein.
Disbursement and repayment of the operating credit shall be made in
multiples of $25,000.00.
The principal amount of the Floating Rate advances shall be payable on
demand.
The Borrower may repay all or part of its Floating Rate advances at any
time during the credit, without penalty.
1.7 FINANCING CONDITIONS
--------------------
The aggregate total amount of advances made by virtue of this credit
facility shall not in any time exceed the value of:
1.7.1 75% of the Borrower's net accounts receivable
(excluding contra or intercompany accounts, accounts
of doubtful quality and those aged 90 days or more);
and
1.7.2 50% of the Borrower's inventory (raw material and
finished products) up to a maximum amount of
$1,500,000.00; and
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Sel-Drum Corporation
<PAGE> 46
Offer of financing Page 4
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1.7.3 the lesser of Sel-Drum Corporation (USA) Inc.'s
corporate guarantee of $2,000,000.00 or 65% of the
equivalent in Canadian Dollars of Sel-Drum
Corporation (USA) Inc.'s net accounts receivable
(excluding contra or intercompany accounts, accounts
of doubtful quality and those aged 90 days or more);
and
1.7.4 50% of the equivalent in Canadian Dollars of Sel-Drum
Corporation (USA) Inc.'s inventory (raw material and
finished products).
The value of the Borrower's and Sel-Drum Corporation (USA) Inc.'s net
accounts receivable and inventory shall be established, from time to
time, by the Bank, taking into account claims ranking prior to the
security of the Bank. The Borrower shall furnish to the Bank, on the
20th day of each month, a detailed list of their accounts receivable
according to age, an inventory declaration on the standard form of the
Bank, and a detailed list of their accounts payable for the month
ending on the last day of the preceding month.
2. CREDIT B - TERM LOAN
--------------------
2.1 AMOUNT
------
The Bank, subject to the terms and conditions hereof, agrees
to make available to the Borrower a term loan in the amount of
$500,000.00 in Canadian Dollars.
2.2 TERM
----
This loan is granted for a term of five (5) years effective as
of the date of its disbursement.
2.3 INTEREST RATE
-------------
At the option of the Borrower, this loan shall bear interest
at the Bank's Canadian Prime Rate plus 1.50% per year
(floating rate) or at the rate offered by the Bank plus 2.75%
per year (fixed rate) with interest at the same rate on all
amounts in arrears. Interest shall be payable monthly on the
26th day of each month.
===============================================================================
Sel-Drum Corporation
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2.4 DISBURSEMENT
------------
The Borrower shall use the present term loan by way of a
single disbursement to be made prior to October 31st, 1999.
Thereafter, the Bank reserves the right to discontinue making
advances under the said financing.
2.5 REPAYMENT TERMS AND CONDITIONS
------------------------------
This loan shall be repaid on the basis of an amortization
period of five (5) years in fifty-nine (59) equal and
consecutive monthly instalments of $8,333.33 and a last
instalment of $8,333.53 in principal, payable on the first day
of each month, the first of such instalments to become due and
payable the first month following the date of the
disbursement. The balance of principal, interest, fees,
accessories and all other sums that may be due to the Bank
under the present loan shall be repaid on the date of the last
instalment without further notice.
2.6 PREPAYMENTS
-----------
The Borrower may, at any time, prepay in whole or in part, the
floating rate term loan upon payment of a penalty equal to
three (3) months of interests on the principal amount prepaid.
Partial prepayments will be applied in reverse order of
Scheduled repayment.
The Borrower, if the fixed rate is chosen, may not prepay all
or part of the term loan provided for herein.
3. SECURITY
--------
To secure the repayment of Credit A and Credit B, the payment of
interest fees and all of the amounts payable thereunder and the
performance of its obligations towards the Bank, the Borrower
undertakes to provide to the Bank the following security, in accordance
with the forms in use at the Bank:
3.1 a first ranking security interst in the amount of
$4,200,000.00 on all the accounts receivable and inventory,
present and future, including also, without limitation, all
other standard protection clauses in favour of the Bank to be
registered in Quebec, Ontario and British Columbia.
