U. S. Securities and Exchange Commission
Washington, D. C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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.)
251 Royal Palm Way, Suite 301
Palm Beach, Florida 33480
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (561) 882-9300
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock, Par value $0.001
(Title of class)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 5(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that
registration was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The aggregate market value of the voting stock on December 31,
1998 (consisting of Common Stock, $0.001 par value per share)
held by non-affiliates was approximately $4,060,976 based upon
the average bid and asked prices for such Common Stock on said
date ($1.3125), as reported by a market maker. On such date,
there were 4,671,917 shares of the Registrant's Common Stock
outstanding.
<PAGE>
Item 1. DESCRIPTION OF BUSINESS
SDC International, Inc., (hereinafter referred to as the
"Company") is a Delaware corporation formed in June, 1994 to
market, sell, and finance Eastern and Central European industrial
products such as diesel generators, co-generation equipment,
electric metering systems, on/off-road trucks, tractors, and
transport equipment such as buses, trolleys, trams, and
airfreight containers. Presently, the Company works to establish
relationships of joint venture or as an acquirer of such
manufacturing companies.
The Company has acted as an exclusive distributor of Skoda Diesel
engines in North, South and Central America, under an exclusive
license from Skoda Diesel, now known as Diesel International,
a.s., ("Diesel"). Diesel products are principally piston
combustion diesel, gas, and bio-gas engines whose applications
include locomotive and stationary engines for the generation and
co-generation of electric power and complete energy for a variety
of purposes. In April 1997, the Company acquired by merger the
Panamanian company representing Tatra, a Czech truck manufacturer
with ISO certification, to market and sell Tatra products in
South and Central America. In August 1997, the Company became
the exclusive North and South American distributor of Metal
Kraft, a.s., a Czech manufacturer of metal pallets and containers
whose customers include Mercedes Benz, BMW, and Volkswagen, and
which, beginning in 1997, offers a line of airfreight cargo
containers. During the final quarter of fiscal 1997, the Company
executed an acquisition agreement with Czech trading company
Motokov International which provided for the Company's
acquisition of the Motokov subsidiary in Bolivia, Skobol, s.a.
Skobol is a thirty-eight year old distributor of Czech products
within Bolivia, and the Company planned 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 acquisition
closed effective September 30, 1997. During 1999, management
reevaluated its Bolivian subsidiary and in December, 1999, the
Company's Board of Directors adopted a plan of disposal for the
subsidiary. In early 1998, the Company executed letters of
intent and agreements to purchase Tatra, a.s. However, the
Company has not consummated the Tatra transaction, and continues
its efforts toward the acquisition.
Through its direct involvement in Central and Eastern Europe, the
Company has learned that most manufacturing companies within this
geographic/political area with whom the Company wishes to
transact its business have a shortage of marketing skills and
financial capability. Therefore, the Company has determined that
it should take an internal position within its targeted
manufacturing companies to assure better financial capability and
<PAGE> 2
marketing skills. This planned activity may be as a joint
venture with or an acquisition of such manufacturing companies.
Diesel International, a.s. (formerly "Skoda Diesel")
The Company offers a broad range of engines in several sizes and
capacities. The Company's products have application in several
markets including electrical power production and co-generation
systems, locomotive engines, pump stations, direct drives for
industrial engines, oil and gas drilling equipment, and complete
power systems for use in hospitals, factories, commercial and
governmental facilities. The products manufactured by Diesel and
marketed by the Company are especially important in the lesser
developed countries seeking to build infrastructure sufficient to
support economic growth and development.
The Company entered into an exclusive agency agreement with Skoda
Diesel dated April 21, 1994 under which it is appointed as Skoda
Diesel's exclusive agent in North, Central and South America for
the marketing and sale of products of Skoda Diesel. The
agreement provides that for the agreement to be not cancelable by
Skoda Diesel, sales made within the foregoing territory shall be
at least $15,000,000 per year by the close of the sixth year
after execution of the agreement. Because of the Company's focus
on developing joint venture or acquisition projects, neither of
which is currently desired by the Company to be formed with
Diesel, sales efforts by the Company on behalf of Diesel products
has been stopped by the Company for the present time.
Tatra, a.s.
The Company is the exclusive distributor for Tatra vehicles,
accessories and spare parts for Colombia with the right of first
refusal to become the exclusive distributor for other countries
of South and Central America. The Company became the exclusive
distributor for Tatra through the merger into the Company of
Golden Grove Business, Inc.
On May 18, 1995, Golden Grove Business, Inc., ("GGB") executed an
agreement with Tatra to become an exclusive distributor of Tatra
vehicles, accessories and spare parts in Colombia with the right
of first refusal to become the exclusive distributor for other
countries in Central and South America. In the beginning of
1997, GGB and the Company entered into an agreement providing for
the merger of GGB into the Company. The merger closed on April
24, 1997.
<PAGE> 3
Tatra, a.s., is a Czech manufacturer of on/off-road heavy duty
trucks. The factory was founded in 1850 and in 1898 the first
truck carrying 2.5 tons of payload 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. The Tatra design enables
quicker passage over rough terrain with significantly less
vibration than that from more orthodox designs. The swing half
axles together with the central backbone tube system create a
stable base for a superstructure resistant to side oscillation.
The trucks are offered in 4 by 4, 6 by 6, and 8 by 8
configurations with a turbocharged eight cylinder diesel engine
with air-to-air intercooler. The transmission is mechanical with
a pneumatic gear shift booster, ten forward and two reverse
speeds of the Tatra design. Tatra has ISO 9000 certification and
Tatra trucks meet all EURO II regulations.
During Tatra's peak production years of the 1980's and early
1990's, the factory produced over 17,000 vehicles per year. In
1998, Tatra produced about 2,800 vehicles, which is an increase
from the lowest production year of 1995 when 2,000 trucks were
produced. Historically, Tatra sold their products domestically
and exported to China, the former Soviet Union, and Europe. The
decrease in sales was attributed to the downturn in the economy
and essentially lower demand for new trucks in the former Soviet
Union and Eastern Europe, all due to the fall of the state's
Communist economy and political system.
The Tatra factory has been struggling with a lack of operating
capital for several years and is burdened with bank credits of
more than US$120,000,000. Tatra revenues in 1998 were
approximately US$240,000,000 compared to US$290,000,000 in 1997.
Tatra reported a loss of approximately US$20,000,000 in 1998
compared to a small profit for 1997. This financial situation
and lack of adequate working capital is similar to that of most
other East European manufacturers who have had to reorganize to
market their products to new markets and customers after the
disintegration of the Communist economic system..
On May 18, 1995, Golden Grove Business, Inc., ("GGB") executed an
agreement with Tatra to become an exclusive distributor of Tatra
vehicles, accessories and spare parts in Colombia with the right
of first refusal to become the exclusive distributor for other
countries in Central and South America. In the beginning of
1997, GGB and the Company entered into an agreement providing for
the merger of GGB into the Company. The merger closed on April
24, 1997.
Moravan Air Containers
On August 21, 1997, the Company executed an exclusive agreement
with Metall Kraft, s.r.o., a Czech manufacturer producing metal
pallets, warehouse transportation equipment,
<PAGE> 4
and transport cargo containers, to market and sell all such
products in North, Central and South America. Since that time,
Metall Kraft, s.r.o. liquidated, and in the process assigned the
agreement to Moravan, a.s., with whom the Company conducts its
business currently under the name Moravan Air Containers.
Through privatization, the owners of Moravan Air Containers
purchased, in 1994, the company CSAO, a state owned company which
for several decades produced automobile and truck bodies,
repaired truck bodies and maintained a metal fabrication
facility. During the same year, the company changed its name from
CSAO to Metall Kraft and then transferred the container business
to Moravan Air Containers, who then began manufacturing metal
transport containers. The Moravan Air Containers facility is
slightly more than 300,000 square feet located in an industrial
zone in the southern region of the Czech Republic. Moravan Air
Containers employs 30 workers and holds manufacturing quality
certificate type CZ-10200.
