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: April 30, 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 April 30, 2002 was 98,524,408.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
1
Page
No.
Part I. Unaudited Financial Information
Item 1. Condensed Consolidated Balance Sheet - 3
April 30, 2002
Condensed Consolidated Statements of Operations - 4
Three and Nine Months Ended April 30, 2002 and 2001
Condensed Consolidated Statement of Stockholders' Equity - 5
Nine Months Ended April 30, 2002
Condensed Consolidated Statements of Cash Flows - 6-7
Nine Months Ended April 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements - 8-13
Nine Months Ended April 30, 2002 and 2001
Item 2. Managements Discussion and Analysis of Financial Condition 14-16
and Results of Operations
Part II. Other Information 17
2
SGD Holdings, Ltd. and Subsidiaries
Condensed Consolidated Balance Sheet
April 30, 2002
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents .................................... $ 1,989,329
Trade accounts receivable .................................... 1,869,312
Marketable equity securities ................................. 232,983
Inventory .................................................... 3,390,699
Deferred income taxes ........................................ 129,300
Prepaid expenses and other assets ............................ 308,828
------------
7,920,451
Property and equipment, net ................................... 616,649
Goodwill and other intangibles ................................ 4,249,926
Due from related parties ...................................... 27,966
Deferred income taxes ......................................... 48,800
Marketable equity securities .................................. 259,150
Deposits and other assets ..................................... 41,416
------------
$ 13,164,358
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt and notes payable ..... 194,245
Notes payable - related parties .............................. 1,744,455
Accounts payable ............................................. 950,781
Accrued expenses ............................................. 165,235
Due to related parties ....................................... 49,533
------------
3,104,249
Long-term debt less current installments ...................... 973,662
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 (deficit) .................................. (144,147)
Accumulated other comprehensive income (loss) ................ (112,400)
------------
9,086,447
------------
$ 13,164,358
============
See accompanying notes to consolidated financial statements.
3
SGD Holdings, Ltd. and Subsidiaries
Condensed Consolidated Statements of Operations
Three and Nine Months April 30, 2002 and 2001
(Unaudited)
Three Months Ended Nine Months Ended
April 30, April 30,
2002 2001 2002 2001
Sales and revenues ......................................... $ 3,424,456 $ 2,568,809 $ 12,658,333 $ 9,887,996
Cost of sales .............................................. 2,330,820 1,554,437 8,548,862 6,343,943
------------ ------------ ------------ ------------
Gross profit ............................................. 1,093,636 1,014,372 4,109,471 3,544,053
Selling, general and administrative expense ................ 1,247,887 1,097,150 3,852,521 3,096,503
------------ ------------ ------------ ------------
Earnings (loss) from operations .......................... (154,251) (82,778) 256,950 447,550
Other income (expense):
Unrealized gain (loss) on marketable securities ........... (23,104) (281,522) (249,017) 368,873
Interest expense .......................................... (1,921) (7,704) (18,339) (24,500)
Interest expense - related parties ........................ (55,311) (53,857) (145,684) (127,863)
Gold consignment fee ...................................... (26,812) (37,730) (89,809) (88,535)
Interest and other income ................................. (930) 48,185 40,146 192,174
------------ ------------ ------------ ------------
(108,078) (332,628) (462,703) 320,149
------------ ------------ ------------ ------------
Net earnings (loss) before income taxes .................... (262,329) (415,406) (205,753) 767,699
Income tax expense (benefit) ............................... (88,300) (117,423) (66,200) 231,777
------------ ------------ ------------ ------------
Net earnings (loss) ........................................ $ (174,029) $ (297,983) $ (139,553) $ 535,922
============ ============ ============ ============
Net earnings (loss) per share .............................. $ (0.002) $ (0.003) $ (0.001) $ 0.006
============ ============ ============ ============
Weighted average shares outstanding (thousands) ............ 98,524.4 96,084.4 97,925.9 95,770.1
============ ============ ============ ============
See accompanying notes to consolidated financial statements
4
SGD Holdings, Ltd. and Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
Nine Months Ended April 30, 2002
(Unaudited)
Accumulated
Retained Other
Common Stock Paid-in Earnings Comprehensive
Shares Par Value Capital (Deficit) 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 .................... -- -- -- -- (112,400) (112,400)
Net earnings ........................ -- -- -- (139,553) -- (139,553)
-----------------------------------------------------------------------------------
Balance, April 30, 2002 .............. 98,524,408 $ 9,852 $ 9,333,142 $ (144,147) $ (112,400) $ 9,086,447
===================================================================================
See accompanying notes to consolidated financial statements.
