UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-27520
SDC International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2583767
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2065 Montgomery Street, Ft. Worth, FL 76107
(Address of principal executive offices) (Zip Code)
(561) 882-9300
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has 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 [xx] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Common stock, par value $.001 per share: 3,819,119 shares outstanding as of
June 30, 1998.
<PAGE>
SDC INTERNATIONAL, INC. AND SUBSIDIARY
INDEX
PART 1 - FINANCIAL INFORMATION:
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited) June 30, 1998
and December 31, 1997 1
Consolidated Statements of Operations (Unaudited)
for the three months ended June 30, 1998
and May 31, 1997 2
Consolidated Statements of Operations (Unaudited)
for the six months ended June 30, 1998
and May 31, 1997 3
Consolidated Statement of Stockholders' Equity
(Unaudited) for the six months ended June 30, 1998 4
Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 1998
and May 31, 1997 5
Notes to Consolidated Financial Statements 6 - 13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14 - 16
PART II - OTHER INFORMATION 18
<PAGE> 1
SDC INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash $ 37,163 $ 104,997
Cash - restricted 80,960 80,960
Accounts receivable 132,742 150,634
Inventory 511,824 437,798
Prepaid expenses 8,912 17,528
Total current assets 771,601 791,917
Machinery and equipment, net 3,263,716 3,398,363
Other assets:
Exclusive agency rights, net 183,584 231,524
Customer list, net 46,875 103,125
Deferred offering costs 50,000 50,000
Organizational costs 4,459 6,369
Other assets 174,736 -
Total other assets 459,654 391,018
Total assets $ 4,494,971 $ 4,581,298
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,364 $ 67,639
Accounts payable - related party 53,477 13,477
Accrued expenses 150,678 81,207
Note payable - short term 265,100 100,100
Line of credit 71,428 -
Due to stockholder 65,539 15,739
Total current liabilities 624,586 278,162
Excess of net assets acquired over cost 512,804 540,804
Commitments and contingencies (Note 5) - -
Stockholders' equity:
Common stock $.001 par value; authorized: 10,000,000
shares; issued and outstanding: 3,819,119 and
2,990,118 shares, respectively 3,819 2,990
Additional paid-in capital 7,886,791 6,853,867
Accumulated deficit (4,429,941) (2,925,233)
Subtotal 3,460,669 3,931,624
Deferred costs (103,088) (169,292)
Total stockholders' equity 3,357,581 3,762,332
Total liabilities and stockholders' equity $ 4,494,971 $ 4,581,298
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 2
SDC INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, May 31,
1998 1997
<S> <C> <C>
Sales $ 43,399 $ -
Cost of goods sold 21,392 -
Gross profit 22,007 -
Expenses:
Selling, general and administrative 360,468 136,943
Depreciation and amortization 135,010 117,152
Stock based consulting and compensation 202,350 -
Total expenses 697,828 254,095
Loss from operations before other income and provision
for income taxes (675,821) (254,095)
Other income (expense):
Interest income 74 1,358
Interest expense (15,163) (11,824)
Amortization of excess of net assets acquired over costs 14,000 -
Foreign currency exchange gain (loss) 34,495 -
Total other income (loss) 33,406 (10,466)
Loss before provision for income taxes (642,415) (264,561)
Provision for income taxes 121 -
Net loss $ (642,294) $ (264,561)
Loss per share:
Basic and diluted:
Net loss $ (.18) $ (.12)
Weighted average number of shares outstanding 3,632,980 2,289,011
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 3
SDC INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, May 31,
1998 1997
<S> <C> <C>
Sales $ 61,937 $ 18,384
Cost of goods sold 29,077 15,738
Gross profit 32,860 2,646
Expenses:
Selling, general and administrative 640,706 237,991
Depreciation and amortization 260,500 226,393
Stock based consulting and compensation 698,864 -
Total expenses 1,600,070 464,384
Loss from operations before other income and provision
for income taxes (1,567,210) (461,738)
Other income (expense):
Amortization of excess of net assets acquired over costs 28,000 -
Interest income 112 3,066
Interest expense (20,753) -
Foreign currency exchange gain (loss) 55,143 -
Total other income (expense) 62,502 3,066
Loss before provision for income taxes (1,504,708) (458,672)
Provision for income taxes - -
Net loss $ (1,504,708) $ (458,672)
Loss per share:
Basic and diluted:
Net loss $ (.43) $ (.21)
Weighted average number of shares outstanding 3,495,952 2,214,858
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 4
SDC INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Total
Common Stock paid-in Accumulated Deferred Stockholders'
Shares Amount capital Deficit Costs Equity
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 2,990,118 $ 2,990 $ 6,853,867 $(2,925,233) $ (169,292) $ 3,762,332
Issuance of common stock in
connection with private placement
memorandum, net of offering costs
