<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended OCTOBER 31, 1999
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-22964
SEL-DRUM INTERNATIONAL, INC.
----------------------------
(Exact name of small business issuer as specified 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)
905-335-2766
------------
(Issuer's telephone number)
----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
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 | |
State the number of shares outstanding for each of the issuer's classes
of common equity, as of the latest practicable date:
COMMON STOCK, $.01 PAR VALUE
7,417,500 SHARES ISSUED AND OUTSTANDING AS OF DECEMBER 10, 1999
Transitional Small Business Disclosure Format (check one:)
Yes | | No |X|
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Unaudited Consolidated Balance Sheets as of October 31,
1999 and July 31, 1999
Unaudited Consolidated Statements of Income for the three
months ended October 31, 1999 and October 31, 1998
Unaudited Consolidated Statements of Cash Flow for the
three months ended October 31, 1999 and October 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
<PAGE> 3
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
PART 1 : FINANCIAL INFORMATION
------------------------------
ITEM 1 : FINANCIAL STATEMENTS
-----------------------------
UNAUDITED CONSOLIDATED BALANCE SHEETS
-------------------------------------
<TABLE>
<CAPTION>
ASSETS (U.S. $)
CURRENT ASSETS October 31, 1999 July 31, 1999*
- -------------- ---------------- --------------
<S> <C> <C>
Cash and Cash equivalents $ 834,912 $ 202,965
Accounts receivable, net 2,228,194 1,877,050
Notes Receivable 1,017,000 ----
Inventories 2,768,554 3,007,597
Refundable income taxes ---- 49,027
Deferred income taxes 38,000 38,000
Other current assets 114,289 101,710
----------- -----------
TOTAL CURRENT ASSETS 7,000,949 5,276,349
PROPERTY
- --------
Equipment 1,025,175 989,118
Vehicles 13,922 13,922
Furniture and fixtures 82,025 80,050
Leasehold improvements 419,661 412,109
----------- -----------
1,540,783 1,495,199
Less accumulated depreciation and amortization (990,586) (930,822)
----------- -----------
550,197 564,377
OTHER ASSETS
- ------------
Non-competition agreement, net 21,819 24,936
Sundry, principally deposits 11,889 11,885
----------- -----------
33,708 36,821
----------- -----------
$ 7,584,854 $ 5,877,547
=========== ===========
</TABLE>
*Dervived from the July 31, 1999 Form 10-KSB
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SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
PART 1 : FINANCIAL INFORMATION
------------------------------
ITEM 1 : FINANCIAL STATEMENTS
-----------------------------
UNAUDITED CONSOLIDATED BALANCE SHEETS (CONT'D)
----------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES (U.S. $)
- ------------------- October 31, 1999 July 31, 1999*
---------------- --------------
<S> <C> <C>
Bank overdraft $ 6,953 $ ----
Notes payable to bank 678,000 ----
Current portion of long-term debt 86,298 31,827
Accounts payable 665,935 404,162
Income Taxes Payable 60,457 ----
Other current liabilities 479,501 321,878
----------- -----------
TOTAL CURRENT LIABILITIES 1,977,144 757,867
OTHER LIABILITIES
- -----------------
Long Term Debt 271,200 ----
SHAREHOLDERS' EQUITY
- --------------------
Common stock 76,425 76,425
Additional paid-in capital 706,846 706,846
Preferred stock 4,499,805 4,499,805
Retained earnings 398,405 211,222
Accumulated other comprehensive loss (244,971) (274,618)
------------ ------------
5,436,510 5,219,680
Less: Common stock in treasury (100,000) (100,000)
------------ ------------
5,336,510 5,119,680
------------ ------------
$ 7,584,854 $ 5,877,547
============ ============
*Dervived from the July 31, 1999 Form 10-KSB
</TABLE>
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<PAGE> 5
SEL-DRUM INTERNATIONAL, INC.
