-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IppoUgY47/iVBLKDdEUOZPZta+q2S85cH0xZeVvY7iUjoatFuGkmES8lKkaNWDJ3 TWOxDd8UKU3/AVHQfBYapQ== 0001137760-01-500080.txt : 20020413 0001137760-01-500080.hdr.sgml : 20020413 ACCESSION NUMBER: 0001137760-01-500080 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011031 FILED AS OF DATE: 20011221 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SGD HOLDINGS LTD CENTRAL INDEX KEY: 0001106836 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 731344983 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-29671 FILM NUMBER: 1820665 BUSINESS ADDRESS: STREET 1: 111 RHODES STREET STREET 2: - CITY: CONROE STATE: TX ZIP: 77301 BUSINESS PHONE: 9367566888 MAIL ADDRESS: STREET 1: 111 RHODES STREET STREET 2: - CITY: CONROE STATE: TX ZIP: 77301 FORMER COMPANY: FORMER CONFORMED NAME: BENTON VENTURES INC DATE OF NAME CHANGE: 20000214 FORMER COMPANY: FORMER CONFORMED NAME: GOLDONLINE INTERNATIONAL INC DATE OF NAME CHANGE: 20000428 10QSB 1 sgd.txt SGD 10 QSB 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, 2001 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 October 31, 2001 was 97,899,408. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]. 1 SGD HOLDINGS, LTD. AND SUBSIDIARIES Index Page No. Part I. Financial Information Item 1. Condensed Consolidated Balance Sheet - 3 October 31, 2001 Condensed Consolidated Statements of Operations - 4 Three Months Ended October 31, 2001 and 2000 Condensed Consolidated Statement of Stockholders' Equity - 5 Three Months Ended October 31, 2001 Condensed Consolidated Statements of Cash Flows - 6 Three Months Ended October 31, 2001 and 2000 Notes to Condensed Consolidated Financial Statements - 7-13 Three Months Ended October 31, 2001 and 2000 Item 2. Managements Discussion and Analysis of Financial Condition 14-16 and Results of Operations Part II. Other Information 17
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SGD HOLDINGS, LTD. AND SUBSIDIARIES Condensed Consolidated Balance Sheet October 31, 2001 (Unaudited) ASSETS Current assets Cash and cash equivalents $ 1,303,104 Trade accounts receivable 2,293,311 Marketable equity securities 290,500 Inventory 3,963,843 Note receivable 500,000 Due from related party 27,408 Prepaid expenses and other assets 247,857 Deferred income taxes 186,400 -------------------- 8,812,423 Property and equipment, net 478,609 Intangible assets 4,047,926 Deferred income taxes 58,400 Marketable equity securities 230,750 Other assets 45,339 -------------------- $ 13,673,447 ==================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current installments of long-term debt 35,569 Notes payable 128,525 Notes payable due related parties 2,755,153 Accounts payable 1,707,352 Accrued expenses 143,176 Due to shareholder 2,656 -------------------- 4,772,431 Long-term debt less current installments 18,898 Stockholders' equity Common stock, $.0001 par value, 200,000,000 shares authorized, 97,899,408 shares issued and outstanding 9,790 Additional paid-in capital 9,258,204 Retained earnings (deficit) (254,676) Accumulated other comprehensive income (loss) (131,200) -------------------- 8,882,118 -------------------- $ 13,673,447 ==================== See accompanying notes to consolidated financial statements. 3 SGD Holdings, Ltd. and Subsidiaries Condensed Consolidated Statements of Operations Three Months Ended October 31, 2001 and 2000 (Unaudited) 2001 2000 Sales and revenues $ 3,675,858 $ 2,056,293 Cost of sales 2,499,351 1,337,705 ------------------ ----------------- Gross profit 1,176,507 718,588 Selling, general and administrative expense 1,117,906 623,791 ------------------ ----------------- Earnings from operations 58,601 94,797 Other income (expense): Unrealized gain (loss) on marketable securities (366,500) 540,000 Interest expense (5,501) (8,812) Interest expense - related parties (50,547) (18,992) Gold consignment fee (32,443) (12,034) Interest and other income 23,008 132,946 ------------------ ----------------- (431,983) 633,108 ------------------ ----------------- Net earnings (loss) before income taxes (373,382) 727,905 Income tax expense (benefit) (123,300) 194,300 ------------------ ----------------- Net earnings (loss) $ (250,082) $ 533,605 ================== ================= Net earnings (loss) per share $ (0.003) $ 0.006 ================== ================= Weighted average shares outstanding, in thousands 96,249.6 95,151.8 ================== ================= See accompanying notes to consolidated financial statements.
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SGD Holdings, Ltd. and Subsidiaries Condensed Consolidated Statement of Stockholders' Equity Three Months Ended October 31, 2001 (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 shares issued as part of of purchase of Tandori, Inc. 800,000 80 159,920 - 160,000 Comprehensive income: Unrealized loss on available-for-sale securities, net - - - - (131,200) (131,200) Net earnings (loss) - - - (250,082) - (250,082) --------------------------------------------------------------------------------------------- Balance, October 31, 2001 97,899,408 $ 9,790 $9,258,204 $ (254,676) $ (131,200) $8,882,118 ============================================================================================= See accompanying notes to consolidated financial statements.