of $32,955 169,001 169 220,378 - - 220,547
Issuance of common stock pursuant
to 1997 non qualified stock option
plan 450,000 450 621,131 - - 621,581
Issuance of common stock for services 140,000 140 126,560 - - 126,700
Issuance of stock pursuant to loan
agreement 70,000 70 64,855 - (29,925) 35,000
Amortization of deferred costs - - - - 96,129 96,129
Net loss for the six months ended
June 30, 1998 - - - (1,504,708) - (1,504,708)
Balances at June 30, 1998 3,819,119 $ 3,819 $ 7,886,791 $(4,429,941) $ (103,088) $ 3,357,581
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
SDC INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, May 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,504,708) $ (409,036)
Adjustments to reconcile net loss to net
cash (used for) provided by operating activities:
Amortization and depreciation 327,908 234,303
Issuance of stock for services 748,283 -
Decrease (increase) in:
Accounts receivable 17,892 (105,134)
Inventory (74,026) -
Restricted cash - -
Other assets (174,736) -
Prepaid expenses (759) 6,000
Increase (decrease) in:
Accounts payable (49,275) -
Accounts payable - related party 40,000 404,680
Accrued expenses 36,516 (39,060)
Net cash (used for) provided by operating
activities (632,905) 91,753
Cash flows from investing activities:
Purchase of machinery and equipment (9,657) -
Net cash used for investing activities (9,657) -
Cash flows from financing activities:
Proceeds from issuance of notes payable 271,428 25,000
Proceeds from stockholder 49,800 1,600
Proceeds from sale of common stock 253,500 190,678
Cost associated with private placement memorandum
and sale of common stock - (16,705)
Net cash provided by financing activities 574,728 200,573
Net (decrease) increase in cash (67,834) 292,326
Cash, at beginning of period 104,997 (788)
Cash ,at end of period $ 37,163 $ 291,538
Supplemental disclosures of non-cash flow information:
Cash paid for:
Interest $ 1,321 $ 12,200
Income taxes $ 3,681 $ -
Supplemental disclosure of non-cash operating and
financing activities:
Issuance of common stock as consideration for loans $ 29,925 $ -
Issuance of common stock as repayment of advance $ 35,000 $ -
Accrual of commissions and expenses on stock sales $ 32,955 $ -
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
SDC INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
NOTE 1 - GENERAL
SDC International, Inc. ("the Company") was incorporated in the state of
Delaware on June 30, 1994. The accompanying financial statements include the
accounts of the Company, and its wholly-owned subsidiary, Skobal, s.a. The
Company's equipment is located in the Czech Republic. Effective August 1998,
in connection with the Company's planned acquisition of a significant portion
of Tatra, a.s., the Company changed its year end from August 31 to December
31. This change became effective from the last annual reporting period,
August 31, 1997, resulting in a transitional report for the period September
1, 1997 through December 31, 1997. The Company has previously filed Form
10-QSB for the quarters ending November 30, 1997, February 28, 1998 and May
31, 1998.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management the interim consolidated financial
statements include all adjustments necessary in order to make the consolidated
financial statements not misleading. The results of operations for the three
and six months ended are not necessarily indicative of the results to be
expected for the full year. For further information, refer to the Company's
audited consolidated financial statements and footnotes thereto at August 31,
1997, included in the Company's Form 10-KSB and the Company's unaudited
consolidated financial statements and footnotes thereto at December 31, 1997,
included in the Company's transition report Form 10-QSB, filed with the
Securities and Exchange Commission.
Certain reclassifications have been made to the May 31, 1997 financial
statements in order to conform to the June 30, 1998 presentation.
NOTE 2 - EXCLUSIVE AGENCY RIGHTS, NET
On April 21, 1994, one of the founding shareholders executed an exclusive
agency representation letter agreement as agent of the Company with Diesel,
a.s. (Formerly Skoda Diesel, a.s. ("Skoda"), pursuant to which the Company was
appointed as Skoda's exclusive sales agent in North, South and Central America
with the exception of the country of Peru. In order for the Company to
maintain its exclusively, it must generate annual gross sales with in the
territory of at least $15,000,000 at the close of its sixth year, (April
1999), after the execution of the agreement. As consideration for the
purchase of these exclusive agency rights, the Company has issued 51,650
shares of its common stock to Skoda. Such stock has been assigned a value of
50% of the private offering per share price of $2.50. Accordingly, the
company has valued such exclusively agency rights at $64,563 which is being
amortized on a straight-line basis over 5 years. As a result, for each of the
six months ended June 30, 1998 and May 31, 1997, the company recorded
amortization expense of $6,456.
