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, 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 October 31, 2004 was 45,666,824.
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 -
October 31, 2004 3
Condensed Consolidated Statements of Operations -
Three Months Ended October 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended October 31, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements - 6-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-18
Item 3. Controls and Procedures 19
Part II. Other Information 20-24
2
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
October 31, 2004
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 522,989
Trade accounts receivable, net of allowance of $61,752 2,308,376
Inventory 3,122,837
Due from related parties 20,711
Deferred income taxes 13,500
Prepaid expenses and other assets 318,745
------------
Total current assets 6,307,158
Property and equipment, net 280,166
Goodwill, net 1,796,768
Marketable equity securities 7,100
Deferred income taxes 163,700
Other assets 32,800
------------
Total assets $ 8,587,692
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Notes payable $ 1,387,709
Notes payable - related parties 1,350,488
Accounts payable 1,888,098
Accrued expenses 1,230,168
Due to related parties 229,586
------------
Total liabilities 6,086,049
------------
Minority interest --
Commitments and contingencies
Stockholders' equity:
Common stock, $.0001 par value; 200,000,000 shares authorized;
45,666,824 shares issued and outstanding 4,567
Additional paid-in capital 9,920,635
Accumulated deficit (7,144,809)
Accumulated other comprehensive loss (278,750)
------------
Total stockholders' equity 2,501,643
------------
Total liabilities and stockholders' equity $ 8,587,692
============
See accompanying notes to condensed consolidated financial statements.
3
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended October 31, 2004 and 2003
(Unaudited)
2004 2003
Sales and revenues $ 3,892,450 $ 3,544,727
Cost of sales 2,891,668 2,719,651
------------ ------------
Gross profit 1,000,782 825,076
Selling, general and administrative expense 881,959 774,650
------------ ------------
Earnings from operations 118,823 50,426
Other income (expense):
Unrealized gain (loss) on marketable securities -- 19,670
Interest expense (16,142) (12,107)
Interest expense - related parties (26,507) (45,350)
Gold consignment fee (38,185) (35,361)
Interest and other income (expense) 1,020 2,883
------------ ------------
Total other income (expense) (79,814) (70,265)
------------ ------------
Net earnings (loss) before income taxes 39,009 (19,839)
Income tax expense (benefit) 13,400 (5,900)
------------ ------------
Net earnings (loss) 25,609 (13,939)
============ ============
Basic and diluted net earnings (loss) per share $ 0.00 $ (0.00)
============ ============
Weighted average shares outstanding (thousands) 45,666.8 36,266.1
============ ============
See accompanying notes to condensed consolidated financial statements.
4
SGD HOLDINGS, LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three Months Ended October 31, 2004 and 2003
(Unaudited)
2004 2003
------------ ------------
Cash flows provided (used) by operating activities:
Net earnings (loss) $ 25,609 $ (13,939)
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 17,877 18,372
Deferred income taxes 13,400 (5,900)
Unrealized (gain) loss on marketable securities -- (19,670)
Changes in assets and liabilities:
Accounts receivable (1,155,716) (1,106,316)
Inventory (670,374) (388,758)
Other assets (119,119) (58,398)
Accounts payable and accrued expenses 1,424,033 1,267,948
------------ ------------
Net cash used by operating activities (464,290) (306,661)
Cash flows used by investing activities:
Capital expenditures (6,737) (8,117)
------------ ------------
Net cash used by investing activities (6,737) (8,117)
Cash flows provided (used) by financing activities:
Amounts due related parties 9,361 --
Loan proceeds 300,000 --
Repayment of long-term debt and notes payable (10,489) --
------------ ------------
Net cash provided (used) by continuing operations 298,872 --
Net increase (decrease) in cash and cash equivalents (172,155) (314,778)
Cash and cash equivalents, beginning of period 695,144 898,828
------------ ------------
Cash and cash equivalents, end of period $ 522,989 $ 584,050
============ ============
See accompanying notes to condensed consolidated financial statements.