5
SGD Holdings, Ltd. and Subsidiaries
Condensed Consolidated Statement of Cash Flows
Nine Months Ended April 30, 2002 and 2001
(Unaudited)
2002 2001
Cash flows from operating activities ---- ----
Net earnings (loss) ...................................... $ (139,553) $ 535,922
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization ........................... 101,463 204,467
Deferred income taxes ................................... (66,200) 231,777
Purchase of marketable equity securities ................ -- (333,587)
Unrealized (gain) loss on marketable equity securities .. 249,017 (368,873)
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) (31,295)
Refund from net operating loss carryback ................ -- 18,623
Changes in assets and liabilities:
Accounts receivable .................................... (716,800) 228,841
Inventory .............................................. (330,620) (770,771)
Other assets ........................................... (64,952) (155,452)
Accounts payable and accrued expenses .................. 543,384 (828,859)
----------- -----------
Net cash provided by operating activities ................ (205,556) (1,276,261)
----------- -----------
Cash flows provided by investing activities
Capital expenditures .................................... (211,392) (112,526)
Acquisition of HMS, net of cash acquired ................ -- (2,817,872)
Acquisition of Tandori, Inc., net of cash acquired ...... (449,650) --
Acquisition of assets at wholesale location ............. -- (105,000)
----------- -----------
Net cash provided by investing activities ................ (661,042) (3,035,398)
----------- -----------
6
SGD Holdings, Ltd. and Subsidiaries
Condensed Consolidated Statement of Cash Flows, Continued
Nine Months Ended April 30, 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 (500,000)
Loan proceeds ................................... 835,000 216,268
Repayment of notes payable and long-term debt ... (33,543) (188,449)
Loan proceeds - related party ................... 444,455 --
Repayment of related party notes ................ (1,305,153) --
Increase (decrease) in amount due related parties 15,270 1,178
----------- -----------
Net cash provided by financing activities ........ 456,029 1,096,497
----------- -----------
Net increase in cash and cash equivalents ........ (410,569) (3,215,162)
Cash and cash equivalents, beginning of period ... 2,399,898 5,969,201
----------- -----------
Cash and cash equivalents, end of period ......... $ 1,989,329 $ 2,754,039
=========== ===========
7
SGD Holdings, Ltd.
Notes to Condensed Consolidated Financial Statements
Nine Months Ended April 30, 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. On April 24, 2002, Tandori acquired the business and
certain assets of A Electric, an electrical contractor, which now operates
as a division of Tandori.
(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. Effective April
24, 2002, with the addition of A Electric, Tandori also operates as an
electrical contractor.
(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 nine months ended April 30, 2001, would have been $150,388 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 ........ $ 153,743
Liabilities assumed .... (150,718)
Franchise .............. 456,975
---------
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. On April 24, 2002, Tandori
paid $150,000 in cash and issued its note for $100,000 to acquire the
assets and business of A Electric, an electrical contractor. The
Company has allocated $24,000 of the purchase price to inventory and
$34,000 to property and equipment. The remaining $192,000 was allocated
to intangible assets.
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
$19,800 during each of the nine-month periods ended April 30, 2002 and
2001.
The Company had received loans from its principal shareholder. The
balance owed was $18,656 at April 30, 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 $72,675 during the nine-month period ended
April 30, 2002 and $56,525 during the nine-month period ended April 30,
2001 (owned by the Company for only seven 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
April 30, 2002 in the amount of $27,966.
10
Related party interest expense amounted to $145,684 and $127,863 for
the nine-month periods ended April 30, 2002 and 2001, respectively.
Accrued interest payable to related parties amounted to $30,785 at
April 30, 2002. See Note 7 for notes payable due related parties.
4. Marketable Equity Securities
The following summarizes the Company's investments in securities at
April 30, 2002:
Trading securities:
Cost ................. $ 242,027
Unrealized gain (loss) (9,044)
---------
Fair value ....... $ 232,983
=========
Available-for-sale securities:
Cost ................. $ 429,550
Unrealized gain (loss) (170,400)
---------
Fair value ....... $ 259,150
=========
The Company recognized an unrealized loss from trading securities in
the amount of $249,017 during the nine months ended April 30, 2002 and
recognized an unrealized gain from trading securities during the nine
months ended April 30, 2001 in the amount of $368,873.