----------------------------
PART 1: FINANCIAL INFORMATION
-----------------------------
ITEM 1: FINANCIAL STATEMENTS
----------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
<TABLE>
<CAPTION>
(U.S.$)
QUARTER ENDED
-----------------------------------
OCTOBER 31
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
Net Sales $ 3,741,525 $ 3,241,790
Cost of goods sold 2,604,076 2,275,643
----------- -----------
GROSS PROFIT 1,137,449 966,147
Selling, operating and general and administrative expenses 808,548 772,224
Provision for bad debts 21,771 17,858
----------- -----------
INCOME FROM OPERATIONS 307,130 176,065
Other income(expense):
Interest Income 507 308
Interest Expense (12,177) (15,325)
Foreign currency Transaction Gain(Loss) 14,505 (2,641)
----------- -----------
2,835 (17,658)
----------- -----------
INCOME BEFORE INCOME TAXES 309,965 158,407
Income Taxes:
Current 122,782 72,587
---- ----
Deferred ----------- -----------
122,782 72,587
----------- -----------
NET INCOME $ 187,183 $ 85,820
=========== ===========
Number of common shares outstanding 7,417,500 7,542,500
Net income per common share $ 0.03 $ 0.01
=========== ============
</TABLE>
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<PAGE> 6
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
---------------------------------------------
PART 1: FINANCIAL INFORMATION
-----------------------------
ITEM 1: FINANCIAL STATEMENTS
-----------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
<TABLE>
<CAPTION>
(U.S. $)
THREE MONTHS OCTOBER 31
-----------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
- ---------------------------------
Net Income $ 187,183 $ 85,820
Adjustments to reconcile net income to net cash provided
from (used for) operating activities:
Provision for bad debts 21,771 17,858
Depreciation and amortization 47,427 58,575
Deferred income taxes ---- 48,158
Gain on Disposal of Property ---- ----
Changes in certain assets and liabilities affecting
operations:
Accounts receivable (351,144) (142,751)
Inventories 239,043 14,898
Other current assets (12,579) 46,200
Deposits (4) 389
Accounts payable 261,773 (211,439)
Income taxes payable 109,484 24,698
Other current liabilities 157,623 112,274
---------- ---------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 660,577 54,680
CASH FLOWS - INVESTING ACTIVITIES
- ---------------------------------
Purchases of property (20,209) (13,445)
---------- ---------
NET CASH (USED FOR) INVESTING ACTIVITIES (20,209) (13,445)
CASH FLOWS - FINANCING ACTIVITIES
- ---------------------------------
Bank overdraft 6,953 (88,569)
Notes receivable - related parties (1,017,000) 4,883
Short-term borrowings net 678,000 (9,493)
Long-Term Borrowings 339,000 ----
Repayments on long-term debt (13,329) (109,516)
Repurchase of common stock ---- (50,000)
---------- ---------
NET CASH (USED FOR) PROVIDED FROM FINANCING ACTIVITIES (6,376) (252,695)
Effect of exchange rate changes on cash (2,045) (3,831)
---------- ---------
NET (DECREASE)INCREASE IN CASH 631,947 (215,291)
Cash and Cash Equivalents at beginning of period 202,965 285,750
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 834,912 $ 70,459
========== =========
</TABLE>
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<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 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.
A Stock Purchase Agreement (the "Agreement") was executed on July 30, 1999 with
respect to the shares of Common Stock between C. Cotran Holding inc., a company
incorporated under the laws of Canada and Robert E. Asseltine, 547118 Ontario
Limited represented by Brian F. Turnbull and the other selling shareholders of
the Company, and with respect to the Preferred Stock of Sel-Drum Imaging
Corporation, the parties to the Agreement are Densigraphix Kopi inc.
("Densigraphix"), a company incorporated under the laws of Canada and Robert E.
Asseltine, Geraldine Asseltine and 547118 Ontario Limited.
The Agreement provided for the acquisition of 97% of the issued and outstanding
Common Stock of the Company by C. Cotran Holding inc. and all of the outstanding
Preferred Stock of Sel-Drum Imaging Corporation by Densigraphix. Subject to
post-closing adjustments, the aggregate purchase price for the Common Stock and
Preferred Stock was $5,702,472 US, that is $0.40 per share for the Common Stock
and $457.90 US per share for the Preferred Stock of Sel-Drum Imaging
Corporation.
On July 30, 1999, Mr. Camille Cotran was appointed Chairman of the Board and
Chief Executive Officer and Mr. Raymond Sparks was appointed President and Chief
Operating Officer of the Company.
The National Bank of Canada (the "Bank") agreed to make available a global
financing in the amount of $6,000,000.00 CDN for the acquisition of the Company
through C. Cotran Holding inc., Densigraphix and Sel-Drum Corporation. To secure
the payment of various loans made for the purpose of the acquisition, the Offer
of Financing by the Bank provides for certain undertakings by the Company, C.
Cotran Holding inc., Densigraphix, Sel-Drum Corporation and Sel-Drum Corporation
(U.S.A.), Inc. which include a moveable hypothec with delivery (pledge) of all
the shares of the Company owned or to be owned by each of the respective
borrowers.
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 strategic alliance with
Densigraphix, the Company strengthened its hold in the toner segment of the
market and positioned itself for a year of strong growth in the US market.
