U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended: JANUARY 31, 2004
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)
4385 SUNBELT DRIVE, ADDISON, TEXAS 75001
(Address of principal executive office)
(972) 248-0266
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares outstanding of registrant's common stock, par value $.0001
per share, as of January 31, 2004 was 43,026,823.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Form 10-QSB Index
Page No.
Part I. Unaudited Financial Information
Item 1. Condensed Consolidated Balance Sheet -
January 31, 2004 3
Condensed Consolidated Statements of Operations -
Three Months Ended January 31, 2004 and 2003 4
Condensed Consolidated Statements of Operations -
Six Months Ended January 31, 2004 and 2003 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended January 31, 2004 and 2003 6
Notes to Condensed Consolidated Financial Statements -
Six Months Ended January 31, 2004 and 2003 7-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-21
Item 3. Controls and Procedures 21
Part II. Other Information 22-26
2
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
January 31, 2004
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 1,177,219
Trade accounts receivable, net of allowance of $61,752 1,471,060
Marketable equity securities 14,143
Inventory 2,662,311
Due from related parties 59,804
Deferred income taxes 164,500
Prepaid expenses and other assets 319,097
------------
Total current assets 5,868,134
Property and equipment, net 249,303
Goodwill, net 3,490,612
Marketable equity securities 10,650
Other assets 27,800
------------
Total assets $ 9,646,499
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Note payable $ 835,000
Notes payable - related parties 1,350,488
Accounts payable 1,180,305
Accrued expenses 23,718
Due to related parties 174,000
------------
Total current liabilities 3,563,511
Deferred income taxes payable 11,800
------------
Total liabilities 3,575,311
------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.0001 par value; 200,000,000 shares authorized;
43,026,823 shares issued and outstanding 4,303
Additional paid-in capital 9,877,799
Accumulated deficit (3,534,514)
Accumulated other comprehensive loss (276,400)
------------
Total stockholders' equity 6,071,188
------------
Total liabilities and stockholders' equity $ 9,646,499
============
See accompanying notes to condensed consolidated financial statements.
3
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended January 31, 2004 and 2003
(Unaudited)
2004 2003
Sales and revenues $ 4,209,979 $ 4,648,559
Cost of sales 3,125,049 3,452,521
------------ ------------
Gross profit 1,084,930 1,196,038
Selling, general and administrative expense 878,731 818,066
------------ ------------
Earnings from operations 206,199 377,972
Other income (expense):
Unrealized gain (loss) on marketable securities 19,540 (1,093)
Loss on sale of marketable securities (22,033) --
Interest expense (13,374) (25,438)
Interest expense - related parties (46,850) (26,000)
Gold consignment fee (35,441) (52,095)
Interest and other income (expense) 12,090 (876)
------------ ------------
Total other income (expense) (86,068) (105,502)
------------ ------------
Earnings from continuing operations before income taxes 120,131 272,470
Income tax expense 42,600 93,300
------------ ------------
Earnings from continuing operations 77,531 179,170
------------ ------------
Discontinued operations:
Loss from operation of discontinued operations -- (310,794)
Income tax benefit -- (103,900)
------------ ------------
Loss on discontinued operations -- (206,894)
------------ ------------
Net earnings (loss) $ 77,531 $ (27,724)
============ ============
Basic and diluted earnings (loss) per share:
Continuing operations $ 0.00 $ 0.01
Discontinued operations -- (0.01)
------------ ------------
Net earnings (loss) per share $ 0.00 $ (0.00)
============ ============
Weighted average shares outstanding (thousands) 36,486.5 28,722.6
============ ============
See accompanying notes to condensed consolidated financial statements.
4
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Six Months Ended January 31, 2004 and 2003
(Unaudited)
2004 2003
Sales and revenues $ 7,754,707 $ 8,643,515
Cost of sales 5,844,700 6,458,819
------------ ------------
Gross profit 1,910,007 2,184,696
Selling, general and administrative expense 1,653,381 1,475,300
------------ ------------
Earnings from operations 256,626 709,396
Other income (expense):
Unrealized gain (loss) on marketable securities 39,210 (5,464)
Loss on sale of marketable securities (22,033) --
Interest expense (25,481) (51,060)
Interest expense - related parties (92,200) (52,000)
Gold consignment fee (70,802) (90,895)
Interest and other income 14,975 1,238
------------ ------------
Total other income (expense) (156,331) (198,181)
------------ ------------
Earnings from continuing operations before income taxes 100,295 511,215
Income tax expense 36,700 175,300
------------ ------------
Earnings from continuing operations 63,595 335,915
------------ ------------
Discontinued operations:
Loss from operation of discontinued operations -- (556,605)
Income tax benefit -- (187,600)
------------ ------------
Loss on discontinued operations -- (369,005)
------------ ------------
Net earnings (loss) $ 63,595 $ (33,090)
============ ============
Basic and diluted earnings (loss) per share:
Continuing operations $ 0.00 $ 0.01
Discontinued operations -- (0.01)
------------ ------------
Net earnings (loss) per share $ 0.00 $ (0.00)
============ ============
Weighted average shares outstanding (thousands) 36,376.3 28,194.3
============ ============
See accompanying notes to condensed consolidated financial statements.
