UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-27520
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, TX 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: 3,640,119 shares outstanding as of
May 31, 1998.
<PAGE>
SDC INTERNATIONAL, INC. AND SUBSIDIARY
INDEX
PART 1 - FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets May 31, 1998 (Unaudited)
and August 31, 1997 1
Consolidated Statements of Operations (Unaudited)
for the three months ended May 31, 1998 and 1997 2
Consolidated Statements of Operations (Unaudited)
for the nine months ended May 31, 1998 and 1997 3
Consolidated Statement of Stockholders' Equity (Unaudited)
for the nine months ended May 31, 1998 4
Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended May 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 - 13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14 - 18
PART II - OTHER INFORMATION 19
<PAGE> 1
SDC INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
May 31, August 31,
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash $ 65,665 $ 15,199
Cash - restricted 80,960 330,932
Accounts receivable 128,125 -
Inventory 554,047 -
Prepaid expenses 8,813 21,875
Other current assets 1,481 1,903
Total current assets 839,091 369,909
Machinery and equipment, net 3,285,984 3,489,341
Other assets:
Exclusive agency rights, net 191,574 263,485
Customer list, net 56,250 140,625
Organizational costs, net 4,778 7,643
Deferred offering costs 50,000 -
Other assets 16,546 -
Total other assets 319,148 411,753
Total assets $ 4,444,223 $ 4,271,003
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (including cash overdraft of
$28,387 as of May 31, 1998) $ 76,716 $ 53,793
Accounts payable - related party 73,477 -
Accrued expenses 149,658 36,467
Note payable - short term 100,100 215,000
Due to officer 69,539 27,036
Total current liabilities 469,490 332,296
Excess of net assets acquired over cost, net 517,471 -
Commitments and contingencies (Note 6) - -
Stockholders' equity:
Common stock $.001 par value, authorized 10,000,000
shares, issued and outstanding 3,640,119 and
2,639,484 shares, respectively 3,640 2,639
Additional paid-in capital 7,682,252 6,345,643
Accumulated deficit (4,131,430) (2,409,575)
Sub total 3,554,462 3,938,707
Deferred costs (97,200) -
Total stockholder's equity, net 3,457,262 3,938,707
Total liabilities and stockholders' equity $ 4,444,223 $ 4,271,003
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 2
SDC INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MAY 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Sales $ 41,607 $ -
Cost of goods sold 20,993 -
Gross profit 20,614 -
Expenses:
Selling, general and administrative 230,633 136,943
Depreciation and amortization 122,860 117,152
Stock based consulting and compensation 252,037 -
Total expenses 605,530 254,095
Loss from operations before other income and provision
for income taxes (584,916) (254,095)
Other income (expense):
Amortization of excess costs 14,000 -
Interest income 99 1,358
Interest expense (7,275) (11,824)
Foreign currency tax exchange income (loss) 4,209 -
Total other income (expense) 11,033 (10,466)
Loss before provision for income taxes (573,883) (264,561)
Provision for income taxes - -
Net loss $ (573,883) $ (264,561)
Earnings (loss) per share:
Basic:
Net loss $ (.16) $ (.12)
Weighted average number of shares outstanding 3,640,119 2,289,011
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 3
SDC INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MAY 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Sales $ 105,345 $ 1,335,579
Cost of goods sold 52,871 1,279,548
Gross profit 52,474 56,031
Expenses:
Selling, general and administrative 720,254 270,698
Depreciation and amortization 362,286 351,455
Stock based consulting and compensation 719,751 -
Total expenses 1,802,291 622,153
Loss from operations before other income and provision
for income taxes (1,749,817) (566,122)
Other income (expense):
Amortization of excess costs 42,000 -
Interest income 3,819 2,866
Interest expense (34,636) (12,200)
Foreign currency exchange income (loss) (1,738) -
Total other income (expense) 9,445 (9,334)
Loss before provision for income taxes (1,740,372) (575,456)
Provision for income taxes - -
Net loss $ (1,740,372) $ (575,456)
