<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended APRIL 30, 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 (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 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 JUNE 14, 2000
Transitional Small Business Disclosure Format (check one:)
Yes No
1
<PAGE>
PART I
FINANCIAL INFORMATION
---------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTANTS REPORT
Consolidated Balance Sheets as of April 30, 2000 and
July 31, 1999
Consolidated Statements of operations for the three months
and nine months ended April 30, 1999 and April 30, 2000
Consolidated Statements of Cash Flow for the
nine months ended April 30, 1999 and April 30, 2000
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
2
<PAGE>
SEL-DRUM INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND
ACCOUNTANTS REPORT
APRIL 30, 2000
ITEM 1. FINANCIAL INFORMATION
----------------------------------------------------------------------------
CONTENTS
--------
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS PAGE
--------------------------------- ----
<S> <C>
Accountants' Report 3
Consolidated Balance Sheets -
April 30, 1999 and July 31, 1999 5
Consolidated Statements of Operations -
Three Months Ended April 30, 2000 and 1999 7
Consolidated Statements of Comprehensive Operations -
Three Months Ended April 30, 2000 and 1999 8
Consolidated Statements of Operations -
Nine Months Ended April 30, 2000 and 1999 9
Consolidated Statements of Comprehensive Operations -
Nine Months Ended April 30, 2000 and 1999 10
Consolidated Statements of Cash Flows -
Nine Months Ended April 30, 2000 and 1999 11
Notes to Consolidated Financial Statements 13
</TABLE>
3
<PAGE>
ACCOUNTANTS' REPORT
Shareholders and Board of Directors
Sel-Drum International, Inc. and Subsidiaries
We have reviewed the consolidated balance sheet of Sel-Drum International,
Inc. and Subsidiaries as of April 30, 2000, and the related consolidated
statements of operations, and comprehensive operations for the three month
and nine month periods ended April 30, 2000, and cash flows for the nine
month period ended April 30, 2000 included in the accompanying Securities and
Exchange Commission Form 10-QSB for the period ended April 30, 2000. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of July 31, 1999, and the
related consolidated statements of operations, comprehensive operations,
changes in shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated September 24, 1999, we expressed
an unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying consolidated balance
sheet as of July 31, 1999 is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
4
<PAGE>
The accompanying consolidated statements of operations, and comprehensive
operations for the three month and nine month periods ended April 30, 1999,
and cash flows for the nine month period ended April 30, 1999 were compiled
by us in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. A
compilation is limited to presenting, in the form of financial statements,
information that is the representation of management. We have not audited or
reviewed the consolidated statements of operations, and comprehensive
operations for the three month and nine month periods ended April 30, 1999,
and cash flows for the nine month period ended April 30, 1999 and,
accordingly, do not express an opinion or any other form of assurance on them.
