U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: January 31, 2002
Commission File Number: 0-29671
SGD HOLDINGS, LTD.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3986493
(State of Incorporation) (IRS Employer ID No)
111 Rhodes Street, Conroe, TX 77301
(Address of principal executive office)
(936) 756-6888
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of January 31, 2002 was 98,524,408.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
1
SGD Holdings, Ltd. and Subsidiaries
Index
Page
No.
Part I. Unaudited Financial Information
Item 1. Condensed Consolidated Balance Sheet - 3
January 31, 2002
Condensed Consolidated Statements of Operations - 4
Three and Six Months Ended January 31, 2002 and 2001
Condensed Consolidated Statement of Stockholders' Equity - 5
Six Months Ended January 31, 2002
Condensed Consolidated Statements of Cash Flows - 6-7
Six Months Ended January 31, 2002 and 2001
Notes to Condensed Consolidated Financial Statements - 8-15
Six Months Ended January 31, 2002 and 2001
Item 2. Managements Discussion and Analysis of Financial Condition 16-18
and Results of Operations
Part II. Other Information 19
2
SGD Holdings, Ltd. and Subsidiaries
Condensed Consolidated Balance Sheet
January 31, 2002
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 1,604,409
Trade accounts receivable 2,125,547
Marketable equity securities 256,087
Inventory 3,516,546
Deferred income taxes 41,000
Prepaid expenses and other assets 343,801
-----------------------
7,887,390
Property and equipment, net 557,637
Goodwill and other intangibles 4,047,926
Due from related parties 28,267
Deferred income taxes 74,100
Marketable equity securities 184,600
Deposits and other assets 44,280
-----------------------
$12,824,200
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt and notes payable 186,230
Notes payable - related parties 2,268,153
Accounts payable 877,156
Accrued expenses 166,398
Due to related parties 51,711
-----------------------
3,549,648
Long-term debt less current installments 63,326
Stockholders' equity
Common stock, $.0001 par value, 200,000,000 shares authorized, 9,852
98,524,408 shares issued and outstanding
Additional paid-in capital 9,333,142
Retained earnings 29,882
Accumulated other comprehensive income (loss) (161,650)
-----------------------
9,211,226
-----------------------
$12,824,200
=======================
See accompanying notes to consolidated financial statements.
3
SGD Holdings, Ltd. and Subsidiaries
Condensed Consolidated Statements of Operations
Three and Six Months Ended January 31, 2002 and 2001
(Unaudited)
Three Months Ended Six Months Ended
January 31, January 31,
2002 2001 2002 2001
Sales and revenues $5,558,019 $ 5,130,882 $ 9,233,877 $ 7,319,186
Cost of sales 3,718,692 3,451,801 6,218,043 4,789,506
--------------------------------------------- -------------------- ------------
Gross profit 1,839,327 1,679,081 3,015,834 2,529,680
Selling, general and administrative expense 1,486,727 1,267,274 2,604,633 1,999,353
--------------------------------------------- -------------------- ------------
Earnings from operations 352,600 411,807 411,201 530,327
Other income (expense):
Unrealized gain (loss) on marketable securities 140,587 110,395 (225,913) 650,395
Interest expense (10,917) (7,984) (16,418) (16,796)
Interest expense - related parties (39,826) (55,013) (90,373) (74,005)
Gold consignment fee (30,554) (38,771) (62,997) (50,805)
Interest and other income 18,068 34,844 41,076 143,989
--------------------------------------------- --------------------- -----------
77,358 43,471 (354,625) 652,778
--------------------------------------------- --------------------- -----------
Net earnings (loss) before income taxes 429,958 455,278 56,576 1,183,105
Income tax expense (benefit) 145,400 154,900 22,100 349,200
--------------------------------------------- -------------------- ------------
Net earnings (loss) $ 284,558 $ 300,378 $ 34,476 $ 833,905
============================================= =================== =============
Net earnings (loss) per share $ 0.003 $ 0.003 $ 0.000 $ 0.009
============================================= ==================== ============
Weighted average shares outstanding (thousands) 98,008.1 96,084.4 97,636.4 95,618.1
============================================= =================================
See accompanying notes to consolidated financial statements.