Skobol, s.a. - Bolivia
During the final quarter of fiscal 1997, the Company executed an
acquisition agreement with Czech trading company Motokov
International which provided for the Company's acquisition of the
Motokov subsidiary in Bolivia, Skobol, s.a. Skobol is a thirty-
eight 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 acquisition closed
effective September 30, 1997. During 1999, management
reevaluated its Bolivian subsidiary and in December, 1999, the
Company's Board of Directors adopted a plan of disposal for the
subsidiary. In early 1998, the Company executed letters of
intent and agreements to purchase Tatra, a.s. However, the
Company has not consummated the Tatra transaction, and continues
its efforts toward the acquisition.
General
In the case of purchase and resale of manufactured products, the
Company is dependent upon certain foreign suppliers for its
products. As such, the Company faces risk of the inability to
obtain products in the event of production problems at these
suppliers due to labor problems, governmental regulations,
working capital deficiencies, political unrest and other problems
which may result in the inability of these suppliers to fulfill
orders of the Company and over which the Company has no control.
In the event these suppliers were unable to fulfill the Company's
orders, it might have to suspend its business until such supply
problems were corrected by the supplier or until alternative
suppliers were located, none of which can be assured.
Additionally, although the Company pays its suppliers in U.S.
Dollars, currency fluctuations may adversely affect the prices
<PAGE> 5
charged by the Company. The Company's sales are made in U.S.
Dollars but currency fluctuations may make its prices non-
competitive to its customers. Due to the Company's newer focus
on joint venture or acquisition projects with such manufacturers,
the Company is dependent upon joint venture or acquisition
agreements being executed, and the ability of the Company to
complete satisfactory due diligence, convert financial
information to United States Generally Accepted Accounting
Principles, and arrange financing for any such transactions
deemed appropriate for the Company. Additionally, there is also
the potential for political instability in the foreign
governments of countries in which the Company conducts its
business, which may result in a loss of the Company's assets
located there.
The Company was formed in 1994 by Skoda Diesel, Double Seal Ring
Company, Inc., and Worth Capital Group (since renamed WCG
Holdings, Inc.) with the view toward introducing and marketing
industrial and transport equipment manufactured in Central and
Eastern Europe. The first arrangement reached by the Company
provided for sales of the Skoda line of engines and related
products in the area of its exclusive license and, also,
globally, where it holds non-exclusive agency rights. Skoda
Diesel, with a long history of quality manufacturing and
technical expertise, combined with Double Seal Ring Company, a
U.S. manufacturer of industrial piston rings which are important
components of all diesel/gas engines, and WCG Holdings, Inc.,
whose business involves international consulting in the areas of
marketing and financing, to form SDC International, Inc.
Item 2. DESCRIPTION OF PROPERTY
The Company has its primary offices at 251 Royal Palm Way, Suite
301, Palm Beach, FL 33480, where corporate, sales and marketing
functions are performed. The offices are inside a six story
facility owned by an unrelated party. In Bolivia, the Company,
through Skobol, s.a., occupies a 6,000 square foot facility owned
by an unrelated party. The annual office rental payments of the
company total approximately $75,000, and are on a month to month
basis. The Company, through its subsidiary, SDC Prague, s.r.o.,
leases an office at Vaclavske nam. 66, Prague, Czech Republic,
for its activities in the Czech Republic.
The machinery and equipment of the Company consists of several
hundred pieces of production machines, tools, and fixtures,
ranging from tables to large scale milling and grinding systems
in the Czech Republic, and warehouse and office equipment within
its Bolivian subsidiary, Skobol, s.a.. The machinery and
equipment formerly used to manufacture Skoda diesel engines is
located within the Diesel International factory in the Czech
Republic. The status and future use of the machinery and
equipment, which is not presently in service, is uncertain.
Additionally, the Company's focus of its business activities has
significantly changed from selling and distributing other
companies' products to focusing the Company's efforts to acquire
Central and East European manufacturing companies in the
transportation equipment business. U. S. accounting rules
require an annual review of the productive use of such machinery.
As a result of the review, and in light of the Company's business
<PAGE> 6
plans, the equipment was deemed to be non-productive on a future
cash flow basis and, in accordance with the accounting rules
related to such machinery and equipment, the Company recorded an
impairment loss of the machinery and equipment at Diesel in the
amount of $3,467,320. The Company plans to discard or abandon
the equipment in the near future, as it is of no use to the
Company and will not be useful under the business plans of the
Company regarding acquisitions.
The Company believes that its existing offices and related
facilities are adequate for the foreseeable future and that,
depending on additional products and sales, similar and/or
additional offices and locations can be acquired on reasonable
terms.
As of December 31, 1998, approximately 12% of the Company's
assets are located in the Czech Republic, 14% are located in
Bolivia, with the balance in the United States.
Item 3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of the security
holders during its fiscal years ending December 31, 1997 or
December 31, 1998.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock was approved on July 29, 1996 by the
National Association of Securities Dealers (NASD) for trading on
the Over-the-Counter Bulletin Board system. The following table
sets forth representative high closing ask and low closing bid
quotes as reported by a market maker, during the period from
October 1, 1997 through December 31, 1998. Bid quotations
reflect prices between dealers, do not include resale mark-ups,
mark-downs or other fees or commissions, and does not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Calendar period Low bid High ask
<S> <C> <C>
October, 1997 - December, 1997 1.25 4.12
January, 1998 - March, 1998 1.75 3.28
April, 1998 - June, 1998 1.53 3.00
July, 1998 - September, 1998 1.56 3.25
October, 1998 - December, 1998 1.12 2.53
</TABLE>
<PAGE> 7
As of December 31, 1998, there were approximately 300 holders of
record of the Company's Common Stock, although the Company
believes that there are approximately 200 additional beneficial
owners of shares of Common Stock held in street name. As of
December 31, 1998, the number of shares of Common Stock
outstanding of the Company was 4,671,917.
The Company has paid no dividends and has no present plan to pay
dividends. Payment of future dividends will be determined from
time to time by its board of directors, based upon its future
earnings (if any), financial condition, capital requirements and
other factors. The Company is not presently subject to any
contractual or similar restriction on its present or future
ability to pay such dividends.
Item 6. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AS
COMPARED TO THE FOUR MONTH PERIOD ENDED AUGUST 31, 1997 AND AS
COMPARED TO THE YEAR ENDED AUGUST 31, 1997
In 1997, the Company consummated a merger with the Panamanian
company Golden Grove Business ("GGB"), which was the Central and
South American distributor for Czech heavy-duty truck
manufacturer Tatra. The merger agreement provided for the
acquisition of one-hundred percent of the outstanding shares of
GGB to be acquired by the Company for 48,000 shares of restricted
common stock of the Company, along with the investment of
approximately $120,000 into GGB. Tatra, a.s., is a Czech
manufacturer of on/off-road heavy duty 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 an air cooled diesel engine and a
solid central backbone tube with swing half axles, both features
being unique features of the Tatra truck. Tatra has ISO 9000
certification and Tatra trucks meet all EURO II regulations.
During the fourth quarter of 1997, the Company established a
division known as SDC - Prague, s. r. o., in the Czech Republic.
SDC Prague will represent SDC International, Inc., in its
business operations within the Czech Republic.
By the close of the fiscal year 1997, a final agreement had been
executed with Metall Kraft, Ltd., a Czech manufacturer which
provides its products to Mercedes Benz, Volvo, BMW and other well
<PAGE> 8
known companies. The agreement establishes the Company as the
exclusive distributor for airfreight cargo containers for all
airline companies in North and South America.
