<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended JULY 31, 1998
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
SEL-DRUM INTERNATIONAL, INC.
----------------------------
(Name of Small Business Issuer in Its Charter)
NEW YORK 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
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, $.01 PAR VALUE
----------------------------
Title of Each Class
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, 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. Yes |X|
The Issuer's revenues for the year ended July 31, 1998 were $14,331,572.
As of October 22, 1998 there were 7,542,500 outstanding shares of Common
Stock, $.01 par value. The aggregate market value of the voting stock of the
registrant held by non-affiliates on October 22, 1998 based on the average bid
and asked price on such date was $786,763.
<PAGE> 2
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Sel-Drum International, Inc., a New York Corporation ("Sel-Drum" or the
"Company") is the successor corporation to Dakota Equities, Ltd., a
publicly-held "blind pool." On February 1, 1995, the Company acquired all the
outstanding common shares of Sel-Drum Imaging Corporation, the parent
corporation of Sel-Drum Corporation, a privately held Canadian corporation
which was founded in 1978. The Company amalgamated Micron Imaging Corporation
(now the Kelowna Facility) and Sel-Drum Corporation on November 1, 1996.
Sel-Drum is a leading independent distributor of high mortality copier
and printer replacement parts and supplies. As one of the largest independent
high mortality copier parts distribution companies in North America, Sel-Drum
provides a link between parts manufacturers, sellers and buyers. Sel-Drum is
also developing strong relationships with suppliers who seek advanced inventory
management and order processing.
Through its 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
directly contact the copier machine dealers throughout North America. There are
approximately 5,000 such dealers marketing various brands of copier products.
The Company estimates that the potential marketplace for high mortality
replacement parts, drums and toner, not controlled by the Original Equipment
Manufacturers ("O.E.M's") to be approximately $750 million in North America.
The Company's primary business is the distribution of high mortality
copier and printer replacement parts, toners, and photoreceptors ("Drums")
including, to a limited extent, the manufacturing of Drums. On August 1, 1995,
the Company added remanufactured facsimile and printer cartridges to its product
offering. The Company markets in the United States and Canada through a direct
network of sales agents and telemarketers. Outside of North America, the Company
is represented by several distributors with their sales accounting for less than
5% of the total revenues.
On March 7, 1997, the Company and certain principal shareholders
terminated discussions with JRCS Corp. regarding the sale of substantially all
of the outstanding capital stock of the Company.
In late 1997, the Company initiated a strategic plan which was
designated to focus on the longer term growth prospects of the Company. This new
strategy 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
<PAGE> 3
marketplace. 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.
Additional strategic items include seeking acquisition candidates and a
listing on the Chicago Stock Exchange, The Nasdaq SmallCap Market or a national
or other regional exchange, and establishing integrated data systems, all of
which served 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 F.
Turnbull who has agreed to remain with the Company as Chairman of the Board.
In December 1997, the Company reorganized its sales staff and began
implementing this reorganization during the month of January. As expected, as a
result of this reorganization of sales staff, sales decreased during Fiscal
1998.
On January 15, 1998, the Company repurchased 172 shares of Class C and
241 shares of Class D Preferred Stock in the Company's Sel-Drum Imaging
Corporation subsidiary held by two of the Company's principal shareholders. The
total purchase price was $300,000, of which approximately $175,000 was
delivered during the quarter ended January 31, 1998, and approximately $125,000
was delivered during the quarter ended April 30, 1998.
COMPANY STRATEGY
Through flexibility in sourcing as well as customer service, the Company
continually strives to be a reliable, innovative and cost-effective provider of
high mortality copier and facsimile component products to the approximately $750
million per year market in North America. The Company believes there are also
significant opportunities in the European and Asia-Pacific regions. The
Company's strategy to accomplish these objectives includes the following:
- 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.
- Improve remanufacturing flexibility. 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
- 2 -
<PAGE> 4
Facility's distribution capabilities to service its
existing customers in Western North America.
- 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 Buffalo New York, 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 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. Implementation is planned for March
1999.
- 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.
- Obtain Nasdaq Stock Market listing. The Company's
management intends to refocus its effort on obtaining
listing on The Nasdaq SmallCap 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. 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 SmallCap
Market. In the event the Company is unsuccessful obtaining
listing on the Nasdaq SmallCap 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
- 3 -
<PAGE> 5
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 and
other distributors.
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 regions throughout North America call upon current
and potential customers on a regular basis to solicit orders and provide product
and operational information. Each service center is staffed to receive and
process telephone, facsimile and mail orders. A majority of the parts
distributed by the Company are located in its Buffalo, New York warehouse
complex, with the remaining parts distributed from the Company's Burlington,
Ontario and Kelowna, British Columbia facilities.
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 Kopi Inc. ("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 using 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 its Kelowna Facility, the Company markets remanufactured
cartridge products to the industry's dealers, vendors and resellers in North
America.
- 4 -
<PAGE> 6
SALES AND MARKETING
The Company markets and inventories a line of 2,500 high mortality
replacement 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.
Sel-Drum's general copier parts distribution operations sell through
both employee and third-party sales representatives to meet customer
requirements. The general copier parts distribution staff works closely with the
regional sales staff and the inventory provisioning group to ensure that
inventory availability and customer service levels are maintained. Frequent
meetings are conducted with suppliers to provide new product introductions as
well as marketing and sales training.
Sel-Drum warrants its products to its Customers. These product
warranties do not represent a material cost to the Company.
SEASONALITY OF BUSINESS
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.
- 5 -
<PAGE> 7
EMPLOYEES
At July 31, 1998, Sel-Drum employed approximately 68 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.
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. The Company's Common Stock
currently trades on the NASD's OTC Bulletin Board. The Company intends to apply
to list the Common Stock on the Nasdaq SmallCap Market or regional or national
exchange, if denied listing on such market. There can be no assurance that a
market for the Common Stock will develop or be sustained. As a result,
purchasers of the Company's securities may have difficulty in selling such
securities should they desire to do so.
COMMON STOCK ELIGIBLE FOR RESALE. Of the 7,542,500 shares of Common
Stock presently outstanding, over 6,283,680 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.
- 6 -
<PAGE> 8
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 F.
Turnbull. Mr. Turnbull has agreed to remain as Chairman of the Board 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 CHANGE. The Company's future performance will depend in
part on its ability to manage changes in its operations and will require the
Company to hire additional management and technical personnel, particularly in
the marketing and customer support areas. In addition, the Company's ability to
manage changes in its operations will require it to continue to improve its
operational and financial control system and to attract, train, motivate, manage
and retain key employees. If the Company's management were to become unable to
manage growth effectively, that would have a material adverse effect on the
Company's financial condition, prospects and operating results.