5
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended January 31, 2004 and 2003
(Unaudited)
2004 2003
Cash flows provided (used) by operating activities:
Net earnings (loss) $ 63,595 $ (33,090)
Loss from discontinued operations -- 369,005
------------ ------------
Earnings from continuing operations 63,595 335,915
Adjustments to reconcile net earnings (loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 37,999 33,463
Deferred income taxes 36,700 175,300
Unrealized (gain) loss on marketable securities (39,210) 5,464
Proceeds from sale of marketable securities 11,547 --
Loss on sale of marketable securities 22,033 --
Common stock issued for services -- 50,000
Changes in assets and liabilities:
Accounts receivable (307,372) (927,670)
Inventory (461,491) (381,321)
Other assets 31,937 40,998
Accounts payable and accrued expenses 940,416 294,527
------------ ------------
Net cash provided (used) by continuing operations 336,154 (373,324)
Net cash used in discontinued operations -- (291,341)
------------ ------------
Net cash provided (used) by operations 336,154 (664,665)
------------ ------------
Cash flows used by investing activities:
Capital expenditures (57,763) (39,040)
------------ ------------
Net cash used by continuing operations (57,763) (39,040)
Net cash used by discontinued operations -- (4,464)
------------ ------------
Net cash used by investing activities (57,763) (43,504)
------------ ------------
Cash flows provided by financing activities:
Loan proceeds, related party -- 30,000
Funds transferred to discontinued operations -- (3,596)
Repayment of long-term debt and notes payable -- (12,876)
------------ ------------
Net cash from continuing operations -- 13,528
Net cash from discontinued operations -- 295,806
------------ ------------
Net cash provided by financing activities -- 309,334
------------ ------------
Net increase (decrease) in cash and cash equivalents 278,391 (398,835)
Cash and cash equivalents, beginning of period 898,828 1,156,355
------------ ------------
Cash and cash equivalents, end of period $ 1,177,219 $ 757,520
============ ============
See accompanying notes to condensed consolidated financial statements.
6
SGD HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JANUARY 31, 2004 AND 2003
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The condensed consolidated financial statements include the accounts of
SGD Holdings, Ltd. ("SGD") and its wholly owned subsidiaries HMS
Jewelry Company, Inc. ("HMS"), Jewelry Solutions & Commerce, Inc.
("Jewelry"), Tandori, Inc. ("Tandori"), Con-Tex Silver Imports, Inc.
("Silver") and Rings N' Things, LLC ("Rings"), the 80% owned subsidiary
of Jewelry, (collectively referred to as the "Company"). Tandori and
Silver are inactive. All material intercompany accounts and
transactions have been eliminated.
(B) ORGANIZATION
SGD was incorporated on May 22, 1996 in Delaware as Transun
International Airways, Inc. 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. Transun International Airways, Inc. changed its name to
Goldonline International, Inc. on June 10, 1999. Goldonline
International, Inc. changed its name to SGD Holdings, Ltd. on January
24, 2001.
On April 20, 2000, pursuant to an agreement and plan of reorganization
dated April 11, 2000, SGD acquired 100% of the issued and outstanding
common stock of Benton Ventures, Inc. ("Benton"), a Delaware
corporation, in exchange for 1,200,000 newly issued common shares of
SGD. On April 25, 2000, the Board of Directors of SGD elected to merge
Benton into SGD pursuant to Section 253 of Delaware's General Corporate
Laws. As a result of the merger, SGD became the surviving company and
assumed the reporting responsibilities under successor issuer status as
more fully detailed in Section 12(g)(3) of The Securities Exchange Act
of 1934. Benton was a dormant company and its assets and liabilities
were insignificant.
HMS was incorporated on October 12, 2000 in Texas. Tandori was
incorporated on November 9, 1998 in Nevada. Jewelry was incorporated on
February 3, 1999 in Delaware. Rings was incorporated on September 2,
2003 in Nevada.
7
On June 10, 1999, SGD acquired all of the issued and outstanding common
stock of Con-Tex Silver Imports, Inc. ("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 amounts prior to June 10, 1999
is that of Silver.
Effective October 1, 2000, SGD completed the acquisition of HMS Jewelry
Co., Ltd., a Texas limited partnership, and HMS Operating Company, a
Texas corporation, and transferred the assets acquired and liabilities
assumed into HMS Jewelry Company, Inc. For accounting purposes, the
acquisition was treated as a purchase.
Effective September 1, 2001, SGD completed the acquisition of Tandori,
Inc. in a transaction treated as a purchase for accounting purposes.