During the final quarter of fiscal 1997, the Company executed an
acquisition agreement with Czech trading company Motokov
International which provided for the Company's acquisition of the
Motokov subsidiary in Bolivia, Skobol, s.a. Skobol is a thirty-
eight year old distributor of Czech products within Bolivia, and
the Company planned 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 acquisition closed
effective September 30, 1997. During 1999, management
reevaluated its Bolivian subsidiary, which has not progressed as
well as planned. The basic reason the Company acquired the
Bolivian operation was to establish an entity for the sale of
used Tatra trucks, a procedure which would be necessary in order
to arrange a leasing program for new Tatra trucks, assuming the
acquisition of Tatra by the Company would be completed. At the
time of the acquisition, the economy of neighboring country
Brazil, was very positive. However, shortly after the
acquisition, the economy of Brazil deteriorated and, therefore,
caused economic hardship for Bolivia, as Bolivia had always been
very dependent upon the economic benefits of a positive Brazilian
economy. Because the Tatra acquisition has not been concluded,
because of the Brazil economic deterioration, and because the
performance of the subsidiary without the Tatra program was still
in a loss situation, in December, 1999, the Company's Board of
Directors adopted a plan of disposal for the subsidiary.
During most of fiscal year ending December 31, 1998, the Company
increased its active pursuit of a joint venture or acquisition,
specifically of Czech truck manufacturer, Tatra, a.s. During the
first half of 1998, the Company signed contracts to purchase
43.5% of Tatra from Skoda Plzen, a.s. (a separate company than
Skoda Diesel), and signed a simultaneously exerciseable contract
with Komercni bank to acquire 90 million USD of Tatra's senior
secured debt. Due to the eventual refusal of the Chairman of
Skoda Plzen to execute the final sales agreement, the planned
acquisition was not consummated. The Company elected not to
litigate because Skoda Plzen's primary bank announced that it
would take over the Tatra shares and debt and find a suitable
acquisition partner for Tatra. The Company believed that this
process would yield more favorable results for the Company rather
than litigating against Skoda Plzen for its failure to perform.
Shortly thereafter, Komercni Banka reached an agreement with
Skoda Plzen for the bank to sell Skoda Plzen's shares in Tatra
along with the bank debts of Tatra. The Company met with the
appropriate officials of the bank on several occasions, and
submitted its firm and binding offer for the Tatra shares and
selected debts of Tatra. However, after several months, the bank
failed to complete a sale and the mandate issued by Skoda Plzen
to the bank to divest of the shares and debt was canceled.
<PAGE> 9
During the last two months of 1999, the Czech government-owned
Konsolidacni Bank has taken over ownership of and the process of
disposing of Tatra. They are offering 60% of Tatra's outstanding
shares along with all of its bank debt, i.e., about
USD120million. This approximates what the Company attempted to
purchase from Komercni Bank in 1998. Management believes that
the process will be professionally handled, and that the Company
has a reasonable chance of acquiring the Tatra shares and
selected debts.
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.
Operating expenses for 1998 were more than in operating year of
1997 due primarily to the expansion of management and the
Company's developing relationships toward joint ventures and
acquisitions of manufacturing companies within Central and
Eastern Europe, including the Tatra project. Total operating
expenses were: $3,673,064 for the twelve month period ending
December 31, 1998; $4,043,618 for the four month period ending
December 31, 1997; and $1,621,028 for the twelve month period
ending August 31, 1997. However, depreciation and amortization
and equipment related write-offs in 1997 were $3,755,589. Non-
cash expense items as depreciation and amortization, the
writedown/loss on disposal/revaluation of machinery and equipment
stated values, and the payment for additional consulting services
accounted for more than seventy-three percent (73%) of the
expenses for 1998, ninety-three percent (93%) of the expenses for
the four month period ending December 31, 1997, and fifty-five
percent (55%) of the expenses for the twelve month ending August
31, 1997. The Company's net losses from continuing operations
for the twelve months ended December 31, 1998 and the four month
period ending December 31, 1997 include certain non-cash charges
as follows:
<TABLE>
<CAPTION>
twelve months four months
ending ending
12-31-98 12-31-97
-------- --------
<S> <C> <C>
Depreciation and Amortization $ 49,039 $ 61,820
Issuance of common stock as
consideration of services 2,422,902 13,850
Amortization of debt discount 1,087,761 17,500
Loss on disposal/revaluation of assets 0 3,693,769
___________ ___________
TOTAL NON-CASH CHARGES $ 3,559,702 $ 3,786,939
</TABLE>
Accordingly, the Company's actual twelve month 1998 loss from
continuing operations before the above non-cash charges amounted
to approximately $1,306,616, and $289,298 for the four month
period ending December 31, 1997.
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for the Company's operating activities for the
twelve month fiscal year 1998 amounted to $1,553,377 whereas the
net cash used for operating activities for the four month period
ending December 31, 1997 amounted to $299,308 and $105,436 for
the twelve month period ending August 31, 1997. Net cash
provided (+) by financing activities in 1998 was $1,734,170
compared to $161,053 for the four month period ending December
31, 1997 and $430,984 for the twelve month period ending August
31, 1997. Net cash used (-) for investing activities in 1998 was
$186,194 compared to $310,349 for the twelve month period ending
August 31, 1997. Total cash on hand as of December 31, 1998 was
$41,651 compared to $47,052 as of December 31, 1997 and $15,199
as of August 31, 1997.
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 new sources of 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. The Company had total liabilities as of
December 31, 1998, of $1,558,162. However, approximately
$1,470,262 of the liabilities of the Company were due to certain
shareholders. Subsequent to December 31, 1998, shareholders
holding such debt in the amount of $1,450,000 principal did
convert all of this debt plus accrued interest into 2,123,072
shares of common stock.
Negative cash flows from the Company's pursuit of a joint venture
or acquisition are anticipated to continue until the Company has
concluded a joint venture or acquisition, if any can be
concluded, and then only if suitable financing of any such joint
venture or acquisition is received by the Company. The Company
acknowledges that there can be no assurance that it will be able
to obtain capital or financing at the time of any such joint
venture or acquisition. In the event the Company does not
receive additional capital, there could be a severe adverse
impact on the Company's future operations.
On February 24, 1997, the Company commenced and privately offered
a second private placement memorandum pursuant to Rule 505 of
Regulation D, on a best efforts basis, of no more than 500,000
shares of common stock in a ninety-day period (before extensions)
of its $0.001 par value common stock at a price of $1.50 per
share before deducting commissions and non-accountable expenses.
These expenses aggregate up to 13% of the gross offering price
which is payable by the Company to members of the NASD, financial
advisors, purchaser representatives, and individuals legally
entitled to receive such commissions. During the year ended
December 31, 1998, the Company completed the Offering in full
(500,000 shares).
<PAGE> 11
In September, 1997, the Company established its 1997 Non-
Qualified Stock Option Plan ("The Plan") pursuant to which
750,000 shares of common stock are reserved for issuance. In
July, 1998, the Company established its 1998 Non-Qualified Stock
Option Plan ("The Plan") pursuant to which 500,000 shares of
common stock were reserved for issuance. The option price per
share shall be determined by the Board of Directors at the time
any options are granted. The Plans are designed to serve as an
incentive for retaining qualified and competent persons who are
key employees, consultants, representatives, officers and
directors of the corporation. As of December 31, 1998, options
for 1,041,000 of the aggregate 1,250,000 shares had been issued,
all of which had been exercised.
The Company's 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.
Item 7. FINANCIAL STATEMENTS
Please see the attached Financial Statements
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective May 31, 1999, Registrant changed its certifying
accountant from Scarano & Tomaro, to Richard A. Eisner & Company,
LLP, New York City. By mutual agreement with the former
accountant, Registrant decided it was in the best interest of the
Registrant to engage an accountant with the professional
resources necessary to meet the needs of the Registrant in its
international operations, business plan, and pending acquisition
of a foreign corporation. Accordingly, the former accountant did
not stand for reelection. The former accountant's reports for
the last two years contain no adverse opinion or disclaimer of
opinion nor is there any disagreement with the former accountant.
The decision to change accountants and the selection of Richard
A. Eisner & Company, LLP, was recommended and approved by the
Registrant's Board of Directors.
<PAGE> 12
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
The Directors, Executive Officers, Promoters, and Control Persons
of the Company, with a brief description, are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Ronald A. Adams 49 Chairman, Chief Executive Officer
and Director
Milota K. Srkal 55 President, Chief Operating Officer
and Director
Henry S. Green, Jr. 67 Secretary and Director
</TABLE>
Directors Adams and Green were originally elected in 1994.