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Sel-Drum Corporation
<PAGE> 48
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3.2 a security under of Section 427 of the Bank Act;
3.3 a general assignment of Book Debts;
3.4 a first ranking chattel mortgage and security interest in the
amount of $4,700,000.00 on all the assets, movable and
immovable, present and future (collectively the "Hypothecated
property"), of the Borrower, including also, without
limitation, and all other standard protection clauses in
favour of the Bank (subject only to the Permitted Encumbrances
being the hypothec in favour of the Bank referred to in
paragraph 3.1 hereinabove);
3.5 an unconditional letter of guarantee in the amount of
$2,000,000.00 by Sel-Drum Corporation (USA) Inc. supported by
a first ranking security interest on all assets of Sel-Drum
Corporation (USA) Inc. with UCC filing, including also,
without limitation, all other standard protection clauses in
favour of the Bank.
3.6 a postponement agreement by Sel-Drum Corporation (USA) Inc. on
all the accounts receivable and inventory, present and future,
including also, without limitation, all other standard
protection clauses in favour of the Bank.
3.7 an unconditional letter of guarantee from Sel-Drum
International Inc. and Sel-Drum Imaging Corporation severally
for the amount of $5,000,000.00;
3.8 an unconditional letter of guarantee in the amount of
$5,000,000.00 by C. Cotran Holdings Inc.;
3.9 a rider designating the Bank as loss payee of the proceeds of
all-risk insurance on the Hypothecated property as security,
up to the full replacement value thereof.
4. REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrower, for itself and for the guarantor, represents and warrants
to the Bank that:
4.1 They are duly constituted, registered and organized companies
and are in good standing under the laws governing them, and
they have the powers,
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Sel-Drum Corporation
<PAGE> 49
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===============================================================================
permits and licences required to carry on their business and
to own, operate and administer their property.
4.2 There has been no material adverse change in their financial
position since the date of their most recent internal
financial statements which have been provided to the Bank.
These statements represent fairly, at the date they were drawn
up, their financial position. The Borrower does not foresee
incurring any significant liabilities which have not already
been disclosed to the Bank.
4.3 They are not a party to any litigation or legal proceedings
which could have a material effect on their financial position
or on their ability to carry on their business.
4.4 They are not in default under the agreements to which they are
a party nor under the legislation and regulations applicable
to the conduct of their business including, without
limitation, any environmental requirements.
4.5 All taxes, assessments, deductions at source, income tax or
annuities for which the payment thereof is guaranteed by prior
claim and/or legal hypothec have been paid by the Borrower
without subrogation or consolidation.
4.6 They have the power to borrow money and give security without
any restriction.
5. CONDITIONS PRECEDENT TO ANY DISBURSEMENT
----------------------------------------
At the time of the disbursement of the credit facilities, the Borrower
shall, as applicable, provide, execute or perform the following to the
satisfaction of the Bank and its legal advisers:
5.1 Representations and Warranties
------------------------------
The representations and warranties contained in the Section entitled
"REPRESENTATIONS AND WARRANTIES" hereof shall continue to be true and
exact and shall survive the execution of this or any subsequent
agreements. No event of default shall have occurred and no other event
shall exist that is likely to materially adversely affect the financial
position of the Borrower or of the guarantors
===============================================================================
Sel-Drum Corporation
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5.2 Documents required
------------------
The following documents shall be furnished to the Bank in form
and substance satisfactory to it for the Borrower and the
Guarantors:
5.2.1 a duly certified copy of the corporate documents and
certificates of good standing and conformity in
accordance with the applicable laws;
5.2.2 a duly certified copy of the borrowing by-laws and
the resolutions of the Board of Directors relating to
the authority to execute these presents and to
perform their obligations hereunder and in virtue of
the security documents;
5.2.3 a certificate setting forth the functions and
signatures of the individuals authorized to represent
them;
5.2.4 a written opinion, in form and substance acceptable
to the Bank and its legal advisers, from the legal
advisers of the Borrower and of the Guarantors
regarding the status and the capacity to perform the
obligations described in this Offer and in virtue of
the security documents;
5.2.5 a copy of the offer to purchase for the shares of
Sel-Drum International Inc., which is to be
satisfactory to the Bank;
5.2.6 completion to the Bank's satisfaction of
questionnaire with respect to environmental and Year
2000 matters;
5.2.7 the instruments or contracts creating the security
contemplated in Section 3 duly executed and duly
registered or filed in all places in Quebec or
elsewhere where such registration or filing is
necessary and duly signified or served when such
signification or service is required under the terms
thereof;
5.2.8 evidence satisfactory to the Bank that all real
estate, including municipal and school taxes
affecting the Hypothecated property have been paid in
full, without subrogation;
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Sel-Drum Corporation
<PAGE> 51
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5.2.9 evidence, in form and substance acceptable to the
Bank and its legal advisers, that the property given
as security is duly insured against loss or damage
caused by fire and any other risk;
5.2.10 a written opinion from the Bank's legal advisers
regarding the registration and rank of the security
documents provided for in this Offer;
5.2.11 payment in full of the set-up fees charged by the
Bank;
5.2.12 acceptance by C. Cotran Holdings Inc. and
Densigraphix Kopi Inc. of their respective offers;
and
5.2.13 any other document that the Bank may reasonably
request.