POTENTIAL UNSPECIFIED ACQUISITIONS. The Company is currently considering
acquiring other smaller businesses within its industry segment from whom
economies of scale can be achieved. In the event the Company determines to
acquire such businesses or assets, investors may not have an opportunity to
review the financial statements of such businesses or to vote on such
acquisitions. To date, the Company has not identified any acquisition candidates
and no assurances can be given that any such acquisitions will occur or if they
occur whether such acquisitions will provide the economies of scale the Company
desires from such candidates.
COMPETITION. The high mortality copier parts business is highly
competitive. The Company believes that competition in the industry is based
principally upon experience, quality, prices and the ability to meet customer
delivery requirements. Prior competition in the industry affects the Company's
ability to increase prices on certain products and, in some cases, subjects the
Company to pressure from its customers to reduce prices. While recently
committing its efforts to improve its 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.
- 7 -
<PAGE> 9
CONTROL BY MANAGEMENT. Management holds approximately 83.90% 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, 1998, the Company was utilizing approximately 45,300
square feet of warehouse and manufacturing space and approximately 6,700 square
feet of office, administrative, training and sales space. The Company believes
that its properties are adequate for its needs. Information with respect to the
principal facilities used by Sel-Drum is set forth below:
ADDRESS PRIMARY USE
501 Amherst Street (1) Registered Headquarters
Buffalo, N.Y. U.S.A. and U.S.A. Distribution
1370 Artisans Court (2) Executive and
Burlington, On. Canada Administration Facilities
Canadian Distribution
1910 Dayton Street (3) Manufacturing Facility
Kelowna, B.C., Canada
1890 Dayton Street (3) Distribution Center
Kelowna, B.C., Canada
(1) The Company established its U.S.A. distribution facilities in 1982, which it
has agreed to lease through October 2001 at an annual rental of $38,000.
- 8 -
<PAGE> 10
(2) Established in 1978 as the executive and administrative offices, together
with the distribution center for product within Canada. The Company has agreed
to lease the property through February 2002 at an annual rental of $78,000.
(3) The Kelowna Facility occupies two properties, one owned by a director
Robert Asseltine and the other by a third party. The property owned by
Mr. Asseltine is leased by the Company through July 2001 and has an annual rent
of approximately $52,000. The other property is leased by the Company through
April 1999 at an annual rent of $22,000.
ITEM 3. LEGAL PROCEEDINGS.
As of July 31, 1998, 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 1998.
- 9 -
<PAGE> 11
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. The range
of high and low bid quotations for the Company's Common Stock for the last two
Fiscal Years were obtained from the NASD and are provided below. The volume of
trading in the Company's Common Stock has been limited and the bid prices
reported may not be indicative of the value of the Common Stock or the existence
of an active trading market.
COMMON STOCK PRICE
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal $.6865 $.6865 $1.00 $.6865 $.25 $.125 $.5625 $.125
1997
Fiscal $.125 $.0625 $ .50 $.07 $.53125 $.375 $.87 $.3125
1998
</TABLE>
On October 22, 1998 there were approximately 376 holders of record of the
Company's common stock. The number of shares issued was 7,542,500.
The Company has not paid a dividend with respect to its Common Stock nor
does the Company anticipate paying dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
The Company markets and 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 its Kelowna Facility.
- 10 -
<PAGE> 12
RESULTS OF OPERATIONS
The Company's results of operations are affected by numerous factors
such as general economic conditions, competition and inventory costs. The
largest component of the Company's cost of sales is inventory cost, which may
vary slightly from period to period based upon timing of purchases which
indirectly affect the Company's inventory costs.
During the third quarter of Fiscal 1998, the Company restated its cost
of goods sold to include additional costs associated, directly or indirectly,
with product costs. These newly incorporated costs include direct and indirect
costs affiliated with the acquisition and handling of inventory. For ease of
presentation the Company has included these costs for the prior periods
presented.
The following table sets forth for each of the periods presented,
certain income statement data for the Company expressed as a percentage of net
sales.
<TABLE>
<CAPTION>
Years Ended
-----------
Statement of Operations Data 1998 1997 1996
- ---------------------------- ---- ---- ----
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
As a Percentage of Net Sales:
Cost of Goods Sold 70.9% 70.3% 70.2%
Gross Profit 29.1% 29.7% 29.8%
Selling, General and 22.1% 19.5% 20.3%
Administrative Expenses
Provision for Bad Debt .2% .5% .3%
Income from Operations 6.8% 9.7% 9.2%
Other Income (Expense) (.7)% (.7)% (.9)%
Income Before Taxes 6.1% 9.0% 8.3%
Net Income 3.6% 5.8% 5.2%
==== ==== ====
</TABLE>
- 11 -
<PAGE> 13
YEAR ENDED 1998 COMPARED TO YEAR ENDED 1997
Net sales for the year ended July 31, 1998 were $14.3 million as
compared with $16.6 million for the year ended July 31, 1997, a decrease of
13.8%. The decrease in net sales is principally the result of the following
factors:
- Lingering Effects of Two Potential Acquisitions of the
Company During Fiscal 1997 and early Fiscal 1998. Prior
to refocusing its efforts on its core business, the
Company engaged in discussions with two potential
acquirors. Employee morale and retention suffered as a
result of this prior strategy and the Company lost
several sales personnel which adversely affected sales
for the first half of Fiscal 1998. Management spent much
of the first half of Fiscal 1998 focusing on employee
productivity and retention.
- General Economic Conditions. To a certain extent the
Company's business is counter cyclical. Purchasers of
copier, facsimile and printer high mortality replacement
parts tend to eschew such purchases in favor of new
machine purchases during favorable economic periods.
Parts dealers consequently do not require as high order
volume and companies such as Sel-Drum experience lower
purchase volumes (and therefore lower revenues) from
dealers. The Company experienced this trend to a certain
degree, particularly during the third and fourth
quarters of Fiscal 1998.
- Management Transition. As previously disclosed, the
Company spent much of Fiscal 1998 reorganizing
management, including restructuring its sales and
marketing staffs. This restructuring diverted some of
management's attention and contributed to a drop in
sales. The Company believes that the restructuring
effort commenced in early Fiscal 1998 should prove
fruitful during Fiscal 1999 although no assurances can
be given that sales volumes will increase.
- Movement toward Digital. The movement away from analogue
technology toward a digital technology within the
copier, facsimile and printer replacement part
marketplace created new copier, facsimile and printer
products which did not have an immediate need for
replacement parts. The Company anticipates that this
need will arise during Fiscal 1999, although no
assurance can be given that this will occur.