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SGD HOLDINGS, LTD. AND SUBSIDIARIES Condensed Consolidated Statement of Cash Flows Three Months Ended October 31, 2001 and 2000 (Unaudited) 2001 2000 Cash flows used in operating activities Net earnings (loss) $ (250,082) $ 533,605 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 28,488 36,352 Deferred income taxes (123,300) 194,300 Purchase of marketable equity securities - (300,000) Unrealized loss (gain) on marketable equity securities 366,500 (540,000) Deferred revenue realized (20,850) - Changes in assets and liabilities: Accounts receivable (1,130,799) (749,391) Inventory (927,765) (1,476,954) Other assets (45,145) (138,586) Accounts payable and accrued expenses 1,236,576 908,969 ----------------------- --------------------- Net cash provided by operating activities (866,377) (1,531,705) ----------------------- --------------------- Cash flows used in investing activities Capital expenditures (67,812) (7,855) Acquisitions, net of cash acquired (299,650) (2,922,872) ----------------------- --------------------- Net cash used in investing activities (367,462) (2,930,727) ----------------------- --------------------- Cash flows provided by financing activities Proceeds from sales of common stock - 1,567,500 Loan proceeds - 478,898 Repayment of notes payable and long-term debt (12,225) (4,439) Loan proceeds - related party 775,000 - Payment of related party notes (625,000) - Increase (decrease) in amount due stockholder (730) 1,806 ----------------------- --------------------- Net cash provided by financing activities 137,045 2,043,765 ----------------------- --------------------- Net decrease in cash and cash equivalents (1,096,794) (2,418,667) Cash and cash equivalents, beginning of period 2,399,898 5,969,201 ----------------------- --------------------- Cash and cash equivalents, end of period $1,303,104 $ 3,550,534 ======================= ===================== See accompanying notes to consolidated financial statements.
6 SGD HOLDINGS, LTD. Notes to Condensed Consolidated Financial Statements Three Months Ended October 31, 2001 and 2000 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. 7 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 three months ended October 31, 2000, would have been $22,353 less had the Statement been in effect during that period. 8 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 $6,600 during each of the three-month periods ended October 31, 2001 and 2000. The Company had received loans from its principal shareholder. The balance owed was $2,656 at October 31, 2001. 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 period ended October 31, 2001 and $8,075 during the three-month period ended October 31, 2000 (owned by the Company for only one month during prior year quarter). 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, 2001 in the amount of $27,408. Related party interest expense amounted to $50,547 and $18,992 for the three-month periods ended October 31, 2001 and 2000, respectively. See Note 8 for notes payable due related parties. 9 4. Marketable Equity Securities The following summarizes the Company's investments in securities at October 31, 2001: Trading securities: Cost $ 417,027 Unrealized gain (loss) (126,527) ------------ Fair value $ 290,500 =========== Available-for-sale securities: Cost $ 429,550 Unrealized gain (loss) (198,800) ------------ Fair value $ 230,750 ===========
The Company recognized an unrealized loss from trading securities in the amount of $366,500 during the three months ended October 31, 2001 and recognized an unrealized gain from trading securities during the three months ended October 31, 2000 in the amount of $540,000. Unrealized losses from available-for-sale securities included as a component of equity for the three months ended October 31, 2001 were as follows: Unrealized losses $ (198,800) Deferred income taxes 67,600 ------------- Accumulated other comprehensive income (loss) $ (131,200) ============== 5. Inventories and gold consignment agreement Inventories at October 31, 2001 consist of: Gold jewelry $ 4,623,031 Silver and other jewelry 2,068,065 Electronic equipment and supplies 32,651 ------------- 6,723,747 Less consigned gold (2,759,904) -------------- Net inventories $ 3,963,843 =============
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 July 31, 2001, HMS had 9,901 ounces of gold on consignment with a market value of $2,759,904. 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. At October 31, 2001, HMS was in compliance with all of the covenants in the consignment agreement. Consigned gold is not included in inventory, and there is no related liability recorded. As a result of these consignment 10 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, 2001. 6. Long-term debt and notes payable Notes payable at October 31, 2001 consists of the following: Note payable to bank with interest at 9% payable on demand or January 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 ========= 7. Long-term debt Long-term debt at October 31, 2001 consists of the following: Notes payable to companies in monthly installments aggregating $1,605, including interest at 10.46% to 11.6%; collateralized by transportation equipment $ 54,467 Current installments of long-term debt and notes payable 35,569 ------- Long-term debt less current installments $ 18,898 ========= 8. Notes payable due related parties Notes payable due related parties at October 31, 2001 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 775,000 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 ------------ $ 2,755,153 ============
11 9. Income Taxes Federal income tax expense (benefit) for the three months ended October 31, 2001 and 2000 consists of:
2001 2000 Federal income taxes $ - $ - Deferred income tax expense (benefit) (123,300) 194,300 --------- ------- $ (123,300) $ 194,300 ======== ======= For the three months ended October 31, 2001 and 2000, actual income tax expense (benefit) applicable to earnings (loss) before income taxes is reconciled with the "normally expected" federal income tax expense (benefit) as follows: 2001 2000 "Normally expected" income tax expense (benefit) $ (126,900) $ 247,500 Change in valuation allowance - (54,000) Other 3,600 800 ----------- ---------- $ (123,300) $ 194,300 =========== ========== The deferred income tax assets and liabilities at October 31, 2001 are comprised of the following: Current Noncurrent Net operating loss carryforwards $ 117,800 $ - Allowance for bad debts 25,600 - Asset basis - (9,200) Unrealized loss (gain) on trading securities 43,000 67,600 -------- ------- Net deferred income tax assets (liabilities) $ 186,400 $ 58,400 ======= =========
10. 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 three months ended October 31, 2001.