In October 1995 the Company purchased the exclusive rights to market and sell
Skoda Diesel products into the countries of China and South Korea based upon
the following terms.
<PAGE> 7
SDC INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
NOTE 2 - EXCLUSIVE AGENCY RIGHTS, NET (Cont'd)
South Korea
i) During the year 1997, sales to South Korea must be in the amount of
least $2,400,000.
ii) During the year 1998, sales to South Korea must be in the amount of
$3,600,000.
iii) Each year thereafter, sales to South Korea must be in the amount of
at least $5,000,000.
The Company paid Skoda, a one time fee of $50,000 for the acquisition of such
exclusive rights.
China
i) During the year 1997, sales to China must be in the amount of at
least $3,000,000.
ii) During the year 1998, sales to China must be in the amount of at
least $4,500,000.
iii) During the year 1999, sales to China must be in the amount of at
least $6,000,000.
The Company paid Skoda a one time fee of $100,000 for the acquisition of such
exclusive rights. The agency rights from China and Korea are amortized on a
monthly basis over five years. For each of the six months ended June 30,
1998 and May 31, 1997, the company has recorded $21,456 in amortization
expense.
On April 18, 1996, the Company entered into a modification agreement whereby
all such sales levels were postponed for one year.
NOTE 3 - NOTES PAYABLE
a) The Company had two bank lines-of-credit which provided short-term
borrowings up to $220,000. Interest on advances was payable quarterly at a
fixed rate of 4.32%. The lines-of-credit expired on October 19, 1997 and were
secured by a certificate of deposit amounting to $250,000. During October
1997, the certificate of deposit was redeemed and such lines of credit were
repaid.
b) During October 1997, the Company borrowed $100,100 from an individual
which is payable in 180 days (which has been extended) at an interest rate of
14%. In connection with such borrowing, the Company issued 15,000 common
shares as additional consideration. See Note 4(c). The issuance of such
shares results in an effective interest rate of 40%. As of June 30, 1998,
the balance of the note was $65,100 and the Company had accrued $8,733 of
interest and amortized $13,125 of deferred interest in relation to this note.
c) During June 1998, the Company borrowed $100,000 from a shareholder which
is payable in 90 days at an interest rate of 14% per annum. In connection
with such borrowing, the Company issued 20,000 common shares as additional
consideration. See Note 4(c). The issuance of such shares results in an
effective interest rate of 82%. As of June 30, 1998, the Company had accrued
$1,150 of interest and amortized $5,700 of deferred interest in relation to
this note.
<PAGE> 8
SDC INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
NOTE 3 - NOTES PAYABLE (Cont'd)
d) During June 1998, the Company borrowed $100,000 from a shareholder which
is payable in 180 days at an interest rate of 14% per annum. In connection
with such borrowing, the Company issued 15,000 common shares as additional
consideration. See Note 4(c). The issuance of such shares results in an
effective interest rate of 40%. As of June 30, 1998, the Company had accrued
$1,150 of interest and amortized $2,138 of deferred interest in relation to
this note.
NOTE 4 - STOCKHOLDERS' EQUITY
a) Private Placement Memorandum
On February 24, 1997, the Company commenced and privately offered pursuant to
rule 505, Regulation D, on a best efforts basis, no more than 500,000 shares
of common stock in a ninety-day period (before extensions) of its $.001 par
value common stock at $1.50 per share before deducting discounts, commissions
and non-accountable expenses. During the six months ended June 30, 1998, the
Company sold an aggregate of 169,001 shares yielding net proceeds of $220,545.