The Board of Directors of the Company, at a meeting held on November 17, 1999,
reviewed the terms and conditions of all transactions taking place between the
Company and Densigraphix to
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<PAGE> 8
ascertain their fairness for the Company. All sales from Densigraphix to
Sel-Drum are executed at terms at least as good as if they were negotiated at
arms' length between independent parties.
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 95% of the Kelowna Facility's refurbished products are 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 7,000 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 and toner. The Company also refurbishes facsimile and
laser printer and fax cartridges. During the course of last year, the Company
discontinued its drum manufacturing activities. This decision was motivated by a
change in technology and did not affect the Company's operations as it had been
ready to use the appropriate facilities for its cartridges refurbishing
activities. The technology and equipment affiliated with the drum manufacturing
operations have been written off and as of the year ended July 31, 1999, a loss
of $394,006.00 was recorded against earnings. In line with its aim of
bolstering the Company's core business, the Company signed a cartridge sales
contract in January 1999 with an important authorized dealer thus taking
advantage of the under-utilized Kelowna Facility refurbishing and distribution
capacity. The second tier of the contract, increasing the number of cartridges
processed in the Kelowna Facility, took effect in early September 1999.
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.
The Company is also looking at the possibility of seeking a listing on the
Chicago Stock Exchange, the Nasdaq SmallCap Market or a national or other
regional exchange. Although not pursued during the past year in view of its
acquisition by C. Cotran Holding inc., this goal remains an integral part of the
Company's development strategy.
A new computer system was introduced in 1999. Training is completed. This system
is now fully functional in Burlington and Buffalo.
RESULTS OF OPERATIONS
- ---------------------
The Company's results of operations are affected by numerous factors such as
general economic conditions, competition and inventory costs. The largest
component of the Company's cost of sales is inventory cost, which may vary
slightly from period to period based upon timing of purchases which indirectly
affect the Company's inventory costs.
The following table sets forth for each of the periods presented, certain income
statement data for the Company expressed as a percentage of net sales.
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
October 31 October 31
Statement of Operations Data 1999 1998
---------------------------- ------------------ ------------------
<S> <C> <C>
Net Sales 100.0% 100.0%
As a Percentage of Net Sales:
Cost of Goods Sold 69.6% 70.2%
Gross Profit 30.4% 29.8%
Selling, General and Administrative Expenses 21.6% 23.8%
Provision for Bad Debt .6% .6%
Income from Operations 8.2% 5.4%
Other Income (Expense) .1% (.5)%
Income before Taxes 8.3% 4.9%
Net Income 5.0% 2.6%
</TABLE>
Net sales for the three months ended October 31, 1999 increased by 15%. The
increase in sales is the result of a combination of factors such as the
strategic alliance with Densigraphix for the sales of toner products, a stronger
demand for replacement parts and other products as well as general economic
conditions.
For the months to come, the Company anticipates that the stronger demand will be
maintained and that the strategic alliance with Densigraphix will continue to
open up U.S. markets for sales of toner products. As a result, the Company
expects to maintain the increase in sales for Fiscal 2000, although no assurance
can be given that this will occur.
Gross profit margin for the three months ended October 31, 1999 was 30.4%, as
compared to 29.8% for October 31, 1998.
Selling, general, and administrative expenses for the three months ended October
31, 1999 increased 4.7% from the prior comparable period. The increase resulted
mainly from the increased commissions following the trend in sales.
As a result of the foregoing, net income for the three months ended October 31,
1999 increased from $85,820 to $187,183.
YEAR 2000 COMPLIANCE ISSUES
An issue affecting the Company and others is the inability of many computer
systems and applications to process the year 2000 date change and the leap year
2000. Many currently installed computer systems and software applications are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept entries to distinguish 21st century dates from 20th
century dates. The inability to recognise or properly treat the year 2000 may
cause our systems and applications to process critical financial and operational
information incorrectly.
-8-
<PAGE> 10
The Company has invested approximately $177,000 to change its computer system in
order to be year 2000 compliant. An amount of $149,000 has been capitalised and
the Company expects to be within its budget of $200,000 by the time the
implementation is completed in connection with hardware and software upgrades
relative to the establishment of an integrated data system.
INTERNAL SYSTEMS
After evaluating the Company's internal computer systems, it was decided to
change the whole system in order to be year 2000 compliant.
The Company has completed the implementation of its new computer system which is
certified by the supplier to be year 2000 compliant.
OUTSIDE VENDORS AND CUSTOMERS
Disruptions with respect to the computer systems of vendors or customers, which
are outside our control, could impair our ability to obtain products and
services or conduct business with our customers.
The Company has sent year 2000 issue questionnaires to its significant
suppliers. Although the responses received do not indicate any significant year
2000 issues, there is no assurance that all significant suppliers and customers
will take the necessary steps to ensure that their respective systems will be
protected against the year 2000 issue or that even if such steps are taken, they
will be successful.