5
SGD HOLDINGS, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of SGD Holdings, Ltd.
("SGD") and its wholly owned subsidiaries HMS Jewelry Company, Inc. ("HMS");
Tandori, Inc. ("Tandori"); and Con-Tex Silver Imports, Inc. ("Silver"); Jewelry
Solutions & Commerce, Inc. ("Jewelry") the 100% subsidiary of HMS; Gem Pak, Inc.
("Gem Pak"), the 80% subsidiary of HMS and Rings N' Things, LLC ("Rings") the
80% subsidiary of Jewelry (collectively referred to as the "Company"). All
material intercompany accounts and transactions have been eliminated.
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.
Silver was incorporated on September 12, 1994, in Texas. 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. Gem Pak was
incorporated on May 24, 2002, in Texas. Rings was incorporated September 2,
2003, 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, 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.
6
Effective September 1, 2001, SGD completed the acquisition of Tandori, Inc. in a
transaction treated as a purchase for accounting purposes.
Jewelry formed Rings and commenced operation of two retail jewelry stores during
October and November 2003. Jewelry also opened two directly owned jewelry stores
during November and December 2003. The two stores operated by Rings were closed
prior to July 2004.
Effective April 1, 2004, HMS completed the acquisition of 80% of Gem Pak in a
transaction treated as a purchase for accounting purposes. SGD issued 100,000
shares of its common stock for 80% of Gem Pak's common stock. Gem Pak sells
packaging and display materials to the same customer base as HMS.
DISCONTINUED OPERATIONS
The operations of Silver and Tandori were discontinued at the end of July 2003.
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.
Gem Pak sells packaging and display materials, principally to retail jewelry
stores. Jewelry currently operates two retail jewelry stores.
STOCK OPTION PLANS
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
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.
SFAS 123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS
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. No awards were granted during the three months ended October 31, 2004 or
2003. Accordingly, since there is no difference, no disclosure is required of
the fair value method as compared to the intrinsic value method.
Options and warrants issued to non-employees are accounted for under SFAS 123,
"Accounting for Stock Based Compensation." For the options and warrants issued
to non-employees, the fair value of each award is calculated using the
Black-Scholes Model in accordance with SFAS 123.
7
2. MARKETABLE INVESTMENT SECURITIES
The following summarizes the Company's investment in securities at October 31,
2004:
Available-for-sale securities:
Cost $ 429,550
Unrealized loss (422,450)
--------------
Fair value $ 7,100
==============
The Company included in operations $19,670 in unrealized gains during the three
months ended October 31, 2003, and had no activity during the current period,
since all trading securities were sold during fiscal 2004.
On July 20, 2001, the Company completed the acquisition of 355,000 shares of the
common stock of Premier Concepts, Inc. ("Premier") in exchange for 965,000
shares of its common stock. The Company used the July 31, 2001 closing market
price as quoted on the Nasdaq Stock Market to value the transaction.
The shares of common stock of Premier are "restricted securities" under Rule
144. As a result of the approval of Premier's bankruptcy plan, the Company's
investment represents less than 1% of the outstanding stock of Premier at
October 31, 2004. Accordingly, the Company is subject to certain restrictions on
the number of shares it can sell and its required holding period. The Company
has classified its investment in Premier as available-for-sale securities as a
result of the Company's intention to hold the securities indefinitely pursuant
to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
Unrealized gains and losses based on fluctuations in the market value of
available-for-sale securities are included in other comprehensive income as an
adjustment to equity. The following unrealized losses have been recorded in
stockholders' equity as accumulated other comprehensive income (loss).