b) 1997 Non-qualified stock option plan
On September 5, 1997, the Company established a Non-Qualified Stock Option
Plan ("the Plan") pursuant to which 750,000 shares of common stock are
reserved for issuance. The option price per share is determined by the Board
of Directors at the time any options are granted. The Plan is designed to
serve as an incentive for retaining qualified and competent persons who are
key employees, consultants, representative, officers and directors of the
Company. During the three and six months ended June 30, 1998, the Company
issued 241,500 and 450,000 shares pursuant to the Plan. Such shares have been
valued at $338,542 and $621,581 representing 75% of the average market value
during the month of issuance as a result of the illiquidity of the Company's
stock. In connection with the issuance of such shares, the Company has
recorded $621,581 as stock-based compensation for the six months ended June
30, 1998. Amortization of deferred costs for the three and six months ended
June 30, 1998, amounted to $48,600 and $97,200, respectively.
c) Deferred interest
In connection with the obtaining of loans (Note 3(b), 3(c) and 3(d)), the
Company issued 15,000, 20,000, and 15,000, shares of common stock,
respectively, as additional consideration. Such shares have been recorded at
50% of the average market value of the stock during the month of issuance as a
result of the illiquidity of the Company's stock. Accordingly, the Company
has recorded deferred interest of $13,125, $17,100 and $12,825, respectively,
which is being amortized over the term of the loans. For the three and six
months ended June 30, 1998, amortized interest amounted to $7,838 and $15,129.
<PAGE> 9
SDC INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
NOTE 4 - STOCKHOLDERS' EQUITY (Cont'd)
d) Stock-based consulting
During the six months ended June 30, 1998, the Company issued 140,000 shares
of restricted common stock for services by two individuals. Such shares have
been valued at $126,700 representing 50% of the average market value when
issued as a result of the illiquidity of the Company's stock and the
restricted nature of the shares issued. No shares of common stock were issued
for services during the three months ended June 30, 1998.
e) Issuance of common stock for acquisition of customer list
Pursuant to a purchase agreement dated December 2, 1995 between the Company
and an unrelated party, the Company acquired certain assets comprising of
supplier and customer lists. As consideration for such assets, the Company
paid $150,000 and issued 150,000 shares of its $.001 par value common stock.
Such stock has been assigned a value of 50% of the private offering per share
price of $2.50. Accordingly, the Company valued such assets at a total of
$337,500 comprising of $150,000 in cash and $187,500 of common stock.
Management has elected to amortize such assets over the life of the management
agreement of three years. Accordingly, for the six months ended June 30, 1998
and May 31, 1997, the Company recorded amortization expense amounting to
$56,250 and $56,250, respectively.
f) Note payable
During the six months ended June 30, 1998, the Company issued 35,000 shares of
restricted common stock in repayment of an advance by a shareholder. Such
shares have been valued at the amount of the advance of $35,000.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
a) Lease agreement
The Company leases its administrative office pursuant to signed lease
agreement commencing July 1, 1995 and expiring on June 30, 1997. Such lease
requires monthly payments of $3,500. Effective December 1996, the Company
terminated this lease. Prior to July 1, 1995 the Company maintained its
administrative office on a month to month basis, free of charge at the office
of Worth. Worth is an entity which the Chairman of the Company is also a 50%
shareholder. Effective January 1, 1998, the Company entered into a new lease
for a one year term. Such lease requires monthly payments of $2,000.
Included in general and administrative expenses is rent expense which amounted
to $14,134 and $9,318 for the three months ended June 30, 1998 and May 31,
1997, respectively and $28,268 and $36,499 for the six months ended June 30,
1998 and May 31, 1997, respectively.
<PAGE> 10
SDC INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Cont'd)
b) Significant customers and vendors
For the six months ended May 31, 1997, the Company purchased 100% of its cost
of goods sold from two of its founding stockholders, Skoda and Double. No
purchases were made from Skoda and Double during the six months ended June 30,
1998.
c) Concentration of credit risk
Due to its current limited sales, the Company has a high concentration of
credit risk until such transactions are completed. The Company is actively
seeking sales outside of the United States. If such sales occur, the revenue
and subsequent collections will be subject to the fluctuations such sales
generate, both from currency and political changes. The Company's machinery
and equipment is located in the Czech Republic. The Company's primary source
of inventory is currently Skoda and Tatra and as such, it is subject to
Skoda's and Tatra's risks of business and its continued financial health, as
well as the risks associated with foreign businesses, both from currency and
political changes.
d) Management agreement
On December 15, 1995 the Company and Worth entered into a management agreement
with an individual for a period of three years. Pursuant to such agreement,
the individual shall devote such time, attention and efforts to management
services as may be reasonably required by the Company and Worth. The Company
and Worth will pay such individual an amount equal to twenty-five percent
(25%) of the gross profit from sales made by the Company. Such payments are
payable monthly after the collection of receivables from said sales. There
are no amounts currently payable under this agreement.
e) Letter of intent
On October 10, 1997, the Company signed a Letter of Intent with an underwriter
to proceed on a "Firm Commitment" basis with a secondary offering of the
Company's Common Stock and redeemable Warrants ("the Warrants"). The Company
will offer 1,000,000 shares of Common Stock and 1,000,000 Warrants. The
1,000,000 shares and Warrants will be offered to the public at a price of
$6.00 per share and $.125 per Warrant, respectively. The total gross
offering amounts to $6,125,000.