Director Srkal was appointed in 1998 to fill the vacancy of
Jindrich Dolezal, former Chairman of Skoda Diesel, a.s. All
directors hold office until the next annual meeting of
stockholders or until their successors are elected and qualify.
Vacancies on the Board of Directors may be filled by the
remaining directors. Officers are elected annually, and serve at
the discretion of the Board of Directors. There are no family
relationships between or among any officers or directors of the
Company.
Ronald A. Adams is the Chairman, Chief Executive Officer and a
Director of the Company. From 1986 through 1996, he served as
President of Worth Capital Group and as Financial Advisor to
Double Seal Ring Company and, from 1994 to 1996, as Financial
Advisor to Skoda Diesel, both entities being among the founding
shareholders of the Company. For the 14 years prior to 1986, Mr.
Adams was Chief Executive Officer of Haltom Manufacturing
Company, engaged in manufacturing of corporate recognition items.
He attended the University of Oklahoma and graduated from Texas
Christian University, where he performed post-graduate studies.
Mr. Adams devotes substantially all of his business time to the
Company.
Milota K. Srkal is the President, Chief Operating Officer and a
Director of the Company. Mr. Srkal was President and Founder of
GGB, the Tatra distributor within certain countries of Central
and South America which merged into SDC in 1997. Prior to
founding GGB, Mr. Srkal was associated with Frederik R. Harris,
Inc., an international construction and management firm. He
served as its Senior Vice President until resigning to found GGB.
Mr. Srkal devotes substantially all of his business time to the
Company.
Henry S. Green, Jr., is the Secretary of the Company. Mr. Green
is the President of Double Seal Ring Company where he has been
employed since 1955. The company, founded in 1931, manufactures
industrial piston rings as those used in diesel and gas
generating sets, which is the product of Skoda and the Company.
He is a graduate of the Business Administration School at
Oklahoma State University and attended the United States Naval
Command School.
<PAGE> 13
Due to business relationships between the Company, Skoda Diesel,
and/or Double Seal, of which two directors of the Company are
officers, there may be potential for conflict of interest. The
Company is aware of such potential and believes that any
transactions resulting from these relationships would be on terms
similar to those available from outside parties.
During 1998 and 1999, the Company established an Advisory Board
which may advise the Board of Directors, from time to time, on
corporate matters. These advisors are not employees or officers
of the Company. Each of the Advisors is a shareholder of the
Company. The Advisors appointed are as follows, with a brief
description of each:
General Alexander Haig, Jr. is a former White House Chief of
Staff, the former Allied Supreme Commander of NATO, the former
President and CEO of United Technologies, Inc., and served as
United States Secretary of State under President Ronald Reagan.
General Haig is, also, on the board of America On Line, MGM
Grand, and MGM United Artists.
Mr. Dennis K. Pawley, former Executive Vice President of
DaimlerChrysler, an SDC shareholder and Strategic Board Advisor,
has 34 years' experience as an executive with General Motors,
Mazda and Chrysler. He recently resigned and took early
retirement as the Executive Vice President of Manufacturing and
Labor Relations at DaimlerChrysler, AG.
Mr. Richard Donnelly, who recently retired as President of
General Motors Europe, has joined SDC International's management
team. Mr. Donnelly had responsibility for GM's vehicle business
in Europe with annual revenues of $25 billion, 80,000 employees
producing in 11 countries and selling 1.9 million vehicles
annually in 42 countries throughout Western, Central and Eastern
Europe. He was Chairman of GM's European Strategy Board and has
been a Director of Saab (Sweden), Isuzu (Japan) and of ACEA, the
European automobile manufacturers association headquartered in
Brussels.
Harbour and Associates, Inc., an SDC shareholder and acquisition
partner, is a prominent Detroit-based manufacturing and
management firm specializing in improving quality, productivity
and profitability of car and truck manufacturing plants. Their
client list includes BMW, Ford Motor Company, DaimlerChrysler,
General Motors Corporation, Fiat, S.P.A., Nissan Motor
Corporation, Toyota Motor Corporation and many others. Harbour
is, also, the publisher of the "Harbour Report", the recognized
analysis report of manufacturing in the American automotive
industry and which is the industry benchmark for international
comparisons and analyses of productivity, capacity utilization
and plant profitability. Harbour and Associates is represented
on the Company's Advisory Board by Ronald Harbour, its President.
<PAGE> 14
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers
and directors, and persons who beneficially own more than 10% of
a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the SEC.
Officers, directors and greater than 10% shareholders are
required by Exchange Act regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received
by it, or written representations from certain reporting persons
that no Form 5 was required for such persons, the Company
believes that, other than as disclosed below, during the fiscal
year ending December 31, 1998, all filing requirements applicable
to officers, directors and greater than 10% beneficial owners
were complied with.
Item 10. EXECUTIVE COMPENSATION
The Company's Chairman and President both received compensation
in the form of management fees amounting to $156,000 each during
the fiscal year 1998, plus normal and reasonable automobile and
medical insurance reimbursements.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table contains information as of December 31, 1998,
as to the number of Shares of Common Stock which is beneficially
owned by (i) each person or entity known by the Company to own
beneficially more than 5% of the Company's Common Stock, (ii)
each person who is a Director of the Company, and (iii) all
persons as a group who are Directors and Officers of the Company,
and as to the percentage of the outstanding Shares held by said
individuals or entities. There is only one class of security of
the Company, Common Stock.
<TABLE>
<CAPTION>
Title of Class: Common Equity Shares
Name and Address Number of Shares Percentage
<S> <C> <C>
Diesel International, a.s.
c/o P. O. Box 2186
Palm Beach, FL 33480 500,000 10.6
WCG Holdings, Inc.
1530 N. Lake Way
Palm Beach, FL 33480 500,000 10.6
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
Title of Class: Common Equity Shares Contd..
Name and Address Number of Shares Percentage
<S> <C> <C>
Double Seal Ring Company, Inc., et al
2065 Montgomery Street
Fort Worth, TX 76107 400,000 8.5
Ronald A. Adams (2) 550,000 11.6
Henry S. Green, Jr. (3) 400,000 8.5
Milota K. Srkal 177,840 3.8
All Officers & Directors
as a Group (2) and (3) 1,127,840 23.89
</TABLE>
Footnotes:
(1) Based on 4,721,917 shares outstanding.
(2) Includes shares owned by WCG Holdings, Inc. and/or Mr. Ronald
A. Adams, Chairman of the Company and an affiliate of WCG
Holdings, Inc.
(3) Owned by Double Seal Ring Company, Inc. and its two major
shareholders. Mr. Henry S. Green, Jr., Secretary of the
Company, is an affiliate of Double Seal Ring Company, Inc.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1994, the Company issued 1,400,000 shares of its
Common Stock to its founding shareholders. Of the total
1,400,000 shares issued, 500,000 and 400,000 shares were issued
to WCG Holdings, Inc. and Double Seal Ring Company, Inc. and were
valued at par value of $.001 per share. Also during September
1994, pursuant to the founding shareholders' agreement, Skoda
contributed machinery and equipment with an independently
certified appraised value of $4,469,064 in exchange for 448,350
shares of the Company's common stock ($9.97 per share).
Additionally, effective April 21, 1994, the Company executed an
exclusive agency agreement with Skoda, pursuant to which the
Company obtained the right to act as Skoda's exclusive agent in
North, Central and South America, and as a non-exclusive agent
throughout the remainder of the world. In consideration of these
rights, the Company issued 51,650 shares of its common stock to
Skoda Diesel, a.s. ($1.25 per share).
The Company has purchased items from Double Seal Ring Company, a
shareholder, and has sold these items to non-related parties as
well as to Skoda Diesel, also a shareholder. Such transactions
were less than $50,000, and a gross profit was made by the
Company. The Company believes that the costs and prices for such
transactions were the same as those which would be afforded to
non-related parties, and that all transactions were at arms-
length.
