November 11, 1996
Xx. Xxxxx Xxxxxxxx
Xx. Xxxxxx X. Xxxxxxxxx
Xx. Xxxxxx Xxxxxxx
Sel-Drum International, Inc.
000 Xxxxxxx Xxxxxx
Xxxxxxx, XX 00000-0000
Re: Acquisition Letter of Intent
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Dear Gentlemen:
This letter expresses the intent of the undersigned to enter
into transactions and agreements as described in this letter (the
"Acquisition") whereby JRCS Corp. or its designee(s) (the
"Buyer") will acquire all of the outstanding preferred stock and
90.1% of the outstanding common stock of Sel-Drum International,
Inc. (the "Company") from its principals Xxxxx Xxxxxxxx and
Xxxxxx Xxxxxxxxx and other shareholders as shall be listed on
Exhibit A (collectively "Selling Shareholders"), and whereby
related employment, non-competition and other agreements as
described herein will be consummated. Closing on the Acquisition
is subject to completion of due diligence to the satisfaction of
Buyer in its sole discretion and to entry into definitive legal
agreements containing provisions as described in this letter and
appropriate representations and warranties and other terms and
provisions (the "Acquisition Agreements"), pursuant to which the
closing shall occur. The Acquisition closing would occur on a
date, to be specified by Xxxxx, not later than March 7, 1997. If
the Acquisition is not completed on or before such date, this
letter, unless extended by written agreement of the undersigned,
shall terminate and be of no further force and effect. The
principal terms of the Acquisition will be as described below.
1. Stock Purchase and Price. At the Closing, Buyer will
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purchase from the Selling Shareholders, and the Selling
Shareholders will sell to Buyer, 100% of the outstanding
preferred stock and 90.1% of the outstanding common stock of the
Company. Buyer will: (a) at Closing pay the Selling Shareholders
U.S.$4.2 million in cash or immediately available funds and (b)
agree to pay U.S.$1.4 million on or before November 1, 1997
pursuant to an irrevocable promissory note executed and delivered
at Closing. The promissory note shall be secured by a bank
letter of credit, or alternatively by other
collateral, security or guarantees satisfactory to the Selling
Shareholders.
Assuming that 7,642,500 shares of common stock are
outstanding (including any and all rights and options for
issuance or potential issuance of common shares) at date of
Closing, 6,885,893 shares shall be transferred to Buyer. The
Selling Shareholders shall be Xxxxx Xxxxxxxx and Xxxxxx
Xxxxxxxxx, and their affiliates who agree to become Selling
Shareholders, such that the total of the common shares
transferred is the required number of shares.
2. Associated Shareholders' and Outside Shareholders' Shares.
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After Closing, an aggregate of 756,607 shares of common stock of
the Company (representing 9.9% of the total outstanding stock of
the Company [756,607/7,642,500]) will be held by owners other
than the Buyer. Of this amount, 514,787 shares will be held by
"Associated Shareholders" as listed on Exhibit B and 241,820
shares will be held by other shareholders ("Outside
Shareholders"). In the event that Buyer or the Company merge the
Company into a private entity or otherwise elect to convert the
Company into a non-reporting private company whose stock is not
publicly traded under applicable SEC rules (a "Going Private
Transaction"), the Company or its designee(s) shall be required
to purchase from the Associated Shareholders, and the Associated
Shareholders shall be required to sell to the Company or its
designee(s), the Associated Shareholders' shares of common stock
for a price of $1.00 per share. The obligation and right of the
Company to so purchase the common stock of the Associated
Shareholders upon a Going Private Transaction shall survive the
Closing in perpetuity as to the common stock that continues to be
owned by the Associated Shareholders. The Associated
Shareholders, until July 31, 1998, shall not be permitted to sell
their shares other than to Buyer, the Company or its designees;
thereafter, the Buyer, Company and its designees shall have a
right of first refusal as to common stock that continues to be
owned by the Associated Shareholders. An appropriate put/call
and first refusal agreement shall be entered into at Closing
between the Company, Buyer and the Associated Shareholders to
implement the foregoing. Xxxxx Xxxxxxxx and Xxxxxx Xxxxxxxxx
will, to the extent necessary, acquire shares of the Associated
Shareholders such that following Closing the total block of
Associated Shareholders' 514,787 shares is subject to the
put/call and first refusal agreement. If there is a Going
Private Transaction in which the 241,820 shares of the Outside
Shareholders are acquired or retired, the Outside Shareholders
shall be paid fair value for their shares; if such Going Private
Transaction occurs within one year of the Closing the amount
offered for their shares shall not in any event be less than
$1.00 per share.