4
SGD Holdings, Ltd. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
Six Months Ended January 31, 2002
(Unaudited)
Accumulated
Other
Common Stock Paid-in Retained Comprehensive
Shares Par Value Capital Earnings Income Total
Balance, August 1, 2001 97,099,408 $ 9,710 $ 9,098,284 $ (4,594) $ - $ 9,103,400
Common stock issued as part of
purchase of Tandori, Inc. 800,000 80 159,920 - - 160,000
Common stock issued for services 625,000 62 74,938 - - 75,000
Comprehensive income:
Unrealized loss on available-for-sale
securities, net - - - - (161,650) (161,650)
Net earnings - - - 34,476 - 34,476
--------------------------------------------------------------------------------------------
Balance, January 31, 2002 98,524,408 $ 9,852 $ 9,333,142 $ 29,882 $ (161,650) $ 9,211,226
============================================================================================
See accompanying notes to consolidated financial statements.
5
SGD Holdings, Ltd. and Subsidiaries
Condensed Consolidated Statement of Cash Flows
Six Months Ended January 31, 2002 and 2001
(Unaudited)
2002 2001
Cash flows from operating activities
Net earnings (loss) $ 34,476 $ 833,905
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 64,167 122,426
Deferred income taxes 22,100 349,200
Purchase of marketable equity securities - (329,005)
Unrealized (gain) loss on marketable equity securities 225,913 (650,395)
Proceeds from sale of marketable securities 175,000 -
Common stock issued for services 75,000 -
Gain on sale of assets - (7,054)
Deferred revenue realized (31,295) -
Changes in assets and liabilities:
Accounts receivable (963,032) (318,542)
Inventory (480,468) (1,157,339)
Other assets (103,091) (135,536)
Accounts payable and accrued expenses 459,101 (690,808)
-------------------- ---------------------
Net cash provided by operating activities (522,129) (1,983,148)
-------------------- ---------------------
Cash flows provided by investing activities
Capital expenditures (149,086) (32,604)
Acquisition of HMS, net of cash acquired - (2,817,872)
Acquisition of Tandori, Inc., net of cash acquired (299,650) -
Acquisition of assets at wholesale location - (105,000)
-------------------- ---------------------
Net cash provided by investing activities (448,736) (2,955,476)
-------------------- ---------------------
6
SGD Holdings, Ltd. and Subsidiaries
Condensed Consolidated Statement of Cash Flows, Continued
Six Months Ended January 31, 2002 and 2001
(Unaudited)
(Continued)
2002 2001
Cash flows provided by financing activities
Proceeds from sales of common stock - 1,567,500
Loans collected (made) 500,000 (350,000)
Loan proceeds - 480,235
Repayment of notes payable and long-term debt (16,893) (70,045)
Loan proceeds - related party 288,000 -
Repayment of related party note (625,000) -
Increase (decrease) in amount due related parties 29,270 1,178
Net cash provided by financing activities 175,377 1,628,868
Net increase in cash and cash equivalents (795,488) (3,309,756)
Cash and cash equivalents, beginning of period 2,399,898 5,969,201
--------------------- ---------------
Cash and cash equivalents, end of period $ 1,604,410 $ 2,659,445
===================== ===============
Supplemental Disclosures of Cash Flow Information
Interest paid $ 16,418 $ 16,796
========= ========
Interest paid - related party $ 90,373 $ 74,005
========= ========
Gold consignment fee paid $ 62,997 $ 50,805
========= ========
Income taxes paid $ - $ -
========= ========
Supplemental Schedule of Noncash Investing and Financing Activities
Convertible promissory notes issued in acquisition of HMS $ - $ 2,500,000
Acquisition of transportation equipment with long-term debt $ 60,799 $ 62,376
Long-term debt retired with trade-in of transportation equipment $ 27,365 $ -
Insurance financed $ 37,800 $ -
See accompanying notes to consolidated financial statements.