<PAGE> 16
The Company's Chairman has served as a Financial Advisor to Skoda
Diesel and Double Seal, and is a majority beneficial shareholder
of WCG Holdings, Inc. The Company's President served as the
President of GGB, the Central and South American distributor for
Tatra, a.s., which the Company purchased by merger in 1997.
During the period ending December 31, 1998, the Company's
Chairman has loaned up to $93,050 to the Company.
Item 13. FINANCIAL STATEMENTS AND EXHIBITS
(a) Please see the attached Financial Statements
(b) Exhibits: (filed with original and previous filings)
(1) (Articles) Certificate of Incorporation -
incorporated by reference into Exhibit 15 (b)(1)
on Registrant's Form 10SB file number 0-27520.
(2) By-Laws of the Company - incorporated by
reference into Exhibit 15 (b) (2) on Registrant's
Form 10SB file number 0-27520.
(3) Material Contracts
(a) Shareholder Agreement - incorporated by
reference into Exhibit 15 (b) (4) (a) on
Registrant's Form 10SB file number 0-27520.
(i) "Expert's Opinion-
Certified Appraisal - incorporated by
reference into Exhibit 15 (b) (4) (a) (i)
on Registrant's Form 10SB file number 0-
27520.
(ii) Bill of Sale and Transfer - incorporated
by reference into Exhibit 15 (b) (4) (a)
(ii) on Registrant's Form 10SB file number
0-27520.
(b) Exclusive Agency Agreement - incorporated by
reference into Exhibit 15 (b) (4) (b) on
Registrant's Form 10SB file number 0-27520.
<PAGE> 17
(c) Agreement to Merge Golden Grove Business, Inc.
into SDC International, Inc., dated January
31, 1997 between SDC International, Inc., and
Golden Grove Business, Inc.
(d) Exclusive Agency Agreement dated August 21,
1997, between Metall Kraft, s.r.o., and SDC
International, Inc.
(e) Purchase and Sale Agreement dated 18th day of
November, 1997 between SDC International, Inc.
and Motokov International, joint stock company.
<PAGE> 18
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Palm
Beach, Florida, on the 27th day of March, 2000.
SDC International, Inc.
(Registrant)
By:/s/Ronald A. Adams
Ronald A. Adams, Chairman
Pursuant to the requirements of the Exchange Act, this report has
been signed below by the following persons on behalf of the Registrant in
the capacities, on the dates indicated, and as representing a majority of
the Board of Directors.
Date: 3-27-00 /s/Ronald A. Adams
Ronald A. Adams, Director
and Chairman (Principal
Executive Officer and
Principal Financial Officer)
Date: 3-27-00 /s/Henry S. Green
Henry S. Green, Jr., Director
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
SDC International, Inc.
Palm Beach, Florida
We have audited the accompanying consolidated balance sheets of
SDC International, Inc. and subsidiary (the "Company") as of
December 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' (deficiency) equity and
cash flows for the year ended December 31, 1998 and the period
from September 1, 1997 through December 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present
fairly, in all material respects, the consolidated financial
position of SDC International, Inc. and subsidiary as of
December 31, 1998 and 1997, and the consolidated results of their
operations and their consolidated cash flows for the year ended
December 31, 1998 and the period from September 1, 1997 through
December 31, 1997 in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
October 7, 1999, except Notes J and F
as to which the dates are December 21, 1999 and March 2, 2000
<PAGE> F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
SDC International, Inc.
We have audited the accompanying statements of operations,
stockholders' equity and cash flows of SDC International, Inc.
(the "Company") for the year ended August 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management,
as well as evaluating the overall financial statement
presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the results of
operations and cash flows of the Company for the year ended
August 31, 1997 in conformity with generally accepted
accounting principles.
Scarano & Tomaro, P.C.
Syosset, New York
December 5, 1997
<PAGE> F-2
SDC INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 41,651 $ 47,052
Inventory 303,223 3,373
Prepaid expenses 15,000 15,625
------------ ------------
Total current assets 359,874 66,050
Machinery and equipment, net 15,251 19,948
Cash - restricted 80,532 80,960
Agency rights at cost, net of accumulated
amortization of $63,702 and $25,482 89,201 127,421
Net assets of discontinued subsidiary 94,518 51,534
Other assets 48,894 20,000
------------ ------------
$ 688,270 $ 365,913
============ ============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 87,900 $ 72,553
Due to related parties, including
accrued interest of $88,928 and
$2,917, net of unamortized
discount of $154,396 and $8,750 1,470,262 110,006
------------ ------------
Total current liabilities 1,558,162 182,559
------------ ------------
Commitments (Note I)
STOCKHOLDERS' (DEFICIENCY) EQUITY
Common stock $.001 par value, 10,000,000
shares authorized, 4,671,917 and
2,990,118 shares issued and outstanding,
respectively 4,672 2,990
Additional paid-in capital 10,570,673 6,844,992
Common shares payable 70,875
Accumulated deficit (11,549,518) (6,524,424)
Accumulated foreign currency translation
adjustment 33,406 12,146
------------ ------------
(869,892) 335,704
Unamortized compensation (152,350)
------------ ------------
(869,892) 183,354
------------ ------------
$ 688,270 $ 365,913
============ ===========
</TABLE>
See notes to financial statements
<PAGE> F-3
SDC INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Period From
September 1,
1997
Year Ended Through Year Ended
December 31, December 31, August 31,
1998 1997 1997
------------ ------------- ------------
<S> <C> <C> <C>
Sales $ 1,128,319
Cost of sales 697,768
------------
Gross profit 430,551
------------
Expenses:
Selling, general and administrative,
including $2,422,902, $13,850 and
$171,250 paid by issuance of stock $ 3,624,025 $ 292,029 733,811
Depreciation and amortization 49,039 61,820 450,129
Loss on disposal of machinery and
equipment 437,088
Loss on impairment of agency
rights and customer list 226,449
Loss on impairment of machinery
and equipment 3,467,320
----------- ------------ ------------
Total expenses 3,673,064 4,047,618 1,621,028
----------- ------------ ------------
Loss from operations before interest
expense (3,673,064) (4,047,618) (1,190,477)
Interest expense including amortization
of debt discount, net (1,193,254) (28,619) (12,622)
----------- ------------ ------------
Loss from continuing operations (4,866,318) (4,076,237) (1,203,099)
Loss from operations of discontinued
subsidiary (158,776) (38,612)
----------- ------------ ------------
Net loss $(5,025,094) $ (4,114,849) $ (1,203,099)
=========== ============ ============
Net loss per share - Basic and diluted:
Loss from continuing operations $(1.30) $(1.43) $(0.50)
Loss from operations of
discontinued subsidiary (0.04) (0.01) -
------- ------- -------
Net loss $(1.34) $(1.44) $(0.50)
======= ======= =======
Weighted average shares outstanding 3,738,147 2,847,893 2,383,254
=========== ============ ============
</TABLE>
See notes to financial statements
<PAGE> F-4
SDC INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' (Deficiency) Equity
<TABLE>
<CAPTION>
Accumulated
Foreign
Common Stock Additional Common Currency
Par Paid-in Shares Accumulated Translation Unamortized
Shares Value Capital Payable Deficit Adjustment Compensation Totals
--------- --------- ----------- ------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - September 1, 1996 2,198,265 $ 2,198 $ 5,845,016 $ (1,206,476) $ 4,640,738
Issuance of common stock in
connection with private
placement memorandum, net
of offering costs of $28,308 195,719 196 271,747 271,943
Issuance of common stock in
connection with acquisition 48,000 48 35,952 36,000
Issuance of common stock as
consideration for consulting
services 197,500 197 192,928 193,125
Net loss and comprehensive
loss for the year ended
August 31, 1997 (1,203,099) (1,203,099)
--------- --------- ----------- ------------ ----------
Balance - August 31, 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 $30,000 185,634 186 248,264 248,450
Issuance of common stock to
consultant for services 150,000 150 224,850 $ (166,200) 58,800
Issuance of common stock in
connection with loan
agreements 15,000 15 26,235 26,250
Amortization of compensation
costs 13,850 13,850
Comprehensive loss:
Foreign currency translation
adjustment $ 12,146 12,146
Net loss for the period from
September 1, 1997 to
December 31, 1997 (4,114,849) (4,114,849)
Total comprehensive loss (4,102,703)
