<TABLE>
<CAPTION>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
___________
FORM 10-KSB
(Mark One)
<S> <C>
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended July 31, 1997
-------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ______________________ to _____________________
Commission File Number 0-22964
SEL-DRUM INTERNATIONAL, INC.
----------------------------
(Name of Small Business Issuer in Its Charter)
Colorado 84-1236134
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
501 Amherst Street, Buffalo, New York 14207-2913
------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
1-800-263-9356
--------------
Issuer's Telephone Number, Including Area Code
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, no par value
--------------------------
Title of Each Class
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X]
The Issuer's revenues for the year ended July 31, 1997 were $16,619,967.
As of October 22, 1997 there were 7,642,500 outstanding shares of Common Stock, no
par value. The aggregate market value of the voting stock of the registrant held by
non-affiliates on October 22, 1997 based on the average bid and asked price on such date
was $105,067.
</TABLE>
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
- ---------------------------------
General
- -------
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 operations in Kelowna, British
Columbia (the "Kelowna Facility"). 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.
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
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.
<PAGE>
Company Strategy
- ----------------
Through flexibility in sourcing as well as customer service, the Company
continually strives to be a reliable, innovative and cost-effective provider of
high mortality copier and facsimile component products to the approximately $675
million per year market in North America. The Company believes there are also
significant opportunities in the European and Asia-Pacific regions. The
Company's strategy to accomplish these objectives includes the following:
o Provide high quality products and superior customer service. The
Company maintains a detailed and extensive quality assurance
program. The Company also requires that both its affiliated and
unaffiliated suppliers conform to Company customer quality and
standards. The Company intends to continue its strategy of
demanding high quality from its vendors.
o Improve remanufacturing flexibility. Management believes that the
Company is the only copier parts distributor with internal
manufacturing and remanufacturing support. Although to date the
Company's manufacturing facility in Kelowna, British Columbia
(the "Kelowna Facility") has been under-utilized, the Company
intends to increase the utilization of its Kelowna Facility to
remanufacture printer and facsimile cartridges. The Company also
intends to reemphasize the Kelowna Facility's distribution
capabilities to service its existing customers in Western North
America. To achieve this strategy, the Company intends to make
capital expenditures in its Kelowna Facility of approximately
$200,000.
o Increase sales outside of North America. As a result of the
recent hiring of a new Chief Executive Officer/President, the
Company's founder, Brian Turnbull, will focus his efforts on
expanding the Company's international sales. The Company believes
that Mr. Turnbull's significant experience and network of
customers will serve to enhance the Company's sales outside of
North America, although no assurances can be given that this will
occur.
o Establish integrated data system. An integrated data system will
permit the Company's employees to access information on stock
availability, pricing and order status, and to perform order
entry on a real time basis from anywhere in the world. The system
will facilitate immediate drop shipment from Burlington, Ontario
or Kelowna, British Columbia to customers throughout North
America and overnight fulfillment of European customer orders.
The anticipated system will provide direct customer access to
Sel- Drum's central inventory management and retrieval system. In
addition, the Sel-Drum order entry system will be available on
the Internet and should enable customers to review parts
availability, place orders and check order status. To date, the
system has not been implemented and no assurances can be given
- 2 -
<PAGE>
that such a system will be implemented or if implemented whether
such system will be successful. The Company estimates the cost
associated with the establishment of such a system will be
approximately $200,000.
o Seek qualified acquisition candidates. The copier, facsimile and
printer component parts industry is extremely fragmented and
undergoing consolidation. Although the Company is not presently
engaged in discussion, part of its strategy is to acquire
existing smaller companies within its industry segment with whom
the Company believes economies of scale can be obtained. No
assurances can be given that the Company will be able to identify
suitable acquisition candidates; or, if identified and
successfully completed, whether such acquisition candidates will
provide the economies of scale the Company is seeking.
o Obtain Nasdaq Stock Market listing. The Company's management
intends to refocus its effort on obtaining listing on the Nasdaq
Small Cap Market system. The Company's management recognizes that
it is substantially more difficult for investors to dispose of
securities or to obtain accurate quotations as to securities in
the OTC Bulletin Board Service. As a longer term strategy, the
Company intends to apply to list the Company's Common Stock on
the Nasdaq Small Cap Stock Market. To date, the Company does not
meet the necessary minimum bid price per share or public float
criteria required by Nasdaq for listing on the Small Cap Market.
In the event the Company is unsuccessful obtaining listing on the
Nasdaq Small Cap Stock Market, it may seek listing on other
regional exchanges or national exchanges. There can be no
assurance that any application for listing on any exchange will
be approved or that a market for the Common Stock will be
obtained.
As a result of the Company's strategy to promote superior customer service,
increase sales outside of North America, establish an integrated data system,
seek qualified acquisition candidates, and obtain Nasdaq Stock Market listing,
the Company believes it is well positioned to increase sales and profitability.
The Company's strategy is subject to certain conditions outside of its control
and no assurances can be given that the Company will be successful in
implementing any or all of its corporate objectives. See "Investment
Considerations."
Copier, Facsimile, and Printer Parts Distribution
- -------------------------------------------------
Management believes Sel-Drum is one of the largest independent North
American distributors of high mortality copier parts, drums, toner and related
supplies, serving both the commercial, institutional and general copier
after-markets. Product lines distributed by Sel- Drum include a variety of other
supplies. Sel-Drum purchases these new parts from suppliers for its own account
and resells such parts to its customers, which include commercial customers,
governmental agencies and other distributors.
- 3 -
<PAGE>
The Company distributes high mortality copier parts from customer service
centers located throughout North America, and to a limited extent in Europe and
the Asia-Pacific region. Although the Company intends to refocus its efforts on
developing markets outside of North America, to date sales outside of North
America account for less than 5% of total sales. Field sales representatives
located in each of these regions call upon current and potential customers on a
regular basis to solicit orders and provide product and operational information.
Each service center is staffed to receive and process telephone, facsimile and
mail orders. A majority of the parts distributed by the Company are located in
its Buffalo, New York warehouse complex, with the remaining parts distributed
from the Company's Burlington, Ontario and Kelowna, British Columbia facilities.
Management believes that this diversity distinguishes Sel-Drum from most
other distributors which carry a narrower range of products. Over 2,500 unique
part numbers are sold to approximately 4,500 customers.
Through Densigraphix of Montreal, Quebec, the Company markets its products
in the province of Quebec. Densigraphix is a significant distributor of toner to
the reprographics industry. The Company markets some of the Densigraphix toners
outside of Quebec, Canada. In August 1995, the Company introduced remanufactured
cartridges for the facsimile and printer market. Many of these products are
marketed by the copier dealers already marketing the Company's products. It is
estimated that 75 million cartridges will be sold to the North American market
by all North American distributors in 1998, and approximately 25 million of
these will be re-charged units.
Through MKG Cartridge Systems Inc., Mississauga, Ontario, Canada, the
Company markets remanufactured cartridge products to the industry's dealers,
vendors and resellers in North America. It is anticipated that this product line
will represent more than 11% of the Company revenues in this coming fiscal year.