(C) DISCONTINUED OPERATIONS
The operations of Silver and Tandori were discontinued at the end of
July 2003, see Note 2.
(D) NATURE OF BUSINESS
SGD is a holding company principally engaged in acquiring and
developing jewelry businesses. HMS is primarily involved in the
wholesale gold jewelry business. Jewelry is evaluating its e-commerce
site and Jewelry and Rings are operating three small retail locations.
(E) GENERAL
The condensed consolidated 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 condensed consolidated financial statements
have not been audited.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America 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 condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report for the year ended July
31, 2003, which is included in the Company's Form 10-KSB dated July 31,
2003 and filed November 13, 2003. 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.
8
(F) STOCK OPTIONS AND WARRANTS
The Company accounts for stock-based awards to employees using the
intrinsic value method described in Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees" and its
related interpretations. Accordingly, no compensation expense has been
recognized in the accompanying condensed consolidated financial
statements for stock-based awards to employees when the exercise price
of the award is equal to or greater than the quoted market price of the
stock on the date of the grant.
As of January 31, 2004, the Company had options outstanding to its
three current directors and one former director, which vested on May
31, 2001, for 100,000 shares each. No options have been granted since
that date. Accordingly, there is no pro forma disclosure for the
current period.
SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123" require
disclosures as if the Company had applied the fair value method to
employee awards rather than the intrinsic value method. The fair value
of stock-based awards to employees is calculated through the use of
option pricing models, which were developed for use in estimating the
fair value of traded options, which have no vesting restrictions and
are fully transferable. These models also require subjective
assumptions, including future stock price volatility and expected time
to exercise, which greatly affect the calculated values.
2. DISCONTINUED OPERATIONS
(a) On April 23, 2003, Silver filed a Voluntary Petition for Reorganization
under Chapter 11 of Title 11 of the United States Code in the United States
Bankruptcy Court for the Northern District of Texas, Fort Worth Division,
Case No. 03-43783-DML-11.
During the week ended July 25, 2003, management of the Company determined
to cease operations of Silver. Accordingly, in SGD's next scheduled Board
of Director's meeting, on August 7, 2003, the Board voted to convert the
Chapter 11 case to Chapter 7 and all operations of Silver were immediately
discontinued. The Voluntary Petition for Reorganization under Chapter 11
was converted to Chapter 7 on September 23, 2003. The operations of Silver
have been included in discontinued operations for the periods presented.
9
Silver was involved in both the wholesale and retail jewelry business,
principally silver, with retail locations in Texas. The wholesale operation
of Silver consisted of sales directly from its headquarters in Conroe,
Texas, sales from a Dallas location and sales from jewelry shows at
locations throughout the south central United States. Silver had sales of
$560,391 and $1,119,211 during the three-month and six-month periods ended
January 31, 2003, respectively.
(b) On July 17, 2003, the Company received an offer to acquire the assets
and business of Tandori, effective July 31, 2003, in exchange for
assumption of liabilities, excluding payroll taxes. In addition, the buyer
agreed to pay SGD up to 50% of any profits the buyer might make from the
sale of Tandori's assets, up to $1,000,000, if the buyer should sell the
assets to a third party within three years of the acquisition. The Company
subsequently approved the offer and the operations have been included in
discontinued operations for the periods presented. The purchaser was G.
David Gordon and the former President of Tandori.
Tandori operated under the LifeStyle Technologies(TM) name as a full
service home technology integration company providing complete installation
and equipment for structured wiring, home audio, home theater, home
security, PC networking, central vacuum, accent lighting and other current
technology applications. Tandori had sales of $787,479 and $1,886,622
during the three-month and six-month periods ended January 31, 2003,
respectively.
3. RELATED PARTY TRANSACTIONS
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 obligation amounted to $48,450 during the six-month periods
ended January 31, 2004 and 2003. HMS Leasing Company, LLC is owned by the
president of HMS. HMS is a guarantor of the loan obligation of HMS Leasing
Company, LLC on the facility, which has a balance of $519,000 at January
31, 2004.
At January 31, 2004, the Company owed G. David Gordon, CEO of HMS, a
shareholder and the brother of a Director, compensation in the amount of
$150,000 at January 31, 2004, which is payable one-half in SGD common stock
and one-half in cash.
At January 31, 2004, the Company had made net advances of $9,254 to the
president of HMS, including companies owned by him.
See Note 7 for details of the $1,350,488 in note obligations to related
parties.
The Company has made net sales to Premier Concepts, Inc. ("Premier") of
$64,221 during the six-month period ended January 31, 2003 and no sales
during the current six-month period. The Company has net receivables from
Premier at January 31, 2004 of $32,799. The Company owns 7.9% of the stock
of Premier at January 31, 2004 and the Chief Executive Officer of Premier
is the Acting CEO and a Director of the Company. On October 10, 2003
Premier filed a Voluntary Petition for Reorganization under Chapter 11 of
Title 11 of the United States Code in the United States Bankruptcy Court
for the Central District of California, Los Angeles Division; Case No. LA
03-36445 BR.