/s/ Mengel, Metzger, Barr & Co. LLP
Rochester, New York
June 7, 2000
5
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, July 31,
ASSETS 2000 1999*
---------- ----------
(Reviewed) (Audited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 229,627 $ 202,965
Accounts receivable, net of allowance for doubtful
accounts of $116,000 and $100,000 respectively 2,217,705 1,877,050
Inventories 3,463,557 3,007,597
Refundable income taxes - 49,027
Deferred income taxes 38,000 38,000
Other current assets 175,549 101,710
---------- ----------
TOTAL CURRENT ASSETS 6,124,438 5,276,349
PROPERTY
Equipment 1,077,564 989,118
Vehicles 13,922 13,922
Furniture and fixtures 84,795 80,050
Leasehold improvements 419,002 412,109
---------- ----------
1,595,283 1,495,199
Less accumulated depreciation and amortization 1,076,064 930,822
---------- ----------
519,219 564,377
OTHER ASSETS
Notes receivable from related parties 1,562,200 -
Non-competition agreement, net of accumulated
amortization of $28,053 and $18,702, respectively 15,585 24,936
Sundry, principally deposits 10,833 11,885
---------- ----------
1,588,618 36,821
---------- ----------
$8,232,275 $5,877,547
---------- ----------
---------- ----------
</TABLE>
* - Derived from the Form 10-KSB
See accountants' report and accompanying notes which are an integral part of
the consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
April 30, July 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999*
---------- ----------
(Reviewed) (Audited)
<S> <C> <C>
CURRENT LIABILITIES
Bank overdraft $ 133,558 $ -
Note payable to bank 1,311,149 -
Current portion of long-term debt 67,477 31,827
Accounts payable 716,938 404,162
Income taxes payable 189,428 -
Other current liabilities - 321,878
---------- ----------
TOTAL CURRENT LIABILITIES 2,418,550 757,867
OTHER LIABILITY
Long-term debt 236,184 -
SHAREHOLDERS' EQUITY
Common stock 74,175 76,425
Additional paid-in capital 609,096 706,846
Preferred stock 4,499,805 4,499,805
Retained earnings 680,843 211,222
Accumulated other comprehensive loss (286,378) (274,618)
---------- ----------
5,577,541 5,219,680
Less: Common stock in treasury, at cost - 100,000
---------- ----------
5,577,541 5,119,680
---------- ----------
$8,232,275 $5,877,547
---------- ----------
---------- ----------
</TABLE>
* - Derived from the Form 10-KSB
7
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended April 30,
-----------------------------
2000 1999
---------- ----------
(Reviewed) (Compiled)
<S> <C> <C>
Net sales $4,032,260 $4,303,357
Cost of goods sold 2,827,550 3,132,634
---------- ----------
GROSS PROFIT 1,204,710 1,170,723
Selling, administrative and general
expenses 911,323 837,924
Bad debts 11,127 23,024
---------- ----------
INCOME FROM OPERATIONS 282,260 309,775
Other income (expense):
Interest income 46,632 1,884
Interest expense (54,483) (17,725)
Foreign currency transaction gain (loss) 5,689 (37,210)
---------- ----------
(2,162) (53,051)
---------- ----------
INCOME BEFORE INCOME TAXES 280,098 256,724
Income tax expense 112,039 91,145
---------- ----------
NET INCOME $ 168,059 $ 165,579
---------- ----------
---------- ----------
Net income per common share:
Basic and diluted $ 0.02 $ 0.02
---------- ----------
---------- ----------
Weighted average:
Common shares 7,417,500 7,459,167
Dilutive stock options - -
---------- ----------
COMMON SHARES AND DILUTIVE STOCK OPTIONS 7,417,500 7,459,167
---------- ----------
---------- ----------
</TABLE>
See accountants' report and accompanying notes which are an integral part of
the consolidated financial statements.
8
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
<TABLE>
<CAPTION>
Three months ended April 30,
-----------------------------
2000 1999
---------- ----------
(Reviewed) (Compiled)
<S> <C> <C>
Net income $168,059 $165,579
Other comprehensive (loss) income:
Foreign currency translation adjustment (12,466) 61,060
-------- --------
COMPREHENSIVE INCOME $155,593 $226,639
-------- --------
-------- --------
</TABLE>
See accountants' report and accompanying notes which are an integral part of
the consolidated financial statements.
9
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended April 30,
------------------------------
2000 1999
------------ ------------
(Reviewed) (Compiled)
<S> <C> <C>
Net sales $ 11,498,975 $ 11,006,239
Cost of goods sold 8,075,349 7,945,612
------------ ------------
GROSS PROFIT 3,423,626 3,060,627
Selling, administrative and general
expenses 2,576,669 2,408,754
Bad debts 43,284 55,493
------------ ------------
INCOME FROM OPERATIONS 803,673 596,380
Other income (expense):
Interest income 56,075 2,764
Interest expense (88,024) (45,718)
Foreign currency transaction gain (loss) 17,319 (28,536)
------------ ------------
(14,630) (71,490)
------------ ------------
INCOME BEFORE INCOME TAXES 789,043 524,890
Income tax expense 319,422 210,313
------------ ------------
NET INCOME $ 469,621 $ 314,577
------------ ------------
------------ ------------
Net income per common share:
Basic and diluted $ 0.06 $ 0.04
------------ ------------
------------ ------------
Weighted average:
Common shares 7,417,500 7,459,167
Dilutive stock options - -
------------ ------------
COMMON SHARES AND DILUTIVE STOCK OPTIONS 7,417,500 7,459,167
------------ ------------
------------ ------------
</TABLE>
See accountants' report and accompanying notes which are an integral part of the
consolidated financial statements.