The Company's distribution centers in Burlington, Ontario (Canada) and
Buffalo, New York (USA) showed gross profit margins during the fiscal year
ended July 31, 1998 on a combined basis of 30%. The margins at the Company's
Kelowna Facility, however, recorded a loss in absolute dollars of approximately
$150,000 as a result of limited remanufacturing production of Drums and the
partial conversion of the Kelowna Facility to cartridge remanufacturing. During
Fiscal 1999, in addition to the remanufacture of Drums, the Company intends to
utilize the Kelowna Facility's capacity to replace its historic reliance upon
third-party
- 12 -
<PAGE> 14
remanufacturers of cartridges. Additionally, the Company intends to utilize
expected additional capacity for distribution of copier and facsimile component
parts in Western North America.
Gross profit margin for the year ended July 31, 1998 was 29.1%, as
compared to 29.7% for Fiscal 1997. As disclosed above, gross profit margins
reflect an increase in profit margins in the Company's two distribution centers
located in Burlington, Ontario and Buffalo, New York, and a loss from the
Company's manufacturing facility in Kelowna, British Columbia.
Selling, general, and administrative expenses for the year ended July
31, 1998 decreased 2.1% from the prior comparable period. The decrease resulted
from lower sales commission due to lower sales volumes and the restatement of
the costs of goods sold.
As a result of the foregoing, net income fell by 46.3% from Fiscal 1997
to Fiscal 1998.
YEAR ENDED 1997 COMPARED TO YEAR ENDED 1996
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.
Gross profit margin for the year ended July 31, 1997 was 29.7%, as
compared to 29.8% for Fiscal 1996. 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 7.6% 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 a
national or regional exchange.
As a result of the foregoing, net income improved by 25% from Fiscal
1996 to Fiscal 1997.
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.
- 13 -
<PAGE> 15
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, 1998 was $462,587. 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 Company's expansion strategy, management believes that the
Company's working capital requirements will increase.
The Company currently has a revolving demand loan arrangement with the
National Bank of Canada in the amount of $2,462,350 (U.S.). These borrowings
generally assist the Company with funding of accounts receivable and inventory
purchases. As of October 15, 1998 outstanding borrowings of approximately
$200,000 (U.S.) net of current cash existed under this arrangement.
On August 2, 1998, the Company paid $100,000 to a key employee pursuant
to a Non- Competition and Share Repurchase Agreement. The Agreement provides for
additional contingent payments of up to $245,000.
Cash flow from operations coupled with cash flow generated by bank
financing has provided the Company with the cash necessary to meet its cash
requirements. The Company may expend an additional $200,000 in connection with
hardware and software upgrades relative to the establishment of an integrated
data system. The Company had anticipated making these expenditures during
Fiscal 1998 and now anticipates making them during Fiscal 1999. 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.
- 14 -
<PAGE> 16
SEL-DRUM INTERNATIONAL, INC.
AND SUBSIDIARIES
AUDITED CONSOLIDATED
FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
JULY 31, 1998 AND 1997
F-1
<PAGE> 17
CONTENTS
<TABLE>
<CAPTION>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS PAGE
<S> <C>
Independent Auditors' Report F - 3
Consolidated Balance Sheet F - 4
Consolidated Statements of Income F - 6
Consolidated Statements of Changes in Shareholders' Equity F - 7
Consolidated Statements of Cash Flows F - 9
Notes to Consolidated Financial Statements F - 11
</TABLE>
F-2
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
Sel-Drum International, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Sel-Drum
International, Inc. and Subsidiaries as of July 31, 1998, 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, 1998. 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, 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
two years in the period ended July 31, 1998, in conformity with generally
accepted accounting principles.
Rochester, New York
September 25, 1998
F-3
<PAGE> 19
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
JULY 31, 1998
-------------
ASSETS
------
<TABLE>
<CAPTION>
CURRENT ASSETS
- --------------
<S> <C>
Cash and cash equivalents $ 285,750
Accounts receivable, net of allowance for doubtful
accounts of $40,483 1,826,182
Inventories 3,457,466
Refundable income taxes 121,155
Deferred income taxes 34,000
Other current assets 107,751
-----------
TOTAL CURRENT ASSETS 5,832,304
PROPERTY
- --------
Equipment 1,332,078
Vehicles 38,757
Furniture and fixtures 65,314
Leasehold improvements 406,696
-----------
1,842,845
Less accumulated depreciation and amortization (1,024,905)
-----------
817,940
OTHER ASSETS
-------------
Organization costs, net of accumulated amortization of $6,411 7,006
Purchased and developed technology, net of accumulated
amortization of $36,603 43,258
Non-competition agreement, net of
accumulated amortization of $16,339 130,711
Deposits 11,593
Loans receivable from related parties 160,084
-----------
352,652
-----------
$ 7,002,896
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 20
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS'EQUITY
-----------------------------------
CURRENT LIABILITIES
-------------------
<S> <C>
Bank overdraft $ 314,104
Notes payable to bank 311,121
Current portion of long-term debt 148,263
Accounts payable 688,451
Other current liabilities 136,300
-----------
TOTAL CURRENT LIABILITIES 1,598,239
OTHER LIABILITIES
------------------
Long-term debt 257,724
Deferred income taxes 49,913
- ----------
307,637
SHAREHOLDERS' EQUITY
--------------------
Common stock 76,425
Additional paid-in capital 706,846
Preferred stock 4,499,805
Cumulative foreign currency translation adjustment (274,643)
Retained earnings 261,087
-----------
5,269,520
Less: Common stock, subject to "put rights" (172,500)
-----------
5,097,020
-----------
$ 7,002,896
===========
</TABLE>
F-5
<PAGE> 21
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Year ended July 31,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 14,331,572 $ 16,619,967
Cost of goods sold 10,155,831 11,686,982
------------ ------------
GROSS PROFIT 4,175,741 4,932,985
Selling, administrative and general
expenses 3,168,780 3,236,418
Provision for doubtful accounts 34,533 75,089
------------ ------------
INCOME FROM OPERATIONS 972,428 1,621,478
Other income (expense):
Interest income 17,303 22,851
Interest expense (75,289) (129,361)
Loss on disposal of property -- (24,551)
Foreign currency transaction (loss) gain (46,310) 9,495
------------ ------------
(104,296) (121,566)
------------ ------------
INCOME BEFORE INCOME TAXES 868,132 1,499,912
Income tax provisions:
Current 342,624 531,155
Deferred 9,004 6,903
------------ ------------
351,628 538,058
------------ ------------
NET INCOME $ 516,504 $ 961,854
============ ============
Earnings per common share:
Basic $ .07 $ .13
============ ============
Diluted $ .07 $ .13
============ ============
Weighted average:
Common shares 7,642,500 7,642,500
Dilutive stock options - -
------------ ------------
Common shares and dilutive stock options 7,642,500 7,642,500
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 22
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'EQUITY
---------------------------------------------------------
<TABLE>
<CAPTION>
Cumulative
foreign (Accumulated
Additional currency deficit)
Common paid-in Preferred translation retained
stock capital stock adjustment earnings
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at
