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: October 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)
3801 WILLIAM D TATE AVENUE, SUITE 100, GRAPEVINE, TEXAS 76051
(Address of principal executive office)
(817) 421-0057
(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 December 2, 2002 was 28,166,077.
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
October 31, 2002
Condensed Consolidated Statements of Operations - 4
Three Months Ended October 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows - 5
Three Months Ended October 31, 2002 and 2001
Notes to Condensed Consolidated Financial Statements - 6-12
Three Months Ended October 31, 2002 and 2001
Item 2. Managements Discussion and Analysis of Financial Condition 13-15
and Results of Operations
Item 3. Controls and Procedures 16
Part II. Other Information 17-19
2
SGD Holdings, Ltd. and Subsidiaries
Condensed Consolidated Balance Sheet
October 31, 2002
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents .................................... $ 368,592
Trade accounts receivable .................................... 3,314,985
Marketable equity securities ................................. 7,664
Inventory .................................................... 4,237,662
Due from related parties ..................................... 93,374
Deferred income taxes ........................................ 231,600
Prepaid expenses and other assets ............................ 523,785
------------
8,777,662
Property and equipment, net ................................... 595,271
Goodwill and other intangibles ................................ 4,132,021
Deferred income taxes ......................................... 10,200
Marketable equity securities .................................. 209,450
Deposits and other assets ..................................... 41,930
------------
$ 13,766,534
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt and notes payable ..... $ 1,228,393
Notes payable - related parties .............................. 1,300,000
Accounts payable ............................................. 2,395,128
Accrued expenses ............................................. 176,916
Due to related parties ....................................... 21,569
------------
5,122,006
Long-term debt less current installments ...................... 152,205
Long-term debt less current installments - related party ...... 473,407
Stockholders' equity
Common stock, $.0001 par value, 200,000,000 shares authorized, 2,817
28,166,077 shares issued and outstanding
Additional paid-in capital ................................... 9,406,678
Retained earnings (deficit) .................................. (1,245,379)
Accumulated other comprehensive income (loss) ................ (145,200)
------------
8,018,916
------------
$ 13,766,534
============
See accompanying notes to condensed consolidated financial statements.
3
SGD Holdings, Ltd. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended October 31, 2002 and 2001
(Unaudited)
2002 2001
Sales and revenues ............................ $ 5,652,918 $ 3,675,858
Cost of sales ................................. 4,058,666 2,499,351
----------- -----------
Gross profit ................................ 1,594,252 1,176,507
Selling, general and administrative expense ... 1,445,705 1,117,906
----------- -----------
Earnings (loss) from operations ............. 148,547 58,601
Other income (expense):
Unrealized loss on marketable securities ..... (4,371) (366,500)
Loss on sale of assets ....................... (51,015) --
Interest expense ............................. (32,167) (5,501)
Interest expense - related parties ........... (33,261) (50,547)
Gold consignment fee ......................... (38,799) (32,443)
Interest and other income .................... 3,998 23,008
----------- -----------
(155,615) (431,983)
----------- -----------
Net earnings (loss) before income taxes ....... (7,068) (373,382)
Income tax expense (benefit) .................. (1,700) (123,300)
----------- -----------
Net earnings (loss) ........................... $ (5,368) $ (250,082)
=========== ===========
Net earnings (loss) per share ................. $ (0.000) $ (0.010)
=========== ===========
Weighted average shares outstanding (thousands) 28,166.1 25,416.3
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
SGD Holdings, Ltd. and Subsidiaries
Condensed Consolidated Statement of Cash Flows
Three Months Ended October 31, 2002 and 2001
(Unaudited)
2002 2001
Cash flows from operating activities
Net earnings (loss) ...................................... $ (5,368) $ (250,082)
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization ........................... 45,299 28,488
Deferred income taxes ................................... (1,700) (123,300)
Unrealized loss on marketable equity securities ......... 4,371 366,500
Loss on sale of assets .................................. 51,015 --
Deferred revenue realized ............................... -- (20,850)
Changes in assets and liabilities:
Accounts receivable .................................... (1,680,605) (1,130,799)
Inventory .............................................. (744,394) (927,765)
Other assets ........................................... 13,352 (45,145)