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 nine months ended April 30, 2002 were as
follows:
Unrealized losses ........................... $(161,300)
Deferred income taxes ....................... 48,800
---------
Accumulated other comprehensive income (loss) $(112,500)
=========
5. Inventories and gold consignment agreement
Inventories at January 31, 2002 consist of:
Gold jewelry .................... $ 4,185,643
Silver and other jewelry ........ 2,056,280
Electronic equipment and supplies 117,357
-----------
6,359,280
Less consigned gold ............. (2,968,582)
-----------
Net inventories ............ $ 3,390,698
===========
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 April 30, 2002, HMS had
9,632 ounces of gold on consignment with a market value of $2,968,582
($308.20 per ounce).
11
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 SGD and its sister companies. At April 30, 2002
HMS had transactions and balances with SGD and its sister companies as
follows:
Expenses paid on behalf of SGD ................... $ 332,100
Product and services sold to sister companies .... 112,988
Loans and advances ............................... 84,128
---------
529,216
HMS share of consolidated income taxes, due to SGD (411,500)
Management fee due SGD ........................... (142,500)
---------
HMS over (under) allowable amount .............. $ (24,784)
=========
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 April 30, 2002.
6. Long-term debt and notes payable
Long-term debt and notes payable at April 30, 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 ................................... 78,908
Financed insurance due in nine monthly payments .............................. 25,474
Note payable to company due July 30, 2003 with interest at
5.8% payable monthly ......................................................... 835,000
Note payable to an individual with interest at New York prime; payable $20,000
plus interest annually ....................................................... 100,000
Current installments of long-term debt and notes payable ..................... (194,245)
---------
Long-term debt less current installments ..................................... $ 973,662
=========
12
7. Notes payable due related parties
Notes payable due related parties at April 30, 2002 consist of the
following:
Notes payable to the president of HMS Jewelry Company, Inc.,
due on October 15, 2002, with interest payable monthly at 8%,
collateralized by the stock of HMS Jewelry Company, Inc. ..... $1,250,000
Notes payable to the brother of the principal shareholder of
the Company due on demand with interest at 12%, unsecured .... 444,455
Note payable to the brother of the principal shareholder of
the Company due on demand with interest at 8%, unsecured,
convertible into common stock of the Company at $.01 per share 50,000
----------
$1,744,455
----------
8. 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 nine-month
period ended April 30, 2002, the Company operated in the following
segments (amounts in thousands):
Corporate
Gold Silver LifeStyle and other Consolidated
Revenues:
External customers $ 9,377 $ 2,111 $ 1,170 $ - $ 12,658
Intersegment $ 22 - - - $ 22
Earnings (loss)
from operations $ 1,004 $ (276) $ (201) $ (270) $ 257
Unrealized (loss) on
marketable securities - - - (249) (249)
Other, net (159) (17) (8) (30) (214)
Deferred income tax
(expense) benefit (289) 98 71 186 66
----------- ----------- --------- ---------- -----------
Net earnings (loss) $ 556 $ (195) $ (138) $ (363) $ (140)
========== =========== ========= ========== ============
Assets $ 8,387 $ 2,624 $ 1,360 $ 793 $ 13,164
========== =========== ========= ========== ===========
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.
13
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 $4,816,204 at April 30, 2002. The decline in working capital of
$983,342 includes $1,250,000 of debt to related parties which was
non-current at July 31, 2001. The remaining net increase includes the
$300,000 in working capital used in the acquisition of Tandori;
increases in accounts receivable of $716,800; increases in inventory of
$330,620; increases in accounts payable and accrued expenses of
$543,385; and other net decreases of $237,377.
The Company has budgeted $50,000 for additional improvements for its
Lifestyle Technology operations, which will be funded from working
capital as needed.