Sales and Marketing
- -------------------
The Company markets and inventories a line of 2,500 high mortality
replacements parts, Drums, toner, and remanufactured facsimile and printer
cartridges. The Company recently added coin-ops for copier and vending machines,
keycounters, key pads and other related accessories. Sel-Drum emphasizes breadth
of product offering, competitive pricing, attention to customer service and
value-added functions through advanced systems and inventory
management/logistics applications. Sel-Drum's parts distribution operations
serve the different requirements of both the commercial copier and the general
copier after-market sectors.
Sel-Drum's commercial and institutional copier parts distribution sales
operations conduct direct sales and marketing efforts through a team of regional
sales managers and field sales representatives who meet regularly with
Sel-Drum's major customers. Their function is not only to sell and provide
technical support for existing products but also to work with Sel-Drum's
customers and with suppliers in order to identify new market opportunities.
- 4 -
<PAGE>
The commercial and institutional parts distribution sales operation
conducts much of its parts purchasing activities through annual or longer term
purchase orders with a strong emphasis upon customer service. Management
believes that Sel-Drum's and its focus on service provide a competitive
advantage in serving its customers.
Sel-Drum's general copier parts distribution operations sell through both
employee and third-party sales representatives to meet customer requirements.
The general copier parts distribution staff works closely with the regional
sales staff and the inventory provisioning group to ensure that inventory
availability and customer service levels are maintained. Frequent meetings are
conducted with suppliers to provide new product introductions as well as
marketing and sales training.
Sel-Drum warrants its products to its Customers which does not represent a
material cost to the Company.
Seasonality of Business
- -----------------------
Although there is no significant fluctuation in the flow of business,
revenues are generally lower during the Company's fourth fiscal quarter. The
Company believes this occurs due to school closings and governments summer
recess because those institutional customers are significant users of copying
machines producing high volumes of copies and the recurring need for replacement
parts.
Competition
- -----------
Sel-Drum's primary competitors for sales of copier parts and supplies are
other independent distributors and the OEMs. While Sel-Drum historically
competed in the parts distribution sector on the basis of price and availability
of parts, management believes that a primary basis for competition today, and
a key differentiating factor in the future, will be the ability to offer
value-added services to accommodate customers, such as broad-based inventory
management services and sophisticated systems capability.
Employees
- ---------
At July 31, 1997, Sel-Drum employed approximately 71 full time employees
located in the United States and Canada. The Company has no employees
represented by unions. The Company believes that its relationship with its
employees is satisfactory.
New Chief Executive Officer
- ---------------------------
The Company recently announced that it had hired Raymond C. Sparks as its
new CEO and President. Mr. Sparks replaces Brian Turnbull, the Company's
founder, who will remain with the Company as a full-time consultant and will
devote much of his efforts toward transitioning his prior responsibilities as
well as developing sales outside of North America. From 1993 to 1997, Mr. Sparks
- 5 -
<PAGE>
was the President, Chairman of the Board and Chief Executive Officer of Village
Green Bookstores, Inc., a publicly-held specialty retailer. Mr. Sparks has eight
years of public accounting experience in South Africa with Ernst & Young and
later, with Webb & Company. Since 1979, Mr. Sparks has been engaged in the
retail industry, primarily in supermarket and specialty stores, in both
operational and financial capacities. Mr. Sparks was Financial Director for
Burlington Industries in Cape Town until 1983. From 1983 to 1987, Mr. Sparks was
Divisional Financial Manager for Checkers Supermarkets Ltd. in Cape Town. Mr.
Sparks moved to the United States in 1987, and became Chief Financial Officer of
Checkers Restaurants, Brooklyn, New York. In 1989, he was named Vice President
of Finance at Tie Rack (U.S.) Inc. Mr. Sparks was the Chief Operating and Chief
Financial Officer of Burke & Burke (New York) in 1991. Mr. Sparks was Vice
President of Conston Corporation, an apparel retailer located in Philadelphia
before he joined Village Green in June 1993. Mr. Sparks holds the professional
qualification of Chartered Accountant (C.A.(S.A.)), and was awarded a Bachelor
of Commerce (with honors) degree in Financial Accounting by the University of
Cape Town, South Africa.
Forward-Looking Information
- ---------------------------
This document contains, and other materials filed or to be filed by the
Company with the Commission which are incorporated by reference herein, as well
as information included in oral statements or other written statements made or
to be made by the Company, contain or will contain or include, disclosures which
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1934, as amended (the "Act"), and Section 21E of the Exchange
Act. Such forward-looking statements address, among other things, strategic
initiatives (including plans for enhancing the Company's business through new
acquisitions, information technology systems, sales strategies, market growth
plans, margin enhancement initiatives, capital expenditures, and financing
sources). Such forward-looking information is based upon management's current
plans or expectations and is subject to a number of uncertainties and risks that
could significantly affect current plans, anticipated actions and the Company's
future financial condition and results. These uncertainties and risks include,
but are not limited to, those relating to successfully managing program to
acquire and integrate new companies, including technical services risks and
uncertainties relating to conducting operations in a competitive environment;
delays, technological changes, management transitions and employment issues;
debt service requirements (including sensitivity to fluctuation in interest
rates and foreign currency); and general economic conditions. As a consequence,
current plans, anticipated actions and future financial condition and results
may differ from those expressed in any forward-looking statements made by or on
behalf of the Company.
Investment Considerations
- -------------------------
The following factors are important and relevant considerations in
evaluating the business of the Company and a potential investment in the
Company's securities.
PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK. Some portion of the Company's
common stock currently trades on the NASD's OTC Bulletin Board. The Company
intends to apply to list the Common stock on the Nasdaq Small Cap Market or
regional or national exchange, if denied listing on such market. There can be no
- 6 -
<PAGE>
assurance that a market for the Common Stock will develop or be sustained. As a
result, purchasers of the Company's securities may have difficulty in selling
such securities should they desire to do so.
COMMON STOCK ELIGIBLE FOR RESALE. Of the 7,642,500 shares of Common Stock
presently outstanding, over 7,400,000 shares are "restricted securities" and
under certain circumstances may be sold in compliance with Rule 144 adopted
under the Securities Act. Future sales of such shares are likely to depress the
market price of the Company's Common Stock, which would have an adverse effect
on the value of the Company's securities.
ABILITY TO RESPOND TO RAPID CHANGE. The Company's future success will
depend significantly on its ability to enhance its current products and develop
or acquire and market new products which keep pace with technological
developments and evolving industry standards as well as to respond to changes in
customer needs. The failure of the Company's management to adapt to changing
technological and business conditions, as well as the growth of its own
business, results of operations and prospects, would have a material adverse
effect on the Company's business.
MANAGEMENT TRANSITION; DEPENDENCE UPON KEY PERSONNEL. The Company's success
will depend in large measure on the efforts of key senior management. The
Company recently announced that it had hired Raymond C. Sparks as its new Chief
Executive Officer and President, replacing the Company's founder, Brian
Turnbull. Mr. Turnbull has agreed to remain as a consultant to the Company and
will devote a substantial amount of time working on the Company's export
business and transitioning his prior responsibilities over to Mr. Sparks. The
loss of the services of Mr. Turnbull or Mr. Sparks or the loss of other key
personnel could have a material adverse effect on the Company.