7
SGD Holdings, Ltd.
Notes to Condensed Consolidated Financial Statements
Six Months Ended January 31, 2002 and 2001
1. Organization and Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts
of SGD Holdings, Ltd. ("SGD") and its wholly owned
subsidiaries HMS Jewelry Company, Inc. ("HMS"), Con-Tex Silver
Imports, Inc. ("Silver"), Jewelry Solutions & Commerce, Inc.
("Jewelry") and Tandori, Inc. ("Tandori") (collectively
referred to as the "Company"). All material intercompany
accounts and transactions have been eliminated.
(b) Organization
SGD was incorporated May 22, 1996 in Delaware and until June
1999 was a development stage company with plans to establish
itself as an air transport company providing non-scheduled air
service (charter flights) for tour operators, charter brokers,
cruise line casinos, theme parks and theme attractions.
Goldonline International, Inc. (formerly Transun International
Airways, Inc.) changed its name to SGD Holdings, Ltd. on January
24, 2001.
Silver was incorporated September 12, 1994 in Texas. Jewelry was
incorporated on February 3, 1999 in Delaware. HMS was incorporated
on October 12, 2000 in Texas. Tandori was incorporated on November
9, 1998 in Nevada.
On June 10, 1999, SGD acquired all of the issued and outstanding
common stock of Silver and Jewelry. For accounting purposes, the
acquisitions were treated as the acquisition of Silver and Jewelry
by SGD with Silver as the acquiror (reverse acquisition). The
historical financial statements prior to June 10, 1999 are those
of Silver.
Effective October 1, 2000, the Company acquired HMS in a
transaction treated as a purchase for accounting purposes. The
results of operations of HMS are included in the consolidated
financial statements commencing October 1, 2000.
Effective September 1, 2001, the Company acquired Tandori in a
transaction treated as a purchase for accounting purposes. The
results of operations of Tandori are included in the consolidated
financial statements commencing September 1, 2001.
(c) Nature of Business
SGD is now a holding company principally engaged in acquiring and
developing jewelry related businesses. Silver is a company
involved in both the wholesale and retail jewelry business,
principally silver, with retail locations in the Houston area. The
wholesale operation of Silver consists of both sales directly from
its headquarters in Conroe, Texas, satellite locations in Dallas,
Texas and from jewelry shows at locations throughout the south
central United States. Jewelry now operates as an e-commerce
solutions provider to the Company's clients by offering web
hosting services and back office jewelry fulfillment services.
HMS is a national jewelry wholesaler, specializing in 18K, 14K and
10K gold and platinum jewelry, with headquarters in Dallas, Texas.
HMS markets its products to a network of over 30,000 retail
jewelers, through a catalog and telephone ordering system and
through its B2B online catalog http://www.HMSgold.com.
8
Tandori installs and sells equipment under the LifeStyle
Technologies(TM) name in both commercial and residential buildings
for security, audio, video, lighting, and other current technology
applications.
(d) General
The financial statements included in this report have been
prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission for interim reporting and
include all adjustments (consisting only of normal recurring
adjustments) that are, in the opinion of management, necessary for
a fair presentation. These financial statements have not been
audited.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations for interim reporting. The
Company believes that the disclosures contained herein are
adequate to make the information presented not misleading.
However, these financial statements should be read in conjunction
with the financial statements and notes thereto included in the
Company's Annual Report for the period ended July 31, 2001, which
is included in the Company's Form 10-KSB dated July 31, 2001 and
filed November 13, 2001. The financial data for the interim
periods presented may not necessarily reflect the results to be
anticipated for the complete year. Certain reclassifications of
the amounts presented for the comparative period have been made to
conform to the current presentation.