--------- --------- ----------- ------------ ----------- ----------- -----------
Balance - December 31, 1997 2,990,118 2,990 6,844,992 (6,524,424) 12,146 (152,350) 183,354
Issuance of common stock in
connection with private
placement memorandum, net
of offering costs of $91,000 292,833 293 258,986 259,279
Issuance of common stock in
connection with loan
agreements 228,033 228 473,912 474,140
Issuance of common stock to
consultants and employees
for services 1,125,933 1,126 2,087,126 2,088,252
Issuance of common stock in
repayment of short-term loan 35,000 35 34,965 35,000
Issuance of warrants to
consultants for services 182,300 182,300
Beneficial conversion feature
related to notes and other
amounts payable 688,392 688,392
Common shares (54,000) to be
issued in connection with
extension of loan $70,875 70,875
Amortization of compensation
costs 152,350 152,350
Comprehensive loss:
Foreign currency translation
adjustment 21,260 21,260
Net loss for the year ended
December 31, 1998 (5,025,094) (5,025,094)
Total comprehensive loss (5,003,834)
--------- --------- ----------- ------- ------------ ----------- ----------- -----------
Balance - December 31, 1998 4,671,917 $ 4,672 $10,570,673 $70,875 $(11,549,518) $ 33,406 $ 0 $ (869,892)
========= ========= =========== ======= ============ =========== =========== ===========
</TABLE>
See notes to financial statements
<PAGE> F-5
SDC INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Period From
September 1,
1997
Year Ended Through Year Ended
December 31, December 31, August 31,
1998 1997 1997
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (5,025,094) $ (4,114,849) $ (1,203,099)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 49,039 61,820 450,129
Amortization of debt discount 1,087,761 17,500
Expenses paid by issuance of stock 2,422,902 13,850 171,250
Loss from operations of discontinued
subsidiary 158,776 42,612
Loss on disposal of machinery and
equipment 437,088
Loss on impairment of machinery and
equipment 3,467,320
Loss on impairment of agency rights and
customer list 226,449
Changes in:
Inventory (299,850) (3,373) 31,310
Security deposits (48,894) 18,000
Prepaid expenses 625 6,248 (15,291)
Other current assets 1,905 (1,903)
Accounts payable and accrued expenses 15,347 (17,707) 7,080
Accrued interest 86,011 2,917
------------ ------------ -----------
Net cash used in operating (1,553,377) (299,308) (105,436)
activities ------------ ------------ -----------
Cash flows from investing activities:
Purchase of machinery and equipment (6,122) (1,864)
Acquisition of agency rights (123,334)
Decrease (increase) in restricted cash 428 249,972 (250,000)
Proceeds from collection of note
receivable 62,985
Investment in, and advances to,
discontinued subsidiary (180,500) (78,000)
------------ ------------ -----------
Net cash (used in) provided by
investing activities (186,194) 170,108 (310,349)
------------ ------------ -----------
Cash flows from financing activities:
Advances (repayment of advances) from
officer, net 9,895 (11,197) (84,266)
Loans from related parties, net 1,444,996 100,000
Proceeds from sale of stock 350,279 337,250 328,558
Costs associated with sale of stock (91,000) (30,000) (28,308)
Deferred offering costs 20,000 (20,000)
Net proceeds (repayments) under line
of credit (215,000) 215,000
------------ ------------ -----------
Net cash provided by financing
activities 1,734,170 161,053 430,984
------------ ------------ -----------
Net (decrease) increase in cash (5,401) 31,853 15,199
Cash, beginning of period 47,052 15,199
------------ ------------ -----------
Cash, end of period $ 41,651 $ 47,052 $ 15,199
============ ============ ===========
Supplemental cash flow disclosure:
Cash paid for:
Interest $ 19,581 $ 10,736 $ 11,415
Supplemental disclosure of noncash
investing and financing activities:
Issuance of common stock for
acquisition of GGB $ 36,000
Issuance of common stock for in
connection with stockholder loans $ 474,140 $ 26,250
Issuance of common stock in payment
of loan payable to stockholder $ 35,000
</TABLE>
See notes to financial statements
<PAGE> F-6
SDC INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Financial Statements
December 31, 1998 and 1997
NOTE A - THE COMPANY AND BASIS OF PREPARATION
The accompanying financial statements include the accounts of SDC
International, Inc., (the "Company") and its wholly-owned subsidiary
Skobol, s.a. ("Skobol") after elimination of all significant
intercompany transactions and balances. The Company was incorporated
in the State of Delaware in 1994, and acquired an exclusive agency
agreement from Diesel International, a.s. (formerly known as Skoda
Diesel, a.s.) ("Diesel") which permitted the Company to sell a broad
range of Diesel's products, including diesel engines and power
generating sets. Diesel, which was formed in what is now the Czech
Republic, was one of the founding stockholders of the Company. During
the year ended August 31, 1997, as a result of financial difficulties
encountered by Diesel, the Company discontinued selling Diesel's
products. Sales made during such year consist principally of two
transactions in February and April 1997 representing approximately 98%
of the sales revenue. One sale for $658,194 was made in Greece and the
other sale, for $443,053, was made in Egypt.
During November 1997, the Company acquired the outstanding common
stock of Skobol, a Bolivian Corporation, which is a distributor within
the country of Bolivia of products manufactured in the Czech Republic.
In December 1999, the Company's Board of Directors adopted a plan to
dispose of the subsidiary and, accordingly, the subsidiary has been
accounted for as a discontinued operation in the accompanying
financial statements (see Note J.)
During the year ended December 31, 1998, the Company has been
attempting to acquire manufacturing entities in the Czech Republic and
has been incurring expenses in connection therewith.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As shown in the
accompanying financial statements, the Company has incurred recurring
net losses and as of December 31, 1998, has a working capital
deficiency and a stockholders' deficiency. In 1999, and on March 2,
2000, amounts due to related parties amounting to $1,408,102 (net of
related discount) at December 31, 1998 were converted into common
stock (see Note F). Continuation of the Company as a going concern is
dependant upon (i) the Company achieving profitable operations through
acquisitions which requires obtaining financing and (ii) obtaining
debt and/or equity financing to fund operating expenses to be incurred
until an acquisition is consummated. Management anticipates
additional financing to be obtained from existing shareholders to fund
operational expenses. However, there is no assurance that the Company
can obtain required financing, make any acquisitions or that profitable
operations can be achieved.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Change in fiscal year:
In 1997, the Company changed its reporting year from a fiscal year
ended August 31 to a calendar year ended December 31.
Accordingly, the accompanying financial statements reflect results
of operations for the period from September 1, 1997 through
December 31, 1997 in order to transition to the new reporting
year.
[2] Restricted cash:
Restricted cash represents collateral under a performance bond
posted as a condition of the agency agreement with Diesel and is
scheduled to be released to the Company in 2000 upon expiration of
the bond.
[3] Inventory:
Inventory, which consists of trucks acquired from Tatra (see Note
D[4]), is stated at the lower of cost (determined on a first-in,
first-out basis) or market.
<PAGE> F-7
SDC INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Financial Statements
December 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[4] Long-lived assets:
Machinery and equipment is recorded at cost. Maintenance and
repairs are charged to expense as incurred. Depreciation is
computed using the straight line method over the estimated useful
lives of the assets as follows:
Machinery and equipment 5-15 years
Computer software 3 years
Computer equipment 5 years
Intangibles, consisting of agency rights and customer lists, are
recorded at cost and amortized on a straight-line basis over
periods of 3 to 5 years.
Machinery and equipment and intangibles are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. In conducting
such review, the estimated future undiscounted cash flows
associated with the asset are compared to the asset's carrying
amount to determine if a write down is required. If such cash
flows are less than the asset's carrying amount, the asset is
written down to estimated fair value.
