<PAGE>
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, 2000
TRANSITION REPORT UNDER TO 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 incorporation (I.R.S.Employer Identification
or organization) No.)
501 AMHERST STREET, BUFFALO, NEW YORK 14207-2913
(Address of principal executive offices)
905-335-2766
(Issuer's telephone number)
N/A
---------------------------------------------------------------------------
(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 14, 2000
Transitional Small Business Disclosure Format (check one:)
Yes _ No X
1
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of October 31, 2000 and
July 31, 2000
Consolidated Statements of Operations for the three
months ended October 31, 2000 and October 31, 1999
Consolidated Statements of Comprehensive Operations
for the three months ended October 31, 2000 and
October 31, 1999
Consolidated Statements of Cash Flows for the three
months ended October 31, 2000 and 1999
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
2
<PAGE>
SEL-DRUM INTERNATIONAL, INC.
AND SUBSIDIARIES
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2000
3
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS PAGE
--------------------------------- ----
<S> <C>
Consolidated Balance Sheets -
October 31, 2000 and July 31, 2000 5
Consolidated Statements of Operations -
Three Months Ended October 31, 2000 and 1999 7
Consolidated Statements of Comprehensive Operations -
Three Months Ended October 31, 2000 and 1999 8
Consolidated Statements of Cash Flows -
Three Months Ended October 31, 2000 and 1999 9
Notes to Consolidated Financial Statements 11
</TABLE>
4
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, July 31,
ASSETS 2000 2000*
------ ----------- ----------
<S> <C> <C>
(Unaudited) (Audited)
CURRENT ASSETS
--------------
Cash and cash equivalents $ 305,283 $ 32,190
Accounts receivable, net of allowance for
doubtful accounts of $44,958 and
$33,460, respectively 2,444,334 2,268,265
Inventories 3,353,605 3,861,037
Deferred income taxes 25,000 25,000
Other current assets 140,292 130,989
---------- ----------
TOTAL CURRENT ASSETS 6,268,514 6,317,481
PROPERTY
--------
Equipment 1,060,577 1,081,604
Vehicles 13,922 13,922
Furniture and fixtures 82,352 84,487
Leasehold improvements 406,734 417,848
---------- ----------
1,563,585 1,597,861
Less accumulated depreciation and amortization 1,122,972 1,110,904
---------- ----------
440,613 486,957
OTHER ASSETS
------------
Non-competition agreement, net of accumulated
amortization of $34,287 and $31,710, respectively 9,351 12,468
Sundry, principally deposits 11,165 11,170
Notes receivable from related parties 1,860,200 1,559,500
---------- ----------
1,880,716 1,583,138
---------- ----------
$8,589,843 $8,387,576
---------- ----------
---------- ----------
</TABLE>
* Derived from Form 10-KSB
5
<PAGE>
<TABLE>
<CAPTION>
October 31, July 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 2000*
------------------------------------ ----------- ----------
<S> <C> <C>
(Unaudited) (Audited)
CURRENT LIABILITIES
Line of credit $1,730,821 $1,339,502
Current portion of long-term debt 65,507 67,296
Accounts payable 555,490 401,262
Income taxes payable 23,317 133,464
Other current liabilities 164,831 487,127
---------- ----------
TOTAL CURRENT LIABILITIES 2,539,966 2,428,651
LONG-TERM DEBT 196,535 218,731
--------------
SHAREHOLDERS' EQUITY
--------------------
Common stock 74,175 74,175
Additional paid-in capital 609,096 609,906
Preferred stock 4,499,805 4,499,805
Retained earnings 993,911 828,729
Accumulated other comprehensive loss (323,645) (271,611)
---------- ----------
5,853,342 5,740,194
---------- ----------
$8,589,843 $8,387,576
---------- ----------
---------- ----------
</TABLE>
* Derived from Form 10-KSB
6
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
October 31,
--------------------------------
2000 1999
----------- -----------
<S> <C> <C>
(Unaudited) (Unaudited)
Net sales $3,638,731 $3,741,525
Cost of goods sold 2,480,097 2,604,076
----------- -----------
GROSS PROFIT 1,158,634 1,137,449
Selling, administrative and general expenses 849,135 808,548
Bad debts 11,498 21,771
----------- -----------
