UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
F O R M 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended October 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from__________to__________
Commission file number 0-22964
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SEL-DRUM INTERNATIONAL, INC.
---------------------------------------------------------------
(Exact name of Small Business Issuer as specified in its charter)
Colorado 84-1236134
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) I.D. number)
501 Amherst Street
Buffalo, New York 14207-2913
--------------------------------------
(Address of principal executive offices)
(905) 335-2766
----------------------------------------------
(Issuer's telephone number, including area code)
Check whether the Issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of common stock outstanding as of December 11, 1997 was
7,642,500.
<PAGE>
SEL-DRUM INTERNATIONAL, INC.
----------------------------
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Consolidated Balance Sheets as of
October 31, 1997 and July 31, 1997............................3
Consolidated Statements of Income
for the three months ended October 31,
1997 and October 31, 1996.....................................5
Consolidated Statements of Cash Flows for the
three months ended October 31, 1997 and
October 31, 1996..............................................6
Item 2. Management's Discussion and Analysis
of Financial Conditions and
Results of Operations.........................................7
Item 3. Quantitative and Qualitative Disclosures
about Market Price...........................................10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................N/A
Item 2. Changes in Securities.......................................N/A
Item 3. Defaults Upon Senior Securities.............................N/A
Item 4. Submission of Matters to a Vote of
Security Holders............................................N/A
Item 5. Other Information...........................................N/A
Item 6. Exhibits and Reports on Form 8-K.............................11
Index to Exhibits......................................................13
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<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS (U.S.$)
CURRENT ASSETS October 31, 1997 July 31, 1997*
- -------------- ---------------- --------------
<S> <C> <C>
Cash and Cash Equivalents $ 932,941 $1,084,954
Accounts receivable, net 2,178,125 2,199,625
Deferred Income Tax Benefit 25,000 25,000
Inventories 2,797,737 3,143,472
Refundable Income Taxes 20,737 38,293
Other Current Assets 82,763 81,485
---------- ----------
TOTAL CURRENT ASSETS 6,037,303 6,572,829
FIXED ASSETS
- ------------
Equipment 1,347,425 1,357,641
Vehicles 38,757 24,835
Furniture and Fixtures 47,942 48,465
Leasehold improvements 408,532 414,114
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1,842,656 1,845,055
Less accumulated
Depreciation and Amortization 964,296 919,898
---------- ----------
878,360 925,157
OTHER ASSETS
- ------------
Organization costs, net 8,624 9,096
Purchased and developed technology, net 52,858 55,840
Loans receivable from related parties 110,710 115,421
Deposits 14,402 17,496
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186,594 197,853
---------- ----------
$7,102,257 $7,695,839
========== ==========
</TABLE>
* Derived from the July 31, 1997 Form 10-KSB
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<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS (CONT'D)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' (U.S.$)
- -----------------------------
EQUITY
- ------
CURRENT LIABILITIES October 31, 1997 July 31, 1997*
- ------------------- ---------------- --------------
<S> <C> <C>
Notes payable to banks $ 674,017 $ 1,393,185
Current portion of long-term debt 58,633 59,524
Accounts payable 573,173 628,999
Other current liabilities 375,659 258,427
----------- -----------
TOTAL CURRENT LIABILITIES 1,681,482 2,340,135
OTHER LIABILITIES
- -----------------
Long-term debt 92,772 109,072
Deferred income taxes 38,572 31,909
----------- -----------
131,344 140,981
SHAREHOLDERS' EQUITY
- --------------------
Common Stock 771,356 771,356
Preferred stock
Class C 1,280,048 1,280,048
Class D 3,520,132 3,520,132
----------- -----------
4,800,180 4,800,180
Additional paid in capital 11,915 11,915
Cumulative foreign currency
translation adjustment (147,854) (113,311)
(Accumulated deficit) (146,166) (255,417)
----------- -----------
5,289,431 5,214,723
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$ 7,102,257 $ 7,695,839
=========== ===========
</TABLE>
*Derived from the July 31, 1997 Form 10-KSB.