August 1, 1996 $ 76,325 $ 696,946 $4,800,180 $(110,067) $(1,217,271)
Net income for the year -- -- -- -- 961,854
Adjustment for foreign
currency translation -- -- -- (3,244) --
Issuance of 10,000 shares
of common stock in
exchange for services
rendered 100 9,900 -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE AT
JULY 31, 1997 76,425 706,846 4,800,180 (113,311) (255,417)
Net income for the year -- -- -- -- 516,504
Adjustment for foreign
currency translation -- -- -- (161,332) --
Repurchase of 172 shares
of Class C preferred
stock and 241 shares
of Class D preferred
stock -- -- (300,375) -- --
345,000 common shares
subject to "put rights",
at $.50 per share -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE AT
JULY 31, 1998 $ 76,425 $ 706,846 $ 4,499,805 $ (274,643) $ 261,087
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 23
<TABLE>
<CAPTION>
Common
stock, Total
subject to shareholders'
"put rights" equity
-------------- -------------
<C> <C>
$ - $ 4,246,113
- 961,854
- (3,244)
- 10,000
--------- -----------
- 5,214,723
- 516,504
- (161,332)
- (300,375)
(172,500) (172,500)
--------- ----------
$(172,500) $5,097,020
========= ==========
</TABLE>
F - 8
<PAGE> 24
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year ended July 31,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
---------------------------------
Net income $ 516,504 $ 961,854
Adjustments to reconcile net income to net cash provided from
operating activities:
Provision for doubtful accounts 34,533 75,089
Depreciation and amortization 208,189 187,032
Deferred income taxes 9,004 6,903
Loss on disposal of property - 24,551
Issuance of common stock in exchange for services rendered - 10,000
Changes in certain assets and liabilities affecting operations:
Accounts receivable 269,731 (505,503)
Inventories (432,582) 652,294
Refundable income taxes (85,457) (38,293)
Other current assets (31,736) 40,174
Deposits 5,768 (3,021)
Accounts payable 90,507 (538,462)
Income taxes payable - (91,771)
Other current liabilities (121,874) 39,198
----------- -----------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 462,587 820,045
CASH FLOWS - INVESTING ACTIVITIES
----------------------------------
Purchases of property (146,422) (90,341)
----------- -----------
NET CASH (USED FOR)
INVESTING ACTIVITIES (146,422) (90,341)
CASH FLOWS - FINANCING ACTIVITIES
---------------------------------
Bank overdraft 329,443 -
Increase in loans receivable from related parties (56,810) (1,126)
Short-term repayments, net (1,014,616) (680,959)
Repayments on long-term debt (65,254) (140,817)
Repurchase of preferred stock (300,375) -
----------- -----------
NET CASH (USED FOR)
FINANCING ACTIVITIES (1,107,612) (822,902)
Effect of exchange rate changes on cash (7,757) (3,244)
NET (DECREASE) IN ---------- ------------
CASH AND CASH EQUIVALENTS (799,204) (96,442)
Cash and cash equivalents at beginning of year 1,084,954 1,181,396
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 285,750 $ 1,084,954
=========== ===========
</TABLE>
F-9
<PAGE> 25
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS, Cont'd
---------------------------------------------
<TABLE>
<CAPTION>
Year ended July 31,
---------------------------
1998 1997
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------
Cash paid during the period for:
<S> <C> <C>
Interest $ 68,928 $ 129,361
========= =========
Income taxes $ 425,486 $ 661,648
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE> 26
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
------------------------------------------
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. Sel-Drum Corporation is also engaged in the commercial production
and distribution of photoconductor drums used in duplicating machinery and
recently the remanufacture of cartridges used in laser printers and
facsimile machines. The Company grants credit to customers which 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 facility for its wholesale
distribution operations, which includes warehouse space and administrative
offices, is located in Burlington, Ontario, Canada. Sel-Drum Corporation
also has a manufacturing facility and administrative offices in Kelowna,
British Columbia, Canada.
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, 1998, there was no excess cash
invested in these term deposit accounts.
CONCENTRATION OF CREDIT RISK - CASH
The Company maintains cash balances at financial institutions located in
New York and Canada. Accounts at the New York institution are insured by
the Federal Deposit Insurance Corporation up to $100,000. Accounts at the
Canadian institutions are insured by the Canadian Deposit Insurance
Corporation up to approximately $40,000 ($60,000 Canadian). Uninsured
balances aggregated approximately $357,000 at July 31, 1998. The Company
has not experienced any losses in such accounts and believes that there is
no exposure to significant credit risk in this regard.
F-11
<PAGE> 27
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
------------------------------------------
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
Sel-Drum Corporation's Kelowna facility's production process, is being
amortized on a straight-line basis over its estimated useful life of ten
years.
NON-COMPETITION AGREEMENT
The non-competition agreement is being amortized on a straight-line basis
over 54 months through August 1, 2002.
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 the fiscal years ended July 31, 1998 and 1997
approximated $85,000 and $110,000, respectively.
F-12
<PAGE> 28
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
------------------------------------------
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
- ---------------------------------------------------------------------
INCOME TAXES
Deferred income tax assets and liabilities arise from temporary differences
associated with differences between the financial statement and tax basis
of assets and liabilities, as determined by the enacted rates which are
expected to be in effect when these differences reverse. Deferred tax
assets and liabilities are classified as current or noncurrent, depending
on the classification of the assets and liabilities to which they relate.
Deferred tax assets and liabilities not related to an asset or liability
are classified as current or noncurrent depending on the periods in which
the temporary differences are expected to reverse. The principal types of
temporary differences between assets and liabilities for financial
statement and tax return purposes are detailed in Note F.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards Number 107, "Disclosures about
Fair Value of Financial Instruments," requires the Company to disclose
estimated fair values for its financial instruments. The carrying amounts
reported in the accompanying consolidated balance sheet for cash, accounts
receivable, accounts payable and accrued expenses approximate fair value
because of the short maturity period of those instruments. In addition, the
Company does not believe it is practicable to estimate the fair value of
loans receivable from related parties and long-term debt due to the terms
of such agreements. Further, any difference between the carrying value and
fair value of those agreements would not be significant.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Number 123 (SFAS 123) "Accounting for
Stock-Based Compensation". This statement established accounting and
reporting standards for stock-based employee compensation plans. As
permitted by the Statement, the Company continues to account for such
arrangements under Accounting Principles Board Opinion Number 25,
"Accounting for Stock Issued to Employees", and related interpretations.
Accordingly, no compensation expense is recognized for stock-option grants
because the exercise price of the stock options equals the market price of
the underlying stock on the date of grant.