INCOME FROM OPERATIONS 298,001 307,130
Other income (expense):
Interest income 35,578 507
Interest expense (47,357) (12,177)
Gain on disposal of property 645 -
Foreign currency transaction (loss) gain (11,565) 14,505
----------- -----------
(22,699) 2,835
----------- -----------
INCOME BEFORE INCOME TAXES 275,302 309,965
Income tax expense 110,120 122,782
----------- -----------
NET INCOME $ 165,182 $ 187,183
----------- -----------
Net income per common share:
Basic and diluted $ 0.02 $ 0.03
----------- -----------
----------- -----------
Weighted average:
Common shares 7,417,500 7,417,500
Dilutive stock options - -
----------- -----------
COMMON SHARES AND DILUTIVE STOCK OPTIONS 7,417,500 7,417,500
----------- -----------
----------- -----------
</TABLE>
7
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
<TABLE>
<CAPTION>
Three months ended
October 31,
--------------------------------
2000 1999
----------- -----------
<S> <C> <C>
(Unaudited) (Unaudited)
Net income $ 165,182 $ 187,183
Other comprehensive loss:
Foreign currency translation adjustment (52,034) (2,045)
----------- -----------
COMPREHENSIVE INCOME $ 113,148 $ 185,138
----------- -----------
----------- -----------
</TABLE>
8
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
October 31,
--------------------------------
2000 1999
----------- -----------
<S> <C> <C>
(Unaudited) (Unaudited)
CASH FLOWS - OPERATING ACTIVITIES
---------------------------------
Net income $ 165,182 $ 187,183
Adjustments to reconcile net income to net cash
provided from operating activities:
Bad debts 11,498 21,771
Depreciation and amortization 39,647 47,427
Gain on disposal of property (645) -
Changes in certain assets and liabilities
affecting operations:
Accounts receivable (187,567) (351,144)
Inventories 507,432 239,043
Other current assets (9,303) (12,579)
Deposits 5 (4)
Accounts payable 154,228 261,773
Income taxes payable (110,147) 109,484
Other current liabilities (322,296) 157,623
----------- -----------
NET CASH PROVIDED FROM
OPERATING ACTIVITIES 248,034 660,577
CASH FLOWS - INVESTING ACTIVITIES
---------------------------------
Purchases of property (4,654) (20,209)
Proceeds from disposal of property 645 -
----------- -----------
NET CASH USED FOR
INVESTING ACTIVITIES (4,009) (20,209)
CASH FLOWS - FINANCING ACTIVITIES
---------------------------------
Increase in bank overdraft - 6,953
Increase in notes receivable from related parties (300,700) (1,017,000)
Short-term borrowings, net 391,319 678,000
Borrowings on long-term debt - 339,000
Repayments on long-term debt (23,985) (13,329)
----------- -----------
NET CASH PROVIDED FROM (USED FOR)
FINANCING ACTIVITIES 66,634 (6,376)
Effect of exchange rate changes on cash (37,566) (2,045)
----------- -----------
NET INCREASE IN
CASH AND CASH EQUIVALENTS 273,093 631,947
Cash and cash equivalents at beginning of period 32,190 202,965
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 305,283 $ 834,912
----------- -----------
----------- -----------
</TABLE>
9
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D
<TABLE>
<CAPTION>
Three months ended
October 31,
--------------------------------
2000 1999
----------- -----------
<S> <C> <C>
(Unaudited) (Unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
------------------------------------------------
Cash paid during the period for:
Interest $ 47,357 $ 12,177
----------- -----------
----------- -----------
Income taxes $ 220,267 $ 62,325
----------- -----------
----------- -----------
</TABLE>
10
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2000
NOTE A: UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
-------------------------------------------------------------
The unaudited consolidated interim financial statements presented herein
have been prepared by Sel-Drum International, Inc. and Subsidiaries (the
"Company") in accordance with the accounting policies described in its
July 31, 2000 Annual Report to the Shareholders and should be read in
conjunction with the notes thereto.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary for a fair statement of
operating results for the interim periods presented have been made.
