SECURITIES AND EXCHANGE COMMISSION,
WASHINGTON, D.C. 20549
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SCHEDULE 13E-3
Rule 13e-3 TRANSACTION STATEMENT UNDER SECTION 13(e)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. __)
SEL-DRUM INTERNATIONAL, INC.
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(Name of the Issuer)
C. Cotran Holding Inc.
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(Name of Person(s) Filing Statement)
Common Stock, par value $.01 per share
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(Title of Class of Securities)
816080105
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(CUSIP Number of Class of Securities)
Camille Cotran, President
220 Boul. Industriel
Boucherville, Quebec, Canada
J4B 2X4
(450) 641-3516
with a copy to:
Guy P. Lander, Esq.
Goodman Phillips & Vineberg
430 Park Avenue
New York, New York 10022
(212) 308-8866
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(Name, Address and Telephone Numbers of Person Authorized to Receive Notices
and Communications on Behalf of the Person(s) Filing Statement)
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This statement is filed in connection with (check the appropriate box):
a.[ ]The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the
Securities Act of 1934
b.[ ]The filing of a registration statement under the Securities Act of
1933.
c.[ ]A tender offer.
d.[X]None of the above
Check the following box if the soliciting materials or information
statement referred to in checking box (a) are preliminary copies: [ ]
Check the following box if the filing is a final amendment reporting the
results of the transaction: [ ]
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CALCULATION OF FILING FEE
Transaction Amount of
Valuation (1) Filing Fee (2)
$97,528.00 $19.51
(1) Estimated solely for the purpose of calculating the filing fee. The
transaction valuation is based upon the aggregate cash consideration to be
paid by C. Cotran Holding Inc. ("Holding") for the outstanding shares of
common stock of Sel-Drum International Inc. ("Sel-Drum") that it does not
currently own. The transaction valuation indicated above was calculated by
multiplying (a) the per-share purchase price of $.40, by (b) 243,820, which
represents the number of shares of Sel-Drum common stock not owned by
Holding as of December 28, 2000.
(2) The amount of the filing fee, calculated in accordance with Rule 0-11 of
the Securities Exchange Act of 1934, as amended, equals 1/50th of one
percent of the value of the securities to be acquired.
Check the box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a) (2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing. [ ]
Amount previously Paid: ___________________ Filing Party ___________________
Form or Registration No. ___________________ Date Filed: ____________________
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INTRODUCTION
This Schedule 13E-3 Transaction Statement relates to the intended acquisition by
C. Cotran Holding Inc. ("Holding," "we" or "us"), a Canadian corporation, of all
of the issued and outstanding shares of common stock of Sel-Drum International
Inc. ("Sel-Drum"), a New York corporation, that are not owned by Holding. The
acquisition will be accomplished through a plan for binding share exchange under
Section 913 of the New York Business Corporation Law. Upon the effectiveness of
the plan of exchange, Sel-Drum will become a wholly-owned subsidiary of Holding.
The use of the symbol "$" in this Transaction Statement refers to U.S. dollars.
References to Canadian dollars are indicated by the symbol "CDN$."
Item 1. Summary Term Sheet.
We currently own approximately 97 percent of the outstanding shares of common
stock of Sel-Drum. Our board of directors has approved a plan for binding share
exchange, a copy of which is attached as Appendix A to the Notice to
Shareholders (attached as Exhibit (a) to this Transaction Statement). Under this
plan, we will acquire from the other stockholders of Sel-Drum all of the
outstanding shares of Sel-Drum's common stock that we do not own in return for a
cash payment.
The material terms of the plan for binding share exchange are as follows:
o Purchase Price. We will pay $.40 in cash for each share of common
stock.
o Payment of Purchase Price. We will deposit $97,528.00 with U.S. Stock
Transfer Corporation. We will instruct U.S. Stock Transfer Corporation
to distribute the purchase price to the shareholders of Sel-Drum who
submit their stock certificates as described in "Surrender of
Certificates," below. However, the purchase price will not be paid to
any shareholders who exercise their dissenters' rights of appraisal
under New York law. Payments will be mailed to shareholders as soon as
practicable after the binding share exchange becomes effective. See
"Terms of the Transaction" in the Notice to Shareholders.
o No Shareholder Approval Required. We will accomplish the binding share
exchange without the approval or consent of any other shareholder of
Sel-Drum. You do not have any right to vote on this transaction. Under
New York law, which applies because Sel-Drum is a New York
corporation, your rights as a shareholder are limited to either
accepting the cash payment being offered by us or exercising your
dissenter's right of appraisal. See "Terms of the Transaction" and
"Dissenters' Rights of Appraisal" in the Notice to Shareholders.
o Dissenters' Rights of Appraisal. If you do not wish to accept our
offer of $.40 per share, you may exercise your right of appraisal by
following the procedures described under the caption "Dissenters'
Rights of Appraisal" in the Notice to Shareholders.
o Surrender of Certificates to Receive Purchase Price. To receive the
purchase price, you must submit your stock certificates to U.S. Stock
Transfer Corporation (at the address set forth in the letter of
transmittal accompanying the Notice to Shareholders, the form of which
is attached to the Notice to Shareholders as Appendix B). Generally,
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if your shares are held in a brokerage account, your broker will
automatically credit your account for the purchase price. If you (or
your broker) do not submit your certificates, your certificates will,
after the binding share exchange is effected, represent only the right
to receive the purchase price or, if you have properly exercised your
right of appraisal, to receive the payment determined to be due you.
See "Terms of the Transaction" and "Dissenters' Rights of Appraisal"
in the Notice to Shareholders.
o Effect of This Binding Share Exchange. The binding share exchange will
become effective when we file a Certificate of Exchange with the
Secretary of State of New York. We intend to file this certificate 30
days after the date the Notice to Shareholders is mailed to the
shareholders. At that time, we will automatically become the owner of
all of the outstanding share of common stock of Sel-Drum, and you will
no longer be a shareholder of Sel-Drum. See "Special
Factors--Consequences" and "Terms of the Transaction" in the Notice to
Shareholders.
Item 2. Subject Company Information.
(a) Sel-Drum International, Inc. ("Sel-Drum") is the subject company.
Sel-Drum's principal executive office is located at 501 Amherst Street, Buffalo,
New York, 14207, and its telephone number is 800-263-9356.
(b) The exact title of the class of equity securities that is the subject
of this filing is common stock, par value $.01 per share, of Sel-Drum. As of
December 28, 2000, there were 7,417,500 outstanding shares of Sel-Drum's common
stock.
(c) Sel-Drum's common stock trades on the Nasdaq OTC Bulletin Board under
the symbol "SDUM." The following table sets forth the high and low bid
quotations provided for Sel-Drum's common stock for each quarterly period during
the last two fiscal years and the first two quarters (through December 28, 2000)
of the current fiscal year.
COMMON STOCK PRICE
<TABLE>
<CAPTION>
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 1999 $0.375 $0.375 $0.375 $0.375 $0.375 $0.375 $0.375 $0.315
Fiscal 2000 $0.34375 $0.3125 $0.50 $0.25 $0.33 $0.3125 $0.375 $0.375
Fiscal 2001 $0.50 $0.219 $0.219 $0.219
</TABLE>
(d) To the best of Holding's knowledge, after making a reasonable inquiry,
Sel-Drum has paid no dividends on its common stock during the past two years.
(e) Not applicable.
(f) On July 30, 1999, Holding purchased 7,173,680 shares of Sel-Drum's
common stock from the principal shareholders of Sel-Drum and other persons
related to them for a total purchase price of $2,869,472, or $.40 per share.
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Item 3. Identity and Background of Filing Person.
(a) This filing is being made by Holding. Holding's principal business
address is 220 Boul. Industriel, Boucherville, Quebec J4B 2X4 and its business
telephone number is (450) 641-3516.
The name and address of the sole officer and director of Holding and the
sole person controlling Holding are as follows:
Name Position Address
---- -------- -------
Camille Cotran Sole Director, President, 220 Boul. Industriel
Secretary-Treasurer Boucherville, Quebec
Canada J4B 2X4
Both Holding and Camille Cotran are affiliates of Sel-Drum. Holding owns
approximately 97% of the outstanding shares of common stock of Sel-Drum, and Mr.
Cotran is the sole shareholder of Holding.
(b) The principal business of Holding is the management of the business of
Sel-Drum and Densigraphix Kopi inc., a wholly-owned subsidiary of Holding
engaged in the sale of compatible toners for copiers and laser printers. Holding
is incorporated under the laws of Canada. During the past five years, Holding
has not been convicted in a criminal proceeding and has not been a party to a
judicial or administrative proceeding that resulted in a judgment, decree or a
final order enjoining Holding from further violations of, or prohibiting
activities subject to, federal or state securities laws, or a finding of any
violation of federal or state securities laws.
(c) The business and background of Camille Cotran are as follows:
Camille Cotran
Sole shareholder and director, President and Secretary-Treasurer
of Holding
220 Boul. Industriel
Boucherville, Quebec, Canada J4B 2X4
Camille Cotran is the sole shareholder and director, and President and
Secretary-Treasurer, of Holding, a company organized in 1986 to hold and manage
investments made by Camille Cotran. Mr. Cotran has also been the Chairman of the
Board of Directors and Chief Executive Officer of Sel-Drum since July 1999. In
1979, Mr. Cotran formed, and he currently is the sole Director, Chairman and
President of Densigraphix Kopi inc. From 1973 to 1979, Mr. Cotran was Vice
President, Manufacturing, for Cancoat Papers, a manufacturer of zinc oxide
photocopy paper. Mr. Cotran is a citizen of Canada.
During the past five years, Camille Cotran has neither been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors) nor
been a party to any judicial or administrative proceeding that resulted in a
judgment, decree or final order enjoining him from future violations of, or
prohibiting activities subject to, federal or state securities laws, or a
finding of any violation of federal or state securities laws.
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Item 4. Terms of the Transaction.
(a) The transaction is being effected pursuant to a plan for binding share
exchange under Section 913 of the Business Corporation Law of the State of New
York ("BCL"). Under BCL Section 913(g), any corporation owning at least 90% of
the outstanding common shares of another corporation (the "subject company") may
effect a binding share exchange without obtaining the vote or other approval of
the other shareholders of the subject company. Accordingly, no vote of the
shareholders of Sel-Drum is required, or will be solicited, for approval of this
transaction. Upon effectiveness of the binding share exchange by the filing of a
certificate of exchange with the State of New York, Holding will automatically
become the holder of all of the outstanding shares of common stock of Sel-Drum.
Holding is offering $.40 per share in cash for the outstanding shares of
Sel-Drum common stock that it does not own. Shareholders not wishing to accept
this offer may exercise dissenters' rights of appraisal in accordance with the
provisions of BCL Section 623, which are described in Item 4(d) of this
Transaction Statement.
Holding will deposit $97,528.00 with the U.S. Stock Transfer Corporation
for payment of the purchase price to shareholders who accept Holding's offer. To
receive the purchase price, you must submit your stock certificates to U.S.
Stock Transfer Corporation (at the address set forth in the letter of
transmittal accompanying the Notice to Shareholders, the form of which is
attached to the Notice as Appendix A). Generally, if your shares are held in a
brokerage account, your broker will automatically credit your account for the
purchase price. If you (or your broker) do not submit your certificates, your
certificates will, after the binding share exchange is effected, represent only
the right to receive the purchase price or, if you have properly exercised your
right of appraisal, to receive the payment determined to be due you in the
appraisal process.
The reason for the transaction is to terminate Sel-Drum's status as a
reporting company under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). On November 2, 2000, the registration of the common stock of
Sel-Drum under the Exchange Act was terminated. In light of the very small
number of holders of Sel-Drum's common stock other than Holding, the very
limited trading market in Sel-Drum's common stock, and Holding's belief that
Sel-Drum will not require access to the public equity market for financing in
the foreseeable future, Holding believes that the expense and effort in
Sel-Drum's continuing to comply with the reporting and other obligations of the
Exchange Act are not justified.
(c) The terms of the transaction reported on this Statement will be the
same for all holders of Sel-Drum's common stock, except as they may be affected
by the exercise of dissenters' rights of appraisal under New York law.
(d) Because Sel-Drum is incorporated in New York, New York law governs its
internal affairs, as well as any rights shareholders may have if they object to
a transaction such as the plan for binding share exchange described in this
Transaction Statement. These rights, commonly called "appraisal rights," entitle
shareholders who object to the transaction and who follow required procedures to
ask a court to determine the fair value of their shares and requires payment of
that amount instead of the consideration being offered by Holding.
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The New York statute establishing appraisal rights provides that appraisal
rights are the exclusive remedy available to shareholders that have those
rights, unless the transaction is unlawful or fraudulent.
Pursuant to BCL Section 910, holders of Sel-Drum common stock have the
right to dissent from the binding share exchange and, if the plan for binding
share exchange is completed, receive payment of the fair value of their Sel-Drum
common stock by complying with the requirements of BCL Section 623 (the full
text of which is set forth as Appendix C to the Notice to Shareholders attached
as Exhibit (a) to this Transaction Statement). Under Section 913 of the BCL,
Holding must give a copy of the plan for binding share exchange adopted by
Holding's board of directors, or an outline of the material features of the
plan, to all other shareholders of Sel-Drum. A copy of the plan is attached as
Appendix A to the Notice to Shareholders. Any shareholder who elects to dissent
from the share exchange must file with Holding, within 20 days after the giving
of the notice to him, a written notice of election, stating his name and
residence address, the number of shares as to which he dissents (which must be
all of his shares) and a demand for payment of the fair value for his shares. At
the time of filing the notice of election to dissent or within one month
thereafter, the shareholder must submit the certificates representing his shares
to Holding or Sel-Drum's transfer agent for notation on the certificates of the
election to dissent, after which the certificates will be returned to the
shareholder. Failure to submit the certificates for notation may result in the
loss of appraisal rights. Within 15 days after the expiration of the period
within which shareholders may file their notices of election to dissent or
within 15 days after effectiveness of the share exchange, whichever is later,
Holding must make a written offer to each shareholder who has filed a notice of
election to pay for his shares at a specified price which Holding considers to
be their fair value. If Holding fails to make the offer within such 15-day
period, or if any dissenting shareholder fails to agree to it within 30 days
after it is made, Holding is required to institute a judicial proceeding within
20 days after the expiration of the applicable period to determine the rights of
dissenting shareholders and to fix the fair value of their shares of Sel-Drum
common stock. If Holding fails to institute the proceeding, a dissenting
shareholder may do so. In the judicial proceeding, the court will determine the
right of each dissenting shareholder to receive payment and the fair value of
their shares.
This is not a complete statement of the provisions of BCL Section 623. A
copy of Section 623 of the BCL is attached as Appendix C to the Notice to
Shareholders attached as Exhibit (a) to this Statement. You should read it
carefully.
(e) Holding has not made any provision in connection with this transaction
to grant access to unaffiliated security holders to the corporate files of
Holding or to obtain counsel or appraisal services for the unaffiliated security
holders at the expense of Holding.
(f) Not Applicable.
Item 5. Past Contracts, Transactions, Negotiations and Agreements.
(a) On August 1, 1999, Holding entered into an agreement with Sel-Drum
Corporation, an indirect wholly-owned subsidiary of Sel-Drum, to provide
consulting, advisory, support and administrative services for an annual fee to
Holding of CDN$150,000, plus expenses. The agreement was amended as of September
15, 2000, to increase the annual fee to CDN$300,000 for the year ended July 31,
2000, and further amended as of December 1, 2000, to provide for the same annual
fee of CDN $300,000 for the year ended July 31, 2001. The
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Agreement is automatically renewable for successive one-year terms unless either
party gives notice to the other party, at least six months prior to the end of
the then-current term, of its intention not to renew the Agreement. The annual
fee is renegotiated each year.
During the fiscal years ended July 31, 2000 and 1999, Sel-Drum made sales
totaling approximately $315,000 and $330,000, respectively, to Densigraphix Kopi
inc., a wholly-owned subsidiary of Holding ("Densigraphix"). During fiscal 2000
and 1999, Sel-Drum purchased approximately $1,550,000 and $465,000,
respectively, of its raw materials from Densigraphix. For the quarter ended
October 31, 2000, sales by Sel-Drum to Densigraphix totaled approximately
$102,000, and purchases of inventory by Sel-Drum from Densigraphix totaled
approximately $444,000.
(b) On July 6, 1999, Brian Turnbull and Robert Asseltine, the then
principal shareholders of Sel-Drum, executed a term sheet ( the "Term Sheet")
among themselves and Holding and Densigraphix ("the Purchasers"). Pursuant to
the Term Sheet, Messrs. Asseltine and Turnbull agreed to sell to the Purchasers
all of Sel-Drum's common stock beneficially held by them, and an additional
1,119,000 shares held by family members or related parties, for an aggregate
purchase price of $2,869,472, or $0.40 per share. The Term Sheet further
provided for the Purchasers' acquisition of all outstanding shares of preferred
stock held by Messrs. Asseltine and Turnbull (or their affiliates) in Sel-Drum's
subsidiary, Sel-Drum Imaging Corporation ("Imaging"), for an aggregate purchase
price of $2,883,000, or $457.90 per share.
The transactions described in the Term Sheet were consummated on July 30,
1999 pursuant to a Stock Purchase Agreement among Holding and Robert Asseltine,
547118 Ontario Limited (a company controlled by Mr. Turnbull) and the other
selling shareholders (for the common stock of Sel-Drum) and Densigraphix and
Robert E. Asseltine, Geraldine Asseltine and 547118 Ontario Limited (for the
preferred shares of Imaging).
Pursuant to the Agreement, Holding acquired approximately 97% of the issued
and outstanding common stock of Sel-Drum and Densigraphix acquired all of the
outstanding preferred stock of Imaging. The aggregate purchase price for the
common stock and the preferred stock was $5,702,472.
Holding, Densigraphix and Sel-Drum Corporation entered into a credit
facility with National Bank of Canada in the aggregate amount of CDN$6.0 million
to provide part of the financing of the acquisition of the Sel-Drum common stock
by Holding and the acquisition of the preferred stock of Imaging by
Densigraphix. All of the funds advanced under the credit facility were applied
towards the acquisition. Under the terms of the credit facility, the shares of
Sel-Drum and Imaging acquired by Holding and Densigraphix, respectively, in
addition to other collateral, were pledged to the bank to secure repayment of
the loans.
(c) For the past several years, Holding and Sel-Drum have been in regular
contact as Holding was both a supplier to and customer of Sel-Drum. In 1997 and
1998, there were sporadic meetings and discussions regarding the possible
acquisition of Sel-Drum between Brian Turnbull, former Chairman of the Board of
Sel-Drum and Robert Asseltine, an advisor of Mr. Turnbull and a consultant to
Sel-Drum, and Camille Cotran, President of Holding. The parties were unable to
reach agreement on the terms of any transaction. In mid-1999, discussions
between these parties were resumed and within a few weeks of
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commencing negotiations, the parties executed the Term Sheet described in Item
5(b) of this Transaction Statement.
(e) As described in Item 5(b) of this Transaction Statement, Holding,
Densigraphix and Sel-Drum Corporation entered into a credit facility with
National Bank of Canada for the purpose of providing part of the financing for
the acquisition in July, 1999 by Holding of approximately 97% of the outstanding
shares of Sel-Drum common stock, and the acquisition by Densigraphix of all of
the outstanding shares of preferred stock of Sel-Drum Imaging Corporation, a
wholly-owned subsidiary of Sel-Drum ("Imaging"). Each company entered into a
separate agreement with the banking covering a portion of the financing.
The bank agreement with Holding provided for a term loan in the amount of
CDN$750,000, which is payable over five years and bears interest at a floating
rate equal to the bank's prime rate plus 1.50%; mezzanine financing in the
amount of CDN$2.0 million, which is payable over three years and bears interest
at a floating rate equal to the bank's prime rate plus 3.0%; and a bridge loan
in the amount of CDN$1.5 million, which was payable in full within sixty (60)
days after the completion of the acquisition of the Sel-Drum stock, and bore
interest at the bank's prime rate plus 1.5%. Pursuant to the agreement with the
bank, Holding pledged all of its shares in Sel-Drum and Densigraphix to secure
payment of the loans. In addition, the bank received a security interest in
Holding's assets and properties and unconditional guarantees from Densigraphix
and Sel-Drum, each in the amount of CDN$4.25 million, and other security.