(e) Recent accounting pronouncements - goodwill
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141 (SFAS
No. 141), "Business Combinations," and Statement of Financial
Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other
Intangible Assets." SFAS No. 141 addresses financial accounting
and reporting for business combinations and supersedes APB
Opinion No. 16, "Business Combinations," and FASB Statement
No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." All business combinations in the scope
of SFAS No. 141 are to be accounted for using one method, the
purchase method. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001 or for which
the date of acquisition is July 1, 2001, or later. The Company
adopted this Statement on August 1, 2001 with no effect on the
results of operations or financial position.
SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supercedes APB
Opinion No. 17, "Intangible Assets." It addresses how intangible
assets that are acquired individually or with a group of other
assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition.
This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially
recognized in the financial statements. The provisions of this
Statement are required to be applied starting with fiscal years
beginning after December 15, 2001. Early application is permitted
for entities with fiscal years beginning after March 15, 2001,
provided that the first interim financial statements have not
previously been issued. This Statement is required to be applied
at the beginning of an entity's fiscal year and to be applied to
all goodwill and other intangible assets recognized in its
financial statements at that date. Impairment losses for goodwill
and indefinite-lived intangible assets that arise due to the
initial application of this Statement (resulting from a
transitional impairment test) are to be reported as resulting from
a change in accounting principle. The Company has elected to adopt
this Statement effective August 1, 2001. The Company did not
record an impairment loss as a result of the initial application
of this Statement. Goodwill amortization expense during the six
months ended January 31, 2001, would have been $85,936 less had
the Statement been in effect during that period.
9
2. Acquisition of Tandori, Inc.
Effective September 1, 2001, the Company acquired the LifeStyle
Technologies(TM) franchise for Raleigh, North Carolina, Houston, Texas,
Wilmington, North Carolina and Greensboro, North Carolina, in exchange
for $300,000 in cash to be paid to the franchisor. In addition, the
Company issued 800,000 shares of its common stock, valued at $160,000,
based upon the quoted price on the date of the transfer, to certain
principals of the new operation.
The acquisition was accounted for using the purchase method of
accounting and, accordingly, the statements of consolidated income
include the results of Tandori beginning September 1, 2001. The assets
acquired and the liabilities assumed were recorded at estimated fair
values as determined by the Company's management based on information
currently available and on current assumptions as to future operations.
A summary of the assets acquired and liabilities assumed in the
acquisition follows:
Estimated fair values:
Assets acquired $ 163,743
Liabilities assumed (150,718)
Franchise 446,975
-------------
Purchase price 460,000
Less cash acquired (350)
Less common stock issued (160,000)
-------------
Net cash paid $ 299,650
=============
The franchise located at Raleigh, North Carolina had been operated by
the franchisor since its inception in January 2001. During the eight
months ended August 31, 2001, this location had unaudited sales of
$411,600 and an operating loss of $200,800.
3. Related Party Transactions
Silver leases its corporate headquarters from the principal shareholder
of the Company at the rate of $2,200 per month. This amounted to
$13,200 during each of the six-month periods ended January 31, 2002 and
2001.
The Company had received loans from its principal shareholder. The
balance owed was $32,656 at January 31, 2002.
HMS leases its facility from HMS Leasing Company, LLC, at the rate of
$8,075 per month pursuant to a lease agreement that expires on October
31, 2010. This amounted to $48,450 during the six-month period ended
January 31, 2002 and $32,300 during the six-month period ended January
31, 2001 (owned by the Company for only four months during prior year
period). HMS Leasing Company, LLC is owned by the president of HMS.
HMS had advances to its president and companies controlled by him at
January 31, 2002 in the amount of $28,267.
Related party interest expense amounted to $90,373 and $74,005 for the
six-month periods ended January 31, 2002 and 2001, respectively.