NOTE B: NOTES RECEIVABLE FROM RELATED PARTIES
-----------------------------------------------
The composition of notes receivable from related parties at October 31, 2000 is
as follows:
<TABLE>
<CAPTION>
<S> <C>
Note receivable from C. Cotran Holding, Inc. (a Canadian
holding company) to Sel-Drum Corporation (U.S.A.), Inc.
bearing interest at the U.S. prime rate less 1% (effective
rate of 8.5% at October 31, 2000). There are currently no
repayment terms for the outstanding balance. $ 550,000
Note receivable from Densigraphix Kopi, Inc. (a wholly-owned
subsidiary of C. Cotran Holding, Inc.) to Sel-Drum Corporation,
bearing interest at the Canadian prime rate plus 1% (effective
rate of 8.5% at October 31, 2000). There are currently no
repayment terms for the outstanding balance. 1,310,200
----------
$1,860,200
----------
----------
</TABLE>
The Company received interest income of approximately $35,500 from the notes
receivable from related parties during the three months ended October 31,
2000.
C. Cotran Holding, Inc. (a Canadian holding company) owns 7,173,680 shares
of the issued and outstanding common stock of Sel-Drum International, Inc.
Densigraphix Kopi, Inc. (a wholly-owned subsidiary of C. Cotran Holding,
Inc.) owns 100% of the issued and outstanding preferred shares of Sel-Drum
Imaging Corporation (Class C and Class D).
Sel-Drum International, Inc. 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).
11
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd.
OCTOBER 31, 2000
NOTE C: LINE OF CREDIT
------------------------
Sel-Drum Corporation has an operating line of credit available for up to
$2,751,420 ($4,200,000 Canadian dollars) through the National Bank of
Canada. The arrangement provides for interest to be paid monthly at the
bank's prime rate plus .50% (an effective rate of 8% at October 31, 2000).
Sel-Drum Corporation may use the credit facility for working capital and
to issue letters of credit for the purchase of inventories, up to a
maximum amount of $982,650 ($1,500,000 Canadian dollars). Issued letters
of credit will reduce the amounts available to the Company to borrow for
working capital needs under the facility. At October 31, 2000, the Company
had $1,730,821 ($2,642,071 Canadian dollars) outstanding under this
arrangement. In addition, at October 31, 2000, the Company had outstanding
letters of credit aggregating $31,794 ($48,533 Canadian dollars).
Accordingly, as of October 31, 2000, the Company had $988,805 available
for borrowing under this arrangement.
The line is secured by substantially all assets of Sel-Drum Corporation
and Sel-Drum Corporation (USA), Inc., the limited corporate guarantees of
Sel-Drum International, Inc. and Sel-Drum Imaging Corporation, each in the
amount of $3,275,500 ($5,000,000 Canadian dollars), and the limited
corporate guarantee of Sel-Drum Corporation (USA), Inc. in the amount of
$1,310,200 ($2,000,000 Canadian dollars). The guarantee by Sel-Drum
Corporation (USA), Inc. is supported by a first ranking security interest
on all assets of Sel-Drum Corporation (USA), Inc. The line also has an
unconditional letter of guarantee from C. Cotran Holding, Inc. in the
amount of $3,275,500 ($5,000,000 Canadian dollars).