6. OBLIGATIONS OF THE BORROWER
---------------------------
6.1 Positive covenants
------------------
Until payment in full of any amount due under the terms of
this Offer, the Borrower shall:
6.1.1 carry on its business in a diligent and continuous
manner;
6.1.2 use the proceeds of the financing for the purposes
provided for herein;
6.1.3 at all times, give the Bank's representatives the
right to inspect its establishments and provide
access thereto, and further permit the Bank's
representatives to examine its books of account and
other records, and take extracts therefrom and/or
copies thereof;
6.1.4 obtain and maintain in effect the permits and
licenses required to carry on its business;
6.1.5 notify the Bank, without delay, of any event of
default or any event which, following notice or the
expiry of a delay, could constitute an event of
default;
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Sel-Drum Corporation
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6.1.6 punctually pay all taxes, assessments, deductions at
source, income tax or annuities for which the payment
thereof is guaranteed by prior claim and/or legal
hypothec, without subrogation or consolidation;
6.1.7 provide the Bank with monthly prepared financial
statements within forty-five (45) days of the end of
each month for Densigraphix Kopi Inc., Sel-Drum
Corporation and Sel-Crum Corporation (USA) Inc.;
6.1.8 provide the Bank with quaterly consolidated financial
statements within forty-five (45) days of the end of
each quarter for C. Cotran Holdings Inc. and Sel-Drum
International Inc.;
6.1.9 provide the Bank with audited financial statements
within ninety (90) days of the end of the fiscal year
for C. Cotran Holdings Inc. (consolidated and
non-consolidated), and within one hundred and twenty
(120) days of the end of the fiscal year for Sel-Drum
International (consolidated), Sel-Drum Imaging
Corporation, Sel-Drum Corporation and Sel-Drum
Corporation (USA) Inc.;
6.1.10 conduct all or the greater part of its business with
the Bank;
6.2 Negative covenants
------------------
The Borrower undertakes not to carry out the following
transactions or operations without obtaining the prior written
consent from the Bank:
6.2.1 substantially change the nature of its operations or
business;
6.2.2 change the voting control of the Borrower, C. Cotran
Holdings Inc. and Sel-Drum International Inc., which
is directly or indirectly held or to be held by
Camille Cotran;
6.2.3 merge with another company, dissolve or wind up the
company.
6.2.4 create or permit the existence of security on the
Hypothecated property, except for permitted
encumbrances;
6.2.5 make an investment or provide financial assistance to
its partners, officers, directors, affiliated
entities or any third party by way of a loan, a
guarantee or otherwise, except in the course of the
project submitted to the Bank.
===============================================================================
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6.3 Environmental obligations
-------------------------
6.3.1 The Borrower shall comply with the requirements of
all legislative and regulatory environmental
provisions (the "Environmental Requirements") and
shall at all times maintain the authorizations,
permits and certificates required under these
provisions.
6.3.2 The Borrower shall immediately notify the Bank of any
notice, order, decree or fine that it may receive or
be ordered to pay relating to Environmental
Requirements in connection with its business or
property and in the event of any release or discovery
of any contaminant upon, under or over its property
or any contiguous real property.