Earnings (loss) per share:
Basic:
Net loss $ (.53) $ (.26)
Weighted average number of shares outstanding 3,281,892 2,231,847
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 4
SDC INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MAY 31, 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 September 1, 1997 2, 639,484 $ 2,639 $ 6,345,643 $ (2,409,575) $ - $ 3,938,707
Issuance of common stock in
connection with private placement
memorandum, net of offering
costs of $69,154 35404,635 355 462,441 - - 462,796
Issuance of common stock
pursuant to the 1997 Non
Qualified Stock Option Plan 491,000 491 734,498 - (194,400) 540,589
Issuance of common stock
for services 140,000 140 126,560 - - 126,700
Issuance of common stock in
connection with loans 15,000 15 13,110 - (13,125) -
Amortization of deferred costs - - - - 110,325 110,325
Adjustments related to fluctuation
of foreign currency - - - 18,517 - 18,517
Net loss for the nine months
ended May 31, 1998 - - - (1,740,372) - (1,740,372)
Balance at May 31, 1998 3,640,119 $ 3,640 $ 7,682,252 $ (4,131,430) $ (97,200) $ 3,457,187
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
SDC INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MAY 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,740,372) $ (575,456)
Adjustments to reconcile net loss to net
cash (used for) provided by operating activities:
Amortization and depreciation 449,697 351,455
Common stock issued for services 667,289 -
Adjustments from fluctuations in foreign currency 18,517 -
Decrease (increase) in:
Accounts receivable 20,094 (130,094)
Inventory (171,469) -
Other assets (16,124) 17,998
Increase (decrease) in:
Accounts payable 9,718 (3,711)
Accounts payable - related party 73,477 440,269
Accrued expenses 41,038 (29,764)
Net cash (used for) provided by operating activities (648,135) 70,697
Cash flows from investing activities:
Acquisition of subsidiary, net of cash acquired 44,878 -
Proceeds from collection of notes receivable - related
parties 62,985
Purchase of machinery and equipment (5,802) -
Decrease (increase) in restricted cash 249,972 (2,262)
Net cash provided by investing activities 289,048 60,723
Cash flows from financing activities:
Proceeds from issuance of note payable 100,000 35,000
Repayment of notes payable (215,000) -
Proceeds from stockholder 42,603 32,500
Proceeds from sale of common stock 531,950 205,679
Cost associated with private placement memorandum
and sale of common stock - (16,705)
Deferred offering costs (50,000) -
Repayment of loans from stockholder - (95,752)
Net cash provided by financing activities 409,553 160,722
Net increase in cash 50,466 292,142
Cash at beginning of period 15,199 -
Cash at end of period $ 65,665 $ 292,142
Supplemental statement of cash flows disclosures:
Interest paid $ 18,291 $ 12,200
Income taxes paid $ - $ -
Supplemental disclosure of non-cash operating and
financing activities:
Issuance of 140,000 shares of common stock for services $ 194,400 $ -
Issuance of 15,000 shares as additional consideration
for loan $ 13,125 $ -
Accrual of costs associated with sale of common stock $ 69,154 $ -
</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 MAY 31, 1998
(UNAUDITED)
NOTE 1 - GENERAL
The consolidated financial statements of SDC International, Inc. (the
"Company") at May 31, 1998 and 1997 include the accounts of its wholly-owned
subsidiary Skobol, s.a. ("Skobol"), after elimination of all significant
intercompany transactions and accounts.
The Company was incorporated in the state of Delaware on June 30, 1994 for
the purpose of developing and marketing an exclusive agency agreement acquired
from Diesel a.s. (formerly known as Skoda Diesel a.s.) ("Skoda") to sell a
broad range of Skoda's products which are primarily comprised of piston
combustion diesel engines whose applications include locomotive and stationary
engines for the generation and co-generation of electric power. Skoda was
formed in Czechoslovakia in the year 1899.
During April 1997, the Company acquired the outstanding common stock of Golden
Grove Business, Inc., ("GGB"), a Panama Corporation, then subsequently
dissolved GGB. During November 1997, the Company acquired all of the
outstanding common stock of Skobol, a Bolivia Corporation.