10
Amounts due to related parties include $24,000 in accrued compensation due
to Terry Washburn, Acting CEO of the Company. On January 28, 2004, the
Company issued Mr. Washburn 1,500,000 common shares in exchange for $15,000
due him.
On January 28, 2004, the Company issued 3,500,000 common shares to BJB
Services, Inc., whose principal serves as controller for the Company, in
exchange for $35,000 due for prior services.
4. MARKETABLE EQUITY SECURITIES
The following summarizes the Company's investments in securities at January
31, 2004:
Trading securities:
Cost $ 60,000
Unrealized gain (loss) (45,857)
------------
Fair value $ 14,143
============
Available-for-sale securities (Premier Concepts, Inc., a related party):
Cost $ 429,550
Unrealized gain (loss) (418,900)
------------
Fair value $ 10,650
============
The Company recognized an unrealized gain from trading securities in the
amount of $19,540 and $39,210 during the three-month and six-month periods
ended January 31, 2004, respectively. The Company recognized an unrealized
loss from trading securities in the amount of $1,093 and $5,464 during the
three-month and six-month periods ended January 31, 2003, respectively.
Unrealized losses from available-for-sale securities, which are restricted
under Rule 144 and which is included as a component of equity, as of
January 31, 2004, were as follows:
Unrealized losses $ (418,900)
Deferred income taxes 142,500
------------
Accumulated other comprehensive income (loss) $ (276,400)
============
11
5. INVENTORIES AND GOLD CONSIGNMENT AGREEMENT
Inventories at January 31, 2004 consist of:
Inventory, principally gold jewelry $ 5,393,963
Less consigned gold (2,731,652)
------------
Net inventories $ 2,662,311
============
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 January 31, 2004,
HMS had 6833.4 ounces of gold on consignment with a market value of
$2,731,652 ($399.75 per ounce).
Consigned gold is not included in inventory, and there is no related
liability recorded. As a result of these consignment arrangements, HMS is
able to shift a substantial portion of the risk of market fluctuations in
the price of gold to the gold lender, since HMS does not purchase gold from
the gold lender until receipt of a purchase order from, or shipment of
jewelry to, its customers.
The gold lender has also provided a line of credit to HMS in the amount of
$1,500,000 that is due on demand, including interest at the lender's prime
rate plus 3/4%. HMS does not have any advances on this line of credit at
January 31, 2004.
Payment for the consigned gold and the line of credit is secured by
substantially all property of HMS including its cash, accounts receivable,
inventory and equipment, the personal guaranty of the President of HMS, the
personal guaranty of G. David Gordon and the corporate guaranty of SGD.
The consignment agreement may be terminated by the gold lender upon 60 days
notice. If the gold lender were to terminate its existing gold consignment
agreement, HMS does not believe it would experience an interruption of its
gold supply that would materially adversely affect its business. HMS
believes that other consignors would be willing to enter into similar
arrangements should its gold lender terminate its relationship with the
company.
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.
12
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.
6. NOTE PAYABLE
The Company has a note payable to a company in the amount of $835,000 which
has been extended to July 31, 2004. The extended note has interest payable
monthly at 5.8% and is convertible into common stock at the lesser of $.015
per share or the market price, limited to 9.9% of the total outstanding
shares of the Company at the time of conversion. All of the issued and
outstanding common stock of HMS is collateral on the note, in second
position behind the collateral position of the note due the president of
HMS. In the event of default on any of the loans secured by the HMS common
stock, the lender has the option to purchase HMS for $5,000,000. On January
28, 2004, the Company issued 250,000 shares of its common stock as a loan
extension fee and issued 1,210,746 shares of its common stock for $12,107
in accrued interest.
7. NOTES PAYABLE DUE RELATED PARTIES
Notes payable due related parties consists of the following at January 31,
2004:
Note payable to the president of HMS, due on
July 31, 2004; interest payable monthly at 8%;
collateralized by the common stock of HMS;
convertible into common stock of the Company
at $.01 per share, limited to 9.9% of the total
outstanding shares of the Company at the time;
with anti-dilution rights $ 1,250,000
Note payable to G. David Gordon, CEO of HMS, a
shareholder and the brother of a Director of the
Company; due on July 31, 2004 with interest at 6%
payable monthly; collateralized by the common stock
of HMS in third position behind the other notes
above; all principal and accrued interest convertible
into common stock of the Company at $.01 per share;
and all shares have anti-dilution rights 100,488
------------
Total notes payable due related parties $ 1,350,488
============
The Company issued the president of HMS 300,000 shares of its common stock
as a loan extension fee on January 28, 2004.
13
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. With the disposition of
Silver and Tandori, continuing operations currently includes only one
segment, the wholesale gold operations of HMS.
9. LEGAL MATTERS
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 alleged 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 Silver.