3. Responsibility for Litigation or Claims. In connection
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with any purchase or retirement of the Outside Shareholders'
shares, the Company shall be responsible for any litigation or
claims of Outside Shareholders and shall hold harmless present
and future directors, officers, Selling Shareholders, Buyer and
their respective affiliates from any such claims. In connection
with the Acquisition or any purchase or retirement of Associated
Shareholders' shares, the Selling Shareholders shall be
responsible for any litigation or claims by the Associated
Shareholders and shall hold harmless the Company, and all present
and future directors, officers, Buyer and their affiliates (other
than the Selling Shareholders) from any such claims.
4. Xxxxx Xxxxxxx Employment Agreement. Buyer will negotiate
----------------------------------
an employment agreement to be entered into between the Company
and Xxxxx Xxxxxxx upon the Closing.
5. Xxxxx Xxxxxxxx Employment Agreement. Buyer will negotiate
-----------------------------------
an employment agreement to be entered into between the Company
and Xxxxx Xxxxxxxx upon the Closing. The agreement will include
the following terms:
- U.S.$125,000 annual salary;
- bonus related to the achievement of
specified targets related to
the export market;
- U.S.$16,000 a year for payment of car lease,
car insurance and operating costs;
- U.S.$5,700 for payment of annual dues and
monthly expenses for golf club;
- U.S.$2,300 for miscellaneous expenses for
sales promotions etc.;
- Reimbursement of out-of-pocket expenses for
overseas export sales trips which are
expected to be in the U.S.$15,000-20,000
range annually provided documented expense
reports are submitted to the Company.
(The foregoing is subject to Xxxxx's confirmation that these
compensation and benefit provisions, other than the agreed
salary, are consistent with current arrangements between the
Company and Xx. Xxxxxxxx.)
6. Bonus for Fiscal Year 1997. Upon the Closing, the Company
--------------------------
will enter into a bonus agreement providing for payment to the
Principals (Xxxxx Xxxxxxxx and Xxxxxx Xxxxxxxxx) of a combined
bonus, not to exceed U.S.$225,000, if the Company achieves an
EBIT of U.S.$1.8 million or greater for the fiscal year ending
July 31, 1997 (the "Principals' 1997 Bonus"). Such bonus would
be due and payable in cash on November 1, 1997 provided that the
audited financial statements for the fiscal year ended July 31,
1997 have been made
available. The bonus would be based on the consolidated
earnings of the Company (including the earnings of any acquired
company if an acquisition by the Company is completed before July
31, 1997 for the part of the fiscal year during which the
acquired entity was owned by the Company). The amount of the
bonus would be based on the following schedule:
EBIT for
F.Y. 1997 Bonus
U.S.$1,800,000 U.S.$50,000
Between
U.S.$1,800,001 to $1,900,000 U.S.$50,000 plus 75% of
EBIT over $1,800,000
Between
U.S.$1,900,001 to $2,100,000 U.S.$125,000 plus 50% of
EBIT over $1,900,000
Above U.S.$2,100,000 Always U.S.$225,000
The Principals' 1997 Bonus will be divided among the Principals
as specified in the bonus agreement to be entered into at Closing
by the Company and the Principals.
7. Non-Competition Agreements. The Principals will sign
--------------------------
covenants and non-competition agreements with the Company and
Buyer effective for a period of five years from the Closing.
Xxxxx Xxxxxxxx, Xxxxx Xxxxxxx and any other Principals who will
continue to be employees of the Company after the Closing will
sign covenants and non-competition agreements that will be
effective during their employment and for five years following
the completion of their employment with the Company. The
covenants and non-competition agreements will include provisions
to protect confidential or proprietary information of the
Company, to prohibit the Principals from competing with the
Company or becoming affiliated with a competitor of the Company,
from pursuing business opportunities of the Company under
consideration during their affiliation with the Company and from
soliciting employees or customers of the Company.