Each Warrant, which is redeemable in 60 months, entitles the holder thereof to
purchase one share of Common Stock at 120% of the offering price of Common
shares. The warrant may be redeemed by the Company at $.10 each after the
common shares have traded at 150% of the offering price of the common shares
for 10 consecutive days. Due to the current progress of negotiations with
potential strategic partners, this offering is postponed by management.
<PAGE>
SDC INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Cont'd)
f) Finder's fee agreement
On May 20, 1996, the Company entered into a finder's fee agreement with Prime
Charter, Ltd ("Prime") for a period of ten years, renewable for additional
five year periods. Pursuant to such agreement, any sales to entities
introduced to the Company by Prime shall result in a finder's fee to Prime of
two percent (2%) of the gross sales price or ten percent (10%) of the adjusted
gross profit resulting from the sales. Such payments are due 45 days after
each quarter-annual calendar period.
g) Dependence on Skoda and Tatra
The Company's operations are dependent on Skoda and Tatra since Skoda and
Tatra are responsible for the manufacturing of all of the Company's products
and for making available sufficient inventory. The Company faces risks of the
inability to obtain products in the event of production problems of Skoda or
Tatra due to labor problems, governmental regulations, working capital
deficiencies, political unrest and other problems which may result in the
inability of Skoda or Tatra to fulfill orders of the Company.
h) Line of Credit
During the June 1998, the Company obtained an unsecured $500,000 line of
credit from a shareholder with an interest rate at fourteen percent (14%) per
annum. The Company may borrow from the credit line up to $35,714 in any one
week. Principal and interest are payable on December 18, 1998. If the
Company is not able to pay such principal and interest when due, the principal
balance of the line of credit and any outstanding accrued interest may be
converted into common stock at the rate of $1 per share. The amount
outstanding at June 30, 1998 under this agreement is $71,428.
NOTE 6 - RELATED PARTY TRANSACTIONS
a) Acquisition of exclusive agency rights
In October 1995, the Company purchased the exclusive rights to market and sell
Skoda products into the countries of China and South Korea. In consideration
for these rights the Company paid Skoda $150,000.
b) Accounts payable
At June 30, 1998, the Company had accounts payable totaling $53,477 which was
due to Double Seal Ring Company, one of its founding shareholders.
c) Due to officer
The Company's Chief Executive Officer and shareholder advances funds to or on
behalf of the Company. As of June 30, 1998, $65,539 was owed to such
officer. Such advances are non interest bearing and due on demand.
<PAGE> 11
SDC INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
NOTE 6 - RELATED PARTY TRANSACTIONS (Cont'd)
d) Management fees
For the six months ended June 30, 1998 and May 31, 1997, the Company recorded
$137,984 and $18,000 respectively for management fees and travel allowance to
the Chief Executive Officer and the President.
e) Rent Expense
Effective January 1, 1998, the Company rents its executive office on a month
to month basis from its Chief Executive Officer with monthly payments
amounting to approximately $2,000.
NOTE 7 - SUBSEQUENT EVENTS
a) Due to shareholder
During July 1998, the Chief Executive Officer advanced $17,000 to the Company.
Such advances are non interest bearing and due on demand.
b) Acquisition
During July 1998, the Company entered into a letter of intent to purchase
43.5% of the Czech truck manufacturer, Tatra a.s., for approximately $13.6
million. In addition, the Company will purchase Tatra's senior secured loan
from the bank holding such note, with an approximate balance of $89.5 million,
for approximately $30 million. Both agreements are anticipated to close
September 30.