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 Silver's behalf. SGD was seeking to recover
its damages, which were in excess of $2.7 million, costs of court and
pre-judgment interest, as allowed by law. SGD dismissed its claim against
Gordon as it determined the cost would exceed any benefit and the funds it
saved could be used to pay creditors of the Company; however the Company
still maintains the right to re-file the lawsuit against Gordon.
On January 3, 2003, James G. Gordon and Lisa K. Gordon ("Plaintiffs") filed
a petition in the District Court of Montgomery County, Texas, Cause No.
03-01-00006-CV against SGD Holdings, Ltd., G. David Gordon and David Covey.
G. David Gordon is the brother of James G. Gordon and David Covey is the
former president of Tandori, Inc., a wholly owned subsidiary of SGD.
Plaintiffs, in their claim asserted against SGD, are seeking to declare the
one for six stock split, which occurred in September 1999, void. If
declared void, they claim they would presently own 75,000,000 shares of SGD
common stock instead of 11,250,000 shares of SGD common stock as currently
reported by the Company. Presently Company Counsel has not had adequate
time to assess the merits of Plaintiffs' claim and is therefore unable to
determine a possible outcome or the extent of the Company's liability, if
any.
In March 2003, Con-Tex Silver Imports, Inc. filed a petition in the
District Court of Galveston County, Texas, Cause No. 03CV0316 against
Debbie King, the sister-in-law of James G. Gordon. Effective October 28,
2002, James G. Gordon, the former President of Silver entered into a
transaction with his sister-in-law whereby he sold the assets of one of the
retail locations of Silver for cash proceeds of $30,645. The Company
recorded a loss on the transaction of $51,015. In its claim, Silver alleged
conspiracy, unjust enrichment and that the sale of the retail location is
void because of unconscionability. Additionally, Silver requested a return
of profits received by Defendant. This action is currently stayed due to
Silver filing a Voluntary Petition for Reorganization under Chapter 11 of
Title 11 of the United States Code on April 23, 2003. The Voluntary
Petition for Reorganization under Chapter 11 was converted to Chapter 7 on
September 23, 2003.
14
On April 23, 2003, SGD's wholly owned subsidiary, Con-Tex Silver Imports,
Inc. filed a Voluntary Petition for Reorganization under Chapter 11 of
Title 11 of the United States Code in the United States Bankruptcy Court
for the Northern District of Texas, Fort Worth Division, Case No.
03-43783-DML-11 and on September 23, 2003 the Voluntary Petition was
converted to Chapter 7.
On May 2, 2003, Lakewood Development Corporation ("Lakewood"), a
stockholder, filed a petition in the District Court of Tarrant County,
Texas, Cause No. 96 198685 03 against SGD Holdings, Ltd. and James G.
Gordon, former President of SGD. Lakewood, in its claim asserted against
SGD and Gordon, alleged fraud in stock transactions under Section 27.01 of
the Texas Business and Commerce Code, violations of the anti-fraud
provisions of the Texas Securities Act and common law fraud. In addition,
Lakewood is alleging breach of fiduciary duty against Gordon. Lakewood is
seeking restitution of the $7,817,500 which it invested in common stock
based upon representations made by Gordon, together with damages, expenses
and interest. Presently, Company counsel has not had adequate time to
assess the merits of Lakewood's claims and therefore is unable to determine
a possible outcome or the extent of the Company's liability, if any.
10. COMMITMENTS
In addition to the HMS lease discussed in Note 3, the Company has two
non-cancelable operating leases. Future minimum lease payments amount to
$65,058 for the balance of fiscal 2004, $88,116 for fiscal 2005 and $38,430
for fiscal 2006.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
From time to time, the Company may publish forward-looking statements
relative to such matters as anticipated financial performance, business
prospects, technological developments and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. All statements other than statements of
historical fact included in this section or elsewhere in this report are,
or may be deemed to be, forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Exchange
Act of 1934. Important factors that could cause actual results to differ
materially from those discussed in such forward-looking statements include:
1. General economic factors including, but not limited to, changes in
interest rates, trends in disposable income; 2. Information and
technological advances; 3. Cost of products sold; 4. Competition; 5. Legal
issues; and 6. Success of marketing, advertising and promotional campaigns.
The continuing operations of the Company consist primarily of the wholesale
sales of HMS.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased from $2,198,988 at July 31, 2003 to
$2,304,623 at January 31, 2004. The increase in working capital of $105,635
consists of an increase in current assets of $1,014,205 less an increase in
current liabilities of $908,570. The major items of the increase in current
assets consisted of an increase in accounts receivable of $307,371, an
increase in inventory of $461,492 and an increase in cash of $278,391. The
major increase in current liabilities was from an increase in accounts
payable of $818,962. The increase in accounts receivable, inventory and
accounts payable are primarily the result of seasonal increases due to
holiday sales.