MANAGEMENT OF GROWTH. The Company has recently experienced a period of
growth and if such growth continues into the future, a significant strain may be
placed on the Company's management and other resources. The Company's future
performance will depend in part on its ability to manage changes in its
operations and will require the Company to hire additional management and
technical personnel, particularly in the marketing and customer support areas.
In addition, the Company's ability to manage changes in its operations will
require it to continue to improve its operational and financial control system
and to attract, train, motivate, manage and retain key employees. If the
Company's management were to become unable to manage growth effectively, that
would have a material adverse effect on the Company's financial condition,
prospects and operating results.
POTENTIAL UNSPECIFIED ACQUISITIONS. The Company is currently considering
acquiring other smaller businesses within its industry segment from whom
economies of scale can be achieved. In the event the Company determines to
acquire such businesses or assets, investors may not have an opportunity to
review the financial statements of such businesses or to vote on such
acquisitions. To date, the Company has not identified any acquisition candidates
and no assurances can be given that any such acquisitions will occur or if they
occur whether such acquisitions will provide the economies of scale the Company
desires from such candidates.
- 7 -
<PAGE>
COMPETITION. The high mortality copier parts business is highly
competitive. The Company believes that competition in the industry is based
principally upon experience, quality, prices and the ability to meet customer
delivery requirements. Prior competition in the industry affects the Company's
ability to increase prices on certain products and, in some cases, subjects the
Company to pressure from its customers to reduce prices. While recently
committing its efforts to improve its remanufacturing and assembly processes to
permit the Company to reduce costs through operating efficiencies, thereby
improving profitability, there can be no assurances that these efforts will
serve to improve productivity and profitability. Additionally, some of the
Company's competitors have greater financial resources than the Company and
there can be no assurance that the Company will be able to compete effectively
with these competitors.
CONTROL BY MANAGEMENT. Management holds approximately 86.60% of the Common
Stock of the Company. As a result, management is in a position to control the
management and policies of the Company, including, but not limited to, electing
or removing the Company's Board of Directors, changing the core business of the
Company, causing or restricting the sale of the Company, causing the Company to
engage in transactions with affiliated companies and controlling the Company's
dividend policy.
RELIANCE ON QUALITY CONTROL OF UNAFFILIATED MANUFACTURERS. Although the
Company believes that it maintains good control with respect to product
specifications and quality, there can be no assurance that unaffiliated
manufacturers become unable or unwilling to continue to manufacture the
Company's distributed products that are consistent with the Company's quality
and performance standards. In this regard, the Company has occasionally
received, and may in the future receive, shipments of product from unaffiliated
manufacturers of products that fail to conform to the Company's quality control
standards or are not timely delivered. Although shipments from unaffiliated
manufacturers of products that failed to conform to the Company's standards have
not materially affected the Company's operation, there cannot be any assurance
that such failure in the future would not materially adversely affect the
Company's results of operations or its reputation in the marketplace.
ITEM 2. DESCRIPTION OF PROPERTY
- ---------------------------------
As of July 31, 1997, the Company was utilizing approximately 45,300 square
feet of warehouse and manufacturing space and approximately 6,700 square feet of
office, administrative, training and sales space. The Company believes that its
properties are adequate for its needs. Information with respect to the principal
facilities used by Sel-Drum is set forth below:
- 8 -
<PAGE>
ADDRESS PRIMARY USE
501 Amherst Street (1) Registered Headquarters
Buffalo, N.Y. U.S.A. and U.S.A. Distribution
1370 Artisans Court (2) Executive and
Burlington, On. Canada Administration Facilities
Canadian Distribution
1910 Dayton Street (3) Manufacturing Facility
Kelowna, B.C., Canada
1944 Dayton Street (4) Distribution Center
Kelowna, B.C., Canada
1890 Dayton Street (5) Distribution Center
Kelowna, B.C., Canada
(1) The Company established its U.S.A. distribution facilities in 1982, which it
has agreed to lease through March 1998 at an annual rental of $38,000.00
(2) Established in 1978 as the executive and administrative offices, together
with the distribution center for product within Canada. The Company has agreed
to lease the property through February 2002 at an annual rental of $85,000.00.
(3) The Kelowna Facility occupies three properties, one owned by a director
Robert Asseltine and the others by third parties. The lease with Mr. Asseltine
is month to month and has an annual rent of approximately $47,500.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
As of July 31, 1997, there are no known material legal proceedings against
the Company or any of its officers and directors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
No matters were submitted to a vote of the security holder during the
fourth fiscal quarter of 1997.
- 9 -
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------
The Common Stock of the Company began trading on the OTC Bulletin Board
June 20th, 1995 under the symbol "SDUM". The OTC Bulletin Board is an NASD
sponsored and operated inter-dealer automated quotation system for equity
securities not included in the Nasdaq system. The OTC Bulletin Board has only
recently been introduced as an alternative to "pink sheet" trading of
over-the-counter securities. Consequently, the liquidity and stock price of the
Company's securities in the secondary market may be adversely affected. There is
no assurance that a regular trading market will develop for any of the Company's
securities or that, if developed, any such market will be sustained. Moreover,
there can be no assurance that the Company's securities will be listed on Nasdaq
or any national securities exchange following the consummation of a Business
Combination. The range of high and low bid quotations for the Company's Common
Stock for the most recently completed Fiscal Year were obtained from the NASD
and are provided below. The volume of trading in the Company's Common Stock has
been limited and the bid prices reported may not be indicative of the value of
the Common Stock or the existence of an active trading market.
COMMON STOCK PRICE
First Quarter Second Quarter Third Quarter Fourth Quarter
- ---------------- --------------- --------------- ---------------
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
$.6865 $.6865 $1.00 $.6865 $.25 $.125 $.5625 $.125
On October 22, 1997 there were approximately 357 holders of record of the
Company's common stock. The number of shares issued was 7,642,500.
The Company has not paid a dividend with respect to its Common Stock nor
does the Company anticipate paying dividends in the foreseeable future.
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
--------------
The Company markets and inventories a line of 2,500 high mortality
replacement parts, Drums, toner, facsimile and printer cartridges. The
replacement parts are principally manufactured in Japan and Germany, many
exclusively to the Company's specifications. Facsimile and printer cartridges
are manufactured for the Company for distribution to the copier dealer market in
North America, by MKG Mississauga, Ontario, Canada. The Company also
remanufactures facsimile and printer cartridges at its Kelowna Facility.
- 10 -
<PAGE>
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.