There is no assurance that the transaction will be completed since the Company
must obtain sufficient capital to complete the acquisition, thus, no pro forma
financial information has been presented. The following information is from
Tatra's audited financial statements. Tatra had sales of approximately $290
million for the year ended December 31, 1997. At December 31, 1997, Tatra had
total assets of approximately $230 million.
c) Note payable
During August 1998, the Company borrowed $350,000 from a shareholder which is
payable in 180 days at an interest rate of 14% per annum. In connection with
such borrowing, the Company issued 37,500 common shares as additional
consideration. Such shares will be valued at 50% of the average market value
when issued as a result of the illiquidity of the Company's stock and the
restricted nature of the shares issued. The issuance of such shares results
in an effective interest rate of 32%.
d) Note payable
During August 1998, the Company borrowed $125,000 from each of two
shareholders which is payable in 180 days at an interest rate of 14% per
annum. In connection with such borrowing, the Company issued each shareholder
31,250 common shares as additional consideration. Such shares will be valued
at 50% of the average market value when issued as a result of the illiquidity
of the Company's stock and the restricted nature of the shares issued. The
issuance of such shares results in an effective interest rate of 57%.
<PAGE> 12
SDC INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
NOTE 7 - SUBSEQUENT EVENTS (Cont'd)
e) Inventory loans
The Company has retired $96,500 of short term inventory loans since June 30,
1998.
<PAGE> 13
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is the Central and South American distributor for Czech
heavy-duty truck manufacturer Tatra. Tatra, a.s., is a Czech manufacturer of
on/off-road heavy trucks. The factory was founded in 1850 and in 1898 the
first truck was manufactured. The factory continued development and
innovations of its vehicle and today produces a truck with the an air cooled
diesel engine and a solid central backbone tube with swing half axles, both
features being unique features of the Tatra truck. Engines are manufactured
by Tatra, Deutz, Detroit Diesel or Cummins Diesel. Tatra has ISO 9001
certification and Tatra trucks meet all EURO II regulations.
During the quarter ending June 30, 1998, there was minimal activity in
the Company's division, SDC Prague, s.r.o., in the Czech Republic. SDC Prague
plans to market and sell electrical generating and co-generating equipment
using the components of East European manufacturers.
During the quarter ending June 30, 1998, the Company continued rebuilding
the inventories of its Bolivian subsidiary, Skobol, s.a., formerly the
subsidiary of Czech trading company Motokov International. Skobol is a
thirty-seven year old distributor of Czech products within Bolivia, and the
Company plans to use this subsidiary as its base to expand throughout that
region of South America with the other Czech products offered by the Company.
The new subsidiary provided an excess of $559,471 of net assets acquired over
the cost of the acquisition. Skobol operated at a small loss during this
period as the products are being expanded and Skobol is reintroducing itself
to the marketplace as a continuing supplier of Czech products. The
subsidiary's financial statements are consolidated with those of the Company.
The Company has cancelled its plans to sell and finance inventories of
Slovakian manufacturer Krizik, a.s., because the Company has developed similar
opportunities with companies with whom SDC has existing relationships and
which are located within the Czech Republic where the Company conducts most if
its business activities.
The Company concluded its Regulation D, Rule 505 offering of its common
stock which provided a gross total of $740,000 for the Company. The Five Year
Growth Plan which was completed in August 1997 has been updated to reflect the
positive developments of the prior six months and management is exploring
different sources of additional capital and reviewing different methods of
obtaining additional capital for the Company in order to execute its five year
plan.
At the close of the quarter ending June 30, 1998, the Company continued
negotiating for a possible acquisition of Skoda's Diesel International
operations. Management and shareholder control of Diesel International
(formerly Skoda Diesel) changed in 1996, and the Company believes that if an
acquisition can be made on terms favorable to the Company, potential negative
effects of the management and shareholder changes of 1996 will be eliminated
and the Company could exert total control over this supplier. SDC management
continues to work with the management in place at Diesel International and
relationships with management are satisfactory. Discussions continue with two
other East European manufacturers of industrial products which should be
synergistic with the Company's present products and markets.
There can be no assurances that any of the matters discussed above will
come to fruition or will result in positive results for the Company.
<PAGE> 14
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company has devoted substantial time and effort to negotiating and
arranging strategic alliances with major Czech manufacturers rather than
devoting its time to beginning its marketing and sales development. It is
felt that the most efficient use of time and resources will be with the proper
product mix for entering new markets. Therefore, the Company's revenues to
date are primarily the result of orders received by the Company rather than
the results of marketing efforts by the Company. The Company records revenue
when products are shipped. During the quarter ending June 30, 1998, the
Company shipped $61,937 and realized a gross profit from those sales of
$22,007. These sales were made by the new subsidiary, Skobol, s.a.