Accounts payable and accrued expenses .................. 1,172,582 1,236,576
----------- -----------
Net cash provided by operating activities ................ (1,145,448) (866,377)
----------- -----------
Cash flows provided by investing activities
Capital expenditures .................................... (9,573) (67,812)
Acquisition of Tandori, Inc., net of cash acquired ...... -- (299,650)
----------- -----------
Net cash provided by investing activities ................ (9,573) (367,462)
----------- -----------
Cash flows provided by financing activities
Loan proceeds ........................................... 215,545 --
Repayment of notes payable and long-term debt ........... (20,024) (12,225)
Loan proceeds - related party ........................... -- 775,000
Repayment of related party notes ........................ -- (625,000)
Increase (decrease) in amount due related parties ....... 13,150 (730)
----------- -----------
Net cash provided by financing activities ................ 208,671 137,045
----------- -----------
Net increase in cash and cash equivalents ................ (946,350) (1,096,794)
Cash and cash equivalents, beginning of period ........... 1,314,942 2,399,898
----------- -----------
Cash and cash equivalents, end of period ................. $ 368,592 $ 1,303,104
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
SGD Holdings, Ltd.
Notes to Condensed Consolidated Financial Statements
Three Months Ended October 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. 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 Texas. 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 is currently inactive.
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.
6
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, 2002, which
is included in the Company's Form 10-KSB dated July 31, 2002 and
filed December 12, 2002. 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
In June 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities". SFAS 146
requires that a liability be recognized on the date on which the
company had committed to an exit plan. The Company does not
believe that the adoption of SFAS 146 will have a material impact
on its consolidated financial statements.
In October 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 147, "Acquisition
of Certain Financial Institutions." The Company does not believe
that the adoption of SFAS 147 will have any impact on its
consolidated financial statements.
2. RELATED PARTY TRANSACTIONS
Silver leases its corporate headquarters from a Director of the Company
at the rate of $2,200 per month. This amounted to $6,600 during each of
the three-month periods ended October 31, 2002 and 2001.
The Company had received loans from one of its Directors. The balance
owed was $1,220 at October 31, 2002. Tandori sold product and services
to the same Director in the amount of $12,310, of which $2,506 remains
unpaid at October 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 $24,225 during the three-month periods ended
October 31, 2002 and 2001. HMS Leasing Company, LLC is owned by the
president of HMS.
HMS had advances to its president and companies controlled by him at
October 31, 2002 in the amount of $921.
7
The Company has made net sales to Premier Concepts, Inc. ("Premier") of
$33,924 during the three months ended October 31, 2002 and has
receivables from Premier of $89,947 at October 31, 2002. The Company
owns 9.5% of the stock of Premier at October 31, 2002. The Chief
Executive Officer of Premier is a Director of the Company and on
November 25, 2002 became President and Acting Chief Executive Officer
of the Company.
Related party interest expense amounted to $33,261 and $50,547 for the
three-month periods ended October 31, 2002 and 2001, respectively.
Accrued interest payable to related parties amounted to $20,349 at
October 31, 2002. See Note 6 for notes payable due related parties.
Effective October 28, 2002, the former President of Con-Tex entered
into a transaction with his sister-in-law whereby he sold the assets of
one of the retail locations for cash proceeds of $30,645. The Company
recorded a loss on the transaction of $51,015 and is currently
evaluating its options.
Amounts due from related parties at October 31, 2002 may be summarized
as follows:
Premier Concepts, Inc. ........ $89,947
Greg Gordon, Director ......... 2,506
Harry Schmidt, President of HMS 921
-------
$93,374
Amounts due to related parties at October 31, 2002, excluding notes
payable included in Note 6, may be summarized as follows:
Greg Gordon, Director .............................. $ 1,220
David Gordon, shareholder and brother of Greg Gordon 20,349
-------
$21,569
3. MARKETABLE EQUITY SECURITIES
The following summarizes the Company's investments in securities at
October 31, 2002:
Trading securities:
Cost ................. $ 93,581
Unrealized gain (loss) (85,917)
---------
Fair value ....... $ 7,664
=========
Available-for-sale securities:
Cost ................. $ 429,550
Unrealized gain (loss) (220,100)
---------
Fair value ....... $ 209,450
=========
The Company recognized an unrealized loss from trading securities in
the amount of $4,371 and $366,500 during the three month periods ended
October 31, 2002 and 2001, respectively.