Years Ended
-----------
Statement of Operations Data 1997 1996 1995
- ---------------------------- ---- ---- ----
Net Sales 100.0% 100.0% 100.0%
As a Percentage of Net Sales:
Cost of Goods Sold 66.0% 65.8% 68.0%
Gross Profit 34.0% 34.2% 32.0%
Selling, General and 23.8% 24.7% 23.9%
Administrative Expenses
Provision for Bad Debt .5% .3% .3%
Income from Operations 9.7% 9.2% 7.8%
Other Income (Expense) (.7%) (.9%) (1.3%)
Income Before Taxes 9.0% 8.3% 6.5%
Net Income 5.8% 5.2% 4.3%
Year Ended 1997 Compared to Year Ended 1996
- -------------------------------------------
The Company's distribution centers in Burlington, Ontario (Canada) and
Buffalo, New York (USA), continued to show strong profit margins during the
fiscal year ended July 31, 1997 with each facility recording 32.2% and 36.6%
gross margins respectively. The Company's Kelowna Facility, however, recorded a
loss in absolute dollars of approximately $285,000 as a result of limited
remanufacturing production of Drums. During Fiscal 1998, in addition to the
remanufacture of Drums, the Company intends to utilize the Kelowna Facility's
capacity to alleviate its current reliance upon third-party remanufacturers of
cartridges. Additionally, the Company intends to utilize expected additional
capacity for distribution of copier and facsimile component parts in Western
North America. The Company anticipates fiscal 1998 capital expenditures related
to the redeployment of assets at the Kelowna Facility to total approximately
$200,000.
Net sales for the year ended July 31, 1997 were $16.6 million as compared
with $14.8 million for the year ended July 31, 1996, an increase of 12.2%. The
increase in net sales is principally the result of steady improvement in the
copier and copier component markets and an intensified marketing effort within
the Company and its distribution channels.
- 11 -
<PAGE>
Gross profit margin for the year ended July 31, 1997 was 34.0%, as compared
to 34.2% for Fiscal 1996. As disclosed above, gross profit margins reflect an
increase in profit margins in the Company's two distribution centers located in
Burlington, Ontario and Buffalo, New York, and a loss from the Company's
manufacturing facility in Kelowna, British Columbia.
Selling, general, and administrative expenses for the year ended July 31,
1997 increased 8.3% from the prior comparable period. This increase resulted
primarily from professional and other fees associated with the terminated
negotiations with JRCS described earlier herein and legal and accounting costs
associated with the Company's longer term strategy to obtain listing on the
Nasdaq Stock Market.
As a result of the foregoing, net income improved by 25% from Fiscal 1996
to Fiscal 1997.
Year Ended 1996 Compared to Year Ended 1995
- -------------------------------------------
Net sales for the year ended July 31, 1996 were $14.8 million, an increase
of $.6 million from the prior year's revenues. Gross profit for Fiscal 1996 of
$5.1 million (34.2%) compared favorably to Fiscal 1995 of $4.5 million (31.7%),
an absolute dollar increase of 11.7%. Margins continued to improve quarter over
quarter with a 2.5% improvement for Fiscal 1996 over previous Fiscal 1995.
Selling and general and administrative expenses increased by $.26 million
in Fiscal 1996 from Fiscal 1995. The increases in expenses were primarily
additional sales commissions and telemarketers added in the fourth quarter of
Fiscal 1996.
The Company changed its policy for the handling of currency transactions
between Sel- Drum Corporation and Sel-Drum Corporation (U.S.A.), Inc. as stated
in the Form 10-KSB for Fiscal 1995. As a result, the Company enjoyed a $15,000
foreign exchange gain, and increased its interest income to $27,260. This income
off-set interest expense of $175,193 to a net interest expense of $147,933,
compared to a net interest expense of $150,612 for the prior fiscal year. Income
before taxes of $1.23 million represented an increase of 35% from the prior
fiscal year.
Taxes incurred in the fiscal year ended July 31, 1996 were $458,663
resulting in net income of $770,187 and earnings per share of $0.10 comparing
favorably with fiscal year ended July 31, 1995 of $613,900 and earnings per
share of $0.08.
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.
- 12 -
<PAGE>
Net cash provided by operating activities primarily represents net income
plus changes in working capital positions. Net cash provided by operating
activities for the year ended July 31, 1997 was $820,000. The Company's
arrangements with its North American customers typically provide that payments
are due within 30 days following the date of the Company's shipment of goods,
while arrangements with overseas customers are generally on a letter of credit
basis. Due to the continuing expansion of the Company's sales, management
believes that the Company's working capital requirements will increase.
Net cash used for investing activities represents purchases of property in
connection with the start up of a facsimile and printer cartridge production
operation at the Company's Kelowna, British Columbia facility.
The Company currently has a revolving demand loan arrangement with the
National Bank of Canada in the amount of $2,683,240 (U.S.). These borrowings
generally assist the Company with funding of accounts receivable and inventory
purchases. As of October 15, 1997 outstanding borrowings of approximately
$400,000 (U.S.) net of current cash existed under this arrangement.
Cash flow from operations coupled with cash flow generated by bank
financing has provided the Company with the cash necessary to meet its cash
requirements. For the foreseeable future, the Company anticipates cash outlays
in connection with the utilization of the Kelowna Facility for remanufacturing
printer and facsimile cartridges to be $200,000. The Company may expend an
additional $200,000 in connection with hardware and software upgrades relative
to the establishment of an integrated data system. The Company's current credit
facility requires it to obtain the written consent of the National Bank of
Canada prior to making capital expenditures during any fiscal year in excess of
$200,000. In connection with the foregoing anticipated capital expenditures, the
Company anticipates seeking such consent.
ITEM 7. FINANCIAL STATEMENTS
- ------------------------------
CONTENTS
--------
AUDITED CONSOLIDATED FINANCIAL STATEMENTS PAGE
- ---------------------------------------------------------
Independent Auditors' Report F-1
Consolidated Balance Sheet F-2, F-3
Consolidated Statements of Income F-4
Consolidated Statements of Changes
in Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Audited Consolidated
Financial Statements F-7 - F-14
- 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, 1997, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the two years in the period ended July 31, 1997. 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 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, 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
two years in the period ended July 31, 1997, in conformity with generally
accepted accounting principles.