F-13
<PAGE> 29
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
------------------------------------------
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
- ---------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
EARNINGS PER COMMON SHARE
Basic earnings per common share is determined by dividing net income by the
weighted average number of common shares outstanding.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Number 128 (SFAS 128) "Earnings Per
Share". This statement, which was required to be adopted for financial
statements issued for interim and annual periods ended after December 15,
1997, replaced previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per
share. The Company has adopted the provisions of this statement.
Accordingly, earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to SFAS 128
requirements.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 130 (SFAS 130) "Reporting
Comprehensive Income". This statement, which is required to be adopted for
financial statements issued for annual periods beginning after December 15,
1997, establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial
statements. The Company will be required to adopt SFAS 130, effective for
its fiscal year beginning August 1, 1998. At that time, the Company will be
required to report total comprehensive income, an amount that will include
net income as well as other comprehensive income. Other comprehensive
income refers to revenues, expenses, gains and losses that under generally
accepted accounting principles have previously been reported as separate
components of equity in the Company's consolidated financial statements. At
present the only item which will require a change in the nature of its
disclosure involves the Company's cumulative foreign currency translation
adjustment.
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 131 (SFAS 131) "Disclosure about
Segments of an Enterprise and Related Information". This statement, which
is required to be adopted for financial statements issued for annual
periods beginning after December 15, 1997, establishes standards for the
way that public business enterprises report information about operating
segments in financial reports issued to shareholders. The Company has
adopted the provisions of this statement. Note L provides the required
segment financial information.
RECLASSIFICATIONS
Certain fiscal 1997 amounts have been reclassified to conform with the
fiscal 1998 presentation.
F-14
<PAGE> 30
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
------------------------------------------
NOTE B: INVENTORIES
- --------------------
The components of inventories at July 31, 1998 are as follows:
Raw materials $ 162,383
Finished goods 3,295,083
----------
$3,457,466
==========
NOTE C: LOANS RECEIVABLE FROM RELATED PARTIES
- ----------------------------------------------
Non-interest bearing loans receivable from related parties at July 31, 1998
are summarized as follows:
Due from 547117 Ontario Limited $ 24,820
Due from 547118 Ontario Limited 135,264
----------
$ 160,084
==========
The Chairman of the Board of the Company 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.
NOTE D: NOTES PAYABLE TO BANK
- -------------------------------
Sel-Drum Corporation has several debt arrangements with a Canadian bank,
summarized as follows:
FACILITY A: $2,462,350 revolving demand loan ($3,700,000 Canadian
dollars) to assist with financing of the accounts receivable and
inventories of Sel-Drum Corporation and Sel-Drum Corporation (U.S.A.),
Inc. The arrangement provides for interest to be paid monthly at the
bank's prime rate plus .25% (an effective rate of 6.75% at July 31,
1998). 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, 1998 of $299,475. 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, 1998 in
an amount of $143,900.
FACILITY B: This arrangement provides the Company with letters of credit
to purchase inventories, up to an amount approximating $988,250
($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, 1998.
F-15
<PAGE> 31
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
------------------------------------------
NOTE D: NOTES PAYABLE TO BANK, Cont'd
- ---------------------------------
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, 1998.
FACILITY E: $232,925 ($350,000 Canadian dollars) facility to provide for
the purchase of up to $1,164,625 ($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, 1998.
FACILITY F: $43,258 ($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
7.5% at July 31, 1998). Borrowings are subject to the outstanding balance
of Facility A cited above. There were borrowings outstanding against this
arrangement at July 31, 1998 of $11,646.
Accordingly, at July 31, 1998 the Company had approximately $2,007,000
available for borrowing under these arrangements.
Total amounts outstanding on all of the above arrangements as of July 31,
1998 amounted to $311,121.
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 $2,329,250 ($3,500,000 Canadian dollars), assignment of a
$332,750 ($500,000 Canadian dollars) life insurance policy on the Chairman
of the Board of the Company, the corporate guarantees of 547118 Ontario
Limited and 547117 Ontario Limited (both of which are substantially owned
by the Chairman of the Board of the Company), and the limited corporate
guarantee of Sel-Drum Corporation (U.S.A.), Inc. in the amount of $998,250
($1,500,000 Canadian dollars). In addition, Facility F is also secured by a
collateral mortgage of $199,650 ($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.
F-16
<PAGE> 32
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
-----------------------------------------
NOTE E: LONG-TERM DEBT
----------------------
<TABLE>
<CAPTION>
Long-term debt at July 31, 1998 is summarized as follows:
<S> <C>
Interest free loan payable to Western Economic Diversification
Fund, due in monthly payments of approximately $4,550 through
February 2000. $ 86,437
Common stock repurchase liability, payable in the amount of $50,000
on August 1, 1998 and $122,500 no later than August 1, 2000. 172,500
Non-competition liability, with interest at 8.5%, payable in the
amount of $43,639 plus interest on August 1, 1998 and $103,411
plus interest no later than August 1, 2000. 147,050
--------
405,987
Less: Current portion of long-term debt 148,263
--------
$257,724
========
Maturities for long-term debt are as follows:
Year ending July 31
------------------
1999 $148,263
2000 31,813
2001 225,911
--------
$405,987
========
</TABLE>
F-17
<PAGE> 33
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
-----------------------------------------
NOTE F: INCOME TAXES
- ----------------------
The total tax provisions are different from the amount that would have been
recorded by applying the U.S. statutory federal income tax rate to income
before income taxes. The reconciliation of these differences is as follows:
<TABLE>
<CAPTION>
July 31
---------------------
1998 1997
---------- -------
<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 canrryforwards - (.2)
Utilization of scientific research and experimental
development expenditure carryforwards (.5)
Difference between non-U.S. and U.S. tax rates (.2) .7
Other 4.7 (.1)
----- -----
EFFECTIVE TAX RATE 40.5% 35.9%
===== =====
</TABLE>
Deferred taxes resulting from temporary differences as of July 31, 1998 are
as follows:
<TABLE>
<CAPTION>
Assets/
(Liabilities)
-------------
<S> <C>
Allowance for doubtful accounts receivable $ 19,000
Capitalization of overhead costs under Section 263A 15,000
Depreciation (70,000)
Net operating loss carryforward 2,900
Scientific research and experimental development
expenditure carryforwards 8,000
Investment tax credit carryforwards 15,187
Tax effect of utilization of investment tax credit
carryforwards required to be included in taxable
income in subsequent tax year (6,000)
--------
$(15,913)
========
Current asset $ 34,000
Long-term liability (49,913)
--------
$(15,913)
========
</TABLE>
At July 31, 1998, Sel-Drum Corporation had scientific research and
experimental development expenditure carryforwards approximating $20,000
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 $15,187
available, subject to certain limitations, to reduce future income taxes
payable. These credits expire at various times through 2004.