Cumulative
----------
Unrealized loss $ 422,450
Deferred income taxes 143,700
--------------
Other comprehensive loss $ 278,750
==============
Due to the limited market for Premier common stock, it is likely that only
limited quantities of the stock will be able to be sold in the open market. As a
result of these restrictions and the probable limited trading volume, the
Company believes the fair value of the investment might be less than the
recorded value required by SFAS No. 115 and that there can be no assurance the
Company will realize the recorded value of its investment in Premier. 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.
8
3. INVENTORIES
Inventories at October 31, 2004, consist of:
Inventory, principally gold jewelry $ 6,871,124
Less consigned gold (3,748,287)
--------------
Net inventories $ 3,122,837
==============
At October 31, 2004, inventories excluded 8,808.1 ounces of gold on consignment.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at October 31, 2004:
Office and computer equipment $ 173,956
Furniture and fixtures 202,214
Software 113,225
Leasehold improvements 32,837
--------------
522,232
Less accumulated depreciation (242,066)
--------------
$ 280,166
==============
5. NOTES PAYABLE
Notes payable at October 31, 2004, consists of the following:
Note payable to a bank with monthly payments of $4,658,
including interest at 5.25%; balance due December 10, 2004;
guaranteed by the President of Gem Pak; collateralized
by bonds owned by an individual who is also a
personal guarantor $ 252,709
Line of credit payable to the gold lender; due on demand
with interest at prime plus 3/4%; (see note 7) 300,000
Note payable to a company; due July 31, 2004; interest
payable monthly at 5.8% (a) 835,000
-------------
Total notes payable $ 1,387,709
=============
9
(a) 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 and the note is guaranteed by G. David Gordon. 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.
6. NOTES PAYABLE DUE RELATED PARTIES
Notes payable due related parties consists of the following at October 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; guaranteed by G. David Gordon;
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, 2005 with interest payable monthly at 6%;
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 at any time after July 31, 2005; and all
shares have anti-dilution rights 100,488
--------------
Total notes payable due related parties $ 1,350,488
==============
7. GOLD CONSIGNMENT AND LINE OF CREDIT AGREEMENT
HMS has a gold consignment agreement with a gold lender. Under the terms of the
agreement, HMS is entitled to lease the lesser of an aggregate amount of 13,200
ounces, or an aggregate consigned gold value not to exceed $4,950,000, less any
balance outstanding on its $1,500,000 line of credit. Title to such consigned
gold remains with the gold lender until HMS purchases the gold. However, during
the period of consignment, the entire risk of loss, damage or destruction of the
gold is borne by HMS. The purchase price per ounce is based on the daily Second
London Gold Fix. HMS pays the gold consignor a consignment fee based upon the
dollar value of gold ounces outstanding, as defined in the agreement. At October
31, 2004, HMS had 8,808.1 ounces of gold on consignment with a market value of
$3,748,287, which was valued at the daily Second London Gold Fix, $425.55 per
ounce at October 31, 2004, and charged 4.25%.
10
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 has an advance in the amount of $300,000 on this line of credit
at October 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 guarantee of the CEO of HMS and the
corporate guarantee 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 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. Management believes
that HMS is in compliance with all covenants of the consignment agreement,
except one, for which HMS has requested a waiver of the covenant from the gold
lender.
8. 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
amounted to $24,225 in rent expense during each of the three month periods ended
October 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 $491,829 at October 31, 2004.
See Note 6 for details of the $1,350,488 in note obligations to related parties.
At October 31, 2004, amounts due from related parties include the following:
Premier Concepts, Inc. $ 13,124
President of HMS 7,587
--------------
Total $ 20,711
==============
At October 31, 2004, the Company had made net advances of $7,587 to the
president of HMS, including companies owned by him.
11
The Company has net receivables from Premier at October 31, 2004, of $13,124.
The Chief Executive Officer of Premier is a Director and acting CEO 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. Premier's Bankruptcy Plan was
approved in October 2004 and the Company's ownership of Premier is now less than
1%.