Pursuant to the bank agreement, Sel-Drum Corporation (USA) Inc., a wholly-owned
subsidiary of Sel-Drum, ("Sel-Drum USA"), has advanced funds to Holding for use
in paying the loans to the bank. As of October 31, 2000, outstanding loans made
by Sel-Drum USA to Holding totaled $550,000. The loans bear interest at the U.S.
prime rate less 1% and contain no principal repayment terms.
The bank agreement with Densigraphix provided for a CDN$1.5 million
increase in Densigraphix's existing revolving credit facility to CDN$3.0 million
(with outstanding advances limited to 75% of net accounts receivable and 50% of
inventory up to CDN$1.5 million), the increase to be used in financing the
acquisition of the Imaging preferred stock. Densigraphix also received a term
loan for CDN$250,000 payable over five years, the proceeds of which were also to
be used in the preferred stock acquisition. The advances under the credit
facility bear interest at the bank's prime rate plus 0.50%, and the term loan
bears interest at a floating rate equal to the bank's prime rate plus 1.50%.
Under the agreement with the bank, Densigraphix pledged all of the preferred
shares of Imaging as security for payment of the loans, and granted the bank a
security interest in its accounts receivable, inventory and other assets, and
Holding delivered to the bank an unconditional guarantee in the amount of
CDN$3.25 million. Pursuant to the bank agreement, Sel-Drum Corporation has
advanced funds to Densigraphix for use in paying these loans to the bank. As of
October 31, 2000, these outstanding loans to Densigraphix totaled $327,550.
These loans bear interest at the Canadian prime rate plus 1% and contain no
principal repayment terms.
The bank agreement with Sel-Drum Corporation provided for a CDN$1.0 million
increase in Sel-Drum Corporation's operating line of credit to CDN$4.2 million,
and a term loan of CDN$500,000. Advances under the line of credit bear interest
at the bank's prime rate plus 0.50%. The term loan is payable over five years,
and bears interest at a floating rate equal to the bank's prime rate plus 1.50%.
As security for the loans, the bank received a chattel mortgage and security
interest in all of Sel-Drum's assets; unconditional guarantees from Holding,
Sel-Drum and Imaging, each in the amount of CDN$5.0 million, and from Sel-Drum
USA in the amount of CDN$2.0 million; a security interest in the assets of
Sel-Drum USA and other security. Upon completion of the share acquisition in
July, 1999 by Holding, Sel-
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Drum Corporation loaned CDN$1.5 million, borrowed under the credit facility and
the term loan, to Densigraphix, which in turn advanced the funds to Holding to
repay the CDN$1.5 million bridge loan obtained by Holding, as described above.
This loan, which at October 31, 2000, totaled $982,650, bears interest at the
Canadian prime rate plus 1% and contains no principal repayment terms.
Item 6. Purposes of the Transactions and Plans or Proposals.
(b) The outstanding shares of Sel-Drum's common stock to be acquired by
Holding in this transaction will be held by Holding as the parent company of
Sel-Drum.
(c) As noted in Item 6(b), above, following Holding's acquisition of all of
the outstanding shares of Sel-Drum common stock, Sel-Drum will be a wholly-owned
subsidiary of Holding. Holding intends to de-list the Sel-Drum common stock from
the Nasdaq OTC Bulletin Board and to file a Form 15 with the Securities and
Exchange Commission to suspend Sel-Drum's reporting requirements under the
Securities Exchange Act of 1934, as amended. Following the effectiveness of the
plan for binding share exchange, Holding intends to proceed with a restructuring
of Sel-Drum, its subsidiaries, and Densigraphix Kopi inc., a wholly-owned
subsidiary of Holding.
Item 7. Purposes, Alternatives, Reasons and Effects.
(a) The purpose of this transaction is to enable Holding to obtain 100%
ownership of Sel-Drum, and to terminate Sel-Drum's status as a reporting company
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), thus
enabling Holding to more effectively implement the plan described in Item 6(c)
of this Transaction Statement, and to eliminate its obligations to file reports
and otherwise comply with the requirements of the Exchange Act.
(b) Because the goal of Holding is to obtain 100% ownership of Sel-Drum's
common stock and to terminate Sel-Drum's status as a reporting company under the
Exchange Act, no alternatives to this transaction were considered.
(c) The reasons for the transaction are as follows: As the controlling
shareholder of Sel-Drum, Holding recognizes the advantages of having a
publicly-traded subsidiary, including enhanced stock value and liquidity and the
ability to use capital stock for financing or corporate acquisition purposes.
However, the pricing trends and trading volume of Sel-Drum's common stock in the
market have not allowed Sel-Drum to effectively take advantage of the market to
the extent of justifying the continued direct and indirect cost of public
registration. The stock is thinly traded and as a result is relatively illiquid.
Consequently, purchasers of Sel-Drum's common stock would experience difficulty
in selling should they desire to do so. Holding believes that the continued poor
price performance and low trading volume of the common stock is not in the best
interest of Sel-Drum or its stockholders.
As a reporting company under the Exchange Act, Sel-Drum incurs direct and
indirect costs associated with compliance with the filing and reporting
requirements imposed on public
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companies. The direct cost savings from terminating reporting status include
lower printing and mailing costs, elimination of the need to prepare extensive
public disclosure, reduction in miscellaneous clerical and other expenses e.g.,
word processing, Edgarizing, and telephone and facsimile charges associated with
SEC filings, elimination of charges of brokers and transfer agents and potential
reduction in auditing fees. The indirect costs of reporting under the Exchange
Act, including the executive time expended to prepare and review public filings,
would also be eliminated.
In addition, Holding believes that the execution of the business plan
described in Item 6(c) of this Transaction Statement will be more effectively
realized without having to comply with the disclosure and other requirements of
a reporting company. In particular, Holding considers the obligation to publicly
disclose proprietary and other business information, such as material contracts,
proposed acquisitions, growth strategies and financial information regarding
overall operations to be a competitive disadvantage, which will be eliminated
when this obligation is terminated.
(d) Upon the effectiveness of the binding share exchange, Holding will
become the sole shareholder of Sel-Drum. The other shareholders of Sel-Drum
will, as described in Items 4(a) and 4(d) of this Transaction Statement, be
entitled to receive the consideration being offered by Holding for their shares
or, if they have properly exercised their rights of appraisal under New York
law, to receive the amount determined to be the fair value of their shares. As a
result of the transaction, Holding's interest in the net book value and net
income of Sel-Drum will increase to 100% from 96.7%. The net book value of
Sel-Drum's common stock at October 31, 2000 was $1,353,537, and its net income
for the year ended July 31, 2000, and the three months ended October 31, 2000,
was $617,057 and $165,182, respectively.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF
SEL-DRUM'S COMMON STOCK. HOLDERS ARE ADVISED AND EXPECTED TO CONSULT WITH THEIR
OWN TAX ADVISORS FOR ADVICE REGARDING THE TAX CONSEQUENCES TO THEM OF DISPOSING
OF THEIR SHARES OF SEL-DRUM COMMON STOCK TO HOLDING IN EXCHANGE FOR CASH, HAVING
REGARD TO THEIR OWN PARTICULAR CIRCUMSTANCES AND ANY OTHER CONSEQUENCES TO THEM
OF SUCH TRANSACTION UNDER STATE, LOCAL, FOREIGN OR OTHER TAX LAWS.
The following is a summary of the material U.S. federal income tax
considerations to a U.S. holder arising from the purchase by Holding of such
U.S. holder's shares of Sel-Drum common stock. A "U.S. holder" is a beneficial
owner of Sel-Drum common stock that is:
- an individual citizen or resident of the United States;
- a corporation created or organized in or under the laws of the United
States or any of its political subdivisions; or
- an estate or trust the income of which is subject to United States
federal income taxation regardless of its source.
11
<PAGE>
This summary only deals with a U.S. holder that holds shares of Sel-Drum
common stock as a capital asset and does not address tax considerations
applicable to U.S. holders that may be subject to special tax rules, such as:
- dealers or traders in securities or currencies;
- financial institutions or other U.S. holders that treat income in
respect of Sel-Drum common stock as financial services income;
- insurance companies;
- regulated investment companies;
- tax-exempt entities;
- U.S. holders that acquired Sel-Drum common stock upon the exercise of
an employee stock option or otherwise in connection with the
performance of services;
- U.S. holders that hold Sel-Drum common stock as part of a straddle or
conversion transaction or other arrangement involving more than one
position;
- U.S. holders that have a principal place of business or "tax home"
outside of the United States; or
- U.S. holders whose "functional currency" is not the United States
dollar.
This summary is based upon the provisions of the U.S. Internal Revenue Code
of 1986, as amended, and regulations, rulings and judicial decisions as of the
date of this Transaction Statement; any such authority may be repealed, revoked
or modified, perhaps with retroactive effect, so as to result in U.S. federal
income tax consequences different from those discussed below. This summary has
no binding effect or official status of any kind; Holding cannot assure
shareholders that the conclusions reached below would be sustained by a court if
challenged by the Internal Revenue Service (the "IRS"). Holding will not seek a
ruling from the IRS with respect to any aspect of the tax considerations
described below.
Since U.S. federal income tax consequences may differ from one U.S. holder
to the next, this summary does not purport to deal with all of the U.S. federal
income tax considerations that might be relevant to shareholders in light of
their personal investment circumstances or status. In addition, this summary
does not address the application of other U.S. taxes, such as the federal estate
tax or alternative minimum tax, or state, local or foreign tax laws.
Accordingly, shareholders are advised to consult their own tax advisors in
determining the specific tax consequences to them of Holding's purchase of their
shares of Sel-Drum common stock, including the application to their particular
situations of the tax considerations discussed below, as well as the application
of state, local, foreign or other tax laws. The statements of U.S. federal
income tax law set out below are based on the laws and interpretations in force
as of the date of this Transaction Statement, and are subject to any changes
occurring after that date.
12
<PAGE>
Sale of Sel-Drum Common Stock
The receipt of cash in exchange for Sel-Drum common stock will be treated
as a taxable transaction for U.S. federal income tax purposes. Accordingly, as a
U.S. holder, a shareholder will recognize a gain or loss in an amount equal to
the difference between the amount of cash that he or she receives and the
adjusted tax basis in his or her hands of the shares of Sel-Drum common stock
surrendered in exchange therefor. The gain or loss will be capital gain or loss
if the shares of Sel-Drum common stock are a capital asset in a shareholder's
hands, and will constitute long-term capital gain or loss if the shareholder has
held such shares for more than one year, or short-term capital gain or loss if
the shareholder has held such shares for one year or less, at the time Holding
purchases such shares from the shareholder for cash. Gains and losses are netted
and combined according to special rules in arriving at the overall capital gain
or loss for a particular taxable year. Under current law, corporations generally
are taxed at the same rates on capital gains as on ordinary income (with a
maximum tax rate of 35%). With certain exceptions, the highest tax rate on
long-term capital gains of individuals (or estates or trusts) currently is 20%
while the highest tax rate on ordinary income and short-term capital gains of
individuals (or estates or trusts) currently is 39.6%. Deductions for net
capital losses are subject to significant limitations. For U.S. holders who are
individuals, any unused portion of such net capital loss may be carried over to
be used in later taxable years until such net capital loss is thereby exhausted.
For U.S. holders that are corporations (other than corporations subject to
subchapter S of the Code), an unused net capital loss may be carried back three
years from the loss year and carried forward five years from the loss year to be
offset against capital gains until such net capital loss is thereby exhausted.
Capital gains or losses recognized by a U.S. holder on a disposition of shares
of Sel-Drum common stock will be treated as arising from U.S. sources.
State, Local and Foreign Tax Considerations
In addition to the U.S. federal income tax consequences described above,
U.S. holders may be subject to certain state, local, foreign or other tax
consequences as a result of their sale to Holding of Sel-Drum common stock.
Accordingly, U.S. holders are urged to consult their own tax advisers with
respect to such state, local, foreign or other tax consequences.
Item 8. Fairness of the Transaction.
(a) Holding reasonably believes that the transaction is fair to all holders
of Sel-Drum common stock unaffiliated with Holding.
(b) The material factors upon which Holding bases its belief stated in Item
8(a), above, are as follows:
Holding is offering cash in the amount of $.40 per share for the
outstanding shares of Sel-Drum common stock that it does not own. The price is
substantially in excess of the current market price for Sel-Drum's common stock,
and is the same per share price that Holding paid in July 1999 for acquisition
of the shares it owns currently. On December 28, 2000, the bid price for
Sel-Drum's common stock as reported by the Nasdaq OTC Bulletin Board was $.219.
In addition, as reflected in the table set forth in Item 2 of this Statement,
the bid price of the common stock has exceeded $.375 in only two quarters during
Sel-Drum's last two fiscal years and its current fiscal year.
13
<PAGE>
Holding considered various factors in determining the consideration to be
offered to the shareholders, such as current and historical market prices of
Sel-Drum's stock, as described above; the net book value of the common stock,
which was $0.18 at July 31, 2000 and $0.20 at October 31, 2000; and the purchase
price paid in previous purchases of Sel-Drum's stock in fiscal 1999, including
the acquisition by Holding of Sel-Drum common stock in July, 1999. Other factors
considered included the continuing poor price performance and low trading volume
of Sel-Drum's common stock, which is detrimental to the interests of
shareholders. Holding also relied on the Fairness Review Report prepared by
Parisien Grou LaSalle Inc. with respect to the fair value of the consideration
offered to unaffiliated shareholders, as more fully described in Item 9 of this
Statement.
(c) Approval of the unaffiliated shareholders of Sel-Drum is not required
to effect the plan for binding share exchange under New York law.
(d) After making reasonable inquiry, Holding believes that no directors of
Sel-Drum have retained an unaffiliated representative to act solely on behalf of
any security holders of Sel-Drum for purposes of negotiating the terms of this
Rule 13e-3 transaction and/or preparing a report concerning the fairness of the
transaction.
(e) Approval of this Rule 13e-3 transaction by the directors of Sel-Drum is
not required under New York law.
(f) Not Applicable.
Item 9. Reports, Opinions, Appraisals and Negotiations.
(a) Holding has received a Fairness Review Report (the "Report") from
Parisien Grou LaSalle Inc. ("PGL"), relating to the fairness of the
consideration to be offered to the shareholders of Sel-Drum other than Holding.
(b) PGL is a corporation, established under the laws of Canada, that
provides corporate consulting and advisory services. In addition to its
consulting and advisory services, PGL's services include corporate and project
acquisition identification and evaluation, corporate and project due diligence
and valuation, acquisition structuring, negotiation and financing. PGL has
extensive experience over the last 20 years in all facets of valuations
including mergers, acquisitions, divestiture and fairness opinion matters. PGL
staff is experienced in project evaluation, financial investment and the
provision of fairness opinions. PGL was formally engaged by Holding under an
Engagement Agreement between Holding and PGL dated November 13, 2000. The terms
of the Engagement Agreement provide that PGL is to be paid a fee of $10,000 for
its services, to be reimbursed for its reasonable out-of-pocket expenses and to
be indemnified in certain circumstances.
PGL is an affiliate of Grou LaSalle and Associates ("Grou LaSalle"), a
public accounting firm located in the Province of Quebec, Canada. Grou LaSalle
has acted as the independent public auditors for Holding and its subsidiary,
Densigraphix Kopi inc., for the past eight years. Except as disclosed in the
preceding sentence, neither Grou LaSalle nor PGL has been engaged to provide any
financial advisory or other services to Holding or Sel-Drum or their affiliates
during the past two years.
14
<PAGE>
Neither PGL nor any of its affiliates is an affiliate of Holding or Sel-Drum.
Neither PGL nor any of its affiliates has participated in any financing
involving Holding or Sel-Drum.
In the Report, PGL states that in its opinion, the plan for binding share
exchange is fair, from a financial point of view, to the shareholders of
Sel-Drum.
In conducting its review, PGL obtained information regarding Sel-Drum in a
variety of ways, including review of Sel-Drum's periodic and other reports filed
with the SEC in 1999 and 2000; discussions with Sel-Drum's management, auditors
and legal counsel; review of Sel-Drum internal documents; and review of other
publicly available information relating to the business, operations, financial
performance and stock trading history of Sel-Drum. PGL has stated, in the
Report, that to the best of its knowledge, it has not been denied access by
Sel-Drum to any information requested by PGL.
In preparing the Report, PGL relied upon techniques it considered
appropriate, in the circumstances, to determine a "fair market value" of the
outstanding Sel-Drum shares. For purposes of the Report, PGL defined "fair
market value" as "the highest price that an informed and prudent buyer would pay
in an open and unrestricted market to an informed and prudent seller, each
acting at arm's length, where neither party is under any compulsion to transact,
expressed in money's worth."
PGL assessed the fairness of the plan of exchange principally on the basis
of a comparison of the following factors to the consideration being paid by
Holding under the plan:
1. Precedent transactions and recent arm's length transactions in the
stock in fiscal 1999. The prices paid in these private transactions
ranged from $0.40 (the price paid by Holding in the acquisition
transaction in July 1999) to $1.00 in the case of the repurchase of
certain shares that were part of the remuneration package of an
employee of Sel-Drum;
2. The trading levels of the Sel-Drum common stock during Sel-Drum's 1999
and 2000 fiscal years. During such two-year period, the median
quotation for the stock averaged between $0.35 and $0.375, and the
stock was very thinly traded.
3. The per share net book value of the Sel-Drum common stock, which at
July 31, 2000 was $0.18 and at October 31, 2000 was $0.20.
Based on these factors, as stated above, PGL has expressed the opinion that
the consideration being offered by Holding for the outstanding shares of common
stock of Sel-Drum is fair, from a financial point of view, to the holders of
such shares.
The amount of consideration to be paid by Holding to the Sel-Drum
shareholders was determined by Holding, and not by PGL.
(c) The report prepared by PGL will be made available for inspection and
copying at the principal executive offices of Holding during its regular
business hours by any shareholder of Sel-Drum or any representative who has been
so designated in writing. A copy of the report prepared by PGL will be
transmitted by Holding to any shareholder of Sel-Drum or representative who has
been so designated in writing upon written request and at the expense of the
requesting shareholder.
15
<PAGE>
Item 10. Source and Amounts of Funds or Other Consideration.
(a) Holding intends to use its working capital, received in the form of
dividends from its wholly-owned subsidiary, Densigraphix Kopi inc., to
purchase the outstanding shares of Sel-Drum common stock. Holding will
pay $97,528.00 ($0.40 per share) for the outstanding shares of
Sel-Drum common stock, and such other amounts, if any, in satisfaction
of any dissenting shareholders' appraisal rights.
(b) Not Applicable.
(c) Holding's estimated expenses for the binding share exchange
transaction are as follows:
Canadian legal and paralegal fees $15,000
U.S. legal counsel 45,000
Stock Transfer/Exchange Agent 10,000
Broker held accounts 2,500
Fairness Review Report 10,000
Printing and Mailing 4,000
---------
Total $86,500
=======
Sel-Drum will not be responsible for, or will be reimbursed by Holding for,
the expenses incurred by Holding in connection with the transaction described in
this Transaction Statement.
(d) Not Applicable.
Item 11. Interest in Securities of the Subject Company.
(a) Holding beneficially owns 7,173,680 shares of Sel-Drum common stock,
which constitutes 96.7% of the outstanding shares of common stock. By
virtue of his 100% ownership of the capital stock of Holding, Camille
Cotran is also deemed a beneficial owner of the shares of Sel-Drum
common stock owned by Holding. Mr. Cotran is the sole officer,
director and controlling person of Holding.
(b) None.
Item 12. The Solicitation or Recommendation.
(a) Not Applicable.
(b) Not Applicable.
Item 13. Financial Statements.
(a) Sel-Drum's financial information is incorporated herein by reference
from Sel-Drum's Annual Report on Form 10-KSB for the year ended July 31, 2000,
and Sel-Drum's Quarterly Report on Form 10-QSB for the quarterly period ended
October 31, 2000, both reports being filed under Commission File No. 0-22964.
Copies of this information are included in the Notice to Shareholders attached
as Exhibit (a) to this Transaction Statement. In addition, copies
16
<PAGE>
of this information may be inspected, and copies obtained at the public
reference facilities maintained by the SEC at:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, NY 10048
Washington, DC 20549 Chicago, IL 60661
</TABLE>
Copies of these materials may also be obtained by mail at prescribed rates from
the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, DC
20549 or by calling the SEC at (800) SEC-0330. The SEC maintains a website that
contains reports and other information regarding Sel-Drum at http://www.sec.gov.