Accrued interest payable to related parties amounted to $19,055 at
January 31, 2002. See Note 7 for notes payable due related parties.
10
4. Marketable Equity Securities
The following summarizes the Company's investments in securities at
January 31, 2002:
Trading securities:
Cost $ 242,027
Unrealized gain (loss) 14,060
-----------
Fair value $ 256,087
===========
Available-for-sale securities:
Cost $ 429,550
Unrealized gain (loss) (244,950)
------------
Fair value $ 184,600
===========
The Company recognized an unrealized loss from trading securities in
the amount of $225,913 during the six months ended January 31, 2002 and
recognized an unrealized gain from trading securities during the six
months ended January 31, 2001 in the amount of $650,395.
The Company sold securities with an original cost of $175,000 for
$175,000 in cash.
Unrealized losses from available-for-sale securities included as a
component of equity for the six months ended January 31, 2002 were as
follows:
Unrealized losses $ (244,950)
Deferred income taxes 83,300
-------------
Accumulated other comprehensive income (loss) $ (161,650)
==============
5. Inventories and gold consignment agreement
Inventories at January 31, 2002 consist of:
Gold jewelry $ 3,731,979
Silver and other jewelry 2,133,321
Electronic equipment and supplies 47,126
-------------
5,912,426
Less consigned gold (2,395,880)
--------------
Net inventories $ 3,516,546
=============
HMS has a gold consignment agreement with a gold lender. Under the
terms of the agreement, HMS is entitled to lease the lesser of an
aggregate amount of 13,200 ounces, or an aggregate consigned gold
value not to exceed $3,450,000. Title to such consigned gold remains
with the gold lender until HMS purchases the gold. However, during the
period of consignment, the entire risk of loss, damage or destruction
of the gold is borne by HMS. The purchase price per ounce is based on
the daily Second London Gold Fix. HMS pays the gold consignor a
consignment fee based upon the dollar value of gold ounces
outstanding, as defined in the agreement. At January 31, 2002, HMS had
8,487 ounces of gold on consignment with a market value of $2,395,880.
The consignment agreement contains certain restrictive covenants
relating to maximum usage, net worth, working capital, and other
financial ratios, and the agreement requires HMS to own a specific
amount of gold at all times. The agreement also limits the amount
which HMS can pay to
11
SGD and its sister companies. At January 31, 2002 HMS had transactions
with SGD and its sister companies as follows:
Expenses paid on behalf of SGD $ 288,600
Product and services sold to sister companies 112,988
Loans and advances 106,840
-------------
508,428
HMS share of consolidated income taxes, due to SGD (394,900)
Management fee due SGD (120,000)
-------------
HMS over (under) allowable amount $ (6,472)
=============
Consigned gold is not included in inventory, and there is no related
liability recorded. As a result of these consignment arrangements, HMS
is able to shift a substantial portion of the risk of market
fluctuations in the price of gold to the gold lender, since HMS does
not purchase gold from the gold lender until receipt of a purchase
order from, or shipment of jewelry to, its customers.
The gold lender has also provided a line of credit to HMS in the
amount of $1,500,000 that is due on demand, including interest at the
lender's prime rate plus 3/4%. HMS does not have any advances on this
line of credit at January 31, 2002.