The Company's equipment is located in the Czech Republic.
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 nine 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, filed with the Securities and
Exchange Commission.
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 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.
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 MAY 31, 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 $5,600,000.
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.
On April 18, 1996, the Company entered into a modification agreement whereby
all such sales levels were postponed for one year.
NOTE 3 - ACQUISITIONS
a) On April 24, 1997, the Company acquired for $120,000 plus 48,000 common
shares all the issued and outstanding common stock of GGB. GGB had acquired
an exclusive agency contract with Tatra a.s. (a Czech Republic truck
manufacturer) to market and sell Tatra's products. The Company amortized such
agency rights over the estimated remaining useful life of four years.
Accordingly, for the three and nine months ended May 31, 1998, amortization
expense amounted to $13,242 and $39,726.
b) On November 18, 1997, the Company acquired 100% of the common stock of
Skobol from Skobol's parent, Motokov International Joint Stock Company, for
$78,000. The acquisition was retroactively effective to September 1, 1997.
The acquisition was accounted as a purchase with the results of Skobol
included from the acquisition date. Skobol is a distributor of Czech Republic
products within the country of Bolivia.
The acquisition of Skobol resulted in an excess of net assets acquired over
costs of $559,471 after application to all non current assets acquired. This
amount is being amortized on a straight-line basis over ten years from date of
acquisition. Accordingly, for the three and nine months ended May 31, 1998,
amortization income amounted to $14,000 and $42,000, respectively.
<PAGE> 8
SDC INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 31, 1998
(UNAUDITED)
NOTE 4 - 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 $100,000 from an individual 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 5(c). The issuance of such shares results in an
effective interest rate of 40%. As of May 31, 1998, the Company had accrued
$7,975 of interest and amortized $13,125 of deferred interest in relation to
this note.
NOTE 5 - 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 extentions) of its $.001 par valu
e common stock at $1.50 per share before deducting discounts, commissions and
non-accountable expenses. During the nine months ended May 31, 1998, the
Company sold an aggregate of 354,635 shares yielding net proceeds of $462,796.
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 nine months ended May 31, 1998, the Company
issued 132,500 and 491,000 shares pursuant to the Plan. Such shares have been
valued at $198,750 and $734,989 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 $540,589 as stock-based compensation and the remaining balance
amounting to $194,400 has been recorded as deferred consulting costs to be
amortized on a monthly basis over 12 months. Accordingly, for the three and
nine months ended May 31, 1998, amortization expense amounted to $48,600 and
$97,200, respectively.
<PAGE> 9
SDC INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 31, 1998
(UNAUDITED)
NOTE 5 - STOCKHOLDERS' EQUITY (Cont'd)
c) Deferred interest
In connection with the obtaining of a loan, the Company issued 15,000 shares
of common stock 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 which is being amortized
over the term of the loan. For the three and nine months ended May 31, 1998,
amortized interest amounted to $4,375 and $13,125.
d) Stock-based consulting
During the nine months ended May 31, 1998, the Company issued 140,000 shares
of restricted common stock. 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 restricted shares of common stock were issued during the three
months ended May 31, 1998.
NOTE 6 - 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 $9,646 and $9,318 for the three months ended May 31, 1998 and 1997,
respectively and $26,887 and $46,999 for the nine months ended May 31, 1998
and 1997, respectively.
b) 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.
<PAGE> 10
SDC INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 31, 1998
(UNAUDITED)
NOTE 6 - COMMITMENTS AND CONTINGENCIES (Cont'd)
c) 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.
d) 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.
d) 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.
e) 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.
<PAGE> 11
SDC INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 31, 1998
(UNAUDITED)
NOTE 7 - RELATED PARTY TRANSACTION
a) Acquisition of exclusive agency rights
In October 1995, the Company purchased the exclusive rights to market and sell
Skoda Diesel products into the countries of China and South Korea. In
consideration for these rights the Company paid Skoda $150,000.
b) Accounts payable
At May 31, 1998, the Company had accounts payable to related parties totalling
$73,477 which were 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 May 31, 1998, $69,539 was owed to such officer.
