-----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, W0aynVhTRxp0XInYvHCSqogVP5f5cXwO6R0kV6LQSx+RF5e00flWeicBFOIp4h76 qxr0uEJr7BT5C3L25ds7DQ== 0001137760-02-000091.txt : 20020621 0001137760-02-000091.hdr.sgml : 20020621 20020621105205 ACCESSION NUMBER: 0001137760-02-000091 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020430 FILED AS OF DATE: 20020621 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: 02683916 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 sgd1qsb.txt SGD 10QSB 4/30/02 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
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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.
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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
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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.
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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) ----------- -----------
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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 -----END PRIVACY-ENHANCED MESSAGE-----