The book value per share of the Sel-Drum common stock at October 31, 2000,
was $0.20.
(b) Not Applicable.
Item 14. Persons/Assets, Returned, Employed, Compensated or Used.
(a) Not Applicable.
(b) Not Applicable.
Item 15. Additional Information.
(b) Holding does not believe that any additional information is necessary
to make the required statements in this Transaction Statement in light of the
circumstances under which they were made, not materially misleading.
Item 16. Exhibits.
(a) Form of Notice to Shareholders of Sel-Drum in connection with the
transaction described in this Transaction Schedule.
(b) Not Applicable.
(c) Report of Parisien Grou LaSalle Inc.
(d) 1. 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 (incorporated by
reference to Exhibit 2.1 to Sel-Drum International, Inc.'s Report
on Form 8-K dated July 30, 1999).
2. Offering Letter by the National Bank of Canada to Sel-Drum
International, Inc. (incorporated by reference to Exhibit 10(e)
to Sel-Drum International, Inc.'s Report on Form 10-KSB for the
fiscal year ended July 31, 1999).
(f) Section 623 of the New York Business Corporation Law (included as
Appendix C to the form of Notice to Shareholders filed herewith as
Exhibit (a)).
(g) Not Applicable.
17
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this Schedule is true, complete and correct.
/s/ Camille Cotran
--------------------------------------------------
(Signature)
Camille Cotran, President, C. Cotran Holding, Inc.
--------------------------------------------------
(Name and Title)
December 29, 2000
--------------------------------------------------
(Date)
18
<PAGE>
EXHIBIT (a)
-----------
C. COTRAN HOLDING INC.
NOTICE TO SHAREHOLDERS OF
SEL-DRUM INTERNATIONAL, INC.
OF
PLAN FOR BINDING SHARE EXCHANGE
This information is disseminated pursuant to Rule 13e-3 of the United States
Securities Exchange Act of 1934, as amended.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION, PASSED UPON THE
MERITS OR FAIRNESS OF THIS TRANSACTION, OR PASSED UPON THE ADEQUACY OF THE
DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
SUMMARY OF TERMS
C. Cotran Holding Inc. ("Holding," "we" or "us") wishes to advise the
shareholders of Sel-Drum International, Inc. ("Sel-Drum") of its intention to
effect a plan for binding share exchange for all of the outstanding shares of
Sel-Drum common stock that it does not currently own.
We currently own approximately 97 percent of the outstanding shares of
common stock of Sel-Drum. Our Board of Directors has approved a plan for binding
share exchange, a copy of which is attached as Appendix A to this Notice to
Shareholders. Under this plan, we will acquire from the other stockholders of
Sel-Drum all of the outstanding shares of Sel-Drum's common stock that we do not
own in return for a cash payment, and Sel-Drum will become our wholly-owned
subsidiary.
The material terms of the plan for binding share exchange are as follows:
o Purchase Price. We will pay $.40 in cash for each share of common
stock.
o Payment of Purchase Price. We will deposit $97,528.00 with U.S. Stock
Transfer Corporation. We will instruct U.S. Stock Transfer Corporation
to distribute the purchase price to the shareholders of Sel-Drum who
submit their stock certificates as described in "Surrender of
Certificates," below. However, the purchase price will not be paid to
any shareholders who exercise their dissenters' rights of appraisal
under New York law. Payments will be mailed to shareholders as soon as
practicable after the binding share exchange becomes effective. See
"Terms of the Transaction" in this Notice to Shareholders.
o No Shareholder Approval Required. We will accomplish the binding share
exchange without the approval or consent of any other shareholder of
Sel-Drum. You do not have any right to vote on this transaction. Under
New York law, which applies because Sel-Drum is a New York
corporation, your rights are limited to either accepting the cash
payment being offered by us or exercising your dissenter's right of
appraisal. See "Terms of the Transaction" and "Dissenters' Rights of
Appraisal" in this Notice to Shareholders.
o Dissenters' Rights of Appraisal. If you do not wish to accept our
offer of $.40 per share, you may exercise your right of appraisal by
following the procedures described under the caption "Dissenters'
Rights of Appraisal" in this Notice to Shareholders.
o Surrender of Certificates to Receive Purchase Price. To receive the
purchase price, you must submit your stock certificates to U.S. Stock
Transfer Corporation (at the address set forth in the letter of
transmittal accompanying this Notice to Shareholders, the form of
which is attached to this Notice as Appendix B). Generally, if your
shares are held in a brokerage account, your broker will automatically
credit your account for the purchase price. If you (or your broker) do
not submit your certificates, your certificates will, after the
binding share exchange is effected, represent only the right to
receive the purchase price or, if you have properly exercised your
right of appraisal, to receive the payment determined to be due you.
See "Terms of the Transaction" and "Dissenters' Rights of Appraisal"
in this Notice to Shareholders.
- 2 -
<PAGE>
o Effect of This Binding Share Exchange. The binding share exchange will
become effective when we file a Certificate of Exchange with the
Secretary of State of New York. We intend to file this certificate 30
days after the date the Notice to Shareholders is mailed to the
shareholders. At that time, we will automatically become the owner of
all of the outstanding share of common stock of Sel-Drum, and you will
no longer be a shareholder of Sel-Drum. See "Special Factors -
Consequences" and "Terms of the Transaction" in this Notice to
Shareholders.
Please note that whenever the "$" symbol is used in this Notice to Shareholders,
it means U.S. dollars. References to Canadian dollars are indicated by the
symbol "CDN$."
SPECIAL FACTORS
Purpose. The purpose of this transaction is to enable Holding to obtain
100% ownership of Sel-Drum, and to terminate Sel-Drum's status as a reporting
company under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), thus enabling Holding to more effectively implement the plan described
under the caption "Plans or Proposals of Holding" in this Notice to
Shareholders, and to eliminate its obligations to file reports and otherwise
comply with the requirements of the Exchange Act.
Alternatives. Because the goal of Holding is to obtain 100% ownership of
Sel-Drum's common stock and to terminate Sel-Drum's status as a reporting
company under the Exchange Act, no alternatives to this transaction were
considered.
Reasons. The reasons for the transaction are as follows: As the controlling
shareholder of Sel-Drum, Holding recognizes the advantages of having a
publicly-traded subsidiary, including enhanced stock value and liquidity and the
ability to use capital stock for financing or corporate acquisition purposes.
However, the pricing trends and trading volume of Sel-Drum's common stock in the
market have not allowed Sel-Drum to effectively take advantage of the market to
the extent of justifying the continued direct and indirect cost of public
registration. The stock is thinly traded and as a result is relatively illiquid.
Consequently, purchasers of Sel-Drum's common stock would experience difficulty
in selling should they desire to do so. Holding believes that the continued poor
price performance and low trading volume of the common stock is not in the best
interest of Sel-Drum or its stockholders.
As a reporting company under the Exchange Act, Sel-Drum incurs direct and
indirect costs associated with compliance with the filing and reporting
requirements imposed on public companies. The direct cost savings from
terminating reporting status include lower printing and mailing costs,
elimination of the need to prepare extensive public disclosure, reduction in
miscellaneous clerical and other expenses e.g., word processing, Edgarizing, and
telephone and facsimile charges associated with SEC filings, elimination of
charges of brokers and transfer agents and potential reduction in auditing fees.
The indirect costs of reporting under the Exchange Act, including the executive
time expended to prepare and review public filings, would also be eliminated.
In addition, Holding believes that the execution of the business plan
described under the caption "Plans or Proposals of Holding" in this Notice to
Shareholders, will be more effectively
- 3 -
<PAGE>
realized without having to comply with the disclosure and other requirements of
a reporting company. In particular, Holding considers the obligation to publicly
disclose proprietary and other business information, such as material contracts,
proposed acquisitions, growth strategies and financial information regarding
overall operations to be a competitive disadvantage, which will be eliminated
when this obligation is terminated.
Consequences. Upon the effectiveness of the binding share exchange, Holding
will become the sole shareholder of Sel-Drum. The other shareholders of Sel-Drum
will, as described under the caption "Terms of the Transaction" in this Notice
to Shareholders, be entitled to receive the consideration being offered by
Holding for their shares or, if they have properly exercised their rights of
appraisal under New York law, to receive the amount determined to be the fair
value of their shares. As a result of the transaction, Holding's interest in the
net book value and net income of Sel-Drum will increase to 100% from 96.7%. The
net book value of Sel-Drum's common stock at October 31, 2000 was $1,353,537,
and its net income for the year ended July 31, 2000, and the three months ended
October 31, 2000, was $617,057 and $165,182, respectively.
Tax Considerations. The following summary is of a general nature only and
is not intended to be, nor should it be construed to be, legal or tax advice to
any particular holder of Sel-Drum's common stock. Holders are advised and
expected to consult with their own tax advisors for advice regarding the tax
consequences to them of disposing of their shares of Sel-Drum common stock to
holding in exchange for cash, having regard to their own particular
circumstances and any other consequences to them of such transaction under
state, local, foreign or other tax laws.
Federal Income Tax Considerations
The following is a summary of the material U.S. federal income tax
considerations to a U.S. holder arising from the purchase by Holding of such
U.S. holder's shares of Sel-Drum common stock. A "U.S. holder" is a beneficial
owner of Sel-Drum common stock that is:
- an individual citizen or resident of the United States;
- a corporation created or organized in or under the laws of the United
States or any of its political subdivisions; or
- an estate or trust the income of which is subject to United States
federal income taxation regardless of its source.
This summary only deals with a U.S. holder that holds shares of Sel-Drum
common stock as a capital asset and does not address tax considerations
applicable to U.S. holders that may be subject to special tax rules, such as:
- dealers or traders in securities or currencies;
- 4 -
<PAGE>
- financial institutions or other U.S. holders that treat income in
respect of Sel-Drum common stock as financial services income;
- insurance companies;
- regulated investment companies;
- tax-exempt entities;
- U.S. holders that acquired Sel-Drum common stock upon the exercise of
an employee stock option or otherwise in connection with the
performance of services;
- U.S. holders that hold Sel-Drum common stock as part of a straddle or
conversion transaction or other arrangement involving more than one
position;
- U.S. holders that have a principal place of business or "tax home"
outside of the United States; or
- U.S. holders whose "functional currency" is not the United States
dollar.
This summary is based upon the provisions of the U.S. Internal Revenue Code
of 1986, as amended, and regulations, rulings and judicial decisions as of the
date of this Notice to Shareholders; any such authority may be repealed, revoked
or modified, perhaps with retroactive effect, so as to result in U.S. federal
income tax consequences different from those discussed below. This summary has
no binding effect or official status of any kind; Holding cannot assure
shareholders that the conclusions reached below would be sustained by a court if
challenged by the Internal Revenue Service (the "IRS"). Holding will not seek a
ruling from the IRS with respect to any aspect of the tax considerations
described below.
Since U.S. federal income tax consequences may differ from one U.S. holder
to the next, this summary does not purport to deal with all of the U.S. federal
income tax considerations that might be relevant to shareholders in light of
their personal investment circumstances or status. In addition, this summary
does not address the application of other U.S. taxes, such as the federal estate
tax or alternative minimum tax, or state, local or foreign tax laws.
Accordingly, shareholders are advised to consult their own tax advisors in
determining the specific tax consequences to them of Holding's purchase of their
shares of Sel-Drum common stock, including the application to their particular
situations of the tax considerations discussed below, as well as the application
of state, local, foreign or other tax laws. The statements of U.S. federal
income tax law set out below are based on the laws and interpretations in force
as of the date of this Notice to Shareholders, and are subject to any changes
occurring after that date.
Sale of Sel-Drum Common Stock
The receipt of cash in exchange for Sel-Drum common stock will be treated
as a taxable transaction for U.S. federal income tax purposes. Accordingly, as a
U.S. holder, a shareholder
- 5 -
<PAGE>
will recognize a gain or loss in an amount equal to the difference between the
amount of cash that he or she receives and the adjusted tax basis in his or her
hands of the shares of Sel-Drum common stock surrendered in exchange therefor.
The gain or loss will be capital gain or loss if the shares of Sel-Drum common
stock are a capital asset in a shareholder's hands, and will constitute
long-term capital gain or loss if the shareholder has held such shares for more
than one year, or short-term capital gain or loss if the shareholder has held
such shares for one year or less, at the time Holding purchases such shares from
the shareholder for cash. Gains and losses are netted and combined according to
special rules in arriving at the overall capital gain or loss for a particular
taxable year. Under current law, corporations generally are taxed at the same
rates on capital gains as on ordinary income (with a maximum tax rate of 35%).
With certain exceptions, the highest tax rate on long-term capital gains of
individuals (or estates or trusts) currently is 20% while the highest tax rate
on ordinary income and short-term capital gains of individuals (or estates or
trusts) currently is 39.6%. Deductions for net capital losses are subject to
significant limitations. For U.S. holders who are individuals, any unused
portion of such net capital loss may be carried over to be used in later taxable
years until such net capital loss is thereby exhausted. For U.S. holders that
are corporations (other than corporations subject to subchapter S of the Code),
an unused net capital loss may be carried back three years from the loss year
and carried forward five years from the loss year to be offset against capital
gains until such net capital loss is thereby exhausted. Capital gains or losses
recognized by a U.S. holder on a disposition of shares of Sel-Drum common stock
will be treated as arising from U.S. sources.
State, Local and Foreign Tax Considerations
In addition to the U.S. federal income tax consequences described above,
U.S. holders may be subject to certain state, local, foreign or other tax
consequences as a result of their sale to Holding of Sel-Drum common stock.
Accordingly, U.S. holders are urged to consult their own tax advisers with
respect to such state, local, foreign or other tax consequences.
Fairness
Holding reasonably believes that the transaction is fair to all holders of
Sel-Drum common stock unaffiliated with Holding. The material factors upon which
Holding bases its belief that the transaction is fair to the holders of the
Sel-Drum Common Stock, are as follows:
Holding is offering cash in the amount of $.40 per share for the
outstanding shares of Sel-Drum common stock that it does not own. The price is
substantially in excess of the current market price for Sel-Drum's common stock,
and is the same per share price that Holding paid in July 1999 for acquisition
of the shares it owns currently. On December 28, 2000, the bid price for
Sel-Drum's common stock as reported by the Nasdaq OTC Bulletin Board was $.219.
In addition, as reflected in the table set forth under the caption
"Identification and Securities of Sel-Drum" in this Notice, the bid price of the
common stock has exceeded $.375 in only two quarters during Sel-Drum's last two
fiscal years and its current fiscal year.
Holding considered various factors in determining the consideration to be
offered to the shareholders, such as current and historical market prices of
Sel-Drum's stock, as described above; the net book value of the common stock,
which was of $0.18 at July 31, 2000 and $0.20 at October 31, 2000; and the
purchase price paid in previous purchases of Sel-Drum's stock in fiscal 1999,
including the acquisition by Holding of Sel-Drum common stock in July, 1999.
Other
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<PAGE>
factors considered included the continuing poor price performance and low
trading volume of Sel-Drum's common stock, which is detrimental to the interests
of shareholders. Holding also relied on the Fairness Review Report prepared by
Parisien Grou LaSalle Inc. with respect to the fair value of the consideration
offered to unaffiliated shareholders, as more fully described under the caption
"Fairness Review Report" in this Notice to Shareholders.
Approval of the unaffiliated shareholders of Sel-Drum is not required to
effect the plan for binding share exchange under New York law. After making
reasonable inquiry, Holding believes that no directors of Sel-Drum have retained
an unaffiliated representative to act solely on behalf of any security holders
of Sel-Drum for purposes of negotiating the terms of the binding share exchange
transaction and/or preparing a report concerning the fairness of the
transaction.
Approval of the binding share exchange transaction by the directors of
Sel-Drum is not required under New York law.
FAIRNESS REVIEW REPORT
Holding has received a Fairness Review Report (the "Report") from Parisien
Grou LaSalle Inc. ("PGL"), relating to the fairness of the consideration to be
offered to the shareholders of Sel-Drum other than Holding.
PGL is a corporation, established under the laws of Canada, that provides
corporate consulting and advisory services. In addition to its consulting and
advisory services, PGL's services include corporate and project acquisition
identification and evaluation, corporate and project due diligence and
valuation, acquisition structuring, negotiation and financing. PGL has extensive
experience over the last 20 years in all facets of valuations including mergers,
acquisitions, divestiture and fairness opinion matters. PGL staff is experienced
in project evaluation, financial investment and the provision of fairness
opinions. PGL was formally engaged by Holding under an Engagement Agreement
between Holding and PGL dated November 13, 2000. The terms of the Engagement
Agreement provide that PGL is to be paid a fee of $10,000 for its services, to
be reimbursed for its reasonable out-of-pocket expenses and to be indemnified in
certain circumstances.
PGL is an affiliate of Grou LaSalle and Associates ("Grou LaSalle"), a
public accounting firm located in the Province of Quebec, Canada. Grou LaSalle
has acted as the independent public auditors for Holding and its subsidiary,
Densigraphix Kopi inc., for the past eight years. Except as disclosed in the
preceding sentence, neither Grou LaSalle nor PGL has been engaged to provide any
financial advisory or other services to Holding or Sel-Drum or their affiliates
during the past two years. Neither PGL nor any of its affiliates is an affiliate
of Holding or Sel-Drum. Neither PGL nor any of its affiliates has participated
in any financing involving Holding or Sel-Drum.
In the Report, PGL states that in its opinion, the plan for binding share
exchange is fair, from a financial point of view, to the shareholders of
Sel-Drum.
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<PAGE>
In conducting its review, PGL obtained information regarding Sel-Drum in a
variety of ways, including review of Sel-Drum's periodic and other reports filed
with the SEC in 1999 and 2000; discussions with Sel-Drum's management, auditors
and legal counsel; review of Sel-Drum internal documents; and review of other
publicly available information relating to the business, operations, financial
performance and stock trading history of Sel-Drum. PGL has stated, in the
Report, that to the best of its knowledge, it has not been denied access by
Sel-Drum to any information requested by PGL.
In preparing the Report, PGL relied upon techniques it considered
appropriate, in the circumstances, to determine a "fair market value" of the
outstanding Sel-Drum shares. For purposes of the Report, PGL defined "fair
market value" as "the highest price that an informed and prudent buyer would pay
in an open and unrestricted market to an informed and prudent seller, each
acting at arm's length, where neither party is under any compulsion to transact,
expressed in money's worth."
PGL assessed the fairness of the plan of exchange principally on the basis
of a comparison of the following factors to the consideration being paid by
Holding under the plan:
1. Precedent transactions and recent arm's length transactions in the
stock in fiscal 1999. The prices paid in these private transactions
ranged from $0.40 (the price paid by Holding in the acquisition
transaction in July 1999) to $1.00 in the case of the repurchase of
certain shares that were part of the remuneration package of an
employee of Sel-Drum;
2. The trading levels of the Sel-Drum common stock during Sel-Drum's 1999
and 2000 fiscal years. During such two-year period, the median
quotation for the stock averaged between $0.35 and $0.375, and the
stock was very thinly traded.
3. The per share net book value of the Sel-Drum common stock, which at
July 31, 2000 was $0.18 and at October 31, 2000 was $0.20.
Based on these factors, as stated above, PGL has expressed the opinion that
the consideration being offered by Holding for the outstanding shares of common
stock of Sel-Drum is fair, from a financial point of view, to the holders of
such shares.
The amount of consideration to be paid by Holding to the Sel-Drum
shareholders was determined by Holding, and not by PGL.
The report prepared by PGL will be made available for inspection and
copying at the principal executive offices of Holding during its regular
business hours by any shareholder of Sel-Drum or any representative who has been
so designated in writing. A copy of the report prepared by PGL will be
transmitted by Holding to any shareholder of Sel-Drum or representative who has
been so designated in writing upon written request and at the expense of the
requesting shareholder.
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<PAGE>
DISSENTERS' RIGHTS OF APPRAISAL
Because Sel-Drum is incorporated in New York, New York law governs its
internal affairs, as well as any rights shareholders may have if they object to
a transaction such as the plan for binding share exchange described in this
Notice to Shareholders. These rights, commonly called "appraisal rights,"
entitle shareholders who object to the transaction and who follow required
procedures to ask a court to determine the fair value of their shares and
requires payment of that amount instead of the consideration being offered by
Holding.