MENGEL, METZGER, BARR & CO. LLP
Rochester, New York
September 19, 1997
F-1
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
JULY 31, 1997
-------------
ASSETS
------
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS
- --------------
Cash and cash equivalents $ 1,084,954
Accounts receivable, net of allowance for doubtful
accounts of $72,504 2,199,625
Inventories 3,143,472
Refundable income taxes 38,293
Deferred income tax benefit 25,000
Other current assets 81,485
---------------------
TOTAL CURRENT ASSETS 6,572,829
PROPERTY
- --------
Equipment 1,357,641
Vehicles 24,835
Furniture and fixtures 48,465
Leasehold improvements 414,114
---------------------
1,845,055
Less accumulated depreciation and amortization 919,898
---------------------
925,157
OTHER ASSETS
- ------------
Organization costs, net of accumulated amortization of $5,479 9,096
Purchased and developed technology, net of accumulated
amortization of $31,184 55,840
Deposits 17,496
Loans receivable from related parties 115,421
---------------------
197,853
---------------------
$ 7,695,839
=====================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-2
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Current portion of long-term debt $ 59,524
Notes payable to bank 1,393,185
Accounts payable 628,999
Other current liabilities 258,427
----------------
TOTAL CURRENT LIABILITIES 2,340,135
OTHER LIABILITIES
- -----------------
Deferred income taxes 31,909
Long-term debt 109,072
----------------
140,981
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock:
Class C 1,280,048
Class D 3,520,132
----------------
4,800,180
Common stock 771,356
Additional paid-in capital 11,915
Cumulative foreign currency translation adjustment (113,311)
Accumulated deficit (255,417)
----------------
5,214,723
----------------
$ 7,695,839
================
F-3
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Year Ended July 31,
-----------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Net sales $ 16,619,967 $ 14,811,891
Cost of goods sold 10,968,448 9,746,252
-------------- --------------
GROSS PROFIT 5,651,519 5,065,639
Selling, administrative and general expenses 3,954,952 3,651,045
Provision for doubtful accounts 75,089 47,960
-------------- --------------
INCOME FROM OPERATIONS 1,621,478 1,366,634
Other income (expense):
Interest income 22,851 27,260
Interest expense (129,361) (175,193)
Loss on disposal of property (24,551) (4,869)
Foreign currency transaction gain 9,495 15,018
-------------- --------------
(121,566) (137,784)
-------------- --------------
INCOME BEFORE INCOME TAXES 1,499,912 1,228,850
Income taxes (benefit):
Current 531,155 463,210
Deferred 6,903 (4,547)
-------------- --------------
538,058 458,663
-------------- --------------
NET INCOME $ 961,854 $ 770,187
============== ==============
Earnings per common share $ .13 $ .10
============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
Foreign
Additional Currency Total
Preferred Common Paid-in Translation Accumulated Shareholders'
Stock Stock Capital Adjustment Deficit Equity
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
August 1, 1995 $ 4,800,180 $ 740,356 $ 11,915 $ (110,532) $(1,987,458) $ 3,454,461
Net income for
the year -- -- -- -- 770,187 770,187
Adjustment for
foreign
currency
translation -- -- -- 465 -- 465
Issuance of 10,500 --
shares of common
stock -- 21,000 -- -- -- 21,000
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT
JULY 31, 1996 4,800,180 761,356 11,915 (110,067) (1,217,271) 4,246,113
Net income for
the year -- -- -- -- 961,854 961,854
Adjustment for
foreign currency
translation -- -- -- (3,244) -- (3,244)
Issuance of 10,000
shares of common
stock in exchange
for services
rendered -- 10,000 -- -- -- 10,000
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT
JULY 31, 1997 $ 4,800,180 $ 771,356 $ 11,915 $ (113,311) $ (255,417) $ 5,214,723
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended July 31,
---------------------------------------
1997 1996
------------------ ------------------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net income $ 961,854 $ 770,187
Adjustments to reconcile net income to net cash provided from
operating activities:
Provision for doubtful accounts 75,089 47,960
Depreciation and amortization 187,032 188,838
Deferred income tax (benefit) 6,903 (4,547)
Loss on disposal of property 24,551 4,869
Issuance of common stock in exchange for services rendered 10,000 -
Changes in certain assets and liabilities affecting operations:
Accounts receivable (505,503) (102,235)
Inventories 652,294 (704,282)
Refundable income taxes (38,293) -
Other current assets 40,174 (13,940)
Deposits (3,021) 145
Accounts payable (538,462) 132,515
Income taxes payable (91,771) 32,319
Other current liabilities 39,198 104,795
------------------ ------------------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 820,045 456,624
CASH FLOWS - INVESTING ACTIVITIES
Purchases of property (90,341) (113,717)
------------------ ------------------
NET CASH (USED FOR)
INVESTING ACTIVITIES (90,341) (113,717)
CASH FLOWS - FINANCING ACTIVITIES
Bank overdraft - (17,058)
Increase in loans receivable from related parties (1,126) (3,063)
Short-term (repayments) borrowings, net (680,959) 731,913
Repayments on long-term debt (140,817) (59,272)
Proceeds from issuance of common stock - 21,000
------------------ ------------------
NET CASH (USED FOR) PROVIDED FROM FINANCING
ACTIVITIES (822,902) 673,520
Effect of exchange rate changes on cash (3,244) (1,036)
------------------ ------------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (96,442) 1,015,391
Cash and cash equivalents at beginning of year 1,181,396 166,005
------------------ ------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 1,084,954 $ 1,181,396
================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ 129,361 $ 175,193
================== ==================
Income taxes $ 661,648 $ 426,046
================== ==================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-6
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------
Description of business
-----------------------
Sel-Drum International, Inc. (the "Company") is a 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).
Prior to November 1, 1996, Micron Imaging Corp. was also a wholly-owned
subsidiary of Sel-Drum Imaging Corporation. On November 1, 1996, Micron
Imaging Corp. and Sel-Drum Corporation combined their operations into one
entity, which continued to do business as Sel-Drum Corporation.
Sel-Drum Corporation (U.S.A.), Inc. and Sel-Drum Corporation are engaged in
the wholesale distribution of parts and supplies used in the reprographic
industry. Micron Imaging (a division of Sel-Drum Corporation as of November
1, 1996) is engaged in the commercial production and distribution of
arsenic triselenide photoconductor aluminum drums used in duplicating
machinery and the remanufacture of cartridges used in laser printers and
facsimile machines. The Companies grant credit to customers who are located
throughout the United States and Canada, and arrange for letters of credit
and sight drafts with international customers.
Sel-Drum Corporation (U.S.A.), Inc. operates from a warehouse located in
Buffalo, New York. Sel- Drum Corporation's operating facility, which
includes warehouse space and administrative offices, is located in
Burlington, Ontario, Canada. Micron Imaging has its manufacturing facility
and administrative offices in Kelowna, British Columbia, Canada.
Principles of consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
Sel-Drum International, Inc. and its wholly-owned subsidiaries (through
Sel-Drum Imaging Corporation), Sel-Drum Corporation (U.S.A.), Inc. and
Sel-Drum Corporation. All material intercompany balances and transactions
have been eliminated in consolidation.
Cash and cash equivalents
-------------------------
The Company's policy is to invest cash in excess of operating requirements
in income producing investments. Cash equivalents are highly liquid
investments purchased with original maturities of three months or less.
Cash equivalents consist of investments in term deposit accounts at a
Canadian financial institution. At July 31, 1997, the Company's investment
in these term deposit accounts aggregated $438,574.
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 $43,500 ($60,000 Canadian). Uninsured balances aggregated
approximately $1,313,000 at July 31, 1997.
F-7
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
- --------------------------------------------------------------------
Inventories
-----------
Inventories are valued at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market.
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.
Organization costs
------------------
Organization costs are being amortized on a straight-line basis over ten
years.
Purchased and developed technology
----------------------------------
Purchased and developed technology, consisting of technology acquired as
well as engineering and other costs associated with the development of
Micron Imaging's production process, is being amortized on a straight-line
basis over its estimated useful life of ten years.
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 income items
are translated at weighted average exchange rates. The resulting
translation adjustments are made directly to a separate component of
shareholders' equity. 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 income.
Advertising costs
-----------------
The Company's policy is to expense advertising costs as incurred.