F-18
<PAGE> 34
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
-----------------------------------------
NOTE G: COMMON AND PREFERRED STOCK
- -----------------------------------
The following is certain information regarding common and preferred stock
as of July 31, 1998:
<TABLE>
<CAPTION>
SEL-DRUM INTERNATIONAL, INC.
<S> <C>
PREFERRED STOCK
Par value $0.01
Shares authorized 10,000,000
Shares issued and outstanding None
COMMON STOCK
Par value $0.01
Shares authorized 100,000,000
Shares issued 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
Stated value None
Shares authorized $727.30
Shares issued and outstanding 5,000
None
Class C (5% non-cumulative):
Par value None
Stated value $727.30
Shares authorized 10,000
Shares issued and outstanding 1,588
Class D (5% non-cumulative):
Par value None
Stated value $727.30
Shares authorized 10,000
Shares issued and outstanding 4,599
</TABLE>
Effective March 6, 1998, the Company was reincorporated as a New York
Corporation. In connection with the reincorporation, Sel-Drum
International, Inc. established a par value of $0.01 per share for its
preferred stock and $0.01 per share for its common stock. Accordingly, the
amounts in the accompanying consolidated financial statements, for all
periods presented, reflect the revised capital structure of the Company,
which resulted in a reduction in common stock from its previously stated
value and an increase in additional paid-in capital of the same amount.
F - 19
<PAGE> 35
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
------------------------------------------
NOTE H: COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
LEASE COMMITMENTS
Sel-Drum Corporation leases its facility in Burlington, Ontario, Canada,
from a related party at a base monthly rental approximating $6,470 through
February 2002. In addition to the base rental, the Company is responsible
for property taxes, insurance, utilities and repairs and maintenance.
Sel-Drum Corporation also leases two facilities in Kelowna, British
Columbia, Canada, one from a related party. The base monthly rental to the
related party is approximately $4,300 per month through the expiration of
the lease in July 2001. The base monthly rental to the unrelated party is
approximately $1,800 per month through the expiration of the lease in April
1999. In addition to the base rental, the Company is responsible for
property taxes, insurance, utilities and repairs and maintenance.
Sel-Drum Corporation (U.S.A.), Inc. leases its facility from an unrelated
party at a base monthly rental approximating $3,200 through the expiration
of the lease in October 2001. The base monthly rental includes property
taxes.
Total rent expense for the Company's facilities was $209,821 and $194,679
for the years ended July 31, 1998 and 1997, respectively.
Total minimum future rental payments required under all non-cancelable
leases are approximately as follows:
Year ending July 31, Amount
------------------- ------
1999 $196,000
2000 179,000
2001 175,000
2002 48,000
--------
$598,000
========
The amounts included in the minimum future rental payments above for the
Company's Canadian facilities have been converted to U.S. dollars using the
appropriate period-end exchange rates.
EMPLOYMENT CONTRACTS
Employment contracts exist with the President, Vice President - Sales and
Vice President - Finance of Sel-Drum International, Inc. as well as the
Chairman of the Board of the Company. These contracts provide for minimum
annual salaries plus bonuses.
CONTINGENCIES
At July 31, 1998, Sel-Drum Corporation was contingently liable for
approximately $144,000 related to letters of credit (see Note D).
F-20
<PAGE> 36
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
------------------------------------------
NOTE I: COMMON STOCK REPURCHASE AND NON-COMPETITION AGREEMENT
- --------------------------------------------------------------
On February 1, 1998, the Company entered into a common stock repurchase and
non-competition agreement with a key employee ("Seller") who owns 345,000
shares of common stock. The agreement provides that the Company shall be
obligated to repurchase the common stock from the Seller at various times
through August 1, 2000 for $1.00 per share. The agreement also allows the
Seller to sell the shares to a third-party if the Seller so desires. In the
event that a third-party were to purchase such shares from the Seller, the
Company's obligation to the Seller would be reduced accordingly. Pursuant
to the common stock repurchase agreement, it is the Company's intention to
purchase any of the remaining shares owned by the Seller no later than
August 1, 2000 at the price of $1.00 per share specified in the agreement.
Accounting standards under rules and regulations issued by the Securities
and Exchange Commission require that common stock subject to "put rights"
(which are exercisable under certain circumstances pursuant to the above
cited common stock repurchase agreement) be presented separately from
common stock which is not subject to "put rights" in order to distinguish
it from permanent capital. At February 1, 1998, management determined that
the Company's common stock had a fair market value of $.50 per share.
Accordingly, the Company has recorded a liability of $172,500 (345,000 x
$.50 per share) in the accompanying consolidated balance sheet at July 31,
1998 and has reduced shareholders' equity by a similar amount.
As part of the common stock repurchase, the Company also entered into a
non-competition agreement with the Seller for a period which the Company
expects will last through August 1, 2002. The Company expects to pay a
total of $172,500 to the Seller for this non-competition agreement and,
accordingly, has recorded an asset to reflect the present value of the
expected payments to be made under the agreement. The corresponding
liability is set forth in Note E.
On August 1, 1998, the Company acquired 100,000 shares of common stock from
the Seller for $100,000 in accordance with the terms of the agreement cited
above.
NOTE J: STOCK OPTION PLANS
- ---------------------------
On November 24, 1995, the Company's shareholders approved the Sel-Drum
International, Inc. 1995 Employee and Non-Employee Director Stock Option
Plan (the "Plan"). The Plan is designed to attract and retain key
employees, directors or advisors of the Company and to encourage them to
contribute to the Company's success by providing the opportunity for stock
ownership. The Plan provides for the grant of incentive stock options and
nonstatutory stock options to key employees, directors and advisors of the
Company to purchase up to an aggregate of 500,000 shares of the Company's
common stock. The Plan is administered by a Stock Option Committee, which
is authorized to determine the recipients of options, the type of options
granted, the number of shares subject to each option, the term of each
option, exercise prices and other option features. The term of an option
may not exceed 5 years where the optionee would thereafter own stock
possessing more than 10% of the combined voting power of the common stock
(a 10% Shareholder"). The exercise price must at least equal the fair
market value of the common stock on the date of the grant of the option,
except that if an incentive stock option is granted to a 10% Shareholder,
the exercise price shall be no less than 110% of the fair market value of
the common stock on the date of the grant of the option. Stock option
grants generally have a contractual life of ten years and vest over a
period of two years from the grant date.