At October 31, 2004, amounts due to related parties include the following:
G. David Gordon $ 137,291
Terry Washburn 27,132
BJB Services, Inc. 62,738
President of Gem Pak 2,425
--------------
Total $ 229,586
==============
At October 31, 2004, the Company owed G. David Gordon, CEO of HMS, a shareholder
and the brother of a Director, $137,291 in addition to a $100,488 note
obligation. The $137,291 includes accrued compensation in the amount of $75,000
which is payable in SGD common stock.
Terry Washburn, President of SGD and a stockholder, was owed $27,132 at October
31, 2004, which is primarily for accrued compensation. Mr. Washburn was issued
1,500,000 shares of SGD common stock during fiscal 2004, in exchange for $15,000
which was due him.
BJB Services, Inc., a shareholder, and another company controlled by the
principal of BJB were owed $62,738 at October 31, 2004, for financial services
rendered. BJB was issued 3,500,000 shares of SGD common stock during fiscal
2004, in exchange for $35,000 which SGD owed BJB.
The President and 20% owner of Gem Pak was owed $2,425 at October 31, 2004.
9. COMMITMENTS AND CONTINGENCIES
Rent expense amounted to $55,777 and $26,850 during the three months ended
October 31, 2004 and 2003, respectively. Minimum rental commitments under all
non-cancelable leases with an initial term in excess of one year are payable as
follows: nine month balance of 2005 - $135,742; 2006 - $184,505; 2007 -
$153,761; 2008 - $100,357; 2009 - $96,900 and thereafter - $121,125.
HMS is a guarantor of the loan obligation of HMS Leasing Company, LLC on the
facility, which has a balance of $491,829 at October 31, 2004.
12
From time to time during their normal course of operations, the Company
maintained cash balances in a financial institution which exceeded the insurance
limits of the Federal Deposit Insurance Corporation.
10. 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 was president of
Tandori, a wholly owned and currently inactive 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. In October
2004, James Gordon was able to obtain a temporary restraining order in this
action which prevents SGD from raising any additional equity capital until the
trial is completed. Trial in the matter is scheduled to commence in the second
week of January 2005. Management of the Company does not expect to incur any
significant liability; however, there are a number of unresolved issues which
could result in liability to the Company.
On April 23, 2003, SGD's wholly owned subsidiary, 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. The reorganization filing was
necessitated as a result of James G. Gordon, a Director and former President of
SGD, locking Silver employees out of the office and warehouse premises which he
owned and leased to Silver, which prevented Silver from operating. The Voluntary
Petition for Reorganization under Chapter 11 was converted to Chapter 7 on
September 23, 2003.
13
On May 2, 2003, Lakewood Development Corporation ("Lakewood") 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 is negotiating a settlement with Lakewood.
The Company accrued $1,000,000 as an estimate of the cost of the settlement at
July 31, 2004.
On December 31, 2003, Richard Singer and Robert Bertsch, on behalf of the
Company, filed suit against James G. Gordon, a director of the Company, for his
breach of fiduciary duty as a result of his unilateral actions to prevent the
Company from exercising its option to acquire the building which HMS currently
leases. The parties have yet to begin any substantial discovery and, therefore,
the Company and its attorneys are not in a position to assess the merits of this
action.
11. GOING CONCERN
At October 31, 2004, the Company's working capital was $221,109 as compared to
$184,360 at July 31, 2004, and $2,198,989 at July 31, 2003. The Company had a
net loss of $3,572,310 for fiscal 2004 which included a charge for goodwill
impairment of $1,988,426 and a charge of $1,000,000 for an estimate of the
Lakewood litigation settlement (see note 10). Accordingly, the Company still
incurred a loss of $583,884 in addition to the charges above. The Company has
two notes payable, in the amount of $1,250,000 and $835,000, which are currently
past due, and because of the temporary restraining order granted to James G.