Unrealized losses from available-for-sale securities included, as a
component of equity, as of October 31, 2002 were as follows:
Unrealized losses ........................... $(220,100)
Deferred income taxes ....................... 74,900
---------
Accumulated other comprehensive income (loss) $(145,200)
=========
8
4. INVENTORIES AND GOLD CONSIGNMENT AGREEMENT
Inventories at October 31, 2002 consist of:
Gold jewelry .................... $ 6,488,939
Silver and other jewelry ........ 1,348,770
Electronic equipment and supplies 153,286
-----------
7,990,995
Less consigned gold ............. (3,753,333)
-----------
Net inventories ............ $ 4,237,662
===========
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 $4,950,000 less any balance outstanding on its
$1,500,000 line of credit. 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 October 31, 2002, HMS had
11,857 ounces of gold on consignment with a market value of $3,753,333
($316.55 per ounce).
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 October 31, 2002
HMS had transactions and balances with SGD and its sister companies as
follows:
Expenses paid on behalf of SGD ................... $ 394,100
Product and services sold to sister companies .... 113,079
Loans and advances ............................... 84,046
---------
591,225
HMS share of consolidated income taxes, due to SGD (372,300)
Management fee due SGD ........................... (187,500)
---------
HMS over (under) allowable amount .............. $ 31,425
=========
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 October 31, 2002.
HMS is currently negotiating with its gold lender to increase the size
of the consignment facility and to modify certain terms and conditions
of the current agreement.
9
5. LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt and notes payable at October 31, 2002 consists of the
following:
Note payable to bank with interest at 9% payable on
demand or January 1, 2003 if no demand is made; accrued
interest payable monthly; collateralized by all assets of
Silver and guaranteed by a Director of SGD (PAST DUE) ........ $ 144,000
Note payable to bank with interest at prime + 1%; currently
5.25%; due on September 25, 2003; guaranteed by the brother of
a Director of SGD ............................................ 200,000
Notes payable to companies in monthly installments;
collateralized by transportation equipment ................... 101,598
Note payable to company due July 30, 2003 with interest
at 5.8% payable monthly(IN DEFAULT) .......................... 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 ..... (1,228,393)
-----------
Long-term debt less current installments ..................... $ 152,205
===========
See Note 8.
6. NOTES PAYABLE DUE RELATED PARTIES
Notes payable due related parties at October 31, 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. (PAST DUE) ............................................... $ 1,250,000
Notes payable to a shareholder and the brother of a Director of the Company; due
on demand with interest at 12%, unsecured ...................................... 473,407
Note payable to a shareholder and the brother of a Director of
the Company; due on demand with interest at 8%; unsecured;
convertible into common stock of the Company at $.01 per share ................. 50,000
Less current installments ...................................................... (1,300,000)
-----------
$ 473,407
===========
See Note 8.