NOTE D: LONG-TERM DEBT
-----------------------
Long-term debt at October 31, 2000 is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Term loan of $327,500 ($500,000 Canadian dollars) payable to
the National Bank of Canada, due in monthly installments of
approximately $5,460 ($8,333 Canadian dollars) through
October 2004, plus interest at the bank's prime rate plus
1.5% (an effective rate of 9% at October 31, 2000). $ 262,042
Less: Current portion of long-term debt 65,507
---------
$ 196,535
---------
---------
</TABLE>
12
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd.
OCTOBER 31, 2000
NOTE D: LONG-TERM DEBT, Cont'd
-----------------------
The maturity of the long-term debt portion is as follows:
<TABLE>
<CAPTION>
Annual period ending
--------------------
<S> <C>
October 31, 2001 $ 65,507
October 31, 2002 65,511
October 31, 2003 65,512
October 31, 2004 65,512
---------
$ 262,042
---------
---------
</TABLE>
NOTE E: RELATED PARTY TRANSACTIONS
-----------------------------------
SALES
The Company had sales to Densigraphix Kopi, Inc. of approximately $102,000
and $115,000 during the three months ended October 31, 2000 and 1999,
respectively. At October 31, 2000, total amounts from Densigraphix Kopi, Inc.
of approximately $224,000 are included in accounts receivable, as reflected
in the accompanying consolidated balance sheet.
PURCHASES
The Company made purchases of inventory from Densigraphix Kopi, Inc. of
approximately $444,000 and $5,000 during the three months ended October 31,
2000 and 1999, respectively. At October 31, 2000, total amounts due to
Densigraphix Kopi, Inc. of approximately $148,000 are included in accounts
payable, as reflected in the accompanying consolidated balance sheet.
13
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
OCTOBER 31, 2000
NOTE F: COMMON AND PREFERRED STOCK
-----------------------------------
The following is certain information regarding common and preferred stock
as of October 31, 2000:
<TABLE>
<CAPTION>
<S> <C>
SEL-DRUM INTERNATIONAL, INC.
COMMON STOCK
Par value $0.01
Shares authorized 100,000,000
Shares issued 7,417,500
PREFERRED STOCK
Par value $0.01
Shares authorized 10,000,000
Shares issued and outstanding None
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>
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------------------------------------------------------------------------------
GENERAL
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 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 strategic alliance
with Densigraphix Kopi inc.(`'Densigraphix"), the Company strengthened its
hold in the toner segment of the market and positioned itself for growth in
the US market. Please see below for more details on this transaction.
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. 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 toners. The Company also refurbishes
facsimile and laser printers and fax cartridges. During the course of fiscal
1999, 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 these facilities for its
cartridges refurbishing activities. The technology and equipment have been
written off and represented as at July 31, 1999, a loss of $394,006 against
earnings. To be able to offer an integrated service comprehending both a
product component and a value added technological component, the Company has
been offering for the past months, through its Burlington office, specialized
technical connectivity (networking) software services. 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 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.
On October 29, 1997, the Company hired Raymond C. Sparks as its Chief
Executive 0fficer and President, replacing Brian Turnbull who had agreed to
remain with the Company as a full-time consultant.
In December 1997, the Company reorganized its sales staff and began
implementing this reorganization during the month of January 1998. As
expected, sales were flat during the first nine months as a result of this
reorganization of sales staff.
On January 15, 1998, the Company began funding a repurchase of 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 former 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.
15
<PAGE>
In late 1997, the Company initiated a strategic plan, which was designed to
focus on the longer term growth prospects of the Company. This new strategy
called 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 marketplace. 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 to produce re-manufactured cartridges. The second tier
of the contract, increasing the number of cartridges processed in the Kelowna
Facility, took effect in early September 1999. The profitability of the
Kelowna Facility is presently dependent on this contract, which can be
cancelled on a 3-month notice. At present, Management has no indication that
such a cancellation could be forthcoming.
In the course of the implementation of its strategic plan which included
seeking acquisition candidates, the Company contacted Densigraphix of
Montreal, Quebec, a company specializing in the toner and cartridge
distribution business, which already distributed some of Sel-Drum's products.