The Company has a number of unresolved legal issues with one of its
Directors, James G. Gordon and will continue to have high legal costs,
which amounted to approximately $60,000 during the six months ended January
31, 2004, until these issues can be resolved. The Company anticipates that
it will be able to raise additional funds, as necessary, to fund these
lawsuits.
The Company is currently budgeting $40,000 for capital expenditures for the
remainder of fiscal 2004. The Company plans to use cash and existing credit
sources for the acquisitions.
HMS relies on a gold consignment program, short-term borrowings and
internally generated funds to finance its inventories and accounts
receivable. HMS fills most of its gold supply needs through a gold
consignment arrangement with a gold lender. Under the terms of that
arrangement, HMS is entitled to lease the lesser of an aggregate of 13,200
ounces of fine gold or an aggregate consigned gold value not to exceed
$4,950,000, reduced by any outstanding balance on its $1,500,000 line of
credit. The consigned gold is secured by substantially all property of HMS,
including its cash, accounts receivable, inventory and machinery and
equipment, the corporate guaranty of SGD and the individual guaranty's of
Harry Schmidt, President of HMS, and G. David Gordon. HMS pays the gold
lender a consignment fee based on the dollar value of ounces of gold
outstanding under their agreement, which value is based on the daily Second
London Gold Fix. HMS believes that its financing rate under the consignment
arrangement is substantially similar to the financing rates charged to gold
consignees similarly situated to HMS. As of January 31, 2004, HMS held
6,833.4 ounces of gold on consignment with a market value of $2,731,652.
16
The consignment agreement contains 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 consignment agreement may be terminated by the gold lender upon 60 days
notice. If the gold lender were to terminate its existing gold consignment
arrangement, HMS does not believe it would experience an interruption of
its gold supply that would materially adversely affect its business. HMS
believes that other consignors would be willing to enter into similar
arrangements should its gold lender terminate its relationship with the
company.
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.
While we believe our supply of gold is relatively secure, significant
increases or rapid fluctuations in the cost of gold may impact the demand
for our products. Fluctuations in the precious metals markets and credit
may result in an interruption of our gold supply or the credit arrangements
necessary to allow us to support our accounts receivable and continue the
use of consigned gold.
The gold lender has also provided a line of credit to HMS in the amount of
$1,500,000 that is due on demand, including interest at the lender's prime
rate plus 3/4%. HMS does not have any advances on this line of credit at
January 31, 2004.
17
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2004 AND 2003
SALES AND COST OF SALES - The Company's sales and cost of sales may be
summarized as follows for the three-month periods ended January 31, 2004
and 2003:
2004 2003
Sales and revenues $ 4,209,979 $ 4,648,559
Cost of sales 3,125,049 3,452,521
------------- -------------
Gross profit $ 1,084,930 $ 1,196,038
============= =============
Total sales, principally gold sales, have decreased $438,580 (9.4%) during
the three month period ended January 31, 2004, as compared to the same
prior year period.
The Second London Gold Fix was $399.75 per ounce on January 31, 2004 and
$386.25 per ounce on October 31, 2003, the beginning of the current year
quarter. The Second London Gold Fix was $367.50 per ounce on January 31,
2003 and $316.55 per ounce on October 31, 2002. Sales volumes were down
substantially during the current quarter, more than countering the
approximate 15% average increase in gold price. The decline in volume sold
is attributed to lower consumer spending due to the general state of the
economy. In addition, the Company is currently in the second year of its
catalog and sales have generally been better during the initial year of a
catalog.
Gross profit has increased to 25.8% during the current year period from
25.7% during the same prior year period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The following summarizes the
Company's selling, general and administrative expenses ("SGA") for the
three-month periods ended January 31, 2004 and 2003:
2004 2003
HMS $ 677,160 $ 698,987
Jewelry and Rings 135,546 1,176
Corporate and other 66,025 117,903
------------- -------------
Total $ 878,731 $ 818,066
============= =============
HMS's SGA for the quarter ended January 31, 2004 decreased 3.1% from the
year earlier period. Jewelry and Rings SGA commenced during the current
quarter and represents the SGA associated with their retail operations.
Corporate SGA decreased $51,878 during the quarter ended January 31, 2004
as compared to the year earlier period. The prior year corporate SGA
includes a $50,000 charge for a settlement with G. David Gordon.
18
INTEREST EXPENSE AND GOLD CONSIGNMENT FEE - Related party interest expense
increased $20,850 to $46,850 during the quarter ended January 31, 2004, as
compared to the year earlier period. Interest expense decreased $12,064
during the quarter ended January 31, 2004, as compared to the year earlier
period. The increase in related party interest expense includes
amortization of a guaranty fee in the amount of $18,750. The balance of the
increase is due to the addition of $30,000 in additional related party debt
in the current year. The decrease in other interest expense is primarily
due to the prior year amount including $13,300 in amortization of loan
fees.