Advertising costs for fiscal 1997 and 1996 were $110,212 and $97,782,
respectively.
F-8
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
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.
Earnings per common share
-------------------------
Earnings per common share is based upon the weighted average number of
common shares considered to be outstanding during the period. The weighted
average number of shares considered to be outstanding for the years ended
July 31, 1997 and 1996 were 7,640,000 and 7,628,900, respectively.
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.
NOTE B: INVENTORIES
- --------------------
The components of inventories at July 31, 1997 are as follows:
Raw materials $ 236,240
Work-in-process 17,763
Finished goods 2,889,469
-------------
$ 3,143,472
=============
NOTE C: LOANS RECEIVABLE FROM RELATED PARTIES
- ----------------------------------------------
Non-interest bearing loans receivable from related parties at July 31, 1997
are summarized as follows:
Due from 547117 Ontario Limited $ 26,003
Due from 547118 Ontario Limited 89,418
-------------
$ 115,421
=============
The President of Sel-Drum Corporation is the majority shareholder (by
attribution) of the Canadian holding companies, 547117 Ontario Limited and
547118 Ontario Limited. There are currently no repayment terms for the
outstanding loans cited above.
F-9
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
NOTE D: NOTES PAYABLE TO BANK
- -------------------------------
Sel-Drum Corporation has several debt arrangements with a Canadian bank,
summarized as follows:
FACILITY A: $2,683,240 revolving demand loan ($3,700,000 Canadian dollars)
to assist with financing of the accounts receivable and inventories of
Sel-Drum Corporation and Sel-Drum Corporation (U.S.A.), Inc. The
arrangement provides for interest to be paid monthly at the bank's prime
rate plus .25% (an effective rate of 5% at July 31, 1997). This
arrangement may be drawn upon by Sel-Drum Corporation and Sel-Drum
Corporation (U.S.A.), Inc. There were borrowings outstanding against this
arrangement at July 31, 1997 of $1,358,738. Letters of credit (see
Facility B below), which reduce the amount of borrowings available under
the terms of the arrangement, were outstanding at July 31, 1997 in an
amount approximating $155,310.
FACILITY B: This arrangement provides the Company with letters of credit
to purchase inventories, up to an amount approximating $1,087,800
($1,500,000 Canadian dollars), subject to the outstanding balance of
Facility A cited above.
FACILITY C: $250,000 revolving demand loan to finance the payment of U.S.
trade accounts payable, subject to the outstanding balance of Facility A
cited above. No amounts were outstanding under this arrangement at July
31, 1997.
FACILITY D: $50,000 facility to provide check clearing privileges for U.S.
dollar checks, subject to the outstanding balance of Facility A cited
above. No amounts were outstanding under this arrangement at July 31,
1997.
FACILITY E: $253,820 ($350,000 Canadian dollars) facility to provide for
the purchase of up to $1,269,100 ($1,750,000 Canadian dollars) of forward
exchange contracts in Japanese yen. Borrowings are subject to the
outstanding balance of Facility A cited above. No amounts were outstanding
under this arrangement at July 31, 1997.
FACILITY F: $47,000 ($65,000 Canadian dollars) arrangement to finance
leasehold improvements at the facility of Sel-Drum Corporation, which
provides for interest at the prime rate plus 1% (an effective rate of
5.75% at July 31, 1997). Borrowings are subject to the outstanding balance
of Facility A cited above. There were borrowings outstanding against this
arrangement at July 31, 1997 of $34,447.
Accordingly, at July 31, 1997 the Company had approximately $1,134,745
available for borrowing under these arrangements.
Total amounts outstanding on all of the above arrangements as of July 31,
1997 amounted to $1,393,185.
F-10
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
NOTE D: NOTES PAYABLE TO BANK, Cont'd
- -------------------------------
The above arrangements are secured by substantially all assets of Sel-Drum
Corporation and Sel-Drum Corporation (U.S.A.), Inc., the limited corporate
guarantees of Sel-Drum International, Inc. and Sel- Drum Imaging Corp.,
each in the amount of $2,538,200 ($3,500,000 Canadian dollars), assignment
of a $362,600 ($500,000 Canadian dollars) life insurance policy on the
President of Sel-Drum Corporation, the corporate guarantees of 547118
Ontario Limited and 547117 Ontario Limited (both of which are substantially
owned by the President of Sel-Drum Corporation) and the limited corporate
guarantee of Sel- Drum Corporation (U.S.A.), Inc. in the amount of
$1,087,800 ($1,500,000 Canadian dollars). In addition, Facility F is also
secured by a collateral mortgage of $217,560 ($300,000 Canadian dollars) on
the operating facilities of Sel-Drum Corporation. Further, the arrangements
contain various covenants which provide for, among other things, the
maintenance of certain ratios and dividend restrictions.
NOTE E: LONG-TERM DEBT
- ------------------------
Long-term debt at July 31, 1997 is summarized as follows:
Interest free loan payable to Western Economic
Diversification Fund, due in monthly payments of $ 168,596
approximately $4,960 through November 1999.
Less: Current portion of long-term debt 59,524
------------------
$ 109,072
==================
Maturities for long-term debt are as follows:
Year ending July 31,
- -----------------------------------
1998 $ 59,524
1999 59,524
2000 49,548
---------------
$ 168,596
===============
F-11
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
NOTE F: INCOME TAXES
- ----------------------
The total tax provision is different from the amount that would have been
recorded by applying the U.S. statutory federal income tax rate to income
before taxes. The reconciliation of these differences is as follows:
<TABLE>
<CAPTION>
July 31,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
Statutory U.S. tax rate 34.0% 34.0%
State income taxes, net of federal tax benefit 2.0 2.0
Utilization of loss carryforwards (.2) (.2)
Utilization of scientific research and experimental development
expenditure carryforwards (.5) -
Difference between non-U.S. and U.S. tax rates .7 1.3
Other (.1) .2
------------- ------------
EFFECTIVE TAX RATE 35.9% 37.3%
============= ============
Deferred taxes resulting from temporary differences as of July 31, 1997 are as follows:
Assets/(Liabilities)
--------------------
<S> <C>
Allowance for doubtful accounts receivable $ 25,000
Depreciation (79,047)
Scientific research and experimental development expenditure carryforwards 20,000
Investment tax credit carryforwards 47,138
Tax effect of utilization of investment tax credit carryforwards being required (20,000)
to be included in taxable income
-------------------
$ (6,909)
===================
Current $ 25,000
Long-term (31,909)
-------------------
$ (6,909)
==================
</TABLE>
At July 31, 1997, Sel-Drum Corporation had scientific research and experimental
development expenditure carryforwards approximating $50,000 which may, subject
to certain limitations, offset future taxable income. The scientific research
and experimental development expenditure carryforwards may be carried forward
indefinitely. In addition, Sel-Drum Corporation also had investment tax credit
carryforwards of $47,138 available, subject to certain limitations, to reduce
future income taxes payable. These credits expire at various times through 2004.
F-12
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
NOTE G: COMMON AND PREFERRED STOCK
- -----------------------------------
The following is certain information regarding common and preferred
stock as of July 31, 1997:
Sel-Drum International, Inc.