In view of the complementary nature of the businesses and the compatible
management philosophies, an agreement was reached between the principal
shareholders and related parties of the companies whereby, C. Cotran Holding
inc., a private company wholly-owned by Camille Cotran, purchased all of the
shares held by Sel-Drum's principal shareholders and related parties.
Following this transaction C. Cotran Holding inc. holds 97% of the voting and
participating shares of the common stock of the Company.
The Company has reviewed all options available to it in terms of securities
markets. After extensive consideration, the Company believes that it is in
its best interest to seek privatization. To this end, it has initiated the
process of applying for termination of registration of its Common Stock under
Section 12 of the Securities Exchange Act of 1934.
A new computer system was introduced in 1999. Training is completed. The
company is now taking advantage of the full functionality of the system. A
full e-commerce strategy is currently under development by the Company.
On July 30, 1999, Brian Turnbull and Robert Asseltine, the principal
shareholders of the Company, and other parties related to them disposed of
all their shares in the Company. On July 6, 1999, Messrs. Turnbull and
Asseltine delivered an executed original Term Sheet (the "Term Sheet" among
themselves, Cotran Holding inc. and Densigraphix ("the purchasers").
Pursuant to the Term Sheet, Messrs. Asseltine and Turnbull agreed to sell to
the purchasers all of the Company's Common Stock beneficially held by them at
a price of $.40 US per share. Additionally, Messrs. Asseltine and Turnbull
agreed to deliver and sell to the purchasers an additional 1,119,000 shares
of Common Stock held by family members or related parties. The Term sheet
further provided for the purchaser's acquisition of all outstanding shares of
Preferred Stock held by Messrs. Asseltine and Turnbull (or their affiliates)
in the Company's Sel-Drum Imaging Corporation subsidiary at a price of
$457.90 US per share.
The proposed transaction was contingent upon several items including but not
limited to: the repayment of indebtedness to the Company owed by related
parties (approximately $159,820 owed by two corporations controlled by Mr.
Turnbull); the resignation of current members of the Board of Directors and
the execution of a definitive agreement.
A Stock Purchase Agreement ("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 (the "purchaser") and Robert
E. Asseltine, 547118 0ntario 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, a company incorporated under the laws of Canada(the
"purchaser") 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 by Densigraphix. Subject to post-closing
adjustments, the aggregate purchase price for the common and preferred stock
was US$5,702,472.
The National Bank of Canada ("Bank") agreed to make available a global
financing in the amount of $6,000,000CDN 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 0ffer of Financing by the Bank provides for certain undertakings by the
Company, C. Cotran Holdings inc., Densigraphix, Sel-Drum Corporation and
Sel-Drum Corporation (U.S.A.) Inc. which include a moveable
16
<PAGE>
hypothec with delivery (pledge) of all the shares of the Company, owned or to
be owned, by each of the respective borrowers.
The Company is currently reviewing options available to it through it's
alliance with Densigraphix to achieve operational economies. These options
may include the consolidation of operations and facilities.
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 and exchange
rate fluctuations 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
October 31, October 31,
STATEMENT OF OPERATIONS DATA 2000 1999
---------------------------- ----------- -----------
<S> <C> <C>
Net Sales 100.0% 100.0%
As a Percentage of Net Sales:
Cost of Goods Sold 68.2% 69.6%
Gross Profit 31.8% 30.4%
Selling, General and Administrative Expenses 23.3% 21.6%
Provision for Bad Debt 0.3% 0.6%
Income from Operations 8.2% 8.2%
Other Income (Expense) (.6)% 0.1%
Income before Taxes 7.6% 8.3%
Net Income 4.5% 5.0%
</TABLE>
17
<PAGE>
Net sales for the three months ended October 31, 2000 were $3,638,731 as
compared with $3,741,525 for the three months ended October 31, 1999, a
decrease of 2.7%. The decrease in sales for the three months ended October
31, 2000 is the result of softer sales in the Canadian marketplace.