10
7. 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 three-month
period ended October 31, 2002, the Company operated in the following
segments (amounts in thousands):
Corporate
Gold Silver LifeStyle and other Consolidated
Revenues:
External customers $ 3,995 $ 559 $ 1,099 $ - $ 5,653
Intersegment $ - - - - $
Earnings (loss)
from operations $ 371 $ (80) $ ( 87) $ (55) $ 149
Unrealized (loss) on
marketable securities - - - (4) (4)
Other, net (59) (54) (24) (14) (152)
Deferred income tax
(expense) benefit (107) 46 38 25 2
----------- ----------- --------- ---------- -----------
Net earnings (loss) $ 205 $ (89) $ (73 ) $ (48) $ (5)
========== =========== ========== ========== ============
Assets $ 9,810 $ 1,808 $ 1,698 $ 451 $ 13,767
========== =========== ========== ========== ===========
For the three-month period ended October 31, 2001, the Company operated
in the following segments (amounts in thousands):
Corporate
Gold Silver LifeStyle and other Consolidated
Revenues:
External customers $ 2,887 $ 558 $ 231 $ - $ 3,676
Intersegment $ 80 - - - $ 80
Earnings (loss)
from operations $ 312 $ (183) $ (8) $ (62) $ 59
Unrealized (loss) on
marketable securities - - - (367) (367)
Other, net (56) (5) - (4) (65)
Deferred income tax
(expense) benefit (89) 62 3 147 123
----------- ----------- --------- ---------- -----------
Net earnings (loss) $ 167 $ (126) $ (5) $ (286) $ (250)
========== =========== ========= ========== ===========
Assets $ 8,808 $ 2,770 $ 813 $ 1,292 $ 13,683
========== =========== ========= ========== ===========
The Gold segment represents the wholesale operations of HMS. The Silver
segment represents the wholesale and retail operations of Silver. The
LifeStyle segment represents the operations of Tandori.
Corporate assets consist primarily of marketable securities and prepaid
expenses.
11
8. SUBSEQUENT EVENTS
At a meeting of the Board of Directors of SGD on November 25, 2002,
Terry Washburn was appointed to replace James G. "Greg" Gordon
("Gordon") as President of SGD. Subsequently, the SGD Board of
Directors removed the Con-Tex Board of Directors and two of the SGD
Directors were appointed to the Board of Directors of Con-Tex. At a
meeting of the Board of Directors of Con-Tex, Gordon, his wife, Lisa
Gordon and the General Manager of Con-Tex were terminated. Terry
Washburn was appointed as the new President of Con-Tex.
On December 13, 2002 SGD filed a petition against Gordon in the 342nd
District Court, Tarrant County, Texas alleging breach of fiduciary
duty, conversion of corporate funds and misappropriation of corporate
funds. SGD is alleging that Gordon, who was President of SGD from June
10, 1999 until November 25, 2002, wrongfully and without authority or
approval, transferred approximately $2.7 million from two separate SGD
bank accounts into an account or accounts held by Con-Tex. Thereafter
Gordon utilized a portion of SGD's funds for his and his family's
personal use and enjoyment, his personal financial gain and for
unauthorized transactions on Con-Tex's behalf. SGD is seeking to
recover its damages, which were in excess of $2.7 million, costs of
court and pre-judgment interest as allowed by law. Gordon has filed a
counter-claim which primarily seeks the reversal of a reverse
stock-split that reduced his share ownership from 67,500,000 shares to
11,250,000 shares.
Con-Tex has a note obligation to a bank in the amount of $144,000 which
is currently past due and SGD has a note obligation to the President of
HMS in the amount of $1,250,000 which is also past due. The litigation
discussed above has impaired the Company's ability to negotiate
necessary extension agreements.
In addition, SGD owes another company $835,000 which is currently in
default. The litigation discussed above has also limited the Company's
ability to cure the defaults in this note as well.
12
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 increased from $3,630,930 at July 31,
2002 to $3,655,656 at October 31, 2002. The increase in working capital
of $24,726 consists of an increase in current assets of $1,385,422 less
an increase in current liabilities of $1,360,696. The major items of
the increase in current assets consisted of an increase in accounts
receivable of $1,680,605; an increase in inventory of $693,379; and a
decrease in cash of $946,350. The major increase in current liabilities
was from an increase in accounts payable of $1,149,628. The majority of
the increases in accounts receivable, inventory and accounts payable,
as well as the decrease in cash are the result of higher pre-Christmas
sales and the increased inventory to support the seasonal sales. These
increases are consistent with activity in the prior year period and are
expected to decline after the Christmas season.
The Company is currently budgeting $200,000 for capital expenditures
for fiscal 2003. This includes approximately $150,000 to upgrade and
add showroom equipment for its Tandori locations and $50,000 for other
miscellaneous equipment. The Company will either use cash, its existing
credit facilities or may secure a floor-plan loan for the Tandori
equipment.