F-21
<PAGE> 37
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
------------------------------------------
NOTE J: STOCK OPTION PLANS, Cont'd
- ---------------------------
On November 3, 1997, the Company granted a non-incentive stock option to
the President of the Company to purchase 250,000 shares of the Company's
common stock. The exercise price for the shares subject to this option was
equal to the fair market value of the common stock on the date of the
grant. This option has a contractual life of five years and vested 100% at
the grant date.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Weighted-
Shares average
subject exercise
to options price
---------- ---------
<S> <C> <C>
Outstanding at July 31, 1997 - $ -
Granted 741,000 $0.47
Outstanding at July 31, 1998 741,000 $0.47
Exercisable at July 31, 1998 413,666 $0.44
</TABLE>
The following table summarizes information about stock options outstanding
at July 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------------------- -----------------------------
Weighted-
Weighted- average Weighted-
average remaining average
Exercise Shares exercise contractual Shares exercise
price subject to price life in subject to price
per share options per share years options per share
---------- ---------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ .40 250,000 $.40 4.3 250,000 $.40
$ .50 491,000 $.50 9.8 163,666 $.50
------- -------
741,000 $.47 7.9 413,666 $.44
======= ==== === ======= ====
</TABLE>
F-22
<PAGE> 38
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
------------------------------------------
NOTE J: STOCK OPTION PLANS, Cont'd
- ---------------------------
Pro forma information regarding net income, basic and diluted earnings per
share is required by SFAS No. 123, and has been determined as if the
Company had accounted for its employee stock options under the fair value
method of that Statement. This disclosure may not be representative of the
effects on reported pro forma net income, basic and diluted earnings per
share for future years, because of the various vesting schedules of the
stock options and the fact that additional awards may be made in the
future. The Company's pro forma net income, basic and diluted earnings per
share are as follows:
Year ended
July 31,
1998
----------
Pro forma net income $ 490,780
==========
Pro forma basic earnings per share $ 0.06
==========
Pro forma diluted earnings per share $ 0.06
==========
For purposes of pro forma disclosures, the estimated fair value of a stock
option is amortized to expense over the option's vesting period. The fair
value of these stock options was estimated at the date of grant using facts
and circumstances available to the Company for its common stock, which is
thinly traded.
NOTE K: MAJOR CUSTOMER
- -----------------------
For the year ended July 31, 1998, approximately 22% of net sales were made
to one customer. At July 31, 1998 total amounts due from this customer of
approximately $278,000 are included in accounts receivable, as reflected in
the accompanying consolidated balance sheet.
F-23
<PAGE> 39
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
------------------------------------------
NOTE L: SEGMENT FINANCIAL INFORMATION
- --------------------------------------
On July 31, 1998, the Company adopted SFAS Number 131, "Disclosure About
Segments of an Enterprise and Related Information". This statement
establishes standards for reporting information about operating segments
and related disclosures about products and services and geographic areas.
The Company's two business segments, as further described in Note A, are
wholesale distribution and manufacturing. The reportable segments are each
managed separately because they offer and provide different products and
services.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies (see Note A).
The Company evaluates segment performance and allocates resources based on
profit and loss from operations before income taxes. Identifiable assets
are those directly used in the operations of each segment.
The wholesale distribution segment's activities are carried on in the
United States and Canada. The manufacturing segment operates exclusively at
the Company's British Columbia, Canada location.
For the years ended July 31, 1998 and 1997, gross profit attributable to
the Company's operations in Canada is net of gross losses of $151,589 and
$58,069, respectively, incurred by the Company's manufacturing operation in
British Columbia, Canada.
The following tables present sales and other financial information by
geographic region and business segment for the years ended July 31, 1998
and July 31, 1997:
<TABLE>
<CAPTION>
United States Canada Eliminations Consolidated
------------- ------ ------------ ------------
<S> <C> <C> <C> <C>
July 31, 1998:
--------------
Sales to unaffiliated customers $ 9,622,758 $4,708,814 $ - $ 14,331,572
Intercompany sales 1,185,694 3,209,806 (4,395,500) -
Gross profit 3,188,299 987,442 - 4,175,741
Operating earnings 1,113,583 (141,155) - 972,428
Identifiable assets 3,312,930 3,559,255 - 6,872,185
Capital expenditures 14,749 131,673 - 146,422
Depreciation and amortization 67,109 141,080 - 208,189
July 31, 1997:
--------------
Sales to unaffiliated customers $11,078,260 $5,541,707 $ - $ 16,619,967
Intercompany sales 1,268,318 3,744,898 (5,013,216) -
Gross profit 3,611,587 1,321,398 - 4,932,985
Operating earnings 1,442,708 178,770 - 1,621,478
Identifiable assets 3,846,794 3,849,045 - 7,695,839
Capital expenditures - 90,341 - 90,341
Depreciation and amortization 46,930 140,102 - 187,032
</TABLE>
F-24
<PAGE> 40
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
------------------------------------------
NOTE L: SEGMENT FINANCIAL INFORMATION, Cont'd
--------------------------------------
<TABLE>
<CAPTION>
Year ended July 31,
--------------------------------
1998 1997
------------ ------------
NET SALES:
<S> <C> <C>
Wholesale distribution $ 14,142,226 $ 16,192,508
Manufacturing 189,346 427,459
------------ ------------
$ 14,331,572 $ 16,619,967
============ ============
GROSS PROFIT (LOSS):
Wholesale distribution $ 4,327,330 $ 4,991,054
Manufacturing (151,589) (58,069)
------------ ------------
$ 4,175,741 $ 4,932,985
============ ============
OPERATING EARNINGS (LOSS):
Wholesale distribution $ 1,263,317 $ 1,842,361
Manufacturing (290,889) (220,883)
------------ ------------
$ 972,428 $ 1,621,478
============ ============
TANGIBLE ASSETS:
Wholesale distribution $ 5,310,649 $ 6,340,695
Manufacturing 1,561,536 1,355,144
------------ ------------
Total identifiable assets 6,872,185 7,695,839
Non-competition agreement, net 130,711 -
------------ ------------
$ 7,002,896 $ 7,695,839
============ ============
CAPITAL EXPENDITURES:
Wholesale distribution $ 95,423 $58,989
Manufacturing 50,999 31,352
------------ ------------
$ 146,422 $ 90,341
============ ============
DEPRECIATION AND AMORTIZATION:
Wholesale distribution $ 93,121 $ 71,805
Manufacturing 115,068 115,227
------------ ------------
$ 208,189 $ 187,032
============ ============
</TABLE>
F-25
<PAGE> 41
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
FOR THE YEARS ENDED JULY 31, 1998 AND 1997
------------------------------------------
NOTE M: IMPACT OF YEAR 2000 (UNAUDITED)
- ----------------------------------------
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any of
the Company's computer programs or operating equipment that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than Year 2000. This could result in a computer system failure or
miscalculations causing disruptions of operations.
Management is in the process of assessing which systems will need to be
modified or replaced so that they will function properly with respect to
dates in the Year 2000 and thereafter. The Company will also initiate
formal communications with its significant vendors to determine the extent
to which the Company's programs or operating equipment are vulnerable to
those third parties' failure to remediate their own Year 2000 issues. The
total Year 2000 project cost has not been determined.