[5] Net loss per share:
In calculating basic and diluted net loss per share, the
Company uses the weighted average number of common shares
outstanding during the respective periods. No shares issuable
upon exercise of outstanding warrants have been included in the
computation of diluted net loss per share as their effect is anti-
dilutive.
[6] Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ
from those estimates.
[7] Fair value:
The carrying value of cash, accounts receivable, accounts
payable, and amounts due to related parties approximates fair
value.
[8] Revenue recognition:
Revenue is recognized when products are shipped.
[9] Comprehensive income:
The Company adopted the provision of SFAS N0. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial
statements. Comprehensive income, as defined, includes all
changes in equity (net assets) during a period from non-owner
sources. Comprehensive loss for the period consists of the net
loss and the loss from foreign currency translation.
<PAGE> F-8
SDC INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Financial Statements
December 31, 1998 and 1997
NOTE C - MACHINERY AND EQUIPMENT
Machinery and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Computer and software $ 36,362 $ 32,790
Machinery and equipment 4,013,183 4,013,183
Leasehold improvements 2,550
----------- -----------
4,052,095 4,045,973
Less accumulated depreciation (569,524) (558,705)
----------- -----------
3,482,571 3,487,268
Less valuation allowance (3,467,320) (3,467,320)
----------- -----------
$ 15,251 $ 19,948
=========== ===========
</TABLE>
Depreciation expense amounted to $10,819, $3,937 and $309,374 for the
year ended December 31, 1998, the four months ended December 31, 1997
and the year ended August 31, 1997, respectively.
During September 1994, the Company issued 448,350 shares of common
stock to Diesel as consideration for the contribution of machinery and
equipment valued by an appraisal and for book purposes at $4,469,064.
During the year ended August 31, 1997, machinery and equipment no
longer being utilized or not considered useful, with a book value of
$437,088, was disposed of by the Company, resulting in a loss on
disposal of $437,088. Through August 31, 1997, the Company had
generated approximately $1,174,000 in net sales since the machinery
and equipment was placed in service. No sales were generated during
the four months ended December 31, 1997. The machinery and equipment,
formerly used in the manufacture of Skoda diesel engines, is located
in the Czech Republic in the Diesel facilities. As a result of the
financial difficulties of Diesel, the status and future use of the
machinery and equipment, which is no longer in service, is uncertain.
The Company currently has no facilities that could be used to house
the machinery and equipment. As a result, during the period ended
December 31, 1997, the Company has recorded a loss on impairment of
the machinery and equipment in the amount of $3,467,320 representing
the remaining undepreciated balance.
NOTE D - AGENCY RIGHTS AND CUSTOMER LISTS
[1] On April 21, 1994, one of the founding stockholders executed an
exclusive agency agreement, as agent of the Company, with Diesel
pursuant to which the Company was appointed as Diesel'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
exclusivity, it must generate annual gross sales within the
territory of at least $15,000,000 at the close of the sixth year
after the execution of the agreement. As consideration for the
purchase of these exclusive agency rights, the Company issued to
Diesel 51,650 shares of its common stock valued at $64,563. The
rights were being amortized on a straight-line basis over five
years. As a result of the financial difficulties of Diesel,
during the period ended December 31, 1997, the Company has
recorded a loss on impairment of the agency rights in the amount
of $25,824 representing the remaining unamortized balance.
<PAGE> F-9
SDC INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Financial Statements
December 31, 1998 and 1997
NOTE D - AGENCY RIGHTS AND CUSTOMER LISTS (CONTINUED)
[2] During October 1995, the Company purchased the exclusive agency
rights to market and sell Diesel products in China and South Korea
for a one-time fee of $100,000 and $50,000, respectively. Such
agency rights had sales performance goals which subsequently have
not been met. During April 1996, the Company entered into a
modification of the agreement whereby all such sales levels were
postponed for one year. The agency rights were being amortized on
a monthly basis over the five years of the agreement. Through
December 31, 1997, the Company had made no sales related to these
agency rights. As a result of the financial difficulties of
Diesel, and the Company's failure to meet its sales performance
goals, during the period ended December 31, 1997, the Company has
recorded a loss on impairment of the agency rights in the amount
of $97,500 representing the remaining unamortized balance.
[3] In December 1995, the Company acquired certain customer lists at a
cost of $337,500, which was being amortized over three years.
Through December 31, 1997, the Company had generated no sales to
such customers. Accordingly, as of such date, the Company has
recorded a loss on impairment of the customer list in the amount
of $103,125 representing the remaining unamortized balance.
[4] On April 24, 1997, the Company acquired for 48,000 common shares
valued at $36,000 all the issued and outstanding common stock of
Golden Grove Business, Inc. ("GGB"), a Panama corporation, whose
sole asset was an exclusive agency contract with Tatra, a.s.
("Tatra"), a Czech truck manufacturer, to market and sell Tatra's
products in Colombia with the right of first refusal to become the
exclusive distributor for other countries in South and Central
America. GGB was merged into the Company and the Company assumed
GGB's liabilities amounting to $116,903 at the date of the merger.
The Company is amortizing such agency rights over the estimated
remaining useful life of four years. Through December 31, 1998,
the Company had generated no sales relating to these agency
rights.
NOTE E- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
December 31:
1998 1997
--------- ----------
Accounts payable $ 31,667
Compensation $ 37,900 14,000
Professional fees 50,000 26,886
--------- ----------
$ 87,900 $ 72,553
========= ==========
<PAGE> F-10
SDC INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Financial Statements
December 31, 1998 and 1997
NOTE F - DUE TO RELATED PARTIES
[1] Line-of-credit:
During June 1998, the Company obtained an unsecured $500,000 line
of credit from a stockholder with a stated interest rate of 14% per
annum. Principal and interest were payable on December 8, 1998.
The agreement provided that the principal balance of the line-of-
credit and any outstanding accrued interest may, at the stockholder's
option, be converted into common stock at $1.00 per share. The
conversion price of the line of credit agreement ($500,000) was less
than the aggregate market price ($1,140,600) of the common stock
obtainable on conversion on the date of the agreement. In connection
therewith, additional interest expense of $500,000 related to the
beneficial conversion feature, limited to the proceeds of the line of
credit, wascharged to operations for the year ended December 31, 1998
with a corresponding credit to additional paid-in capital. By agreement
with the stockholder, the due date of the agreement was extended
to December 31, 1999. In connection therewith, the Company agreed
to issue 54,000 common shares quarterly until maturity. This
resulted in additional interest expense of $70,875 for the year
ended December 31, 1998 with a corresponding credit to common
shares payable. As of December 31, 1998, outstanding borrowings
under the line of credit amounted to $500,000 and accrued interest
amounted to $28,941. The Company's effective interest rate for
borrowings under the agreement amounted to 250%. On March 2, 2000,
the outstanding balance under the line of credit, together with
accrued interest, was converted to 583,425 shares of common stock.
[2] Loans from stockholders:
During October 1997 and from June 1998 through September 1998, the
Company borrowed $100,000 and $1,186,500, respectively, from
stockholders under notes which are repayable in periods ranging
from 90 to 180 days, at a stated interest rate of 14% per annum.
Of the 1998 borrowings, notes for $950,000 were convertible into
common shares at either (i) 70% of market value, (ii) $1.00 per
common share or (iii) in the event of default. The conversion
price of the notes other than those convertible on default
($350,000) was less than the aggregate market price ($538,392)
of the common stock obtainable on the date the notes were issued.
Interest accrued on these notes at December 31, 1998 and 1997
amounted to $59,987 and $2,917, respectively. Interest expense
on the notes during the year ended December 31, 1998 and the four
months ended December 31, 1997 amounted to $73,976 and $2,917,
respectively. During 1999 and on March 2, 2000, holders of notes
with outstanding principal balances of $1,265,000 (which included
additional borrowings of $315,000 subsequent to December 31, 1998)
converted their notes, together with accrued interest, into
1,879,081 shares of common stock.