6.3.3 At the request and upon the conditions set forth by
the Bank, the Borrower shall, at its own cost,
provide the Bank with all the informations that the
Bank may require regarding the environmental
situation of the Borrower. In the event that any
Environmental Requirements are not being respected,
the Borrower shall effect the necessary work to
ensure that its business and property meet the
Environmental Requirements within a delay acceptable
to the Bank.
6.3.4 The Borrower undertakes to indemnify the Bank for any
damage which the Bank may suffer or any
responsibility which it may incur as a result of the
non-compliance with Environmental Requirements.
6.3.5 The provisions of and undertakings and
indemnification set out in this Section shall survive
the satisfaction and release of the security for, and
payment and satisfaction of the indebtedness and
liability of the Borrower to the Bank pursuant to the
terms hereof.
7. DEFAULT
-------
7.1 Events of Default
-----------------
The occurrence of one or more of the following events, shall
constitute a default under this Offer:
7.1.1 if the Borrower fails to make a payment, on demand or
when due, of principal under the terms hereof; or
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===============================================================================
7.1.2 if the Borrower fails to make a payment, when due, of
interest, fees or any other amount which may become
due hereunder or under any of the security documents
provided for herein; or
7.1.3 if the Borrower fails to perform or otherwise
breaches any obligation hereunder or pursuant to any
of the security documents provided for herein; or
7.1.4 if the Borrower becomes subject to any of the
provisions of the Bankruptcy and Insolvency Act
(Canada) or of any other bankruptcy, insolvency,
proposal or winding up legislation; or
7.1.5 if proceedings are instituted for the Borrower's
dissolution, winding-up or suspension of its
operations; including for any readjustment of the
indebtedness of the Borrower; or
7.1.6 if the property of the Borrower or a substantial part
thereof becomes subject to a hypothecary recourse or
be subject to a taking of possession by a creditor or
be seized or if a sequestrator is appointed; or
7.1.7 if the Borrower is in default under any other
contracts, agreements or writings with the Bank or
any other financial institution; or
7.1.8 if any representation or warranty made by the
Borrower herein or in any document or certificate
furnished to the Bank in connection herewith proves
to be materially incorrect or erroneous in an
important manner or
7.1.9 if, in the opinion of the Bank,
- there is a deterioration in the Borrower's
financial position;
- the Borrower contravenes the provisions,
whether of a legislative, regulatory,
administrative or other nature, of the
federal, provincial, municipal or other
authorities as regards environmental
pollution, toxic substances or other causes
endangering the environment or public health
and safety or other laws, to which the
Borrower's activities and property are
subject.
===============================================================================
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===============================================================================
7.1.10 any default occurs with respect to the terms and
conditions of the Offer of financing made to
Densigraphix Kopi Inc. and/or Sel-Drum Corporation
concurrently to this Offer shall also constitute
default under this Offer.
7.2 Rights and recourse of the Bank
-------------------------------
Without limiting the Bank's rights hereunder or under the
security and subject to its other rights and recourse in the
even of default:
7.2.1 the Bank may declare liquid and exigible all monetary
obligations of the Borrower still outstanding at that
time and claim for the Borrower, with no other notice
of default, immediate payment of the principal,
interest, fees and any other amount, including the
fees incurred by the Bank for the collection and
protection of the debt and the execution of any other
obligation of the Borrower;
7.2.2 the Borrower shall lose all its rights and privileges
hereunder including, without limitation, the right to
receive additional advances;
7.2.3 the Bank may charge the Borrower reasonable analysis,
administration and follow-up charges and may also
incur and pay any reasonable amount for services
rendered (including the fees for legal counsel,
accountants or any other professional whose services
may be required or deemed necessary) with respect to
the realization, sale, transfer, delivery or payment
to be made in the exercise of any security held by
the Bank and may withhold such charges and fee
amounts from the proceeds of the realization of
security;
7.2.4 any amount collected or received by the Bank,
including the balance of any proceeds of the
realization on security, may be withheld by the Bank
and may, at the Bank's discretion, be charged to any
portion of the Borrower's indebtedness to the Bank;
7.2.5 any amount incurred and paid by the Bank to realize,
retain or preserve any security given by the Borrower
to the Bank hereunder or by law, shall bear interest
at the Canadian Prime Rage of the Bank plus 3% per
annum until payment of said amount.