As of January 13, 2003, the Company is past due on one note payable to
a bank in the amount of $144,000; is in default of the covenants of a
note payable in the amount of $835,000; and is past due on a related
party note in the amount of $1,250,000. It will be necessary for the
Company to restructure this debt as it does not have the current
resources to repay the loans.
13
B. RESULTS OF OPERATIONS
SALES AND COST OF SALES - During the three months ended October 31,
2002 sales increased $1,977,060 (54%) from the same year earlier
period. The Company's sales may be summarized as follows for the
three-month periods ended October 31, 2002 and 2001:
2002 2001
Gold ............. $ 3,994,956 $ 2,967,347
Silver:
Wholesale ...... 365,100 376,812
Retail ......... 193,720 181,295
----------- -----------
558,820 558,107
Tandori .......... 1,099,142 230,535
----------- -----------
5,652,918 3,755,989
Intersegment sales -- (80,131)
----------- -----------
$ 5,652,918 $ 3,675,858
=========== ===========
Gold sales have increased $1,027,609 (35%) from the year earlier
period. The majority of the increase is attributed to the new catalog
which was distributed during the late spring. The catalog also added a
new silver line which accounted for $290,986 of the sales increase.
Silver sales were flat with the 3% decline in wholesale sales offset by
an increase in total retail sales. Silver experienced a decline of 11%
in same store sales, but was able to increase total retail sales by
adding one new store.
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.
Tandori sales increased $868,607 (377%) from the year earlier period.
The prior year period included only one location for two months,
whereas the current year period includes two locations for the full
quarter. Sales from the Raleigh, North Carolina location accounted for
77.6% of the total while the new location in Spring, Texas, which
became fully operational earlier this calendar year, accounted for the
remainder.
During the three months ended October 31, 2002, gold had a gross profit
of24.7%; Silver had a gross profit of 53%; and Tandori had a gross
profit of 28.1% for a combined gross profit of 28.2%. This compares to
gross profit of: Gold - 27.4%; Silver - 51.2%; Tandori - 40.3%; and
combined - 32% for the prior year period. Gold's gross profit has
declined primarily due to the increase in gold price. Gold has a fixed
amount of profit for each ounce of gold sold; accordingly, with the
gold value increasing the gross profit percentage is a smaller
percentage of sales. The decline in Tandori's gross profit percentage
is in part due to the addition of high voltage electrical services to
their Spring, Texas location. The electrical contractor has only
nominal costs which are not included in cost of sales and accordingly
has a lower gross profit margin.
14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - During the three months
ended October 31, 2002, selling, general and administrative expense
increased $327,799 (29.3%) from the same year earlier period. The
following table summarizes the Company's selling, general and
administrative expenses for the three-month periods ended October 31,
2002 and 2001:
2002 2001
Gold .............. $ 617,706 $ 500,392
Silver ............ 376,661 468,458
Tandori ........... 396,810 100,415
Corporate and other 54,528 48,641
---------- ----------
Total ........... $1,445,705 $1,117,906
========== ==========
Gold's selling, general and administrative expense ("SGA") increased
$117,314 (23.4%) from the prior year period. The major cost increases
included salaries of $48,667; catalog costs of $29,283; freight of
$24,033; and commissions of $19,802. Advertising costs declined
$18,424. The increase in SGA is consistent with the 34.6% sales
increase.
Silver's SGD decreased $91,797 from the prior year period. The major
components of the decline were: payroll decrease of $106,376; rent
increase of $26,832; and an increase in legal and professional costs of
$14,798.
Tandori's SGA increased $296,395. The major reason for the increase is
operating one location during the prior year period for only two months
as compared to operating two locations for three months during the
current period.
Corporate SGA remained approximately the same as in the prior year and
consists primarily of insurance, accounting and audit costs.
INTEREST EXPENSE AND GOLD CONSIGNMENT FEE - Interest expense, related
party and other, increased $9,380 during the three-month period ended
October 31, 2002, as compared to the same year earlier period. The
increase is primarily the result of the new debt to fund the operations
and equipment for Tandori. The gold consignment fee increased 19.6%,
due to higher gold prices and higher consignment levels.