Such advances are non-interest bearing and due on demand.
d) Management fees
For the three months ended May 31, 1998 and 1997, the Company recorded $51,600
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 8 - SUBSEQUENT EVENTS
a) Note payable
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. 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 82%.
b) Note payable
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. 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 40%.
<PAGE> 12
SDC INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 31, 1998
(UNAUDITED)
NOTE 8 - SUBSEQUENT EVENTS (Cont'd)
c) Line of credit
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 $1.00 per share.
d) Due to shareholder
During July 1998, the Chairman of the Company advanced $17,000 to the Company.
Such advances are non interest bearing and due on demand.
e) 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.
f) 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%.
g) 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> 13
SDC INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MAY 31, 1998
(UNAUDITED)
h) Inventory loans
The Company has retired $96,500 of short term inventory loans since May 31,
1998.
<PAGE> 14
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 May 31, 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 May 31, 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 May 31, 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> 15
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 May 31, 1998, the
Company shipped $41,607 and realized a gross profit from those sales of
$26,395. 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 May 31, 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 May 31, were $265,919 in 1997 and
$612,805 in 1998. Non-cash expenses as deprecation and amortization and
payment for consulting services accounted for $321,610, more than fifty-two
(52%) of the expenses during the quarter ending May 31, 1998. During the
quarter ending May 31, 1998, expenses increased due to the increased activity
level of corporate and product acquisition plans and related activities. The
Company's net loss of $573,883 for the quarter ending May 31, 1998, includes
certain non-cash charges as follows:
Depreciation and amortization $ 122,860
Issuance of common stock as
consideration of services 198,750
Total non-cash charges $ 321,610
Accordingly, the Company's cash loss before the above charges amounted to
approximately $252,273.
<PAGE> 16
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
During the three months ending May 31, 1998, as compared to the three months
ending May 31, 1997, operating expenses were approximately $351,435 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 months
period ending May 31, 1998, were; Amortization and depreciation $122,860;
Office rent $9,646; Management compensation and salary $51,600; Travel and
lodging $19,981; Consulting $13,474; Legal and accounting $9,130; Telephone
$10,169; Consulting costs paid by issuance of stock $102,037; Advertising
$6,500; Repair and maintenance $16,162; Office supplies $7,530 Wages $39,850;
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 May 1998, the Company's working capital is $369,601. Net cash
used for the Company's operating activities for the quarter ending May 31,
1998 amounted to $648,135 whereas the net cash provided by operating
activities for the quarter ending May 31, 1997 amounted to $70,697. Net cash
provided by financing activities in the quarter ending May 31, 1998 was
$409,553 compared to $160,722 for the quarter ending May 31, 1997. Net cash
provided by investing activities during the quarter ending May 31, 1998 was
$289,048 compared to $60,723 for the quarter ending May 31, 1997. Therefore,
total cash at the end of the quarter ending May 31, 1998 was $65,665 compared
to $292,142 at the end of the quarter ending May 31, 1997. During the quarter
ending May 31, 1998, all corporate debt amounted to $169,639.
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> 17
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 May 31, 1998, 491,000 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 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. 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 82%.
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 considerat
ion. 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 40%.
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.
<PAGE> 18
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (Cont'd)
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.
The Company has retired $96,500 of short term inventory loans since May 31,
1998.
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%.
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> 19
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> 20
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> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 65,665
<SECURITIES> 0
<RECEIVABLES> 128,125
<ALLOWANCES> 0
<INVENTORY> 554,047
<CURRENT-ASSETS> 839,091
<PP&E> 3,285,984
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,444,223
<CURRENT-LIABILITIES> 469,490
<BONDS> 0
0
0
<COMMON> 3,640
<OTHER-SE> 3,453,622
<TOTAL-LIABILITY-AND-EQUITY> 4,444,223
<SALES> 105,345
<TOTAL-REVENUES> 105,345
<CGS> 52,871
<TOTAL-COSTS> 52,871
<OTHER-EXPENSES> 1,802,291
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,636
<INCOME-PRETAX> (1,740,372)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,740,372)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,740,372)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> 0
</TABLE>