The gold consignment fee decreased $16,654 during the three month period
ended January 31, 2004, as compared to the prior year period. The decrease
is due to having lower balances on the gold consignment facility as a
result of a reduction in the number of ounces of gold on consignment. At
January 31, 2004 HMS had 6,833.4 ounces of gold on consignment with a
related consignment obligation of $2,731,652 ($399.75 per ounce). At
January 31, 2003 HMS had 11,907 ounces of gold on consignment with a
related consignment obligation of $4,375,823 ($367.50 per ounce).
Accordingly, the decrease is a result of the 43% decrease in the quantity
of gold on consignment offset by the 9% increase in the price of gold.
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES - The Company recognized an
unrealized gain in the amount of $19,540 during the three month period
ended January 31, 2004, from its investment in marketable equity securities
that have been classified as trading securities. During the three month
period ended January 31, 2003 the Company recognized an unrealized loss of
$1,093.
INCOME TAXES - The Company recorded an income tax provision of $42,600
during the three month period ended January 31, 2004 and a provision for
income taxes in the amount of $93,300 during the three month period ended
January 31, 2003.
DISCONTINUED OPERATIONS - The Company recognized a loss of $206,894,
including an income tax benefit of $103,900, during the three months ended
January 31, 2003 from its discontinued operations.
19
SIX MONTHS ENDED JANUARY 31, 2004 AND 2003
SALES AND COST OF SALES - The Company's sales and cost of sales may be
summarized as follows for the six-month periods ended January 31, 2004 and
2003:
2004 2003
Sales and revenues $ 7,754,707 $ 8,643,515
Cost of sales 5,844,700 6,458,819
------------- -------------
Gross profit $ 1,910,007 $ 2,184,696
============= =============
Total sales, principally gold sales, have decreased $888,808 (10.3%) during
the six-month period ended January 31, 2004, as compared to the same prior
year period.
The Second London Gold Fix was $399.75 per ounce on January 31, 2004 as
compared to $354.75 per ounce on July 31, 2003, the beginning of the
current year period. The Second London Gold Fix was $367.50 per ounce on
January 31, 2003 as compared to $304.65 per ounce on July 31, 2002. Sales
volumes were down substantially during the current year period, more than
countering the approximate 12% average increase in gold price. The decline
in volume sold is attributed to lower consumer spending due to the general
state of the economy. In addition, the Company is currently in the second
year of its catalog and sales have generally been better during the initial
year of a catalog.
Gross profit has declined to 24.6% during the current year period from
25.3% during the same prior year period. HMS has a fixed dollar 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The following summarizes the
Company's selling, general and administrative expenses ("SGA") for the
six-month periods ended January 31, 2004 and 2003:
2004 2003
HMS $ 1,294,464 $ 1,316,693
Jewelry and Rings 163,409 2,279
Corporate 195,508 156,328
------------- -------------
Total $ 1,653,381 $ 1,475,300
============= =============
HMS's SGA for the six-month period ended January 31, 2004 decreased 1.7%
from the year earlier period. Jewelry and Rings SGA commenced during the
current year period and represents the SGA associated with their retail
operations. Corporate SGA increased $39,180 during the six-month period
ended January 31, 2004 as compared to the year earlier period. The major
components of the corporate SGA increase include an increase of
approximately $37,000 in salaries and a reduction of $13,000 in
professional fees.
INTEREST EXPENSE AND GOLD CONSIGNMENT FEE - Related party interest expense
increased $40,200 to $92,200 during the six-month period ended January 31,
2004, as compared to the year earlier period. Interest expense decreased
$25,579 during the six month period ended January 31, 2004, as compared to
the year earlier period. The increase in related party interest expense
includes amortization of a guaranty fee in the amount of $37,500. The
balance of the increase is due to the addition of $30,000 in additional
related party debt in the current year. The decrease in other interest
expense is primarily due to the prior year amount including $26,600 in
amortization of loan fees.
20
The gold consignment fee decreased $20,093 during the six-month period
ended January 31, 2004, as compared to the prior year period. The decrease
is due to having lower balances on the gold consignment facility as a
result of a reduction in the number of ounces of gold on consignment. At
January 31, 2004 HMS had 6,833.4 ounces of gold on consignment with a
related consignment obligation of $2,731,652 ($399.75 per ounce). At
January 31, 2003 HMS had 11,907 ounces of gold on consignment with a
related consignment obligation of $4,375,823 ($367.50 per ounce).
Accordingly, the decrease is a result of the 43% decrease in the quantity
of gold on consignment offset by the 9% increase in the price of gold.
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES - The Company recognized an
unrealized gain in the amount of $39,210 during the six-month period ended
January 31, 2004, from its investment in marketable equity securities that
have been classified as trading securities. During the six-month period
ended January 31, 2003 the Company recognized an unrealized loss of $5,464.
INCOME TAXES - The Company recorded an income tax provision of $36,700
during the six-month period ended January 31, 2004 and a provision for
income taxes in the amount of $175,300 during the six-month period ended
January 31, 2003.