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<PAGE>
SEL-DRUM INTERNATIONAL, INC.
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(U.S.$)
QUARTER ENDED
---------------------------
OCTOBER 31
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 3,688,289 $ 3,937,236
Cost of goods sold 2,446,233 2,549,255
----------- -----------
GROSS PROFIT 1,242,056 1,387,981
Selling, operating, general and administrative
expenses 987,367 922,828
Provision for bad debts 18,595 13,697
----------- -----------
INCOME FROM OPERATIONS 236,094 451,456
Other income (expense):
Interest Income 196 5,545
Interest Expense (18,182) (37,675)
Foreign currency transaction gain (loss) 5,318 10,433
Disposal Fixed Asset gain (loss) -- 1,154
----------- -----------
(12,668) (20,543)
----------- -----------
INCOME BEFORE INCOME TAXES 223,426 430,913
Income Taxes:
Current 114,175 173,105
Deferred -- --
----------- -----------
114,175 173,105
----------- -----------
NET INCOME $ 109,251 $ 257,808
----------- -----------
Number of common shares outstanding 7,642,500 7,642,500
Net income per common share $ .01 $ .03
=========== ===========
</TABLE>
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<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
(U.S.$)
THREE MONTHS ENDED
--------------------------
OCTOBER 31
--------------------------
CASH FLOWS - OPERATING ACTIVITIES 1997 1996
----------- -----------
<S> <C> <C>
Net Income $ 109,251 $ 257,808
Adjustments to reconcile net income to net cash provided from
(used for) operating activities:
Provision for bad debts 18,595 13,697
Depreciation and amortization 59,799 47,832
Deferred income taxes 6,663 --
Gain on Disposal of Property -- (1,154)
Changes in certain assets and liabilities affecting operations:
Accounts receivable (2,905) (370,461)
Inventories 345,735 333,385
Other current assets 16,278 13,800
Deposits 3,094 73
Accounts payable (122,992) 173,701
Income taxes payable 67,166 51,259
Other current liabilities 117,232 (151,666)
----------- -----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 617,916 368,274
CASH FLOWS - INVESTING ACTIVITIES
- ---------------------------------
Purchases of property (23,618) (11,875)
----------- -----------
NET CASH (USED FOR) INVESTING ACTIVITIES (23,618) (11,875)
CASH FLOWS - FINANCING ACTIVITIES
- ---------------------------------
Bank overdraft -- --
Loans receivable - related parties 4,711 (3,045)
Short-term borrowings net (719,168) (583,146)
Repayments on long-term debt (17,191) (115,129)
Proceeds from Disposal of Assets -- 2,804
----------- -----------
NET CASH (USED FOR) PROVIDED FROM FINANCING ACTIVITIES (731,648) (698,516)
Effect of exchange rate changes on cash (14,663) 1,615
----------- -----------
NET (DECREASE) INCREASE IN CASH (152,013) (340,502)
Cash and Cash Equivalents at beginning of period 1,084,954 1,181,396
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 932,941 $ 840,894
=========== ===========
</TABLE>
- 6 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
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Sel-Drum International, Inc., ("Sel-Drum" or the "Company") is the
successor corporation to Dakota Equities Ltd., a publicly-held "blind pool." On
February 1, 1995, the Company acquired all the outstanding common shares of
Sel-Drum Imaging Corporation, the parent corporation of a privately held
Canadian Corporation which was founded in 1978. The Company's primary business
is the distribution of high mortality copier replacement parts, toners, and
photoreceptors ("Drums"), including, to a limited extent, the remanufacturing of
Drums. On August 1, 1995, the Company added remanufactured facsimile and printer
cartridges to its product offering through its manufacturing relationship with
MKG and later through its operation in Kelowna, British Columbia (the "Kelowna
Facility") on January 1, 1997. The Company markets in the United States and
Canada through a direct network of sales agents and telemarketers. Outside of
North America, the Company is represented by several distributors and their
sales account for less than 5% of the total revenues. The Company amalgamated
Micron Imaging Corporation (now the Kelowna Facility) and Sel-Drum Corporation
on November 1, 1996.