10
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
<TABLE>
<CAPTION>
Nine months ended April 30,
------------------------------
2000 1999
------------ ------------
(Reviewed) (Compiled)
<S> <C> <C>
Net income $ 469,621 $ 314,577
Other comprehensive (loss) income:
Foreign currency translation adjustment (11,760) 65,871
------------ ------------
COMPREHENSIVE INCOME $ 457,861 $ 380,448
------------ ------------
------------ ------------
</TABLE>
See accountants' report and accompanying notes which are an integral part of the
consolidated financial statements.
11
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended April 30,
-----------------------------
2000 1999
------------ ------------
(Reviewed) (Compiled)
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net income $ 469,621 $ 314,577
Adjustments to reconcile net income to
net cash (used for) provided from
operating activities:
Bad debts 43,284 55,493
Depreciation and amortization 154,593 183,247
Deferred income taxes - 53,903
Changes in certain assets and liabilities
affecting operations:
Accounts receivable (383,939) (631,919)
Inventories (455,960) 411,303
Refundable income taxes 49,027 -
Other current assets (73,839) 147,613
Deposits 1,052 (74)
Accounts payable 312,776 (176,110)
Income taxes payable 189,428 -
Other current liabilities (321,878) 105,778
------------ ------------
NET CASH (USED FOR) PROVIDED FROM
OPERATING ACTIVITIES (15,835) 463,811
CASH FLOWS - INVESTING ACTIVITIES
Purchases of property (100,084) (164,658)
------------ ------------
NET CASH USED FOR
INVESTING ACTIVITIES (100,084) (164,658)
CASH FLOWS - FINANCING ACTIVITIES
Increase (decrease) in bank overdraft 133,558 (211,063)
(Increase) decrease in notes receivable from
related parties (1,562,200) 39,846
Short-term borrowings (repayments), net 1,311,149 (105,091)
Borrowings on long-term debt 337,400 -
Repayments on long-term debt (65,566) (138,083)
Repurchase of common stock - (83,332)
------------ ------------
NET CASH PROVIDED FROM (USED FOR)
FINANCING ACTIVITIES 154,341 (497,723)
Effect of exchange rate changes on cash (11,760) 65,871
------------ ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 26,662 (132,699)
Cash and cash equivalents at beginning of period 202,965 285,750
------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 229,627 $ 153,051
------------ ------------
------------ ------------
</TABLE>
12
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONT'D
<TABLE>
<CAPTION>
Nine months ended April 30,
-----------------------------
2000 1999
------------ ------------
(Reviewed) (Compiled)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 88,024 $ 45,718
------------ ------------
------------ ------------
Income taxes $ 80,967 $ 50,557
------------ ------------
------------ ------------
NON-CASH FINANCING ACTIVITY
Retirement of treasury stock $ 100,000 $ -
------------ ------------
------------ ------------
</TABLE>
See accountants' report and accompanying notes which are an integral part of the
consolidated financial statements.
13
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(See Accountants' Report)
APRIL 30, 2000
NOTE A: UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
The unaudited consolidated interim financial statements presented
herein have been prepared by Sel-Drum International, Inc. (the
"Company") in accordance with the accounting policies described in its
July 31, 1999 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 April 30,
2000 is as follows:
<TABLE>
<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% at April 30, 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% at April 30, 2000). There are currently no repayment
terms for the outstanding balance. 1,012,200
----------
$1,562,200
----------
----------
</TABLE>
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).