Based upon its due diligence review, the Buyer may require
as a Closing condition that designated employees or agents of the
Company other than the Principals enter into appropriate
covenants and non-competition agreements if such agreements are
not in place.
8. Building Lease. At the Closing, the Company will enter
--------------
into a five year lease from the date of Closing, at the present
rental
rate, on the existing Burlington offices of the Company, subject
to Buyer determining through due diligence that the lease rent
and other provisions are at market.
9. Auditors. Until payment of the Principals' 1997 Bonus, if
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Buyer elects to change the Company's auditors, Buyer will select
one of the "big six" accounting firms or Xxxxx Xxxxxxxx.
Following payment of such bonus, Buyer and the Company shall be
under no restriction with respect to selection of auditors.
10. Form 8K Filing. The parties recognize that the Company
--------------
will file a Form 8K with the Securities and Exchange Commission
no later than 15 days after the date hereof.
11. Agreements as to Exclusivity; No Violation; Due
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Diligence.
---------
While the foregoing expresses the parties' intent regarding
the Acquisition and principal terms of the Acquisition Agreements
but is subject to Buyer's due diligence and entry into the
definitive Acquisition Agreements, the provisions of this Section
11 are binding upon the Selling Shareholders and the Company as
an agreement with Buyer. Selling Shareholders and the Company
recognize that in reliance on this agreement, Xxxxx will
undertake due diligence analysis and incur significant efforts
and costs pertaining to the potential Acquisition.
a. The Company and each of its Selling Shareholders who
execute this letter hereby agree that none of them, directly or
indirectly, nor any of their representatives, directors,
officers, employees, agents or affiliates with their knowledge,
encouragement or authorization, shall, until March 7, 1997: (i)
discuss, enter into negotiations for, solicit offers for, or
otherwise pursue a possible sale or other disposition of the
Company, control of the Company, or any interest therein, with
any other party, whether by sale of stock, assets, merger or
otherwise, or provide any information to any other party for
discussion, evaluation or consummation of any such possible
transaction; (ii) discuss, enter into negotiations for, solicit
offers for, or otherwise pursue sale of all or substantial assets
of the Company, merger with or acquisition of another company or
assets thereof, or, without consent of Buyer, engage in other
transactions outside of the ordinary course of business of the
Company; or (iii) disclose to or discuss with any other party the
contents of this letter (other than as required in filings to be
made with the Securities and Exchange Commission or other
regulatory agencies or to shareholders in response to inquiries
from shareholders; no press release or similar release shall be
issued without consent and approval of Buyer). The Company shall
inform those of its directors, officers, employees or agents who
hold positions of significant
responsibility within the Company of the foregoing agreement so
that it is complied with by the Company. In furtherance of the
foregoing, in the event of breach of the foregoing (i) or (ii),
if Selling Shareholders or the Company thereafter enter into a
transaction providing for sale or transfer of control of the
Company or sale of substantially all assets thereof to a party
other than the Buyer, the Company shall be obligated to pay Buyer
a fee ("Break-Up Fee") of U.S.$1.1 million due and payable in
cash upon consummation of such transaction. The provision for
this Break-Up Fee is in addition to, and shall not be in lieu of,
the right of Buyer to enjoin violation of and specifically
enforce this Section 11, or to bring suit against any person or
entity that interferes with compliance with this Section 11 by
the Company and Selling Shareholders. The Company and the
Selling Shareholders shall immediately disclose to Buyer the
receipt or existence of any proposal or expression of interest
which they may hereafter receive during the exclusivity period in
respect of any competing transaction, which disclosure shall
include the identity of the person or entity that is tendering
any proposal or expression of interest and the terms and
substance thereof.
b. The Company and the Selling Shareholders represent that
neither they nor any of their affiliates will, by pursuing or
concluding the transactions contemplated hereby, violate the
terms of any other agreement or obligation to which any of them
is subject.