----------------------------
Preferred Stock
---------------
Par Value None
Shares authorized 10,000,000
Shares issued and outstanding None
Common Stock
------------
Par value None
Shares authorized 100,000,000
Shares issued and outstanding 7,642,500
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 1,760
Class D (5% non-cumulative):
Par value None
Stated value $727.30
Shares authorized 10,000
Shares issued and outstanding 4,840
F-13
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED JULY 31, 1997 AND 1996
------------------------------------------
NOTE H: COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
Lease commitments
-----------------
Sel-Drum Corporation leases its operating facility from a related
party at a base monthly rental approximating $7,050 through February
2002. In addition to the base rental, the Company is responsible for
property taxes, insurance, utilities and repairs and maintenance.
Sel-Drum Corporation (U.S.A.), Inc. leases its warehouse from an
unrelated party at a base monthly rental approximating $2,800 through
March 1998, then $3,200 through the expiration of the lease in October
2001. The base monthly rental includes property taxes and utilities.
Micron Imaging leases one of its facilities for approximately $1,500
per month under a lease agreement which expires in May 1998. Micron
Imaging also leases two additional facilities on a month-to-month
basis, one from a related party.
Total rent expense for the Company's operating facilities and
warehouse was $194,679 and $149,761 for the years ended July 31, 1997
and 1996, respectively.
Total minimum future rental payments under all noncancellable leases
are approximately as follows:
Year ending July 31, Amount
--------------------------- ------------
1998 $ 146,669
1999 134,824
2000 126,845
2001 122,856
2002 51,864
------------
$ 583,058
============
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 and
Director of Finance of Sel-Drum Corporation and the General Manager of
Micron Imaging. These contracts provide for minimum annual salaries
plus bonuses.
Contingencies
-------------
At July 31, 1997, Sel-Drum Corporation was contingently liable for
approximately $155,310 related to letters of credit (see Note D).
F-14
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- --------------------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
--------------------------------------------------
The directors, nominees, and executive officers of the Company are as
follows:
Name Age Position with Company
---- --- ---------------------
Robert Asseltine 66 Chairman, Director
Brian Turnbull 62 Director, President, Chief
Executive Officer
Brien Murtagh 49 Executive Vice President of
Sales
John Hall 55 Financial Director
Robert Orr 53 Director Nominee
BRIAN TURNBULL. The Company's founder, Mr. Turnbull has been in the
photocopier industry his entire business career. The Sel-Drum Group of companies
started in 1978 with Mr. Turnbull's launching Sel-Drum Corp. Mr. Turnbull will
resign as CEO and President effective January 1, 1998. Mr. Turnbull will remain
with the Company as a full-time consultant and will focus his efforts at
developing the Company's international sales.
ROBERT ASSELTINE. Mr. Asseltine has been with the Company since February 1,
1995. Mr. Asseltine was founder and CEO of Micron Imaging Corp., the photocopier
drum manufacturer now owned by the Company which was amalgamated with Sel-Drum
Corporation in November 1996. Prior to founding Micron Imaging in 1991, Mr.
Asseltine was the Founder and President of the Copytron Group of companies,
formerly Western Canada's largest independent copier dealer, which was sold to
Savin Canada.
BRIEN MURTAGH. Mr. Murtagh has been with Sel-Drum for over 15 years and
became Executive Vice President of Sales on February 1,1995. Prior to assuming
this position, he was Vice President of Sel-Drum Corporation and Sel-Drum
Corporation (U.S.A.), Inc. Mr.Murtagh has been associated with the reprographics
industry for many years, starting his career with Nashua in the U.K.
JOHN HALL. Mr. Hall joined Sel-Drum Corporation in 1985 as the Financial
Manager. On February 1, 1995, he was appointed as Director of Finance for the
Company. Previously, he was employed for five years by Butler Metals Co., an
- 14 -
<PAGE>
automotive related company, in the position of Manager of Accounting. Prior to
his employment with Butler, he was employed by T.R.W. in Canada in the capacity
of Chief Accountant. Mr. Hall earned his C.M.A. in 1972.
ROBERT ORR. Mr. Orr is a former partner in the law firm of Ross & McBride,
the Company's Canadian Corporate Counsel. Mr. Orr's 25 years of practice
experience includes representation of small to medium sized corporations
including corporate restructuring, financing and commercial real estate. Mr. Orr
has agreed to become a director beginning after the next annual meeting of
shareholders.
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors and the holders of more than ten
percent (10%) of the Company's outstanding Common Stock to file reports of
ownership with the Securities and Exchange Commission and to furnish the Company
with copies of these reports. The Company believes that all such reports
required to be filed during or with respect to the fiscal year ended July 31,
1997 were made on a timely basis.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
The following table sets forth the compensation of the executive officers of
the Company:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------ ------------------------------
Securities
Name and All other Underlying
Principal Position Year Salary ($) Bonus ($) Compensation Options/SARs(#)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Brian Turnbull, Director,
Chief Executive Officer 1997 $210,000 (1) $52,497 -0- -0-
1996 $210,000 (1) $47,437 -0-
Brien Murtagh
Vice President of Sales 1997 $91,250 $52,497 -0- -0-
1996 $72,830 $47,437 -0- -0-
____________
(1) Perquisite and other benefits not included above are: (a) an automobile lease
allowance of $12,000; (b) a golf club membership of $1,500; and (c) the payment of
life insurance premiums of approximately $17,000 per year.
</TABLE>
Compensation of Directors
- -------------------------
Directors are reimbursed for their reasonable expenses incident to travel and
attendance at meetings. Directors do not receive any other compensation for
attendance at meetings.
- 15 -
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
As of October 22, 1997, the only class of voting securities issued and
outstanding was 7,642,500 shares of the Company's Common Stock, no par value
(the "Common Stock").
The following table sets forth certain information as of October 22, 1997,
regarding (i) each person known to the Company to be a record or beneficial
owner of more than 5% of the Common Stock, (ii) each director of the Company,
(iii) each executive officer (See Item 10: Executive Compensation), and (iv)
directors and officers as a group.
Amount and
Nature of
Name and Address of Beneficial Percent
Beneficial Owner Ownership (1) Class (1)
------------------------------ ----------------- -------------
Robert Asseltine
501 Amherst Street
Buffalo, New York 14207 1,759,680 (2) 23.02%
Brian Turnbull
501 Amherst Street
Buffalo, New York 14207 4,514,000 (3) 59.06%
Brien Murtagh
501 Amherst Street
Buffalo, New York 14208 345,000 4.51%
All Directors and Executive
Officers as a group (4 persons) 6,618,680 86.60%
__________
1. As reported by such persons as of October 22, 1997, with percentage based
on 7,642,500 shares issued and outstanding. To date, there are no presently
exercisable options or warrants that would increase the number of shares
owned by such person and the number of shares outstanding.
2. Includes 237,000 shares owned of record by Mr. Asseltine's wife. Also
includes 293,680 shares to be issued to Mr. Asseltine pursuant to a private
transaction.
3. Shares owned of record by 547118 Ontario Limited, an Ontario corporation
controlled by Mr. Turnbull.