DISCONTINUED OPERATIONS - The Company recognized a loss of $369,005,
including an income tax benefit of $187,600, during the six-month period
ended January 31, 2003 from its discontinued operations.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in the
reports that are filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
the reports that are filed under the Exchange Act is accumulated and
communicated to management, including the principal executive officer, as
appropriate to allow timely decisions regarding required disclosure. Under
the supervision of and with the participation of management, including the
principal executive officer, the Company has evaluated the effectiveness of
the design and operation of its disclosure controls and procedures as of
January 31, 2004, and, based on its evaluation, our principal executive
officer has concluded that these controls and procedures are effective.
(b) Changes in Internal Controls
There have been no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the
date of the evaluation described above, including any corrective actions
with regard to significant deficiencies and material weaknesses.
21
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 alleged 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 Silver.
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 Silver's behalf. SGD was seeking to recover
its damages, which were in excess of $2.7 million, costs of court and
pre-judgment interest, as allowed by law. SGD dismissed its claim against
Gordon as it determined the cost would exceed any benefit and the funds it
saved could be used to pay creditors of the Company; however the Company
still maintains the right to re-file the lawsuit against Gordon.
On January 3, 2003, James G. Gordon and Lisa K. Gordon ("Plaintiffs") filed
a petition in the District Court of Montgomery County, Texas, Cause No.
03-01-00006-CV against SGD Holdings, Ltd., G. David Gordon and David Covey.
G. David Gordon is the brother of James G. Gordon and David Covey is the
former president of Tandori, Inc., a wholly owned subsidiary of SGD.
Plaintiffs, in their claim asserted against SGD, are seeking to declare the
one for six stock split, which occurred in September 1999, void. If
declared void, they claim they would presently own 75,000,000 shares of SGD
common stock instead of 11,250,000 shares of SGD common stock as currently
reported by the Company. Presently Company Counsel has not had adequate
time to assess the merits of Plaintiffs' claim and is therefore unable to
determine a possible outcome or the extent of the Company's liability, if
any.
In March 2003, Con-Tex Silver Imports, Inc. filed a petition in the
District Court of Galveston County, Texas, Cause No. 03CV0316 against
Debbie King, the sister-in-law of James G. Gordon. Effective October 28,
2002, James G. Gordon, the former President of Silver entered into a
transaction with his sister-in-law whereby he sold the assets of one of the
retail locations of Silver for cash proceeds of $30,645. The Company
recorded a loss on the transaction of $51,015. In its claim, Silver alleged
conspiracy, unjust enrichment and that the sale of the retail location is
void because of unconscionability. Additionally, Silver requested a return
of profits received by Defendant. This action is currently stayed due to
Silver filing a Voluntary Petition for Reorganization under Chapter 11 of
Title 11 of the United States Code on April 23, 2003. The Voluntary
Petition for Reorganization under Chapter 11 was converted to Chapter 7 on
September 23, 2003.
On April 23, 2003, SGD's wholly owned subsidiary, Con-Tex Silver Imports,
Inc. filed a Voluntary Petition for Reorganization under Chapter 11 of
Title 11 of the United States Code in the United States Bankruptcy Court
for the Northern District of Texas, Fort Worth Division, Case No.
03-43783-DML-11 and on September 23, 2003 the Voluntary Petition was
converted to Chapter 7.
22
On May 2, 2003, Lakewood Development Corporation ("Lakewood"), a
stockholder, filed a petition in the District Court of Tarrant County,
Texas, Cause No. 96 198685 03 against SGD Holdings, Ltd. and James G.
Gordon, former President of SGD. Lakewood, in its claim asserted against
SGD and Gordon, alleged fraud in stock transactions under Section 27.01 of
the Texas Business and Commerce Code, violations of the anti-fraud
provisions of the Texas Securities Act and common law fraud. In addition,
Lakewood is alleging breach of fiduciary duty against Gordon. Lakewood is
seeking restitution of the $7,817,500 which it invested in common stock
based upon representations made by Gordon, together with damages, expenses
and interest. Presently, Company counsel has not had adequate time to
assess the merits of Lakewood's claims and therefore is unable to determine
a possible outcome or the extent of the Company's liability, if any.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 28, 2004, the Company issued 6,760,746 shares of its common
stock in exchange for $50,000 in accounts payable, $12,107 in accrued
interest and loan extension fees in the amount of $5,500. The small
business issuer claimed exemption from registration based upon Section 4(2)
of the Securities and Exchange Act of 1933.
ITEM 5. OTHER INFORMATION
Although the Company does not currently employ a Chief Financial Officer,
Terry Washburn, President and Acting CEO, is also the principal accounting
officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31 Certification pursuant to 18 U.S.C. Section 1350
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SGD HOLDINGS, LTD.
Date: March 11, 2004 By: /s/ Terry Washburn
-------------------------------------
Terry Washburn, President, Acting CEO
and Principal Accounting Officer
24