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, October 31, 2001 9,492,000 400,000 $ 1.00 ========= ======= ============
Stock options are anti-dilutive at October 31, 2001 and accordingly are not included in the earnings per share calculation. 12 11. 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, 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, which is primarily silver jewelry sales. The LifeStyle segment represents the operations of Tandori. Corporate assets consist primarily of marketable securities and notes receivable. 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 $4,039,992 at October 31, 2001. The decline in working capital of $1,759,554 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. 14 B. RESULTS OF OPERATIONS SALES AND COST OF SALES - During the three months ended October 31, 2001 sales increased $1,619,565 from $2,056,293 to $3,675,858 from the same year earlier period. The Company's sales may be summarized as follows for the three-month periods ended October 31, 2001 and 2000:
2001 2000 Gold $ 2,967,347 $ 1,406,366 Silver: Wholesale 376,812 484,161 Retail 181,295 149,544 ------------- -------------- 558,107 633,705 Tandori 230,535 - Other - 16,222 ------------ -------------- 3,755,989 2,056,293 Intersegment sales (80,131) - ------------- ------------- $ 3,675,858 $ 2,056,293 ============= ==============
Gold sales in the prior year period included the month of October only, since that was the only month HMS was owned by the Company. On a pro forma basis, Gold sales during the three-month period ended October 31, 2000 were $3,352,759. Accordingly, Gold sales decreased 11.5% 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 declined $107,349 (22.2%) from the year earlier period. Total Silver retail sales increased $31,751 (21.2%) from the year earlier period. However, the increase in Silver retail sales includes $68,353 in new store sales less a decline in existing store sales of $36,602 (24.5%). 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 started expanded silver jewelry sales at the end of October 2001 through their new catalog, which has added 1,600 new customers as of December 15, 2001. The Company is trying to broaden its customer base by developing new catalogues with new product lines in an effort to improve sales and counteract the impact of the slumping economy. During the three months ended October 31, 2001, the Company's gross profit margin decreased to 32% from 34.9% in the year earlier period. Gold sales represent 80.7% of sales during the three-month period ended October 31, 2001 as compared to 68.4% during the prior year period. Gold sales realized a gross profit margin of 27.4% during the three-month period ended October 31, 2001 while Silver's gross profit margin was 51.2% and Tandori's 40.3% during the same period. 15 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - During the three months ended October 31, 2001, selling, general and administrative expense increased $494,115 (79.2%) 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, 2001 and 2000:
2001 2000 Gold $ 500,392 $ 244,272 Silver 468,458 371,848 Tandori 100,415 - Corporate and other 48,641 7,671 ------------- -------------- Total $ 1,117,906 $ 623,791 ============= ==============
Gold operations are comparing three months in the current year period to only one month in the prior year period. A comparison of the current quarter to the three months ended October 31, 2000 results in a decrease of $162,186 (24.5%) 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 $40,832, a reduction of $78,858 in rent and a net reduction in other costs of $42,496. Silver's selling, general and administrative costs increased $96,610 to $468,458 during the three-month period ended October 31, 2001 as compared to the year earlier amount of $371,848. The $96,610 increase includes $29,543 from one retail location which was not open during the prior year. Total labor costs increased $121,420 during the three-month period ended October 31, 2001 as compared to the year earlier period, including $16,607 from the new retail location. The labor cost increase is due to increases necessary to transition from a principally manual inventory system to a later version of the same software utilized in the Gold operations; increases necessary to publish a new catalog and add a large number of new jewelry to inventory; and increases to set-up and establish new markets for the Company's products. INTEREST EXPENSE - Interest expense, related party and other, increased $28,244 (101.6%) during the three-month period ended October 31, 2001, 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 three-month period ended October 31, 2001 from the same year earlier period to $23,008 from $132,946. The decrease is attributed to the higher cash balances during the quarter ended October 31, 2000, which were due to 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 $366,500 during the three months ended October 31, 2001, 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 $540,000. INCOME TAXES - The Company recorded income tax benefit in the amount of $123,300 during the three month period ended October 31, 2001 and income tax expense in the amount of $194,300 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. 16 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: December 21, 2001 By: /s/ James G. Gordon ------------------------- James G. Gordon, President and Principal Accounting Officer 17 -----END PRIVACY-ENHANCED MESSAGE-----