===============================================================================
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===============================================================================
7.3 Waiver, Omission and Cumulative Recourse
----------------------------------------
The Bank may grant delays, accept or waive security, accept
arrangements, grant releases and discharges and transact with
the Borrower as it shall deem acceptable without in any way
limiting the responsibility of the Borrower or infringing on
the rights of the Bank under the security provided for
hereunder.
The omission on the part of the Bank to notify the borrower of
any event of default hereunder or to avail itself of any of
its rights hereunder shall not be construed as a waiver by the
Bank to take recourse in the event of such default or to
exercise its right.
Acceptance by the Bank following any default by the Borrower
of any sum owing to it or its exercising of any right or
recourse shall not preclude the Bank from exercising any other
right or recourse, which it may have, whether pursuant to any
agreement or otherwise provided by law, said rights and
recourses of the Bank being cumulative and not alternative,
and in addition to and not in substitution for, any other
right or recourse of the Bank.
8. MISCELLANEOUS PROVISIONS
------------------------
8.1 Definitions
-----------
For the purposes hereof, the following words and phrases shall
have the following meaning:
8.1.1 "CANADIAN DOLLARS" "CAN DOLLARS" "CDN$": means lawful
money of Canada.
8.1.2 "CANADIAN PRIME RATE": means the annual variable rate
of interest announced from time to time by the Bank
and used to determine the interest rates on Canadian
Dollars commercial loans granted by the Bank in
Canada.
8.1.3 "DEBT" OR "TOTAL INDEBTEDNESS" OR "CREDIT FACILITY"
OR "ADVANCES": means the aggregate amount of
principal, interest and accessories due by the
Borrower hereunder.
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8.1.4 "FLOATING RATE": means the interest rate applicable
to floating rate advances made hereunder in Canadian
Dollars.
8.1.5 "PERMITTED ENCUMBRANCES" : refers collectively to
charges created by the security document granted from
time to time in virtue of these presents and any
other charge which constitutes a "Permitted
Encumbrance", as may be defined in the said
documents.
8.1.6 "RATE OFFERED" : means the annual interest rate
determined from time to time by the Bank, for the
term chosen by the Borrower, as being the fixed
interest rate applicable to its commercial fixed rate
term loans granted in Canada for the same term.
8.2 Accounting Terms
----------------
Unless another definition is provided hereunder, each
accounting term used in this Offer shall have the meaning
ascribed to it in accordance with accounting principles
generally accepted by the Canadian Institute of Chartered
Accountants.
8.3 Currency and place of payment
-----------------------------
All amounts due by the Borrower under this offer shall be paid
by the Borrower to the Bank, at the branch of the Bank where
the Borrower operates its bank account, in Canadian Dollars.
8.4 Calculation of interest and arrears
-----------------------------------
8.4.1 Unless otherwise provided for herein, interest on any
amount due hereunder shall be calculated daily and
not in advance on the basis of a 365-day year.
8.4.2 For the purposes of the Interest Act (Canada) in the
case of a leap year, the annual interest rate
corresponding to the interest calculated on the basis
of a 365-day year is equal to the interest rate thus
calculated multiplied by 366 and divided by 365.
8.4.3 Any amount of principal, interest, commission,
discount or of any other nature remaining unpaid at
maturity, shall bear interest at the
===============================================================================
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Offer of financing Page 16
===============================================================================
rate provided for herein, being understood that the
said interest rate on arrears shall not exceed the
maximum rate provided by law.
8.4.4 Interest on arrears shall be compounded daily and
payable on demand.
8.5 Records
-------
The Bank shall keep records and computerized data evidencing
the transactions performed under this financing. Such records
or computerized data shall be presumed to reflect these
transactions and shall constituted evidenced of the debt due
to the Bank.
8.6 Account debits
--------------
The Borrower irrevocably authorizes the Bank to debit
periodically or from time to time any bank account it may
maintain with the Bank in order to pay all or part of the
amounts it may owe to the Bank hereunder.
8.7 Non-Business Days
-----------------
Should any payment of capital or interest hereunder become due
on a day which is not a Business Day, the due date thereof
shall be extended to the immediate following Business Day.