The New York statute establishing appraisal rights provides that appraisal
rights are the exclusive remedy available to shareholders that have those
rights, unless the transaction is unlawful or fraudulent.
Pursuant to Section 910 of the New York Business Corporation Law ("BCL"),
holders of Sel-Drum common stock have the right to dissent from the binding
share exchange and, if the plan for binding share exchange is completed, receive
payment of the fair value of their Sel-Drum common stock by complying with the
requirements of BCL Section 623 (the full text of which is set forth as Appendix
C to this Notice to Shareholders). Under Section 913 of the BCL, Holding must
give a copy of the plan for binding share exchange adopted by Holding's board of
directors, or an outline of the material features of the plan, to all other
shareholders of Sel-Drum. A copy of the plan is attached as Appendix A to this
Notice to Shareholders. If you elect to dissent from the share exchange you must
file with Holding, within 20 days after the giving of this Notice to
Shareholders to you, a written notice of such election, stating your name and
residence address, the number of shares as to which you dissent (which must be
all of your shares) and a demand for payment of the fair value for your shares.
At the time of filing the notice of election to dissent or within one month
thereafter, you must submit the certificates representing your shares to Holding
or Sel-Drum's transfer agent for notation on the certificates of your election
to dissent, after which the certificates will be returned to you. Failure to
submit the certificates for such notation may result in the loss of your
appraisal rights. Within 15 days after the expiration of the period within which
shareholders may file their notices of election to dissent or within 15 days
after effectiveness of the share exchange, whichever is later, Holding must make
a written offer to each shareholder who has filed a notice of election to pay
for his shares at a specified price which Holding considers to be their fair
value. If Holding fails to make the offer within such 15-day period, or if any
dissenting shareholder fails to agree to it within 30 days after it is made,
Holding is required to institute a judicial proceeding within 20 days after the
expiration of the applicable period to determine the rights of dissenting
shareholders and to fix the fair value of their shares of Sel-Drum common stock.
If Holding fails to institute the proceeding, a dissenting shareholder may do
so. In the judicial proceeding, the court will determine the right of each
dissenting shareholder to receive payment and the fair value of their shares.
This summary is not a complete statement of the provisions of BCL Section
623. A copy of Section 623 of the BCL is attached as Appendix C to this Notice
to Shareholders. You should read it carefully.
If you object to the binding share exchange and wish to exercise your
rights further, you should consult with your legal counsel at your expense.
Holding has not made any provision in
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<PAGE>
connection with this transaction to grant you access to the corporate files of
Holding or to reimburse you for any of your legal expenses or for any expenses.
IDENTIFICATION AND SECURITIES OF SEL-DRUM
Sel-Drum's principal executive office is located at 501 Amherst Street,
Buffalo, New York, 14207, and its telephone number is 800-263-9356.
The exact title of the class of equity securities that is the subject of
this filing is common stock, par value $.01 per share, of Sel-Drum. As of
December 28, 2000, there were 7,417,500 outstanding shares of Sel-Drum's common
stock.
Sel-Drum's common stock trades on the Nasdaq OTC Bulletin Board under the
symbol "SDUM." The following table sets forth the high and low bid quotations
provided for Sel-Drum's common stock for each quarterly period during the last
two fiscal years and the first two quarters (through December 28, 2000) of the
current fiscal year.
COMMON STOCK PRICE
<TABLE>
<CAPTION>
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 1999 $0.375 $0.375 $0.375 $0.375 $0.375 $0.375 $0.375 $0.315
Fiscal 2000 $0.34375 $0.3125 $0.50 $0.25 $0.33 $0.3125 $0.375 $0.375
Fiscal 2001 $0.500 $0.219 $0.219 $0.219
</TABLE>
To the best of Holding's knowledge, after making a reasonable inquiry,
Sel-Drum has paid no dividends on its common stock during the past two years.
On July 30, 1999, Holding purchased 7,173,680 shares of Sel-Drum's common
stock from the principal shareholders of Sel-Drum and other persons related to
them for a total purchase price of $2,869,472, or $.40 per share. This
transaction is described in more detail under the caption "Past Contacts,
Transactions, Negotiations and Agreements" in this Notice to Shareholders.
IDENTIFICATION OF HOLDING
Holding's principal business address is 220 Boul. Industriel, Boucherville,
Quebec J4B 2X4 and its business telephone number is (450) 641-3516.
The name and address of the sole officer and director of Holding and the
sole person controlling Holding are as follows:
<TABLE>
<CAPTION>
Name Position Address
---- -------- -------
<S> <C> <C>
Camille Cotran Sole Shareholder and Director, President, 220 Boul. Industriel
Secretary-Treasurer Boucherville, Quebec
Canada J4B 2X4
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<PAGE>
Both Holding and Camille Cotran are affiliates of Sel-Drum. Holding owns
approximately 97% of the outstanding shares of common stock of Sel-Drum, and Mr.
Cotran is the sole shareholder of Holding.
The principal business of Holding is the management of the business of
Sel-Drum and Densigraphix Kopi inc., a wholly-owned subsidiary of Holding
engaged in the sale of compatible toners for copiers and laser printers .
Holding is incorporated under the laws of Canada. During the past five years,
Holding has not been convicted in a criminal proceeding and has not been a party
to a judicial or administrative proceeding that resulted in a judgment, decree
or a final order enjoining Holding from further violations of, or prohibiting
activities subject to, federal or state securities laws, or a finding of any
violation of federal or state securities laws.
The business and background of Camille Cotran are as follows:
Camille Cotran
Sole shareholder and director, President and Secretary-Treasurer
of Holding
220 Boul. Industriel
Boucherville, Quebec, Canada J4B 2X4
Camille Cotran is the sole shareholder and director, and President and
Secretary-Treasurer, of Holding, a company organized in 1986 to hold and manage
investments made by Camille Cotran. Mr. Cotran has also been the Chairman of the
Board of Directors and Chief Executive Officer of Sel-Drum since July 1999. In
1979, Mr. Cotran formed, and he currently is the sole Director, Chairman and
President of Densigraphix Kopi inc. From 1973 to 1979, Mr. Cotran was Vice
President, Manufacturing, for Cancoat Papers, a manufacturer of zinc oxide
photocopy paper. Mr. Cotran is a citizen of Canada.
During the past five years, Camille Cotran has neither been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors) nor
been a party to any judicial or administrative proceeding that resulted in a
judgment, decree or final order enjoining him from future violations of, or
prohibiting activities subject to, federal or state securities laws, or a
finding of any violation of federal or state securities laws.
PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS
The nature and approximate dollar amount of all the transactions between
Holding and Sel-Drum, and any of their affiliates, including agreements
involving Sel-Drum's securities, that have occurred during the past two years,
are as follows:
On August 1, 1999, Holding entered into an agreement with Sel-Drum
Corporation, an indirect wholly-owned subsidiary of Sel-Drum, to provide
consulting, advisory, support and administrative services for an annual fee to
Holding of CDN$150,000, plus expenses. The agreement was amended as of September
15, 2000, to increase the annual fee to CDN$300,000 for the year ended July 31,
2000, and further amended as of December 1, 2000, to provide for the same annual
fee of CDN $300,000 for the year ended July 31, 2001. The Agreement is
automatically renewable for successive one-year terms unless either party gives
notice to the other party, at least six months prior to the end of the
then-current term, of its intention not to renew the Agreement. The annual fee
is renegotiated each year.
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<PAGE>
During the fiscal years ended July 31, 2000 and 1999, Sel-Drum made sales
totaling approximately $315,000 and $330,000, respectively, to Densigraphix Kopi
inc., a wholly-owned subsidiary of Holding ("Densigraphix"). During fiscal 2000
and 1999, Sel-Drum purchased approximately $1,550,000 and $465,000,
respectively, of its raw materials from Densigraphix. For the quarter ended
October 31, 2000, sales by Sel-Drum to Densigraphix totaled approximately
$102,000, and purchases of inventory by Sel-Drum from Densigraphix totaled
approximately $444,000.
For the past several years, Holding and Sel-Drum have been in regular
contact as Holding was both a supplier to and customer of Sel-Drum. 1997 and
1998, there were sporadic meetings and discussions regarding the possible
acquisition of Sel-Drum between Brian Turnbull, former Chairman of the Board of
Sel-Drum and Robert Asseltine, an advisor of Mr. Turnbull and a consultant to
Sel-Drum, and Camille Cotran, President of Holding. The parties were unable to
reach agreement on the terms of any transaction. In mid-1999, discussions
between these parties were resumed and, on July 6, 1999, the parties executed a
term sheet (the "Term Sheet") among themselves and Holding and Densigraphix
("the Purchasers"). Pursuant to the Term Sheet, Messrs Asseltine and Turnbull
agreed to sell to the Purchasers all of Sel-Drum's common stock beneficially
held by them, and an additional 1,119,000 shares held by family members or
related parties, for an aggregate purchase price of $2,869,472, or $0.40 per
share. The Term Sheet further provided for the Purchasers' acquisition of all
outstanding shares of preferred stock held by Messrs. Asseltine and Turnbull (or
their affiliates) in Sel-Drum's subsidiary, Sel-Drum Imaging Corporation
("Imaging"), for an aggregate purchase price of $2,883,000, or $457.90 per
share.
The transactions described in the Term Sheet were consummated on July 30,
1999 pursuant to a Stock Purchase Agreement among Holding and Robert Asseltine,
547118 Ontario Limited (a company controlled by Mr. Turnbull) and the other
selling shareholders (for the common stock of Sel-Drum) and Densigraphix and
Robert E. Asseltine, Geraldine Asseltine and 547118 Ontario Limited (for the
preferred shares of Imaging).
Pursuant to the Agreement, Holding acquired approximately 97% of the issued
and outstanding common stock of Sel-Drum and Densigraphix acquired all of the
outstanding preferred stock of Imaging. The aggregate purchase price for the
common stock and the preferred stock was $5,702,472.
Holding, Densigraphix and Sel-Drum Corporation entered into a credit
facility with National Bank of Canada in the aggregate amount of CDN$6.0 million
to provide part of the financing of the acquisition of the Sel-Drum common stock
by Holding and the acquisition of the preferred stock of Imaging by
Densigraphix. All of the funds advanced under the credit facility were applied
towards the acquisition. Under the terms of the credit facility, the shares of
Sel-Drum and Imaging acquired by Holding and Densigraphix, respectively, in
addition to other collateral, were pledged to the bank to secure repayment of
the loans. Each company entered into a separate agreement with the bank covering
a portion of the financing.
The bank agreement with Holding provided for a term loan in the amount of
CDN$750,000, which is payable over five years and bears interest at a floating
rate equal to the
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<PAGE>
bank's prime rate plus 1.50%; mezzanine financing in the amount of CDN$2.0
million, which is payable over three years and bears interest at a floating rate
equal to the bank's prime rate plus 3.0%; and a bridge loan in the amount of
CDN$1.5 million, which was payable in full within sixty (60) days after the
completion of the acquisition of the Sel-Drum stock, and bore interest at the
bank's prime rate plus 1.5%. Pursuant to the agreement with the bank, Holding
pledged all of its shares in Sel-Drum and Densigraphix to secure payment of the
loans. In addition, the bank received a security interest in Holding's assets
and properties and unconditional guarantees from Densigraphix and Sel-Drum, each
in the amount of CDN$4.25 million, and other security. Pursuant to the bank
agreement, Sel-Drum Corporation (USA) Inc., a wholly-owned subsidiary of
Sel-Drum, ("Sel-Drum USA"), has advanced funds to Holding for use in paying the
loans to the bank. As of October 31, 2000, outstanding loans made by Sel-Drum
USA to Holding totaled $550,000. The loans bear interest at the U.S. prime rate
less 1% and contain no principal repayment terms.
The bank agreement with Densigraphix provided for a CDN$1.5 million
increase in Densigraphix's existing revolving credit facility to CDN$3.0 million
(with outstanding advances limited to 75% of net accounts receivable and 50% of
inventory up to CDN$1.5 million), the increase to be used in financing the
acquisition of the Imaging preferred stock. Densigraphix also received a term
loan for CDN$250,000 payable over five years, the proceeds of which were also to
be used in the preferred stock acquisition. The advances under the credit
facility bear interest at the bank's prime rate plus 0.50%, and the term loan
bears interest at a floating rate equal to the bank's prime rate plus 1.50%.
Under the agreement with the bank, Densigraphix pledged all of the preferred
shares of Imaging as security for payment of the loans, and granted the bank a
security interest in its accounts receivable, inventory and other assets, and
Holding delivered to the bank an unconditional guarantee in the amount of
CDN$3.25 million. Pursuant to the bank agreement, Sel-Drum Corporation has
advanced funds to Densigraphix for use in paying these loans to the bank. As of
October 31, 2000, these outstanding loans to Densigraphix totaled $327,550.
These loans bear interest at the Canadian prime rate plus 1% and contain no
principal repayment terms.
The bank agreement with Sel-Drum Corporation provided for a CDN$1.0 million
increase in Sel-Drum Corporation's operating line of credit to CDN$4.2 million,
and a term loan of CDN$500,000. Advances under the line of credit bear interest
at the bank's prime rate plus 0.50%. The term loan is payable over five years,
and bears interest at a floating rate equal to the bank's prime rate plus 1.50%.
As security for the loans, the bank received a chattel mortgage and security
interest in all of Sel-Drum's assets; unconditional guarantees from Holding,
Sel-Drum and Imaging, each in the amount of CDN$5.0 million, and from Sel-Drum
USA in the amount of CDN$2.0 million; a security interest in the assets of
Sel-Drum USA and other security. Upon completion of the share acquisition in
July, 1999 by Holding, Sel-Drum Corporation loaned CDN$1.5 million, borrowed
under the credit facility and the term loan, to Densigraphix, which in turn
advanced the funds to Holding to repay the CDN$1.5 million bridge loan obtained
by Holding, as described above. This loan, which at October 31, 2000, totaled
$982,650, bears interest at the Canadian prime rate plus 1% and contains no
principal repayment terms.
None of the shares to be acquired by Holding in the binding share exchange
are held by any officer, director or affiliate of Holding.
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<PAGE>
TERMS OF THE TRANSACTION
The transaction is being effected pursuant to a plan for binding share
exchange under Section 913 of the Business Corporation Law of the State of New
York ("BCL"). Under BCL Section 913(g), any corporation owning at least 90% of
the outstanding common shares of another corporation (the "subject company") may
effect a binding share exchange without obtaining the vote or other approval of
the other shareholders of the subject company. Accordingly, no vote of the
shareholders of Sel-Drum is required, or will be solicited, for approval of the
binding share exchange. Upon effectiveness of the binding share exchange by the
filing of a certificate of exchange with the State of New York, Holding will
automatically become the holder of all of the outstanding shares of common stock
of Sel-Drum.
Holding is offering $.40 per share in cash for the outstanding shares of
Sel-Drum common stock that it does not own. Shareholders not wishing to accept
this offer may exercise dissenters' rights of appraisal in accordance with the
provisions of BCL Section 623, which are described under the caption
"Dissenters' Rights of Appraisal" in this Notice to Shareholders. Shareholders
who exercise their appraisal rights will not receive the purchase price being
offered by Holding.
Holding will deposit $97,528.00 with the U.S. Stock Transfer Corporation
for payment of the purchase price to shareholders who accept Holding's offer. To
receive the purchase price being offered by Holding, you must submit your stock
certificates to U.S. Stock Transfer Corporation (at the address set forth in the
letter of transmittal accompanying this Notice to Shareholders, the form of
which is attached to this Notice as Appendix B). Generally, if your shares are
held in a brokerage account, your broker will automatically credit your account
for the purchase price. If you (or your broker) do not submit your certificates,
your certificates will, after the binding share exchange is effected, represent
only the right to receive the purchase price or, if you have properly exercised
your right of appraisal, to receive the payment determined to be due you in the
appraisal process.
The reason for the transaction is to terminate Sel-Drum's status as a
reporting company under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). On November 2, 2000, the registration of the common stock of
Sel-Drum under the Exchange Act was terminated. In light of the very small
number of holders of Sel-Drum's common stock other than Holding, the very
limited trading market in Sel-Drum's common stock, and Holding's belief that
Sel-Drum will not require access to the public equity market for financing in
the foreseeable future, Holding believes that the expense and effort in
Sel-Drum's continuing to comply with the reporting and other obligations of the
Exchange Act are not justified.
The terms of the transaction described in this Notice to Shareholders will
be the same for all holders of Sel-Drum's common stock, except as they may be
affected by the exercise of dissenters' rights of appraisal under New York law.
PLANS OR PROPOSALS OF HOLDING
The outstanding shares of Sel-Drum's common stock to be acquired by Holding
in this transaction will be held by Holding as the parent company of Sel-Drum.
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<PAGE>
Following Holding's acquisition of all of the outstanding shares of
Sel-Drum common stock, Sel-Drum will be a wholly-owned subsidiary of Holding.
Holding intends to de-list the Sel-Drum common stock from the Nasdaq OTC
Bulletin Board and to file a Form 15 with the Securities and Exchange Commission
to suspend Sel-Drum's reporting requirements under the Securities Exchange Act
of 1934. Following the effectiveness of the plan for binding share exchange,
Holding intends to proceed with a restructuring of Sel-Drum, its subsidiaries,
and Densigraphix Kopi inc., a wholly-owned subsidiary of Holding.
INTEREST IN SECURITIES OF SEL-DRUM
Holding beneficially owns 7,173,680 shares of Sel-Drum common stock, which
constitutes 96.7% of the outstanding shares of common stock. By virtue of his
100% ownership of the capital stock of Holding, Camille Cotran is also deemed a
beneficial owner of the shares of Sel-Drum common stock owned by Holding. Mr.
Cotran is the sole officer, director and controlling person of Holding.
TRANSACTION EXPENSES
Holding's estimated expenses for the transaction include legal fees (U.S.
and Canada) of $60,000, exchange agent fees of $10,000, fairness review report
fee of $10,000, fees associated with accounts held by brokers of $2,500, and
printing and mailing costs of $4,000. Sel-Drum will not be responsible for
paying, or will be reimbursed by Holding for, Holding's expenses associated with
the acquisition of all of the outstanding shares of Sel-Drum common stock under
the plan for binding share exchange.
SOURCE OF TRANSACTION FUNDS
The source of the funds totaling $97,528.00 to purchase the outstanding
shares of Sel-Drum common stock will be cash from Holding's working capital,
derived from dividends received from its wholly-owned subsidiary, Densigraphix
Kopi inc.
FINANCIAL STATEMENTS
Following are Sel-Drum's Audited Consolidated Financial Statements and
Independent Auditors' Report for the fiscal years ended July 31, 2000 and 1999,
and Sel-Drum's Consolidated Financial Statements for the quarter ended October
31, 2000. Copies of all reports and other documents filed by Sel-Drum with the
Securities and Exchange Commission may be inspected, and copies obtained at the
public reference facilities maintained by the SEC at:
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, NY 10048
Washington, DC 20549 Chicago, IL 60661
Copies of these materials may also be obtained by mail at prescribed rates
from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, DC 20549 or by calling the SEC at (800) SEC-0330. The SEC maintains
a website that contains reports and other information regarding Sel-Drum at
http://www.sec.gov.
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<PAGE>
SEL-DRUM INTERNATIONAL, INC.
AND SUBSIDIARIES
AUDITED CONSOLIDATED
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
JULY 31, 2000 AND 1999
<PAGE>
CONTENTS
AUDITED CONSOLIDATED FINANCIAL STATEMENTS PAGE
Independent Auditors' Report 3
Consolidated Balance Sheet 4
Consolidated Statements of Operations 6
Consolidated Statements of Comprehensive Operations 8
Consolidated Statements of Changes in Shareholders' Equity 9
Consolidated Statements of Cash Flows 11
Notes to Consolidated Financial Statements 13
<PAGE>
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, 2000, 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, 2000. 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, 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended July 31, 2000, in conformity with
generally accepted accounting principles.