Gordon the Company is unable to raise any equity capital. Trial for the
litigation with James G. Gordon is scheduled to commence during the second week
of January 2005 (see note 10). In addition, the Company is in violation of a
restrictive covenant related to its gold consignment agreement, for which a
requested waiver has not been obtained (see note 7). Although the Company had
net earnings of $25,609 during the three months ended October 31, 2004, the
Company does not have sufficient cash flows to meet its obligations currently
due within the next 12 months. These conditions raise substantial doubt about
the Company's ability to continue as a going concern.
If the Company is (i) unable to grow its business or improve its operating cash
flows as expected, (ii) unsuccessful in extending a substantial portion of the
debt repayments currently past due, (iii) unsuccessful in its litigation with
James G. Gordon, (iv) unable to raise additional funds through private placement
sales of its common stock, or (v) unable to satisfy the covenants of the gold
consignment agreement, then the Company may be unable to continue as a going
concern. There can be no assurance that additional financing will be available
when needed or, if available, that it will be on terms favorable to the Company
and its stockholders. If the Company is not successful in generating sufficient
cash flows from operations, or in raising additional capital when required in
sufficient amounts and on terms acceptable to the Company, these failures would
have a material adverse effect on the Company's business, results of operations
and financial condition. If additional funds are raised through the issuance of
equity securities, the percentage ownership of the Company's current
shareholders would be diluted. These consolidated financial statements do not
include any adjustments that may result from the outcome of these uncertainties.
14
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
operations of HMS.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased from $184,360 at July 31, 2004 to
$221,109 at October 31, 2004. The increase in working capital of $36,749
consists of an increase in current assets of $1,759,654 less an increase in
current liabilities of $1,722,905. The major items of the increase in current
assets consisted of an increase in accounts receivable of $1,155,716 and an
increase in inventory of $670,374. The major increase in current liabilities was
from an increase in accounts payable of $1,399,311 and an increase in notes
payable of $289,511.
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 $8,000 during the three months ended October 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 acquired property and equipment in the amount of $6,737 during the
three-month period ended October 31, 2004 and is currently budgeting an
additional $60,000 for capital expenditures for the remainder of fiscal 2005.
The Company plans to use cash and existing credit sources for the acquisitions.
15
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 of G. David Gordon, CEO of HMS. 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 October 31, 2004, HMS held 8,808.1 ounces of
gold on consignment with a market value of $3,748,287.
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. Management believes
that HMS is in compliance with all covenants of the consignment agreement,
except one, for which HMS has requested a waiver of the covenant from the gold
lender.
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 has an advance in the amount of $300,000 on this line of credit
at October 31, 2004.
16
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 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 October 31, 2004
and 2003:
2004 2003
----------- -----------
Sales and revenues $ 3,892,450 $ 3,544,727
Cost of sales 2,891,668 2,719,651
----------- -----------
Gross profit $ 1,000,782 $ 825,076
=========== ===========
Total sales increased $347,723 (9.8%) during the three-month period ended
October 31, 2004, as compared to the same prior year period. The increase
consists of $104,277 in retail sales by the jewelry stores, $270,142 in Gem Pak
sales and a decrease of $26,696 in wholesale gold sales. Gem Pak distributed its
new catalog during April 2004 and HMS distributed its catalog during May and
June 2004. The Company expects improved sales from new products during the
upcoming holiday season. In addition, the Company has experienced higher sales
since the national election.
The Second London Gold Fix was $425.55 per ounce on October 31, 2004 and $391.40
per ounce on July 31, 2004, the beginning of the current year quarter. The
Second London Gold Fix was $386.25 per ounce on October 31, 2003 and $354.75 per
ounce on July 31, 2003. Sales volumes were down during the current quarter,
countering the approximate 10% average increase in gold price. The decline in
volume sold is attributed to lower consumer spending for higher cost items and
was mitigated by the release of the new catalog during the prior quarter.