In connection with these borrowings, during the year ended
December 31, 1998 and the four months ended December 31, 1997, the
Company issued to the stockholders 228,033 and 15,000 shares of
common stock valued at $474,140 and $26,250, respectively. Such
amount has been accounted for as debt discount. Additional debt
discount of $188,392 was also recognized in connection with the
beneficial conversion features of certain of the convertible notes
issued in 1998. The Company's effective rate for these borrowings,
including debt discount, ranged from 14% to 188%. During the year
ended December 31, 1998 and the four months ended December 31,
1997, amortization of discount amounted to $516,886 and $17,500,
respectively.
During 1998, the Company repaid notes of $276,500, including a
note of $35,000 by issuance of 35,000 common shares.
NOTE G - INCOME TAXES
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to net operating loss carryforwards
and to differences between the financial statement and tax bases of
assets and liabilities. The deferred tax assets and liabilities
represent the future tax return consequences of these temporary
differences, which will either be taxable or deductible when the
assets and liabilities are recovered or settled.
At December 31, 1998, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $5,900,000 expiring
in the years 2009 through 2018.
<PAGE> F-11
SDC INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Financial Statements
December 31, 1998 and 1997
NOTE G - INCOME TAXES (CONTINUED)
As of December 31, 1998 and 1997, deferred tax assets consist of the
following:
December 31,
1998 1997
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 2,016,000 $ 518,000
Excess of tax basis over statement
basis of machinery and equipment
and other assets 1,447,000 1,542,000
----------- -----------
3,463,000 2,060,000
Valuation allowance (3,463,000) (2,060,000)
----------- -----------
Net deferred tax asset $ - $ -
=========== ===========
At December 31, 1998 and 1997, a valuation allowance has been provided
to offset the deferred tax asset since management could not determine
that it was more likely than not that the benefit of the deferred tax
asset would be realized. Increases (decreases) in the valuation
allowance amounted to $1,403,000, $1,700,000 and $(86,000) during the
year ended December 31, 1998, four months ended December 31, 1997 and
the year ended August 31, 1997, respectively.
NOTE H - STOCKHOLDERS' EQUITY
[1] 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) at $1.50 per share before deducting discounts,
commissions and nonaccountable expenses. During the year ended
December 31, 1998, the four months ended December 31, 1997 and the
year ended August 31, 1997, the Company sold an aggregate of
292,833, 185,634 and 190,119 common shares yielding proceeds net
of offering costs of $259,279, $248,450 and $256,870,
respectively.
[2] In November 1997, outstanding warrants to purchase 40,000 shares
of the Company's common stock at an exercise price of $3.00 per
share were cancelled.
[3] On September 5, 1997, the Company established a Nonqualified Stock
Option Plan (the "97 Plan") pursuant to which 750,000 shares of
common stock are reserved for issuance. On October 29, 1998, the
Company established a second Nonqualified Stock Option Plan (the
"98 Plan") pursuant to which 500,000 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 97 and 98 Plans are designed to serve as an incentive for
retaining qualified and competent persons who are key employees,
consultants, representatives, officers and directors of the
Company.
During the year ended December 31, 1998 and the four months ended
December 31, 1997, the Company granted to consultants and
employees options to purchase 891,000 common shares and 150,000
common shares, respectively. The options, which had exercise
prices of zero and $.40, respectively, were exercised immediately
upon grant. The market value of the common shares on the date of
grant, in excess of the exercise price, amounting to $1,622,258
(1998) and $166,200 (1997) were charged to expense and unamortized
compensation, respectively. As of December 31, 1998, no options
were outstanding under the plans.
<PAGE> F-12
SDC INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Financial Statements
December 31, 1998 and 1997
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
[4] As of December 31, 1998, the Company has outstanding warrants to
purchase a total of 180,000 shares of common stock at exercise
prices of $2.00 and $2.50 per share, of which 130,000 expire in
2000 and 50,000 expire in 2003. These warrants had been issued to
consultants during 1998.
NOTE I - COMMITMENTS AND OTHER COMMENTS
[1] Lease agreement:
Effective January 1, 1997, the Company leases its executive office
on a month to month basis from its Chief Executive Officer
("CEO".) Rent expense under the arrangement amounted to $27,000,
$12,000 and $15,000 during the year ended December 31, 1998, the
four months ended December 31, 1997 and the year ended August 31,
1997, respectively.
Included in general and administrative expenses is rent expense
for the above and other rentals which totaled $47,718, $12,541 and
$63,732 for the year ended December 31, 1998, the four months
ended December 31, 1997 and the year ended August 31, 1997,
respectively.
[2] 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 results in a finder's fee to Prime of two percent of the
gross sales price or ten percent of the adjusted gross profit
resulting from the sales. Such payments are due 45 days after
each quarter-annual calendar period. As of December 31, 1998, no
amounts were due under this agreement.
[3] Executive compensation:
For the year ended December 31, 1998, the four months ended
December 31, 1997 and the year ended August 31, 1997,
respectively, the Company incurred management fees of $156,000,
$65,000 and $72,000, payable to its Chief Executive Officer.
For the year ended December 31, 1998, the Company incurred
management fees of $181,000 to its President.
NOTE J - DISCONTINUED OPERATIONS
On November 18, 1997, the Company acquired 99.9% of the common stock
of Skobol for $78,000. Skobol is a Bolivian corporation, which imports
and sells at retail in Bolivia, light transportation and other
equipment which is manufactured in the Czech Republic. On December 21,
1999, the Board of Directors of the Company authorized the sale of
Skobol. Accordingly, the results of operations of Skobol, which are
included in the accompanying financial statements from September 1,
1997, the effective date of acquisition, are shown as discontinued
operations. In addition, the assets and liabilities of Skobol are
reflected in the balance sheets as net assets of discontinued
subsidiary.
The excess ($126,283) of the fair value of the net current assets
acquired over the cost of acquisition is being amortized on a
straight-line basis over 60 months. Amortization of such excess
amounted to $25,260 in 1998 and $8,420 in 1997.
<PAGE> F-13
SDC INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Financial Statements
December 31, 1998 and 1997
NOTE J - DISCONTINUED OPERATIONS (CONTINUED)
Assets and liabilities related to Skobol at December 31,
1998 and 1997 follows:
1998 1997
--------- ----------
Cash $ 15,775 $ 53,897
Receivables 100,957 103,229
Inventory 201,851 92,104
Other current assets 15,484 4,466
Fixed assets, net 1,830 439
--------- ----------
Total assets 335,897 254,135
Accounts payable and accrued
expenses (a) (148,776) (84,738)
Excess of value of net assets
acquired Over cost of
acquisition (92,603) (117,863)
--------- ----------
Net assets of discontinued
subsidiary $ 94,518 $ 51,534
========= ==========
(a) Excludes amounts due to Company of $180,500 (1998)
Net sales of Skobol amounted to $199,989 and $58,129 in the
year ended December 31, 1998 and the four months ended
December 31, 1997, respectively.
The functional currency of Skobol is its local currency.
Accordingly, the subsidiary's operations are translated at
average exchange rates during the period, and assets and
liabilities are translated at end-of-period rates.
Translation adjustments are included as a separate component
of stockholders' (deficiency) equity. Gains and losses on
currency transactions denominated in other than the local
Bolivian currency are reflected in operations.
<PAGE> F-14
<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 II, Item 7. of this Form 10-KSB and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 41,651
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 303,233
<CURRENT-ASSETS> 359,874
<PP&E> 15,251
<DEPRECIATION> 0
<TOTAL-ASSETS> 688,270
<CURRENT-LIABILITIES> 1,558,162
<BONDS> 0
0
0
<COMMON> 4,672
<OTHER-SE> 10,641,548
<TOTAL-LIABILITY-AND-EQUITY> 688,270
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,673,064
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,193,254
<INCOME-PRETAX> (4,866,318)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> (158,776)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,025,094)
<EPS-BASIC> (1.34)
<EPS-DILUTED> (1.34)
</TABLE>