Management believes sales by Skobol will increase as its reorganization of its
operations is completed and new inventories are provided. However, Company
sales and shipments will continue to be sporadic until a more steady flow of
orders exist, and until the marketing efforts for larger items, such as
electrical generating sets and trucks, can come to fruition.
Operating expenses for the quarter ending June 30, 1998 were more than in
the quarter ending May 31, 1997, due primarily to the expansion of management,
development of additional product lines needed in order to enhance future
growth and revenues of the Company, and the continuing negotiations for major
strategic alliances which often times include paid professional advisors such
as attorneys and accountants. Expense categories such as legal, accounting,
travel, and costs and expenses for securities matters increased due to the
fact that the Company is a fully reporting 12 (g) company, due to the planned
acquisition of new product lines, and due to the extensive discussions and
negotiations in the Czech Republic regarding future strategic alliances and
the possible acquisition of Diesel International.
Total expenses for the quarter ending June 30, 1998 were $697,556 and
$254,095 for the quarter ending May 31, 1997. Non-cash expenses as
deprecation and amortization and payment for consulting services accounted for
$337,360 more than forty-eight (48%) of the expenses during the quarter ending
June 30, 1998. During the quarter ending June 30, 1998, expenses increased
due to the increased activity level of corporate and product acquisition plans
and related activities. The Company's net loss of $642,294 for the quarter
ending June 30, 1998, includes certain non-cash charges as follows:
Depreciation and amortization $ 135,010
Issuance of common stock as
consideration of services 202,350
Total non-cash charges $ 337,360
Accordingly, the Company's cash loss before the above charges amounted to
approximately $304,934.
<PAGE> 15
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
During the three months ending June 30, 1998, as compared to the three
months ending May 31, 1997, operating expenses were approximately $443,461
higher. Management expects operating expenses (non-depreciation and
non-amortization), to remain at this approximate level for the near future due
to the level of negotiations and expansion discussions taking place presently.
Operating expense categories which exceeded $5,000, for the three month
period ending June 30, 1998, were; Amortization and depreciation $135,010;
Office rent $20,567; Management compensation and salary $43,000; Travel and
lodging $16,504; Consulting $13,441; Legal and accounting $21,461; Telephone
$11,777; Consulting costs paid by issuance of stock $188,542; and maintenance
$17,549; Office supplies $7,706; Wages $40,687; and Management compensation
paid by stock $150,000.
Operating expense categories which exceeded $5,000 for the three month
period ending May 31, 1997 were; Amortization and depreciation $117,151;
Office rent $9,318; Marketing $35,720; Taxes and licenses $9,335; Interest
$11,824; Management compensation and salary $18,000; Travel and lodging
$23,866; Consulting $18,293; Legal and accounting $8,157; and Telephone
$9,537.
LIQUIDITY AND CAPITAL RESOURCES
At the end of June 1998, the Company's working capital is $147,016. Net
cash used for the Company's operating activities for the quarter ending June
30, 1998 amounted to $(771,543) whereas the net cash provided by operating
activities for the quarter ending May 31, 1997 amounted to $91,753. Net cash
provided by financing activities in the quarter ending June 30, 1998, was
$713,366 compared to $200,573 for the quarter ending May 31, 1997. Net cash
provided for (used by) investing activities during the quarter ending June 30,
1998, was $(9,657) compared to $0 for the quarter ending May 31, 1997.
Therefore, total cash at the end of the quarter ending June 30, 1998 was
$37,163 compared to $291,538 at the end of the quarter ending May 31, 1997.
During the quarter ending June 30, 1998 all corporate debt amounted to
$422,006.
Management is evaluating its current and projected cash needs to
determine if its current financial situation will be sufficient to meet such
needs. If the Company continues according to its present plans and without
modification, the Company will be required to obtain additional financing or
equity capital. Management is actively exploring possible sources of
additional capital and is reviewing possible methods to obtain such additional
capital, as needed. There is no assurance that such financing or capital will
be available.
Negative cash flows from the Company's operating activities are
anticipated to continue until the Company has established its distributors
within its sales territories, nas received and shipped orders, and has
collected payment for such orders. The Company may encounter difficulties in
financing the purchase of inventory necessary to complete orders. The Company
acknowledges that there can be no assurance that it will be able to obtain
capital or financing until the time of such payment is received or that such
capital is unable to provide needed revenues to finance its ongoing operating
or if the Company does not receive additional capital, there could be a severe
adverse impact on the Company's future operations.