8.8 Invalidity of any provisions hereunder
--------------------------------------
Any decision of a court to the effect that any of the
provisions hereunder are null and void or non-executory shall
in no way affect, invalidate or render unenforceable the other
provisions hereunder.
8.9 Modifications
-------------
Any modifications hereto or waiver of a right thereunder is
without effect if it is not expressly made and evidenced in a
written document executed between the parties hereto.
===============================================================================
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===============================================================================
8.10 Others Documents
----------------
The Borrower shall do all things and sign all documents which
may be deemed necessary or appropriate by the Bank for the
purposes of giving full effect to the terms, conditions,
undertakings and security provided herein.
8.11 Final agreement and interpretation
----------------------------------
Upon acceptance and execution by the Borrower, this Offer
shall constitute the final agreement between the parties
hereto with, the exception of any further written modification
agreed by the parties and replaces and supersedes any prior
agreements verbal or written between the parties related to
the financing described herein.
Notwithstanding the foregoing, this Offer does not create
novation and does not constitute any derogation to the rights,
privileges and remedies of the Bank under the terms of any
agreements, promissory notes and/or any instruments or
contracts regarding the facilities or the security
contemplated herein and executed by the Borrower prior to the
date of this Offer. The Borrower represents and warrants that
the rights, privileges and remedies of the Bank under these
agreements, promissory notes and security documents have not
been modified and cover the Borrower's obligations
contemplated herein, the whole without novation.
9. REVIEW
------
Notwithstanding any provisions to the contrary, the terms and
conditions provided for herein are subject to be reviewed by the Bank
on April 30, 2000, based upon the Borrower's financial statements which
it shall furnish the Bank, in accordance with the provisions herein.
Upon review, renewal fees of 0.25% of the amount of the Operating line
of credit shall be payable by the Borrower to the Bank.
10. FEES
----
10.1 Non-refundable set-up fees of $25,000.00 shall be payable by
the Borrower upon acceptance of this Offer.
===============================================================================
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<PAGE> 60
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===============================================================================
10.2 The legal fees and expenses relating to this Offer and to the
preparation of the security documents required herein and the
registration, if required, shall be payable by the Borrower in
addition to the fees stipulated hereinabove.
11. ACCESS TO INFORMATION
---------------------
The Borrower hereby authorizes any personal information agent,
financial institution, creditor, tax authority, employer or any other
person, including any public body, holding information concerning the
Borrower or its property including any financial information or with
respect to any undertaking or surety given by the Borrower in favour of
third parties, to supply such information to the Bank for the purposes
of verifying information provided to the Bank or that will be provided
by the Borrower and to ensure its solvency at all times.
12. NOTICES
-------
Any notice or demand to or upon the respective parties hereto shall be
in writing and shall be validly communicated by the delivery thereof to
its addressee, by a delivery, certified mail, postage prepaid, or by
transmitting the same by fax, to the addressee hereinafter mentioned,
or at such other address as any of the parties hereto may hereafter
notify the other in writing:
NATIONAL BANK OF CANADA
Central Montreal Regional Centre
Bank Tower and North
600, de La Gauchetiere Street West
Ground Floor
Montreal (Quebec)
H3B 4L2
Fax: (514) 394-4144
To the attention of: Suzanne Werbiski
Account Manager
===============================================================================
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===============================================================================
SEL-DRUM CORPORATION
c/o C. COTRAN HOLDING INC.
220 Industriel Boulevard
Boucherville (Quebec)
J4B 2X4
Fax: (450) 641-4332
To the attention of: Camille Cotran
President
Any such notice or demand sent as aforesaid shall be deemed to have
been received by the party to whom it is addressed upon delivery, if
delivered, and on the actual receipt thereof, if sent by certified
mail, and when transmitted, if sent by fax; provided, however, that in
the event normal mail service or fax service shall be interrupted by
strike, "force majeure" or other cause, then the party sending the
notice or demand shall use anyone of the said services which has not
been so interrupted or, failing the availability of any such service,
any other mode of communication which shall ensure prompt receipt of
such notice or demand by the other party.
13. GOVERNING LAW
-------------
This Offer shall be construed and interpreted in accordance with the
laws of the Province of Quebec.