Rochester, New York
September 29, 2000
- 3 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JULY 31, 2000
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 32,190
Accounts receivable, net of allowance for doubtful
accounts of $33,460 2,268,265
Inventories 3,861,037
Deferred income taxes 25,000
Other current assets 130,989
----------
TOTAL CURRENT ASSETS 6,317,481
PROPERTY
Equipment 1,081,604
Vehicles 13,922
Furniture and fixtures 84,487
Leasehold improvements 417,848
----------
1,597,861
Less accumulated depreciation and amortization 1,110,904
----------
486,957
OTHER ASSETS
Non-competition agreement, net of
accumulated amortization of $31,170 12,468
Sundry, principally deposits 11,170
Notes receivable from related parties 1,559,500
----------
1,583,138
----------
$8,387,576
==========
The accompanying notes are an integral part of the consolidated financial
statements.
- 4 -
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit borrowings $ 1,339,502
Current portion of long-term debt 67,296
Accounts payable 401,262
Income taxes payable 133,464
Other current liabilities 487,127
-----------
TOTAL CURRENT LIABILITIES 2,428,651
LONG-TERM DEBT 218,731
SHAREHOLDERS' EQUITY
Common stock 74,175
Additional paid-in capital 609,096
Preferred stock 4,499,805
Retained earnings 828,729
Accumulated other comprehensive loss (271,611)
-----------
5,740,194
-----------
$ 8,387,576
===========
- 5 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended July 31,
------------------------------
2000 1999
-------------- --------------
Net sales $ 15,372,469 $ 14,631,235
Cost of goods sold 10,793,712 10,555,266
------------ ------------
GROSS PROFIT 4,578,757 4,075,969
Selling, administrative and general
expenses 3,580,767 3,305,529
Bad debts 348 130,326
------------ ------------
INCOME FROM OPERATIONS 997,642 640,114
Other income (expense):
Interest income 81,784 1,325
Interest expense (132,437) (53,706)
Gain (loss) on disposal of property 14,793 (2,241)
Foreign currency transaction loss (12,489) (9,465)
------------ ------------
(48,349) (64,087)
------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 949,293 576,027
Income tax expense (benefit):
Current 318,786 235,886
Deferred 13,000 (4,000)
------------ ------------
331,786 231,886
------------ ------------
NET INCOME FROM CONTINUING OPERATIONS 617,507 344,141
Discontinued operations:
Loss from operations of drum recoating division
(net of income tax benefit of $13,222 in 1999) -- (19,833)
Write-off of assets related to drum recoating division
(net of income tax benefit of $49,725 in 1999) -- (374,173)
------------ ------------
-- (394,006)
NET INCOME (LOSS) $ 617,507 $ (49,865)
============ ============
- 6 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, Cont'd
Year ended July 31,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net income (loss) per common share:
Basic and diluted:
Continuing operations $ 0.08 $ 0.04
Discontinued operations:
Loss from operations -- --
Write-off of assets -- (0.05)
------------- -------------
NET INCOME (LOSS) PER COMM0N SHARE $ 0.08 $ (0.01)
============= =============
Weighted average:
Common shares 7,417,500 7,542,158
Dilutive stock options -- --
------------- -------------
COMMON SHARES AND DILUTIVE STOCK OPTIONS 7,417,500 7,542,158
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 7 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
<TABLE>
<CAPTION>
Year ended July 31,
----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net income (loss) $617,507 $(49,865)
Other comprehensive income:
Foreign currency translation adjustment 3,007 25
-------- --------
COMPREHENSIVE INCOME (LOSS) $620,514 $(49,840)
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 8 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common paid-in Preferred Retained
stock capital stock earnings
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Balance at
August 1, 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 I -- -- -- --
Repurchase of 125,000 common shares
at $.40 per share
---------- ---------- ---------- ----------
BALANCE AT
JULY 31, 1999 76,425 706,846 4,499,805 211,222
Net income for the year -- -- -- 617,507
Current year other comprehensive income -- -- -- --
Retirement of 225,000 shares of
treasury stock (2,250) (97,750) -- --
---------- ---------- ---------- ----------
BALANCE AT
JULY 31, 2000 $ 74,175 $ 609,096 $4,499,805 $ 828,729
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 9 -
<PAGE>
<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, 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 I -- 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
Net income for the year -- -- -- 617,507
Current year other comprehensive income 3,007 -- -- 3,007
Retirement of 225,000 shares of
treasury stock -- -- 100,000 --
----------- ----------- ----------- -----------
BALANCE AT
JULY 31, 2000 $ (271,611) $ -- $ -- $ 5,740,194
=========== =========== =========== ===========
</TABLE>
- 10 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended July 31,
----------------------------
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net income (loss) $ 617,507 $ (49,865)
Adjustments to reconcile net income (loss) to net cash (used for)
provided from operating activities:
Bad debts 348 130,326
Depreciation and amortization 184,456 167,867
Deferred income taxes 13,000 (53,913)
(Gain) loss on disposal of property (14,793) 2,241
Write-off of assets related to drum recoating division -- 423,898
Changes in certain assets and liabilities affecting operations:
Accounts receivable (391,563) (180,484)
Inventories (853,440) 364,073
Refundable income taxes 49,027 72,124
Other current assets (29,279) 6,120
Deposits 715 (74)
Accounts payable (2,900) (285,034)
Income taxes payable 133,464 --
Other current liabilities 165,249 186,311
----------- -----------
NET CASH (USED FOR) PROVIDED FROM
OPERATING ACTIVITIES (128,209) 783,590
CASH FLOWS - INVESTING ACTIVITIES
Purchases of property (94,568) (205,026)
Proceeds on disposal of property 14,793 2,312
----------- -----------
NET CASH USED FOR
INVESTING ACTIVITIES (79,775) (202,714)
CASH FLOWS - FINANCING ACTIVITIES
Decrease in bank overdraft -- (315,284)
Net increase (decrease) in short-term financing 1,339,502 (310,043)
Repayments on long-term debt (82,300) (98,439)
Proceeds from long-term debt 336,500 --
(Increase) decrease in notes receivable from related parties (1,559,500) 160,084
Purchase of treasury stock -- (100,000)
----------- -----------
NET CASH PROVIDED FROM (USED FOR)
FINANCING ACTIVITIES 34,202 (663,682)
Effect of exchange rate changes on cash 3,007 21
----------- -----------
NET DECREASE IN
CASH AND CASH EQUIVALENTS (170,775) (82,785)
Cash and cash equivalents at beginning of year 202,965 285,750
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 32,190 $ 202,965
=========== ===========
</TABLE>
- 11 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Cont'd
<TABLE>
<CAPTION>
Year ended July 31,
----------------------------
2000 1999
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C> <C>
Cash paid during the year for:
Interest $ 130,976 $ 53,706
========== =========
Income taxes $ 132,633 $ 150,536
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
- 12 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
Sel-Drum International, Inc. (the "Company") is a United States holding
company, which owns 100% of the common stock of Sel-Drum Imaging
Corporation (a Canadian holding company). Sel-Drum Imaging Corporation owns
100% of the common stock of Sel-Drum Corporation (U.S.A.), Inc. (a United
States operating company) and Sel-Drum Corporation (a Canadian operating
company).
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 N.
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 generally consist of investments in term deposit accounts
at a Canadian financial institution. At July 31, 2000, 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 $211,000 at July 31, 2000. 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.
- 13 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
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 statement 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, 2000 and 1999
approximated $112,000 and $104,000, respectively.
- 14 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
Income taxes
Deferred income tax assets and liabilities arise from temporary differences
associated with differences between the financial statement and tax basis
of assets and liabilities, as determined by the enacted rates which are
expected to be in effect when these differences reverse. Deferred tax
assets and liabilities are classified as current or noncurrent, depending
on the classification of the assets and liabilities to which they relate.
Deferred tax assets and liabilities not related to an asset or liability
are classified as current or noncurrent depending on the periods in which
the temporary differences are expected to reverse. The principal types of
temporary differences between assets and liabilities for financial
statement and tax return purposes are detailed in Note F.
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, line of credit borrowings, accounts payable and other current
liabilities approximate fair value because of the short maturity period of
those instruments. In addition, the carrying amounts of notes receivable
from related parties and long-term debt approximate fair value based on
current notes.
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 income (loss) per common share
Basic net income (loss) per common share is determined by dividing net
income (loss) by the weighted average number of common shares outstanding.
As of July 31, 2000 and 1999 there are no dilutive potential common shares.
NOTE B: INVENTORIES
The components of inventories at July 31, 2000 are as follows:
Raw materials $ 185,569
Finished goods 3,675,468
----------
$3,861,037
==========
- 15 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
NOTE C: NOTES RECEIVABLE FROM RELATED PARTIES
Notes receivable from related parties (see Notes A and L) are summarized as
follows:
<TABLE>
<S> <C>
Note receivable from C. Cotran Holding, Inc., bearing interest
at the Canadian prime rate minus 1% (an effective rate of 6.5%
at July 31, 2000). $ 550,000
Note receivable from Densigraphix Kopi, Inc., bearing interest
at the Canadian prime rate plus 1% (an effective rate
of 8.5% at July 31, 2000). 1,009,500
----------
$1,559,500
==========
</TABLE>
There are currently no principal repayment terms for these notes
receivable. The Company received interest income of approximately $76,000
from the notes receivable from related parties during the year ended July
31, 2000. The Company advanced an additional $336,500 to Densigraphix Kopi,
Inc. in August 2000.
NOTE D: LINE OF CREDIT
Sel-Drum Corporation has an operating line of credit available for up to
$2,826,600 ($4,200,000 Canadian dollars) through the National Bank of
Canada. The arrangement provides for interest to be paid monthly at the
bank's prime rate plus .50% (an effective rate of 8% at July 31, 2000).
Sel-Drum Corporation may use the credit facility to issue letters of credit
for the purchase of inventories, up to a maximum amount of $1,009,500
($1,500,000 Canadian dollars). Issued letters of credit will reduce the
amounts available to the Company to borrow for working capital needs under
the facility. At July 31, 2000, the Company had outstanding letters of
credit aggregating $27,600 ($40,800 Canadian dollars).
The line is secured by substantially all assets of Sel-Drum Corporation and
Sel-Drum Corporation (USA), Inc., the limited corporate guarantees of
Sel-Drum International, Inc. and Sel-Drum Imaging Corporation, each in the
amount of $3,365,000 ($5,000,000 Canadian dollars), and the limited
corporate guarantee of Sel-Drum Corporation (USA), Inc. in the amount of
$1,346,000 ($2,000,000 Canadian dollars). The guarantee by Sel-Drum
Corporation (USA), Inc. is supported by a first ranking security interest
on all assets of Sel-Drum Corporation (USA), Inc. The line also has an
unconditional letter of guarantee from C. Cotran Holding, Inc. in the
amount of $3,365,000 ($5,000,000 Canadian dollars). At July 31, 2000, the
Company had $1,339,502 ($1,990,345 Canadian dollars) outstanding under this
arrangement.
At July 31, 2000, the Company had $1,459,498 available for borrowings under
this arrangement.
- 16 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
NOTE E: LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<S> <C>
Term loan of $336,500 ($500,000 Canadian dollars) payable to
the National Bank of Canada, due in monthly installments of
$5,608 ($8,333 Canadian dollars) through October 2005, plus
interest at the bank's prime rate plus 1.5% (an effective rate
of 9% at July 31, 2000). $ 286,027
Less: Current portion of long-term debt 67,296
---------
$ 218,731
=========
</TABLE>
The Company shall be entitled to use this credit facility for working
capital and for the issuance of letters of credit, which are used primarily
for the purchase of inventories from foreign suppliers.
Annual maturities of long-term debt are as follows:
Year ending July 31, Amount
-------------------- ----------
2001 $ 67,296
2002 67,296
2003 67,296
2004 67,296
2005 16,843
--------
$286,027
========
The above-cited term loan is secured by substantially all assets of
Sel-Drum Corporation and Sel-Drum Corporation (USA), Inc., the limited
corporate guarantees of Sel-Drum International, Inc. and Sel-Drum Imaging
Corporation, each in the amount of $3,365,000 ($5,000,000 Canadian
dollars), and the limited corporate guarantee of Sel-Drum Corporation
(USA), Inc. in the amount of $1,346,000 ($2,000,000 Canadian dollars). The
loan is also secured by an unconditional letter of guarantee from C. Cotran
Holding, Inc. in the amount of $3,365,000 ($5,000,000 Canadian dollars).
- 17 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
NOTE F: 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,
----------------------------
2000 1999
------------- -------------
<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 (1.0) 4.3
------ -----
EFFECTIVE TAX RATE 35.0% 40.3%
====== =====
</TABLE>
The tax effects of temporary differences that give rise to the current
deferred tax asset as of July 31, 2000 are presented below:
Assets/
(Liability)
-----------
Allowance for doubtful accounts receivable $ 13,300
Capitalization of overhead costs under Section 263A 17,000
Depreciation 24,000
--------
54,300
Less: Valuation allowance (29,300)
--------
$ 25,000
========
- 18 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
NOTE G: COMMON AND PREFERRED STOCK
The following is certain information regarding common and preferred stock
as of July 31, 2000:
Sel-Drum International, Inc.
Common stock
Par value $ 0.01
Shares authorized 100,000,000
Shares issued 7,417,500
Preferred Stock
Par value $ 0.01
Shares authorized 10,000,000
Shares issued and outstanding None
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
- 19 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
NOTE H: COMMITMENTS AND CONTINGENCIES
Lease commitments
Sel-Drum Corporation leases its facility in Burlington, Ontario, Canada at
a base monthly rental approximating $6,500 through February 2004. 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 April 2002. The
base monthly rental on its other facility is approximately $1,500 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 approximated $215,000 and
$209,000 for the years ended July 31, 2000 and 1999, respectively.
In addition, the Company has operating lease agreements for certain
vehicles and equipment, which expire in various years through 2003.
Total minimum future rental payments required under all non-cancelable
leases are approximately as follows:
Year ending July 31, Amount
-------------------- -------------
2001 $ 202,000
2002 152,000
2003 86,000
2004 46,000
---------
$ 486,000
=========
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.
- 20 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
NOTE I: 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
had 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.
- 21 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
NOTE J: 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. There were 601,500 shares subject to options under the Plan at
July 31, 2000.
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:
Weighted-
Shares average
subject exercise
to options price
------------- -------------
Outstanding at July 31, 1999 699,500 $ 0.46
Granted 190,000 $ 0.50
Forfeited (38,000) $ 0.50
--------
Outstanding at July 31, 2000 851,500 $ 0.47
========
Exercisable at July 31, 2000 724,834 $ 0.47
========
Exercisable at July 31, 1999 563,000 $ 0.46
========
- 22 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
NOTE J: STOCK OPTION PLANS, Cont'd
---------------------------
The following table summarizes information about stock options outstanding
at July 31, 2000:
<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 2.3 250,000 $ .40
$ .50 601,500 $ .50 7.8 474,834 $ .50
-------- --------
851,500 $ .47 5.8 724,834 $ .47
======== ========
</TABLE>
Pro forma information regarding net income (loss) and basic and diluted net
income (loss) 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 income (loss) and
basic and diluted net income (loss) 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
income (loss) and basic and diluted net income (loss) per share are as
follows:
<TABLE>
<CAPTION>
Year ended July 31,
----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Pro forma net income (loss) $ 628,391 $ (62,555)
========== ==========
Pro forma basic net income (loss) per share $ 0.08 $ (0.01)
======= ========
Pro forma diluted net income (loss) per share $ 0.08 $ (0.01)
======= ========
</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.
- 23 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
NOTE K: MAJOR CUSTOMER AND SUPPLIERS
For the fiscal years ended July 31, 2000 and 1999, approximately 34% and
24%, respectively, of net sales were made to one customer. At July 31,
2000, total amounts due from this customer of approximately $810,000 are
included in accounts receivable, as reflected in the accompanying
consolidated balance sheet.
During fiscal years ended July 31, 2000 and 1999, the Company purchased
approximately 32% and 31%, respectively, from two suppliers. At July 31,
2000, total amounts due to these suppliers of approximately $48,000 are
included in accounts payable, as reflected in the accompanying consolidated
balance sheet.
NOTE L: RELATED PARTY TRANSACTIONS
Sales
The Company sold approximately $315,000 and $330,000 to Densigraphix Kopi,
Inc. during the years ended July 31, 2000 and 1999, respectively. At July
31, 2000, total amounts from Densigraphix Kopi, Inc. of approximately
$118,000 are included in accounts receivable, as reflected in the
accompanying consolidated balance sheet.
Purchases
The Company purchased approximately $1,550,000 and $465,000 of its raw
materials from Densigraphix Kopi, Inc. during the years ended July 31, 2000
and 1999, respectively. At July 31, 2000, total amounts due to Densigraphix
Kopi, Inc. of approximately $79,000 are included in accounts payable, as
reflected in the accompanying consolidated balance sheet.
Consulting
Effective August 1, 1999, Sel-Drum Corporation entered into an agreement
with C. Cotran Holding, Inc. Under terms of the agreement, C. Cotran
Holding, Inc. provides consulting, advisory support and administrative
services. In consideration for the services provided, Sel-Drum Corporation
pays $201,900 ($300,000 Canadian dollars) annually, plus out of pocket
expenses. The agreement renews annually, unless notice is given by either
party at least six months before the end of the renewal period.
NOTE M: SEGMENT FINANCIAL INFORMATION
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.