6. Long-term debt and notes payable
Long-term debt and notes payable at January 31, 2002 consists of the
following:
Note payable to bank with interest at 9% payable on
demand or July 1, 2002 if no demand is made; accrued interest
payable monthly; collateralized by all assets of Silver and
guaranteed by the principal shareholder of the Company $
128,525
Notes payable to companies in monthly installments;
collateralized by transportation equipment 83,231
Financed insurance due in nine monthly payments 37,800
Current installments of long-term debt and notes payable (186,230)
---------
Long-term debt less current installments $ 63,326
===========
12
7. Notes payable due related parties
Notes payable due related parties at January 31, 2002 consist of the
following:
Note payable to the mother of the president of HMS; due on
February 15, 2002 with interest at the Paine Webber margin
interest rate, payable monthly $ 55,153
Notes payable to the president of HMS Jewelry Company, Inc.,
due $625,000 on April 15,2002 and $1,250,000 on October 15,
2002, with interest payable monthly at 8%, collateralized by
the stock of HMS Jewelry Company, Inc. 1,875,000
Notes payable to the brother of the principal share- holder of
the Company due on demand with interest at 12%, unsecured 288,000
Note payable to the brother of the principal share-
holder of the Company due on demand with interest at 8%, unsecured, convertible
into common stock of the Company at $.01 per share 50,000
-------------
$ 2,268,153
=============
8. Income Taxes
Federal income tax expense for the six months ended January 31, 2002
and 2001 consists of:
2002 2001
Federal income taxes $ - $ -
Deferred income tax expense (benefit) 22,100 349,200
----------- -----------
$ 22,100 $ 349,200
=========== -----------
For the six months ended January 31, 2002 and 2001, actual income tax
expense applicable to earnings before income taxes is reconciled with
the "normally expected" federal income tax expense as follows:
2002 2001
"Normally expected" income tax expense (benefit) $ 19,200 $ 402,300
Change in valuation allowance - (54,000)
Other 2,900 900
------------ -----------
$ 22,100 $ 349,200
============ ===========
13
The deferred income tax assets and liabilities at January 31, 2002 are
comprised of the following:
Current Noncurrent
Net operating loss carryforwards $ 20,200 $ -
Allowance for bad debts 25,600 -
Asset basis - (9,200)
Unrealized loss on trading securities (4,800) 83,300
------------ -----------
Net deferred income tax assets $ 41,000 $ 74,100
=========== ==========
9. Stock Options
On September 1, 1999, the Company established a stock option plan,
which reserved 10,000,000 shares of the Company's common stock for
issue to certain employees, directors and consultants. The Plan
provides that options may be granted for no less than fair market value
at the date of the option grant. The following is a summary of option
activity for the six months ended January 31, 2002.
Options Options Outstanding
Available Weighted Average
For Grant Options Exercise Price
Balance, July 31, 2001 9,492,000 400,000 $ 1.00
--------- ----------- ------------
Granted - - -
Exercised - - -
Cancelled - - -
-------- -------- ------------
Balance, January 31, 2002 9,492,000 400,000 $ 1.00
========= ======= ============
Stock options are anti-dilutive at January 31, 2002 and accordingly are
not included in the earnings per share calculation.
14
10. Segment information
The Company reports segments based upon the management approach, which
designates the internal reporting that is used by management for making
operating decisions and assessing performance. For the six-month period
ended January 31, 2002, the Company operated in the following segments
(amounts in thousands):
Corporate
Gold Silver LifeStyle and other Consolidated
Revenues:
External customers $ 7,044 $ 1,565 $ 625 $ - $ 9,234
Intersegment $ 46 - - - $ 46
Earnings (loss)
from operations $ 923 $ (156) $ (150) $ (206) $ 411
Unrealized (loss) on
marketable securities - - - (226) (226)
Other, net (110) (10) 1 (10) (129)
Deferred income tax
(expense) benefit (278) 55 51 150 (22)
----------- ----------- --------- ---------- ------------
Net earnings (loss) $ 535 $ (111) $ (98) $ (292) $ 34
========== =========== ========= ========== ===========
Assets $ 8,273 $ 2,782 $ 938 $ 831 $ 12,824
========== =========== ========= ========== ===========
The Gold segment represents the wholesale operations of HMS. The Silver
segment represents the wholesale and retail operations of Silver, which
is primarily silver jewelry sales. The LifeStyle segment represents the
operations of Tandori.