On March 7, 1997, the Company and certain principal shareholders terminated
discussions with JRCS Corp. regarding the sale of substantially all of the
outstanding capital stock of the Company.
In late 1997 the Company initiated a strategic plan which was designed to
focus on the longer term growth prospects of the Company. This new strategy
calls for concentrating future efforts to take advantage of the perceived
potential financial returns presented by existing opportunities within the high
mortality copier replacement part and printer part market place. The
implementation of this strategy includes programs aimed at bolstering the
Company's core business. Specifically, the Company is looking at its
under-utilization of the Kelowna Facility with a view toward having the Kelowna
Facility provide limited remanufacturing support and increased distribution
support. This may require some capital expenditures, although to date the
Company is exploring whether such option is viable.
Additional strategic items include seeking acquisition candidates and a
listing on the Nasdaq stock market and establishing integrated data systems, all
of which may serve to increase the Company's budgeted 1998 expenses.
On October 29, 1997, the Company announced that it had hired Raymond C.
Sparks as its new Chief Executive Officer and President, replacing Brian
Turnbull who has agreed to remain with the Company as a full-time consultant.
Sel-Drum is a leading independent distributor of high mortality copier
replacement parts and supplies. As one of the largest independent high mortality
copier parts distribution companies in North America, Sel-Drum provides a link
- 7 -
<PAGE>
between parts manufacturers, sellers and buyers. Sel- Drum is also developing
strong relationships with suppliers who seek advanced inventory management,
order processing and forecasting.
Through its Sel-Drum Imaging Corporation subsidiary, the Company has two
wholly owned subsidiaries, Sel-Drum Corporation (U.S.A.), Inc. and Sel-Drum
Corporation. Unless otherwise indicated, all references to "Sel-Drum" or the
"Company" include the Company, Sel-Drum Imaging Corporation, Sel-Drum
Corporation and Sel-Drum Corporation (U.S.A.), Inc. It should be noted that
approximately 50% of the Kelowna Facility's remanufactured product is sold
directly to the other operating divisions. Sel-Drum Corporation (U.S.A.), Inc.
and Sel-Drum Corporation employ a number of sales agents and telemarketers who
contact directly the copier machine dealers throughout North America. There are
approximately 12,000 such dealers marketing various brands of copier products.
The Company estimates that the potential market place for high mortality
replacements parts, drums and toner, not controlled by the Original Equipment
Manufacturers ("O.E.M."s) to be approximately $675 million in North America.
RESULTS OF OPERATIONS
---------------------
The Company's results of operations are affected by numerous factors such
as general economic conditions, competition and inventory costs. The largest
component of the Company's cost of sales is inventory cost, which may vary
slightly from period to period based upon timing of purchases which indirectly
affect the Company's inventory costs.
The following table sets forth for each of the periods presented, certain
income statement data for the Company expressed as a percentage of net sales.
Three Months Ended
------------------
October 31, October 31,
----------- -----------
Statement of Operations Data 1997 1996
- ---------------------------- ---- ----
Net Sales 100.0% 100.0%
As a Percentage of Net Sales:
Cost of Goods Sold 66.3 64.8
------ ------
Gross Profit 33.7 35.2
Selling, General and 26.8 23.5
Administrative Expenses
Provision for Bad Debt .5 .3
------ ------
Income from Operations 6.4 11.4
Other Income (Expense) (.3) (.5)
------- -------
Income Before Taxes 6.1 10.9
------ ------
Net Income 3.0 6.5
====== ======
- 8 -
<PAGE>
Net sales for the three months ended October 31, 1997 were $3,688,289 as
compared with $3,937,236 for the three months ended October 31, 1996, a decrease
of 6%. The decrease in net sales for the three months ended October 31, 1997 is
principally the result of reduction in drum sales and in timing of customer
purchases.