- 24 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
NOTE M: SEGMENT FINANCIAL INFORMATION, Cont'd
The following tables present sales and other financial information by
geographic region and business segment for the years ended July 31, 2000
and July 31, 1999:
<TABLE>
<CAPTION>
United States Canada Eliminations Consolidated
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
July 31, 2000:
-------------
Sales to unaffiliated customers $ 8,452,647 $6,919,822 $ - $15,372,469
Intercompany sales 2,021,624 2,690,928 (4,712,552) -
Gross profit 2,889,029 1,647,057 42,671 4,578,757
Operating earnings 482,182 515,460 - 997,642
Identifiable assets 4,133,287 4,241,821 - 8,375,108
Capital expenditures 21,424 73,144 - 94,568
Depreciation and amortization 89,506 94,950 - 184,456
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
</TABLE>
- 25 -
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
NOTE M: SEGMENT FINANCIAL INFORMATION, Cont'd
<TABLE>
<CAPTION>
Year ended July 31,
------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Net sales:
Wholesale distribution $13,307,788 $13,132,839
Manufacturing 2,064,681 1,498,396
----------- -----------
$15,372,469 $14,631,235
=========== ===========
Gross profit:
Wholesale distribution $ 4,275,567 $ 3,848,302
Manufacturing 303,190 227,667
----------- -----------
$ 4,578,757 $ 4,075,969
=========== ===========
Operating earnings:
Wholesale distribution $ 878,578 $ 588,981
Manufacturing 119,064 51,133
----------- -----------
$ 997,642 $ 640,114
=========== ===========
Tangible assets:
Wholesale distribution $ 7,851,126 $ 5,332,161
Manufacturing 523,982 520,450
----------- -----------
Total identifiable assets 8,375,108 5,852,611
Non-competition agreement, net 12,468 24,936
----------- -----------
$ 8,387,576 $ 5,877,547
=========== ===========
Capital expenditures:
Wholesale distribution $ 81,682 $ 173,343
Manufacturing 12,886 31,683
----------- -----------
$ 94,568 $ 205,026
=========== ===========
Depreciation and amortization:
Wholesale distribution $ 132,143 $ 75,447
Manufacturing 52,313 60,034
----------- -----------
184,456 135,481
Discontinued operations -- 32,386
----------- -----------
$ 184,456 $ 167,867
=========== ===========
</TABLE>
- 26 -
<PAGE>
NOTE N: 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 year ended July 31, 1999 is as follows:
<TABLE>
<S> <C>
Net sales $ 48,266
Cost of goods sold 75,635
--------
GROSS LOSS (27,369)
Selling, administrative and general expenses 5,686
--------
Loss before income taxes (33,055)
Income tax benefit 13,222
--------
NET LOSS $(19,833)
========
</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 was as
follows:
<TABLE>
<S> <C>
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
========
</TABLE>
<PAGE>
SEL-DRUM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2000
<PAGE>
CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets -
October 31, 2000 and July 31, 2000 F - 3
Consolidated Statements of Operations -
Three Months Ended October 31, 2000 and 1999 F - 5
Consolidated Statements of Comprehensive Operations -
Three Months Ended October 31, 2000 and 1999 F - 6
Consolidated Statements of Cash Flows -
Three Months Ended October 31, 2000 and 1999 F - 7
Notes to Consolidated Financial Statements F - 9
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS October 31, July 31,
------ 2000 2000*
------------ ------------
(Unaudited) (Audited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 305,283 $ 32,190
Accounts receivable, net of allowance for doubtful
accounts of $44,958 and $33,460, respectively 2,444,334 2,268,265
Inventories 3,353,605 3,861,037
Deferred income taxes 25,000 25,000
Other current assets 140,292 130,989
----------- -----------
TOTAL CURRENT ASSETS 6,268,514 6,317,481
PROPERTY
Equipment 1,060,577 1,081,604
Vehicles 13,922 13,922
Furniture and fixtures 82,352 84,487
Leasehold improvements 406,734 417,848
----------- -----------
1,563,585 1,597,861
Less accumulated depreciation and amortization 1,122,972 1,110,904
----------- -----------
440,613 486,957
OTHER ASSETS
Non-competition agreement, net of accumulated
amortization of $34,287 and $31,170, respectively 9,351 12,468
Sundry, principally deposits 11,165 11,170
Notes receivable from related parties 1,860,200 1,559,500
----------- -----------
1,880,716 1,583,138
----------- -----------
$ 8,589,843 $ 8,387,576
=========== ===========
</TABLE>
* - Derived from Form 10-KSB
F - 3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY October 31, July 31,
2000 2000*
------------- -------------
(Unaudited) (Audited)
CURRENT LIABILITIES
<S> <C> <C>
Line of credit $ 1,730,821 $ 1,339,502
Current portion of long-term debt 65,507 67,296
Accounts payable 555,490 401,262
Income taxes payable 23,317 133,464
Other current liabilities 164,831 487,127
----------- -----------
TOTAL CURRENT LIABILITIES 2,539,966 2,428,651
LONG-TERM DEBT 196,535 218,731
SHAREHOLDERS' EQUITY
Common stock 74,175 74,175
Additional paid-in capital 609,096 609,096
Preferred stock 4,499,805 4,499,805
Retained earnings 993,911 828,729
Accumulated other comprehensive loss (323,645) (271,611)
----------- -----------
5,853,342 5,740,194
----------- -----------
$ 8,589,843 $ 8,387,576
=========== ===========
</TABLE>
* - Derived from Form 10-KSB
F - 4
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
October 31,
--------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $ 3,638,731 $ 3,741,525
Cost of goods sold 2,480,097 2,604,076
----------- -----------
GROSS PROFIT 1,158,634 1,137,449
Selling, administrative and general expenses 849,135 808,548
Bad debts 11,498 21,771
----------- -----------
INCOME FROM OPERATIONS 298,001 307,130
Other income (expense):
Interest income 35,578 507
Interest expense (47,357) (12,177)
Gain on disposal of property 645 --
Foreign currency transaction (loss) gain (11,565) 14,505
----------- -----------
(22,699) 2,835
INCOME BEFORE INCOME TAXES 275,302 309,965
Income tax expense 110,120 122,782
----------- -----------
NET INCOME $ 165,182 $ 187,183
=========== ===========
Net income per common share:
Basic and diluted $ 0.02 $ 0.03
=========== ===========
Weighted average:
Common shares 7,417,500 7,417,500
Dilutive stock options -- --
----------- -----------
COMMON SHARES AND DILUTIVE STOCK OPTIONS 7,417,500 7,417,500
=========== ===========
</TABLE>
F - 5
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
<TABLE>
<CAPTION>
Three months ended
October 31,
------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net income $ 165,182 $ 187,183
Other comprehensive loss:
Foreign currency translation adjustment (52,034) (2,045)
--------- ---------
COMPREHENSIVE INCOME $ 113,148 $ 185,138
========= =========
</TABLE>
F - 6
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
October 31,
---------------------------
2000 1999
------------ -----------
(Unaudited) (Unaudited)
CASH FLOWS - OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 165,182 $ 187,183
Adjustments to reconcile net income to net cash provided from
operating activities:
Bad debts 11,498 21,771
Depreciation and amortization 39,647 47,427
Gain on disposal of property (645) --
Changes in certain assets and liabilities affecting operations:
Accounts receivable (187,567) (351,144)
Inventories 507,432 239,043
Other current assets (9,303) (12,579)
Deposits 5 (4)
Accounts payable 154,228 261,773
Income taxes payable (110,147) 109,484
Other current liabilities (322,296) 157,623
----------- -----------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 248,034 660,577
CASH FLOWS - INVESTING ACTIVITIES
Purchases of property (4,654) (20,209)
Proceeds from disposal of property 645 --
----------- -----------
NET CASH USED FOR
INVESTING ACTIVITIES (4,009) (20,209)
CASH FLOWS - FINANCING ACTIVITIES
Increase in bank overdraft -- 6,953
Increase in notes receivable from related parties (300,700) (1,017,000)
Short-term borrowings, net 391,319 678,000
Borrowings on long-term debt -- 339,000
Repayments on long-term debt (23,985) (13,329)
----------- -----------
NET CASH PROVIDED FROM (USED FOR)
FINANCING ACTIVITIES 66,634 (6,376)
Effect of exchange rate changes on cash (37,566) (2,045)
----------- -----------
NET INCREASE IN
CASH AND CASH EQUIVALENTS 273,093 631,947
Cash and cash equivalents at beginning of period 32,190 202,965
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 305,283 $ 834,912
=========== ===========
</TABLE>
F - 7
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Cont'd
Three months ended
October 31,
----------------------------
2000 1999
------------- -------------
(Unaudited) (Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 47,357 $ 12,177
======== ========
Income taxes $220,267 $ 62,325
======== ========
F - 8
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2000
NOTE A: UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
The unaudited consolidated interim financial statements presented herein
have been prepared by Sel-Drum International, Inc. and Subsidiaries (the
"Company") in accordance with the accounting policies described in its July
31, 2000 Annual Report to the Shareholders and should be read in
conjunction with the notes thereto.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary for a fair statement of
operating results for the interim periods presented have been made.
NOTE B: NOTES RECEIVABLE FROM RELATED PARTIES
The composition of notes receivable from related parties at October 31,
2000 is as follows:
Note receivable from C. Cotran Holding,
Inc. (a Canadian holding company) to
Sel-Drum Corporation (U.S.A.), Inc.
bearing interest at the U.S. prime rate
less 1% (effective rate of 8.5% at
October 31, 2000). There are currently
no repayment terms for the outstanding
balance. $ 550,000
Note receivable from Densigraphix Kopi,
Inc. (a wholly-owned subsidiary of C.
Cotran Holding, Inc.) to Sel-Drum
Corporation, bearing interest at the
Canadian prime rate plus 1% (effective
rate of 8.5% at October 31, 2000). There
are currently no repayment terms for the
outstanding balance. 1,310,200
----------
$1,860,200
==========
The Company received interest income of approximately $35,500 from the
notes receivable from related parties during the three months ended October
31, 2000.
C. Cotran Holding, Inc. (a Canadian holding company) owns 7,173,680 shares
of the issued and outstanding common stock of Sel-Drum International, Inc.
Densigraphix Kopi, Inc. (a wholly-owned subsidiary of C. Cotran Holding,
Inc.) owns 100% of the issued and outstanding preferred shares of Sel-Drum
Imaging Corporation (Class C and Class D).
Sel-Drum International, Inc. 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).
F - 9
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
OCTOBER 31, 2000
NOTE C: LINE OF CREDIT
Sel-Drum Corporation has an operating line of credit available for up to
$2,751,420 ($4,200,000 Canadian dollars) through the National Bank of
Canada. The arrangement provides for interest to be paid monthly at the
bank's prime rate plus .50% (an effective rate of 8% at October 31, 2000).
Sel-Drum Corporation may use the credit facility for working capital and to
issue letters of credit for the purchase of inventories, up to a maximum
amount of $982,650 ($1,500,000 Canadian dollars). Issued letters of credit
will reduce the amounts available to the Company to borrow for working
capital needs under the facility. At October 31, 2000, the Company had
$1,730,821 ($2,642,071 Canadian dollars) outstanding under this
arrangement. In addition, at October 31, 2000, the Company had outstanding
letters of credit aggregating $31,794 ($48,533 Canadian dollars).
Accordingly, as of October 31, 2000, the Company had $988,805 available for
borrowing under this arrangement.
The line is secured by substantially all assets of Sel-Drum Corporation and
Sel-Drum Corporation (USA), Inc., the limited corporate guarantees of
Sel-Drum International, Inc. and Sel-Drum Imaging Corporation, each in the
amount of $3,275,500 ($5,000,000 Canadian dollars), and the limited
corporate guarantee of Sel-Drum Corporation (USA), Inc. in the amount of
$1,310,200 ($2,000,000 Canadian dollars). The guarantee by Sel-Drum
Corporation (USA), Inc. is supported by a first ranking security interest
on all assets of Sel-Drum Corporation (USA), Inc. The line also has an
unconditional letter of guarantee from C. Cotran Holding, Inc. in the
amount of $3,275,500 ($5,000,000 Canadian dollars).
NOTE D: LONG-TERM DEBT
Long-term debt at October 31, 2000 is summarized as follows:
Term loan of $327,550 ($500,000 Canadian
dollars) payable to the National Bank of
Canada, due in monthly installments of
approximately $5,460 ($8,333 Canadian
dollars) through October 2004, plus
interest at the bank's prime rate plus
1.5% (an effective rate of 9% at October
31, 2000). $ 262,042
Less: Current portion of long-term debt 65,507
---------
$ 196,535
=========
F - 10
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
OCTOBER 31, 2000
NOTE D: LONG-TERM DEBT, Cont'd
The maturity of the long-term debt portion is as follows:
Annual period ending
--------------------
October 31, 2001 $ 65,507
October 31, 2002 65,511
October 31, 2003 65,512
October 31, 2004 65,512
--------
$262,042
========
NOTE E: RELATED PARTY TRANSACTIONS
Sales
The Company had sales to Densigraphix Kopi, Inc. of approximately $102,000
and $115,000 during the three months ended October 31, 2000 and 1999,
respectively. At October 31, 2000, total amounts from Densigraphix Kopi,
Inc. of approximately $224,000 are included in accounts receivable, as
reflected in the accompanying consolidated balance sheet.
Purchases
The Company made purchases of inventory from Densigraphix Kopi, Inc. of
approximately $444,000 and $5,000 during the three months ended October 31,
2000 and 1999, respectively. At October 31, 2000, total amounts due to
Densigraphix Kopi, Inc. of approximately $148,000 are included in accounts
payable, as reflected in the accompanying consolidated balance sheet.
F - 11
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
OCTOBER 31, 2000
NOTE F: COMMON AND PREFERRED STOCK
The following is certain information regarding common and preferred stock
as of October 31, 2000:
Sel-Drum International, Inc.
Common stock
Par value $0.01
Shares authorized 100,000,000
Shares issued 7,417,500
Preferred Stock
Par value $0.01
Shares authorized 10,000,000
Shares issued and outstanding None
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 None
Stated value $727.30
Shares authorized 5,000
Shares issued and outstanding 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
F - 12
<PAGE>
APPENDIX A
PLAN FOR BINDING SHARE EXCHANGE
This PLAN FOR BINDING SHARE EXCHANGE (the "Plan") is approved by the Sole
Director of C. Cotran Holding Inc. ("Holding") as of this 29th day of December,
2000. The Plan authorizes a binding share exchange pursuant to Section 913(g) of
the New York Business Corporation Law ("BCL") under which Holding will acquire
all of the outstanding shares of common stock of Sel-Drum International, Inc.
("Sel-Drum") that it does not currently own.
WITNESSETH:
WHEREAS, pursuant to a resolution of the Sole Director of Holding
authorizing the Plan, Holding desires to effect a binding share exchange under
BCL Section 913(g) to acquire all of the issued and outstanding shares of common
stock of Sel-Drum that Holding does not currently own; and
WHEREAS, upon effectiveness of the binding share exchange, ownership of the
common shares to be acquired pursuant to the Plan shall vest in Holding, and
Sel-Drum will become a wholly-owned subsidiary of Holding.
NOW, THEREFORE, to authorize the binding share exchange, the Sole Director
of Holding adopts the following as required by Section 913 of the BCL:
ARTICLE I:
ACQUIRING CORPORATION AND SUBJECT CORPORATION
Section 1. C. Cotran Holding, Inc. ("Holding"), a Canadian corporation, is
the acquiring corporation. Holding's principal place of business is 220 Boul.
Industriel, Boucherville, Quebec J4B 2X4. Sel-Drum International, Inc.
("Sel-Drum"), a New York corporation, is the subject corporation. Sel-Drum's
principal place of business is 501 Amherst Street, Buffalo, New York 14207.
Sel-Drum is the successor corporation to Dakota Equities, Ltd., a company
organized under the laws of the state of Colorado. On November 29, 1993, the
corporate name was formally changed from Dakota Equities, Ltd. to Sel-Drum
International, Inc. On March 6, 1998, Sel-Drum was reincorporated in the State
of New York. Holding has not had a corporate name change or been incorporated in
another jurisdiction.
Section 2. The exact title of the class of equity securities that is the
subject of this binding share exchange is common stock, par value $.01 per share
(the "Common Stock"), of Sel-Drum. As of the date hereof, there were 7,417,500
outstanding shares of Sel-Drum Common Stock. The shares of Common Stock contain
full voting rights and are the only class or series of capital stock authorized
and issued by Sel-Drum. The number of outstanding shares of Common Stock is not
subject to change prior to the effective date of the binding share exchange.
Section 3. Holding, the acquiring corporation, beneficially owns 7,173,680
shares of Common Stock, which constitute 96.7% of the outstanding shares of
Common Stock of Sel-Drum, the subject corporation. As of the date hereof, the
remaining 243,820 shares of Common
<PAGE>
APPENDIX A
Stock, which constitute 3.3% of the outstanding shares of Common Stock, were
held of record by approximately 350 shareholders.
ARTICLE II:
TERMS AND CONDITIONS OF BINDING SHARE EXCHANGE
Section 1. The binding share exchange is authorized under Section 913(g) of
the BCL. Under Section 913(g), any corporation (the "acquiring corporation")
owning at least 90% of the outstanding shares of another corporation (the
"subject corporation") may effect a binding share exchange without obtaining the
vote or other approval of the shareholders of the subject corporation.
Consequently, no vote or other approval of the shareholders of Sel-Drum is
required for Holding to adopt this Plan to effect a binding share exchange for
the remaining outstanding shares of Common Stock of Sel-Drum that Holding does
not beneficially own.
To effect the binding share exchange under the BCL, Holding will file a
"Certificate of exchange of shares of Sel-Drum International Inc., subject
corporation, for shares of C. Cotran Holding Inc., acquiring corporation, or
other consideration, under paragraph (g) of Subsection 913 of the Business
Corporation Law" ("Certificate of Exchange") with the New York Department of
State in accordance with Section 913(g)(2) of the BCL. Upon filing the
Certificate of Exchange, ownership of the shares to be acquired pursuant to the
Plan will automatically (i.e., by operation of law) vest in Holding, and Holding
will become the sole holder of Sel-Drum Common Stock. The effective date of the
binding share exchange will be the date the Certificate of Exchange is filed
with the New York Department of State, or such subsequent date as may be
lawfully set forth in the Certificate of Exchange.
Section 2. Holding will pay to each shareholder of record of Sel-Drum a
purchase price of $0.40 per share (the "purchase price") in cash for all of the
remaining outstanding shares of Sel-Drum Common Stock that it does not
beneficially own. Prior to the effective date of the binding share exchange,
Holding may cause funds in sufficient amount to purchase all of the outstanding
shares of Common Stock to be deposited with its exchange agent. To receive the
purchase price, Sel-Drum shareholders must surrender their stock certificates
representing the shares of Common Stock of Sel-Drum to Holding or its designated
exchange agent. Upon receipt of the shareholders' stock certificate(s),
accompanied by a properly completed and executed Letter of Transmittal, Holding
or its designated exchange agent will, as promptly as reasonably practicable
after the effective date of the binding share exchange, distribute the purchase
price to the shareholders. Alternatively, shareholders may elect to exercise
their rights under Section 910 of the BCL to receive payment for their shares of
Common Stock by following the procedures set forth in Section 623 of the BCL.
Section 3. Holding shall cause a Transaction Statement on Schedule 13E-3 to
be filed with the U.S. Securities and Exchange Commission, and shall cause a
Notice of Shareholders to be mailed to each shareholder of record of Sel-Drum in
accordance with, and pursuant to the requirements of, all applicable United
States securities laws and the laws of the State of New York, and shall take, or
cause to be taken, all such other actions as may be necessary to effect the
Plan.
-2-
<PAGE>
APPENDIX A
IN WITNESS WHEREOF, the Sole Director of Holding hereby adopts the Plan and
causes the same to be executed and attested to.
C. COTRAN HOLDING, INC.,
a Canadian Corporation
------------------------------------
Camille Cotran
Sole Director
ATTESTED
By:
---------------------------------
Name:
------------------------------
Title: Secretary
-----------------------------
-3-
<PAGE>
APPENDIX B
LETTER OF TRANSMITTAL
TO ACCOMPANY CERTIFICATES FORMERLY REPRESENTING
SHARES OF COMMON STOCK OF
SEL-DRUM INTERNATIONAL, INC.
By Mail or Hand Delivery to:
U.S. STOCK TRANSFER CORPORATION
1745 Gardena Avenue
Glendale, California 91204-2991
[__] CHECK HERE IF YOU CANNOT LOCATE YOUR CERTIFICATE(S) AND REQUIRE
ASSISTANCE IN REPLACING THEM. UPON RECEIPT OF A NOTIFICATION ON THIS LETTER
OF TRANSMITTAL, THE EXCHANGE AGENT WILL CONTACT YOU DIRECTLY WITH
REPLACEMENT INSTRUCTIONS.
If you require additional information, please call
U.S. Stock Transfer Corporation (the "Exchange Agent")
at 818-502-1404
NOTE SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS.
This letter of transmittal form should be promptly (i) completed and signed
both in Boxes B and D and (ii) mailed or delivered with your certificate(s)
representing shares of Sel-Drum International, Inc. ("Sel-Drum") common stock to
U.S. Stock Transfer Corporation, acting as Exchange Agent, at the above-listed
address.
BOX A
CERTIFICATES ENCLOSED
Name and Address of Registered Holder(s) Certificate Number
as shown on the Stock Certificates Number(s) of Shares
-------------------- ---------------------------------
-------------------- ---------------------------------
-------------------- ---------------------------------
-------------------- ---------------------------------
-------------------- ---------------------------------
(Attach additional schedule if necessary) Total Common Shares
<PAGE>
APPENDIX B
Ladies and Gentlemen:
Pursuant to a Plan for Binding Share Exchange dated as of December 29,
2000, C. Cotran Holding Inc. ("Holding") and in compliance with the instructions
set forth in this letter of transmittal, the undersigned hereby surrenders to
you for cancellation, as Exchange Agent, certificate(s) representing all of the
undersigned's shares of common stock of Sel-Drum (the "Shares") listed in Box A
in exchange for $0.40 for each share so surrendered.
The undersigned hereby represents and warrants that the undersigned is the
registered holder of the Shares with good title to the Shares and full power and
authority to sell, assign, transfer and surrender the Shares represented by the
enclosed certificate(s), free and clear of any liens, claims, charges or
encumbrances whatsoever. The undersigned will, upon request, execute any
additional documents necessary or desirable to complete the surrender and
exchange of the Shares. The undersigned hereby irrevocably appoints the Exchange
Agent, as agent of the undersigned, to effect the exchange. All authority
conferred or agreed to be conferred in this letter of transmittal will be
binding on the successors, assigns, heirs, executors, administrators and legal
representatives of the undersigned and will not be affected by, and will
survive, the death or incapacity of the undersigned.
It is understood and agreed that the undersigned will not receive any cash
until the certificate(s) representing the Shares owned by the undersigned are
received by the Exchange Agent at the address set forth above, together with any
other documents the Exchange Agent may require and until the certificate(s) and
other documents are processed for exchange by the Exchange Agent. It is further
understood and agreed that no interest will accrue on any cash.