14
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
(See Accountants' Report)
APRIL 30, 2000
NOTE C: NOTES PAYABLE TO BANK
Sel-Drum Corporation has several debt arrangements with a Canadian
bank, summarized as follows:
FACILITY A: $2,834,160 revolving demand loan ($4,200,000 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 1.5% (an effective rate of 8.5% at April 30,
2000). This arrangement may be drawn upon by Sel-Drum Corporation and
Sel-Drum Corporation (U.S.A.), Inc. At April 30, 2000, outstanding
borrowings under Facility A were $1,311,149. Letters of credit (see
Facility B below), reduce the amount of borrowings available under the
terms of the arrangement.
FACILITY B: This arrangement provides the Company with letters of
credit to purchase inventories, up to an amount approximating
$1,012,200 ($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.
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.
FACILITY E: $236,180 ($350,000 Canadian dollars) facility to provide
for the purchase of up to $1,180,900 ($1,750,000 Canadian dollars) of
forward exchange contracts in various foreign currencies. Borrowings
are subject to the outstanding balance of Facility A cited above. At
April 30, 2000, the Company had outstanding forward exchange contracts
aggregating $375,000, which reduced the availability for borrowing
under Facility A by $75,000.
At April 30, 2000 the Company had $1,448,011 available for borrowing under these
arrangements.
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 $2,361,800 ($3,500,000 Canadian dollars), and the limited
corporate guarantee of Sel-Drum Corporation (U.S.A.), Inc. in the amount of
$1,012,200 ($1,500,000 Canadian dollars). Further, the arrangements contain
various covenants, which provide for, among other things, the maintenance of
certain ratios and dividend restrictions.
15
<PAGE>
SEL-DRUM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D
(See Accountants' Report)
APRIL 30, 2000
NOTE D: LONG-TERM DEBT
Long-term debt at April 30, 2000 is summarized as follows:
<TABLE>
<S> <C>
Term note payable to financial institution, due in equal monthly
installments of $5,623 plus interest at the Canadian prime rate
plus 1.5% (effective rate of 8.5% at April 30, 2000), through
October 2004. $303,661
Less: Current portion of long-term debt 67,477
--------
$236,184
--------
--------
</TABLE>
The maturity of the long-term debt portion is as follows:
<TABLE>
<CAPTION>
Annual period ending
--------------------
<S> <C>
April 30, 2002 $ 67,476
April 30, 2003 67,476
April 30, 2004 67,476
April 30, 2005 33,756
--------
$236,184
--------
--------
</TABLE>
NOTE E: COMMON STOCK
The following is certain information regarding common stock as of
April 30, 2000:
<TABLE>
<CAPTION>
Common stock
------------
<S> <C>
Par value $0.01
Shares authorized 100,000,000
Shares issued and outstanding 7,417,500
</TABLE>
16
<PAGE>
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 of the Company between C. Cotran
Holding Inc., a company incorporated under the laws of Canada 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, between 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 shares of 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.
The National Bank of Canada (the "Bank") agreed to make available a global
financing in the amount of $6,000,000 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.
On January 13, 2000, an amending agreement was signed whereby the purchase
price was adjusted by $20,000 as a final post-closing adjustment in
accordance with the terms of the Stock Purchase Agreement.
At a Board of Directors meeting held on November 17, 1999, the directors
approved a resolution to cancel 225,000 shares of common stock held by the
Company as treasury stock and these shares were restored to authorized but
unissued shares.
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 programs. 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 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
17
<PAGE>
and Sel-Drum Corporation (U.S.A.), Inc. It should be noted that approximately
95% of the Kelowna Facility's 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 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 as of the year
ended July 31, 1999 and in consequence a loss of $394,006.00 was recorded
against earnings.
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 presently evaluating all its options as to its listing on the
NASDAQ Bulletin Board.