Corporate assets consist primarily of marketable securities, prepaid
expenses and other assets.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
From time to time, the Company may publish forward-looking statements
relative to such matters as anticipated financial performance, business
prospects, technological developments and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. All statements other than statements of
historical fact included in this section or elsewhere in this report
are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Exchange Act of 1934. Important factors that could cause actual
results to differ materially from those discussed in such
forward-looking statements include: 1. General economic factors
including, but not limited to, changes in interest rates, trends in
disposable income; 2. Information and technological advances; 3. Cost
of products sold; 4. Competition; and 5. Success of marketing,
advertising and promotional campaigns.
Effective October 1, 2000, the Company acquired, pursuant to an
Agreement and Plan of Merger the operations and business of HMS, in
exchange for $4,547,500 in cash (including $47,500 in legal and
professional costs) and convertible promissory notes in the amount of
$2,500,000. The transaction resulted in the merger of the business and
operations of HMS Jewelry Co., Ltd., a Texas limited partnership and
HMS Operating Company, a Texas corporation into a newly formed
subsidiary of the Company, HMS Jewelry Company, Inc. HMS is a national
jewelry wholesaler, specializing in 18K, 14K and 10K gold and platinum
jewelry, with headquarters in Dallas, Texas. HMS markets its products
to a network of over 30,000 retail jewelers, through a catalog and
telephone ordering system and through its B2B online catalog
http://www.HMSgold.com.
Effective September 1, 2001, the Company acquired the LifeStyle
Technologies(TM) franchise for Raleigh, North Carolina, Houston, Texas,
Wilmington, North Carolina and Greensboro, North Carolina, in exchange
for $300,000 in cash to be paid to the franchisor. In addition, the
Company issued 800,000 shares of its common stock, valued at $160,000,
based upon the quoted price on the date of the transfer, to certain
principals of the new operation.
A. LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased from $5,799,546 at July 31,
2001 to $4,337,742 at January 31, 2002. The decline in working capital
of $1,461,804 includes $1,250,000 of debt to related parties which was
non-current at July 31, 2001. The remaining net decline includes the
$300,000 in working capital used in the acquisition of Tandori and the
results of operations for the period.
The Company has budgeted $50,000 for additional improvements for its
Lifestyle Technology operations, which will be funded from working
capital as needed.
16
B. RESULTS OF OPERATIONS
SALES AND COST OF SALES - During the six months ended January 31, 2002
sales increased $1,914,691 from $7,319,186 to $9,233,877 from the same
year earlier period. The Company's sales may be summarized as follows
for the six-month periods ended January 31, 2002 and 2001:
2002 2001
Gold $ 7,090,606 $ 5,828,394
Silver:
Wholesale 1,053,486 889,999
Retail 511,497 514,777
------------- --------------
1,564,983 1,404,776
Tandori 624,788 -
Other - 86,016
------------ --------------
9,280,377 7,319,186
Intersegment sales (46,500) -
------------- -------------
$ 9,233,877 $ 7,319,186
============= ==============
Gold sales in the prior year period included the four months ended
January 31, 2001, since that was the only period HMS was owned by the
Company. On a pro forma basis, Gold sales during the six-month period
ended January 31, 2001 were $7,774,787. Accordingly, Gold sales
decreased 8.8% from the year earlier comparable period. Until September
11, 2001, Gold sales were ahead of the comparable prior year period.
The impact of the September 11 terrorist attacks resulted in
substantially reduced sales for the remainder of the quarter.
Comparatively, sales were 11.5% lower in the quarter ended October 31,
2001 and 4.2% lower in the quarter ended January 31, 2002.
Silver wholesale sales increased $163,487 (18.4%) from the year earlier
period. Silver retail sales decreased $3,280 (0.6%) from the year
earlier period.
Gold sales are typically one of the first things to decline when the
economy is going down and one of the last things to improve when the
economy is going back up. Silver sales are generally subject to similar
constraints, although to a lesser degree, since silver jewelry is less
expensive than gold.