14. LANGUAGE (QUEBEC)
-----------------
The parties declare that they have requested and do hereby confirm
their request that the present Offer and the ancillary documents
related thereto be in English; les parties declarent qu'elles ont exige
et par la presente confirment leur demande que la presente offre ainsi
que les documents connexes soient rediges en anglais.
15. PREPARATION OF LEGAL DOCUMENTATION
----------------------------------
Once this Offer has been accepted, we will ask our legal advisers to
draw up the applicable security documents in accordance with standards
acceptable to the Bank.
===============================================================================
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<PAGE> 62
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===============================================================================
We hope that our financial support will continue to contribute to your company's
development.
Yours truly,
NATIONAL BANK OF CANADA
per: /s/Michel Gendron per:
---------------------------- ----------------------------
Michel Gendron Suzanne Werbiski
Vice-President Account Manager
ACCEPTANCE
WE ACCEPT THE TERMS AND CONDITIONS OF YOUR OFFER OF FINANCING.
We, undersigned, hereby authorize the National Bank of Canada to gather any
information relating to our financial situation and/or credit history from any
credit agency and/or financial institution and/or employer and/or person with
whom we have or may have a business relationship with. We also authorize the
National Bank of Canada to release this information to such persons.
The National Bank of Canada may use the information it has obtained to make
decisions regarding any credit facility or any other services made available to
us or to be made available to us.
THIS 23rd day of July 1999.
---- ----
SEL-DRUM CORPORATION
per: C. COTRAN HOLDING INC.
per: /s/Camille Cotran
--------------------------
Camille Cotran
===============================================================================
Sel-Drum Corporation
<PAGE> 63
OFFER OF FINANCING Page 21
================================================================================
and subject to the conclusion of the contemplated transaction
GUARANTORS
SEL-DRUM COPRORATION THIS 23rd day of July 1999.
(USA) INC.
per: /s/ Camille Cotran
------------------------------------
SEL-DRUM INTERNATIONAL INC. THIS 23rd day of July 1999.
per: /s/ Camille Cotran
------------------------------------
SEL-DRUM IMAGING
CORPORATION THIS 23rd day of July 1999.
per: /s/ Camille Cotran
------------------------------------
C. COTRAN HOLDINGS INC. THIS 23rd day of July 1999.
per: /s/ Camille Cotran
------------------------------------
================================================================================
SEL-DRUM CORPORATION
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Sel-Drum Imaging Corporation
(Vancouver, B.C., Canada)
Sel-Drum Corporation (U.S.A.), Inc.
(Albany, New York)
Sel-Drum Corporation
(Burlington, Ontario, Canada)
<PAGE> 1
EXHIBIT 23.1
Independent Auditors' Consent
We hereby consent to the incorporation by reference of our report dated
September 24, 1999, included in this Form 10-KSB, into Sel-Drum International,
Inc.'s previously filed Registration Statement on Form S-8 (Registration No.
333-57885).
/s/ Mengel, Metzger, Barr & Co. LLP
Rochester, New York
October 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SEL-DRUM INTERNATIONAL, INC., FOR THIS TWELVE MONTH
PERIOD ENDED JULY 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 202,965
<SECURITIES> 0
<RECEIVABLES> 1,977,050
<ALLOWANCES> 100,000
<INVENTORY> 3,007,597
<CURRENT-ASSETS> 5,276,349
<PP&E> 1,495,199
<DEPRECIATION> 930,822
<TOTAL-ASSETS> 5,877,547
<CURRENT-LIABILITIES> 757,867
<BONDS> 0
0
4,499,805
<COMMON> 76,425
<OTHER-SE> 543,450
<TOTAL-LIABILITY-AND-EQUITY> 5,877,547
<SALES> 14,631,235
<TOTAL-REVENUES> 14,631,235
<CGS> 10,555,266
<TOTAL-COSTS> 10,555,266
<OTHER-EXPENSES> 3,305,529
<LOSS-PROVISION> 130,326
<INTEREST-EXPENSE> 52,381
<INCOME-PRETAX> 576,027
<INCOME-TAX> 231,886
<INCOME-CONTINUING> 344,141
<DISCONTINUED> (394,006)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49,865)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