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 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 NINE MONTHS ENDED
------------------ -----------------
April 30, April 30, April 30, April 30,
STATEMENT OF OPERATIONS DATA 2000 1999 2000 1999
---------------------------- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
As a Percentage of Net Sales:
Cost of Goods Sold 70.1% 72.8% 70.2% 72.2%
Gross Profit 29.9% 27.2% 29.8% 27.8%
Selling, General and Administrative Expenses 22.6% 19.5% 22.4% 21.9%
Provision for Bad Debt 0.3% 0.5% 0.4% 0.5%
Income from Operations 7.0% 7.2% 7.0% 5.4%
Other Income (Expense) (0.1)% (1.2)% (0.1)% (0.6)%
Income before Taxes 6.9% 6.0% 6.9% 4.8%
Net Income 4.2% 3.8% 4.1% 2.9%
</TABLE>
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Net sales for the three months ended April 30, 2000 were $4,032,260 as
compared with $4,303,357 for the three months ended April 30, 1999, a
decrease of 6.3%. For the nine months ended April 30, 2000, net sales were
$11,498,975, as compared with $11,006,239 for the nine months ended April 30,
1999, an increase of 4.5%. The increase in sales for the nine months ended
April 30, 2000 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.
Gross profit margin for the three months ending April 30, 2000 was 29.9%, as
compared to 27.2% for the same period last year. For the nine months ended
April 30, 2000, gross profit margin was 29.8% as compared to 27.8% for the
nine months ended April 30, 1999. The gross profit in absolute dollars
increased by $33,987 and $362,999 for the three and nine month periods,
respectively.
Selling, general, and administrative expenses for the three months ended
April 30, 2000 increased $73,399 or 8.8% from the prior comparable period.
For the nine months ended April 30, 2000, selling, general and administrative
expenses in absolute dollars increased by $167,915 or 7%. Selling, general,
and administrative expenses were 22.4% of net sales for the nine-month period
ended April 30, 2000 as compared to 21.9% for the same period last year. The
increase for the nine-month period resulted primarily from timing of sales
commissions and bonuses following the trend in sales, and increased sales and
computer training expenses for new products and the new computer system.
The interest expense for the nine months ended April 30, 2000 increased by
$42,306 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 April 30,
2000 increased from $165,579 to $168,059 and represents 4.2% of net sales.
For the nine months ended April 30, 2000 net income increased from $314,577
to $469,621 and represents 4.1% of net sales.
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 nor
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 nine month
period ended April 30, 2000, the financing activities provided net cash of
$154,341 which the Company used for operations ($15,835) and to purchase
fixed assets ($100,084). As a result, the net increase in cash of $26,662 for
the nine-month period ended April 30, 2000 shows an improvement compared to a
net decrease in cash of $132,699 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 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$2,834,160 ($4,200,000 Canadian).
These borrowings generally assist the Company with
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funding of accounts receivable and inventory purchases for an amount of
US$2,159,000 ($3,200,000 Canadian). As at October 29, 1999, the revolving
demand loan was increased by US$337,400. ($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$337,400
($500,000 Canadian) was granted to the company.
The additional financing provided by the Bank was used to lend to
Densigraphix an amount of US$1,012,200 ($1,500,000 Canadian dollars). The
note receivable carries an interest rate of prime + 1% and no repayment term.
As at April 30, 2000 outstanding borrowing of US$1,311,149 existed under this
arrangement. An amount of $674,800 ($1,000,000 Canadian) was used as part of
the stock purchase financing and the balance US$636,349 ($943,020 Canadian)
was used in operations.
In March 2000, Sel-Drum International advanced an additional US$550,000.
($815,000 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.
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 June 14, 2000 /s/ Camille Cotran, Chairman and CEO
------------------ ----------------------------------------
Date June 14, 2000 /s/ John C. Hall, Vice-President, Finance
------------------ -----------------------------------------
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INDEX TO EXHIBITS
<TABLE>
<S> <C>
(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
</TABLE>
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