Gross profit has increased to 25.7% during the current year period from 23.3%
during the same prior year period. The 2.4% improvement is primarily from the
higher gross profit realized from new operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE - The following summarizes the
Company's selling, general and administrative expenses ("SGA") for the
three-month periods ended October 31, 2004 and 2003:
2004 2003
----------- -----------
HMS $ 610,460 $ 617,304
Jewelry and Rings 79,688 27,864
Gem Pak 129,284 --
Corporate and other 62,527 129,482
----------- -----------
Total $ 881,959 $ 774,650
=========== ===========
17
HMS's SGA for the quarter ended October 31, 2004 decreased 1.1% from the year
earlier period. Jewelry and Rings commenced operations during the middle of the
prior year quarter and the SGA associated with their retail operations covers
the full quarter in the current year period as compared to approximately
one-third of the quarter in the prior year period. Gem Pak was acquired
effective April 1, 2004. Accordingly, it has SGA only in the current year
period. Corporate SGA decreased $66,955 during the quarter ended October 31,
2004 as compared to the year earlier period. The prior year corporate SGA
includes higher legal costs of $38,000 and higher officer compensation costs of
$24,000.
INTEREST EXPENSE - Related party interest expense decreased from $45,350 to
$26,507 during the quarter ended October 31, 2004, as compared to the year
earlier period. Interest expense increased $4,035 during the quarter ended
October 31, 2004, as compared to the year earlier period. The decrease in
related party interest expense is primarily due to the prior year amount
including amortization of loan and guaranty fees in the amount of $18,750. The
increase in other interest expense is primarily due to the current year amount
including interest on the Gem Pak debt for the first time.
GOLD CONSIGNMENT FEE - The gold consignment fee increased $2,824 during the
three month period ended October 31, 2004, as compared to the prior year period.
The increase is due to having slightly higher dollar balances on the gold
consignment facility as a result of the increased gold prices.
UNREALIZED GAIN (LOSS) ON MARKETABLE SECURITIES - The Company recognized an
unrealized gain in the amount of $19,670 during the three month period ended
October 31, 2003, from its investment in marketable equity securities that had
been classified as trading securities. The Company sold these securities prior
to the beginning of the current year.
INCOME TAXES - The Company recorded an income tax provision of $13,400 during
the three month period ended October 31, 2004, and a benefit for income taxes in
the amount of $5,900 during the three month period ended October 31, 2003.
18
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 October 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.
19
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 was president of
Tandori, a wholly owned and currently inactive 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. In October
2004, James Gordon was able to obtain a temporary restraining order in this
action which prevents SGD from raising any additional equity capital until the
trial is completed. Trial in the matter is scheduled to commence in the second
week of January 2005. Management of the Company does not expect to incur any
significant liability; however, there are a number of unresolved issues which
could result in liability to the Company.
On April 23, 2003, SGD's wholly owned subsidiary, 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. The reorganization filing was
necessitated as a result of James G. Gordon, a Director and former President of
SGD, locking Silver employees out of the office and warehouse premises which he
owned and leased to Silver, which prevented Silver from operating. The Voluntary
Petition for Reorganization under Chapter 11 was converted to Chapter 7 on
September 23, 2003.
On May 2, 2003, Lakewood Development Corporation ("Lakewood") 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 is negotiating a settlement with Lakewood.
The Company accrued $1,000,000 as an estimate of the cost of the settlement at
July 31, 2004.
20
On December 31, 2003, Richard Singer and Robert Bertsch, on behalf of the
Company, filed suit against James G. Gordon, a director of the Company, for his
breach of fiduciary duty as a result of his unilateral actions to prevent the
Company from exercising its option to acquire the building which HMS currently
leases. The parties have yet to begin any substantial discovery and, therefore,
the Company and its attorneys are not in a position to assess the merits of this
action.
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.
21
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.
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 17, 2004 By: /s/ Terry Washburn
------------------------------------
Terry Washburn, President, Acting
CEO and Principal Accounting Officer
22