The Company expanded wholesale silver jewelry sales starting at the end
of October 2001 through their new catalog, which has added
approximately 1,800 new customers.
During the six months ended January 31, 2002, the Company's gross
profit margin remained relatively stable with a decrease to 32.7% from
33.5% in the year earlier period.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - During the six months
ended January 31, 2002, selling, general and administrative expense
increased $605,281 (30.3%) from the same year earlier period. The
following table summarizes the Company's selling, general and
administrative expenses for the six-month periods ended January 31,
2002 and 2001:
2002 2001
Gold $ 1,113,635 $ 1,068,670
Silver 959,958 874,327
Tandori 325,062 -
Corporate and other 205,979 56,356
------------- --------------
Total $ 2,604,634 $ 1,999,353
============= ==============
Gold operations are comparing six months in the current year period to
only four months in the prior year period. A comparison of the current
six month period to the six months ended January 31, 2001 on a proforma
basis results in a decrease of $313,472 (21.3%) in Gold's selling,
general and administrative expenses. The decline is primarily the
result of the elimination of legal and professional costs from the
acquisition in the prior year of $52,647; a reduction of $82,600 in
amortization; a reduction in advertising expense of $119,798; a
reduction in catalog costs of $29,449; a reduction in rent, net of an
associated increase in real estate taxes of $78,861; an increase in
salaries and wages of $85,751 and a net reduction in other costs of
$35,868.
Silver's selling, general and administrative costs increased $85,631 to
$959,958 during the six-month period ended January 31, 2002 as compared
to the year earlier amount of $874,327. Total labor costs, including
taxes and benefits, increased $78,317; commissions increased $35,933;
catalog expense increased $44,473; advertising expense decreased
$25,074; operating supplies and consumables decreased $34,189; postage
and delivery decreased $19,536; and all other costs increased $5,707,
net.
Tandori's selling, general and administrative expenses include the five
months during which it was owned by SGD.
Corporate and other selling, general and administrative expense
increased $149,623 during the six months ended January 31, 2002 as
compared to the year earlier period. The increase consists of $75,000
in compensation costs relating to the issue of common stock for
services; an increase of $44,103 from compensation costs, automobile
lease expense and travel expense which were included in Silver's
operations in the prior year period; an increase of $16,526 for
directors' and officers' liability insurance; an increase of $17,358
for professional fees; a decrease in costs from other operations of
$14,324; and an increase in other net costs of $10,960.
INTEREST EXPENSE - Interest expense, related party and other, increased
$15,990 during the six-month period ended January 31, 2002, as compared
to the same year earlier period. The increase is primarily the result
of the new related party debt from the acquisition of HMS in October
2000.
INTEREST AND OTHER INCOME - Interest and other income of the Company
decreased during the six-month period ended January 31, 2002 from the
same year earlier period to $41,076 from $143,989. The decrease is
attributed to the higher average cash balances during the six-month
period ended January 31, 2001, which were from the sale of common stock
through exercise of stock options and warrants.
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES - The Company
recognized an unrealized loss in the amount of $225,913 during the six
months ended January 31, 2002, from its investment in marketable equity
securities that have been classified as trading securities. During the
year earlier period, the Company recognized an unrealized gain in the
amount of $650,395.
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INCOME TAXES - The Company recorded income tax expense in the amount of
$22,100 during the six month period ended January 31, 2002 and income
tax expense in the amount of $349,200 during the year earlier period.
The prior year expense was $54,000 less than the expected tax would
have been as a result of the Company reversing the valuation allowance
which it had previously recorded.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Not applicable
(b) Reports on Form 8-K - Not applicable
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SGD HOLDINGS, LTD.
Date: March 25, 2002 By: /s/ James G. Gordon
-----------------------------------
James G. Gordon, President and
Principal Accounting Officer
19