- 16 -
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Employment Contracts
- --------------------
RAYMOND C. SPARKS EMPLOYMENT AGREEMENT. Effective November 1, 1997, the
Company will enter into an Employment Agreement with Mr. Sparks (the "Employment
Agreement") to serve as the Chief Executive Officer of the Company. The
Agreement provides for a term of three years, subject to termination as provided
in the Agreement, and provides that as compensation under the Agreement, Mr.
Sparks will be paid $125,000 (U.S.) annual salary and will receive an option to
purchase 250,000 shares of the Company's no par value Common Stock, at an
exercise price of forty cents per share. The Employment Agreement also provides
for a $25,000 relocation allowance, fringe benefits, including health insurance,
on terms which may be agreed to from time to time by the Company and Mr. Sparks.
Shareholder Loans
- -----------------
The Company is owed $115,000 by 547117 Ontario Ltd. and 547118 Ontario Ltd.,
both of which are controlled by Brian Turnbull, Chief Executive Officer,
President and a Director, in the form of an interest-free loan from the
Company's subsidiary, Sel-Drum Corporation. The loan was used to provide
leasehold and structural improvements to the Company's Burlington, Ontario
facility.
Preferred Stock
- ---------------
The Company's Sel-Drum Imaging Corporation subsidiary has issued to each of
Messrs. Turnbull and Asseltine, Preferred Stock which is redeemable at the
Company's option at $727.30 per share. Mr. Asseltine owns 1,760 Class C
Preferred Shares and Mr. Turnbull owns 4,840 Class D Preferred Shares. These
shares were issued to Messrs. Turnbull and Asseltine in connection with the
Company's transaction with Dakota Equities Ltd. in February, 1995.
Consulting Agreements
- ---------------------
During Fiscal 1997, the Company paid Mr. Asseltine $28,000 in connection with
his efforts to transition management and find a suitable replacement for Mr.
Turnbull, who has agreed to remain as a consultant to the Company for the
purposes of expanding the Company's international sales. Beginning January 1,
1998, the Company and Mr. Turnbull will terminate Mr. Turnbull's employment
contract. In his capacity as a consultant, Mr. Turnbull will receive annual
compensation of $126,000 as well as existing fringe benefits including the lease
of a car by the Company.
- 17 -
<PAGE>
Leases
- ------
Mr. Asseltine, through Reaton Leasing Ltd., a corporation he controls, leases
to the Company a 12,800 square foot facility at 1890 Dayton Street for one of
the Company's facilities in Kelowna, British Columbia. Lease payments are $4,000
per month.
The Company leases its 21,600 square foot Burlington facility from Mr.
Turnbull pursuant to a lease terminating in February 2002. Annual lease payments
are approximately $85,000.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
- -------------------------------------------------
(a) See Index to Exhibits.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
- 18 -
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SEL-DRUM INTERNATIONAL, INC.
Dated: October 29, 1997 By: /s/ Brian Turnbull
-----------------------------------
Brian Turnbull
President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature and Title Date
------------------- ----
/s/ Robert Asseltine October 29, 1997
- ------------------------------
Robert Asseltine
/s/ John Hall October 29, 1997
- ------------------------------
John Hall
Financial Director
(Chief Accounting Officer)
- 19 -
<PAGE>
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION
Not applicable.
(3) (a) ARTICLES OF INCORPORATION
Articles of Incorporation are incorporated herein by reference to
Exhibit 3.1 to the Registrant's Form 10-KSB filed for the fiscal
year ended July 31, 1996.
(b) BY-LAWS
By-laws are incorporated herein by reference to Exhibit 3.2 to the
Registrant's Form 10-KSB filed for the fiscal year ended July 31,
1996.
(4) INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS, INCLUDING INDENTURES
(a) The documents listed under Item (3) of this Index are incorporated
herein by reference.
(9) VOTING TRUST AGREEMENT
Not applicable.
(10) MATERIAL CONTRACTS
(a) Employment Agreement between Sel-Drum Corporation, Sel-Drum
Imaging Corporation and Brian F. Turnbull dated January 31, 1995
is incorporated herein by reference to Exhibit 10.2 to the
Registrant's Form 10-KSB for the fiscal year ended July 31, 1996.
(b) Employment Agreement between Sel-Drum Corporation, Sel-Drum Corp.
U.S.A. Inc., Sel-Drum Imaging Corporation and Brien Murtagh dated
January 31, 1995 is incorporated herein by reference to Exhibit
10.3 to the Registrant's Form 10-KSB for the fiscal year ended
July 31, 1996.
(c) Employment Agreement, as amended, between Micron Imaging Corp. and
Alex Brian Green dated as of October 3, 1994 is incorporated
herein by reference to Exhibit 10.4 to the Registrant's Form
10-KSB for the year ended July 31, 1996.
(11) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Computation can be clearly determined from the Financial Statements and
Notes thereto included herein.
- 20 -
<PAGE>
(13) ANNUAL OR QUARTERLY REPORTS, FORM 10-Q AND FORM 10-QSB
Not applicable.
(16) LETTER ON CHANGE IN CERTIFYING ACCOUNTANT
Not applicable.
(18) LETTER ON CHANGE IN ACCOUNTING PRINCIPLES
Not applicable.
*(21) SUBSIDIARIES OF THE REGISTRANT
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE
Not applicable.
(23) CONSENT OF EXPERTS AND COUNSEL
Not applicable.
(24) POWER OF ATTORNEY
Not applicable.
*(27) FINANCIAL DATA SCHEDULE
The Financial Data Schedule is included herein as Exhibit 27.
(99) Additional Exhibits
Not applicable.
________________________
* Exhibit filed with this Report
- 21 -
Exhibit 21
Subsidiaries of the Registrant
Sel-Drum Imaging Corporation
(Vancouver, B.C., Canada)
Sel-Drum Corporation (U.S.A.), Inc.
(Albany, New York)
Sel-Drum Corporation
(Burlington, Ontario, Canada)
- 22 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SEL-DRUM INTERNATIONAL, INC., FOR THE TWELVE MONTH
PERIOD ENDED JULY 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 1,084,954
<SECURITIES> 0
<RECEIVABLES> 2,272,129
<ALLOWANCES> 72,504
<INVENTORY> 3,143,472
<CURRENT-ASSETS> 6,572,829
<PP&E> 1,845,055
<DEPRECIATION> 919,898
<TOTAL-ASSETS> 7,695,839
<CURRENT-LIABILITIES> 2,340,135
<BONDS> 0
0
4,800,180
<COMMON> 771,356
<OTHER-SE> (356,813)
<TOTAL-LIABILITY-AND-EQUITY> 7,695,839
<SALES> 16,619,967
<TOTAL-REVENUES> 16,619,967
<CGS> 10,968,448
<TOTAL-COSTS> 10,968,448
<OTHER-EXPENSES> 3,954,952
<LOSS-PROVISION> 75,089
<INTEREST-EXPENSE> 106,510
<INCOME-PRETAX> 1,499,912
<INCOME-TAX> 538,058
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 961,854
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