In exchange for the enclosed certificate(s), unless otherwise indicated in
Boxes E and F which are captioned Special Issuance and Special Delivery
Instructions, the undersigned requests a check for cash in the name of the
undersigned. Similarly, unless otherwise indicated in Box F, please mail the
check to the undersigned at the address shown below. In the event that both the
Special Issuance Instructions of Box E and the Special Delivery Instructions of
Box F are completed, please issue the check in the name of, and mail the check
to the person or entity so indicated at the address indicated in Box B.
Appropriate signature guarantees have been included for Shares for which Special
Issuance Instructions and/or Special Delivery Instructions have been given.
All holders of Sel-Drum common stock must complete Boxes A, B, and D and
enclose their stock certificates.
HOLDER CERTIFICATION
The undersigned in Box B hereby represents and warrants that the
undersigned has full power and authority to deliver for surrender and
cancellation the above-described certificate(s) delivered herewith and that the
rights represented by the certificate(s) are free and clear of all liens,
restrictions, charges and encumbrances and are not subject to any adverse
-2-
<PAGE>
APPENDIX B
claim. The undersigned will, upon request, execute any additional documents
necessary or desirable to complete the exchange of the certificate(s)
surrendered herewith. All authority herein conferred shall survive the death or
incapacity of the undersigned and all obligations of the undersigned hereunder
shall be binding upon the heirs, personal representatives, successors and
assigns of the undersigned. Delivery of the certificate(s) for cancellation and
exchange is irrevocable.
---------------------------------------------------------------
BOX B
SIGN HERE
(To be completed by all person(s) surrendering certificates)
----------------------------------------------
----------------------------------------------
(Signature(s) of holder(s))
Dated:
----------------------------------------------
Names(s):
----------------------------------------------
----------------------------------------------
----------------------------------------------
Address:
----------------------------------------------
----------------------------------------------
(Including zip code)
[_] Check box if change of address
Phone:
----------------------------------------------
Must be signed by registered holder(s) exactly as name(s) appear(s) on stock
certificate(s) or by person(s) authorized to become registered holder(s) by
documents transmitted herewith. If signature is by trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or in any
other fiduciary or representative capacity, please set forth full title. (See
instruction 4).
Title:
----------------------------------------------
(Other than signature(s), please print or type)
-3-
<PAGE>
APPENDIX B
---------------------------------------------------------------
BOX C
SIGNATURE GUARANTEE
(See Instructions 1 and 4)
Complete ONLY if required by Instructions 1 and 4.
The undersigned hereby guarantees the signature(s) which appear(s) in the
opposite signature box.
------------------------------------
(Name of firm issuing guarantee)
------------------------------------
(Signature of officer)
------------------------------------
(Title of officer signing guarantee)
------------------------------------
(Address of guaranteeing firm)
------------------------------------
(Date)
(Other than signature, please print or type)
---------------------------------------------------------------
IMPORTANT TAX INFORMATION
PLEASE PROVIDE YOUR SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER ON
THIS SUBSTITUTE FORM W-9 AND CERTIFY THEREIN THAT YOU ARE NOT SUBJECT TO BACKUP
WITHHOLDING. FAILURE TO DO SO WILL SUBJECT YOU TO 31% FEDERAL INCOME TAX
WITHHOLDING FROM YOUR PAYMENT CHECKS.
----------------------------------------------------------------------
BOX D
SUBSTITUTE FORM W-9
----------------------------------------------------------------------
Part I --- Please provide the Taxpayer
Identification Number ("TIN") of the
person submitting this Letter of
Transmittal on the line at right and
certify by signing and dating
-----------------------------
Social Security Number
or Employer Identification Number
----------------------------------------------------------------------
Part II --- The undersigned Is an Exempt Payee |_| (check here)
----------------------------------------------------------------------
Part III --- CERTIFICATE FOR FOREIGN RECORD HOLDERS
-4-
<PAGE>
APPENDIX B
Under penalty of perjury, I certify that I am not a United States citizen
or resident (or I am signing for a foreign corporation, partnership, estate or
Trust).
Signature Date
---------------------------------- ------------------------
----------------------------------------------------------------------
Certification -- Under penalties of perjury, the undersigned hereby
certifies the following:
(1) The TIN shown in Part I above is the correct TIN of the person who is
submitting this Letter of Transmittal and who is required by law to provide such
TIN (or such person is waiting for a number to be issued); and
(2) The person who is submitting this Letter of Transmittal and who is
required by law to provide such TIN is not subject to backup withholding because
such person has not been notified by the Internal Revenue Service ("IRS") that
such person is subject to backup withholding as a result of a failure to report
interest and dividend income, or because the IRS has notified such person that
he or she is no longer subject to backup withholding, or because such person is
an exempt payee.
(3) Any other information provided on this form is true, correct and
complete.
Note: You must cross out item (2) above if you have been notified by the
IRS that you are subject to backup withholding unless you have been notified by
the IRS that you are no longer subject to backup withholding.
Signature Date
---------------------------------- ------------------------
----------------------------------------------------------------------
SPECIAL ISSUANCE AND MAILING INSTRUCTIONS
The undersigned understands that the payment checks to be issued with
respect to the shares of Sel-Drum common stock surrendered will be issued in the
same name(s) as the certificate(s) surrendered and will be mailed to the address
of the registered holder(s) indicated above, unless otherwise indicated in Box E
and/or Box F below.
If Box E is completed, the signature of the undersigned must be guaranteed
as set forth in Instruction 4.
-------------------------------------- -------------------------------------
BOX E BOX F
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See instruction 6) (See instruction 6)
TO BE COMPLETED ONLY if the payment TO BE COMPLETED ONLY if the payment
checks are to be payable to someone checks are to be delivered to the
other than the registered holder(s) registered holder(s) or someone
set forth above. other than the holder(s) at an
address other than that shown above
ISSUE TO: MAIL TO:
Name Name
------------------------------ ------------------------------
Address Address
------------------------------ ------------------------------
(street and number) (street and number)
-5-
<PAGE>
APPENDIX B
-------------------------------------- ----------------------------------
(city, state and zip code) (city, state and zip code)
-------------------------------------- ----------------------------------
(Employer Identification or (Employer Identification or
Social Security Number) Social Security Number)
(Please print or type) (Please print or type)
INSTRUCTIONS
You will not receive a check representing cash in exchange for your
certificate(s) of Sel-Drum common stock until the certificate(s) owned by you
are received by the Exchange Agent at the address set forth above, together with
any other documents the Exchange Agent may require, and until the certificate(s)
and other documents are processed for exchange by the Exchange Agent. No
interest will accrue on any amounts due in cash.
1. GUARANTEE OF SIGNATURES.
No signature guarantee is required on this letter of transmittal (i) if you
have signed this letter of transmittal and are the registered holder of the
Shares surrendered with it unless you have completed either the box captioned
Special Issuance Instructions or the box captioned Special Delivery Instructions
on the letter of transmittal, or (ii) if the Shares are to be surrendered for
the account of a member firm of a registered national securities exchange or a
member of the National Association of Securities Dealers, Inc. or by a
commercial bank or trust company having an office or correspondent in the United
States or by any other "Eligible Guarantor Institution" as such term is defined
in Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, each of
which we refer to as an Eligible Institution. In all other cases, all signatures
on the letter of transmittal must be guaranteed by an Eligible Institution.
Eligible Institutions include: (i) a bank, as that term is defined in
Section 3(a) of the Federal Deposit Insurance Act; (ii) a broker, dealer,
municipal securities dealer, municipal securities broker, government securities
dealer or government securities broker, as those terms are defined under the
Securities Exchange Act of 1934; (iii) a credit union, as that term is defined
in Section 19(b)(1)(A) of the Federal Reserve Act; (iv) a national securities
exchange, registered securities association, or clearing agency, as those terms
are used under the Securities Exchange Act of 1934; or (v) a savings
association; as that term is defined in Section 3(b) of the Federal Deposit
Insurance Act. Notaries public cannot execute an acceptable guarantee of
signature.
2. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES.
You should deliver this letter of transmittal, properly completed and duly
executed, with your Sel-Drum certificate(s), to the Exchange Agent at the
address set forth in this letter of transmittal.
-6-
<PAGE>
APPENDIX B
THE METHOD OF DELIVERY OF YOUR CERTIFICATE(S) AND ALL OTHER REQUIRED
DOCUMENTS IS YOUR CHOICE AND IS AT YOUR RISK. IF YOU SEND YOUR CERTIFICATE(S) BY
MAIL WE RECOMMEND THAT YOU SEND THEM BY REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED. THE RISK OF LOSS AND TITLE TO YOUR CERTIFICATE(S) WILL
PASS ONLY ON DELIVERY OF THE CERTIFICATE(S) TO THE EXCHANGE AGENT.
Holding will determine all questions as to the validity, form and
eligibility of your surrender of certificate(s) under this letter of
transmittal. Holding may delegate the power to make these determinations in
whole or in part to the Exchange Agent. Determinations by Holding and/or the
Exchange Agent will be final and binding. Holding reserves the right to waive
any irregularities or defects In the surrender of any certificate(s). A
surrender will not be deemed to have been made until all irregularities have
been cured or waived.
3. INADEQUATE SPACE.
If the space provided on this letter of transmittal is inadequate, your
certificate numbers and the numbers of Shares that they represent should be
listed on a separate schedule and attached to this letter of transmittal.
4. SIGNATURES ON LETTER OF TRANSMITTAL, STOCK POWERS AND ENDORSEMENTS.
If this letter of transmittal is signed by the registered holder of the
certificate(s) surrendered with this letter of transmittal, the signature of the
registered holder must correspond exactly with the name written on the face of
the certificate(s) without alteration, enlargement or any change whatsoever.
If the certificate(s) surrendered with this letter of transmittal is owned
of record by two or more joint owners, all of the owners must sign this letter
of transmittal.
If any Shares that are surrendered are registered in different names on
several certificates, you will need to complete, sign and submit as many
separate letters of transmittal as there are different registrations of
certificates.
When this letter of transmittal is signed by the registered owner(s) of the
certificate(s) listed and surrendered with this letter of transmittal, no
endorsements of certificates or separate stock powers are required.
If this letter of transmittal is signed by a person other than the
registered owner(s) of the certificate(s) listed or if the check is to be issued
in the name of anyone other than the registered owner(s) or mailed to person(s)
other than the person(s) signing this letter of transmittal, the certificate(s)
must be endorsed or accompanied by appropriate stock powers, in either case
signed by the registered owner or owners or a person with full authority to sign
on behalf of the registered owner. Signatures on these certificates or stock
powers must be guaranteed by an Eligible Institution. See Instruction 1.
-7-
<PAGE>
APPENDIX B
If this letter of transmittal or any certificate or stock power is signed
by a trustee, executor, administrator, guardian, agent, attorney-in-fact,
officer of a corporation or others acting in a fiduciary or representative
capacity, that person should indicate his/her capacity when signing, and
evidence satisfactory to the Exchange Agent of his/her authority to act in that
capacity must be submitted. The Exchange Agent will not exchange any Shares
until you have complied with all instructions of this letter of transmittal.
5. STOCK TRANSFER TAXES.
In the event that any transfer or other taxes become payable by reason of
the issuance of the check in any name other than the name of the record holder,
the transferee or assignee must pay that tax to Holding or must establish to the
satisfaction of Holding that the tax has been paid.
-8-
<PAGE>
APPENDIX B
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Indicate the name and address of the person(s) to whom the check
representing cash is to be issued and sent if they are different from the name
and address of the person(s) signing this letter of transmittal.
7. SUBSTITUTE FORM W-9.
Each surrendering shareholder is required to provide the Exchange Agent
with the holder's correct taxpayer identification number, which we refer to as
his/her TIN, on the Substitute Form W-9 that is a part of this letter of
transmittal and to certify whether the shareholder is subject to backup
withholding. Failure to provide the information on the form may subject you to
31% federal income tax withholding on payments made to you with respect to the
Shares. You must cross out item (2) of Part 2 in the certification box of
Substitute Form W-9 if you are subject to backup withholding. If you have not
been issued a TIN and have applied for a TIN or intend to apply for a TIN in the
near future, it should be noted in Part 1. If so noted, and the Exchange Agent
is not provided with a TIN within 60 days, Holding will withhold 31% of all
payments and dividends until a TIN is provided to the Exchange Agent.
8. LOST OR DESTROYED CERTIFICATES.
If your certificate(s) has been either lost or destroyed, please check the
box on the first page of this letter of transmittal. The Exchange Agent will
then contact you with instructions as to the steps you must take in order to
exchange your shares.
9. INFORMATION AND ADDITIONAL COPIES.
If you need help or additional copies of this letter of transmittal, you
can write to the Exchange Agent at the address listed on the front page of this
letter of transmittal or call the Exchange Agent at (818) 502-1404.
IMPORTANT TAX INFORMATION
Under federal income tax laws, a holder who receives payments in the share
exchange is required by law to provide the Exchange Agent, as payer, with
his/her correct TIN on Substitute Form W-9 below. If you are an individual, the
TIN is your social security number. If you do not provide the Exchange Agent
with your correct TIN, a $50 penalty may be imposed by the Internal Revenue
Service and the cash received by you in the exchange may be subject to backup
withholding.
Certain holders are not subject to these backup withholding and reporting
requirements. Exempt holders should indicate their exempt status on Substitute
Form W-9. In order for a foreign individual to qualify as an exempt recipient,
the individual must submit a statement, signed under penalties of perjury,
attesting to the individual's exempt status. A certificate for this purpose is
provided in Part 3 of the Substitute Form W-9. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions.
-9-
<PAGE>
APPENDIX B
If backup withholding applies to payments made with respect to your shares,
the Exchange Agent is required to withhold 31% of any payments made with respect
to your shares. Backup withholding is not an additional tax. The federal income
tax liability of persons subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment of taxes, you
may obtain a refund from the Internal Revenue Service.
Purpose of Substitute Form W-9
To prevent backup withholding on payments made with respect to your Shares,
you are required to notify the Exchange Agent of your correct TIN by completing
the form below, certifying that the TIN provided on the Substitute Form W-9 is
correct (or that you are awaiting a TIN) and that (a) you are exempt from backup
withholding, or (b) you have not been notified by the Internal Revenue Service
that you are subject to backup withholding as a result of a failure to report
all interest on dividends or (c) the Internal Revenue Service has notified you
that you are no longer subject to backup withholding.
What Number to Give the Exchange Agent
You are required to give the Exchange Agent the TIN of the holder of the
Shares surrendered with this letter of transmittal, which is the social security
number or employer identification number. If the Shares are held in more than
one name or are not held in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional guidance on which number to report.
-10-
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
(FOR U.S. TAX PURPOSES)
Guidelines for Determining the Proper Identification Number to Give the Payer.
Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e. 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Give the SOCIAL Give the EMPLOYER
For this type of account: SECURITY number of For this type of account: IDENTIFICATION number of
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Individual The individual 6. A valid trust, The legal entity (Do not
estate, or pension furnish the identifying
trust. number of the personal
representative or trustee
unless the legal entity
itself is not designated
in the account title(4)
2. Two or more The actual owner of the 7. Corporate The corporation
individuals (joint account or, if combined
account) funds, the first
individual on the
account(1)
3. Custodian account of The minor(2) 8. Religious, The organization
a minor (Uniform charitable, or
Gift to Minors Act) educational
organization
4. a. The usual The grantor-trustee(1) 9. Partnership account The partnership
revocable savings held in the name of
trust account the business.
(grantor is also
trustee)
b. So-called trust The actual owner(1) 10. Association, club, The organization
account that is not or other tax-exempt
a legal or valid organization.
trust under State
Law.
5. Sole proprietorship The owner(3) 11. A broker or The broker or nominee
account registered nominee
12. Account with the The public entity
Department of
Agriculture in the
name of a public
entity (such as a
State or local
government, school
district, or prison)
that receives
agricultural program
payments.
</TABLE>
----------
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has a social security number, that
person's social security number must be furnished.
(2) Circle the minor's name and furnish the minor's social security number.
(3) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your social security number or
your employer identification number (if you have one).
(4) List first and circle the name of the legal trust, estate or pension trust.
Note: If no name is circled when there is more than one name listed, the number
will be considered to be that of the first name listed.
-11-
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
(FOR U.S. TAX PURPOSES)
How to Obtain a TIN
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
Payees Exempt from Backup Withholding
Even if the payee does not provide a TIN in the manner required, you are not
required to backup withhold on any payments you make if the payee is:
An organization exempt from tax under U.S. Internal Revenue Code section
501(a), any IRA, or a custodial account under section 403(b)(7) if the
account satisfies the requirements of section 104(f)(2).
The United States or any of its agencies or instrumentalities.
A state, the District of Columbia, a possession of the United States, or
any of their political subdivisions or instrumentalities.
A foreign government of any of its political subdivisions, agencies, or
instrumentalities.
An international organization or any of its agencies or instrumentalities.
Other payees that may be exempt from backup withholding include:
o A corporation.
o A foreign central bank of issue.
o A dealer in securities or commodities required to register in the
United States, the District of Columbia, or a possession of the United
States.
o A real estate investment trust.
o An entity registered at all times during the tax year under the
Investment Company Act of 1940.
o A common trust fund operated by a bank under section 584(a).
o A trust exempt from tax under section 664(c) or described in section
4947(a)(1).
o A financial institution.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
o Payments to nonresident aliens subject to withholding under section
1441.
o Payments to partnerships not engaged in a trade or business in the
United States and that have at least one nonresident alien partner.
o Payments of patronage dividends where the amount received is not paid
in money.
o Payments made by certain foreign organizations.
Payments of interest not generally subject to backup withholding include the
following:
Payments of interest on obligations issued by individuals.
Note: You may be subject to backup withholding if this interest is $600 or more
and is paid in the course of the payer's trade of business and you have not
provided your correct taxpayer identification number to the payer.
Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
Payments described in section 6049(b)(5) to nonresident aliens.
Payments on tax-free covenant bonds under section 1451.
Payments made by certain foreign organizations.
Exempt payees described above should file Substitute Form W-9 to avoid possible
erroneous back withholding. FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, CHECK
THE "EXEMPT PAYEE" BOX ON THE FACE OF THE FORM IN PART 2, SIGN AND DATE THE
FORM, AND RETURN IT TO THE PAYER.
Certain payments, other than interest, dividends and patronage dividends that
are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6045 and 6050A.
Privacy Act Notice. Section 6109 requires most recipients of dividend, interest
or other payments to give their correct taxpayer identification numbers to
payers who must report the payments to the IRS. The IRS uses the numbers for
identification purposes and to help verify the accuracy of tax returns. Payers
must be given the numbers whether or not recipients are required to file tax
returns. Payers must generally withhold 31% of taxable interest, dividend and
certain other payments to a payee who does not furnish a taxpayer identification
number to a payer. Certain penalties may also apply.
Penalties
(1) Penalty for Failure to Furnish Taxpayer Identification Number. If you fail
to furnish your correct taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is
due to reasonable cause and not to willful neglect.
(2) Civil Penalty for False Information With Respect to Withholding. If you
make a false statement with no reasonable basis which results in no
imposition of backup withholding, you are subject to a penalty of $500.
(3) Criminal Penalty for Falsifying Information. Willfully falsifying
certifications or affirmations may subject you to criminal penalties
including fines and/or imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
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<PAGE>
APPENDIX C
New York Business Corporation Law Section 623
623. Procedure to enforce shareholder's right to receive payment for shares
(a) A shareholder intending to enforce his right under a section of this chapter
to receive payment for his shares if the proposed corporate action referred to
therein is taken shall file with the corporation, before the meeting of
shareholders at which the action is submitted to a vote, or at such meeting but
before the vote, written objection to the action. The objection shall include a
notice of his election to dissent, his name and residence address, the number
and classes of shares as to which he dissents and a demand for payment of the
fair value of his shares if the action is taken. Such objection is not required
from any shareholder to whom the corporation did not give notice of such meeting
in accordance with this chapter or where the proposed action is authorized by
written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term as
used in this section means the date on which the shareholders' vote authorizing
such action was taken, or the date on which such consent without a meeting was
obtained from the requisite shareholders, the corporation shall give written
notice of such authorization or consent by registered mail to each shareholder
who filed written objection or from whom written objection was not required,
excepting any shareholder who voted for or consented in writing to the proposed
action and who thereby is deemed to have elected not to enforce his right to
receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder from
whom written objection was not required and who elects to dissent shall file
with the corporation a written notice of such election, stating his name and
residence address, the number and classes of shares as to which he dissents and
a demand for payment of the fair value of his shares. Any shareholder who elects
to dissent from a merger under section 905 (Merger of subsidiary corporation) or
paragraph (c) of section 907 (Merger or consolidation of domestic and foreign
corporations) or from a share exchange under paragraph (g) of section 913 (Share
exchanges) shall file a written notice of such election to dissent within twenty
days after the giving to him of a copy of the plan of merger or exchange or an
outline of the material features thereof under section 905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to which
he has a right to dissent, held by him of record, that he owns beneficially. A
nominee or fiduciary may not dissent on behalf of any beneficial owner as to
less than all of the shares of such owner, as to which such nominee or fiduciary
has a right to dissent, held of record by such nominee or fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease to
have any of the rights of a shareholder except the right to be paid the
<PAGE>
APPENDIX C
fair value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenters' rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has been completed, in
lieu thereof, at the election of the corporation, the fair value thereof in cash
as determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim.