<PAGE> 16
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (Cont'd)
On September 5, 1997, the Company established a Non-Qualified Stock
Option Plan ("The Plan") pursuant to which 750,000 shares of common stock are
reserved for issuance. The option price per share shall be determined by the
Board of Directors at the time any options are granted. The Plan is designed
to serve as an incentive for retainage qualified and competent persons who are
key employees, consultants, representatives, officers and directors of the
corporation. As of June 30, 1998, 600,000 shares had been issued under such
Plan. See Notes to financial statements, Note 5(b).
On October 10, 1997, the Company signed a Letter of Intent with an
underwriter to proceed on a "Firm Commitment" basis with a secondary offering
of the Company's common stock and redeemable warrants ("the Warrants"). The
Company plans to offer 1,000,000 shares and warrants will be offered to the
public at a price of $6.00 per share and $0.125 per warrant, respectively.
The total gross offering amounts to $6,125,000. The Company, if necessary,
will effect a reverse stock split in order to complete the secondary offering
at a price of at least $6.00 per share. Each warrant, which is redeemable
within 60 months, entitles the holder thereof to purchase one share of common
stock at 120% of the offering price of the common shares. The warrants may be
redeemed by the Company at $0.10 each after the common shares have traded at
150% of the offering price of common shares for ten consecutive days. Due to
the current progress of negotiations with potential strategic partners, this
offering is postponed by management.
The Company' products are sold in US dollars and the Company does not
believe currency exchange rates or current inflation rates will have a
significant effect on sales or profitability. Although the Company maintains
a bank account in Czech currency within the Czech Republic for paying local
expenses, the amount on deposit in such account is usually small and,
therefore, fluctuation in the currency exchange rates should not have a
significant effect on the Company.
During June 1998, the Company obtained an unsecured $500,000 line of
credit from a shareholder with an interest rate at fourteen percent (14%) per
annum. The Company may borrow from the credit line up to $35,714 in any one
week. Principal and interest are payable on December 18, 1998. If the Company
is not able to pay such principal and interest when due, the principal balance
of the line of credit and any outstanding accrued interest may be converted
into common stock at the rate of $1 per share.
During July 1998, the Chairman of the Company advanced $17,000 to the
Company. Such advances are non interest bearing and due on demand.
During July 1998, the Company entered into a letter of intent to purchase
43.5% of the Czech truck manufacturer, Tatra a.s., for approximately $13.6
million. In addition, the Company will purchase Tatra's senior secured loan
from the bank holding such note, with an approximate balance of $89.5 million,
for approximately $30 million. Both agreements are anticipated to close
September 30.
There is no assurance that the transaction will be completed since the
Company must obtain sufficient capital to complete the acquisition. The
following information is from Tatra's audited financial statements. Tatra had
sales of approximately $290 million for the year ended December 31, 1997. At
December 31, 1997, Tatra had total assets of approximately $230 million.
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings:
None
ITEM 2 - Changes in Securities:
None
ITEM 3 - Defaults Upon Senior Securities:
None
ITEM 4 - Submission of Matters to a Vote of Security Holders:
None
ITEM 5 - Other Information:
None
ITEM 6 - Exhibits and Reports on Form 8-K:
None
<PAGE> 18
SIGNATURES
In accordance with section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, hereunto
duly authorized.
SDC INTERNATIONAL, INC.
BY:/s/Ronald A. Adams
Ronald A. Adams, President
August 31, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacitates and on
the dates indicated.
/s/Ronald A. Adams August 31, 1998
Ronald A. Adams, Director and President
(Principal Executive Officer and Principal
Financial Officer)
/s/Henry S. Green August 31, 1998
Henry S. Green, Jr., Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from Balance Sheet,
Statement of Operations, Statement of Cash Flows and Notes thereto incorporated
in Part I of this Form 10-QSB and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 37,163
<SECURITIES> 0
<RECEIVABLES> 132,742
<ALLOWANCES> 0
<INVENTORY> 511,824
<CURRENT-ASSETS> 771,601
<PP&E> 3,263,716
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,494,971
<CURRENT-LIABILITIES> 624,586
<BONDS> 0
0
0
<COMMON> 3,819
<OTHER-SE> 3,353,762
<TOTAL-LIABILITY-AND-EQUITY> 4,494,971
<SALES> 61,937
<TOTAL-REVENUES> 61,937
<CGS> 29,077
<TOTAL-COSTS> 29,077
<OTHER-EXPENSES> 1,600,070
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,753
<INCOME-PRETAX> (1,504,708)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,504,708)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,504,708)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> 0
</TABLE>