INTEREST AND OTHER INCOME - Interest and other income of the Company
decreased during the three-month period ended October 31, 2002 from the
same year earlier period to $3,998 from $23,008. The decrease is
attributed to the higher average cash balances during the prior year
period.
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES - The Company
recognized an unrealized loss in the amount of $4,371 and $366,500
during the three month periods ended October 31, 2002 and 2001,
respectively, from its investment in marketable equity securities that
have been classified as trading securities.
LOSS ON SALE OF ASSETS - Effective October 28, 2002, the former
President of Con-Tex entered into a transaction with his sister-in-law
whereby he sold the assets of one of the retail locations for cash
proceeds of $30,645. The Company recorded a loss on the transaction of
$51,015.
INCOME TAXES - The Company recorded income tax benefit in the amount of
$1,700 and $123,300 during the three month periods ended October 31,
2002 and 2001, respectively
15
Item 3. CONTROLS AND PROCEDURES
The Company has established and currently maintains controls and other
procedures designed to ensure that material information required to be
disclosed in its reports filed under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported, within the time
periods specified by the Securities and Exchange Commission. In
conjunction with the close of each fiscal quarter, the Company conducts
an update and a review and evaluation of the effectivenessof the
Company's disclosure controls and procedures. In the opinion of the
Company's principal executive officer, based upon an evaluation
completed within 90 days prior to the filing of this report, that the
Company's disclosure controls and procedures are sufficiently effective
to ensure that any materialinformation relating to the Company is
recorded, processed, summarized and reported to its principal officers
to allow timely decisions regarding required disclosures.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 13, 2002 SGD filed a petition against James G. "Greg"
Gordon ("Gordon") in the 342nd District Court, Tarrant County, Texas
alleging breach of fiduciary duty, conversion of corporate funds and
misappropriation of corporate funds. SGD is alleging that Gordon, who
was President of SGD from June 10, 1999 until November 25, 2002,
wrongfully and without authority or approval, transferred approximately
$2.7 million from two separate SGD bank accounts into an account or
accounts held by Con-Tex. Thereafter Gordon utilized a portion of SGD's
funds for his and his family's personal use and enjoyment, his personal
financial gain and for unauthorized transactions on Con-Tex's behalf.
SGD is seeking to recover its damages, which were in excess of $2.7
million, costs of court and pre-judgment interest as allowed by law.
Gordon has filed a counter-claim which primarily seeks the reversal of
a reverse stock-split that reduced his share ownership from 67,500,000
shares to 11,250,000 shares.
ITEM 5. OTHER INFORMATION
The Company reported in its July 31, 2002 Form 10-KSB that effective
September 10, 1999 the Company had reverse-split all of its common
stock, one share for each six shares outstanding. The Amended
Certificate of Incorporation of SGD effectuating the reverse-split was
filed on September 2, 1999 and the shares began trading on a post-split
basis on September 10, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - 99.1 Certificate Pursuant to 18 U.S.C. Section 1350
(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: January 15, 2003 By: /s/ Terry Washburn
-------------------------------------
Terry Washburn, President, Acting CEO
and Principal Accounting Officer
17
CERTIFICATION
I, Terry Washburn, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of SGD Holdings,
Ltd.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as, and for the periods presented in this
quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have: a) designed such disclosure controls and
procedures to ensure that material information relating to the
registrant
is made known to me by others within the Company, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions): a) all
significant deficiencies in the design or operation of internal
controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls;
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
January 15, 2003 /s/ Terry Washburn
--------------------------
Terry Washburn
President and Acting CEO
18
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
Pursuant to and solely for purposes of, 18 U.S.C. Section 1350 (Section
906 of the Sarbanes-Oxley Act of 2002), the undersigned hereby
certifies in the capacity and on the date indicated below that:
1. The Quarterly Report of SGD Holdings, Ltd. (the
"Registrant") on Form 10-QSB for the period ended
October 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report")
fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the
Registrant.
Date: January 15, 2003 By: /s/Terry Washburn
-----------------
Terry Washburn
President and Acting CEO
19