14
B. RESULTS OF OPERATIONS
SALES AND COST OF SALES - During the nine months ended April 30, 2002
sales increased $2,770,337 from $9,887,996 to $12,658,333 from the same
year earlier period. The Company's sales may be summarized as follows
for the nine-month periods ended April 30, 2002 and 2001:
2002 2001
Gold ................... $ 9,399,072 $ 7,954,319
Silver:
Wholesale ............ 1,404,258 1,134,403
Retail ............... 706,623 709,425
----------- -----------
2,110,881 1,843,828
Tandori ................ 1,170,080 --
Other .................. -- 89,849
----------- -----------
12,680,033 9,887,996
Intersegment sales ..... (21,700) --
----------- -----------
$ 12,658,333 $ 9,887,996
=========== ===========
Gold sales in the prior year period included the seven months ended
April 30, 2001, since that was the only period HMS was owned by the
Company. On a pro forma basis, Gold sales during the nine-month period
ended April 30, 2001 were $9,900,712. Accordingly, Gold sales decreased
5.1% 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.
Silver wholesale sales increased $269,855 (23.8%) from the year earlier
period. Silver retail sales decreased $2,802 (0.4%) 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 nine months ended April 30, 2002, the Company's gross profit
margin remained relatively stable with a decrease to 32.5% from 35.8%
in the year earlier period. The decline is primarily associated with
Gold operations, whose gross profit margin declined from 31.0% in the
year earlier period to 28.2% during the current period. This decline in
gross profit of $263,174 is offset by a decline in selling, general and
administrative expenses of $442,178 as discussed below.
15
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - During the nine months
ended April 30, 2002, selling, general and administrative expense
increased $756,018 (24.4%) from the same year earlier period. The
following table summarizes the Company's selling, general and
administrative expenses for the nine-month periods ended April 30, 2002
and 2001:
2002 2001
Gold .............. $ 1,639,927 $ 1,732,386
Silver ............ 1,381,019 1,276,369
Tandori ........... 561,008 --
Corporate and other 270,567 87,748
--------- ---------
Total ........... $ 3,852,521 $ 3,096,503
========= =========
Gold operations are comparing nine months in the current year period to
only seven months in the prior year period. A comparison of the current
nine month period to the nine months ended April 30, 2001 on a proforma
basis results in a decrease of $442,178 (21.2%) 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 $91,072; a reduction of $144,550 in
amortization; a reduction in advertising expense of $152,885; a
reduction in catalog costs of $50,318; a reduction in rent, net of an
associated increase in real estate taxes of $109,993; an increase in
salaries and wages of $106,674 and a net reduction in other costs of
$34.
Silver's selling, general and administrative costs increased $104,650
to $1,381,019 during the nine-month period ended April 30, 2002 as
compared to the year earlier amount of $1,276,369. Total labor costs,
including taxes and benefits, increased $62,592; commissions increased
$48,313; catalog expense increased $77,660; advertising expense
decreased $36,431; operating supplies and consumables decreased
$38,489; postage and delivery decreased $24,170; and all other costs
increased $15,175, net.
Tandori's selling, general and administrative expenses include the
eight months during which it was owned by SGD.
Corporate and other selling, general and administrative expense
increased $182,819 during the nine months ended April 30, 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 $61,290 from compensation costs, automobile
lease expense and travel expense which were included in Silver's
operations in the prior year period; an increase of $20,414 for
directors' and officers' liability insurance; an increase of $29,689
for professional fees; a decrease in costs from other operations of
$14,740; and an increase in other net costs of $11,166.
INTEREST EXPENSE - Interest expense, related party and other, increased
$11,660 during the nine-month period ended April 30, 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 and loans received during the current year to fund the purchase
and initial operations of Tandori. The gold consignment fee increased
1.4%, primarily due to higher gold prices.
INTEREST AND OTHER INCOME - Interest and other income of the Company
decreased during the nine-month period ended April 30, 2002 from the
same year earlier period to $40,146 from $192,174. The decrease is
attributed to the higher average cash balances during the nine-month
period ended April 30, 2001, which were from the sale of common stock
through exercise of stock options and warrants.
16
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES - The Company
recognized an unrealized loss in the amount of $249,017 during the nine
months ended April 30, 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 $368,873.
INCOME TAXES - The Company recorded income tax benefit in the amount of
$66,200 during the nine month period ended April 30, 2002 and income
tax expense in the amount of $231,777 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: June 20, 2002 By: /s/ James G. Gordon
-------------------
James G. Gordon, President and
Principal Accounting Officer
17