Gross profit margin for the three months ending October 31, 2000 was 31.8%,
as compared to 30.4% for the same period last year. The gross profit in
absolute dollars increased by $21,185 for the three-month period as is
largely due to the strength of the US dollar against currencies of trading
partners.
Selling, general, and administrative expenses for the three months ended
October 31, 2000 increased by $40,587 or 5.0% from the prior comparable
period. Selling, general, and administrative expenses were 23.3% of net sales
for the three months ended October 31, 2000 as compared to 21.6% for the same
period last year. This increase was due to an increase in the U.S. sales team.
The interest expense for the three months ended October 31, 2000 increased by
$35,180 as a result of the new financing put in place October 31, 1999 but
was partly offset by an increase in interest income.
As a result of the foregoing, net income for the three months ended October
31, 2000 was $165,182, which represents 4.5% of net sales against $187,183
for the three months ended October 31, 1999.
YEAR 2000 COMPLIANCE ISSUES
----------------------------
In the context of the Year 2000 review and after evaluating the company's
internal computer systems, it had been decided to change the whole system in
order to be year 2000 compliant. The company invested approximately $195,000
to change its computer system. Implementation was completed on time and
within the $200,000 budget. An e-commerce functionality is now being added to
the system.
During the year 2000 date change and the leap year 2000, no problems or
disruptions with respect to the computer systems of vendors or customers were
experienced by the company.
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 or used for operating activities primarily represents
net income plus changes in working capital positions. For the three month
period ended October 31, 2000, the financing activities provided net cash of
$66,634 and operating activities provided $248,034 which was offset by $4009
used to purchase fixed assets and an effect of exchange rate changes on cash
of $37,566. As a result, the net increase in cash was $273,093 for the
three-month period ended October 31, 2000. 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 or sight draft. 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 US$2,751,420 ($4,200,000 Canadian).
These borrowings generally assist the Company with funding of accounts
receivable and inventory purchases for an amount of US$2,096,320 ($3,200,000
Canadian). As at October 29,1999, the revolving demand loan was increased by
US$327,550. ($500,000 Canadian) 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 US$327,550 ($500,000 Canadian) was
granted to the company.
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The additional financing provided by the Bank was used to lend to
Densigraphix an amount of US$982,650 ($1,500,000 Canadian dollars). The note
receivable carries an interest rate of prime + 1% and no repayment term.
As at October 31, 2000 outstanding borrowing of US$1,730,821 existed under
this arrangement. An amount of $655,100 ($1,000,000 Canadian) was used as
part of the stock purchase financing and the balance US$1,075,721 ($1,642,071
Canadian) was used in operations.
In March 2000, Sel-Drum Corporation U.S.A. advanced an additional US$550,000.
($839,566 Canadian) to its parent company C. Cotran Holding, under the same
terms and conditions than the existing note receivable. This amount was used
by the parent company to reimburse part of the acquisition financing to the
National Bank of Canada.
In October 2000, Sel-Drum Corporation advanced an additional US$300,700.
($500,000 Canadian) to Densigraphix Kopi inc. under the same terms and
conditions as the existing note receivable.
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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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 14, 2000 /S/ CAMILLE COTRAN, CHAIRMAN AND CEO
---------------------- ------------------------------------
DATE DECEMBER 14, 2000 /S/ JOHN C. HALL, VICE-PRESIDENT, FINANCE
---------------------- -----------------------------------------
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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
(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 STATEMENTS
Accountants Report included in Financial Statements
(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.
(23) CONSENT OF EXPERTS AND COUNSEL
Not applicable.
(24) POWER OF ATTORNEY
Not applicable.
*(27) FINANCIAL DATA SCHEDULE
The Financial Data Schedule is included herein as Exhibit 27.
(99) ADDITIONAL EXHIBITS
Not applicable.
* Exhibit filed with this Report
21