Gross profit margin for the three months ending October 31, 1997 was 33.7%,
as compared to 35.2% for the same period last year. In absolute dollars, gross
profit decreased from $1,387,981 for the three months ended October 31, 1996 to
$1,242,056 for the three months ended October 31, 1997. The decrease in absolute
gross profit dollars of $145,925 for the three month period resulted primarily
from anticipated seasonal net sales decreases and decreases in sales volume and
increasing costs at the Kelowna Facility.
Selling, general, and administrative expenses for the three months ended
October 31, 1997 increased 7.0% from the prior comparable period. As a
percentage of net sales, selling, general and administrative expenses increased
as a result of decreased sales volume. The increase in selling, general and
administrative expenses for the three months is also attributable to fees and
expenses associated with the recently implemented Company strategy described
above.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's principal capital requirements are to fund its working
capital needs and material inventory requirements and to fund the improvement of
facilities, machinery and equipment. Historically the Company has used income
generated by operations as well as bank financing to fund these capital needs.
Net cash provided by operating activities primarily represents net income
plus changes in working capital positions. Net cash provided by operating
activities for the three months ended October 31, 1997 was $617,916.
Net cash used for investing activities represents purchases of property in
connection with the start up of a facsimile and printer cartridge production
operation at the Company's Kelowna, British Columbia facility. As previously
disclosed in the Company's Form 10-KSB, the Company is exploring ways to improve
the Kelowna Facility's performance with the view toward returning the Kelowna
Facility to profitability. This strategy could include additional capital
expenditures. No assurances can be given that the Company will be successful
implementing its strategy for the Kelowna Facility.
The Company currently has a revolving demand loan arrangement with the
National Bank of Canada in the amount of $3,700,000 (CDN). These borrowings
generally assist the Company with funding of accounts receivable and inventory
purchases. As of October 31, 1997 outstanding borrowings of $645,896 (U.S.)
existed under this arrangement.
- 9 -
<PAGE>
Cash flow from operations coupled with cash flow generated by bank
financing has provided the Company with the cash necessary to meet its cash
requirements. For the foreseeable future, the Company does not anticipate any
significant cash outlays other than those consistent with past practices.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCL0SURES ABOUT MARKET PRICE.
There currently is a limited market for the Company's securities.
- 10 -
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
---------
See Index to Exhibits.
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
- 11 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEL-DRUM INTERNATIONAL, INC.
Dated: December 15, 1997
By: /s/ Raymond Sparks
-----------------------------------
Raymond Sparks, President, CEO
By: /s/ John Hall
-----------------------------------
John Hall, Financial Director
- 12 -
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
- ------
27 Financial Data Schedule
- 13 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SEL-DRUM INTERNATIONAL, INC. FOR THE THREE MONTH PERIOD
ENDED OCTOBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 932,941
<SECURITIES> 0
<RECEIVABLES> 2,271,542
<ALLOWANCES> 93,417
<INVENTORY> 3,797,737
<CURRENT-ASSETS> 6,037,303
<PP&E> 1,842,656
<DEPRECIATION> 964,296
<TOTAL-ASSETS> 7,102,257
<CURRENT-LIABILITIES> 1,681,482
<BONDS> 0
0
4,800,180
<COMMON> 771,356
<OTHER-SE> 282,105
<TOTAL-LIABILITY-AND-EQUITY> 7,102,257
<SALES> 3,688,289
<TOTAL-REVENUES> 3,688,289
<CGS> 2,446,233
<TOTAL-COSTS> 2,446,233
<OTHER-EXPENSES> 987,367
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,182
<INCOME-PRETAX> 223,426
<INCOME-TAX> 114,175
<INCOME-CONTINUING> 109,251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,251
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