OUR PRODUCTS
The products and services offered by the Company are year 2000 compliant and
will accommodate the year 2000 date change.
SUMMARY
There is no assurance that any year 2000 issue - related precautions with
respect to internal information technology systems or products will eliminate
the numerous and varied risks associated with the year 2000 date change.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's principal capital requirements are to fund its working capital
needs and material inventory requirements and to fund the improvement of
facilities, machinery and equipment. Historically, the Company has used income
generated by operations as well as bank financing to fund these capital needs.
Net cash provided by operating activities primarily represents net income plus
changes in working capital positions. Net cash provided by operating activities
showed an improvement for the three months ended October 31, 1999 at $660,577
compared to $54,680 for the previous period. 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
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<PAGE> 11
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 $2,847,600 US. ($4,200,000 Canadian dollars).
These borrowings generally assist the Company with funding of accounts
receivable and inventory purchases for an amount of $2,169,600 US. ($3,200,000
Canadian dollars). As at October 29,1999, the revolving demand loan was
increased by $339,000 US. ($500,000 Canadian dollars) according to the terms
of the financing provided by the National Bank of Canada for the acquisition by
C. Cotran Holding and Densigraphix of Sel-Drum International Inc. In addition,
as part of the financing, a new term loan of $339,000 US. ($500,000 Canadian
dollars) was granted to the Company.
The additional financing provided by the Bank was used to lend to Densigraphix
an amount of $1,017,000 US. ($1,500,000 Canadian dollars). The note receivable
carries an interest rate of prime + 1% and the interest will be payable monthly.
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.
RISKS
- -----
Sel-Drum faces the financial risks inherent to the nature of its activities. The
Company also faces risks stemming from other factors such as fluctuations in
exchange rates and economic market conditions in general.
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<PAGE> 12
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See Index to Exhibits.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter for which this report
is filed.
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SEL-DRUM INTERNATIONAL INC.
Date December 15, 1999 /s/ Camille Cotran, Chairman and CEO
- ---------------------- -------------------------------------------
Date December 15, 1999 /s/ John C. Hall, Vice-President, Finance
- ---------------------- -------------------------------------------
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<PAGE> 13
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION
Not applicable.
(3) (a) ARTICLES OF INCORPORATION
Restated Certificate of Incorporation is incorporated by
reference to Exhibit 3(a) to the Registrant's Form 10-QSB
filed for the quarterly period ended January 31, 1998.
(b) BY-LAWS
Amended and Restated By-Laws are incorporated by reference to
Exhibit 3(b) to the Registrant's Form 10-QSB filed for the
quarterly period ended January 31, 1998.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
(a) The documents listed under Item (3) of this Index are incoporated
herein by reference.
(10) MATERIAL CONTRACTS
Not applicable.
(11) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Computation can be clearly determined in the Financial Statements
included herein under Item 1.
(15) LETTER ON UNAUDITED INTERIM FINANCIAL INFORMATION
Not applicable.
(18) LETTER ON CHANGE IN ACCOUNTING PRINCIPLES
Not applicable.
(19) REPORTS FURNISHED TO SECURITY HOLDERS
Not applicable.
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE
Not applicable.
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<PAGE> 14
(23) CONSENT OF EXPERTS AND COUNSEL
Not applicable.
(24) POWER OF ATTORNEY
Not applicable.
*(27) FINANCIAL DATA SCHEDULE
The Financial Data Schedule is included herein as Exhibit 27.
(99) ADDITIONAL EXHIBITS
Not applicable.
* Exhibit filed with this Report
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SEL-DRUM INTERNATIONAL, INC. FOR THE THREE MONTH PERIOD
ENDED OCTOBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 834,912
<SECURITIES> 0
<RECEIVABLES> 3,404,309
<ALLOWANCES> 159,115
<INVENTORY> 2,768,554
<CURRENT-ASSETS> 7,000,949
<PP&E> 1,540,783
<DEPRECIATION> 990,586
<TOTAL-ASSETS> 7,584,854
<CURRENT-LIABILITIES> 1,977,174
<BONDS> 0
0
4,499,805
<COMMON> 76,425
<OTHER-SE> 760,280
<TOTAL-LIABILITY-AND-EQUITY> 7,584,854
<SALES> 3,741,525
<TOTAL-REVENUES> 3,741,525
<CGS> 2,604,076
<TOTAL-COSTS> 2,604,076
<OTHER-EXPENSES> 808,548
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,177
<INCOME-PRETAX> 309,965
<INCOME-TAX> 122,782
<INCOME-CONTINUING> 187,183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 187,183
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