(f) At the time of filing the notice of election to dissent or within one month
thereafter the shareholder of shares represented by certificates shall submit
the certificates representing his shares to the corporation, or to its transfer
agent, which shall forthwith note conspicuously thereon that a notice of
election has been filed and shall return the certificates to the shareholder or
other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election
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<PAGE>
APPENDIX C
to pay for his shares at a specified price which the corporation considers to be
their fair value. Such offer shall be accompanied by a statement setting forth
the aggregate number of shares with respect to which notices of election to
dissent have been received and the aggregate number of holders of such shares.
If the corporate action has been consummated, such offer shall also be
accompanied by (1) advance payment to each such shareholder who has submitted
the certificates representing his shares to the corporation, as provided in
paragraph (f), of an amount equal to eighty percent of the amount of such offer,
or (2) as to each shareholder who has not yet submitted his certificates a
statement that advance payment to him of an amount equal to eighty percent of
the amount of such offer will be made by the corporation promptly upon
submission of his certificates. If the corporate action has not been consummated
at the time of the making of the offer, such advance payment or statement as to
advance payment shall be sent to each shareholder entitled thereto forthwith
upon consummation of the corporate action. Every advance payment or statement as
to advance payment shall include advice to the shareholder to the effect that
acceptance of such payment does not constitute a waiver of any dissenters'
rights. If the corporate action has not been consummated upon the expiration of
the ninety day period after the shareholders' authorization date, the offer may
be conditioned upon the consummation of such action. Such offer shall be made at
the same price per share to all dissenting shareholders of the same class, or if
divided into series, of the same series and shall be accompanied by a balance
sheet of the corporation whose shares the dissenting shareholder holds as of the
latest available date, which shall not be earlier than twelve months before the
making of such offer, and a profit and loss statement or statements for not less
than a twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
(h) The following procedure shall apply if the corporation fails to make such
offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
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<PAGE>
APPENDIX C
(1) The corporation shall, within twenty days after the expiration of whichever
is applicable of the two periods last mentioned, institute a special proceeding
in the supreme court in the judicial district in which the office of the
corporation is located to determine the rights of dissenting shareholders and to
fix the fair value of their shares. If, in the case of merger or consolidation,
the surviving or new corporation is a foreign corporation without an office in
this state, such proceeding shall be brought in the county where the office of
the domestic corporation, whose shares are to be valued, was located.
(2) If the corporation fails to institute such proceeding within such period of
twenty days, any dissenting shareholder may institute such proceeding for the
same purpose not later than thirty days after the expiration of such twenty day
period. If such proceeding is not instituted within such thirty day period, all
dissenter's rights shall be lost unless the supreme court, for good cause shown,
shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in paragraph
(g), have agreed with the corporation upon the price to be paid for their
shares, shall be made parties to such proceeding, which shall have the effect of
an action quasi in rem against their shares. The corporation shall serve a copy
of the petition in such proceeding upon each dissenting shareholder who is a
resident of this state in the manner provided by law for the service of a
summons, and upon each nonresident dissenting shareholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as to whom
the corporation requests the court to make such determination, is entitled to
receive payment for his shares. If the corporation does not request any such
determination or if the court finds that any dissenting shareholder is so
entitled, it shall proceed to fix the value of the shares, which, for the
purposes of this section, shall be the fair value as of the close of business on
the day prior to the shareholders' authorization date. In fixing the fair value
of the shares, the court shall consider the nature of the transaction giving
rise to the shareholder's right to receive payment for shares and its effects on
the corporation and its shareholders, the concepts and methods then customary in
the relevant securities and financial markets for determining fair value of
shares of a corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the fair
value of the shares without a jury and without referral to an appraiser or
referee. Upon application by the corporation or by any shareholder who is a
party to the proceeding, the court may, in its discretion, permit pretrial
disclosure, including, but not limited to, disclosure of any expert's reports
relating to the fair value of the shares whether or not intended for use at the
trial in the proceeding and notwithstanding subdivision (d) of section 3101 of
the civil practice law and rules.
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<PAGE>
APPENDIX C
(5) The final order in the proceeding shall be entered against the corporation
in favor of each dissenting shareholder who is a party to the proceeding and is
entitled thereto for the value of his shares so determined.
(6) The final order shall include an allowance for interest at such rate as the
court finds to be equitable, from the date the corporate action was consummated
to the date of payment. In determining the rate of interest, the court shall
consider all relevant factors, including the rate of interest which the
corporation would have had to pay to borrow money during the pendency of the
proceeding. If the court finds that the refusal of any shareholder to accept the
corporate offer of payment for his shares was arbitrary, vexatious or otherwise
not in good faith, no interest shall be allowed to him.
(7) Each party to such proceeding shall bear its own costs and expenses,
including the fees and expenses of its counsel and of any experts employed by
it. Notwithstanding the foregoing, the court may, in its discretion, apportion
and assess all or any part of the costs, expenses and fees incurred by the
corporation against any or all of the dissenting shareholders who are parties to
the proceeding, including any who have withdrawn their notices of election as
provided in paragraph (e), if the court finds that their refusal to accept the
corporate offer was arbitrary, vexatious or otherwise not in good faith. The
court may, in its discretion, apportion and assess all or any part of the costs,
expenses and fees incurred by any or all of the dissenting shareholders who are
parties to the proceeding against the corporation if the court finds any of the
following: (A) that the fair value of the shares as determined materially
exceeds the amount which the corporation offered to pay; (B) that no offer or
required advance payment was made by the corporation; (C) that the corporation
failed to institute the special proceeding within the period specified therefor;
or (D) that the action of the corporation in complying with its obligations as
provided in this section was arbitrary, vexatious or otherwise not in good
faith. In making any determination as provided in clause (A), the court may
consider the dollar amount or the percentage, or both, by which the fair value
of the shares as determined exceeds the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be due
him, upon surrender of the certificates for any such shares represented by
certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
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<PAGE>
APPENDIX C
(j) No payment shall be made to a dissenting shareholder under this section at a
time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be deemed
withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it is
liquidated, be subordinated to the rights of creditors of the corporation, but
have rights superior to the non-dissenting shareholders, and if it is not
liquidated, retain his right to be paid for his shares, which right the
corporation shall be obliged to satisfy when the restrictions of this paragraph
do not apply.
(3) The dissenting shareholder shall exercise such option under subparagraph (1)
or (2) by written notice filed with the corporation within thirty days after the
corporation has given him written notice that payment for his shares cannot be
made because of the restrictions of this paragraph. If the dissenting
shareholder fails to exercise such option as provided, the corporation shall
exercise the option by written notice given to him within twenty days after the
expiration of such period of thirty days.
(k) The enforcement by a shareholder of his right to receive payment for his
shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to be
given by a corporation to a shareholder under this section shall be given in the
manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided in
subparagraph (e)(2) of section 907 (Merger or consolidation of domestic and
foreign corporations).
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<PAGE>
EXHIBIT (c)
December 14, 2000
C. Cotran Holding inc.,
220 Boul. Industriel
Boucherville, Quebec
Canada J4B2X4
Dear Sirs:
Parisien, Grou, La Salle Inc. ("PGL") understands that C. Cotran Holding
Inc. (Cotran) contemplates the purchase of all the issued and outstanding common
shares of Sel-Drum International Inc. ("Company") through a Plan of Binding
Share Exchange (the "Plan") pursuant to Section 913(g) of the Business
Corporation Law of the State of New York. The terms of the Plan are described in
a Transaction Statement in Schedule 13E-3 to be filed with the Securities and
Exchange Commission and in a Notice to Shareholders (the "Notice") which PGL
understands will be mailed to shareholders of the Company in connection with the
Plan.
Cotran has retained the services of PGL to provide guidance for itself in
evaluating the Plan which includes a review thereof, and the preparation and
delivery of a report as to its fairness for the holders of Common Shares, from a
financial point of view (the "Fairness Review"). In order to execute this
Fairness Review we have performed the procedures usually prescribed and
recognised in such matters under business valuation standards.
PGL has not been engaged to prepare a valuation of the Company or of any of
it's assets, and the Fairness Review should not be construed as such.
Engagement
PGL was formally engaged by Cotran through an agreement between Cotran and
PGL (the "Engagement Agreement") dated November 13, 2000. The terms of the
Engagement Agreement provide that PGL is to be paid a fee of $10,000 for its
services. In addition, PGL is to be reimbursed for its reasonable out-of-pocket
expenses and to be indemnified by Cotran in certain circumstances.
PGL acknowledges that the conclusions of its Fairness Review will be relied upon
by the Board of Directors of Cotran. PGL further consents to the filing of its
Fairness Review report in its entirety with the Securities and Exchange
Commission and to reference thereto and description thereof in the Notice to be
distributed to shareholders.
<PAGE>
Relationship with Interested Parties
Neither PGL, nor any of their respective associates or affiliates is an
insider, associate or affiliate of Cotran or of the Company affiliates. PGL has
not participated in any financing involving Cotran or the Company or any of
their associates or affiliates.
Except as disclosed hereafter, PGL has not been engaged to provide any
financial advisory services to Cotran or the Company. Grou La Salle +
Associates, a partnership constituted under the laws of the Province of Quebec
whose partners are also shareholders of PGL, has been acting as external
auditors of Densigraphix Kopi inc and Cotran since 1992. There are no
understandings, agreements or commitments between Grou La Salle + Associates,
PGL, the Company, Densigraphix Kopi inc., Cotran and or any of their respective
associates or affiliates with respect to any future business dealings. PGL may,
in the future, in the ordinary course of its business, perform financial
advisory or investment services for Cotran, the Company, Densigraphix Kopi inc.
or any of their respective associates or affiliates.
Credentials of PGL
PGL is a corporation established under the laws of Canada which provides
corporate consulting and advisory services to companies.
PGL'S services include:
o Corporate and project acquisition identification and evaluation.
o Corporate and project due diligence and valuation.
o Acquisition structuring, negotiation, and financing.
PGL'S team has extensive experience in all facets of valuations including
mergers, acquisitions, divestiture and fairness opinion matters. The team
includes members experienced in project evaluation, financial investment, and
the provision of fairness opinions.
Scope of Review
To execute our Fairness Review, we have reviewed and relied upon or carried
out, among other things, the following:
The Plan
1. Schedule 13E-3, the Plan of Exchange and the Notice to Shareholders to
be filed with the Securities and Exchange Commission on or about
December 22, 2000.
2
<PAGE>
Sel-Drum International Inc.
3. audited financial statements of the Company for the years ended July
31, 1999 and July 31, 2000;
4. annual report of the Company for the year ended July 31, 1999;
5. Notice of Annual Meeting for Shareholders and Proxy Statement of the
Company for the year ended July 31, 1999.
6. Forms 10-K of the Company for the years ended July 31, 1999 and July
31, 2000; and Form 10-Q for the Company for the quarter ending October
31, 2000.
7. Internal management information provided by the Company;
8. Discussions with senior management of the Company;
9. Discussions with the Company's auditors and legal counsel;
10. The Company's internal budget prepared by management with respect to
the years 2000 and 2001;
11. Review of minutes of the board of directors of the Company;
12. Certain agreements involving the Company;
13. Outstanding options of the Company;
General
14. Public information relating to the business, operations, financial
performance and stock trading history of the Company;
15. Representations contained in certificates addressed to us, dated as of
the date hereof, from senior officers of the Company as to the
completeness and accuracy of the information upon which the Fairness
Review report is based; and
16. Such other corporate, industry and financial market information,
investigations and analyses as PGL considered necessary or appropriate
in the circumstances.
PGL has not, to the best of its knowledge, been denied access by the
Company to any information requested by PGL.
3
<PAGE>
Prior Valuations
The Company has represented to PGL that there have not been any prior
valuations of the Company or of its associates or affiliates, material assets or
securities in the past twenty-four month period.
Assumptions and Limitations
With the approval of Cotran and as provided for in the Engagement
Agreement, PGL has relied upon the completeness, accuracy and fair presentation
of all of the financial and other information, data, advice, opinions or
representations obtained by it from public sources, senior management of the
Company and their consultants and advisors (collectively, the "Information").
The fairness Review report is conditional upon such completeness, accuracy and
fair presentation of such information. Subject to the exercise of professional
judgment and except as expressly described herein, we have not attempted to
verify independently the completeness, accuracy or fair presentation of any of
the information.
Senior officers of the Company have represented to PGL in a certificate
delivered as of the date hereof, among other things, that (i) the Information
(as defined above) provided orally by, or in the presence of, an officer of the
Company or in writing by the Company or any of its subsidiaries or their
respective agents to PGL relating to the Company or any of its subsidiaries or
to the Plan, for the purpose of preparing the Fairness Review report was, at the
date the Information was provided to PGL, and is, except as has been disclosed
in writing to PGL, complete, true and correct in all material respects, and did
not, and does not, contain any untrue statement of a material fact in respect of
the Company, its subsidiaries or the Plan, and did not, and does not, omit to
state a material fact in respect of the Company, its subsidiaries or the Plan
necessary to make the Information not misleading in light of the circumstances
under which the Information was made or provided; and that (ii) since the dates
on which the Information was provided to PGL, except as disclosed in writing to
PGL, or as publicly disclosed by the Company, there has been no material change,
financial or otherwise, in the financial condition, assets, liabilities
(contingent or otherwise), business, operations or prospects of the Company or
any of its subsidiaries and no material change has occurred in the Information
or any part thereof which would have, or which would reasonably be expected to
have, a material effect on the Fairness Review report.
In preparing the Fairness Review report, PGL has made several assumptions,
including that all of the conditions required to implement the Plan will be made
and that the disclosure provided or incorporated by reference in the Notice with
respect to the Company and its subsidiaries and affiliates and the Plan is
accurate in all material respects.
4
<PAGE>
The Fairness Review report addresses the fairness of the Plan on the basis
of securities markets, economic, financial and general business conditions
prevailing as at the date hereof and the condition and prospects, financial and
otherwise, of the Company, its subsidiaries and affiliates, as they were
reflected in the Information and as they have been represented to PGL in
discussions with management of the Company. In its analyses and in preparing the
Fairness Review report, PGL made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of PGL or any party involved in the Plan.
The Fairness Review report has been provided for the use of Cotran and may
not be used by any other person or relied upon by any other person other than
Cotran without the express prior written consent of PGL. The Fairness Review
report is released as of the date hereof and PGL disclaims any undertaking or
obligation to advise any person of any change in any fact or matter affecting
the Fairness Review report which may come or be brought to PGL'S attention after
the date hereof. Without limiting the foregoing, in the event that there is any
material change in any fact or matter affecting the conclusions of the Fairness
Review report after the date hereof, PGL reserves the right to change, modify or
withdraw the Fairness Review report.
PGL believes that its analysis must be considered as a whole and that
selecting portions of the analysis or the factors considered by it, without
considering all factors and analysis together, could create a misleading view of
the process underlying the Fairness Review report. The preparation of such a
report is a complex process and is not necessarily susceptible to partial
analysis or summary description. Any attempt to do so could lead to undue
emphasis on any particular factor or analysis. The Fairness Review report is not
to be construed as a recommendation to any holder of Common Shares as to whether
to accept the Plan.
Overview of the Company
Sel-Drum International, Inc. (the "Company") is a United States holding
company, which owns 100% of the common stock of Sel-Drum Imaging Corporation (a
Canadian holding company). Sel-Drum Imaging Corporation owns 100% of the common
stock of Sel-Drum Corporation (U.S.A.), Inc. (a United States operating company)
and Sel-Drum Corporation (a Canadian operating company).
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.
5
<PAGE>
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.
On July 30, 1999 a stock purchase agreement was executed which provided for
the acquisition of 96.7% of the issued and outstanding common stock of the
Company by C. Cotran Holding Inc. Further information regarding the Company is
included in the Notice.
Fairness Analysis
Approach to Fairness
The Fairness Analysis has been prepared based upon techniques that PGL
considers appropriate in the circumstances, after considering all relevant
factors and taking into account its assumptions in order to arrive at a "fair
market value" of the Common Shares. For the purposes of the Fairness Analysis,
PGL defines "fair market value" as the highest price that an informed and
prudent buyer would pay in an open and unrestricted market to an informed and
prudent seller, each acting at arm's length, where neither party is under any
compulsion to transact, expressed in terms of money's worth.
In preparing the Fairness Analysis, PGL considered different evaluation
methodologies such as the net asset value analysis, price/earnings analysis,
precedent transactions and recent arm's length transaction analysis, market
trading analysis and determined the precedent and recent arm's length analysis
to be the most appropriate method.
PGL has assessed the fairness of the Plan to the holders of Common Shares
from a financial point of view, based upon a number of factors. These factors
include:
(i) a comparison of the consideration under the Plan to precedent
transactions and recent arm's length transactions;
(ii) a comparison of the consideration under the Plan to trading levels of
the Common Shares;
(iii)a comparison of the consideration under the Plan to the Net Book
value.
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<PAGE>
Precedent transaction and arm's length transaction
PGL in assessing the fairness of the transaction, reviewed the share
purchase agreement executed on July 30, 1999 whereby Cotran purchased 96.7% of
issued and outstanding shares of the Company, as well as transactions in fiscal
1999 to repurchase common shares resulting from third party transaction or put
rights agreement.
The consideration for such share purchase agreements were as follows :
--------------------------------------------------------------------------------
Date of transaction Number of shares Price
transacted / %
--------------------------------------------------------------------------------
July 31, 1999 7,173,680( 96.7%) $0.40 per share
--------------------------------------------------------------------------------
August 1, 1998 *100,000 $1.00 per share
July 30,1999 245,000 $1.00 per share
--------------------------------------------------------------------------------
January to May 1999 125,000 $0.40 per share
--------------------------------------------------------------------------------
*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 .
Based on this analysis, it appears that the price of $0.40 paid by Cotran
in July 1999 for the 96.7% interest in the Company, represents a fair value for
the shares.
Trading Analysis
PGL also examined the trading history of the Company 1) for the period from
July 1997 to June 1999 prior to the acquisition by Cotran and 2) for the period
from October 1999 to October 2000 after the acquisition by Cotran and 3) prior
to the announcement of the Arrangement. The following table sets forth the high
and low bid quotations provided for Sel-Drum's common stock for each quarterly
period during the last three fiscal years.:
<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
2000 $0.34375 $0.3125 $0.5 $0.25 $0.33 $0.3125 $0.375 $0.375
Fiscal
1999 $0.375 $0.375 $0.375 $0.375 $0.375 $0.375 $0.375 $0.315
Fiscal
1998 $0.125 $0.0625 $0.50 $0.07 $0.53125 $0.375 $0.87 $0.3125
</TABLE>
7
<PAGE>
From this analysis, it appears that the average median trading value in the last
year was between $0.35 and $0.375 with a very low trading activity for the 3.3%
of common stock held by the public, resulting in poor price performance since
1997.
Net Asset Analysis
PGL also performed an analysis of the net book value of the shares, being the
minimum value for the common shares. The analysis took into consideration fixed
assets, intangible assets and earnings per share. The net book value of the
shares was calculated at July 31, 2000 at $0.18 and at $0.20 at October 31,
2000.
Fairness Review report
Based upon and subject to the foregoing, PGL is of the opinion that, as of
the date hereof, the Plan is fair, from a financial point of view, to the
holders of Common Shares.
Yours very truly,
PARISIEN, GROU, LA SALLE inc.
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