c. Within ten business days following the execution of this
letter, Xxxxx Xxxxxxxx and Xxxxxx Xxxxxxxxx will cause at least
6,885,893 shares of common stock, together with executed stock
powers and other documents required for the transfer thereof (such
executed stock powers and other documents to be added to the
escrow on or before December 20, 1996), to be placed in escrow
with Xxxx & XxXxxxx, pursuant to the form of escrow letter
attached as Exhibit C, [not included in this filing] such shares to
be held in escrow and
available for transfer in the Acquisition. To the extent that
Xxxxx Xxxxxxxx and Xxxxxx Xxxxxxxxx acquire other shares of
common stock prior to Closing, such shares and applicable
documents for transfer shall be added to the shares and documents
in escrow.
d. Promptly upon execution of this letter of intent, Xxxxx
will provide an initial list of due diligence information and an
initial schedule for visits to the Company's facilities and
meetings with management. During the period from the date of
this letter until Closing, the Company and the Selling
Shareholders agree to promptly and efficiently make disclosures
and provide all information to Buyer (including representatives
of Buyer) which Xxxxx describes or requests including but not
limited to the business, affairs, operations, personnel,
procedures, competitors, properties, assets, liabilities,
financial condition and ownership
of the Company, and all such other information which the Company
or Selling Shareholders deem may be relevant or material to Buyer
in consummating the Acquisition and/or in preparing for oversight
and management of the Company after Closing. Buyer shall be
given access to the premises and files of the Company on
reasonable notice and under conditions and arrangements that do
not interfere with the day to day operations of the business of
the Company.
We look forward to working with you with the goal of
successfully entering into final Acquisition Agreements and
consummating the Acquisition. Please signify your agreement with
this letter by signing below.
Very truly yours,
JRCS CORP.
By: /s/ Xxxx X. Xxxx
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Xxxx X. Xxxx
Xxxxxx and accepted as of
the date first written above:
THE COMPANY:
SEL-DRUM INTERNATIONAL, INC.
By: /s/ Xxxxx Xxxxxxxx
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Its: CEO
PRINCIPAL SELLING SHAREHOLDERS:
/s/ Xxxxxx X. Xxxxxxxxx
-----------------------
Xxxxxx X. Xxxxxxxxx
/s/ Xxxxx Xxxxxxxx
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Xxxxx Xxxxxxxx
EXHIBIT A
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List of selling Shareholders
----------------------------
The Selling Shareholders shall be Xxxxx Xxxxxxxx and Xxxxxx
Xxxxxxxxx, their affiliates and such other shareholders as they
shall designate before Closing, such that the total common stock
transferred to Buyer at the Closing represents 90.1% of the
outstanding common stock including all rights and options for
issuance of common stock. The final listing of Selling
Shareholders and the number of shares to be sold by each will be
specified before or at Closing by Xxxxx Xxxxxxxx and Xxxxxx
Xxxxxxxxx.
Xxxxx Xxxxxxxx affiliated shareholders include the following:
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Xxxxx Xxxxxxxx
Xxxxx Xxxxxxxx
Xxxxx Xxxxxxxx
Xxxxx Xxxxxxxx
Xxxxx Xxxxxxxx
Xxxxx Xxxxxxxx
Xxxxxx Xxxxxxxxx
Xxxxxx Xxxxxxxxx affiliated shareholders include the following:
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Xxxxxx Xxxxxxxxx
Xxxxxxxxx Xxxxxxxxx
EXHIBIT B
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Associated Shareholders
-----------------------
Shareholders who shall be deemed to be Associated Shareholders
shall include the following:
Name of Shareholder Shares Currently Owned
Xxxxx Xxxxxxxx 4,514,000
Xxxxx Xxxxxxxx 13,500
Xxxxx Xxxxxxxx 13,500
Xxxxx Xxxxxxxx 100,000
Xxxxx Xxxxxxxx 100,000
Xxxxx Xxxxxxxx 100,000
Xxxxxx Xxxxxxxxx 100,000
Xxxxxx Xxxxxxxxx 1,199,000
Xxxxxxxxx Xxxxxxxxx 237,000
Xxxxxx Xxxxxxx 125,000
Xxxxx Xxxxxxx 385,000
Xxxxxxx Xxxxxx 83,680
Kensington Int., 220,000 (est.)
a Barbados Holding Company
Xxxx Xxxxx 100,000
Bon Green 85,000
Xxxxxx Xxxx 25,000
(Should Xxxxxx Xxxxx receive shares from any of the above, he
shall be deemed an Associated Shareholder with regard to those
shares.)