F-26
<PAGE> 42
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
--------
The information required by Item 9 (Directors, Executive Officers,
Promoters and Control Persons; Compliance with Section 16(a) of the Exchange
Act), Item 10 (Executive Compensation), Item 11 (Security Ownership of Certain
Beneficial Owners and Management), and Item 12 (Certain Relationships and
Related Transactions) is incorporated herein by reference to the Company's
proxy statement to be issued in connection with the Annual Meeting of
Shareholders to be held on December 1, 1998, which proxy statement will be filed
with the Commission within 120 days after the Company's July 31, 1998 fiscal
year end.
ITEM 13. EXHIBITS 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.
-15-
<PAGE> 43
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SEL-DRUM INTERNATIONAL, INC.
Dated: October 29, 1998 By: /s/ Raymond C. Sparks
-----------------------
Raymond C. Sparks
President and
Chief Executive Officer
(Principal Executive Officer)
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature and Title Date
------------------- ----
October 29, 1998
- ------------------------------------
Robert E. Asseltine, Director
/s/ Brian F. Turnbull October 29, 1998
- ------------------------------------
Brian F. Turnbull, Director
/s/ Robert M. Orr October 29, 1998
- ------------------------------------
Robert M. Orr, Director
/s/ John C. Hall October 29, 1998
- ------------------------------------
John C. Hall
Vice President - Finance
(Principal Accounting Officer)
-16-
<PAGE> 44
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION
Not applicable.
(3) (a) ARTICLES OF INCORPORATION
Articles of Incorporation are incorporated herein by
reference to Exhibit 3.1 to the Registrant's Form 10-KSB
filed for the fiscal year ended July 31, 1996.
(b) BY-LAWS
By-laws are incorporated herein by reference to Exhibit 3.2
to the Registrant's Form 10-KSB filed for the fiscal year
ended July 31, 1996.
(4) INSTRUMENTS DEFINING THE RIGHTS OF HOLDERS, INCLUDING INDENTURES
(a) The documents listed under Item (3) of this Index are incorporated
herein by reference.
(9) VOTING TRUST AGREEMENT
Not applicable.
(10) MATERIAL CONTRACTS
(a) Employment Contract dated as of November 1, 1997,
between Sel-Drum International, Inc., and Raymond
Sparks is incorporated herein by reference to Exhibit
10(a) to the Company's Form 10-QSB for the quarter
ended January 31, 1998.
(b) Non-Incentive Stock Option Grant granted as of November
3, 1997, by Sel-Drum International, Inc., to Raymond C.
Sparks is incorporated herein by reference to Exhibit
10(b) to the Company's Form 10-QSB for the quarter
ended January 31, 1998.
(c) Form of Redemption Agreement by and between 547118
Ontario Limited, Sel-Drum Imaging Corporation and
Sel-Drum International, Inc., is incorporated herein by
reference to Exhibit 10(c) to the Company's Form 10-QSB
for the quarter ended January 31, 1998.
(d) Form of Redemption Agreement by and between Robert
Asseltine, Geraldine Asseltine, Sel-Drum Imaging
Corporation and Sel-Drum
-17-
<PAGE> 45
International, Inc., is incorporated herein by
reference to Exhibit 10(d) to the Company's Form
10-QSB for the quarter ended January 31, 1998.
(e) Insurance Policy Agreement dated February 1, 1998,
between Sel-Drum International, Inc., and Brian F.
Turnbull is incorporated herein by reference to Exhibit
10(a) to the Company's Form 10-QSB for the quarter
ended April 30, 1998.
(f) Sel-Drum International, Inc. 1995 Employee and
Non-Employee Director Stock Option Plan is
incorporated herein by reference to Exhibit 99.1 to
the Company's Registration Statement on Form S-8
(Registration No. 333-57885).
(g) Share Repurchase and Non-Competition Agreement dated as
of February 1, 1998, by and among Brien Murtagh,
Sel-Drum Imaging Corporation and Sel-Drum
International, Inc. is incorporated herein by reference
to Exhibit 10(g) to the Company's Registration
Statement on Form SB-2 (Registration No. 333-59897).
(h) Form of Financial Consulting Agreement between Sel-Drum
International, Inc. and Pittsford Capital Markets, Inc.
is incorporated herein by reference to Exhibit 10(h) to
the Company's Registration Statement on Form SB-2
(Registration No. 333-59897).
(11) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Computation can be clearly determined from the Financial Statements and
Notes thereto included herein.
(13) ANNUAL OR QUARTERLY REPORTS, FORM 10-Q AND FORM 10-QSB
Not applicable.
(16) LETTER ON CHANGE IN CERTIFYING ACCOUNTANT
Not applicable.
(18) LETTER ON CHANGE IN ACCOUNTING PRINCIPLES
Not applicable.
*(21) SUBSIDIARIES OF THE REGISTRANT
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE
-18-
<PAGE> 46
Not applicable.
*(23) CONSENT OF EXPERTS AND COUNSEL
(a) Consent of Mengel, Metzger, Barr & Co. LLP
(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
-19-
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Sel-Drum Imaging Corporation
(Vancouver, B.C., Canada)
Sel-Drum Corporation (U.S.A.), Inc.
(Albany, New York)
Sel-Drum Corporation
(Burlington, Ontario, Canada)
<PAGE> 1
EXHIBIT 23(a)
Independent Auditors' Consent
We hereby consent to the incorporation by reference of our report dated
September 25, 1998 included in this Form 10-KSB, into Sel-Drum
International, Inc.'s previously filed Registration Statement on Form S-8
(Registration No. 333-57885).
/s/ Mengel, Metzger, Barr & Co. LLP
Rochester, New York
October 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SEL-DRUM INTERNATIONAL, INC., FOR THIS TWELVE MONTH
PERIOD ENDED JULY 31, 1998, 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-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 285,750
<SECURITIES> 0
<RECEIVABLES> 1,866,665
<ALLOWANCES> 40,483
<INVENTORY> 3,457,466
<CURRENT-ASSETS> 5,832,304
<PP&E> 1,842,845
<DEPRECIATION> 1,024,905
<TOTAL-ASSETS> 7,002,896
<CURRENT-LIABILITIES> 1,598,239
<BONDS> 0
0
4,499,805
<COMMON> 76,425
<OTHER-SE> 520,790
<TOTAL-LIABILITY-AND-EQUITY> 7,002,896
<SALES> 14,331,572
<TOTAL-REVENUES> 14,331,572
<CGS> 10,155,831
<TOTAL-COSTS> 10,155,831
<OTHER-EXPENSES> 3,168,780
<LOSS-PROVISION> 34,533
<INTEREST-EXPENSE> 57,986
<INCOME-PRETAX> 868,132
<INCOME-TAX> 351,628
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 516,504
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
